The 19th century had many lessons for the corporate world; the most fascinating was possibly the disruption caused by alternating current.
Factories belonging to a number to flourishing businesses were not designed for AC electricity, and they chose not to revamp their facilities as it was painful and costly. The result: these companies would soon go out of business.
The ones which took the pain and remodelled their facilities quickly not only survived but also became dominant players of their industries.
Morgan Stanley’s India head Ridham Desai shared this anecdote during an interaction with ETNOW to stress why investors need to constantly look for companies that are adapting faster to changing business dynamics. They are the ones that hold value, he said.
Desai calls them Corporate 2.0.
“Companies which are not changing their business models will lose in this environment, and investors need to be very careful while picking such stocks,” Desai said.
The Dalal Street veteran says things like robotics, artificial intelligence are creating the same situation for today’s businesses what AC current had done to 19th Century companies.
Change is key to success in business. “Companies that are transforming as per the need of the environment, as well as consumer behaviour, will only survive in this age of disruptions,” said Desai.
The impact of changing business environment is already visible in sectors like auto, IT, media and FMCG, among others. The external environment and tighter regulations are slowing down auto companies and they now need to quickly upgrade to the reality of electric vehicles.
“Most businesses adapting to new technologies in different parts of their businesses; some are adopting new tech in production , some in distribution. In broadcast entertainment with content digitization and streaming, digital media are the obvious areas of rapid change. But even in these areas, changes take years, sometimes decades. It is not always easy to pick the winners. The losers are far easier to identify. Rapid change in an industry sometimes throws up completely new beneficiaries,” said Abhishek Basumullick, Kolkata-based value investor and Chief Investment Advisor, Intelsense Capital.
The IT industry is being forced to adapt to an environment of digitisation and robotics, while FMCG firms are being forced to change product mix to cater to a more health-conscious consumer.
“The IT sector is seeing a lot of disruptions, adaptation to new technology. Companies have adjusted their business models, accordingly,” says Deepak Jasani, Head of Retail Research at HDFC Securities.
The brokerage is today mildly bullish on the IT services space.
“Within the IT services space, large-caps will give you 8-12 per cent return per annum but we will have to be a little more careful about the midcaps. The risk-reward will be higher, because the base of these companies are smaller, the risk they have taken and the niche areas they want to get into are limited. In case something goes wrong or the managements are not able to adapt to changing requirements, the smaller players could come under pressure,” said Jasani.
Traditional cable distribution businesses are being challenged by digital distributors like OTT platforms and live streaming apps, while in the content consumption space itself, the demand is changing fast.
“Investors need to look at business models on a case to case basis and understand the impact of new technologies on their businesses,” said Basumallick.
Media consumption on mobile internet has gone up from 9.4 minutes daily in 2013 to 54 minutes this year. It is expected to be the highest across mediums, with consumers likely to spend 79 minutes a day by 2021, says media agency Zenith.
Reliance Industries’ telecom arm Jio, Bharti AirtelNSE -2.87 %, Zee Entertainment, Eros Media and Vodafone Idea are all getting into the live streaming businesses.
“Visionary entrepreneurs change their strategies with changing economy and business dynamics. I see Reliance Industries as one such company that has changed its business models from a pure-play energy player to retail, media and internet-telephony,” says G Chokkalingam, founder of Equinomics Research and Advisory.