Ronald Goseco l October 14, 2022 l The Manila Times
AT a recent Finex (Financial Executives Institute of the Philippines) conference, Amit Dalmia, senior managing director of Blackstone, declared that the conditions we are experiencing are unprecedented and “there are now weeks when decades happen.”
This also reminds me of Lawrence Summers’ remark that “the world is on fire.” Dalmia was referring to the fact that things are developing so fast that he suggested that the VUCA world that we have gotten used to may have transcended into BANI. Recall that the made-up word VUCA is composed of four terms: volatility, uncertainly, complexity and ambiguity. It was used to describe the radically changed environment, and how leaders and companies have to adapt to the changing landscape.
This was further complicated by Covid-19 and the Ukraine war, the consequences of which, are still unfolding. The effects of these events are unpredictable. VUCA describes the present, while BANI was supposed to describe the future. With everything that is happening now though, Dalmia suggested that the conditions now represent a different state — BANI. This artificial word stands for brittle, anxious, non-linear and incomprehensible. It was originally coined by James Caisco from the Institute of the Future in California. In 2020, he presented it as a meaningful logic that will replace VUCA. Caisco said BANI defines the future as pure chaos. He concluded that we have to accept this to lead and navigate our organizations to achieve our goals.
In his presentation of the Global Investment Environment, Dalmia confirmed the worst of our fears that the world economy was at the brink of a global recession. He quoted the World Bank president, who likewise shared the view that “for many countries, recession will be hard to avoid.”
He described the markets as becoming tougher with interest rate hikes, soaring energy and food costs, and Covid lockdowns in China, which are affecting the supply chain around the world. Inflation pressures, coupled with sharp currency depreciation against the US dollar, are causing headwinds for growth affecting markets. Most markets are now trading at 3 percent to 24 percent below 10-year medians. Rising inflation will dampen operational performance of companies and challenge future market returns.
Dalmia explained that the market environment has fundamentally changed because of structural changes in the cost of capital due to inflation, positive real interest rates which we have not seen for a long time, volatility and the global trade friction due to geo-political tensions. He believes that the rigorous and multiple expansions of the last decade are unlikely to persist. With these conditions, capital deployment or new investments should reflect this changed environment. Proper valuations will matter greatly and should be examined closely. Operating interventions to optimize productivity will have to be implemented to generate good returns. Furthermore, he sees that the holding periods for investments will be longer with challenged liquidity. This will make the exit option for private equity firms as this more difficult.
Dalmia offered solutions to put some sanity into this incomprehensible situation. The first is to set up the right defense strategy. The elements to this strategy include: focusing on profitability, ensuring supply chain continuity, and implementing the right talent hiring and retention policies. To ensure supply chain continuity, we need to maintain redundant sourcing capabilities. We also need to understand that customers now demand fast turnaround deliveries. Although many of us are not yet experiencing it, we should expect that energy sources will likewise tighten so we have to be ready with alternate energy sources. We also have a hyper-competitive talent market and it will require structural changes to the way we recruit and retain employees. The business models for work from home or return to office as well as in-house vs outsourced options have to be carefully evaluated to achieve the right balance. It has also been proven that working in small teams was an effective way to promote a sense of ownership and faster project delivery.
The right offense strategy should have the following elements: be the tech-disruptor, accelerate corporate development and focus on ESG (environmental, social and governance). Being a tech disruptor starts with process automation to permanently reduce the cost of doing business. We should learn to differentiate our companies with the right artificial intelligence and machine learning applications. The customer experience needs to be complemented with digital solutions which should be cloud based. It is also expected that many company valuations will come down with some leading to bankruptcies.
There will be opportunities to acquire companies at reasonable price earning multiples. It is also important to create synergies by partnering or through mergers. Integrating ESG into the business strategy is necessary as it also opens up access to larger pools of capital. Dalmia’s final advice is to focus on creating value. Valuation will surely follow.
If we are indeed ending the VUCA era, I hope that it has provided you with vision, understanding, clarity and adaptability to prosper in this new age of chaos and opportunities.
*** Ronald S. Goseco is a Finex director. But the opinions expressed are his own and nor do they reflect The Manila Times.