In today’s environment, there are many reasons to give restructuring its rightful eminence, so that it garners trust and delivers sustainable outcomes.
The first is climate change. The pace of action on transition risks arising from decarbonization will ebb and flow based on the political environment. But the physical risks of climate change will also manifest themselves, necessitating relocation and a consequent restructuring. An MIT Technology Review Insights survey of senior executives in the US revealed that 75% of the surveyed organizations had considered relocating.
Also Read: Climate Change and the New Green Economy: The big questions for 2025
The second is automation coupled with artificial intelligence (AI) to enhance productivity. According to a PwC report, AI will augment global GDP by 14% in 2030. The manufacturing sector may see the introduction of AI-developed demand- responsive production plans, Internet of Things (IoT)-based predictive maintenance schedules, intelligent energy balancing, among other changes.
Similarly, service industries may adopt AI-based data analysis, programming, reports and financial models. This may result in redundancies or a hiring freeze. But some jobs may undergo a metamorphosis. The strategic scenario planning department of yesteryear, for example, may stage a comeback.
This department may well be essential, as AI models are trained on past data, often producing similar if not identical outputs. However, these outputs, particularly forecasts, may not always be accurate, given the likely changes in underlying conditions. Not only are AI models based on past data, they may not account for deep-rooted cognitive biases, mental schema, perceived tactics or the strategies behind decisions. Further, some data could be exaggerated, understated or fictional.
Also Read: Arun Maira: The impact of AI on Indian jobs is a distraction we can do without
Therefore, scenario planners must adjust outputs by taking into account factors such as demography, immigration, government policies, GDP growth, institutional mechanisms and geopolitics.
The third is geopolitics. This is one of the big reasons why AI models require moderation. This manifests in two primary ways. First, geopolitical tensions such as wars, tariffs, boycotts and sanctions lead to significant supply-chain disturbances. This necessitates a change in manufacturing models, which in the past few decades have been geared for just-in-time operations.
Today, protectionism is on the rise, a policy-set that includes re-shoring, the promotion of national champions and even the re-nationalization of industries. The traditional concept of ‘comparative advantage’ is becoming less relevant as capital is directed to sectors deemed critical. This has led to a resurgence of strategic licensing, regulated pricing and subsidies. Such developments will require changes in production processes, inventory management, quality standards and pricing strategies.
Also Read: Raghuram Rajan: How emerging economies can prosper in a protectionist world
The fourth reason is the atrophy of global institutions. The World Trade Organization (WTO) appellate body has been non-functional since 2019. There is no adjudication on the dumping of goods, non-tariff barriers or punitive tariffs. On the other hand, wars continue unabated, reminiscent of the pre-World War II era. Business strategies, thus, need to factor in weak enforcement of global pacts, persistent disagreements among nations, crude forms of diplomacy and the weakening rule of international law.
The fifth reason is rising inequality and India’s covert introduction of a Universal Basic Income (UBI). A consequence of our electoral democracy’s compulsions, the UBI idea has taken myriad forms, such as direct cash transfers to farmers, women, youth and economically weaker sections. This new normal will affect India’s labour market, consumption basket, product characteristics and market segments.
Similar events have occurred in isolation throughout history. Today, however, we face a perfect storm of converging factors. Climate change, for instance, has been linked by some studies to the decline of the Indus Valley Civilization and the fall of the Akkadian Empire. Recent examples include Panama’s evacuation of Gardi Sugdub, a low-lying island, and the residents of Pacific island Tuvalu moving to Australia.
Like AI, the Industrial Revolution spurred the rise of corporations and institutions that boosted productivity and GDP amid high population growth and active migration. Today, however, population growth is slowing and migration faces increasing resistance, though global capability centres that use cross-border talent are thriving.
Also, geopolitics has always shaped businesses. The global industrial landscape was impacted by World War II, the Soviet Union’s breakup, the European Economic Community’s formation and, more recently, China’s Belt and Road Initiative.
Further, India’s free-food programme is akin to the ancient Roman practice of ‘cura annonae,’ wherein free food was given to citizens; it was a temporary provision that achieved permanence. This had an effect on businesses of that era, from ports and shipping to warehouses and watermills.
The lifespan of large successful corporations has historically been short, or at least not as long as they would have liked. Only 49 companies of the first list of Fortune 500 companies survive today. Similarly, only eight of the original Nifty 50 companies are in this stock index today.
If corporates don’t restructure now, demise could be a certainty. This in turn will affect the other two components of the B-school elective: mergers and acquisitions. The terminal value of their discounted future cash flows will not be a true reflection of reality.
The author is an INSOL Fellow and an Interim Leader.
