The Turn of the Screw


“Change is hard because people overestimate the value of what they have—and underestimate the value of what they may gain by giving that up.”

by James Belasco and Ralph Stayer in Flight of the Buffalo,1994

Turn of the screw

China seems to be more and more in the news of late. Well I suppose with its clout as the second largest economic powerhouse in the world, that is hardly unusual. A couple of months back, the country unilaterally devalued its currency Yuan by about five percent to combat declining exports and economic slowdown. More recently the Chinese communist party at its annual conclave announced the end of the controversial ‘One child’ policy, allowing couples to have two children for the first time in thirty-five years. In an environment of economic slowdown, this underlines a heightened fear of loss of competitiveness to countries with better demography.

China degrowth

The Turn of the Screw…….

As Oil prices drop from above one hundred dollars to around forty dollars per barrel, the oil producing nation states in the Middle East led by Saudi Arabia seem to be stumbling, with fiscal deficit rapidly rising to unsustainable 20% of GDP levels. As these countries frantically dip into their reserves to balance the deficit, they fervently hope for oil prices to start climbing up again.

Oil and Gas

The Turn of the Screw……..

I suppose majority of the world believes, just as China and the Middle East hope for, that the economic and oil prices downturn are temporary and the ‘screw would turn back’. China would continue its rise, oil prices would climb back and all would be well with the world again.

My thoughts go back to that prescient article “Marketing Myopia” written by Professor Theodore Levitt of Harvard Business School more than half a century back. The central argument in that was “the history of every dead and dying ‘growth’ shows a self-deceiving cycle of bountiful expansion and undetected decay.” Professor Levitt goes on to say that with the ‘turn of the screw’ in terms of the environment, market and technology, there is always a small timeframe ‘window’ allowing an optimal match between these and an entity’s intrinsic competences. As the screw turns, that fit between such competences and the environment, market and technology starts getting lost. What is needed then is to rediscover and reinvent oneself in terms of ‘What business we are in?’ While Professor Levitt essentially wrote the article from an organisational and industry perspective, I see his concept much more universal and having relevance to nations and Global trends.

myopia

So how do I see the future trending?

For decades, manufacturing from the developed world has been migrating to China, attracted by low costs and productivity. But rising costs in China and development of sophisticated automation are tipping the scales back. Realizing the need to automate to remain competitive, China is implementing advanced robotics. It is constructing the first “Zero human labour” factory in Guangdong which would use a thousand robots to do the work of two thousand humans! But does this not run contrary to the effort to increase the Chinese work force by allowing a two child policy? And what happens to the Chinese manufacturing competitiveness as and when the US and Europe also employ similar robotics to manufacture? Allowing same costs but less the shipping time and transportation costs. Clearly, manufacturing is headed back to the consuming countries themselves. Once again a manifestation of the turn of the screw.

And what about the Middle East and its oil lifeline? For decades now, this region has been enjoying windfall profits from Oil and Gas and resorting to heavy subsidization of its citizenry. Says Meghan L. O’Sullivan, director of the Geopolitics of Energy project at Harvard Business school, “The expensive social contract existing between the Rulers and citizens in the gulf states will get more difficult, and eventually impossible to sustain if oil prices don’t recover”. (A few years back, during the days of the Arab Spring, I had deliberated on this ‘Social Contract’ aspect in my post, “Childhood’s End?”). The question that brooks an answer is when will the oil prices recover? More and more experts in the Energy sector are of the view that with improved energy efficiencies brought in by new technologies and the fracking industry waiting on the sidelines, there is no way oil prices can go up to earlier levels. This coupled with clean energy technologies like the Solar and Wind advancing exponentially means that the fossil fuel industry is headed the way of the dinosaurs. Yet another manifestation of the turn of the screw!

One might wonder that with such inevitable turn of the screw, what is the kind of leadership that would succeed in the world. As I think of this, I realise that such leadership needs to have the ability to envision and embrace a future unencumbered by the present- be it the technology, the geopolitics or the economics. A future which addresses core concerns rather than transitory symptoms. And a leadership which comes to live into such a future as it empowers others to deal with the socio-economic and other changes needed to realise that envisioned future. A future that was not going to happen anyways……….

In learning………….. Shakti Ghosal

Reference: Marketing Myopia by Theodore Levitt, HBR July-Aug 1960.

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