How will you reset to accommodate macroscopic disrupters?
Macroscopic factors may not influence the short-term valuation or value creation ability of a company if they do not come to pass immediately. But when they eventually transpire, there won’t be a rock to hide under if we do not prepare a company for it.
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The world is always changing. Reassessing a company’s value proposition is important to do every year, especially for a smaller company. Every planning cycle must consider how our ecosystem has changed and our ongoing relevance in that evolved ecosystem. But every few years, we have to go well beyond shifts in customer sentiments and competitor actions.
We have to consider the tectonic shifts that are brewing to hit us. If we are caught surprised by predictable massive systemic shifts, we don’t get to call them “Black Swan events”. For instance, many call the financial crisis of 2008/09 a Black Swan event. It was not. It was a very predictable over-indulgence in the mortgage market that eventually caused systemic hemorrhaging. The shock about misbehaviors was big enough that two Harvard Business School professors rolled out an “MBA Oath” in 2010 as an equivalent to the Hippocratic Oath that doctors take. Apparently, over 10,000 MBA students signed it in 2010. I was excited for such a sentiment before I started business school, but by the time I graduated from my MBA in 2012, everyone had forgotten about it. Massive systemic changes shock us if we are too busy being passengers. It should not be shocking that brakes are suddenly applied if a car is moving at 80 miles an hour and a bend in the road appears.
There are many carriages vs. automobiles scenarios that have been circling above our heads. So, what are the key concepts that we must consider that fall in to this 80-miles-an-hour-meet-brakes category from a planning perspective?
There are three primary macroscopic disrupters that every company must consider as part of 2022 planning.
Disrupter 1: Monetary policy impact
The last major shift in our business ecosystem coincided with the labor market shifts triggered by the financial crisis in 2008/09. Prolonged ultra-low interest rates and quantitative easing have fueled the corporate ecosystem since. The easy-money era has allowed many companies and consumers to spend loosely. The unprecedented amount of public funds pumped into economies and dissemination of ever-higher private funding through private equity and venture capital have even blunted the short-term impact of COVID-19.
Although trickle-down economics is often made fun of, it is not entirely baseless. Every western economy is ardently watching inflation figures. The primary source of these concerns is various side effects of a prolonged loose monetary policy. Whether or not a company is flush with cash, the loose monetary policy cannot last forever unless we plan to break market economics. Time for belt tightening will soon come. At that point, the ability and willingness to spend will significantly reduce throughout the ecosystem. It is important to consider the efficacy of a company’s business model if buyers’ ability or willingness to pay decrease.
How will the company’s value proposition stack up when the buyer's price-to-value expectations tighten? Will their willingness to pay for our company’s offerings change if customers tighten their belt? i.e., How high or low do we sit on the purchasing priority list? What share of customers will outright stop using the company’s offerings if they had to tighten their belt?
These questions might seem unexciting and may not rally the company about the future. But strategic planning is not intended to be an exercise in cowboy economics, which assumes everything is unlimited. Risk management is a necessary strategic planning mentality.
Disrupter 2: Technology evolution that provides the next foundational blocks
The technology wave that has already passed was enabled by global proliferation of a few foundational blocks such as mobile devices, cloud storage, GPS, and high-speed internet and 4G access. We can trace back the foundational enablers of the most highly valued companies after the FAANGs (Facebook, Amazon, Apple, Netflix, and Google) and Salesforce back to these technology enablement factors. Most newly successful business-to-consumer and business-to-business technology solutions in the last 10-12 years have generally moved desktop computer solutions to mobile solutions that provide on-the-go accessibility. Others have converted traditional processes that used paper, word processors, or spreadsheets to cloud-based forms and databases. Creation and usage of such solutions are now pervasive. What’s next?
For years, we have used the words Artificial Intelligence (AI) and Internet of Things (IoT) with very little day-to-day impact beyond marketing. Blockchain is a conversation fad. Thus far, AI has just been a rebranding of automation of tactical activities based on preset rules. Internet of Things is restricted to very niche solutions with limited broad-based impact. All crypto currencies only have a combined market valuation of Microsoft or Apple. This may change sooner than later.
We talked about cloud or digital for several years before everyone in the world could experience it. Similarly, the next wave of foundational blocks of technology will disrupt how businesses operate. We have been experimenting with Machine Learning long enough that practical applications better than DeepMind’s AlphaGo program will come to pass. Intelligent decision-making based on predictive models will become far more prevalent. Similarly, improving robotics and sustainable energy sources will liven up many more things in our ecosystem. 20% of Americans are already wearing some form of a smart wearable technology. Additionally, it is important to understand the implications to every business if the energy challenges around block chain technology are eliminated.
The punchline is that every company must reconsider how their ecosystem will change as customers understand and expect value from the next evolution of technology enablers. Ask yourself:
What are the next set of foundational blocks in technology that will impact our ecosystem? Does the next wave of technology evolution present an opportunity or a threat for our business?
Disrupter 3: Impact of environmental policy and preferences
Lastly, sustainability has moved from merely a concept to now having money, practical expectations, and policies behind it. The term Environmental-Social-Governance (ESG) has become as prevalent as AI. With mass-market usage, it also becomes unclear what the relevant bits are to focus on.
After a year-long deep dive into ESG, I have concluded that strategic priorities must focus primarily on Environmental aspects. Social and Governance conversations are largely a rebranding of ideas that have existed for decades with few fresh additions.
Social covers the concepts delivered by behavioral economics Nobel laureates over decades past. It largely focuses on sourcing and channeling investments to under-represented groups. As someone who grew up in India, where even a developing country had quotas targeted at supplanting historic challenges around caste system, setting quotas for underrepresented groups doesn’t feel like a radical new thesis. It does not change how businesses operate.
Governance topics will always overlap with laws and regulatory frameworks, and sensible operational practices. If a company claims that “we have good governance today”, I would ask, “Which governance concepts were you breaking yesterday?!” I spent a lot of my early career on Sarbanes-Oxley compliance. That is governance, we just didn’t have a convenient umbrella for it.
If a company is still behind the curve on Social and Governance topics, it’s time to catch up on decades-old concepts that are table stakes expectations. They are also akin to bumper rails on a bowling lane to prevent our balls from falling into the gutter. The main game still needs to be played in the center of the lane. So, what is the main game in ESG?
My advice is to dedicate time and effort to environmental topics because they can have a very tangible, new, and evolutionary impact on business models either due to customer choices, policies, or sheer necessity. Technology enablers will turbo-charge opportunities that companies can deploy, and customers will expect around environmental sustainability. How could environmental sentiments change your market ecosystem?
If a company operates in a world of physical goods, it must consider every step in the value chain from sourcing through creation, movement, consumption, and recycling. Every stage can be fundamentally disrupted by an environmental factor. If we are in software, two-sided platforms, or services businesses, a company’s or a group of companies’ relevance can change at the drop of a hat. What if a simple environmental marketing campaign like “Dining at home is the new chic” catches fire? How far will that ripple through the ecosystem of restaurants, software platforms, delivery businesses, and other intermediaries?
What are the likely scenarios we must understand and plan for over the next three to five years around Environmental factors such as energy, climate, natural ecosystem, food, and living?
None of these macroscopic shifts I listed are new; they have been written about ad nauseam. But the pieces on a chessboard aren't new either. Our level of shock only correlates with our lack of anticipation of upcoming moves.
Consider the following introspective questions.
How sustainable and effective is your business model without any macroscopic shifts? What about when monetary policy, technological enablers, and environmental shifts do occur?
How happy are your customers if you take away their short-term incentives?
Whether COVID-19 shock had good, bad, or neutral impact on a company, it doesn’t matter. Macroscopic changes will affect every company’s ecosystem and it is better to begin remodeling with anticipation.
So, going into 2022, it’s important to consider how prepared you are for the impact of such macroscopic factors on your ecosystem.