Interview with Kavan Choksi

1. How has the current environment (i.e., inflation, recession, supply chain issues, and lingering COVID restrictions) impacted our economy and businesses?

Businesses entered this current environment from a position of balance sheet strength. Revenue growth was strong, and margins were at record highs, owing in part to a period of low interest rates that allowed companies to borrow at favorable terms.

However, the cost of doing business in 2022 has surged. The pandemic resulted in wide-spread facility closures, leading to mass layoffs and supply chain issues. Some of the closures are still ongoing, particularly in China, where any new outbreaks amid the government’s “Zero-Covid” policy can threaten global production. In turn, these economic shocks have ultimately created the inflationary pressures we’re seeing now.

As the world continues to recover from the impacts of COVID-19, business leaders will continue to shape their decisions around the pandemic’s lasting effects and new, challenging conditions. Largely, these tactics have included cost control measures and pricing decisions. Businesses so far have been successful in passing on the cost increases to the end-consumer.

Central banks, including the U.S., have raised rates at a pace we haven’t seen in decades to fight inflation. We’ve quickly transitioned from an easy monetary policy to a tight money policy, which has resulted in significantly higher interest rates and restrained access to credit. Capital for expansion is more expensive and difficult to come by. Surging interest rates has led to fluctuations in currency, changing the profitability of doing business overseas. Business leaders must be selective in making borrowing decisions, and certain companies may find that funding expansion with equity, rather than debt, makes more sense in this interest rate climate.

Other headwinds businesses may face include labor shortages and increased regulations. Skilled labor pools have become scarce, and it remains challenging to secure work visas, obtain permits, and hire the right people on a global scale. Governments have also tightened regulations that broadly impact business operations, from environmental regulations to the introduction of stricter labor laws. These circumstances have made it more difficult to scale a company across borders and have resulted in the higher costs of doing business in foreign markets.

2. What steps can business leaders take during times of uncertainty to combat these challenges – both domestically and internationally?

History has shown us that companies often fail to prepare or respond quickly enough to a deteriorating market. Challenging markets create opportunities, but in this environment, I would advise companies to remain nimble when being opportunistic and avoid over-committing resources. We cannot predict the length or intensity of the upcoming recession, and businesses should be prepared to weather a prolonged period of macroeconomic headwinds.

Companies should evaluate their pricing structure and margins to ensure that any rise in production costs are being absorbed by customers to an extent that is fair and equitable. Even if inflation subsides, businesses may see increased long-term costs in energy. Higher CapEx costs will likely persist for some time, so funding expansion and maintenance may need to be reevaluated. This is particularly important for international organizations, which likely have been impacted by currency fluctuations. Currency volatility and hedging costs may erode margins as central banks diverge in monetary policy.

Additionally, companies must prepare for unforeseen risks, such as the next global pandemic or geopolitical shock. This starts by maintaining discipline with your supply chain, which is especially important when importing and exporting internationally. Stick to buying schedules, maintain appropriate inventory levels, and build in sufficient lead times. No one can predict when or what will cause a snag in the supply chain, but you can prepare yourself to be in the best position possible.

3. Are businesses facing similar challenges globally? How do their approaches to overcoming these issues differ?

Simply put, yes. Many of the same challenges we see in the U.S. exist on a global scale. Supply chain issues and inflation continue to be major pain points impeding businesses around the world. We’re also experiencing a steady pullback in international expansion with a concerted effort to re-establish domestic production and self-reliance. Additionally, we’re seeing precautionary measures implemented by central governments and policymakers that will safeguard key strategic industries and sectors. This period of de-globalization we’ve entered is expected to be inflationary by nature.

Globally, as supply chain issues and Russia’s invasion of Ukraine have sent energy and commodity prices higher, resource-rich markets have benefitted. Meanwhile, Europe has faced an energy crisis, with governments seeking to reduce demand. Overall, until we see indications that global inflation has peaked, higher costs will continue to weigh on any expansionary ambitions companies may have.

4. The pandemic brought on a range of changes to our economy and workplace. What notable changes must business leaders consider when scaling their business to ensure a successful product or service?

The first thing you must determine is if now is the right time to expand. Ask yourself these two questions: Has my business hit a saturation point in its current market? Does my business have a unique value proposition that can be scaled? If the answer to both is yes, then expansion may be the best option. However, before making that decision, your business must be profitable and mature, otherwise, you won’t be able to absorb any of the early losses you are likely to incur when entering a new market.

Additionally, you need to have a deep understanding of the new market and its demographics, especially if you’re expanding internationally. Your product or service may be successful in your home market, but that doesn’t mean it will translate across borders. To be successful, you must offer something unique that addresses a particular need in the new target market.

During one of my earlier consulting assignments, a well-known jewelry brand was looking to expand into Japan. Having achieved great success in both the European and U.S. markets, the brand assumed that this success would automatically be replicated in Japan. However, the company refused to alter its product offerings and market strategy to fit the needs of the Japanese consumer. This led to the brand’s demise in the market and serves as an example of what can go wrong if you’re unwilling to adapt to new cultures.

The lesson learned is that you can’t predict how a new market will react to your offerings based on success in other markets. Listen to what your target audience is saying and be willing to pivot when needed to accommodate. Take a look at your competitors and how they’ve established themselves and learn from their successes.

One final consideration is to keep an eye on your competitors as you execute your expansion, especially internationally. There will always be those who look to replicate your business model, so it is important that you are the best at what you do or have enough brand equity that will translate across borders. Building this credibility and trust among existing and new consumers is essential to successfully warding off the competition. Those whose value proposition doesn’t translate or is easily replicated will ultimately crumble.

5. Can you share an example of a company that has successfully scaled up and what other business leaders can learn from their success?

Take a look at what Apple is doing in this current environment. Yes, the company is well-known for its tech products, but the success of its innovations and marketing are supported by tight-knit supply chains across multiple countries. Apple’s enviable supply chains are a testament to its strongly-developed relationships with suppliers and the ability to maintain a strategic inventory with a keen focus on sustainability. Notably, the company’s response to pandemic-era changes, specifically around the supply chain, have been impressive.

The pandemic exposed just how fragile the supply chain can be. But Apple remained nimble and proactively diversified its supply chain, recently announcing a move of 5% of its iPhone production to India, which puts it on track to achieve 25% by 2025. The company is also moving 20% of iPad and Apple Watch production, 5% of MacBook, and 65% of AirPods to Vietnam in that same window. While Apple has a large market share and enough capital to do this, it offers a great example of focusing on a key component of the business that allows it to successfully scale.

Additionally, part of a successful expansion strategy includes having the right people to execute your business plan. Existing employees are a great source for heading up your expansion as they already have the institutional knowledge and understanding to operate and implement your current business practices. However, the most important decision a business owner will make is hiring a new CEO or manager to oversee an expansion. By hiring a senior leader who brings a deep understanding of the new territory, you’ll have the support of a trusted resource on the ground that can manage the day-to-day operation and help you navigate local challenges in real-time. It’s important to build clear lines of communication with the CEO or manager and the heads of each department to gain a balanced picture of your operation on the ground.

A successful international expansion also requires connecting with local business and trade organizations. It’s essential to understand the local market in addition to broader government regulations, trends, and policy directions in order to navigate today’s economic environment. For example, when I worked with a Japanese retailer, we became members of a local trade organization which allowed us to stay up to date with the most relevant and pressing issues facing our industry, how our competitors managed these challenges, and what macro events could impact the market.

6. What are your predictions for the coming years and what can business leaders do now to prepare?

As we move into Q4 2022, we can anticipate the global economy to grow at a slower pace and possibly contract. Inflation will remain high, and central banks will continue to raise rates until we see prices stabilize. Central banks may diverge in policy, leading to sporadic rate declines in certain countries. Expect some markets to see continued geopolitical instability. Geopolitical events will be important for businesses to consider as instability could hinder any expansion plans or growth strategies in those markets and their trading partners. Supply chains will continue to diversify to avoid future disruptions; however, we’ll continue to see governments impose new policies, especially in the U.S., to encourage domestic production.

At the end of the day, the best piece of advice I share with both clients and other leaders is to re-evaluate their business model and value proposition. This is a great indicator of how their company is currently positioned and offers valuable insights into how they can adjust and prepare for future growth.

Author Kavan Choksi:

 

Kavan Choksi is a successful investor, business management and wealth consultant. He works strategically with companies across fast-moving consumer goods, retail and luxury markets – leveraging his vast experience to help clients turnaround and revitalize their business. With expertise in economics and finance, Kavan has developed a passion for investing over the years and enjoys helping others do more with their money.