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Wednesday 18 August 2021

The Four Pillars of Future Business ~ Megatrends in the Making

“The only function of economic forecasting is to make astrology look respectable” said John Kenneth Galbraith. And he was right. One of the reasons economic forecasting, as well as financial market forecasting, is fraught with such a high degree of risk is because it operates in a complex adaptive system. One small change in one small component somewhere and there could be a large impact in a completely different system in an entirely different place and time.

However, looking at the future does require some amount of understanding of the present, trend-following characteristics and understanding of potential disruptions. With this in mind, I have tried to analyse the major pillars of future business change. Below are the four pillars of my mental framework for the future of businesses:

1. China + 1
2. Climate Change
3. Digital & Tech
4. Health & Wellness

A) China + 1:
With the battle lines drawn between China and the Western world, there is a definite possibility of a Cold War 2.0 ensuing in the next few years. Some experts say it is already underway. Global corporations will be forced to de-risk their sourcing and move away from their dependence on China as their sole supplier. Global supply chains may have to reorganise to reduce and remove the domination of a single point of failure.

However, China + 1 is not just reducing dependence on China. It is a complete overhaul of the decades of policy of super-efficient supply chain systems. The just-in-time delivery model is also likely to take a back seat as companies build inventory and build in some slack in their supply lines to take care of unforeseen events.

With increasing automation and the use of technology, manufacturing is also shifting back to developed economies as labour costs start mattering less and less in the overall scheme of things. In addition, we also see a rise of nationalistic fervour across the world and politicians will be more likely to promote companies that create jobs in their countries even at the cost of maximum efficiency.

B) Climate Change:
The 2030 Paris agreement and other such agreements will force countries to regulate agents of climate change and take corrective actions. We have already seen China act on this by banning chemical factories and other highly polluting plants. This is likely to become more of a trend. As more and more developed and slowly developing nations understand the true cost of climate change (increased weather disruptions and natural disasters), they will be forced to take action.

Governments and corporations will have to focus on better sanitation, clean water and clean air. We are already seeing the beginning of this. Increasingly difficult emission norms for automobiles and their resultant switch to cleaner fuel and EVs; large water treatment and desalination plants; efforts towards rainwater harvesting; solar and wind energy adoption and many more such initiatives are picking up across the world.

We are also seeing a thrust towards biodegradable products, banning of plastic use, recycling of products including the right to repair (something new for the developed world which we have been doing forever!!) .

C) Digital & Tech:
What can I say about this that has not been talked about already by everyone? Technology has become ubiquitous in our lives. Online classes for students, mobile games, the rise of esports, 101 apps for every conceivable activity are now a part of our lives.

Next is the Metaverse. You may be able to travel to Alaska without ever leaving your sofa, or do your online shopping by walking through the virtual store and pick products, just with a VR set.

Companies will increasingly be dependent on tech to not only move ahead of their competition but just to survive! The better a company is at using tech, the more competitive it will be.

D) Health & Wellness:
Sitting indoors due to a pandemic, people across the world seemed to have realised the value of health and wellness. People and governments across the world have fallen short in managing the pandemic and the scars of this will take a very long period to heal. So, there is likely to be increased focus on healthcare spending across the board - governments, corporates and households.

The entire spectrum of health and wellness - diagnostics, online consultations, e-pharmacies, online health records, medical insurance, preventive health care will fall in this ambit. Mental health has emerged as a subject that people have openly started discussing and it is likely that a lot more focus will be in this area as well. Companies in these areas would definitely have a tailwind for the next few decades.

Companies will get both positively and negatively impacted by one or more of the four pillars. Business strategy will require thought and investments in these four pillars. As investors, we need to evaluate how one or more of these four pillars affect the business that we own and how they are addressing these issues as corporates.

This article first appeared in The Economic Times.

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