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The Supercharged Transition


Daniel Moisyeyev
Daniel Moisyeyev

The COVID-19 pandemic is the major cataclysm of our time. Global events of such scale bring on world-wide ramifications and inevitably end up changing the course of history. One could argue that the last time humanity faced a global crisis that created such a level of uncertainty was 80 years ago - and while we are not technically in a world war (although some kind of "vaccine wars" may have already started with a few nations starting to show their teeth...), the current situation does have some parallels.

It's easy to overlook the long-term effects of the COVID-19 pandemic if you just focus on the present matters. If you were to analyse the media coverage of the pandemic, most of the current efforts worldwide would appear to be focused on defeating the virus: i.e., streamlining vaccine production and distribution, finding new and novel treatments, and preventing further outbreaks. It's clear that the most pressing matter for governments across the world is to how to protect those most at risk.

The other noticeable course of action being taken by developed nations is economic intervention - attempts to preserve jobs, businesses, and the status quo. This is evident by the release of massive financial stimulus packages with the goal of injecting cash into the economy and keeping people and businesses liquid - Australian programs such as JobKeeper, temporary changes to JobSeeker and Cash Flow Boost are all good examples.

We are very fortunate that we live in a first world nation and that we haven't been left to our own devices to fend for ourselves. Australia may be one of the best countries to be in right now - we don't have many cases compared to other nations and few restrictions to speak of. One can even argue that we haven't technically experienced the true effects of the COVID-19 pandemic - just some financial pain due to snap lockdowns and border closures.

Having said the above, there is another serious issue simmering in the background: a total restructure of the way we go about our life and the way we do business. Our government may have engineered a genius plan of putting the economy in "hibernation" for six months and restarting our lives from a "saved" point in February 2020 - but that plan sounded a bit naive even at the time of announcement. This was never going to happen in the middle of a worldwide pandemic. The mentality, perceptions, and expectations of people all around the world are rapidly changing, and there is no going back to things as they were before COVID-19. The longer the pandemic lasts, the more permanent and irreversible these changes and adaptations will be.

The harsh truth is that many business models that were viable yesterday will no longer be in the near future. Just as horses and carriages had their day, there are many businesses in operation today that have to make the choice right now to completely change and adapt, contract their operations to preserve cash or face involuntary administration in the near future.

The war against the virus hasn't been won yet and as the saying goes: "It's not over until it's over." Before, and if, the virus is defeated, our business landscape will irreversibly change.

Below I will touch on some of the broader changes in play that affect the majority of businesses. I am well aware that some industries such as tourism/travel, hospitality, transport, education, and many others are facing very specific challenges, and, in many cases, have completely non-sustainable business models as a result of the COVID-19 pandemic. Business owners in these industries need not to only "adapt" and "innovate" - they should be talking to financial and insolvency experts right now as to how to proceed further without digging themselves deeper in the hole.

Let's start with the first major topic. Online Shopping and e-Commerce.

The Shift to Online Shopping

The shift to buying products and services online has become one of the most noticeable, talked about and studied changes to the way we do business post COVID-19. A business survey conducted by NAB found that when it came to online purchases made in the last three months of 2020, one in four consumers purchased items online that they would have otherwise purchased from a physical store1.

The consumer is a definite winner in the shift to online shopping. It's convenient. It saves time. No travel worries and expenses. A much wider choice of items and better prices. Better for your health. The paranoia around security issues and credit card theft is long gone.

People, being creatures of comfort, are unlikely to revert to dragging themselves to a physical shop once they made the switch. Unless you visit shopping centres for personal enjoyment, experience or for spending time with friends and family, is there really a valid reason for being there?

What about the other side? Are businesses the winners in the shift to online shopping? As someone in the IT/web development industry, my answer is a resounding "No". The shift to buying goods online is about to spawn a major issue - a brutal race to the bottom and extreme competition. An inherent issue with e-commerce is that it is commoditised and businesses are forced to compete on price.

Commoditisation according to wikipedia.org:

"In business literature, commoditisation is defined as the process by which goods that have economic value and are distinguishable in terms of attributes end up becoming simple commodities in the eyes of the market or consumers." 6

When a consumer has the convenience of immediately finding the best price for a particular product, the transaction will always go to the supplier with the lowest price. It's easy to buy even bulky and unconventional items such as car tyres online at a significant discount and pick them up from a warehouse that imports directly from the manufacturer - as opposed to visiting the local family-owned tyre fitter.

The issue is that some larger suppliers can go as far as selling items below cost (!) to sustain market share. Profit margins are easily driven to zero in the world of e-commerce when you have to compete against big players.

This problem arises due to the way the digital space functions. It operates on completely different rules and principles. A typical bricks-and-mortar retailer has a competitive advantage due to their physical presence - i.e., unless a new shop selling the same type of goods opens up next door, a retailer has a definite pool of potential clients to access. This pool was traditionally limited by distance - i.e., the willingness of customers to physically travel to said shop. The limiting factor for competitors attempting to get a slice of the market share was whether the aspiring proprietor was willing to risk signing a lease, investing in a fit out, hiring staff and committing to operations for at least the next three years (most likely seven as is the expectation in retail environments). This is a barrier to entry so to speak.

You would think that the lower barrier of entry makes the online space a much better place to get started for a small retailer. That may be true to some extent due to lower upfront costs and the absence of the need to risk it all by signing a director's guarantee on a lease, but these advantages come with a big caveat. The potential of your new venture will now be limited by your willingness and capacity to invest serious dollars into developing an online retail presence that can exceed that of your competitors. That is a huge issue, and the door is rapidly closing for small entrants as more and more big guys join the game. The fact of the matter is that the digital e-commerce space is starting to become quite saturated.

You are looking at competing in an environment where only the top three search results get any traction - can you get there? Do you have what it takes to build an e-commerce store to compete with tech giants and an army of start-ups operating at perpetual losses that have access to funding from investors with deep pockets and the share market? Forget about it - you won't be able to compete at that level if you are small fish.

Perhaps you want to take advantage of the easy option and make use of one of the existing giant e-commerce retailing platforms that sell a wide range of products on a commission basis? In that case, the platform and their algorithms will decide when, where and to whom to feature your products - you have no power there at all. If you depend on one of these platforms, your business is completely at their mercy.

Suddenly, competing as a bricks-and-mortar store looks a simpler affair.

As more and more big businesses get serious about e-commerce and join the game, this problem will be further exacerbated. The race to the bottom will become a lot more prevalent. Remember that big businesses can hire top-dollar software engineers, UX/UI designers, and digital marketing specialists to build very complex and sophisticated digital platforms.

The digital environment operates in such a way that it concentrates power in the hands of the few. Potential customers tend to be "stuck" in certain areas in the digital space - this principle results in a "winner takes all" scenario. The big guys come out first and end up wielding a lot of market power. This power imbalance was actually on full display during the recent saga with the "News media bargaining code"2.

Small retailers are facing a tough future. The choice will be to go all-in and build a top-end platform to compete with the big guns, pay commissions from each sale to one of the existing e-commerce giants where the final outcome will be the same as what happened to the hospitality industry in respect to food delivery apps and their exorbitant fees that erode profit margins, or sell specific niche products that competitors can't get their hands on.

The move to online shopping will lead to the demise of small family-owned retailers. There is no beating around the bush on this issue. But the truth of the matter is that the shift was already underway with or without the COVID-19 pandemic - it's just that this transition has been supercharged as of late.

Remote Working

The shift to remote working is one of the more positive trends that resulted from the pandemic.

There is a bit of a duality at play behind the shift - some are preferring to work remotely due to comfort and financial advantages associated with not leaving their residences, while others are specifically avoiding face-to-face interactions to safeguard their health. Remote working is not for everyone - some people need constant external motivation to get them going, but others are far more productive on their own and end up healthier and with better work-life balance in the long term. Remote working is one of those unexpected changes brought on by the COVID-19 pandemic that has made people question their lives - and now it's hard to put the cat back in the bag after people experienced so much freedom and flexibility.

Our politicians have some sort of an agenda of getting workers back into the CBD to get them mingling again and buy overpriced coffee and sandwiches (or perhaps it has something to do with commercial real estate...), but the question to ask: Is it perhaps the concept of the "CBD" itself that is a bit out of date? Is there any valid reason as to why anyone should spend three to four hours a day travelling back and forth stuck in traffic or on public transport, surrounded by strangers with questionable hygiene, to spend an entire day in a cubicle surrounded by other people that really don't want to be there? Is this a productive use of our time? What about the environmental costs and emissions associated with transport? Do we need all those cars stuck on toll roads every day at 8am and 5pm?

Is there actually a valid argument for working in the office supported by productivity statistics? Do we really need to waste so much of our life travelling just to sit in an office in the centre of the city? To be honest, the only entity I can see deriving a consistent benefit from cramming workers into the traditional office are REITs (Real Estate Investment Trusts) that own and manage commercial property.

An American survey of 1,004 full-time employees carried out in 2019 by Airtasker3 pointed out that remote employees spend 1.4 more days per month working than office-based counterparts. This translates to an increased productivity of 16.8 more days every year.

The fact of the matter is that if you look to the future, remote working should become more prevalent. Technology will only get better with time. Internet connection speeds, mobile internet coverage and teleconferencing capabilities will only improve as time goes on. 5G is coming. Virtual reality may even become a possible solution in the future to improve interaction and

move it into a 3D environment - indeed Facebook floated this idea in 20204.

If the COVID-19 pandemic keeps rolling on, it wouldn't be much of a surprise if governments introduce remote working mandates for businesses that can reliably carry out their activities without face-to-face interaction.

Customer Interaction

Customer interaction is also shifting into the digital space.

Research shows that the global average share of customer interactions carried out digitally jumped from just 20% in mid-2017 to a whopping 58% mid 20205. However, the share of customer interactions over digital channels has been increasing prior to the COVID-19 pandemic as well - it's just that the process has accelerated as of late.

Is this a good or a bad development? In many cases, it's a positive.

Digital communication channels are much simpler to streamline and automate. They offer logging and recording of communications. It is easier to be accurate and precise. I, myself, prefer to communicate with my clients remotely - with the specific exception of the sales process (more on that later). Businesses in certain industries, such as those offering digital cloud services, are easily able to implement novel tools such as chatbots to save costs on customer support.

Some industries, such as certain types of retail, are well positioned to moving all their transactions and communication online and cutting off traditional forms of customer service altogether. On the other hand, the situation is a bit more complex for small service providers, where a human touch is a necessity to build and keep rapport with clients.

The Sales Process

With all the benefits to remote interaction, I feel that that there is one key component in business that is negatively impacted by this shift. It's the sales process.

During the 2020 Sydney lockdowns, I have noticed that there was something critical missing in the way business was conducted. While there were no issues interacting with existing clients and discussing service-related technical matters, acquisition of new clients became a bit of an issue. There was something difficult about closing sales without face-to-face interaction.

The truth to the matter is that people do business with people, and as it turns out, it is quite difficult to sell certain types of products, specifically the non-commoditised kind, and professional services remotely. You will often find that before you sign the dotted line, you do need to get a feel for the person you are about to do business with - something that is completely missing in virtual interactions.

While this requirement isn't a factor with small goods and "need" type products that are easily sold online without issue, when it comes to selling professional services, it's an issue. The key part is that you need to sell yourself as a professional in addition to the service itself. And when you are confined to the virtual environment, you are quite limited in your presentation and ability to rapport.

While you may be a confident person with a strong presence that can be an asset during face-to-face interactions, you will find it difficult to project these qualities in the same manner in a virtual environment. The sales game is completely different online and new tactics will be needed for some businesses.

Conclusion

The paradigm shifts caused by the COVID-19 pandemic are real. I have only briefly touched on the most pressing developments, and I am sure that there are many more changes to the way we live our lives and conduct business just around the corner.

I feel that the best course of action for businesses for the moment is to be very flexible and be ready to quickly change, adapt and exit. The future is still completely uncertain, despite surveys on booming business confidence, improving unemployment statistics and new vaccines coming out to treat COVID-19. The time when we can relax and get complacent hasn't arrived yet.

Having said that, I do hope 2021 brings some certainty, clarity and positivity to our future.

Please send your comments to bizinet@bizinet.net.au


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1 https://www.smh.com.au/business/the-economy/more-sophisticated-the-pandemic-has-changed-how-australians-are-spending-money-20210216-p572yt.html
2 https://www.accc.gov.au/focus-areas/digital-platforms/news-media-bargaining-code
3 https://www.businessnewsdaily.com/15259-working-from-home-more-productive.html
4 https://www.theverge.com/2020/5/21/21266945/facebook-ar-vr-remote-work-oculus-passthrough-future-tech
5 https://www.mckinsey.com/business-functions/strategy-and-corporate-finance/our-insights/how-covid-19-has-pushed-companies-over-the-technology-tipping-point-and-transformed-business-forever
6 https://en.wikipedia.org/wiki/Commoditization


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