Law of Double Jeopardy is a term I use to describe the dilemma of many start-ups. Their product cost is typically higher versus the market leader because they do not have economies of scale yet and most also have to use lower introductory pricing for consumers to try their new products. This sets the stage for double jeopardy of lower price and higher cost which means lower margins and inferior profits, a situation they need to quickly get away from. Ultimately they need to be able to achieve scale and do the reverse, which is to increase price while reducing cost, to improve their outlook.
During the lock down for Covid 19, the Law of Double Jeopardy was at play again, but this time deadlier. Most companies were mandated to stop operating temporarily by the government and to do home quarantine. These businesses have no revenues, yet, expenses in their companies continue. They not only experience lower margins, but they also experience real losses without a fighting chance. This is further aggravated if they have products with expiration dates, so they may even have to find a way to quickly sell below cost. Lower demand with only a few business operating also means a bigger bottleneck in importation, and higher storage costs. A series of unfortunate causes and effects for SMEs.
Even in essential industries like food manufacturing, they would be lucky with having half of the workers report for work because the other half are either afraid, or have no means of transportation. Those who are present sometimes walk for hours just to get to work, and end up doing the work of several people.
Many of these small and medium scale enterprises have been hit hard even before the lock down. Their sales were reportedly lower since January 2020. They have loans to pay, credit card bills to settle, and no way to operate normally. With demand not stabilizing for several months, many have a sense of hopelessness and helplessness.
What will these SME entrepreneurs resort to for self-preservation and to avoid bankruptcy? They will reduce their cost and lower their breakeven point for sure, starting with the number of employees working for them. They will remove excess casual employees, try unpaid leaves or reduced work time before retrenchment, and may ask for pay cuts from managers and board members for several months. People getting retrenched is one problem, new graduates who will end up jobless is another, as many companies will likely give retrenched employees first priority when they lift their freeze hiring.
What can big companies do to help, knowing that SMEs will be struggling? They can pay earlier, or even pay in advance as a customer. They can extend terms as a supplier. They can include more SMEs in their supply chain and they should not cancel any pending orders from SMEs.
What about from the government? Emergency support has already been broadcasted, including the recent announcement that the government will guarantee small loans of SMEs. We hope these moves can make entrepreneurs dream again even before normalcy. The additional support from the government needs to meet the 4C’ss criteria – to create confidence in the business sector, to promote consumption, to offer cashflow, and to promote competitiveness to help attain the business goals of the SMEs while re-attracting employment. The result of the government support will determine the competitiveness and attractiveness of the Philippines as a foreign direct investment destination, but do note that the 4C’s are not multiple choice options!
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