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Old versus new in the economy

Aug 07, 2005 Management, Sunday Nation

Once upon a time, in a country far, far away, the leading businesses of the land made money in a certain way. First and foremost, they made friends with influential politicians. They cultivated them, wined and dined them, offered them shares, and gave them positions on their boards. Having obtained the necessary political backing, these businesses set out to create a monopoly situation. They obtained exclusive access rights to a market, say, or to a physical resource (mineral deposits, plantations). Or they simply made sure they were the only licensee allowed to conduct business in a particular industry.

Having laid the necessary groundwork, these businesses proceeded to reap the rewards. And because of the lack of competition, these companies generally had an easy time. Customers had no choice but to buy their products, so the incentive to invest in product or service development was minimal. Cost containment was never a burning issue, so sophisticated management information systems were unnecessary. Advertising and promotional expenditure was kept at a comfortable minimum. And when competition emerged from unexpected directions (such as from overseas, or from substitute products) these firms could usually lobby successfully for tariff protection, or legal blockage.

Once upon a different time, in another country also far, far away, an altogether different type of business was thriving. These businesses did not need to suppress competition artificially – they thrived on the constant challenge posed by rivals trying to outmanoeuvre them. These companies, therefore, had no real need for friendly politicians. If they lobbied for anything, it was for good policy frameworks, appropriate incentives and stable fiscal and monetary policies. These firms invariably invested heavily in their brands. They also required up-to-the minute management information, and were therefore heavy users of information-technology applications. And their modus operandi was innovation: they had to engage in continuous reassessment of their products, people, organisations and strategies.

The first type of business represents Kenya’s “old economy”; the second category epitomises the “new economy”. They are both “far, far away” from Kenya today because we are poised on the cusp of change. We have neither consigned the old to history, nor wholeheartedly embraced the new. “Old versus new” battles are beginning to take centre-stage in the minds of executives and in boardrooms across the land. And inevitably, the old ways will be left behind. The new will take hold of the economy and drive it forward.

The problem with the old economy is this: it lacks the correct incentives to perform. A system based on patronage, connections and exclusion is not one that will foster innovation or demand high performance. Why spend too much money on expensive people, advanced technology or efficient processes when the market is locked in to buy from you? The better investment is to keep nurturing the source of your monopoly – your connections with the powers that be.

Equally, old-economy businesses tend to maintain hands-off relationships with their customers. Customers who are given no choice can scream, but they can’t really kick. And they certainly can’t walk away. Think of what you’ve put up with from your landline operator, your power supply company, even various old-style banks to understand the truth of this. There is just no incentive to change products or service levels just because some pesky customers said so.

Over time, old-economy businesses have let costs go inexorably upward; fought off all attempts to introduce competition; and let their product features stay frozen at the level of decades ago. If you ever wonder why we live in a high-cost economy despite being a poor country, look no further. It is the model of business that we have operated in this country that is to blame. David Ndii, one of our more eminent economists, has been pointing this out for many years.

How are things different in a new economy business? Firstly, the mere existence of competitors who can actually bite changes things. Competitive businesses are always on their toes, because the carpet can be pulled away from under their feet at any given time. Even Microsoft, arguably the world’s most dominant firm of recent times, cannot afford the slightest complacency. Bill Gates is known to tell his people: at any given moment, we’re only two years away from irrelevance. He knows that if Microsoft does not keep raising its game, the chasing pack of piranhas will soon pull it down.

And so new economy firms must keep innovating: in product features, in methods of delivery, in organisational structures – just about everything, in fact. Ideas come from people, so an innovation culture demands an emphasis on human capital: development and remuneration schemes that allow the best firms to keep the best people. It is the age-old rule: the need to survive brings out the most adaptive behaviour in nature, in people – and in businesses.

It is not the case, however, that an old-economy business must wither away and die. Some of our most famous businesses in this country were once old-fashioned monopolists, but have realised that they cannot prevent the onslaught of competition – from abroad, from substitute products, from new inventions, even from seemingly non-competitive products that nevertheless take a “share of wallet”. The rocketing rise of Safaricom and Celtel, for example, did not just hurt Telkom Kenya – it diverted consumer spending away from products as diverse as beer, newspapers and petrol.

So some old-fashioned businesses that wake up to the realities of the new world in time do indeed manage to transform themselves. They become closer to customers, spend more on research and development, invest in systems and processes, and build brands with great vigour. After a few years of this, they look nothing like their former incarnations – one only has to look at East African Breweries, Safaricom and Kenya Airways to see this. None of those businesses faces terribly vigorous competition in its market today – but the realisation that a more competitive future is inevitable keeps them raising the bar of their own performance. For many others, the grave awaits.

The change that is needed takes place in the mind. The mindset that regards the right political connections as the ultimate source of competitive advantage is the one that we must dump. That was our model for decades. It was taught to us by the colonial government – selective access to resources and markets, industry and agriculture run by a few gentlemen wearing the correct tie. We outgrew this “one-of-us” model of business years ago, but are only just beginning to realise it. It’s time to accelerate the process. Our informal sector, open to all comers, has been generating 90 per cent of new employment for years now. What does that tell us?

Economic natural selection demands that the company gene pool is constantly refreshed. Artificially blocking this reduces the genetic diversity of business. The resulting inbreeding is the cause of our economic stagnation. The best business teams know this, and play to win against all comers. They do not arrange to have the pitch tilted in their favour, and the referee in their pocket. That might win you a few games, but it will not build a great business spanning generations. Not any more. So let us ring in the new economy – it will be the engine of our future growth.

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