Friday, February 25, 2011

The Firm’s Next Frontier: The Universal Corporation?

There is no evidence in industrial chronology as to when the first firm came into being in this world. It may, however, be hypothesized that the concept of the firm got established when the first trade took place in the world, probably simultaneous with the origin of human being. The firm as an institution got rooted in different countries and communities as the concept of capitalism got ingrained in the human mind (probably from 1300 AD). Capitalism being creation of more wealth from available wealth, human beings found the need for collaborate as well as compete to gain access for resources, convert the resources into products and/or services and sell them. In this process, the firm emerged as the appropriate forum to conduct all such activities. There is, however, enough evidence when the first joint stock company was established in the world (Muscovy Company in Britain, circa 1555) and when the first international venture originated (East India Company of Britain, circa 1600). The Dutch East India Company was probably an earlier multinational corporation in the world, but it was the East India Company of Britain that was aggressively multinational, also gaining infamy as the Trojan Horse that brought the British conquest of India. Today’s firm has, of course, come a long, long way from the historical version of the firm. Keeping that in view, we also need to conceptualize how the firm of the future would look like. India, like China, offers an excellent backdrop to analyze the past evolution and forecast the future transformation of the firm.

MNCs in India, and of India

Over the centuries, the firm has taken various hues. From a strictly own country boundary to export to other countries had been the first evolution for the firm. An export-oriented firm thus took shape. In due course, the multinational firm took shape as the firm started having headquarters and/or principal manufacturing complex in one country, mostly a developed country, and having production and/or sales in different countries, mostly developing nations. Also called transnational corporation, the multinational corporation (MNC) has been a major feature of industrial development in the whole of the twentieth century. The growth of MNCs has been like the flow of water; from developed economies to less developed economies, from high technology countries to low technology countries, and from saturated markets to virgin markets. Market and structural imperfections such as differentials in skill levels, access to resources, policy inducements, local partnerships, and tax treatments provided additional impetus to the growth of the MNCs. Typically the need of the host country for the MNCs proprietary technology and the need of the MNC for new markets provided a platform of quid pro quo for such development. The journey for the MNCs has rarely been smooth however across the world, more so in less developed countries. India offers an educative case example.

The growth of the MNCs during 1950s to 1990s in India has been marked by both pragmatic and dogmatic considerations. Industrial evolution in the pre-independence India had to bear the bias of foreign occupation. Industrial development in the post-independence followed a very distinct model governed by the socialistic dogmas of the successive governments. All technology and investment-intensive industries were, by and large, reserved for the government owned enterprises, called public sector undertakings (PSUs). PSUs typically grew based on technical collaborations with engineering and technology majors from advanced countries without any equity investments. However, the areas that the successive governments considered non-strategic were left open for MNCs to enter India as branch offices, listed companies, joint ventures and in exceptional cases as wholly owned enterprises. Almost all aspects of MNC enterprise operations were closely monitored and controlled while in some cases either takeover by the government (nationalization) as in the case of Shell, Exon or Caltex or demands for alignment with public policy made certain MNCs in a few sectors disappear from India (for eg., Coca Cola and IBM). Until economic liberalization of the 1990s and beyond, most MNCs stayed on as bystanders than as active participants of economic development. The liberalization of economic policy and dismantling of licensing has seen a host of MNCs reenter India in 1900s and 2000s to benefit not only from India’s huge market base that could absorb MNC products and services but also from India’s educated workforce which could provide cost-competitive software and manufacturing solutions.

As one reviews the tryst between India and the MNCs, the need for public policy and private initiative to be aligned with each other becomes clear. Clearly, the MNCs in the initial days of Indian independence were reluctant to offer any more than low technology items (eg., oils and soaps) or dated technologies in otherwise high technology industries (eg., automobiles and electronics). MNCs in certain sectors such as pharmaceuticals were totally reluctant to participate in India due to lack of patent protection. The government, on its part, was perhaps justified in insisting that the MNCs should do better than offering cigarettes and aerated beverages to India. The government, in addition, had its own strange diffidence towards the Indian private sector, which could have been the natural ally for the MNCs in India on a much larger spectrum. Today, the history of India’s industrial development, despite the warp, offers two lessons: firstly, Indian government’s protectionist policies have given strength to a fledgling indigenous private sector (as was the case with several other emerging economies) as well as established a robust public sector, operating in technology and investment intensive sectors (a feature unique to India). Secondly, market imperfections being what they are, the market and the MNCs had to find workarounds to facilitate MNC growth in India. From re-jigging product and manufacturing strategies through a national lens (for eg., Lever and Colgate) to collaborating on a low-risk technical collaboration and minority equity route (for eg., auto components) MNCs and India had been moderately successful in retaining a relationship if not a tryst. As MNCs and a host of rapidly developing economies, including India and China, view the future the question to ask is whether the MNC as seen today would morph into a new avatar!

MNCs and societies under transformation

Some scholars believe that rapid economic growth around the world has reduced market imperfections, and as a result the MNCs and the nations now face a climate of mutual trust and dependency, in the background of market maturity. Some others believe that most MNCs are already becoming global corporations in the sense that the research, manufacturing and commercial operations are more widely dispersed across several countries than ever. They also believe that the sheer need for investible resources from the MNCs would keep the nations on the path of pragmatism. Both the schools inevitably come to the conclusion that the emergence of a global corporation, already underway, would make the classic MNC an even more relevant institution for the future. While these views have their merit, the fact is that both MNCs and societies are under such transformation that even the concept of a global corporation would fall short of the transformational change that would dictate new trends. There are two market and skill related facets of the transformation that the MNCs and nations must take note of even as they participate in the transformation, by design or default.

Markets as 3D Matrices

Just how effective the firm would in future be would in turn be dependent on how the firm is aligned to the markets, and how well the skills are aligned to the needs so that the firm could develop the products the markets would need. Hitherto, it has been assumed that the MNCs by virtue of their scale, scope and technologies are well positioned to address the needs of the markets and access the skills well. In doing so, it is also assumed that the markets can be segmented to accept products at different points, essentially specification-price driven, often depending on the purchasing power of economies and their citizens while countries and skills can be uniquely identified with each other to arrive at the most efficient means of development and manufacture. This finely honed model of the MNC, it is felt by them, would meet all foreseeable needs for the future. The classic MNC model, which ordains that certain economies need only certain types of products misses out the crucial point that more than the corporation, the consumer is global today. The citizen as the consumer has, in fact, transformed more than the citizen as the producer. This has important implications as below.

With information display and information flow reaching new highs through the Internet and all of global media systems the consumer is exposed to multiple technologies and functionalities. The consumer no longer views product differentiation merely in terms of a few features or price levels. Neither is the consumer interested in receiving products with generational lag depending on the development status of the country he or she belongs to. Under the transformation currently underway, the traditional one-dimensional layering of the market or two-dimensional market segmentation is yielding place to a more sophisticated three dimensional market cubing, the key dimensions being technological feel, functional performance and value pricing, irrespective of the development status of the country. These three dimensions are of transformational impact. Technological feel is the tactile, sensual and emotional experience that a device or equipment provides. Functional performance is the efficiency and effectiveness with which the device or equipment meets the performance needs of different market cubes. Value pricing is cost competitiveness enhanced by perceived superior value of the product in its market cube.

The corporation of tomorrow has to therefore develop a broad range of products, satisfying all of the market cubes, if it needs to achieve scale. The corporation has to master the ability to first start with the best of the three dimensions, and then downsize or vary the dimensions to meet various market cubes. This approach is antithetical to the wisdom that new products should be introduced at the lower end first to get as large a market toehold as possible and then upgrade to cover higher grounds. The transformation of the consumer from a price-sensitive persona to a value-conscious personality drives this need to stay at the top of the three dimensional axis. This hypothesis also upturns the established notion that different countries could be seen on the three dimensions of technology, performance and value depending on stage of their economic and social development. Nike, Rolex and iPhone are today seen as much in any interior habitat of Asia and Africa as they are seen in the upscale neighborhoods of New York Manhattan and Tokyo Ginza. The corporation of tomorrow has no option other than transform itself into a universal marketer, and consequently a universal developer and manufacturer as well.

Equilibrium of skills

A world leader implied in a recent exhortation to the developed industry that technology should flow to where markets are, and production should occur right in the midst of such needy markets. This, he argued, would create more jobs in developed countries as well, because as core technologies and components would continue to be developed out of developed countries. This, in fact, has been the theory and practice of the classic MNC. Unfortunately, the universalized market structure no longer deems the classic MNC model to be adequate. Sophisticated designs and products would need to be made in as many countries as possible to achieve universal appeal with country-specific value pricing. Fortune at the bottom of the pyramid applies to countries in economic pyramid as much as to economic strata in each country. This again requires as much universalized development and production across the globe as possible. There is a concomitant need therefore for several countries to ensure the availability of leading skills as an essential requirement for supporting universal production.

Not many would still endorse the proposition that there could eventually be better skill-sets emerging out of developing nations, leading eventually to equilibrium of skills across nations, developed and developing. That is probably a myopic view. None had, for example, hypothesized two decades ago that India would have leading edge automobile design and manufacturing skills. The fact, however, is that India over these two decades not only commenced design and manufacture of vehicles indigenously but could also create the world’s smallest but spacious Nano car as an innovative first in the world. Two decades into the future it is quite conceivable that India could be a hub of global innovation and manufacture in a wide range of industries, developing products truly for the first time in the world. Similar could be the opportunity for other innovation-aspiring countries. Technological leapfrogging could occur in respect of select rapidly developing countries on a much larger scale in future.

The essential requirement for the transformation would, however, be the availability of requisite intellectual capital in universities, laboratories and industries. Here again, the view could be that India or any other developing country would never reach the intellectual level of advanced countries, given the fact that thousands of Indian graduates still flock to the US universities for higher order education and research. That again would be a myopic view. There are clearly two waves of educational transformation sweeping India and China, whether or not attributable to tiger parents in these countries. The only inhibitor to a total global domination by the educational value chain of these two countries relates to certain major disconnects.

For example, aggressive private sector investments in secondary schooling have led to mathematical and scientific brilliance at school finishing levels in India. This is taken forward at graduation level by the Indian Institutes of Technology and Indian Institutes of Management which are among the top institutions globally already on their own. However, major failure in high quality primary education at the lower end, and significant inadequacies in cutting edge research in sunrise sectors are two major disconnects that constrains the educational value chain of these countries. As these countries recognize the need for fundamental investments in education at both the ends of the spectrum, the capabilities of their educational systems would increase manifold. Also, as more educational institutions and laboratories become multinational the intellectual transformation would be stoked further by their participation in the rapidly developing economies. In addition, the corporation that desires to cater to all the multidimensional cubes of the markets across the world has to make special efforts to advance the skill levels in the host countries. As skill levels reach equilibrium the intellectual markets would turn perfect providing flexibility to adopt multiple modes of development and manufacture in multiple countries.

The universal corporation

The age of the universal corporation is ready to dawn, primed by growth of new age economies such as India and China and the consequent diversification in development, manufacturing and marketing bases across the world. As customers become well informed and highly discerning, apparently homogenous markets would support heterogeneous products and services. The classic concept of a multinational corporation headquartered in an advanced country and having manufacturing bases in low cost countries, and accepting generations of products, and their manufacturing lines, sequentially would be a thing of the past in the next decade or two. The concept of a universal corporation which constantly seeks value arbitrage rather than mere cost arbitrage would simultaneously take root. The scale and scope of the markets in the rapidly developing economies combined with the accumulating and unstoppable intellectual power of youthful demographics in such economies would make the universal corporation a reality. What would be the strategies, structures and competencies of such universal corporations is, of course, a distinct area of research by itself.

Posted by Dr CB Rao on February 25, 2011

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