Disruptions and contingencies

ECONOMISTS predict that the world economy will grow at 2.9 percent. The economic outlook for the Asean region in 2024 remains positive. The Philippine economy will likely grow at a faster rate (6.5 percent to 7.5 percent) than those of the world and the Asean after a 9.6 percent contraction in 2020.

The good news

Finance Secretary Benjamin Diokno said, “While multilateral organizations project a slower global outlook for 2024 at 2.9 percent, the Philippine economy is expected to improve, reinforcing its status as one of the fastest-growing economies in the region.” (Philippine News Agency)

The Asean expects a continued expansion of domestic demand. Multinationals will continue to diversify their supply chain, and foreign direct investments (FDI) are therefore expected to flow toward industrialized Asean nations.

To ensure that the Philippines becomes a preferred FDI destination, the government announced the possibility of changing the Constitution to remove limits to foreign ownership of businesses. To support its growth momentum, the government passed a budget of nearly P6 trillion.

The bad news

The country continues to grapple with high inflation rates, especially for food items. This could be made worse by the looming drought brought about by the El Niño phenomenon expected to hit the country from February to May 2024, which could adversely affect 65 out of 82 provinces. The drought will elevate food (vegetables, particularly) prices, reduce water sufficiency, increase electricity prices and result in higher inflation rates.

Some economists say that the Philippine GDP could be lucky to hit the lower end of earlier estimates, mostly on account of a strong 5.9 percent bounce in Q3 2023 driven by government spending, up from a 0.7 percent contraction during Q2 2023. (Source: Nikkei Asia)

The lifting of the pandemic restrictions in 2023 produced good and bad results — it propelled household spending (revenge travels, revenge mall shopping, revenge online buying, etc.), but it also drove inflation higher. This stubborn inflation was worsened by the weak peso and the supply chain disruptions.

Disruptions

Businesses today and in the future are being transformed by the interplay among “social, economic, and geopolitical shifts, disruptive ideas, bold strategies, and breakthroughs in science and technology.”

Disruptions can occur in a number of different ways. For example, a supply chain disruption is any event that disrupts the normal flow of production, sale, or distribution of products and services. This kind of disruption affects the whole ecosystem — the raw materials producer, the manufacturer, the distributors, the transport and freight service providers, the retailers, and the final consumer. Supply chain disruptions can be caused by natural calamities, pandemics or geopolitical conflicts.

Disruptions can also be caused by innovation. Sometimes, a new market player comes along with an innovative, non-conventional business model to challenge industry incumbents and leaders with what appears to be a poor-performing product. Over time, the new product becomes the market leader.

“Disruptive innovation” was coined by Harvard Business School professor Clayton Christensen in 1995 and referred to as a “process in which an underrated product or service starts to become popular enough to replace or displace a conventional product or service.”

The key to the takeover usually consists of low costs, higher accessibility and great service that make the new product more appealing than the leading products. To the unaware erstwhile market leaders, a disruptive innovation could cause contingencies.

Contingencies

In simplest terms, a contingency is a potential occurrence of a negative event in the future. In 2020, businesses were hit by the pandemic. The contingency response was remote working and enhanced measures to prevent the spread of the Covid-19 virus.

Contingencies can be prepared for, but the nature, scope, and full impact of negative events are not easily predictable. Many organizations spend serious time and money to set up risk management and contingency plans. In some cases, organizations have to rearrange the company’s strategies, structures, skills sets, and staffing in order to cope with contingencies.

There are generally “two categories of contingencies: environmental contingencies and internal contingencies.” (Helms, 2000: 125-6).

Environmental contingency theories focus mainly on the relative stability of the environment, while internal contingencies concern facts such as the size of the organization and other issues such as costs and competencies that could be affected by competition.

Coping mechanisms

To succeed in a fast-changing business environment, businesses must prepare for disruptions and contingencies. Here are a few suggestions:

– Analyze, identify, resolve the issues. Identify the issues, analyze the root causes, and resolve the issues by taking corrective measures that address the issues’ root causes. If the root cause is a dwindling level of competitiveness, determine what’s causing it. The culprits could be low quality, inefficiencies, high fixed costs, supply chain disruptions, inability to effectively market the products, etc.

– Balance structure and flexibility. Issues with quality and efficiency are within the control of your employees. Provide a structured work environment, but allow flexibility for employees to meet their needs. Explore flexible schedules, remote work and job sharing.

– Control costs. Many businesses failed because they were not able to control their fixed operating costs. Unless you are a monopoly, you can hardly dictate your selling prices. Be firm on your budgets and review year-to-date expenses versus revenues. Simplify your operations, ensure strong fundamentals, and always go back to basics.

– Consider contingent staffing. Many businesses are still recovering from the pandemic and should consider contingent staffing as they begin to recover market share. Rationalize your minimum regular staffing in your core businesses and simply outsource peripheral functions to expert service providers.

– Compensate employees with contingent pay. Make it a policy that as the company grows, so should the employees. First and foremost, both parties must help create a bigger pie instead of one asking incessantly for a bigger share of the pie. In times of disruptions and contingencies, contingent pay is more appropriate. It could be performance-, competence- or skill-related or contribution-related — not across the board.

– Clarify compensation policy. Many employers must clarify their pay policy. The basic pay is the pay for the position and is given to an employee in exchange for a job well done. If the employee performs well, he is already paid with the basic pay. You only increase the basic pay if there are movements in the job market — due to rare skills, inflation, etc. For above-average and top performers, grant a onetime performance bonus, not a salary increase, depending on the performance of the business and the employee.

Brian Solis, American digital anthropologist and futurist, said, “Disruption is either going to happen to you or because of you.”

Ernie Cecilia is the chairman of the Human Capital Committee and the Publication Committee of the American Chamber of Commerce of the Philippines (AmCham); chairman of the Employers Confederation of the Philippines’ (ECOP’s) TWG on Labor and Social Policy Issues; and past president of the People Management Association of the Philippines (PMAP). He can be reached at erniececilia@gmail.com.