The Covid-19 crisis exposed stark differences in the fortunes of different small and medium-sized businesses (SMBs). Well-capitalized startups have weathered the storm better than cash-poor community businesses; manufacturers of PPE equipment have experienced unprecedented demand while hospitality venues have been shuttered; and digitally enabled retailers have been able to shift delivery and customer services online, pivoting into entirely new business models. While the overall shock to SMBs has been serious, some have survived, and even thrived. It’s not too late for others to adopt the practices that made those SMBs successful in such a tumultuous environment.
In April, the OECD estimated that, across 32 countries, 70 to 80% of SMBs had experienced a drop in revenue of between 30 and 50%. Larger businesses have been slightly less hard-hit as a group, but the pandemic amplified a divergence between leading companies and the rest. In the U.S., the revenue of companies in the top decile by economic profit was flat between the third quarters of 2019 and 2020, while revenue for other companies declined by 11%.
Many of the actions taken by the most effective large companies are mirrored (albeit on a smaller scale) by higher-performing SMBs. Leading firms in both size categories had the financial resilience, organizational capabilities, and strategic focus to continue to invest and adapt throughout the crisis. Most notably, they accelerated digitization, including automation and shifts to online channels and remote or hybrid work; reorganized and reskilled for operational efficiency; and became more agile, increasing the pace of both product and business model innovation.
Such transformations could potentially produce a period of rapid economic progress once the crisis abates. Recent McKinsey Global Institute research found that productivity growth could be accelerated by 1% annually until 2024 in the U.S. and six large European economies. However, this upside can only be captured if demand growth is robust; the productivity-enhancing actions that leading firms take are replicated across the rest of the business population; and governments, companies, and individuals alike invest in their skills (in particular, skills for the future).
Whether due to future waves of the pandemic or other forces, there is likely to be some further economic turbulence ahead. Here are a few lessons leaders of small to medium-sized businesses can take from companies that have been successful during the crisis.
Deeper digital capability
The world of business has, of course, been moving online for a while. Pre-pandemic, more than 80% of SMBs in the U.S. and Europe had a company website, and more than two-thirds had some employees working via mobile devices, according to European Commission data and a 2019 survey by the National Small Business Association. Social distancing, lockdowns, and remote delivery during the pandemic catapulted many businesses much deeper into digital: Cloud-based solutions, video communications, and online sales have become commonplace.
The businesses that have leveraged digital the most are those that already had digital experience. One survey found that SMBs that had previously adopted software tools were nearly 30% more likely to have implemented new technology since the crisis began. These organizations already had the confidence and capability to go through the often challenging implementation journey. In particular, they had learned that digitization is not a magic wand — it’s powerful only when integrated with people and processes.
Consider Blue Bay Travel, an award-winning travel agency based in Stoke-On-Trent, England. By 2019, just a year after upgrading its digital and data infrastructure, the company’s sales had increased by 71%. While technology — in this case, a state-of-the-art reporting suite — was integral to its success, so were two other ingredients: a restructuring of its marketing organization and an entirely new set of skills to analyze and interpret data.
With the external push of the Covid-19 crisis, now is the ideal time for SMBs to regroup and identify the areas where digital technology could further boost their business. Basic as it sounds, it’s likely to set them apart from competition. Indeed, in an Enterprise Research Centre survey conducted in September and November 2020, most SMBs in the UK said they weren’t planning to make further technology investments in the near term. This is in stark contrast to our survey of executives from larger companies, where 75% reported that they would further accelerate technology investment in the next five years.
Balancing remote and real life
Working from home and interacting virtually with customers has been a mixed blessing for businesses. While plenty of research suggests that both practices can drive productivity gains on average, the results very much depend on the individual circumstances. For example, remote employees’ ability to work efficiently is determined not just by the appropriate space, tools, and environment, but also by the effectiveness and flexibility of work scheduling.
In principle, SMBs have an advantage here: With fewer layers between leadership and frontline workers and fewer corporate policies, it should be possible for managers to find tailored approaches for their teams. Indeed, 44% of SMBs in the UK that have some flexible working practices expect to increase this activity over the next 12 months. This, in turn, is likely to significantly increase engagement and satisfaction and subsequently business performance; up to 30% of office workers say that they would consider leaving their current job if not given the opportunity to work from home at least some of the time.
Online organic skincare school Formula Botanica has experienced these challenges and opportunities firsthand. Its business model has employees working in far-flung locations from Brazil to Slovakia. As the company has grown, it has had to work hard to maintain levels of energy and motivation among people working alone at home. In addition to recruiting people who are passionate about the business and its values, the company has put in place some basic but effective people practices to stay connected.
Each staff member has a line manager who holds regular one-on-ones with employees. More importantly, there’s a culture of “checking in” to make sure employees are okay. The company operates a day-to-day channel on Slack, where everyone says good morning and farewell on their working days. This means that even if employees’ working hours overlap with others’ only slightly, they end up chatting and sharing pictures and birthday messages and connecting on a personal level.
Since Formula Botanica’s staff is primarily made up of working mothers, the company has also made flexibility a priority. Employees choose the hours they want to work, helping them feel in control of their work-life balance. And whenever someone needs more flexibility, even on short notice, management has an open door for those conversations. These ways of working have proven instrumental in maintaining high performance throughout the crisis. But they also confer a significant longer-term advantage: staff satisfaction, loyalty, and productivity.
Skills transitions and recruiting
SMBs have traditionally faced more challenges than large businesses in attracting the best and most diverse talent. This can be a drag on management capability, innovation, and growth. For example, research has found that a higher workforce share of science and engineering graduates is associated with more new-to-market products and greater external cooperation. Similarly, businesses with highly diverse leadership are 70% likelier to report that the firm captured a new market than their less-diverse counterparts.
Yet, by implementing the flexibility advantages described — and often a purpose-driven ethos — smaller companies need not be shy about competing for talent against larger enterprises. This is the recent experience of Lux Afrique, a luxury concierge business. Despite scarcity of IT staff in general, the company managed to attract top performers to support its digital transformation by making flexibility a core part of its employee value proposition. Many organizations remain vague about their post-pandemic remote work setup. In contrast, at Lux Afrique, remote work is fully integrated into the day-to-day experience. For example, all work is managed via a platform called Monday.com, which allows everyone — remote or not — to see what’s happening, schedule their work efficiently, and even automate repetitive tasks.
Of course, it’s not enough to recruit talented people: They also need training and development and attractive career paths. Smaller businesses have historically been less predisposed to focus on these practices, but as the experience of global luggage delivery service Send My Bag shows, people development brings real rewards. The company has three-year progression plans for staff that outline the levels they can work up to and the subsequent pay increases they’ll see. The approach has been so successful that only one person has left the organization in the past two years.
Finally, with the demands of the workplace continuing to shift, businesses of all sizes are likely to face skills shortages. Rather than just looking outside to recruit new people, many SMBs would benefit from upskilling their existing staff — McKinsey research finds that the benefits could outweigh the costs in three-quarters of cases. Jessica Keir, the Operations Director of Newcastle-based car finance broker Refused Car Finance, agrees: “Providing staff members with a training budget and allocated time to step away from their daily workload to learn something new does not only boost the feeling of value within your staff, but it also impacts profits. When our employees feel supported, they work more efficiently and to a higher standard, which all contributes to the success of our business.”
Agility and innovation
Agility has been key to success, or even survival, during the pandemic. But stability and resilience were the hallmarks of high-performing businesses in the previous major upheaval: the global financial crisis of 2008. How can small and medium-sized businesses achieve both?
If the past is any guide to the future, the answer is two-fold. First, plot your post-pandemic course with potential future crises in mind. Even if the volatility caused by Covid-19 caught you off guard, don’t let that happen the next time a shock arrives. For example, find an operating model that will allow you to quickly scale the business down and up again, or build optionality into your business plan to make such flexing feasible. And, if you don’t already have one in place, articulate and embed a purpose and values that can outlast a crisis.
In March 2020, and in each subsequent lockdown, up to 95% of Dunsters Farm’s customers — schools, restaurants, and catering facilities — closed overnight. To survive, it built an online food delivery business serving customers at home. As the UK emerges from Covid-19 restrictions, the company plans to continue its consumer business, with a specialized gift delivery service. In both its B2C and B2B offerings, it’s now better positioned to cater to customers who increasingly prefer locally sourced produce.
Second, expand the organization’s innovation capacity. Amid what economists call “creative destruction,” this really is a business’s only source of long-term advantage. In our survey, more than 60% of SMBs said that they were planning to increase the rate of product and business model innovation post-pandemic.
For SMBs, external collaborations are particularly important for building an innovation advantage. Staying close to customers’ experiences, engaging with suppliers, empowering staff, and joining local business networks are all powerful sources of new, practical ideas, as well as support. The participant feedback from Be the Business’ programs is clear: SMBs draw the most inspiration — and performance improvements — by interacting with and learning from their peers.
Despite unprecedented challenges, many SMBs around the world have shown remarkable resilience and capacity to reinvent themselves. Now is the time to take inspiration from businesses that have thrived and to build resilience for the future. SMBs that heed the lessons from this crisis are well positioned to weather the next one.This article first appeared in Harvard Business Review.