The Hindu Business Line : <I>Delayed reactions to globalisation </I>

When the Indian economy began to be linked more closely to the world in 1991, the full implications of it did not hit many managers for a while. Very little bad news showed up. The obvious facts were increase in business freedoms, freer imports, lower rates of taxes and interest. For some, there was the prospect of crippling price competition and international players entering hitherto protected areas. Yet, less obvious was the economy being open to far more external shocks.

Wrong arithmetic

The world-wide outbreak of terrorism, especially post-2001, the precarious relations between West Asia and the US, and the skyrocketing price of crude, upset the calculations of finance chiefs and managing directors. Increasingly, even the buoyancy and undreamt of bonanza of the stock market boom and obvious increase in company valuations does not take away from the sense of nervousness in the corporate sector.

Confidence in the overall prospects of business still runs high but no one is under any illusions that being profitable is as easy as it was before. A McKinsey study in 2005 showed that in a large sample of over 700 companies around the world, the largest explanatory variable that accounts for performance differences between companies is the quality of management practices, a factor not so far taken seriously by managements.

Implications of globalisation

Some of the recent implications of globalisation are noteworthy. With greater flexibility in imports, the domestic supply base was exposed to scrutiny as never before. Manufacturers increasingly see China as a major low-cost alternative for sourcing of components. Direct in-house manufacturing in India thus gets reduced to the essential parts, where quality and reliability of the end-product is crucial. Prices for local and export markets are getting stickier. And increase in input costs of metals or commodities cannot easily be passed on to customers. Nor can prices be raised just to restore margins unlike in the past.

Even the government has realised that the reductions in import duties are a good stimulus for businesses to make themselves more responsive. Above all, companies have to deal with an impossible question: How to continue to improve the product's performance, styling and design, pay more for inputs, while keeping end-product prices same or lower?

For long, we have been used to the notion that the customer can be made to part with a higher price for superior design characteristics or styling in a product. Even the so-called popular or economy segment customer wants the appearance, fit and finish equal to the best while continuing to pay a lower price. Above all, management itself has become suddenly much more expensive, with rising executive compensation, the result of international competition and the employers all over the world recognising the wage arbitrage in setting up senior employees in India.

Silver lining

The only silver lining is that for organisations that have made quality a religion, there is still hope: Export sales could counterbalance the swings in the local demand; one's existence need not be under threat if one kept up the pressure on waste reduction and cost management, besides, of course, innovation.

(Feedback can be sent to srchander23@netscape.net)

S. Ramachander