Has the water crisis made SA's business more resilient?
Smaller firms are more resilient than larger ones, which often have higher levels of inertia and resource rigidity than smaller ones, writes Hamieda Parker
Disruptions such as the Western Cape drought can make businesses more resilient. According to research from the UCT Graduate School of Business (GSB), businesses that are able to adapt to one crisis are more likely to be able to survive multiple disruptions.
The City of Cape Town recently announced that it would be relaxing the strict water restrictions for residents as well as commercial and industrial users following good winter rain and with local dams more than 70% full. Moving from level 6B to level 5 from the beginning of October 2018 will bring relief to many – not the least of which will be small and medium-sized businesses.
The effects of the water crisis have been felt by local enterprises across the country, but especially in drought-stricken areas. In Cape Town, laundry businesses, car washes and hair salons were severely affected by water restrictions, while farmers lost cattle and game and harvests were delayed or ruined. The country’s agricultural output decreased by 29.2% in the second quarter of 2018 and this is being attributed directly to the drought.
The good news is that having survived one of the worst droughts on record — these businesses may now be in a stronger position going forward. According to a study by GSB, businesses that successfully navigate disruption build resilience capabilities that will stand them in good stead.
This is an advantage because disruptions are common in emerging-market economies. Water scarcity is but one of the threats facing businesses in these contexts. Power outages, strikes and protest actions are other possible and even likely occurrences that may derail normal business operations.
The GSB study, which was published in the Journal of Business Research, set out to explore why some firms fail in the face of such disruption, while others survive and thrive. It looked specifically at how small and medium-sized enterprises coped with disruption over a period of frequent power supply cuts in SA, between November 2014 and June 2015.
A survey done in SA around this time found that 71% of small businesses said that frequent and prolonged power failures were the biggest threat to their survival. The power disruptions, which happened almost daily and occurred nationwide affected domestic operations significantly.
Many organisations failed during this period, but those that survived emerged more resilient. And the study found that the way in which these survivors adapted to the disruption helped them to develop dynamic capabilities — or resilience capabilities — that enabled them to deal with other disruptions as well.
These capabilities may include, for instance, the ability to reconfigure resources, such as changing working hours of staff or factory hours to reduce the burden on the power grid, managing pro-actively, or understanding how to invest in risk-averting infrastructure such as back up diesel generators, alternative energy sources (solar power) or information processing equipment that helps to warn the firm of an impending disruption.
The GSB study found that a company’s ability to proactively adapt their risk management behaviour and the ability to reconfigure firm resources, had a positive influence on firm resilience, showing that developing resilience was less about spending money on infrastructure or resources and more about developing the abilities to operate in a more flexible and responsive manner. The study also found that smaller companies were more resilient than larger organisations, which often have higher levels of inertia and resource rigidity than smaller firms.
Smaller firms often have fewer resources and are therefore forced to develop the capability to reconfigure according to daily challenges. This gives them frequent practice and when a disruption strikes, they are better prepared.
Consulting firm PwC defines business resilience as a “corporate immune system” that helps an organisation to withstand changes and survive crises. It goes on to say that it is not enough for a business to simply keep going, but that firms need to develop the ability to look ahead to plan for and strategise for possible disruptions in the future. Developing such resilience capabilities makes a business more agile and able to spot opportunities for growth amid the turmoil heading their way.
Resource capability building is about more than having a plan B — it is about having many plan Bs, like cellphone manufacturer Nokia. After a factory fire destroyed its main source of cellphone chips in 2000, Nokia had to become proactive in finding other suppliers and even re-engineering some of their phones to take chips from other sources. By comparison, their competitor, Ericsson, decided to wait out the crisis and hoped the factory would get back on track. This did not happen and the company lost about $400m in potential revenue. In fact, the case has become a classic text book case of supply chain disruptions.
While there is a fair amount of data on resilience in larger firms in developed countries, there is not a lot of evidence on SMMEs, especially in emerging markets. The insights from the study therefore cast new light on this important topic. The findings also hold valuable lessons for managers of larger businesses — especially those that are operating in or seeking to expand into Africa and other emerging economies.
Although emerging economies hold much promise for multinationals that are eager to expand, they will need to understand how to cope in turbulent environments fraught with disruptions. In this context, being resilient is not about simply getting through the current crisis, but being prepared for whatever disruption may lie ahead and flourishing and growing as a business, in spite of them.
• Parker is an associate professor at the UCT Graduate School of Business.