“Specialisation needs to go hand-in-hand with growth”: Ten business lessons from economics

Prashan Karunaratne

Prashan Karunaratne is an economist from the Macquarie University Business School.

You’ve probably read plenty of articles on business strategy, financial planning and tax minimisation for your business during these ‘COVIDian’ times.

And while those pieces of information are informative, this is certainly not one of those articles.

The pandemic has changed the world as we know it — everything that was a given is no longer. Therefore, we need to begin to look at the way we do business from a new lens.

A creative look at old tools and ideas could help SMEs and startups as they begin a new financial year. We’re not re-inventing the wheel, we’re putting a new spin on it.

Here are 10 lessons from the threshold concepts of economics to help your company plan for the year ahead. 

1. Elasticity: How responsive demand and supply is to a shock

The pandemic has exposed some weaknesses within companies as they have struggled to be responsive to external shocks.

For a business to be responsive to external shocks, it should ensure that it has a diverse supply chain, as well as the necessary investments in place from the outset (which I elaborate further below).

2. Diversification: Don’t put all your eggs in the one basket

We all know about this golden rule when it comes to our financial investments, but we are not as good as putting this rule into practice when it comes to the product range that we bring to the market.

The pandemic has shown us that those who have a diverse product offering are those that can weather the storm.

3. Scale: Invest in your business

The pandemic has tested business’ discomfort in incurring large fixed costs of investments, and gaining comfort that the rewards will more likely come over a longer period of time than what normally would have occurred pre-COVID-19.

Forward-planning these investments will allow you to be a step ahead of your competitors when the world continues to change around you.

Yes, the new piece of equipment, the new software or the new training program is expensive — but so is not being able to respond in a crisis.

4. The substitution effect versus the income effect: Cater to all markets

You would have seen several companies go under that only catered to the luxury end of the market.

When real incomes fell because of the pandemic, these brands could not cater to the reduction in income and spending.

Your product range needs to cater to both ends of the market if you are to navigate the business cycle and any impending storm.

Capitalise on both the income effect as well as the substitution effect by catering to both the high and low end of the market.

5. Specialisation needs to go hand-in-hand with growth

The traditional economic mantra would be to specialise in your comparative advantage and trade.

However, the pandemic has made us rethink this.

What if the very thing that you specialise in is made redundant during a shock such as the pandemic?

Perhaps we should specialise, while having a growth mindset.

Broadening your services or products means you are better prepared for an ever-changing world.

6. Microeconomic policy: Re-skill and re-train

The Australian government has realised that the JobSeeker and JobKeeper stimulus packages are only band-aid solutions to the pandemic – they do not address the systemic structural issues in the labour force or the economy.

To ensure that the economy is organically able to recover, the newer ‘JobMaker’ package encourages re-skilling and re-tooling of individuals and by extension, entire industries.

This is microeconomic policy in action, which SMEs and startups also need to embrace. 

7. Monetary policy: Avoid the liquidity trap

In the post-GFC era, central banks around the world relied on the traditional reduction of interest rates to stimulate recessionary economies.

However, an over-reliance on this type of policy has led to zero and in some cases negative interest rates — which we call a liquidity trap.

It’s a wake-up call for all of us, SMEs and startups included, that an over-reliance on one policy, one skill, or one product can become a trap that we all find ourselves in. 

8. Fiscal policy: Debt is not a dirty word in this environment

The government has announced several consecutive stimulatory policies, each of which costs several tens of billions of dollars, running the budget into the red, and adding to government debt.

The argument is that if the rate of return on the investment exceeds the interest rate (which is at a historic low), then the investment is worthwhile.

Similarly, companies too need to re-think their views towards debt within such a low-interest-rate environment — just as the government is doing.

9. Equality and equity: Businesses have a responsibility

Issues of equality and equity have surfaced more than ever due to this pandemic.

Those who have access to technology, the internet, and a safe home environment can easily transition to studying or working from home, compared to those who do not have access to these COVID-19 necessities.

SMEs and startups need to consider such equality and equity issues for their own teams, ensuring everyone has the right tools to contribute to business outcomes, goals and viability. 

10. Agility versus specialisation: This conversation needs to happen today

Bringing this all together, SMEs and startups need to have strategic conversations within their leadership teams about the right balance between specialisation and agility.

You want your company to be an expert and to excel in what you do. However, you also want our company to be agile in an ever-changing and ever-shocked world.

Therefore, you need to be a specialist in your niche, but always have a growth mindset, where you supplement and complement your skills, your products, and your markets so that you can come out on top.

NOW READ: Peter Strong: Australia’s economic recovery depends on us all listening to each other

NOW READ: What small business owners need to know about the coming recession

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