Keeping a business going amidst change is an expected challenge for any company. But the past two years of the Covid-19 outbreak have greatly raised the odds against business resilience. With strong vaccination rates and the lifting of movement restrictions, the Malaysian economy is on the road to recovery – it is projected to expand by 5.5% in 2022, according to the World Bank. Yet businesses barely have time to catch their breath. Those that survived are now staring at more upheavals like the climate crisis and increased workforce attrition, which will require nimble adaptation and a rethinking of day-to-day operations.
As more shocks are likely on the horizon, this issue of Asia Connects covers several pertinent – but often overlooked – factors that can help SMEs stabilise their runway, carve new opportunities and build resilience.
Business longevity through income diversity
As the travel and beauty service sectors learned during the pandemic, entrepreneurs with foresight know that being overly dependent on one revenue stream may spell disaster if demand for it dries up unexpectedly. While diversification can build business resilience, it does invite risks – dividing resources, attention, and expertise into different areas may stretch a company more than what it is ready for.
The urgency to branch out from one’s comfort zone – main revenue line – is usually driven by major changes in the market, such as a pandemic or a formidable competitor entering the playing field. This compounds the risks of diversification as companies usually weigh it “under intense time pressure”, according to Constantinos C. Markides, a professor of strategic and international management at London Business School, in the article ‘To Diversify or Not to Diversify’ for the Harvard Business Review.
Markides recommends that companies deliberate several points before diversifying, such as identifying the business’s unique strengths and the strategic assets it needs in a new market, assessing its ability to match or surpass existing competitors, and whether the diversification move would fragment assets that needed to be intact. Ultimately, the professor writes, a company wins at diversification only when it can offer the new market something unique that incumbents cannot imitate quickly and cheaply.
One right to rule them all
In many ways, diversification and intellectual property (IP) protection go hand-in-hand. Whether businesses are entering new markets with a game-changing product or solving internal limitations with innovative processes, they can open up new revenue streams by registering and protecting their inventions.
According to the World Intellectual Property Organisation (WIPO), IP refers to any creation of the mind. It consists of six components:
- Copyright – creators’ rights over their literary and artistic works, including books, music, paintings, computer programs, advertisements, maps, and technical drawings.
- Patents – an exclusive right for an invention, allowing the patent owner to decide how and whether others can use the invention.
- Trademarks – any signs (names, signatures, words, numerals, or any combination thereof) that distinguish the goods and services of one entity from another.
- Industrial designs – an article’s ornamental or aesthetic aspects, including patterns, lines and colour.
- Geographical indications – a sign that indicates a product’s qualities and reputation are due to a certain geographic origin.
- Trade secrets – IP rights on confidential information that may be sold or licensed.
“Increasingly, and largely as a result of the information technologies revolution and the growth of the service economy, companies are realising that intangible assets are often becoming more valuable than their physical assets… In short, large warehouses and factories are increasingly being replaced by powerful software and innovative ideas as the main source of income for a large and growing proportion of enterprises worldwide… and SMEs should seek how to make the best use of their intangible assets,” says WIPO.
The organisation further explained that IP gives companies an exclusive right to prevent others from commercially using or imitating a product or service, thus helping the business maintain a competitive advantage. Licensing and selling the creation for other companies is another way that IP owners can maximise the return of their research and development investment, earn additional income, and expand their business footprint without extensive capital. IP assets may even ease the ability to obtain financing.
Export revenues going up in flames?
While plenty of threats can weaken business resilience, perhaps none is more urgent and overwhelming than extreme weather events, sea level rise, water stress, and the resulting public health risks – all of which are likely to affect, even eviscerate, an industry’s supply chain and day-to-day operation in the blink of an eye.
For example, the floods that hit parts of Klang Valley in December 2021 due to days of continuous downpours incurred heavy losses for businesses in the affected zones. SMEs – some of whom saw their shops flooded within 10 minutes – were unable to save their inventory, electrical appliances, furniture and fittings and so on. On top of suffering property and asset damages, manufacturers struggled with production and logistics disruption as the floods cut off roads. The continuous rain also wiped out crops, causing a shortage in the food supply chain across the state.
Overall, the Department of Statistics estimated that flood losses in 2021 for Malaysia totalled up to RM6.1 billion, of which 15% were manufacturing losses, and 8% were business premise losses.
Environmental scientists see floods as an example of extreme weather patterns resulting from high carbon emissions – a driving force of climate change.
As climate change brought a domino impact across closely-interlinked economic sectors, world leaders and economic players have been jolted into action. Across the globe, governments – including Malaysia – have set an ambitious target to achieve net-zero greenhouse gas emissions by 2050.
As such, multinational corporations (MNCs) are feeling the pressure. In the Carbon Dated study last year by Standard Chartered, 78% of multinational companies (MNCs) will remove suppliers threatening their carbon transition plan by 2025. Rather than focusing on their own carbon output, 67% of MNCs said they would tackle emissions from their supply chain first. After all, the study found that supply chain emissions account for 73% of MNCs’ total emissions.
This means that the supply chain ecosystems that have yet to catch up to the MNCs’ decarbonisation pace may be looking at massive losses in export revenue. Malaysia is expected to be one of the top seven biggest losers in the world; its annual export revenue at risk is worth US$65.3 billion (RM304 billion), according to the same study.
SMEs, which contribute 18% to Malaysia’s overall export, would take a substantial hit. As MNC clients usually make up a large chunk of an SME’s income, business resilience would be severely compromised if they lose these contracts.
What can SMEs do? Margie Ong, partner at the Malaysian office of the global sustainability firm Environmental Resources Management (ERM), has some answers. She unpacks the seemingly daunting interplay of sustainability and business continuity while recommending practical strategies for SMEs to begin their sustainability journey on Page 14.
The Malaysian finance minister Tengku Zafrul Aziz has also urged banks to help MSMEs to practice environmental, social and governance (ESG), which is the set of measurable standards to evaluate a company’s sustainability, ethics, and risks. Riding on the prospering Halal trade ecosystem, Standard Chartered Saadiq launched a programme that helps SMEs leverage the natural ESG advantage of Islamic financing and supply chain – read more on Page 26.
Keeping employees = keeping a business going
Having lived through two years of fearing for their health and safety, it is no wonder that people have a newfound appreciation of life outside of work. This has culminated in one in two Malaysian employees saying that they would leave their jobs if it stands in the way of them enjoying their lives, as the recruitment agency Randstad found in its 2022 Workmonitor survey. It also found that respondents who switched employers rose from 29% in March 2021 to 36% in September 2021.
This aligns with the ‘Great Resignation’ trend observed worldwide. While the survey of another recruitment firm Robert Walters found that the trend did not hit Southeast Asia as badly, it nonetheless reported that 68% of its respondents are looking to change jobs within the next year.
Losing key employees, even a whole team, can knock the wind out of a business, especially one in survival mode since the pandemic. According to an estimate by the US Department of Labour, the cost of replacing a team member who left their job is 33% of a new recruit’s salary. The price involves direct training expenses and lost productivity. Beyond that, a company also suffers from dented morale when employees leave en masse. The increased workload of staff who stayed can lead to heightened stress, poor health and – coming full circle – more resignation letters.
There are clues to what will keep employees from jumping ship. When asked the reasons for switching employers between March and September 2021, most (51%) of the respondents in the Randstad survey say they value career growth opportunities, followed by opportunities to gain more long-term marketable skills (37%). This indicates that, outside of work-life balance, talents also emphasise on levelling up – especially as the job market is evolving to depend more on machines and artificial intelligence.
Hence, while companies woo more clients with promotions and attractive pricing, career accelerator and coaching practice CuriousCore makes the case on Page 24 that it may be more worthwhile to invest in employees’ skill development – a crucial piece to the business longevity puzzle.
To plan for succession is to plan for long-term success
Sadly, besides resignation, there is another way to lose valuable decision-makers in a company – death or disability. As the world lives with an infectious disease that has killed millions since 2020, this risk weighs even heavier on the mind. Without adequate preparation, the loss of an executive leader in an SME can cripple operations amidst the grief, transition in management, and possible power struggles.
Despite that, many businesses in Malaysia have neglected succession planning – which involves laying out who will take ownership of a business in the event of the owner’s death, disability, or retirement. According to PwC’s Family Business Survey 2021 – the Malaysian chapter, only 59% of Malaysian family businesses polled have some form of ownership governance policy, compared to 79% globally.
Equally concerning is that many of the Malaysian family businesses surveyed do not seem aligned internally about future plans. Only 45% of respondents agreed that all of their family involved or affected have similar views or priorities about the company’s direction. Without a succession plan, a change in business ownership – if the owner can no longer run the business – may be fraught with complicated clashes and derail a company’s trajectory.
“In family businesses, the ultimate decision-making power lies with the owners. For this reason, families need to learn what it means to be capable owners and to pass the ownership to the right people in the next generation – not necessarily to the heirs,” writes PwC.
With a strong track record in legacy planning for businesses, Sun Life Malaysia explains on Page 20 how and why business and wealth protection helps keep a business going strong amidst transitions and secure the owner’s vision for the legacy they have built.
