Global competitiveness is not just about trade in goods or services. Ultimately, it is about the quest for higher productivity.
In the cutting-edge economies, competitiveness is driven by innovation and efforts to move into new, high-margin industries. In the large emerging economies, it is driven by efficiencies and efforts to move away from old, low-margin industries.
In both cases, the key indicator is productivity – and the collapse of cost structures.
The Story of GE
A year ago, I moderated a KPMG leadership conference with Jack Welch, former CEO of GE, in Helsinki, Finland. Among other things, I asked him about the role of globalization and services in GE during his tenure.
– In the mid-70s, I visited a Japanese manufacturing plant, he recalled. – I was awed by their efficiency.
As Welch took charge of GE in 1981, it was the visit to Japan that motivated the transformation of the bureaucratic behemoth to dynamic and revered powerhouse. As one of every four employees left the GE payroll, 118 000 people in all, GE market value grew from $13 billion to $500 billion.
– Along with globalization, e-business and quality, services were a key area of change, he recalled. Between 1995 and Welch’s retirement in 2001, the services division grew from $8 billion to $19 billion.
– In 1981, when we first defined our business strategy, the focus was Japan, Welch said. By the end of the decade, – that competitive toughness increased by a factor of 5 or 10.
And today? – Well, with the rise of China, competitive intensity has soared by a magnitude.
The story of GE’s transformation mimics the history of nations, which have progressed from agriculture to industrialization, to services.
Before Adam Smith’s “Wealth of Nations”, the French physiocrats, led by Turgot and Quesnay, believed that the wealth of nations derived solely from the value of agriculture. In the United States, Alexander Hamilton, one of the Founding Fathers, portrayed the American manufacturing system as vital for national independence. In “The Coming of Post-Industrial Society” (1973), Daniel Bell demonstrated that post-industrialism would be information-led and service-oriented.
Neither agricultural efficiency nor manufacturing or service performance is a panacea. Rather, the key indicator is productivity, which supports prosperity and is driven by innovation – but, as Welch’s story indicates, that is changing as well.
Today, government leaders and senior executives in the United States, Western Europe or Japan intend to cope with the challenges of China and India by “moving higher in the value-added chain.” But so do government leaders and senior executives in the large emerging economies.
In the 1970s and 1980s, the Japanese companies tore apart the cost structure in a few industries, particularly cars and consumer electronics. That was only a prelude.
In the coming decades, the rise of China and other large emerging economies will result in tearing apart the cost structure in industry after industry – through cost advantage and innovation.
Dr. Dan Steinbock is Research Director of International Business at the India, China and America Institute