IIC 2021: “Confronting Disruption” by Lutfey Siddiqi, CFA

Disruption is not a recent phenomenon. A year ago, COVID-19 spiralled the world into a global crisis, the scale and range of which had not been witnessed in living memory. And now a year later, we are hearing words like Gamestop, Reddit and Robinhood. If we cast our minds back to pre-COVID times, year 2019 had already seen the slowest GDP growth since the 2008 financial crisis. The IMF had already downgraded growth forecasts several times and central banks worldwide loosened Monetary Policy and effected quantitative easing. The trade war between US and China had already disrupted supply chains worldwide. Many countries including China (which has a disproportionate impact on both global growth and trade) were grappling with internal imbalances. So, the first point to note is that the world wasn’t really fighting fit from macroeconomic standpoint going into the COVID crisis. The other vector of disruption that was already upon us is the 4^th Industrial revolution. For almost a decade now, we have witnessed the forces of extreme automation and extreme connectivity, more recently powered by machine learning, upend business models, consumer expectations and behaviour.

If you compare the Top 10 largest listed companies from 10 years ago vs now, you will see a dramatically different picture. Concepts like Uberization, Platform Revolution and Servicification of Products have swept into mainstream business models at a dramatic pace. In terms of market capital, Netflix or even Zoom is now worth more than Exxon Mobil and Walmart and Amazon were neck to neck just a year and half ago. And we all know the story of Tesla vs all other car companies combined. In fact, there has been more than one phase of disruption in last decade. Think about an extra-specialist – a radiologist, working in some remote location, empowered by file transfer technology which would allow them to read and give their opinion on X-rays from all parts of the world. The same radiologist is now disrupted away by diagnostic technology powered by Artificial Intelligence. The demands on all of us to be agile and to be able to pivot are extreme. COVID-19, coupled with a flood of quantitative easing unleashed over the last year, has accelerated many of these trends and at the same time, overturned some taboos and resistance that would have otherwise slowed down the pace of disruption.

Macro trends have implications for the micro – both at the level of a company or individual professionals. This is a period of radical uncertainty, which is different from straight-forward risk in a few ways – Firstly, we are no longer in the world of extrapolation. In the earlier times, strategy was mostly about grabbing market share in a fairly static market – you found out who has a bigger market share than you and then sought to close that gap by out-running your competitor. Today, competition happens at the boundaries of what defines the market. Think about Nokia or Blackberry against the iPhone, or more recently, a Rolex watch against an Apple watch. With uncertainty there is no drop-down of strategic choices – everyone is at the frontier, everyone is having to re-imagine their vision. It is also a world where grand theories and ideologies must give way to Trial and Error, Micro-experiments and a Plurality of Models to Try, Test, Feedback and Retry. It is a world that is so different from a normal distribution that it almost does not make sense to talk about averages. In fact, concepts like the Sharpe Ratio or other reductionist forms of analysis that focus on just 1 or 2 summary variables are no longer effective. This is a non-linear multi-dimensional world and we need the full dashboard. Linear models are no longer fit for purpose. It is a world where optimization and continuous pursuit of efficiency needs to give way to more optionality and deliberate slack in the system because that contributes to risk resiliency which has proven especially useful in last 12 months. It is a world of information overload and misinformation. In that world, if you are a Trust-maker, Taste-maker or Context-maker, you are valued.

So, what is the best way to cope with disruption?

Two necessary conditions to overcome and thrive in such a world are Purpose and Inclusion. Corporate purpose, if co-created in the right manner that appeals to personal purpose, can provide a solid backing when strategy and operating plans seem to be a state of flux. Radical uncertainty also puts a premium on Diversity and Inclusion – not just because it is the right thing to do but also the prudent thing to do from the perspective of opportunity scanning and risk mitigation. Both Purpose and Inclusion provide the added benefit of employee engagement. Recent trust surveys have shown that businesses have now supplanted governments in the trust rankings for the first time in history. At a macro level, Inclusion and the wider concept of stakeholder capitalism is a strategic imperative for both companies looking for new markets and investors looking for new asset classes. So as the world transitions from a with-COVID to a post-COVID world, the private sector will need to give a bolder voice to Environmental, Social and Governance issues.