by Mitchel Osak
MBA, Consulting Partner of MNP
The pandemic has hit every industry and business hard, none more than small- to medium-sized enterprises (SMEs) – which represent the bulk of residential construction companies. This is of serious concern not only because jobs and shareholder wealth are at risk but also because this cohort is a major driver of Canada’s economic growth, trade, and innovation.
SMEs matter. They are a critical contributor of employment, economic activity, and family wealth. While definitions vary, a Canadian SME is roughly defined as a company with between $1 million and $250 million in revenue, and having 1-499 employees. According to the Business Development Bank of Canada (BDC), the SME segment represents 99.8 percent of all Canadian businesses and is responsible for 54.2% of all economic output. SMEs share much in common and have unique needs relative to large companies and sole proprietors. They are typically owner operated, regionally based, and concentrated in several labour-intensive sectors including manufacturing, construction, business services, wholesale trade, retail, and hospitality.
Yet the SME segment is not unsophisticated or passive. The BDC reports that 90 percent of all Canadian exporters, representing 25 percent of our total exports, have fewer than 100 employees. At the same time, SMEs are especially vulnerable to economic downturns and unexpected disruptions and often lack the resources to bounce back quickly. Specifically, SMEs don’t have the same advantages as larger companies in terms of market power, access to capital, multi-jurisdiction revenue diversification, and depth of management and capability.
When looking at the residential construction sector, 69 percent were micro businesses, with fewer than five employees, according to a Statistics Canada 2019 report. Small enterprises of five to 99 employees accounted for 31 percent.
COVID-19 has hit this sector particularly hard, with many SMEs facing corporate insolvency or experiencing significant revenue declines. While government support has helped, most SMEs would recognize financial relief is not indefinite; in many cases it is insufficient to maintain pre-COVID operations and growth prospects.
To further complicate their outlook, they see other looming business risks. Public health officials warn of a second wave of COVID-19 occurring within the next six months. A U.S.–China trade war is not out of the cards, which could raise SME input costs and reduce market access. Finally, SMEs may see their own supply chain and channel partners go bankrupt or pivot to new markets as they themselves try to cope with the effects of the pandemic and recession.
Most leaders we speak to have adjusted and are beginning to explore how they can reignite their growth engines and improve operational resilience. The challenge is to understand what has changed and its impact on their future operating environment. We have identified a number of these transformational developments, which could include:
- The potential for a significant drop in consumer demand due to higher unemployment, potentially higher taxes, and reduced disposal income;
- A reduction in available capital for investment and working capital for companies with weak balance sheets;
- Fundamental shifts in consumer behavior, both in terms of reduced aggregate demand and a shift to online commerce;
- The possibility of significant labour shortages in certain regions, sectors, and skillsets (even with high overall unemployment) due to pandemic effects, internal migration between localities, and restrictions around immigration;
- Changing practices towards work, office, and travel, and how it impacts business development, infrastructure management, customer service, and role definition.
What can SMEs do today to stabilize their business and position themselves for future growth? We recommend taking the following steps today to set your business up for a more sustainable future.
- Get an in-depth grasp on your financial situation, both from a cashflow and balance sheet perspective. You need up-to-date and accurate information to make key decisions;
- Revisit customer and channel needs as they may have shifted. For example, customers may be trading down within categories, deferring, or even abandoning purchases;
- Reconsider your operating model. The ability to quickly and efficiently scale operations will be important when the economy re-inflates. Firms should consider new operational approaches such as outsourcing non-core activities and forming strategic partnerships with other SMEs offering complementary services;
- Accelerate digital adoption. Though it may be painful, now is an ideal time to automate manual, routine activities and digitally enable operations and value delivery. In particular, the use of advanced data analytics can improve decision making, optimize spending, and enable tighter customer relationships;
- Retool your supply chains to build resilience and reduce operational risk. Prudent leaders should look to diversify your supplier base, including adding local vendors;
- Prioritize talent management. The operational agility required in these difficult times puts a premium on having a skilled yet flexible workforce. Companies should emphasize generalist skills sets and IT competencies in their recruiting and revisit their training and succession plans;
- Explore untapped markets. Firms facing a recessionary environment should seek out new markets that could be disrupted with existing strategies, products, brands, and capabilities. This could be a geographic expansion and/or increasing the share of wallet of existing customers;
- Be realistic – some business may not bounce back to what they were pre-COVID-19. It may be time to consider a strategic pivot.
Building a recovery plan doesn’t have to be a challenge you face alone. MNP is ready to support businesses as they explore opportunities and examine their path ahead.
To learn more, contact Mitchell Osak, MBA, Consulting Partner of MNP, at 416-263-6985 or firstname.lastname@example.org.