One misconception to be avoided is the exclusive focus on the interests of the shareholders to the exclusion of stakeholders. Covid-19 has brought to bear a renewed interest in the importance of stakeholders.
by Dr. Ruwantissa Abeyratne from Montreal
“It is a truth universally acknowledged that a zombie in possession of brains must be in want of more brains.” ― Seth Grahame-Smith, Pride and Prejudice and Zombies
One of the definitions Meriam Webster gives of a Zombie is “a person held to resemble the so-called walking dead”. Analogically, a zombie company would be a business entity that is technically dead but manages to wobble along in a moribund sort of way. In other words, in terminal decline. A recent issue of The Economist calls zombie companies: “ Firms that are dead competitively but continue to haunt their living peers… competition between businesses can deliver vast rewards to the winners, as rich lists dotted with spacefaring billionaires attest. The fate of the losers, on the other hand, is a gruesome demise. At least, that used to be the case. A horde of companies has of late emerged that is neither profitable nor condemned to liquidation or takeover. Such corporate “zombies” stalk the business landscape. They are bad news for the economy. And many more firms are in danger of being zombified during the covid-19 downturn”.
This phenomenon has given rise to a possible new inclusion in the dictionary – Zombification – which has any number of nuances, starting with the chugging along by zombie companies without making profit, unable to meet their commitments such as interest payments but still clinging on to the market while keeping their employees on the payroll indefinitely. The Economist goes further to say that zombie firms often crowd out healthy competition and, in some instances, even distort the market. Governments do not help either, by enabling companies to gain easier access to credit; and by freezing the economy in status quo ante during the pandemic with schemes such as “furlough schemes that cover wage bills and state-backed loans that provide liquidity enable unprofitable firms to keep going. Some politicians have leant on banks not to foreclose on companies. Many countries have thrown more sand in the gears of creative destruction”.
In this sense any company which offers a unique product, even if it performs a cliff hanging act during the current pandemic crisis, cannot not be considered a “zombie” as it would be able to retain the potential to revive its comparative advantage in better times. On the contrary, zombie companies continue with “zombie ideas” which Nobel Laureate Paul Krugman calls in his latest book Arguing with Zombies economic and financial ideas which have long been dead but are being kept continuously chugging along by their proponents.
One misconception to be avoided is the exclusive focus on the interests of the shareholders to the exclusion of stakeholders. Covid-19 has brought to bear a renewed interest in the importance of stakeholders. Harvard Business Review records: “Shareholder primacy is the cornerstone of the agency-based model of governance, but if the pandemic has shown anything, it is the importance of each and every stakeholder group to a company’s ability to function, let alone thrive and succeed over time. In the face of Covid-19, some companies struggled because their customers disappeared. Others saw their workforce reduced to a skeleton crew of essential employees”. Other aspects that need focus are: the need to pay heed to societal needs of the product being offered during these special times; concentration on paying adequate compensation to employees and, most importantly, deliberative thinking on appropriate and relevant product distribution.
Arguably, the most important aspect would be a well thought through investment strategy. First off, a company in the throes of collapsing should review its strategy. Strategy is basically doing the same or similar things that your competitors are doing in a different way. A strategy therefore should typically be a comprehensive, action-oriented plan which, following a thorough analysis of the business environment in which it operates, clearly defines the mission, vision and the objectives of the enterprise, the means to realize such vision and objectives, the means to measure results and performance, as well as the financial implications of the overall corporate strategy.
Investment must reflect a rich conception of competition that includes segmented markets, differentiated products, technology differences, and economies of scale. A new theory must go beyond cost and explain why companies from some nations are better than others at creating advantages based on quality, features, and new product innovation. Furthermore, a new theory must begin from the premise that competition is dynamic and evolving; it must answer the question: why do some companies based in some nations innovate more than others? The most important feature of a competitive company is its decisive characteristic that allows it to create and sustain competitive advantage in particular fields.
Digitalization is another powerful and indispensable tool for a falling company to use with a view to gaining a competitive edge. It is incontrovertible that the digital economy has had a profound impact on the global business landscape. New phenomena such as online platforms, social media, digital ledger technology, big data and online service providers affect business models and our understanding of what a “business” is.
Digitalization also has a significant impact on the workplace and can affect production and distribution, both positively and negatively. It has driven innovation in all sectors, but also contributed to the transformation and disruption of traditional industries, making it imperative for incumbents to acquire new digital competencies rapidly. The implications of digitalization for responsible business conduct are manifold. New digital tools can accelerate development, and enable businesses to strengthen their efforts to act responsibly, in particular as it relates to responsible supply chain management (e.g. blockchain technology to manage supply chains, machine learning and analytics to track risk). At the same time, caution should be exercised as digital transformation can also lead to business causing or contributing to human rights and other social and environmental harms in new ways (e.g. risk of bias and discrimination in the use of artificial intelligence, and human rights risks associated with surveillance technology and the misuse of online content platforms).
Blockchain is another useful tool. It is a combination of already existing technologies that together can create networks that secure trust between people or parties who otherwise have no reason to trust one another. Specifically, it utilizes distributed ledger technology (DLT) to store information verified by cryptography among a group of users, which is agreed through a pre-defined network protocol, often without the control of a central authority. The marriage of these technologies gives blockchain networks key characteristics that can remove the need for trust, and therefore enable a secure transfer of value and data directly between parties. In conclusion, the threatened company should carefully assess new demand and plug any gaps they might find, while questioning outworn assumptions. The most important achievement of failing companies would be building trust among stakeholders and clients.
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