Sunday, April 18, 2010

New Masters of Management

The Economist [April 15th, European Print Edition] produced a Special Report titled 'The New Masters of Management', on the subject of innovation and new management paradigm coming out of emerging economies.

Most of the staff is well known. We have read about this in the writings of Nirmalya Kumar, Tarun Khanna and C K Prahalad.

The emerging economy companies approach M&A, as Dr Kumar has pointed out, with not so much cost savings in mind as they want to acquire brand, know-how and market access. This makes M&As like the acquisition of Corus by Tatas, of Axon by HCL, of Volvo by Geely, fundamentally different from the other M&A activities carried out by Western companies mainly on account of synergy and cost savings [of Cadbury by Kraft, for example].

Dr Prahalad has written extensively about the Bottom of the Pyramid approach, where companies innovate to bring products and services to consumers who live in rural areas and have very low income in dollar terms. The low income is made up by their numbers. Such innovation is called Frugal or Reverse Innovation, The Economist reports. The report cites innovations by Dr Devi Shetty who applied assembly line techniques to open heart surgeries; but there are numerous other examples, such as Grameen Bank's rural PCO scheme, the application of assembly line techniques to IOL surgery by Aravind Eye Hospital, the making of Tata Nano, world's cheapest car, the revolution in agricultural trading brought about by ITC's e-Choupal etc.

The Economist article, however, makes an important point. This attempts to present such business models and approaches as the emerging paradigm in management, which the Western companies should examine and learn from. It is too easy to dismiss these models out of hand as peculiar or primitive, depending on who you ask. However, it is important to understand that the current business models as pursued by successful companies in Europe and America is actually based on assumptions that debt-fuelled consumption of world's richest 1 billion people can continue forever. The recent recession is a clear reminder than things have to change, and will change.

Besides, there is this question of inclusive development. Increasingly, the statelessness of the challengers of the global system, like Al Queda, point to the necessity of developing an inclusive model; we can forget all about Somalia by installing a government which takes our hand-out and obey our orders, but still the poverty stricken Somalis can disrupt our lives significantly, driving our yachts off the Red Sea, and driving up fuel prices in our neighbourhood gas stations. But there is almost no way, within the economic system, that we can do it. Besides, the environmental impact of bringing 5 billion people to party, giving them a modern lifestyle, will be unsustainable. Unless, of course, we turn to 'frugal' innovation.

It is also interesting to note the comments made on The Economist website. Most of the readers did not take it kindly that the article highlights emerging country innovation and somehow imply that this is the way to go. While the importance of such innovation and business models are commonly accepted in the Western media and business literature [see Businessweek here], Western executives are usually dismissive. Especially, they don't get India, where the lack of infrastructure and chaotic ways of doing things [as opposed to shiny infrastructure and businesslike ways in China] appear too daunting.

The business houses, usually diversified conglomerates owned by families, seem to them too primitive, and often they lack the sophisticated management practises of capital market driven Western public companies. But, as The Economist reports, such diversified conglomerates operate to overcome the limitations of the capital markets, as well as to deal with two important challenges - brand building and market access, and talent acquisition and retention. One can also argue that family ownership of such large businesses allow these companies to take a longer term view than Western public companies, which may work as a competitive advantage.

Celebration of emerging market innovativeness should no way imply that these companies are going to take over the world real soon. For example, family owned conglomerates, despite their advantages, often stifle innovation and entrepreneuralism. In my own experience, I know life is hard for small businesses in India. That has to change, for the country to move to the next level of innovation and progress. Infrastructure, in most countries including India, remains a huge challenge, as many readers pointed out on The Economist website. As the report itself points out, India [along with Brazil and China] remains a hard place to do business for an outsider, ranking 133rd in a list of 183 countries by the World Bank. And, most importantly, the businesses in emerging countries are growing faster than the human infrastructure, education, talent mobility and social security, creating serious bottlenecks and social misalignment which may, in turn, come back to haunt businesses.

In summary, then, while important challenges remain, emerging country companies are leading the way in disruptive innovation, which will go a long way in bringing modern lifestyle to the world's 5 billion people living in these countries. Such innovation, while may be of little relevance to developed world companies as long as they confine themselves in their local markets, will be critical in the global agenda going forward. Since stagnation is not an option, such business models need to be studied and should be incorporated in the mainstream management literature. These are no longer novelties, but precursors of the world to come.

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