Business Case Studies, Executive Interviews, Bala Chakravarthy on Global Economy and Global Managers

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Executive Interviews: Interview with Bala Chakravarthy on Global Economy and Global Managers
October 2008 - By Dr. Nagendra V Chowdary

Prof. Bala Chakravarthy
Professor of Strategy and International Management

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  • Corporate R&D labs used to be the key for companies to create competitive advantage. But in the 21st century, innovation is moving out of the lab and across the globe. The research indicates that a real source of competitive advantage is skill in managing innovation partnerships. For instance, Boeing's unique assets and skills are increasingly tied to the way the firm orchestrates, manages, and coordinates its network of hundreds of global partners. Innovation is increasingly driven through collaborative teams due to product complexity, availability of low-cost but highly skilled labor pool and advances in development tools. At a macro level, what's driving this trend? Is this going to be a competitive necessity or a competitive choice? What are the advantages to companies that do it well?
    True, the boundary of innovative firms is fast extending beyond their organizations to include its partners. Companies in a number of industries, such as pharmaceuticals, medical devices, aerospace, information and communications, are increasingly using external networks to build missing competencies or to enter new markets. There is a lot of uncertainty in these industries as to which competencies, especially technology platforms, will be the winners in the future. Building new competencies is both expensive and risky as is entry into new markets in emerging economies. Besides, competencies can become obsolete very quickly. Therefore, partnering and virtual networks are a competitive necessity.

    Not just Boeing, but several others have pursued such a strategy of distributed innovation. For example, P&G has created an extended R&D organization connecting its own 7500 researchers and engineers with the vast external pool through a permeable boundary. Its R&D productivity and innovation success rate have nearly doubled, while the cost of innovation has fallen. This is the kind of advantage that others are trying to replicate.

  • According a recent McKinsey Global Survey, almost 70% of executives around the world say that global, social, environmental, and business trends are increasingly important to corporate strategy. Yet relatively few companies act on the global trends they think will affect them most; among those that do act, only 17% report significant benefits. Why is there such a disparity between need and action?
    Great question! I hope you will ask McKinsey for a response. Let me take a crack at it though. Recall, I noted earlier how it is very hard for a firmto sustain profitable growth. If a firm's financial performance is poor, it is hard for its leaders to justify investments in a firm's social and environmental performanceā€”even though these investments may be necessary to sustain financial performance over the long run. This preoccupation with financial performance in the short term may explain why there is a major disconnect between awareness and action. Unless social or environmental performance becomes important to financial analysts, there will only be lip service paid to them, especially in firms that are in financial trouble.

    Also, there is a tendency to measure benefits from business initiatives that deal with the social and environmental responsibilities of a firmonly in terms of improvements to its financial performance. They may guarantee a firm's license to operate or minimize the risks of disruptions to its operations. Both offer significant benefits to the firm. But these are not always easy to quantify. Hence these benefits tend to be systematically understated.

  • Do you foresee a decreasing role for multilateral international bodies like, WTO (with the rise of regional and bilateral trade agreements and perennial showdown at recent meetings, including impasse at Doha round of talks), UNO (with private sector assuming a great role at humanitarian activities for instance, Bill and Melinda Gates Foundation, Clinton Global Initiative, etc and increasing role of Social Entrepreneurship Initiatives and Microfinance Initiatives, etc), the IMF and the World Bank?
    I wish this were not the case but I am afraid you point to a growing reality. Nation states have a natural tendency to be self centered and competitive. While cooperative institutions like, the European Union are refreshing exceptions, the EU too is having its fair share of problems in agreeing to a common constitution or defense strategy. The UN bodies are far more heterogeneous by contrast. There are toomany vested interests and shifting alliances. Finding a multilateral winwin solution in such a setting is very difficult. We are left, therefore, with the less ambitious arrangement of regional or even bilateral treaties.

    Multilateral international bodies are taking a backseat today because we have very few world leaders who are both popular at home and well respected abroad leaders who can make the gutsy first selfless move.

    Without such an action it is hard to get others to yield.When public governance fails we have to look to the generosity of individuals; but theirs is just a drop in the bucket, given the enormity of the challenges that confront the world community

  • What according to you are the important trends that are going to shape the way global business will be carried out and what advice would you offer to the top managers operating those businesses?
    There are many important trends. Let me just focus on three here:

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