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Zombie Companies, Dead End Business (Break Even Point)

Zombie Companies, Dead End Business (Break Even Point)

  • João Gomes • Partner @BlueBiz

This article is apropos of an observation made by a colleague professor, in the scope of the 5th edition of the “Global MBA in Impact Entrepreneurship “1, recently held in Harare, who stated that in Zimbabwe the vast majority of the MSMEs – Micro, Small and Medium Enterprises (over) live in …. a dead end (Break Even Point).

As I have already written here2, the ‘Informal Economy is normal’ in the SADC3 region, I would venture to generalise that it is not only in Zimbabwe that Zombie Enterprises predominate.

In this article I challenge my reader@ to answer the question: why do most MSMEs, in the SADC region, (over)live in a Zombie state?

Let us look at it successively:

  • What is the Zombie enterprise.
  • Why don’t Zombie Enterprises grow.
  • Conclusion.
  1. What is a Zombie Company?

In my opinion, a Zombie company is characterised by the combined presence of the following elements:

  • It is an economic organisation (i.e. it uses and transforms scarce resources, in a very competitive environment),
  • [Organisation] is not necessarily formalised (i.e., in the SADC region, it is even mostly informal, unregistered, does not pay taxes and social security contributions).
  • Which [Organisation] offers, to a clientele with weak economic power,
  • A very narrow range of products and/or services,
  • products and services] of very low quality and value.
  • As a result, Zombie generally charges very low unit prices.
  • These are accompanied by similarly low production volumes of goods and/or services.
  • Operating in this context [of low unit prices x low volumes] it is not surprising to see a very low revenue generation capacity.
  • Which [Revenue] grows well below the costs of inputs, compounded by the fact that the Zombie company operates in economies in the SADC region with very poor economic performance.
  • Weak economic performance that has been compounded by the brutal increase in input costs resulting from the combined covid-19 and Ukraine war crises.
  • With [very low unit prices x very low production volumes – very high input costs], Zombie companies are living practically without a margin.
  • This situation renders the Zombie company unable to accumulate capital to innovate and reinvest in business expansion.
  • Like the living dead, the Zombie company is only able to generate revenue to cover its (fixed and variable) operating costs: and (over)living in a permanent state of Dead Point of Sales (PMV)4.
  • And because the Zombie enterprise operates predominantly in the informal economy, it is thus not exposed to the persecutory action of the State, nor to the debt-servicing pressure of the financial sector, nor to the rules of labour and commercial law, and thus escapes certain liquidation.
  1. Why don’t Zombie companies grow?

A very interesting study5 by the University of Nairobi found that Kenyan SMEs, and depending on the sectors, take on average 16.74 months to reach the Sales Dead Point (SMP)⁴, recording a minimum of three months (in the carpentry, bakery sectors) and a maximum of 40 months (supermarkets).

And, also according to the study, a duration of more than 18 months to reach PMV is clearly indicative of future risks for the business and the company.

Zombie companies never go beyond PMV: it is as if they live in it, permanently and in a sort of limbo.

According to Rothberg⁶, the duration to reach the PMV is an excellent indicator to give us notice, respectively:

(i) of the capacity to plan and manage financial resources (individual attribute).

According to the aforementioned study, the level of training in financial management is the most important co-variable, explaining up to 12.1% of the variation in the duration of the PMV: the higher this competence, the shorter the duration to reach the PMV. However, in the Zombie company this competence does not exist.

ii) The firm’s structure and its ability to publicize its products and services (organizational attribute).

The results of the study indicate that

In the SADC region, where the “informal economy is normal”, the Zombie firm emerges as an escape valve to alleviate poverty

  • The percentage of firms that achieved PMV in the first ten months of operation was highest among limited companies and lowest among SMEs operating as sole proprietorships. However, in the Zombie enterprise the sole proprietorship predominates, and informality is the norm.
  • 28.5% of SMEs that advertised their goods and services achieved PMV in the first nine months of their operations, compared with 10.5% of those that did not. At Zombie, tight budgets and a lack of marketing skills prevented effective promotional activity.
  • The availability of financial resources was one of the most important co-variables, explaining up to 7.5% of the variation in the LMP duration: SMEs investing little capital took longer to reach the LMP. In contrast, at higher levels of capital investment, the time taken for SMEs to reach break-even was relatively shorter. In Zombie, however, financial resources are practically non-existent.
  • The size of SMEs (measured in number of employees) was one of the most important co-variables, explaining up to 6.8% of the variation in the LMP duration: smaller firms take longer to reach the LMP. In contrast, in larger firms, the time taken for SMEs to reach break-even point was relatively shorter. In the case of Zombie, very small firms (one to three employees) predominated.

iii) The quality of infrastructures (business environment attribute).

The results of the study we have been following indicate that, and in this order, the following factors (multiple response) significantly delay the average time for Kenyan SMEs to reach PMV:

  • 30.03% of respondents indicated the high level of competition;
  • 24.92% of respondents indicated the high poverty rate in the country;
  • 23.00% of the respondents indicated the high cost of energy.

Without taking away or putting away, these three parameters are part of the day-to-day life and condition the growth of the Zombie company.

See Also

In conclusion

In the SADC region, where the “informal economy is normal”, the Zombie enterprise emerges as an escape valve to alleviate poverty.

However, the combined effect of i) the lack of capacity to plan and manage financial resources (individual attribute); ii) along with the individual structure of the enterprise and its inability to publicise its products and services (organisational attribute); iii) and the poor quality of infrastructure (business environment attribute) prevent enterprises from overcoming the Sales Dead Point (SMP), being able to meet the scale factor7 and contribute to the development of the economies of the region.

The Zombie company stagnates and remains there in a very precarious equilibrium point, doing justice to the popular saying “chapa ganha, chapa gasta”.

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