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No 69                                                                               August 2005

When Disasters an Small Businesses Collide

Following on from the last NEWORKer - a reality check.

This report is by Daniel J. Alesch and James N. Holly, University of Wisconsin–Green Bay - May 2002

Natural disasters and wilful acts of terrorism or civil disruption that result in widespread damage usually inflict major losses on small businesses and not-for-profit organisations. These losses last for years, ultimately forcing many businesses and other organisations to close their doors. Although owners and employees are affected, such events create broader social problems as well, because many entities in a single community fail.

With funding from the Public Entity Risk Institute and other sources, we conducted face-to-face interviews with scores of owners and operators of small businesses and organisations that had experienced earthquakes, hurricanes, floods, wildfires, or tornadoes. Interviews were conducted in California, Florida, Georgia, Minnesota, New Mexico, North Carolina, and North Dakota. Disasters in our study had occurred as long ago as 10 years (Hurricane Andrew, 1992) and as recently as the Cerro Grande Fire in Los Alamos, New Mexico, in 2000. We interviewed retailers, wholesalers, manufacturers, service providers, and not-for-profit organisations, including museums and social service organisations. We sought to determine the differences between smaller businesses that survive and recover from natural disasters and those that do not.

Business owners often suffer substantial long-term financial, emotional, and psychological effects from disasters. One couple whose business was severely damaged by a tornado three years prior to our interview was still finding glass shards on their company’s property. Each fragment was a painful reminder of the losses they had suffered. Although their business was recovering slowly, emotional recovery was taking much longer. The husband was still being treated for depression brought on by the disaster, and both spouses wept while recounting their experiences.

In another case, the owner of a retail shop in a strip mall in California suffered damage caused by the Northridge earthquake, including broken windows, shattered display cabinets, and ruined inventory. Although her shop did not have structural damage, other retailers in the mall suffered so much destruction their stores were condemned. Despite these obstacles, the owner and her employees set up shop outside, cleaned up the debris, and managed to remain open.

In the months that followed, however, business was terrible. Between the demolition of damaged units and retailers who were unwilling or unable to return, customers were scarce. Stress from the continuing struggle affected her home life, and two years after the quake, she and her husband divorced and she lost her house.

The shop owner tried desperately to find a better location for her business. Unfortunately, her store had been funded based on her husband’s financial status and credit rating, leaving her unable to obtain a loan. She lost her business three years after the quake.

The term "recovery" is used widely in the disaster community. In addressing disasters, we think in terms of preparedness, response, recovery, and mitigation. In that context, recovery has often meant a return to the way things were before the event. We concluded, however, that such a definition works only for small events and simple systems. This traditional notion of recovery is misleading and irrelevant for complex systems affected by disaster.

Small businesses, not-for-profit organisations, and communities do not "recover" in the sense of returning to what existed before. Instead, they struggle, sometimes for years, to achieve viability in an environment that often changes substantially following a catastrophic event. Only rarely, however, do owners and managers immediately understand that they must work with substantially altered circumstances. Typically, participants in our study stated shortly after a disaster that their goal was to return to their former state; yet, a year or more later they understood the irrevocable changes in their lives.

Long after the debris is swept away, long after new buildings are constructed and grass grows over scars in the land, the effects of a disaster linger. For organisations and communities that suffer significant losses, returning to the way things were before a disaster is often a chimera—a mythical illusion that can never be achieved.

We identified five key variables central to the survival of a small business or not-for-profit following a disaster. They are:

• the extent to which customers or clientele are adversely affected by the disaster;
• the amount of an organisation's product or service that its customers can defer, replace with another, or acquire elsewhere without significant increases in cost;
• current trends within a specific industry and the individual organisation's position within that industry;
• the degree to which the business or not-for-profit organisation loses critical production, inventory, or capital assets; and
• the adaptation by an owner or operator to changes in the postdisaster environment.

When a business cannot meet its customer’s needs, customers go elsewhere. When customers lose purchasing power, businesses lose income. A business or not-for-profit need not suffer direct damage from a natural disaster or terrorist attack to find itself in peril. Manufacturing firms usually recover more quickly than many kinds of retail firms if their customer base is geographically diverse. Retail and service organisations whose customers are concentrated geographically face serious problems, even if they experience no direct damage themselves.

If customers have money or credit following an event, they buy what they need to survive and to repair their homes and other assets. Consequently, sales of certain items, such as plywood, lumber, paint, and floor covering, boom—at least for a while. And, depending on the scale of the destruction, vendors and contractors from across the country often descend on stricken areas to offer their wares and services.

When customers move away, businesses suffer. Following Hurricane Andrew, large numbers of people left Homestead, Florida, particularly those with reliable incomes and skills who worked at Homestead Air Force Base. The closing of the base, permanently evacuated just hours before the hurricane struck, substantially reduced the area’s population. Although the community of Homestead still exists, it is an entirely different place than it was before Andrew struck.

People often show good sense, reasoning that, if they do not have to live in a disaster-prone area, they should leave. In every community we visited, substantial numbers of people moved away. Further, in most communities, those who moved away were replaced by people with lower incomes, less education, or language barriers. These changes pose special challenges to small organisations.

Disasters also exacerbate many pre-existing trends in urban areas, hastening demographic and land use changes. For more than a year before the Northridge earthquake, the area was suffering from a recession. Many retail firms that were in business well before the quake lost revenues long afterward because their customers had moved away. Thus, the earthquake accelerated neighbourhood transformations that were already underway.

Perhaps the most important variable in the survival equation is the extent to which an owner or manager recognises and adapts to changing circumstances. Those who are aware that things change after a disaster and that a community will never "get back to normal," then respond quickly and appropriately, have an excellent chance of survival and long-term viability. Those who continue under the old business paradigm, assuming the community will return to its prior state, have the odds stacked against them.

© 2003 The Nework Centre   |   email neworknz@yahoo.co.nz

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