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Nurturing 21st century enterprises

LiveMint logoLiveMint 28-02-2017 Amitabh Kant

The 20th century was the era of the large corporations. It can be argued that the growth of the market economies of the West, and in recent decades the Asian Tigers and China, was closely correlated with, if not driven by, the growth of their business houses. Conglomerates such as General Electric, Procter and Gamble, Schneider Electric, IBM, Nestlé, General Motors, Toyota, Mitsubishi, Siemens, Volkswagen, Fiat, Nissan, Nokia, Microsoft, Samsung, Apple, Google, and many more were the flag-bearers of globalization, instrumental in deploying a variety of technologies and products worldwide, improving the quality of lives of hundreds of millions, if not billions, of people. Simultaneously, large business houses created jobs, and led the creation of wealth in their societies through shareholder value creation, or by paying taxes. India missed out on getting the benefits of a national manufacturing champion, arguably thanks to the failed experiment with state-driven socialism, but we have an opportunity to gain leadership in the future of innovation-driven enterprises. The Union government is putting together a few programmes to help support India’s enterprises of the future.

There is much to criticize the multinational corporations about, such as their undesirable impacts on the environment, ecological diversity, concentration of wealth, etc. The intention of this series is not to discuss the pros and cons of the current system, but to explore the recent trends in the evolution of the business universe.

For any of the large multinationals, the current structure would be along broadly similar lines: Corporate headquarters provide the backbone to individual business units, such as corporate branding, growth capital, shared knowledge of functions such as marketing and management of human resources, regulatory support, and financing of research and development of new products. Centralizing this knowledge and these functions provides economies of scale, and optimal utilization of scarce resources such as management bandwidth and cutting-edge expertise. Corporations were able to optimize this structure and expand in new regions quickly. A new business line is started or a new market is opened by some enterprising executives of the business, with the support and funding of the mothership, the corporate headquarters.

The nature of the enterprise is undergoing a tectonic shift, a “disruption” in start-up speak. While businesses and enterprises have germinated and expanded throughout the last few hundred years, the trend of identifying fledgling businesses as “start-ups” reflects a new world where a few entrepreneurs develop a technology, and deploy it in the market spurred on by external capital, provided by private equity/venture capital (PE/VC). As India undergoes a start-up revolution and VCs proliferate, this is the right time to examine the changing nature of the business world.

In the business world of the near future, smaller business units and start-ups, with very little in common, would be responsible for a much larger share of the “corporate functions”, while still connected to the same VCs or PE groups. These finance houses would take on a smaller than traditional role of “corporate headquarters”, allocating only capital and sometimes providing advice on market entry.

While the rumour of the demise of the multinational might be premature, the signs of trouble are unmistakable. According to a recent article in The Economist (goo.gl/nz4mBe), this global trend has picked up pace in recent years. The number of global PE groups multiplied from 24 in 1980 to more than 6,600 in 2015, the year when the total assets under management by PE firms exceeded $4 trillion. According to this article, two of the US’ largest PE groups own companies that hire more than 700,000 employees each, exceeded only by retail giant Wal-Mart.

This “unbundling” of the traditional corporate system would reduce principal-agent problems, bringing more “skin-in-the-game” efficiencies, since start-up founders do not have the back-up of their corporate job in case the enterprise fails to excite its consumers. Founders also have more control over the fate of their firms than if they were trying to deploy technologies or products through the traditional model, where the vagaries of the corporate parent determine success far more than the quality of the start-up’s offering. In short, this model aligns risks and rewards better, leading to better outcomes.

Many existing large corporations are trying to reduce the procedural and process overheads before approving projects, in effect allowing dynamic “intra-preneurs” to develop projects within their corporate umbrella, with less drag from systemic requirements and more independence and agility. Similarly, many large businesses have started engaging with start-ups through corporate VC funds or accelerators, to keep abreast of new tech and business models. For example, Alphabet, Google’s relatively new overarching corporate entity, has structured itself to stay nimble and enable new ideas by providing a more start-up-like environment, less hindered by the demands of the corporate set-up.

The agility and flexibility of this process-light business environment will provide an inherent strength that will challenge the lumbering giants of the corporate world.

The Indian government is ready, keen, and working to support the various pieces and elements of the “Enterprise of the Future”. The Atal Innovation Mission, based at the NITI Aayog, is helping create the infrastructure and institutions to support the business world of the 21st century. A programme to fund Atal Tinkering Laboratories (ATLs) will give high-school students the chance to experiment with making things, populating the pipeline for new entrepreneurs in a few years. The flagship programme to support Atal Incubation Centres (AICs) around the country will help create the sandboxes where start-ups figure out their business models and take their first few tentative steps in the business world, hopefully giving India its business giants of the future. The nascent VC/PE industry in India will be given an impetus by the Fund-of-Funds, managed by the department of industrial policy and promotion (Dipp). The Startup India hub aims to help facilitate start-ups as they go about finding their business models.

This overarching plan, implemented with a business-like approach, will hopefully help India create the economic giants of the future that can drive our growth, create jobs, generate wealth, and provide resources for the underprivileged in our society.

This is the first part of a series in which NITI Aayog officials will examine each of these various programmes in greater detail.

Amitabh Kant and Mudit Narain are, respectively, the CEO and manager, Atal Innovation Mission, both at the NITI Aayog.

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