Ethics in Management

According to Newsweek (December 22, 2008), consequent to the Wall Street crisis and economic meltdown, the United States would have to eventually spend US$ 8 trillion, in bailout funds and loan commitments. These funds are badly required to shore up the collapsed and collapsing banks, companies and intermediaries and avert an economic crisis of horrendous proportions. This bailout figure represents more than half of US GDP and is a truly astounding reflection of the bloated asset valuations and disguised financials that camouflaged some of the worst kind of corporate and accounting recklessness that was ever witnessed in the US. The issues in Europe and Japan and the consequent bailout commitments are estimated to be no less severe as per the magazine.

These recent happenings, particularly in the Wall Street and Corporate America brought the global economy into a tailspin and caused an unprecedented global liquidity squeeze. The underlying mis-management of economies, industries and corporations that has triggered the deep global recession brings to the fore the issue of ethics in management.

Several principal issues emerge. Are ethics a set of floating principles to be evaluated in a contemporaneous manner relative to the times? Do government regulations and rules as well as professional codes effectively promote ethics? Are individual and professional ethics oftentimes subordinate to corporate wealth maximization goals? What are the boundaries of action for the governments in the face of collective corporate mismanagement? What is the accountability and punishment for managerial recklessness and professional duplicity as well as complicity? How can corporate managements restore a measure of credibility for themselves?

Ethics cannot change; should be cast in stone

Ethics are defined as the moral principles that govern a person’s behavior or how an activity is conducted. Morality is the set of principles concerning the difference between right and wrong. From times immemorial what helps or uplifts the common man has been considered right while what exploits or hurts the common man considered wrong. Governments, which are the ultimate national organizations for managing the economies and the gross national products, are ordained to operate for society’s common good. Corporations which are the organizational instruments for wealth generation in different sectors through specific products and services cannot be any different.



Whatever are the times and whichever the nations, societies are stratified in terms of rich and poor, or high income, middle income and low income. Over time, however, governments have begun to place excessive emphasis on gross economic indicators such as consumer spend, housing stock and mortgages as reflective of society’s economic wellbeing. Individuals have also fallen prey to a single minded pursuit of wealth and/or credit-driven easy living where assets disproportionate to incomes are acquired adventurously. The underlying absolute and relative inequities suffered by the poorer sections have come to be overwhelmed by quantitative indices of gross economic growth, personal incomes and consumer spend.

Sadly, governments and companies began to ignore the ethical compulsions of directing
economic and commercial activities in such a manner that the poor are enabled reasonable and secure disposable incomes and are provided a quality of life consistent with changing times. Banks began enticing consumers with unreal and inflated asset values and indefensible mortgages, throwing safety to winds. Industries churned out inefficient but expensive products and services which came to be accepted by an elitist society with access to growing salaries and easy credit. Multi-million dollar bonuses and commissions computed on virtual and false profits, and golden parachutes of separation pay for senior executives became the rewards of a high-performance corporate imagery. Such lifestyle approaches and economic and business activities which bartered the hard savings of small investors and the job security of rank and file workers for the performance aggrandizement, in some cases, of CEOs, COOs and CFOs as well as other key managerial personnel can hardly be considered ethical. The need for the societies, governments and corporations to cast ethics in stone is more acutely felt than ever.

Regulations have to move beyond compliance reports

Post-Enron, the US has prided itself to be the torchbearer of corporate governance, statutory compliance and risk management. For example, the Sarbanes-Oxley Act enforced on July 30, 2002 in the wake of several corporate and accounting standards imposed a host of governance, compliance and reporting restrictions on corporations listed in the US. What happened in 2008 in the Wall Street and Corporate America is a true shocker on how intrepid and avaricious managements can cleverly circumvent the toughest of regulations.

The US has a legion of legal and governmental boards, commissions and committees, executive departments, independent agencies, judicial organs, legislative bodies and quasi-official watchdogs which are entrusted with oversight on corporate, professional and accounting behavior. Securities and Exchanges Commission, NYSE and Nasdaq have stringent listing and reporting requirements. If the sophisticated governmental agencies fail to detect the economic rumblings and the SEC and stock exchange regulations fail to check incorrect and incongruent business and accounting practices, it is not ethical governance and management either.

The striking takeaway is that regulation has to be internally inspired and intrinsically self-driven. Each company or management knows fully well what it does. The board or the audit firm, despite diligence, has to essentially rely on certifications by the management. It is the ethical perception of the management that differentiates a well-regulated and truly compliant firm from a wayward and exploitative company. No amount of external regulation or board supervision can avert an unethical management from undertaking activities that destroy value for the common man. If only the ethics of larger good for the poorer sections of society are given the governing position such distortions would not occur. It is time that all educational curricula, be they science, engineering or management, incorporate ethics prominently in the studies, and all professional bodies, be they of accountants, analysts or company secretaries, insist on ethics based operations and performance reporting.

Personal and professional ethics should override corporate wealth goals

The CEO who drives growth by stretching resources beyond a sustainable balance or by expanding business boundaries ignoring core competencies has learnt to subordinate his professional logic to personal aspiration. The finance manager who seeks funds based on erroneous use of funds does so thinking that it would help the company raise cash to compensate for performance shortfalls. The procurement manager who sources products from emerging economies at irrationally low prices believes that it helps his company earn enhanced margins. The sales manager who stuffs trade channels with his products thinks that he is preempting the shelf space for his competition. The operations manager who settles for low productivity is happy not to upset the harmonious industrial relations in the company. Each of the above officers in the process is failing to realize the harm he or she is doing to the company in terms of long term risk profile, financial instability, quality erosion and bad debts.

Each of the corporate officers illustratively mentioned above has the academic education, professional experience and hopefully personal value system that would tell him or her at first pass to do the right things. However, the superimposition of a corporate role wherein he or she has to contribute to higher revenues or profits or lower costs as his or her key performance metric makes the officer to work for corporate profit maximization as a short run goal. No wonder that a series of corporate profit driven thought processes and actions across the entire hierarchy institutionalizes an organizational eco system which would reward contribution to short term profits and discourage, if not penalize, value building for the future.

While there is no denying that business organizations cannot be run as charitable bodies and they do need to generate wealth to be able to distribute to its stakeholders, clearly considerations such as quality, safety, health, environment, risk and social responsibility have to be given equal weight. The model of “leadership through trusteeship” set by the TATA group in India acting as trustees for public wealth through their corporations is a model worth emulating. Corporate managements and boards have to establish ethics forums where such issues can be brought up and debated. Progressive companies could support this trend by establishing a departmental structure for managing ethics oriented issues. Sooner than later, it should be mandatory for each company to have a Chief Ethics Officer with a board representation and whose compensation and employment contract are guaranteed by a department of ethics in the federal government.

Governmental power and accountability on ethics to be significant

Governments are expected to be the ultimate custodians and trustees for public good. However, as one watches the activities and intents of the governments the world over, whether of dictatorial or democratic variety, one would be saddened that there are only very few enlightened governments and even fewer welfare states. Governments which are regressive in outlook, which indulge in wars and terrorist actions, and which encourage crony capitalism or state corruption can hardly be the role models of ethics.

Governments have to be modern, secular, equitable and ethical to do good for all sections of the society. It appears that the well established ‘checks and balances’ system of government (or the executive), legislature and judiciary has to be further strengthened by creating a constitutionally ordained body for protecting and promoting ethics. Watchdog bodies, vigilance commissions and audit bodies may be brought under the control of such a ministry of ethics.

The events in Corporate America have proved beyond doubt that ethics cannot be implemented through regulations as they are often reduced to meaningless numbers and verbose texts of corporate reports and compliance documentation. Governments have to assume the primary responsibility for ethics by setting example in conduct of governmental affairs, be it in terms of aiding other ethical and democratic nations or curbing elitist and exploitative practices within the country. While the US government may have been corporate-friendly in terms of bailing out many errant corporations by doling out billions of dollars, it is sad that the government is also appearing to be hapless or powerless in the face of collective mismanagement by that many corporations. A more socialistic regime would have totally nationalized such failing enterprises as a quid pro quo for the exceptional funding support provided. While largely adopting an ambassadorial role for ethics, governments should also not fight shy of punishing malpractice wherever it occurs and thus emerging as a powerful icon of ethical accountability.

Corporate recklessness and professional duplicity need deterrence

In the normal course, corporate hierarchy and managerial processes together with the board supervision and investor activism ought to be providing the requisite deterrence against corporate recklessness and professional duplicity. Unfortunately, this does not seem to be adequate or even appropriate to stem unethical practices. The earlier analysis

illustrated that in an era of falling ethical values, a variety of inducements and aspirations, including corporate wealth maximization and personal aggrandizement lead to failures in corporate governance. Unquestioned leadership adulation adds an aura of invincibility for the top leaders when corporate performance is seemingly on a high.

There is considerable body of knowledge that suggests that ethics and values are the superior ethos that control, minimize and refine the primal instincts of human race. As ethics and values fall, greed is the lever that triggers malpractice and fear is the counter-lever that can deter and correct it. Today’s environment suggests that corporations and their CEOs and CFOs are unlikely to have learnt their lessons as they have had fairly easy bailouts and the leaders personally had easy separations, in most cases with multi-million dollar separation payments.

There is a need to engage the failed leaders not necessarily to punish them legally for their erroneous judgments or acts, but to bring out the deficiencies as a warning to others from following similar dicey pathways. It is also necessary to ensure some justice by not allowing such failed leaders to apparently go into oblivion and actually rehabilitate themselves. Bad management and faulty leadership need to be chronicled as much as good management and robust leadership to ensure corporate and professional integrity. Perhaps it would not be inappropriate to establish a journal for failed leadership and management practices and doomed business models. It may even be worthwhile to establish an academy for failed but contrite leaders and a hall of infamy for failed but unrepentant leaders.

Leaders and managers can, and should, work to restore their credibility

Nations and governments do not have unending fountains of dollar-billions to save failing institutions and trigger exceptional stimulus packages and thus insulate economies from deep recession. What has been done for certain financial institutions and automobile companies in the US cannot be repeated for the whole spectrum of enterprises which may start seeking such aid. Banks cannot keep lowering interest rates or keep reducing reserve ratios to enhance velocity of money in the system. It is the corporate sector that needs to act sensibly and soundly to restore its credibility and consequently restore public confidence in the economy.

Leaders and managers have to connect themselves with the changed realities and modify their business plans on the basis of better products, higher productivity and improved pricing that in combination would provide greater value for the customer. Leaders and managers will need to work with scientists and technologists to design new products and adopt better manufacturing practices. As the CEO of Fiat has illustrated in his turnaround story, all CEOs should cease dominating their companies through individual hegemony and instead focus on developing multiple leaders who can drive recovery and rejuvenation.

Corporations have to look beyond the tyranny of quarterly guidance and build value for all stakeholders. Organizations have to refocus on core competencies but go beyond them to develop game changing paradigms that create new markets through innovative products. Japan has always been adept in the innovation game; Korea has been a successful player of late. India has scored an inflection point with the design and manufacture of a transformational micro car called Nano. Leaders and managers have to disown their egos that are fed on external adulation and internal submissiveness over the years, re-learn time-tested ethics and values, and facilitate the spread of ethical leadership and management in their companies. Competence with humility and a concern for equity would lead to a restoration of credibility for the leadership and management in the corporate sector. Leadership and managerial credibility based on sound ethical values would be essential to restore public confidence in the consumer markets, stock markets, housing markets and the economy in general.

The global economy and the comity of nations are facing an economic crisis of unprecedented scale, scope and depth caused by corporate recklessness and in some cases leadership malpractices. Erosion of ethical principles in public governance and corporate management as well as in individual and professional life aspirations are at the root of this sordid saga. When ethics are restored in all walks of life in their pristine purity, there would be sustainable growth with equity all round.

Posted by Dr CB Rao on December 21, 2008

Globalization of the IITs : A Pan-IIT 2008 Thought Stream

The Indian Institutes of Technology (IITs) are by far the most visible symbols of India’s prowess in scientific and technical education. Alumni of the IITs have distinguished themselves in academic and industrial settings in India and in all the advanced countries of the world. No wonder then that the recently concluded Pan-IIT 2008 deliberated on what else the IITs could or should do on a global canvas. Here are a few thoughts:

1. Commercializing cutting-edge research

The IIT system has completed 56 years of truly high technology educational saga in India. What started as an undergraduate program had soon become a beacon for higher order post-graduate and research education. It is a matter of no small significance that Ph.D. students currently constitute about 17% of the total student population in the IITs. Post-graduate and research education has been an engine of growth in IITs in its own right. There is a need, however, to establish centres in areas of cutting edge science and technology such as biotechnology, nanotechnology, robotics and artificial intelligence from which innovative ideas and inventions could be generated and incubated as entrepreneurial start-ups. This model has been perfected in the United States by a number of universities and is now pioneered in Europe by institutes such as Karolinska Institute and can be easily supported by the IITs in India. Following the example set by IIT Madras, Research Parks may also be set up by various IITs. However, these ventures need to be supported by government grants and industrial donations so that faculty and inventive students are provided laboratory space free of charge during the incubation period.

2. Converging engineering and medicine.

For far too long a period, India has treated Engineering and Medicine as two physically and intellectually distinct streams of education and research. This contrasts sharply with the US scenario where the best of engineering and medical institutions function within common campuses, and under shared umbrellas. With advances in genetic engineering, medical engineering, physical, chemical and material sciences and several hybrid domains it has become possible to study the human body (or objects of life) as much as engineering traditionally studied inanimate objects (such as buildings or machinery). The ultimate goal of science and engineering will be to understand life in its entirety to be able to arrive at cost-effective diagnostic and therapeutic solutions. In order to promote such convergence, IITs need to expand curriculum to include biological sciences as well as hybrid biology-engineering domains to create requisite academic and research platforms. Just as management schools have become integral parts of the IITs, medical schools would also need to be parts of IITs. Medical undergraduates need to be facilitated to acquire post-graduate engineering degrees in fields such as robotic surgery, tele-medicine, bio-medical engineering, and so on. Similarly, engineering undergraduates should be facilitated to acquire post-graduate medical degrees in fields such as genetic engineering, artificial organ engineering, pharmaceutical drug delivery, human biotechnology and medical nanotechnology, and so on.

3. Globalization of IITs

IIT alumni have been the most powerful and iconic representatives of India’s highly successful IIT system abroad. Despite the clear knowledge and competence edge, IITs have not been overtly successful in drawing students from advanced countries. Even students from emerging economies and contiguous nations are not many at the IITs. Lack of awareness, concerns on geo-political safety, family and cultural issues, logistics, higher costs of overseas education and loss of linkages with employment sources could be the causes that limit the number of students accessing IITs in India. The only way to irrefutably strengthen IITs’ global blueprint is only through physical presence in advanced countries. This could at the minimum level take the shape of faculty collaboration cum student exchange programs with reputed overseas institutions and at the aspirational level could involve setting up of overseas campuses. The latter of course requires deep financial resources and support of non-resident Indians in a big way. A start could be made with the setting up of mini-campuses within major universities such as Harvard, Stanford, MIT, Oxford, Cambridge and Karolinska. The value proposition for those universities would be in terms of an intense exposure to Indian economic, technical and business perspectives and preparation of their students for cross-cultural professional employment.

4. Strengthening the faculty.

Even as the intake of IITs has been expanding, the share of research growing and the number of IITs itself increasing, the availability of requisite faculty has become a major issue. There is a need to create new tiers of post-doctoral programs to generate and retain new pools of academically oriented researchers who could undertake a variety of educational and research activities in the IITs. At another level, apart from enhancing the compensation levels for the faculty members, and increasing their share of consultancy income, out-of-box measures such as participation in research driven start-ups could attract greater number of bright doctoral and post-doctoral professionals to the IITs. It may also be beneficial to create pools of superannuated faculty as well as industry professionals to act as adjunct faculty for application oriented courses.

5. Transactional efficiency in consulting.

IITs can help industries and businesses, big and small, because of the superior laboratory resources, computer facilities and knowledge systems that reside in the IITs. The vast pool of students and researchers can, of course, undertake project works of short time bursts. However, the IITs have not been able to leverage these intellectual assets due to slow pace of consulting transactions. By setting up offices for business development in consulting and project management for facilitating and monitoring the execution of consulting projects, the IITs can achieve transactional efficiency. Consulting at IITs should, however, be truly in knowledge-intensive sectors befitting the scientific pedigree. Deployment of modern electronic and telecommunication technologies in logistics and transportation projects could, for example, be a challenging area of consultancy. Design of flexible manufacturing systems for small and medium enterprises could be another. There would be potential areas in each industrial or business sector that demand the skill-sets of the IITs.


By focusing on and commercializing cutting edge research, integrating engineering and medicine, globalizing the campus presence and faculty-student intake, reinforcing the faculty and enhancing transactional efficiency in consulting, the IITs could become the top-tier educational system on a global basis over the next two decades.

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Dr C Bhaktavatsala Rao is an alumnus of the Indian Institute of Technology Madras, and is presently the Deputy Managing Director of Orchid Chemicals and Pharmaceuticals Limited, Chennai. Posted on December 19, 2008.

Globalization of the IITs : A Pan-IIT 2008 Thought Stream

The Indian Institutes of Technology (IITs) are by far the most visible symbols of India’s prowess in scientific and technical education. Alumni of the IITs have distinguished themselves in academic and industrial settings in India and in all the advanced countries of the world. No wonder then that the recently concluded Pan-IIT 2008 deliberated on what else the IITs could or should do on a global canvas. Here are a few thoughts:

1. Commercializing cutting-edge research

The IIT system has completed 56 years of truly high technology educational saga in India. What started as an undergraduate program had soon become a beacon for higher order post-graduate and research education. It is a matter of no mean significance that Ph.D. students currently constitute about 17% of the total student population in the IITs. Post-graduate and research education has been an engine of growth in IITs in its own right. There is a need, however, to establish centres in areas of cutting edge science and technology such as biotechnology, nanotechnology, robotics and artificial intelligence from which innovative ideas and inventions could be generated and incubated as entrepreneurial start-ups. This model has been perfected in the United States by a number of universities and is now pioneered in Europe by institutes such as Karolinska Institute and can be easily supported by the IITs in India. Following the example set by IIT Madras, Research Parks may also be set up by various IITs. However, these ventures need to be supported by government grants and industrial donations so that faculty and inventive students are provided laboratory space free of charge during the incubation period.

2. Converging engineering and medicine.

For far too long a period, India has treated Engineering and Medicine as two physically and intellectually distinct streams of education and research. This contrasts sharply with the US scenario where the best of engineering and medical institutions function within common campuses, and under shared umbrellas. With advances in genetic engineering, medical engineering, physical, chemical and material sciences and several hybrid domains it has become possible to study the human body (or objects of life) as much as engineering traditionally studied inanimate objects (such as buildings or machinery). The ultimate goal of science and engineering will be to understand life in its entirety to be able to arrive at cost-effective diagnostic and therapeutic solutions. In order to promote such convergence, IITs need to expand curriculum to include biological sciences as well as hybrid biology-engineering domains to create requisite academic and research platforms. Just as management schools have become integral parts of the IITs, medical schools would also need to be parts of IITs. Medical undergraduates need to be facilitated to acquire post-graduate engineering degrees in fields such as robotic surgery, tele-medicine, bio-medical engineering, and so on. Similarly, engineering undergraduates should be facilitated to acquire post-graduate medical degrees in fields such as genetic engineering, artificial organ engineering, pharmaceutical drug delivery, human biotechnology and medical nanotechnology, and so on.

3. Globalization of IITs

IIT alumni have been the most powerful and iconic representatives of India’s highly successful IIT system abroad. Despite the clear knowledge and competence edge, IITs have not been overtly successful in drawing students from advanced countries. Even students from emerging economies and contiguous nations are not many at the IITs. Lack of awareness, concerns on geo-political safety, family and cultural issues, logistics, higher costs of overseas education and loss of linkages with employment sources could be the causes that limit the number of students accessing IITs in India. The only way to irrefutably strengthen IITs’ global blueprint is only through physical presence in advanced countries. This could at the minimum level take the shape of faculty collaboration cum student exchange programs with reputed overseas institutions and at the aspirational level could involve setting up of overseas campuses. The latter of course requires deep financial resources and support of non-resident Indians in a big way. A start could be made with the setting up of
mini-campuses within major universities such as Harvard, Stanford, MIT, Oxford, Cambridge and Karolinska. The value proposition for those universities would be in terms of an intense exposure to Indian economic, technical and business perspectives and preparation of their students for cross-cultural professional employment.

4. Strengthening the faculty.

Even as the intake of IITs has been expanding, the share of research growing and the number of IITs itself increasing, the availability of requisite faculty has become a major issue. There is a need to create new tiers of post-doctoral programs to generate and retain new pools of academically oriented researchers who could undertake a variety of educational and research activities in the IITs. At another level, apart from enhancing the compensation levels for the faculty members, and increasing their share of consultancy income, out-of-box measures such as participation in research driven start-ups could attract greater number of bright doctoral and post-doctoral professionals to the IITs. It may also be beneficial to create pools of superannuated faculty as well as industry professionals to act as adjunct faculty for application oriented courses.

5. Transactional efficiency in consulting.

IITs can help industries and businesses, big and small, because of the superior laboratory resources, computer facilities and knowledge systems that reside in the IITs. The vast pool of students and researchers can, of course, undertake project works of short time bursts. However, the IITs have not been able to leverage these intellectual assets due to slow pace of consulting transactions. By setting up offices for business development in consulting and project management for facilitating and monitoring the execution of consulting projects, the IITs can achieve transactional efficiency. Consulting at IITs should, however, be truly in knowledge-intensive sectors befitting the scientific pedigree. Deployment of modern electronic and telecommunication technologies in logistics and transportation projects could, for example, be a challenging area of consultancy. Design of flexible manufacturing systems for small and medium enterprises could be another. There would be potential areas in each industrial or business sector that demand the skill-sets of the IITs.


By focusing on and commercializing cutting edge research, integrating engineering and medicine, globalizing the campus presence and faculty-student intake, reinforcing the faculty and enhancing transactional efficiency in consulting, the IITs could become the top-tier educational system on a global basis over the next two decades.

--------------------------------------------------------
Dr C Bhaktavatsala Rao is an alumnus of the Indian Institute of Technology Madras, and is presently the Deputy Managing Director of Orchid Chemicals and Pharmaceuticals Limited, Chennai. Posted on December 19, 2008

Recession and Rigidity

Corporations the world over are concerned with and fearful about recession. Having been accustomed to years of unbridled growth which piggybacked on easy money, bloated assets and burgeoning demand, companies are finding the liquidity crunch, asset revaluations and frozen demand as indicative of a long, harsh recession. While a few companies may welcome periodic recessionary episodes as a much needed correction to profligacy and a reward for efficiency, most companies tend to be clueless and powerless in the wake of a recession.

It is surprising how even enlightened companies react typically to recession in terms of a three point formula: refusal, reduction and regression. Committed to a bandwagon of growth, CEOs universally at first refuse to recognize recession. As a result, companies build up huge inventories, which require painful adjustments in terms of slashed production. When recession stares one in the face and declining demand can no longer be brushed under the carpet, then follows an unthinking wave of reduction measures, from job and salary cuts to business and plant closures. By the time this cycle of compression is complete, companies would have regressed by a few years, unable to discover in time the silent revival of demand, much less respond to it.

The rigid mindsets of organizations ahead, in the midst and in the aftermath of recession lead to intriguingly counter-intuitive and counter-productive strategies, which tend to shrink their ability to fight recession even more. There are examples galore in the Indian business scene. A few months ago when consumer purchasing power was at its peak in India, a Rs 25000 (USD 500) mobile phone was considered a high end phone. Today, when every consumer is trying to avoid all discretionary expenditure, we have a host of mobile phones launched with a price tag of Rs 35000 to Rs 40000 (USD 700 to 800), with obviously little consumer enthusiasm for the usurious pricing! Low cost airliners were offering plenty of services when corporate and personal travels were at their peak. Today, when corporations and individuals seek to minimize or avoid travel costs, we have the low cost airliners either withdrawing their operations or increasing their prices. There was a great urgency in the Tata group to launch the ultra low cost Nano micro car in the midst of an automobile boom. In today’s recession, on the other hand, Nano is miles away from a mass launch.

The above paradoxical and market-inefficient business strategies of even reputed companies are a result of a corporate mindset which fails to absorb the ramifications of recession in a timely manner and come up with appropriate strategic revisions. Companies have to appreciate that recession affects different sectors differently. There are four basic realities of recession. Firstly, recession only distorts demand but does not destroy demand. Secondly, certain sectors tend to be recession-proof. Thirdly, governmental responses to recession often stimulate certain sectors differentially. And finally, if one domain needs increased investment in recession it is Research & Development (R&D).

Fundamentally, even in recessionary conditions demand does not disappear; it only migrates across market segments. The boom in WalMart sales in US is indicative of this. Demand has migrated in this case from high end malls to economy departmental stores. Had Indian telecom companies been appreciative of this, their product introduction strategies would have been more pro-consumer, packing more value for less money. Airlines would have persevered with their low-cost flying strategies for a few more months to woo the cash strapped companies and individuals. The Tata group would have substituted Indica and Indigo car production with Nano car production in all their plants to accelerate the Nano revolution on the Indian roads.

Secondly, sectors which are intertwined with the basic needs of a society will buck recession rather than succumb to it. Generic and innovative pharmaceuticals, healthcare, textiles, education, low and middle income housing, passenger transportation, basic consumer goods and household items are some industrial sectors which would survive most recessionary conditions. By enhancing product introductions across customer segments in such sectors and expanding scale and scope in such industrial segments, recession in other sectors can be compensated. Conglomerate groups such as Tatas, Birlas and Reliances would do well to realign their group business strategies accordingly.

Thirdly, in several countries with infrastructural stimulus packages, construction and capital goods sectors would see a major growth impetus. Cement, steel, earthmovers, heavy duty vehicles, power and transmission equipment and allied sectors could be the first victims of a recession but would also be the enduring beneficiaries of recession in government sponsored programs of stimulus. Bracing for capacity augmentation and cost competitiveness, such industries can qualify as preferred bidders in public and private works programs.

And finally, progressive companies would do well to accelerate their research activities and enhance their R&D investments to eventually beat recession. New products and services which provide greater value would help sustain demand in recession and trigger growth beyond recession. Examples are energy conserving automobiles, cost saving consumer goods, productivity equipment, recycling products and global connectivity services. Each domain would need to integrate electronics and information technology to create new generation goods and services.

In the overall, full-line manufacturers who offer multiple products at different price points, conglomerates which operate in different industrial sectors, companies which are committed to continuous R&D and more importantly companies and groups which have a flexible, proactive and strategic mindset would weather any recession successfully.

Posted by Dr CB Rao on December 14, 2008

Future of the US Automobile Industry : Cash Bailout or Competitive Efficiency

The US Economy (and with it the global economy) has until recently been severely pressured by the failures in the Wall Street. It now appears to be the turn of the US automobile industry to adversely impact the US economy. The decline and the looming bankruptcy of the Big 3 US auto makers (General Motors, Ford and Chrysler) could have a more long term and widespread damage given the cascading connectivity of the automobile industry with a host of industrial and social sectors.

While the anxiety to save the US automobile industry is understandable, the path being pursued to bail out the industry appears to be illogical. While it is well said by the US Congress that the cash bail out by the US government can only be a life line but not a life insurance, there is no compelling evidence that either the US government or the US auto industry is committed to a specific plan to make the US auto industry truly efficient and self-reliant.

It is indeed surprising as to why the Big 3 of the US could not reinvent and recharge themselves when other global companies such as Renault, Fiat and Nissan could become more competitive despite the dire straits they had to go through from time to time. The answer perhaps lies in the insular approach of the Big 3 towards the newer concepts of competitive efficiency in automobile design, manufacture and management.

The US economy and the auto industry traditionally thrived in an era of cheap oil in which the size of a car was often equated with the comfort and prestige it offered. In the process the US automobile industry has been singularly guilty of not shaping the market direction with innovative product choices and creative manufacturing options. As a result the power to weight ratios of a typical US automobile always tended to be adverse relative to a typical Japanese automobile, leading to higher product costs, higher operating costs and lower returns to the manufacturers as well as consumers. Added to that, the shortfalls in quality and customer service ensured that the vicious circle of escalating costs and declining demand was complete.

The answer to this industrial tragedy lies in large scale adoption of new product technologies, including in-licensing of new Japanese and European design technologies and adoption of Japanese production system across all the global manufacturing plants of the US auto makers. A massive change in the mindset of the managerial bureaucracy and the workforce in the automobile industry is required to make this happen. Perhaps, the US government itself needs to be less nationalistic, less protectionist and more global by encouraging the Toyotas, Hondas and Renaults of the world to take a stake, both financial and operational, in the US automobile industry to achieve a lasting turnaround.

Perhaps, not so well appreciated is what emerging industrial economies such as India can do to help out the US automobile industry. The US auto industry may not acknowledge it, but India is the most vibrant automobile hub globally, outside of the US, European Union and Japan. Both from a historical and contemporary perspective, India has assimilated the best of European, US and Japanese automotive practices and amalgamated its competitive cost structure to develop its own automotive paradigm. The design and manufacture of Nano microcar by the Tata Group is a testimony to the new-found design creativity and manufacturing panache of select Indian automobile firms.

Two of the three US automobile firms (GM and Ford) are already present in India. Several of the Indian automobile and automotive components firms have had technology relationships with the US firms. It is time that the Indian automotive and component sectors are leveraged by the US automotive industry to achieve the needed cost competitiveness. In addition, Indian information technology sector and automobile design sector can collaborate to create new automotive designs which are leaner, more efficient and yet more long-lasting.

While some level of immediate cash bailout for the US automobile makers would be inevitable, a substantial portion of the next phase of cash support has to be placed into a modernization fund which would enable the US auto makers commit to in-licensing of competitive automotive design technologies (say, from Japan) and integration with globally cost-competitive component base (say, from India). These must be accompanied by large scale induction of manufacturing practices from the Japanese automotive industry to achieve sustainable competitiveness.


Posted by Dr CB Rao on 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

Suggestions for President-elect Barack Obama

November 25, 2008

Suggestions to prime the US Economy

By

Dr CB Rao

A characteristic feature of mature economies has been a strident focus on corporate profits and market capitalization. In the US, this feature, accompanied by non-interventionist federal and state government policies, resulted in a systematic reduction of public and private investments in infrastructure and a profligate resort to debt as an instrument of wealth maximization. The collapse of the Wall Street, the decline in productivity of the US industry, the obsolescence of products and the high cost of services are some of the net results of such economic and industrial practice.

The election of Barack Obama heralds a change. Everyone around the world feels the change. However, for the change to be meaningful, a number of economic, industrial and social initiatives need to be taken. This note summarizes several such initiatives, as below:

1. Integrated economic and industrial policy

Governments have to be strategic in terms of setting the growth direction for the economy, industry and society. While completely free market economies such as the US may balk at the very thought of a five year plan (as followed in India), it is certainly relevant to have a strategic economic plan for the US at this stage. The plan should go beyond the short term economic stimulus currently being planned and extend itself into a comprehensive public-private investment plan for all key sectors of the economy such as industry, infrastructure, energy, transportation, healthcare, education etc., and their sub-sectors.

2. METI Clone

The Ministry of International Trade and Industry (MITI) was undoubtedly the most insightful and powerful agencies of the Japanese Government that influenced Japan’s science and technology and led different sectors of its economy and industry towards global leadership. It has helped in the formulation of proactive and progressive scientific and industrial policies, funding research and directing investment in Japan. Its role has since been taken over by the Ministry of Economy, Trade and Industry (METI).

Given the crossroads faced by the US, where despite having some of the best universities, laboratories, facilities and brains for research, manufacture and management, the economy is on a perilous downhill, there is every need to establish a METI Clone in the US to direct the strategic technical and investment direction for the economy. While President-Elect Obama has constituted an empowered and intellectual economic team, as well as a transition team, the creation of a full-fledged planning ministry is sorely needed.

3. Core Infrastructure

There can be no two views that the infrastructure in US, much appreciated years ago, has since sharply slipped in terms of global efficiency rankings (let alone elegance rankings). There is an urgent need for massive re-building, expansion and modernization of aged airports, sea ports, bridges, oil and gas rigs, power houses, as well as for expansion and modernization of all related facilities.

The US also lags the rest of the advanced world in terms of fast and economic transportation. Huge and productive investments need to be made in bullet trains, elevated rails, public transport buses, freight trains, oil and gas pipelines, power distribution lines and so on.

Together, the fixed infrastructure and mobile infrastructure should be the core of the economic stimulus package that the Barack Obama administration could bank on. These investments will have cascading and multiplier effects across all industrial sectors and create millions of jobs, quite apart from enhancing productivity of life, and driving down the transaction costs.

4. Sunrise Infrastructure

Distinct from the core infrastructure is the sunrise infrastructure, which the President-Elect has rightly focused as the Grean Technologies. Alternative sources of energy, clean vehicles, green buildings, energy-efficient equipment are capable of priming a totally new wave of research. They will help in the creation of a new genre of industries which will minimize energy consumption and enhance harmony with environment, while at the same time creating jobs from the most advanced research layers to the most needed basic foundations.

In addition to the USD 700 billion stimulus on core infrastructure, a USD 300 billion investment in sunrise infrastructure would be most appropriate.

5. Positive Globalization

Globalization has come to stay; yet it cannot be a myopic concept of shifting jobs for mere labor cost advantage. Positive globalization has three parts; (i) the globalization of value chain with a fair share for emerging markets based on factor competencies (not merely labour cost advantage), (ii) harmonization and opening up of all markets (in terms of customer access and transparent regulatory systems) and (iii) continuous churn of new technologies in the developed markets (leveraging the fundamental university competencies and funding strengths). The way Japan has benefitted from such globalization is an instructive model for the US. Even as one generation of products is extensively globalized across the world, a new generation of products takes root in Japan. In such a model products get developed in line with multiple market needs and purchasing power slabs, even as the inventive country holds technological leadership in the new generation of products.

6. University and Laboratory Innovation

In spite of the corporate or economic failures that have come the US way, the universities in US still remain the bedrock of science, technology and management, with the potential to trigger new waves of innovation and creativity. It is necessary for the new government to step up investments in universities in frontier fields such as nanotechnology, stem cells, recycling, solar energy, biofuels, energy-efficient equipment and so on.

As in the case of National Institutes of Health, it may be appropriate to set up new national institutes for each of such sectors, if needed in 50:50 public-private partnerships.

7. Main Street and Wall Street

One of the most profound observations made by the President-Elect is that there cannot be a thriving Wall Street without a thriving Main Street. It is indeed a universal truth for the modern times. The Main Street itself rests on a trio of education, industry and social services. Markets for products and services have to continually expand based on innovative and cost competitive products and services so that corporates can maximize wealth generation; the Wall Street can then take a share of the wealth.

The core of the strategy should therefore be in terms of enhancing industrial and business competitiveness. All tools, from more efficient design to value engineering, from manufacturing productivity to supply chain efficiency and from information technology to artificial intelligence would need to be deployed to commercialize constantly a new wave of products and services. Tax breaks for genuinely innovative R&D and manufacturing productivity, whether such tax incentives are deemed politically correct or not, appear to be economically justified.

Simultaneously, the Main Street corporates have to be released from the tyranny of Wall Street (whether it is of quarterly guidance, analyst calls or rating scrutiny) as much as they have to be subject to rigorous competition from more competitive global companies. In the absence of such of dual yet balanced approach, CEOs and CFOs would only be emphasizing the short run revenue and profit maximization objectives to the detriment of long term innovation and strategic requirements of corporates.




8. Affordable Healthcare

The democratic party, and Barack Obama, in particular, have been dedicated to the cause of affordable healthcare. As part of this it is essential that the intentions of the Hatch-Waxman Act and other legislation, intended to expand the use of affordable quality generics by the US society, are realized in full. Towards this end, the various tactics adopted by innovator firms to block generic drugs by resort to citizen petitions, listing and/or de-listing patents towards the end of product patent life need to be firmly discouraged. It is ironic that even today the US patients are losing millions of dollars by the monopoly of an innovator company on its life saving antibiotic (Piperacillin-Tazobactam Injection) despite the lapse of over 20 months after its patent expiry, just because the innovator company has reformulated the product and resorted to the citizen petition route to block the generic entry. The innovator’s actions are all the more ironical given that the original formulation was never withdrawn by the innovator for safety or efficacy reasons and was in fact co-marketed for several months alongside the new formulation by the innovator. FDA must be strengthened in terms of staff and resources with requisite guidance and authority for pro-generic oversight to eliminate such anti-generic and anti-consumer activities.

The issue of expanding affordable healthcare does not end merely with a focus on expansion of access to generics, however important it is. The issue must be tackled straight at the core of innovation. Increasingly, there is a trend within the US FDA as well as in the innovative pharma sector to limit the number of follow-on new drugs, once a first-in-class drug is approved. FDA has of late increased the bar on approval of follow-on new drugs and the industry has also been reluctant to invest additional resources to bring out best-in-class follow-on drugs. As a result of this, while the potential remains to enrich a therapeutic group with several interesting and innovative follow-on molecules which could compete with each other and enhance affordability even at the branded drug level, the current FDA and industry practice seems to enhance monopoly power. The entire policy on approval of first-in-class and best-in-class drugs needs a review with an emphasis on patient safety, drug efficacy, versatility of treatment options and cost competitiveness amongst innovators.

9. Incentives for pharmaceutical research (including biosimilars)

It is important that innovation in pharmaceutical research is continuously encouraged. It is disconcerting to see in this context that innovator after innovator has been reducing the therapeutic areas for drug research even as the insights into multiple (and till recently unknown) disease areas are expanding. These short-sighted approaches are clearly meant to manage the short run profit pressures. The new government should positively consider incentives for firms which invest in more than say ten therapeutic areas; each additional therapeutic area entitling the company for a higher weighted average reduction of R&D investments.

At another end of spectrum, biosimilars need also to be treated as “virtual new drugs” and provided funding support. Each biosimilar could cost around USD 40 million in terms of a clinical trial to establish biosimilarity and avoid all concerns about immuno-genocity. Not many generic companies would probably be in a position to attempt such investments on biosimilars. Also, given such a peculiar and investment-intensive nature of biosimilars, rather than fostering unbrindled free market generic competition, a model of directed investment and administered pricing (whereby generic pricing is no lower than say 30% and no higher than 70% of the innovator price) would need to be adopted.

10. Towards Global Reconstruction

Last but not the least, if the Obama administration is able to lead the world into a phase of peace where all nations cooperate in terms of global peace and harmony, trillions of dollars could be released for spending on more beneficial global reconstruction activities where every human being across the globe can live a full life of safety, harmony, health and happiness.

Posted by Dr CB Rao on November 30, 2008