More than anything else, our main disadvantage is incompatible and poor
management skills
Why are Pakistani businesses unable to compete in the global markets? What
is it that inhibits them from breaking through overseas? As our exports
continue to decline, the commonly heard responses to these questions from
the private sector are lack of government support, expensive inputs, energy
shortages and a slowdown in global markets amongst many others. On the
other hand, the government blames past policies including currency
overvaluation, limited product range and underinvestment by the industry.
While none of these are entirely incorrect, I would like to dig deeper and
understand why our industry could not find answers to these issues. None of
these are problems which could not be effectively countered by sound
thinking and good management. After all, the same sort of issues have been
successfully dealt with in the domestic market. I therefore hypothesise that
management skills are an important missing ingredient and a major
contributor to our failure in the world markets.
We do not like talking about poor management as it is always easier to blame
others for our faults. But the truth is, that as an economy, we have been
lacking in management skills required to compete in the global markets. I
would like to shed some light on where we went wrong and what can be learnt
going forward.
We have seen some announcements recently from companies in Pakistan
wishing to venture into export markets. We will look at how they stand to
perform in view of this analysis.To begin with, post the initial few decades, our entrepreneurs never felt the
need to compete globally. They preferred to operate in industries which
served the domestic market where they could leverage their networks. If you
look at Pakistan’s largest conglomerates you will see bulk of their
investments in industries like fertiliser, energy, cement, sugar, automotive,
FMCG and services – all meant for the local population.
While these were necessary investments required for the domestic market,
they were relatively more attractive given their unusually low risk and high
returns and it is this equation which caused the problem. When capital is
scarce it will naturally chase lower risk options. It became too strong an
incentive for industrialists to resist the low hanging fruit and hence the
largest business houses focused their financial and human capital on the
domestic market. Their attention was diverted from the potential exportbased
investments which required longer-term investment horizons.
It is interesting to note that most local industrial groups started in the textile
sector and many of them still have textiles amongst their portfolios, albeit a
much smaller proportion of their overall business than what it was when they
got going.
While textiles were the only export industry in which local entrepreneurs
found sizable success, there were two problems with the strategy they
followed. First, their investments were primarily in the commodity end of
textiles value chain which provided small margins. They either produced
yarn and grey fabric and later developed home textiles and basic garments
business.
International yarn and fabric middlemen played the key role in purchasing
these products from Pakistan while sales to large wholesale and retail brands
were made via buying houses and visits to trade fairs. Revenues in all cases
were dependent on big buyers who exerted their power in terms of the
minimal margins provided to Pakistani suppliers.
Even so, survival was possible until the quota regime lasted since Pakistani
companies did not have to worry about many expenses such as marketing,
business development and research on new products. But as soon as the
quota allowances under the General Agreement on Tariffs and Trade (GATT)
– the predecessor to the World Trade Organisation (WTO) – regime ended,
Pakistan suffered badly as manufacturers could not remain competitive in many segments when compared to Bangladesh, India, Turkey and many
other developing economies.
Second, and more importantly, our managers did not see the change coming
and never realised that they had little competitive advantage. Lack of
appropriate business knowhow coupled with limited information about
international markets meant that Pakistani producers did not understand
the competition, did not see the shift in trends in products and markets, the
changing industry cost structures and the new global supply chains.
Consequently, they failed to enter the value-added segments at the right
time, giving up market share to new entrants who were far better organised
to address the changed market needs. Incidentally, the few companies which
did invest in value added sectors and modernised their businesses have
reaped considerable rewards for their persistence and continue to do so.
In many other sectors, Pakistan has developed manufacturing skills and can
make good products. We have traditionally been exporting surgical and
sports goods from places like Sialkot, our basmati rice is known for its
superior taste and aroma and our artisans can take pride in their arts and
crafts. But unfortunately, in almost every sector, we have failed to brand and
package our products to appeal to the developed world.
Our aesthetic sense remains old school instead of fresh, inspiring and
wholesome. We rely on basic production capabilities while the world invests
in superior marketing and sophisticated aesthetics. We also live in relative
isolation from the world markets. As a society, our exposure to diverse
cultures is limited and we find it difficult to understand people from different
backgrounds. We like to cling to our ways and are apprehensive of breaking
cultural boundaries, which is another reason why our managers fear
challenging the status quo and have problems understanding other markets.
It is no secret that all our South Asian neighbours are much better
amalgamated in the global economy. In fact, we will find it difficult to
compare ourselves with any other Asian economy in this respect, apart from
North Korea perhaps.
We have therefore followed flawed strategies, developed and executed by
poor managers who had no understanding of global markets and preferred
to remain isolated. Since we have never invested in world scale capability, we
end up relying on management teams which are good enough to run operations in industries protected in one way or the other by the state. But
this skill set has no idea how to operate globally. It is not qualified to operate
in international markets neither can this capability be developed overnight.
This brings me to the interesting announcements recently from a few major
companies to invest in export-oriented businesses. While the thinking is
appreciated and it is in line with the spirit of the times, I wonder if any
attention has been paid to the various points I have raised here. They should
consider moving up the value-added chain instead of investing in
commodities which add little value and create few jobs. Instead, they should
follow a country like Vietnam which is now producing smartphones and
computer chips having begun with textiles!
Even if we were to give these organisations the benefit of the doubt around
their export strategy, history tells us that our chances of success will be low
if we do not develop an internationally oriented managerial workforce.
This is where the state, the private sector and academia must join hands and
develop educational programs in international marketing, export sales,
project management, overseas customer support & service, product design &
development and foreign languages & cultural awareness.
In addition to classroom training, companies will have to expose their people
to global markets through secondments, international conferences and
wider travel at various levels in the organisation. Over the medium to long
term, Pakistan could develop management skills which are suited for global
markets. For those who dare to venture forth without these, we will just have
to wait and see.
Source: The Pakistan Today, Pakistan Wednesday, 31 July 2019