3 crisis lessons for SMEs in economic resilience from Germany’s construction sector

How did Germany’s construction market grow against the backdrop of an economy in freefall? Photo: Oxford Economics

Against that backdrop though, and at a time when the Germany’s national economy fell by more than 11%, the country’s construction industry posted real annual output growth of 1.6% in the second quarter of 2020.

While it’s possible to explain some of the sector’s ability to buck the wider economic impact of Covid-19, with the ability of building sites to often stay open during national lockdowns, the fall in activity during both 2020 and even the 2009 global financial crisis in Germany’s construction industry was less than those of other Eurozone countries.

This points to a level of crisis resilience that may contain lessons for small and medium-sized enterprises (SMEs) facing future shocks regardless of the industry they’re in.

In order to identify the strategies that German construction firms used that help to insulate their businesses, Oxford Economics teamed up with IfM Bonn, a thinktank concerned with SMEs, in a study commissioned by the German Federal Office for Building and Regional Planning.

We identified three distinct types of resilience that provided different levels of insulation for firms facing a crisis.

Three levels of resilience

The first resilience type was what we called “simple” resilience — the ability of entrepreneurs to take immediate measures during a crisis to mitigate its impacts. These included taking swift action to eliminate liquidity bottlenecks by collecting outstanding debts, drawing down savings and reducing costs.

At the same time, firms also used their experience of previous crises, which we called “reflexive” resilience.

One example learned during the Covid-19 crisis was to focus on strategic liquidity management that aimed to keep outstanding debts low via consistent invoicing strategies, reduce their dependency on specific customers and suppliers, and diversify into more business areas.

Johanna Neuhoff, associate director of economic consulting for continental Europe at Oxford Economics. Photo: Oxford Economics

The third group we called “adaptive” resilience. The essence of this strategy is the ability to anticipate structural threats in advance and take measures to mitigate them the moment a crisis breaks out.

While all three groups are related and important to strengthen overall crisis resilience, it is the third group that contains the most powerful lessons to enable firms to take measures needed to withstand a crisis.

Breaking it down

At the heart of adaptive resilience is the ability to identify trends such as climate change, digitisation, and shortage of skilled workers that harbour the potential for crises.

By identifying the potential threat these issues pose, managers can draw the right conclusions about the potential impact and take the necessary measures to prepare for their effects.

Keeping an eye on changes in the market, for example by exchanging ideas with other entrepreneurs and experts, can strengthen the hand of SME owners not only to deal with an acute crisis, but also to recognise promising trends at an early stage and to use them as business opportunities.

A good example is digitisation. One entrepreneur told us, as part of our interviews with 15 SMEs, that they drew on fellow entrepreneurs’ experiences when deciding which program to purchase. “We talked to people who already have the programs up and running.

“And then we simply decided as a team which program would probably be the one that caused us the fewest problems.”

When it comes to dealing with the challenges posed by climate change and policies around it, German construction companies demonstrated adaptive resilience by identifying the opportunities from operating sustainably, as well as working to reduce the risks.

One entrepreneur points out: “Of course, climate change can actually be a gift for us. It is, after all, an economic engine.

“If we stop buying oil and try to save energy, we have to insulate houses or install heating systems or solar panels on the roof, everything results in some kind of construction measures. That’s a great story for us craftsmen, of course.”

Then again, he also identifies measures to seize this opportunity: “This is only a good opportunity if you position yourself well, have a vision of where your company wants to go and train your employees accordingly.”

Some companies in our sample were successful in planning far in advance which projects they would carry out, at what time, and which building materials they would need for the implementation. “That’s why extremely long, forward-looking planning is the be all and end all,” one said.

Fitter for fragile future

The recent spate of crises, from the coronavirus pandemic to the Ukraine war and the spike in inflation, shows how difficult — if not impossible — it is to forecast future crises.

But the experience of one sector in one country offers lessons for other small and medium-sized business caught up in a predicament not of their making.

At the basic level, it is a reminder of the need for “simple” measures, such as strategic liquidity protection and continuing diversification – not just of customers but of markets, financiers and suppliers.

But one key lesson from the Covid-19 crisis is that some so-called “universal” solutions that are deemed to help with organisational resilience during times of economic stability could have the opposite impact during a crisis.

One example is “just in time production”, which had to be reversed after firms found themselves short of key supplies and replaced by “just in case” stock management.

Ultimately the main lesson for entrepreneurs to entrepreneurs is to anticipate threats in advance and take measures that help to mitigate a crisis, rather than dealing with them once they have occurred.

It is this magic recipe of identifying structural changes, exploiting intuition and foresight, and drawing on knowledge built on experience that enables firms to be ready for any potential challenges that might arise.

Firms must, of course, take immediate action to mitigate the consequences of the crisis, but those that are strategically clever and take transformative measures ahead of unknown future crises will be better placed to withstand the impacts of potentially damaging events, and therefore be more prepared for a more fragile future.

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Johanna Neuhoff is associate director of economic consulting for continental Europe at Oxford Economics