Monday, February 6, 2012

Public Policy and Industry Structure: Challenges and Opportunities

There is a considerable degree of misunderstanding on the scope and role of public policy in a global economy that is liberalized and provides the pride of place to free enterprise. Emerging economies such as India are prone to an even greater level of confusion on this, particularly in the context of controversies in the formulation and execution of various public policy initiatives. However, the role of positive and proactive public policy that guards the interests of society and spurs triggers development cannot be ignored. In many instances, public policy has been in the vanguard of changes that protect consumer interests. In the early years of India’s industrialization the ISI marking on industrial and consumer products and in the later years the Bharat fuel economy certifications for the automobiles are two examples of the Indian government mandatorily influencing the development of higher quality and performance norms on industries.

Governments, central and state, could, and need to, do much more to drive industrial change in India. There is, for example, a dire need to display prominently and scientifically, the ingredients, serving sizes and the nutrition values of all food products, whether they are manufactured by large companies or small and medium enterprises. This would enable a concerted move to curb the uneducated and uncontrolled drift of the population from nutrition to taste. In a similar fashion, mandatory development of easy-to-read pharmaceutical packages and introduction of package inserts for all pharmaceutical preparations could be steps that would ensure better patient safety. Public policy is vital to ensure that private enterprise in its quest for sales maximization and cost minimization does not lose track of consumer interests. Publication of data on carbon credits and other disclosure items by the companies also fall under the category of investor protection.

Transformative policy

At times, however, public policy can be transformative in its impact on social and industry structure. For example, the governments can decide that in the interests of passenger safety (protection against deep vein thrombosis) and comfort (for the young and the old alike), all airlines must provide flat-bed seats, irrespective of the class of travel, whenever travel time exceeds say, five hours. With thousands of planes flying on long distance travel and with bulk of the seats being for the economy class with constrained leg space, the drastic impact of such a policy prescription on aircraft configuration and capacity, and on air travel economics can be imagined. Such a policy prescription can affect the constituents of the broader air transportation industry in different ways. The aircraft manufacturers may face demand buoyancy as airliners may seek to order new aircraft to fulfill the new requirement. They may also be induced in the long run to develop new aircraft configurations that could provide flat-bed capacity throughout the aircraft without reducing seating capacity too much. The manufacturers may also experience a spurt in demand for larger aircraft such as Airbus A 380 or Boeing Dreamliner.

The policy prescription would impact the other constituents of the airline industry in different ways. The aircraft interior makers and seat developers would benefit from a huge demand spurt. Logistics and transportation consulting firms would have a major demand for analytics that optimize seating configurations between short haul and long haul flights as well as pricing and differentiation models. The airliners may face huge dis-economics of the policy change in terms of what the economy market segment could bear for the enhanced passenger comfort on one hand, and the possibilities of demand flux and migration across the economy class, business class and first class user segments. The society and the intellectual groups, especially in emerging markets, may react in a totally different way questioning the priority of the governments in ensuring passenger comfort in air travel when other transportation services such as road and rail are grossly inadequate. It is quite likely that emerging economies may have a positive backlash of similar structural reforms in other transportation sectors such as high speed bullet trains, full scale sleeper compartments and fully air-conditioned train and bus services.

Services, infrastructure and resources

As governments the world over quit manufacturing and ease the controls on the sector, they would focus more on services and infrastructure as well as physical resources. Policies on these sectors need to be positively disruptive to catalyze growth. In India, in particular, what are considered subsidies and election sops today could be essential social needs, in the years to come. From providing subsidized rice, governments may move towards low cost production of rice through better farming methods and yields. From providing laptops as an election promise, the governments may see the laptops and tablets as an essential investment in students to enhance the quality of students. As already contemplated, governments may enhance the duration of the medical course by one year to accommodate a one year rural stint. Governments may take upon universal medical care, universal housing and universal education as their responsibilities. Access to affordable and comfortable public transport may be seen as essential to ensure social and economic productivity. Road development may become a priority item. While all these may be seen to be taking away tax revenues, the overall economic benefit may outweigh the short term impact.

At the same time, societies and governments are likely to be vocal and interventionist in terms of natural resource utilization. Mining of coal and metals would be a contentious issue as industrialists and environmentalists seek to balance the conflicting imperatives of growth and conservation. Pricing of these resources may no longer be a matter between the private exploiters and the governments; rather it could be a matter of public interest with the courts also coming into play from time to time. Equally contentious would be matters relating to quality of air, matters of pollution, and utilization of scarce vital resources of land and water. Public policy in matters of resource utilization needs to be proactive to enable fair generation and optimal utilization of resources, rather than be ignorant of it for long spells of time, and then take draconian measures. Policies on fuel consumption and plastic and electronic waste are a few examples of the need for continuous and calibrated monitoring. While corporations may overcome domestic natural resource constraints through overseas acquisitions, governments cannot be oblivious to the geo-political impact of overseas acquisitions.

Public policy and industrial restructuring

Public policy leads to industrial restructuring from time to time. The US government’s fuel economy and EPA norms of the 1970s, promulgated in the wake of the first oil crisis, have caused complete restructuring of the global automobile industry, providing an opportunity to the Japanese automobile industry to leverage its unique fuel-efficient compact car technologies to achieve global dominance. It is not that public policy always constrains and restructures the industry. But for the support of the US government, General Motors would have ceased to exist after the global economic meltdown in 2008 and 2009. The private sector as well as public sector airlines in India are facing a situation of needing governmental support for bailout. However, it is a matter of debate if public policy should in the first place cause distress through either excessive freedom or excessive control, and then seek to remedy later. What constitutes proactive and prudent industrial management or reactive and casual industrial management in the face of unpredictable public policy has always been a grey area. Corporations have to necessarily structure their strategies anticipating volatile public policy shifts, especially in emerging economies.

In contrast, where public safety and health, resource conservation and environmental protection are concerned it would pay for the businesses to be ahead of the public policy curve. Many times, public policy comes up with requirements that challenge the industry. The pharmaceutical industry has instances of ePedigree solutions (required by the US government) or the 2D barcoding (required by the Indian government) adding new packaging and distribution requirements. Whether it is first PVC and now BPA free food grade materials or lead free fuels, those companies which are proactive in developing superior products ahead of public policy not only serve the society better but also secure competitive advantage. To be able to do so, firms must first consider public policy as a competitive input rather than collaborative enabler. The author of this blog post argued earlier that the theory of Five Competitive Forces propounded by Michael Porter needs to be expanded to include global liquidity as the sixth competitive force. It would be appropriate to consider the competitive pressure of public policy as the seventh competitive force.

Technology as a differentiator

Public policy does not of course happen in thin air. Many times it is developed based on technological developments that happen in different sectors, and in different countries. The way the pharmaceutical industry controls its aseptic manufacture stringently could prompt the governments to require hospitals to establish similar aseptic standards in their operation theatres and intensive care units. The technologies that are generated in research laboratories, many of which are either funded by the governments or owned by the governments, could trigger the governments to mandate the commercial application of such technologies. Elimination of cancer causing materials is one such example. As the seismic activity in different regions becomes unpredictable, governments may mandate that all builders must follow Japanese-type earthquake proof construction. Similarly, deployment of green building technologies or alternative energy concepts could become the rules rather than exceptions.

Firms must, as a corollary, never accept technological status quo as a strategy. Those firms which constantly examine the linkages between their products and services on one hand and the consumer and environment protection needs, and develop appropriate technological solutions on the other could be ahead of the public policy curve. Yet, it is amazing how industries get trapped within the technological, operational and business templates that have proved successful, and lose sight of the impending game changing public policy directives. Reverting to the earlier example of the aircraft and airline industries, it is surprising why the industry refuses to recognize leg space, let alone, sleeping comfort as the essence of futuristic aviation design. The automobile industry took several long years to discover the needs of the society for low-floor buses and hybrid vehicles. There is no reason why other industries should fail to see the wave of egalitarian design becoming an edgy public policy.

Opportunities, rather than challenges

Public policy provides to the industry as many opportunities as challenges. In fact, proactive firms may see more opportunities than challenges. To institutionally respond to this paradigm, firms must go beyond the strategy of higher allocations to R&D. Emphasis must be placed on channeling a certain portion of R&D expenditure towards more consumer and environment friendly technologies which could serve public policy more effectively. The attempt to develop Aakash tablet computer by India as an extremely low cost computer for school children is a perfect example. The tablet computer industry could, instead of trying an unending desperate attempt to compete with Apple, view the billions of school and college going students as the universe to serve. Agricultural scientists and food processing industries could align themselves to the needs of the public policy to provide low cost food grains through better technologies and farming practices. Those participants in education, healthcare, and housing sectors may examine how parts of their services portfolio could be aligned to public policy imperatives of universalization. Anticipating and proactively catering to public policy changes could vest in firms virtually unlimited market opportunities and significant competitive advantage.

Posted by Dr CB Rao on February 6, 2012

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