LAUSANNE, Switzerland — The turn of the century is an important opportunity to engage in questioning and re-evaluating some of the global community’s basic tenets, assumptions, policies and directions. On these matters we are being well-served by some excellent books.
One of the indictments of the second half of the 20th century is that in spite of all the money and ideas invested in developing countries, with very few exceptions development — sustained growth leading to significantly higher GDPs per capita — by and large did not occur. Many Third World countries are poorer today than they were several decades ago, others have stood still, and the number of true success stories is limited to the proverbial “gang of four”: South Korea, Hong Kong, Singapore and Taiwan. China seems to be embarked on this journey, but remains very far from its destination.
William Easterly, senior adviser to the Development Research Group at the World Bank, has produced an insightful, thought-provoking book on the reasons for the failures (and prescriptions for remedying them) titled, “The Elusive Quest for Growth: Economists’ Adventures and Misadventures in the Tropics.” As Easterly insists, although economists do not understand growth, we do know what the major impediments to growth are. Some — war, corruption, hyperinflation — are obvious, others less so.
The issues that Easterly raises are primarily meant to be applied to developing countries, but some are highly relevant to industrialized countries as well, especially those — like Japan — which have fallen or propelled themselves into a no-growth trap.
Easterly places emphasis on the role of technology, not as a panacea for growth, but as a critical driver. But knowing or owning the technology — no matter how advanced — is not sufficient. What matters is how it is applied, who applies it and in what context.
Easterly underlines the fundamental importance of the Schumpeterian model of creative destruction. For societies to thrive, it is important not only to innovate, but also to destroy old technologies, obsolete practices, sclerotic institutions and, of course, all the dead wood lying around.
Thus, as Easterly states, “technological creation and destruction is the essence of the growth process.” Destruction, however, can be as difficult as creation. This is mainly because those who would wish to introduce new creative technologies will meet with forces of resistance and vested interests that wish to maintain the old technologies. And almost invariably the latter are older and more powerful than the former. This is how Easterly puts it:
“The old technology has its adherents who have to be overcome if the process of growth is to go forward. They will try to erect barriers to the entry of new firms to preserve their competitiveness with the old technology. A favorable climate for new generations of business people and entrepreneurs is essential for growth from the creative destruction point of view.”
When I read this paragraph, I was struck by how admirably, even if inadvertently, it corresponded to the current Japanese situation. There has been very little creative destruction in Japan at any level. There has been some destructive destruction, i.e., firms that have imploded and left massive debts in their wake, but there have been hardly any firms or institutions that have reinvented themselves.
And there is the perennial problem of the entry of new firms in the Japanese business environment. In the course of the last decade, the dismal doldrums in which Japan’s established companies find themselves in notwithstanding, how many dynamic new firms have appeared that have shaken the establishment and gained significantly in market share? In the last decade, how many new Japanese firms have emerged and established themselves in global markets?
This is one of the key points that I have insisted on in this series. I have no magic prescription for what might regenerate growth in Japan. I do know what some of the major impediments are to growth. One, to put it in Easterly’s terms, is that the “adherents of the old technology” are too many, too encrusted and too powerful. I found myself reflecting on this in the course of an illuminating meeting I was fortunate to have recently at IMD with a young Italian named Andrea Guerra. Despite being only 37, Guerra is the CEO of a company called Merloni. Merloni is a family company, founded in 1930, which specializes in electrical domestic appliances. Guerra is not a member of the family. He began his career working for Marriott Hotels and then joined Merloni, initially as director of its Turkish subsidiary. He was made CEO in 1999.
Prior to Guerra’s assumption of the job of CEO, Merloni had been a sleepy and rather marginal company in a very sleepy sector characterized by overcapacity, very low margins, a handful of dominant global players, a host of small domestic players and a definite trend toward “commoditization.” The young and energetic Guerra proceeded to redefine the landscape.
He set about conquering Central and Eastern Europe, including Turkey, both as markets and as manufacturing platforms for Western Europe. He has fostered organic growth, carried out acquisitions and engaged in strategic alliances, including one with the emerging Chinese appliance manufacturer Haier.
He segmented the market and has developed technologically advanced products for the high end of the market. In an industry that was hitherto driven by the interests of retailers, Merloni under Guerra has aggressively moved closer to customers, both in the design of products and in the provision of services.
To achieve all this, Guerra radically restructured management, eliminating layers of hierarchy and rejuvenating the workforce. Whereas Merloni was a quite “typically” Italian company, today it is pan-European, including both East and West, in every respect.
The results have been outstanding. Once a minor Italian player, Merloni is now No. 3 in Europe and No. 1 or 2 in certain sectors and markets. Profits have soared and so has its stock-market value. By engaging in creative destruction, though, Guerra ensured that the best Merloni traditions should be maintained, including the core value defined by the founder, Aristide Merloni: “The economic success of any industrial activity is worth nothing unless it is also accompanied by a commitment to social progress.”
What Guerra has done, which all entrepreneurs should aim to do, is to create wealth for Merloni’s shareholders, its stakeholders, the communities he has invested in and society in general.
People like Guerra are exceptional, but so is Vittorio Merloni, the son of the founder and the person who ran the company for four decades. By being willing to get out of the way, Merloni — an adherent of “old technology” — made it possible for the young and dynamic Guerra to bring in new technology.
This is a model of creative destruction. The Merloni story should be made required reading in the corridors of establishment power in Japan and among budding entrepreneurs.
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