Businesses need to face up to new realities and challenges. The current economic downturn is not the cause, but a catalyst. With or without this downturn, companies need to adapt to changing geopolitical realities. World class businesses fail because they are either unable or unwilling to discard old models of businesses when external forces have changed dramatically. We must now reinvent business to position for the age of capability, said Jagdish N. Sheth, Charles H. Kellstadt Professor of Marketing, from Emory University's Goizueta Business School. Sheth was speaking at a recent lecture at Singapore Management University (SMU).
Sheth, who is also a SMU Distinguished Scholar, is by no means running down global businesses. He calls them great institutions. But, these institutions are in a mid-life crisis. They do not know how to behave differently, especially in the last twenty years. Most of them have been driving too hard from the shareholders' viewpoint, as if that's the only obligation. The CEOs, the boards, have to shift, he said.
Several forces are behind this need for change. More and more, global economic growth is going to happen from emerging economies and not advanced economies. So the future will be determined by emerging economies such as Brazil, Russia, India and China. But to do business with them or to understand them, the traditional models and markets are not likely to be sustainable, said Sheth.
For one, companies that want a piece of the growing pie in emerging economies need to tackle the key issue of affordability. It is not about whether you can make the best quality product or not, but whether you can make it affordable at the same time, said Sheth. Of course, market size, which brings about economies of scale, helps in making products and services affordable - just look at influence China and India have on the mobile phone industry.
But, the companies need to look beyond mere market numbers from a superficial perspective. The traditional approach of looking at them from the colonial lens, mindset, is not going to work anymore. You have to look upon them as places to innovate, places where competition will come; you have look at them in an excited, positive way, and put them in the front burner rather than the backburner.
As businesses extend their reach around the world, they will also find themselves facing greater accountability to society at large, and scrutiny - not unlike fishes in a fishbowl. Everybody is watching. Today, everybody wants to take a stake in that company even though they are not stakeholders -- they are just bystanders. Referring to the growing influence and voice of these bystanders in the Internet era, Sheth said: It's like the California forest fires, where a little spark can get out of hand completely.
Scrutiny and distrust, previously reserved by active citizenry on monopolies like telecom companies, utility and power companies, are now extended to the wider business community. Today, nobody's trusting business, said Sheth, citing examples like Satyam, WorldCom and Enron - corporate scandals which provided more ammunition to the distrust. To a large extent, the distrust of businesses is an existing problem that has only gotten worse. Businesses have not been historically trusted by the Europeans. There are many industries which the Europeans will never give to the private sector. The American model was that we'll trust capitalism till it proves that it can't be trusted, which is the result of the current financial crisis phenomenon, and you can still see the denial, said Sheth. AIG's insistence to award bonuses to some employees, General Motors' reluctance in making drastic restructuring, are but examples that Sheth said boggles my mind on how senior business leaders do not understand the new reality.
Businesses also need to deal with a new generation of employees who think and act differently from their predecessors. Not too long ago, managers were using the hierarchal approach, otherwise known as Theory X, where employees were assumed to dislike their work and therefore comprehensive supervision and management has to be in place. As economies mature and companies become more sophisticated, Theory X gave way to Theory Y, which is a significantly more positive way of management, where managers believe that by providing a nicer environment, their subordinates will be sufficiently self-motivated by job satisfaction.
Today, people simply say, ‘that's not enough anymore, I want empowerment'. They don't want bosses anymore, so the traditional role of a boss has to change dramatically, said Sheth. From his perspective, change is already happening, as traditional hierarchies make way for flatter, more egalitarian structures like those in consultancies, accounting firms, and non-governmental organisations.
The seven ways
So, what should companies do to reinvent themselves as they gear up to meet these new challenges?
First, companies need to freely challenge the industry dogma. To Sheth, an industry's legacy and heritage is more of a liability than an asset. The reluctance to change, the natural tendency to follow a prevailing wisdom, is a behaviour not restricted to a narrow group of companies. Companies are able to thrive under tough times by challenging existing dogma, he said. For example, banks were reluctant to take part in micro-banking - the lending of small, miniscule sums of money to the poor and disadvantaged. But with a net margin of at least 40%, micro-banking is proving to be even more profitable than even investment banking.
Second, business leaders need to make ordinary people extraordinary. The best talent lies not at the top of the organisation, but at the foundation level. How you nurture them, how you bring them up, actually becomes a requirement for businesses, and there are companies that have done it, said Sheth, citing India's Wipro Technologies, one of its largest technology services firm, as an example. Think about the value-add of a grain of wheat: when you make it into bread, the value-add is about five times. But if you take a human being, which is the best resource you can ever get, and polish him, nurture him, educate him, the value-add is infinite, said Sheth, a member of Wipro's board of directors since 1999.
Next, companies should learn how to be world class customers. Many large corporations are great marketers, with the skill and savvy to produce goods that people are all too willing to buy. Yet, these very same companies are also the worst buyers, with corrupt procurement departments and not nurturing their own suppliers positively, said Sheth. In a typical large manufacturer, the company's own value-add is only 30% of the total costs, including labour and capital investments. The other 70% are the costs of materials procured from the company's suppliers. Thus, if you treat them with respect, just as you treat your customers, you will get an enormous leverage out of your suppliers, said Sheth. But, I've not seen that in most companies.
The fourth way to reinvent a business is to innovate for affordability. Anybody who knows how to make the same product more affordable wins the race. Affordability should be the driver, said Sheth. This has happened before, when mass-produced Timex watches in America killed many European watch makers, who were stuck in the mould of making expensive watches that were used as gifts for once-in-a-lifetime events like weddings or graduation. The mobile phone industry, for one, has driven the costs of handsets to mere tens of dollars apiece, thus helping to stimulate billions more new mobile users. The Nano, billed as the world's cheapest car by its maker, India's Tata Group, is chalking up a long waiting list of buyers, thanks to its price tag of a mere 100,000 rupees, or some US$2000. That's a paradigm shift, said Sheth.
Also, companies need to correct a mistake made in the first industrial revolution. Instead of ignoring the environment, they now need to nurture nature. Resources are really organic -- they are living, breathing things. The more you nurture nature, the more nature will give you back, said Sheth. To him, this is an issue even more urgent than the rise of China and India's economies, where the combined market of more than two billion consumers means that demand for resources will be never higher than before. The only show-stopper will not be geopolitics, technology, nor regulation, but nature. Nature is not passive, but it can have a very passive resistance. It can reproduce itself enormously if you treat it right, he said.
Companies' main, and at times, sole reason for existence is to make a profit for its owners, but, according to Sheth, they should find a higher purpose other than the bottomline. Nobody will like to work for you anymore, unless you make them passionate with a purpose higher than money, he said. Based on his research on the wealthy, those with no higher purpose tend to feel empty inside. Some of them create foundations, but more as an afterthought. My view is that it should be a daily necessity in a corporation, that going forward, we must instil purpose into the profit, he stressed.
Last but not least, business leaders need to also practice a culture of responsibility. From Sheth's perspective, this is a fundamental change that many senior business leaders are not yet ready to make. For one, they have to play the role of a coach and mentor to their subordinates; not a boss. In a sign of prevailing attitudes, a study of manufacturing staff in America, from factory workers to plant managers and corporate senior executives, everyone, at every level, seems to believe that their boss is incompetent. It's going to be matter of time before it happens here in Asia, mind you, said Sheth. He calls for business leaders to draw leadership examples from those serving in sports teams, where great coaches arouse greater potential from their players, who reciprocate with a lifetime of respect.
It may sound like an onerous process to undertake, but the reinvention of businesses is more than just a good-to-have. It is a necessity in today's environment. Just as we reinvented business from the agricultural to the industrial age, we must now reinvent business to position for the knowledge age, Sheth added.