Your fiercest competitor and persistent supply chain disruptions can deny your best efforts. While we cannot prevent unwanted events, we have discovered a way to keep them from grounding a business. I am not talking about hording cash or being a loan application expert. It’s committing strategy on purpose.
Is Cash Always King?
Experts will tell you that to survive an economic downturn, you will need cash. While it is important, there is more to keeping a business afloat than having enough funds to wait it out. Most businesses do not keep 6 to 12 months of cash around just in case something happens. So, for companies to stay open, money must come from borrowing or sales. Loans may be a near term solution but you can only borrow so much.
During the pandemic, the Federal government helped many by giving access to money, but it was not enough. There was not enough money to pay everyone, the rent, and other business expenses. Customer demand was artificially cut off by the lockdown, so staying open became impossible for countless.
An Alternative
It is exceedingly rare for a business to jump into another industry. So, leaders must be creative in modifying the way they create and deliver value. One strategic choice is to compete within adjacent spaces. For example, consumer goods companies switched soap and lotion production lines to make hand sanitizers. Beer brewers supplied bottled or canned water, while car manufacturers made respirators, and textile capacity was used to make face masks.
Hospitality and food service was one of the hardest hit industries. Over 5 million employees lost their jobs within a month. The majority came from full-service restaurants (see Figure 1 below). It is estimated that over 100,000 restaurants have permanently closed [1]. More than a year after the March of 2020 lockdown, employment in the restaurant industry was still 36% below pre-pandemic levels.
Full-service restaurants took the brunt of the layoffs because inside dining was prohibited with lingering mandates limiting occupancy for months. Despite this roadblock, some restaurants survived. Chain restaurants have deeper pockets, but it was not just about having cash. Let us look at what happened to the restaurant industry through a capabilities lens. This view offers a better understanding of why some survived despite the odds.
The table below lists three categories of restaurants with some of their core capabilities. Given the restrictions of the pandemic, full-service restaurants were the most vulnerable to closing because they did not know how to sell through delivery or take-out.
What I discovered through my research was those restaurants that already had the ability to package food for delivery and especially those who ran delivery services had the greatest chance of staying open. They could rely on their existing capabilities. Even though full-service restaurants were at a disadvantage, they were not necessarily doomed.
Why Did Technology Not Help?
As with most things, tech must be part of the solution. Given the strain of the pandemic, technology that could help had to already be proven. For example, if using outside services like Grubhub and DoorDash or delivery were already part of their business model, then restaurants found it easier to stay open. But one of the reasons outsourced delivery services were not more popular was because they added expense to already low margins. This is an industry that was struggling for cash. For technology to help restaurants, it would have to offset existing costs or drive revenue growth.
New Capabilities Needed
What could full-service restaurants do? The answer lies in the ability to assemble new capabilities before customer demand changes. David Teece named this ability dynamic capabilities (See figure 2 below for each type).
A company’s unique way of delivering value is people developing capabilities, together with technology, over time. They are the knowledge, skills, and abilities to perform simple to complex activities. This goes beyond just being ‘book smart’. People also need to possess the capacity to perform in the real-world. These include intellect, self-efficacy, and wherewithal in the workplace. I think of it as ‘book smarts’ meets ‘street smarts.’
the firm’s ability to integrate, build, and reconfigure internal and external competencies to address rapidly changing environments.” – Teece, Pisano & Shuen (1997)
Capacity is not often found in abundance, so sacrifices need to be made. Companies often need to give something up to be able to do something new or different. It is also important to note that having too much can be wasteful because humans tend to use up whatever time and space is available. Even with all that, there is one more ingredient needed, resources.
Resources are information, materials, outside help, or institutions that are inputs to a company’s processes. To improve competitiveness, VRIN (valuable, rare, imperfectly imitable, or non-substitutable) resources ensure rivals will have difficulty in taking business away. If a firm is using the same resources that others can easily get then there is one less competitive advantage.
What Real-World Dynamic Capabilities Look like
Joe Ray of Wired.com provides us a fitting example with a story about a full-service restaurant that was doing well even though millions of people were being laid off [2]. How did Chef Rivera of Addo manage to keep his full-service restaurant open? In his words: “Focus less on what you’re used to doing and more on what people need. Think of the things that would be nice if you are sitting on the couch or need a little pick-me-up. Don’t get too wordy or descriptive.” The following are highlights from Ray’s article:
- Wait staff was used to deliver instead of an outside delivery services.
- Created a two-person delivery system where one person drive and the other could provide customer service and gather feedback.
- Provided ‘Take and Bake’ options to give customers the ability to have a hot meal at their convenience.
- Multiple price points and dropping higher end offerings (Rivera still had $45 pasta w/ wine for two and $105 Hawaiian feast for two)
- Wine pairings to keep full-service conveniences.
- Rivera also offered $9 pay-it-forward bowls to be delivered weekly to the homeless shelter — was up to 1000 donated bowls by 3/17/2020.
- He used social media to highlight upcoming dishes and descriptive videos of what the take-out/delivery meals look like.
- Adopted a payment system where customers order everything ahead of time.
What makes these capabilities dynamic is Chef Rivera was already sensing what his customer wanted before 2020. When the pandemic hit, he again sensed the difference in customer needs and changed his core capabilities to match, as the lockdown began, not weeks or months later.
Strategy and Purpose
I had a client who said that a strategy could not be formulated for his business because the environment was too unpredictable. He was thinking in terms of his organization’s current capabilities. The fact that many businesses thrive in very chaotic environments should tell everyone that its possible, for anyone.
Understanding where you are coming from helps decide where your organization can go. As time goes on, more information becomes available and if done correctly, the organization will have different, if not better, capabilities.
Going for the ‘easy button’, will only slow you down if not make you vulnerable to your competition. Rally your teams around your brand, offering(s), or your purpose. Make how you create and deliver value YOUR way. I promise you will become a force to be reckoned with, the likes your competition will not see coming.
Read more about strategy and capabilities here: Leadership, Capabilities, & Strategy
[1] Source: Thousands of Restaurants Closed During the Pandemic
