24 May 12 Schumpeterian new world demands a radical change in firm behaviour

A recent column in the Mint provides a fresh perspective of what otherwise seems to be the beginning of the end. The end of the second digital economy bubble. The writer has used Austrian-American economist Schumpeter’s thoughts to argue that the digital networking wave could be “advance signs of a Schumpeterian renewal of the global economy”.

In principle this could be true. And I hope that the innovation that accompanies this new technological wave will pull the world out of the gloom, creating a greener energy efficient world. And for this to happen, for a creative disruption to happen, operations at firms producing goods and services will have to change radically. Rather, they will have to dismantle and rebuild their operational structures, technology and business models to adapt to the change.

Take for example the auto ancillary firms. During the course of a recent research assignment, we held discussions with both auto manufacturers and ancillary equipment suppliers on their innovation and R&D efforts. While the general trend was towards becoming more energy and fuel efficient, reducing product cost and increasing consumer convenience and safety, these appear to be only incremental in the context of the disruption that seems inevitable. Firms will have to think and act fast and ahead of competition in a way that is sustainable, from the environmental perspective.

Are these firms ready to embrace the new scheme of things? Will new leaders emerge and traditional companies get wiped out? So what are the new fundamental questions? What, when and for whom to produce will remain the key questions of business economics. But add to the list questions on carbon efficiency and environmental impact. For, the politics and economics of everything will be dictated by the environmental realities rather than pure economics or business objectives. So a relevant question would be how green is my product and the way my firm operates? How can my product leave behind minimum carbon footprint?

Answers to these cannot be arrived at by adjusting a few variables, but demand a thorough firm wide structural change. Moreover, the new world realities might force firms to defy traditional theories of economics and competition. For example, firms might have to go back to localization of production despite higher costs to minimize carbon footprint. And in fact certain industries like airlines might shrink, forcing firms to leave. A case in point is the recent European Union carbon levy on airlines operating in its skies. While many countries and global airlines have voiced their concerns, and plan retaliatory moves, these kind of environment related levies will only increase in the years to come. Who knows the concept of a low-cost airline will altogether vanish in 10-15 years time. Going forward, make or buy decisions will be influenced more by environmental concerns than by profit motives.

Globally, firms – big and small have started to undertake some of these going-green steps as a part of their corporate social responsibility (CSR) initiatives. But going forward these will become strong business imperatives. Environmental impact minimization will precede profit maximization.