Emerald Now, 15 January 2007
Abstract: An interview by Sarah Powell with Professor Richard Scase on the implications for western businesses of the readjustment or ‘remix’ of the world economy resulting from the growing importance of India and China and other Asian economies. Recognizes the risks, urging reappraisal of risk management strategies, but highlighting the potential benefits. Stresses the need for companies to operate as globally integrated rather than multinational enterprises, developing centres of excellent from an operational point of view in terms of availability of markets and talent. Deplores the adoption of offshoring for short-term gain, emphasizing the need for proper strategic relationships and long-term stakeholder interest. While accepting the particular challenges faced by SMEs, points out the tremendous opportunities given their ability to adapt fast and work to longer-term perspectives.
Keywords:Globalization, Global Economy, China, India, Markets, SMEs, Entrepreneurship, Enterprise, Offshoring, Talent.
Spotlight: You have warned that the ‘remix of the global economy’ with the rise of India and China and other Asian economies requires corporate leaders to rethink fundamentally how and where they do business. What, briefly, are the major risks and challenges they face?
Richard Scase: The ‘global remix’ refers to the current readjustment of the world economy, which notably reflects the rapid development of India and China as markets of 2.5 billion people including growing numbers of affluent consumers. These countries’ economies are fuelled by increasing consumption of energy and commodities, which means that global energy and commodity prices will inevitably rise. Taking a longer-term perspective, corporate leaders need to recognize that transport, energy and raw materials will all be more expensive in the future. Historically we’ve tended to assume that these things would be cheap; this is no longer the case.
Currency rates and fiscal arrangements will also be increasingly shaped by decision-making in China. The Chinese banking system is fragile, which will create many risks in the world financial markets. Historically, companies doing business overseas have operated in business environments which are fairly stable from both political and legal points of view. Regulations, governance and compliance have been relatively transparent and straightforward. Business leaders will be operating in far more uncertain environments, and risk management strategy will need to be reappraised.
The remix also extends to products and services. Companies operating in these unfamiliar environments, whether in capital or consumer-focused industries, are already discovering that the key drivers to innovation, research and development, marketing and so forth, are being shaped by the demands and requirements of consumers and this will extend increasingly to those in the emerging markets.
Spotlight: How can western businesses and notably SMEs remain competitive and gain a competitive edge in this changing global context?
Richard Scase: I believe that the emerging global marketplace is creating huge opportunities for SMEs, both in the emerging markets and also in the mature markets of the world. In mature markets the whole shift towards individualism, to what I’d describe as an ‘I’, ‘me’, celebrity culture, this shift towards people wanting to be different, together with the development of online direct marketing strategies, means that SMEs can respond far more effectively to changing business opportunities than can their larger counterparts. To exploit the opportunities available in emerging markets, SMEs are being pulled into global supply chains to offer flexible, just-in-time lean delivery systems to their corporate clients and customers.
From both a consumer market and business-to-business point of view, there are tremendous opportunities for SMEs. Bill Gates has said that the twenty-first century is the century of the small and medium-sized enterprise – and I think he’s absolutely right. In order to remain competitive, large corporations faced with these very much more flexible, adaptive business environments will have to restructure and continually reinvent themselves on the basis of constellations of small and medium-sized enterprises focusing on different kinds of products and service portfolios.
Spotlight: While all this sounds promising, surely an SME faces added risks and challenges, e.g. if they are not paid or if something goes wrong at the overseas end?
Richard Scase: Absolutely. As far as SMEs operating in global supply chains are concerned, payment systems and trading and dealing with international agencies etc. are key issues. Another problem is that there remains a funding gap for small business owners. Funding bodies are becoming ever more cautious and their risk management strategies are increasingly rigorous; these factors hinder the growth of SMEs. Paradoxically it is less difficult to obtain large sums than small sums. Few agencies apart from business angels will offer that crucial first £50,000 in the UK or $100,000 in the USA.
But of course entrepreneurs thrive on these kinds of challenges. True entrepreneurs like risk and enjoy the uncertainty because they know that they can compete in ways in which their larger competitors can’t. As Joseph Schumpeter pointed out more than half a century ago, small business owners taking these sorts of risks identify market opportunities on the basis of intuition, on the basis of a kind of gut feeling. Unlike executives in large companies, they do not then need to prepare a business plan, argue the business case, fund it, cost it and ensure a payback within a couple of years. Entrepreneurs can take the longer-term perspective. Hence opportunities in India and China should be particularly attractive to them because these frequently require a longer-term perspective and approach – and these are not options for the corporate leader who is required to deliver on a short-term basis to his or her financial institution or shareholders.
Spotlight: To what extent is business in the West recognizing and exploiting the emerging opportunities afforded by global market growth and which countries or regions are making the greatest progress?
Richard Scase: The figures speak for themselves. There are 500,000 foreign-owned companies operating in China, of which 350,000 are US-owned. US companies are far more alert to the opportunities than are their continental European counterparts. UK companies, for their part, have been taking more notice over the past couple of years, but to date only some 1.2% of UK exports go to India and a similar percentage to China. This said, awareness has been growing, prompted by increasing press coverage of the business opportunities and the impact of the development of India and China in terms of demand for products and services, the implications for sustainability, the contribution to global warming and so on. The knock-on effects of India and China’s development are massive and western companies know that they will all be affected by these trends.
Spotlight: Given the offshoring of many manufacturing, IT, service and some professional functions, what changes do you foresee to business activities and employment patterns in the West?
Richard Scase: The economic growth of India and China and China’s role as the manufacturing base of the world alongside some of the other Asian economies reinforce the need for the economies of Europe and the USA to become knowledge-intensive and knowledge-based, focusing upon research and development of high value added technological products and services such as aerospace and biotechnology through to professional services, media activities, consumer-focused services, marketing, design, and such like.
Spotlight: You have condemned the practice of ‘offshoring for short-term gain without any regard for long-term integrity’. What strategies do you advocate?
Richard Scase: I believe that offshoring for short-term gain causes huge problems because of the absence of a long-term stakeholder interest in the relationship. This lays the business open to problems of fraud, abuse of intellectual property rights, low sub-contractor morale and risk to quality of products and service. I believe that offshoring must be conducted within a proper strategic relationship or partnership with a focus on a long-term investment with the local partner or service provider in terms of developing skills and capabilities, ensuring the integrity of their systems, and so on. Without such a relationship I believe offshoring can be counter-productive rather than adding positive value to the business.
In the summer of 2006 IBM announced that it was investing $10 billion in an R&D capability in India. I believe this to be very indicative of trends to come. Another example is Novartis which is investing $100 million in a drug-discovery facility in China. What is also interesting is that it is recruiting Chinese scientist returnees from the USA to staff this facility.
Five to ten years ago the emerging markets were regarded as low-cost economies, i.e. good locations for cheap labour for fairly routine jobs. It is now being recognized that these economies offer highly talented knowledge pools which can best be tapped in long-term strategic relationships. It is for this reason that I talk about globally integrated enterprises rather than multinational corporations. The latter outsource various activities but retain their nerve centres in the USA or in Europe. Globally integrated enterprises, on the other hand, develop their centres of excellence from an operational point of view in terms of availability of markets and talent. I believe that the concept of a US-, German- or UK-owned company with headquarters in one place and subsidiaries elsewhere will become a thing of the past. We’re moving into a phase when globally integrated enterprises will be genuinely international in terms of their culture and their structures.
Spotlight: How can cultural, ethical, behavioural, values- and trust-based diversity be addressed in globally integrated enterprises?
Richard Scase: The days when a company could apply a US or a western methodology on practices in operations in the emerging markets have gone. Different local cultures must be respected and incorporated into business policies and practices. Take, for example, the whole issue of religion. This is something we wouldn’t have considered some years ago and we’re currently suffering a backlash from that neglect. I believe that the study of religion should be taught in business schools. People doing business in India, China, the Middle East and so on must understand local cultures not simply in terms of etiquette but also in order to have a genuine understanding of the history and cultural dynamics of other countries. This will enable them not only to create cultural ‘windows’ for open, trust-based dialogues, but also to understand the attitudes of the people with whom they’re doing business – and this will aid in establishing mutual respect.
Knowledge of a foreign language is also important as it illustrates respect of other cultures. I believe we need to take far more seriously the need to teach Mandarin as a foreign language in schools in Europe and the USA – this will be far more important than French, say, or German.
Spotlight: You note the need for a new business model – or ‘café corporation’ – to embrace the sociability and foster the talent and capacity for innovation and entrepreneurship of the iPod generation. What do you have in mind?
Richard Scase: The iPod generation does things and is creative in ways we wouldn’t have dreamed of 30 years ago. These young people make their own CDs and DVDs and launch them on the Internet through sites such as YouTube and MySpace. They play games in global teams. They’re cosmopolitan, knowledgeable and egalitarian. They also have no respect for authority because they operate within communities in which they are in control.
The established model of manufacturing management will not in any way appeal to these people. If a company adheres to a traditional model of management, it will not attract the young talent of the future – and by talent I am not talking about those with university degrees, because today 30–40% of an age group in the USA and in Europe goes to university. Young talent now is highly individualistic, highly iconoclastic, and highly non-conformist. So, the question is: how do you capture and engage this talent?
I believe you have to redefine the workplace, creating a café culture similar to that on a university campus or in the Starbucks and Caffè Nero chains that have mushroomed in our cities. You need to create an environment in which people can engage with each other, argue with each other, discuss things and play around in terms of problem-solving. In this kind of environment work will be enjoyed and such kinds of workplace have already been created within some of the highly performing knowledge-based SMEs – which again is why the twenty-first century is the century of the SME.
Ideas of how to foster this sort of environment are being debated in pharmaceutical companies which, of course, are heavily dependent on drug discoveries; and these discoveries depend on creative thinking. The debate focuses on whether corporate structures are too large and bureaucratic to foster creativity. The question is: if so, should the drug-discovery process be outsourced to small biotechnology companies?
My model of the café corporation is one that emphasizes informality and flexibility in terms of working practices and also environment, i.e. architecture, architectural design and workplace location. This focus is evident in the BBC’s redevelopment of Broadcasting House, at Telenor outside Oslo in Norway, which got the prize for being the best office building in the world, at Bloomberg in London, and Nokia in Espoo, Finland. There are numerous examples of how companies are responding to these changing psychologies by totally redesigning the environment in which their creative people work.
Spotlight: How will the rapid development of countries such as India and China and ageing of workforces in the West impact on the search for top talent?
Richard Scase: There are several issues here. Firstly we need to redefine age. Older people don’t necessarily think as older people. As far as the USA and Northern Europe including the UK are concerned, for people between the ages of 30 and 60, age is no longer the predictor of attitudes, values, lifestyles and spending patterns. It is a factor, of course, but it’s not the predictor it used to be. This means that, in the war for talent, corporations must really think about how 50 year olds, for example, see themselves and, to address our demographic talent shortage, we need to redefine how we see ‘older’ people.
Equally, we need to address the female and ethnic minority talent wasted or lost in western corporations as a result of presuppositions about leadership qualities, which are still sometimes seen as the exclusive domain of white, middle-class males.
In Western Europe we also need to take full advantage of the European Union. What after all is a common market if it does not provide free mobility of capital and labour? There should be no complaints when people exercise their right to move freely from one part of this labour market to another, as will soon be the case with citizens of Romania and Bulgaria and as has been the case with Polish citizens coming to the UK, Ireland and Sweden. Increasingly, much of our technical talent in Western Europe will come from people from the EU accession states.
At the same time, while the population of western Europe is ageing, that of the USA is not. There is a growing pool of young, mostly Spanish-speaking talent, in that country, which can be tapped.
The search for talent will also move eastward, as we have already seen with the IBM and Novartis plans already mentioned, and similar moves by Pfizer. Knowledge-based businesses requiring highly motivated, highly technical and scientific talent will increasingly locate R&D and knowledge nerve centres in the East, facilitated by the revolution in information and communication technologies.
In terms of combating skills’ shortages and seeking talent overseas, I am also proposing that businesses should pursue a ‘North Sea oil rig solution’, i.e. flying in teams of people from, say, India or China on a short-term basis, then flying them home and bringing in another team, and then repeating the process with the original team – so you constantly have a charter flight going backwards and forwards, flying in and out on a two-week basis or so. This solution provides a constant interchange of two teams of skilled workers.
Spotlight: Could you cite a specific company or industry that is responding particularly innovatively to the challenges of the global marketplace?
Richard Scase: There are no great surprises here. I would have to cite biotechnology, information and communication technology, and aerospace companies. Pharmaceutical companies are tasked with developing new, lower cost drugs for emerging markets. Information and communication technology companies are working on increasingly efficient and effective kinds of communication channels and processes to serve the requirements of global markets and supply chains and globally integrated enterprises. Meanwhile, aerospace companies have seen a huge increase in air passenger travel and defence requirements.
Alongside these leading edge industries, media companies are benefiting from the rapid growth of the consumer markets of India and China. Alan Rusbridger, editor of The Guardian, has pointed out that the online readership of his newspaper is now greater in India than it is in the UK, and that he has eight million offline readers in the USA compared with 400,000 in the UK. The western retail sector has also moved into emerging markets. Carrefour is well established in China and Tesco is making rapid inroads.
Globalization works in all directions, of course, and, as western companies move east, so eastern companies move west, buying up European and US companies to develop a global presence and global brands. The Tata and Mittal families are examples of Indian companies on the acquisition trail in Europe. Chinese companies are doing the same: the Chinese Lenovo group recently acquired the personal computer division of IBM; another Chinese company, TCL, engaged in a joint venture with Thomson in France. . . Globalization is a continual two-way process and we shouldn’t forget that.
Read the interview at www.emeraldinsight.com/info/about_emerald/emeraldnow/index.jsp