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3. Leadership Conclave 2019
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The Growth Paradox: Resolution through Change in ‘Frames for Choices’

A. Economics and Finance  

Economic choices are expected to help us raise our standard of living without a disproportionate increase in cost. Since a large proportion of global population still lives at subsistence level, it is essential that the economy grows to provide opportunities for everyone to raise their standard of living.

If we assume the global economy (or a closed one) to be the unit of analysis, consumption and investment are the drivers of economic growth. Growth in consumption and investment, in turn, depends on growth in earnings. In the short run, credit can accelerate consumption and/or investment, but it is the growth in earnings and savings that determines the level of credit that the economy can sustain in the long run.

In other words, credit can’t buy growth.

Another aspect of economic reality is that one person’s earnings are another person’s costs, as there is very little production that is meant for self-consumption.[1] In this sense, earnings and costs are two sides of the same coin. That is, an increase in earnings implies an increase in cost. But if the earnings don’t go up, consumption and savings would not grow, which in turn, means that investments would not grow. If investment and consumption don’t grow, the economy does not grow, as economic growth, by definition, is the sum of consumption and investment.

It is in this context that we argue for conversations on economic choices to be focused on earnings rather than consumption and/or investment, given the current state of global and the Indian economy.

Earnings growth is not a cost burden if we are able to enhance quality of life through value-creation. But the earnings growth that does not come with increased value-creation causes inflation, e.g., profit inflation if a firm raises prices without delivering additional value to its consumers and wage inflation if an employee does not contribute to creating that additional value but still manages to get a higher wage. We can, of course, lower cost inflation, by raising productivity and realising economies of scale and scope.

In short, increased value-creation helps raise the standard of living and increased productivity and higher economies of scale and scope lower the cost of living.

Our sessions on Economic Choices, therefore, would focus on the following questions:

A 1. Characterising the Current Situation: Indian and the Global Economy

• What has been holding back the earnings (including wages), savings and potential output growth in a world where population is growing and is young, labour force participation is low, average level of education has been getting better, cost of finance and inflation are at a historically low level and liquidity is on tap?

A 2. Frame for Economic Development in Rural India

• What are the key characteristics of India’s rural economy? What are the main opportunities for raising the earnings?
• What has been holding back the growth in earnings (including wages) and savings, allowing families to build required capital?
• How far are the prices of rural economic output objectively and fairly determined? What can be done to improve realisation for agricultural output and craft products?
• How do we improve productivity with low capital investment, as increased capital intensity requires scale, but a large amount of farming and other economic activity operates at the margin (small land holding, local markets, no or limited availability of capital, etc.)?
• What is the role of digital technology (information acquisition, processing and insights for choices) in creating value, enhancing productivity and managing risk?
• What is the role of Panchayati Raj Institutions and community collectives in building infrastructure and raising earning potential?
• What are the opportunities for enhancing the quality of life through provision of consistent supply of quality electricity, water and transportation services?
• What is the most appropriate pricing strategy for infrastructure services, given the income structure (level of income and its distribution) of the Indian economy?
• What is the most appropriate institutional arrangement (including public-private partnership) for financing development in rural India?

A 3. Social Infrastructure: Healthcare and Medical Education 

• What are the opportunities for enhancing the quality of life (improving health outcomes) through investment in urban and rural India?
• How could we improve productivity and realise economies of scale and scope across the value-chain, i.e., payors, providers, pharmaceutical and device producers, etc.?
• What is the most appropriate pricing strategy, given the income structure (level of income and its distribution) of the Indian economy?
• What is the most appropriate capital structure and institutional arrangement (including public-private partnership) for financing, considering the risk and uncertainty associated with each stage of value-chain?
• What is the role of digital technology in improving outcomes, growing productivity and managing risk?
• What role does public policy have in managing risk and uncertainty across the entire value-chain and creating fair and competitive industry context? In other words, what is the most appropriate risk-sharing arrangement between private and the public sector at this stage?

A 4. Financing to deal with Risk and Uncertainty

Frank Knight was one of the earliest economists to distinguish between uncertainty (a situation where we know the possibilities of an event happening but don’t know the probability) and risk (a situation where the probability associated with the event is known). Knight defined profit to be the compensation for taking risk and bearing uncertainty.

An economic activity that carries high risk and uncertainty needs larger amount of equity to support it, and thereby is expected to earn higher return. While it is easy to define the idea of equity in personal and organisational context and is also possible to measure the amount of equity that is available at any point in time, we don’t have a direct measure of equity in public (government) context.

Individuals and firms can leverage their equity to raise a finite amount of debt, depending on the amount of cash flow they generate for meeting the debt obligation without jeopardising their existence. Similarly, the government can leverage its ability to tax and print money to raise debt. The government’s ability to raise debt is constrained by the economy’s ability and willingness to pay taxes and its tolerance for inflation. In other words, the amount of debt an economy can afford to take depends on the cash flow generating ability of households, firms and the government. Since the government and firms are only the intermediary institutions, it is the household earnings and savings that determine an economy’s ability to raise capital, which depending on household risk profile (ability and willingness to take risk), in turn, determines the split between equity and the debt that would be available. We propose to discuss the following questions in this Session.

• What role does equity play in dealing with uncertainty and risk in personal, organisational and public (government) context?
• How much debt is too much debt, given the context?
• Does the Indian economic system have the ability to raise the required amount of equity capital and debt for financing growth, given that the household earnings are not growing at the same level as in the past?

B. Organisation and Leadership

B 1. Building Blocks for the Organisation of Future: Risk, Value, Trust and Technology

Organisation theory suggests that organisations are not a passive recipient of changes in their environment. They choose niches that they are comfortable with, and enact, negotiate with or attempt to change their environment when required.

Changes in consumer preferences arising from evolution of technology, changes in social preferences and emergence of new business models; fragmentation of value-chain resulting in changes in risk-sharing arrangement, and; changes in nature of workforce (part-time, independent, gig, crowd, temporary workers) are some of the most important changes being experienced at present.

In addition, we have a situation where the trust in democratic and market institutions is observed to be declining. Consequently, we see economic organisations having to manage a complex set of needs and expectations, which have arisen from interactions among multiple stakeholders.

Sumantra Ghoshal argued for aligning the organisation to a purpose rather than a strategy, as the commonly understood idea of strategy is biased towards value-appropriation for one group of stakeholders (e.g., shareholders’ wealth maximisation). An organisation can expect to become self-sustaining when people internalise its values and purpose and thereby eliminating the need for hierarchy-based administration.

We would address the following questions at the Conclave:

• How far has the idea of consumer value changed with evolution of technology, business models and social preferences? What are the implications of this change for choice of organisation purpose and strategy?
• How is the nature of work and consequently the nature of organisation changing as a result of evolution of digital technology, fragmentation of value chain, variety in business models, etc.?
• How do we prepare ourselves for assuming risk and dealing with uncertainty in an environment characterised by structural changes in consumer and social preferences and discontinuous changes in technology?
• Given the nature of contractual arrangement with workers, customers and value-chain partners, how do we build trust and collaboration across the chain? What prevents trust and collaboration from happening at present?

B 2. Leadership in States of Transition

As mentioned earlier, social preferences across the world are changing with changes in economic, technological and ecological conditions. We also observe an increasing amount of dissatisfaction with the governance systems as they have failed in creating an equitable and just society. Consequently, we see the need for reframing the questions about the role of leadership where the nature and properties of change elements are different from what they were in the past, interaction effects are unknown, and we are not in a position to anticipate the unintended consequences of our choices.

• How does the leadership team prepare the organisation for assuming risk and dealing with uncertainty in an environment characterised by structural changes in consumer and social preferences, discontinuous changes in technology and changing nature of work and work contracts?
• How do we create an organisation (structure, processes and culture) required for a digital world characterised by fragmented value-chains and declining trust in institutions?
• How do we build capabilities for making the workforce future-ready in a growth-constrained, continuously evolving environment where workforce contracts are not long-term?
• What would it take for an individual to be an effective leader (personal characteristics and behaviours) in the new context?

B 3. Redesigning Compensation and Incentive Structures for Responsible Leadership

Compensation, level and its structure, particularly in the financial sector, has received significant attention post the global financial crisis, as the general public viewed it as a sign, if not the proof, of unfairness of the larger system – a system where the common man paid the cost arising from the choices made by well-placed business leaders and the bankers.

Given the popular sentiment, the regulators and shareholders, in some cases, have made an effort to restructure compensation arrangement, allowing for holding the leadership teams accountable for their choices and actions. Regulation, while an important instrument, is not the most effective one, as people learn to game the system over time – as has been the case with capital regulation in the banking system.

As mentioned earlier, we also expect the nature of risk-sharing arrangements to undergo changes, as the value-chains are getting fragmented. In many cases it may not even be possible (ex ante) to formally identify various risks and create a contract that rewards people or partners who are likely to bear the risk, requiring different parties to solve problems together in a continuously evolving environment. In most organisation situation, it is also not possible to identify the marginal contribution different teams make to organisation performance. Consequently, the leadership and management teams are required to exercise their judgement about who received what kind of compensation for his or her effort and contribution.

• What is the nature of risk-sharing arrangements that can help build organisation capability, converge organisation effort and enhance organisation effectiveness, given the nature of work and work contracts?
• Given the nature of contractual arrangement (independent or freelance, gig, crowd and part-time workers) between workforce and the organisation, what kind of risk-sharing arrangements do we need to sustain and enhance collaboration and deliver consistent performance in a fragmented value chain?

C. Organisation Strategy

C 1. Choice of Growth Strategy: Leveraging Technology for Growth and Profitability

As mentioned earlier, there is very little production that is meant for self-consumption – an extremely large percentage of consumption is someone else’s production which flows through highly fragmented value-chains, often global. Fragmentation results in distribution of risk across the value-chain, requires high degree of co-ordination and interaction among different players, particularly if these are independent players. In addition, fragmentation causes economies of scale and scope to shift over time as the chain evolves. In other words, the fragmented chains are characterised by complexity, which can, in turn, result in increased uncertainty around investment, financing, production, trading and consumption choices. Fragmented chains also result in diffusing the responsibility structure, e.g., customer-ownership tends to be no one’s responsibility, particularly where sales and service value-chain is outsourced to multiple vendors.

Evolving consumer and social preferences and a fragmented value-chain combined with new age work-force contracts create additional complexity in coordination and assignment of responsibility and workforce and customer engagement. Consequently, we need much higher degree of collaboration than what was required in the past. While technology can help integrate the chain by making it possible to monitor complex interactions, we run the risk of losing the value that personal interactions bring.

• What are the possible generic strategies that can help release constraints on potential growth? How does the evolution of digital technology impact the effectiveness of these strategies in building a low-risk, profitable growth business?
• What is the nature of investment required in enhancing customer engagement in new and existing markets?
• How do we realise economies of scale in a fragmented value-chain without letting the cost of complexity go up disproportionately?
• How far do we need to reconfigure the value-chain and consequently the risk-sharing sharing arrangements with our partners in a low-growth environment?

C 2. Pricing Strategy: Pricing for Value

‘Pricing for Value’ is at the core of any economic activity – be it a commercial activity or a public service. While it is an accepted practice to subsidise (or cross-subsidise) public services, it is uncommon to find businesses that subsidise and/or cross-subsidise their customers in the long run. However, we observe that many of the new-age businesses ground their growth strategy in subsidising their customers either at the cost of their own margin (large cumulative losses for shareholders), partner margins (squeezing vendor margins), selling consumer information to other businesses or requiring consumers to consume services (advertisement from other businesses) that they would otherwise not necessarily consume. In most of these cases, it is argued that the long-run economic benefits outweigh the impact of distortions that such a strategy causes. We have seen some of the subsidy-based businesses being valued at extremely high price-earnings multiples in financial markets. In many cases the valuation multiples have not sustained post listing on the exchange.

We also observe that the provision of service in exchange of personal information has come under increasing amount of scrutiny during the recent years, resulting in the regulatory intervention through data privacy and security laws. In some situations, we are also seeing the government trying to control data flow across borders or is trying to deny individuals their right over personal information. In this context, we intend to discuss the following questions:

• Are we to believe that ‘pricing for value’ is not likely to remain a choice for most situations, given that the private sector is increasingly dependent on subsidising or cross subsidising their customers for building scale? [2]
• What are the situations where subsidies or cross-subsidies are sustainable, without causing long-term distortions?
• How does one value personal information that is being exchanged (in lieu of cash) in an increasing number of markets?
• What role does ‘pricing for value’ have in building a low-risk, profitable growth business or providing an economically and financially sustainable public service?
• What are the pre-requisites for a deep-discount or zero-price strategy to provide sustainable competitive advantage?
• What is the economic cost of pricing strategy that causes structural shift in consumer or public preferences, industry value-chain or competitive conditions?

[1] All of us are part of one value-chain or the other – the final price paid by a consumer is the cost incurred at different stages of the value-chain and the profit that different players have earned for taking risk and dealing with uncertainty.

[2] The ‘winner takes it all’ possibility encourages businesses to continue pursuing zero price or deep discount -based pricing strategy for a long time.