Friday, December 12, 2008

India and the Global Meltdown

The global economy is facing one of the most unsettling periods ever witnessed. The global financial meltdown which started in the USA is affecting the orderly economic growth of all the countries, advanced as well as emerging. As one traces the causative factors, clearly management seems to have failed economics, in a sordid saga of corporate recklessness and expansionist greed.

Economic and management professionals have long agreed on the fundamental premise that wealth creation is the sine qua non of economic growth and social equity. There have however been diametrically opposite ideological views on the pros and cons of free market economy (or capitalistic economy) versus controlled economy (or socialistic economy). The desperate moves by the governments of the free market economies to step in and part-support or part-nationalize the private financial institutions are seen by critics as a triumph of the socialistic ideology and a failure of the capitalistic philosophy.

Some critics have also been blaming the adverse developments on excessive globalization. The acute discomfort caused by the flight of global capital is seen by them as validation of the perils of globalization. However, such conclusions are not only quite simplistic but even highly erroneous. Today’s crisis is neither of ownership of wealth nor of globalization of economies but is a more fundamental misconception of what constitutes true national wealth and what signifies true global competitiveness. Sadly, management as a profession has contributed to such a misconception instead of avoiding it or correcting it.

True wealth is driven by science and technology on one hand and people and talent on the other. As many will recollect, Japan was seriously impacted in the 1980s by the collapse of its economy due to the real estate bubble and its subsequent transition to a serious deflationary mode. Yet, Japan retained its pre-eminent position as an industrially advanced nation by virtue of its fundamental leadership in science and technology. Companies, industries and nations should focus on generating true national wealth through science and technology as well as productive asset capital rather than through exotic financial instruments and mystic valuations.

Similarly, globalization is not economic Darwinism. Globalization is an opportunity for competent firms and businesses to excel with scale and scope. Emerging nations have to recognize that global resources constantly seek avenues that are more attractive and outsourcing would favour countries that demonstrate superior competitive efficiency. Advanced nations which globalize and outsource have to discover newer scientific, technological and business platforms to sustain and grow their own economies in the long term. Emerging and global economies which do not recognize this vital and maverick nature of globalization will find the advantages to be transient and its long term impact too volatile to handle.

Rather than be alarmed by these macroeconomic developments, one must use them as new opportunities. Every enterprise has to focus from the very inception on creating world-class assets which can produce high quality products and services for appropriate market needs. Business strategies need to be driven by scientific and technical competencies, be it in the form of integration, diversification or customization models. There is also need to create intellectual capital through continuous inventions and patenting of them.

The hard physical assets and the soft intellectual assets together represent true national wealth, about which companies and nations can be proud of. As India aims to become a global economic power, asset quality and business competitiveness will emerge as the key drivers. While the economic turbulence does impact organizations with a large investment-intensive asset base, the long term resilience of such organizations would eventually make them emerge stronger from such crises.

Managers must therefore focus on creating wealth through intellectual talent; wealth that is real and competitive and that endures the economic vagaries. Managers must understand how prudent business models can be built around serving customers effectively by offering products and services that meet their inherent and latent needs. More importantly, management professionals should know how to differentiate between cost reduction and value enhancement and use them as levers relevant to diverse situations.

Very often, run-of-the-mill managements get into a stupor when faced with adverse market or economic conditions; most even draw back from investing for the future. Managements must, however, recognize that a crisis presents the opportunity to undertake institutional reforms, weed out the inefficient baggage and add on value builders for the future. Firms which are able to weather the storm of recession and yet are bold enough to invest for the future are more likely to lead the growth waves of the future; they probably will rewrite the industrial structure decisively in their favour.

Indian scientists, technologists, managers and business leaders need to look to the future not in terms of today’s economic crisis or its impact on the placements, but more in terms of preparing for a challenging and exciting tomorrow where India is destined to play a major role in global economy and business, come what may. In such an evolution managerial talent coupled with an unswerving faith in technology can lead to a wave of sustainable wealth creation and competitive growth.

Posted by Dr CB Rao on December 12, 2008

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