The usual approach of the leadership of an organization, firm or a country is to shape strategy and actions for growth or development on the basis of external factors like the customers (markets), competitors, suppliers and barriers for entry. In other words a firm or country strategy is determined on the basis of external structural conditions.
Declining demand following the recessionary conditions facing the western world and the cut-throat competition that it has produced raise the question whether internal strategy could be reconstructed successfully to determine external structural conditions. This has been referred to as endogenous growth strategy or 'blue ocean strategy' as restructuring internal strategy enables the securing of a market without much competition, while the usual approach is called the 'red ocean strategy', being the opposite ie. determined by the market and the competition. Examples of the former include the Model T Ford, the cheap motor car mass produced in America to replace the horse drawn carriage and Dubai the Middle Eastern 'miracle' economy created from a desert where people lived in palm thatched huts herding sheep and goats (see "How Strategy Shapes Structure" by W Chan Kim and Renee Mauborgne, Harvard Business Review, September 2009).
Here we examine how Sri Lanka's economic development strategy could be fine-tuned on the lines of the blue ocean strategy adopted by Dubai to inspire new thinking in the New Year.
Three strategic approaches
Strategy preparation normally involves alignment of three approaches: a) the value approach which deals with the satisfaction the customer receives from a product or service minus the price paid for it, b) the profit approach dealing with the revenue that a firm or country receives from selling goods and services less the cost of producing them, and c) the people approach that deals with the incentives offered to the people (employees and supply chain partners etc of a firm and in the case of a country its citizens) to support and implement whatever version of strategy - 'red ocean' or the 'blue ocean'. Alignment for low cost and differentiation It has to be emphasized that all three approaches have to be consistently and strongly followed up.
If for instance value and profit approaches are emphasized and the people-approach is neglected, a firm or country may face failure due to lack of enthusiasm for the implementation of its strategies and activities. It is equally important particularly in the case of the blue ocean strategy that all these approaches are aligned/ coordinated to achieve both low cost and differentiation to enhance revenue earnings consistently by catering to new higher paying market segments with value adding products and services and also by preventing imitation by competitors; this is the primary duty of the leaders concerned and their advisors. However, earnings could decline, if differentiation is aligned around the value and profit approaches only and low costs are targeted in managing people. It has to be stated that competitors could copy the value and profit strategies and not the people approach.
Fine-tuning the Sri Lankan strategy
Dubai, a city state like Singapore, has been one of the fastest growing economies of the world during the last two decades (though unfavourably affected by the recent recession in the USA) by adopting the blue ocean strategy. Sri Lanka too could emulate Dubai in pursuing its ambition to become a miracle economy in Asia and profit by it. What then are the specifics of this development strategy? Value approach Dubai offers value to foreign direct investors that are quite different from that of competitors. It has set up a number of free trade zones that are comparable if not better than such facilities elsewhere with very attractive incentives that are different from those offered by other countries. Differentiation is achieved by offering 100% ownership and free repatriation of profits and capital. The low cost part of it for investors consists of tax holidays ranging from 15 to 50 years, zero import and export duties and levies, registration within half an hour to operate in Dubai, a minimum of documentation in English and easy enforcement of contracts under an independent and transparent judiciary/legal system like that of the UK.
Sri Lanka offers a similar package of incentives. But it has to be fine-tuned to achieve differentiation and low cost as in the case of Dubai particularly to fill the investment gap of about 7 to 12% of GDP (present investment level being 28% of GDP) to double the current per capita income of the people to US$ 4,000 or so by 2016 and alleviate poverty substantially, as envisaged in the forward vision of President Mahinda Rajapaksa. For instance the duration of the tax holidays has to be extended especially for exports to achieve differentiation without offering it to all and sundry in view of the fact that the expenditure of the government far exceeds its revenue; the policies should be predictable and should not change from time to time. Costs/prices of domestic inputs have to be lowered for the investors by greater fiscal and monetary discipline, reduction of import tariff protection (that makes producers sluggish where value adding innovation is concerned in the absence of competition from the rest of the world), zero levies on imported inputs including machinery/equipment, land reform policies that are aimed at realization of economies of scale/lowering unit costs by encouraging consolidation of small farms, in addition to improving the efficiency of public services by recruiting/promoting officials purely on merit and without politicization, while documentation as well as the registration process especially at the BOI have to be simplified and reduced.
Enforcement of contracts and law and order have to be substantially improved by making the judiciary and the law enforcement system independent and transparent mainly by going back to the independent commissions under the 17thAmendment; under this system endemic bribery/ corruption also has to be reduced significantly while revising the labour laws to simplify retrenchment and dispute resolution. It is such a differentiated and low cost system for the investors that Sri Lanka will be able to compete with Dubai and the other countries in the business of attracting FDI and domestic investments.
Since corporate and income taxes have been brought down to zero and the cost of its government is borne by the rest of the oil-rich United Arab Emirates, Dubai earns most of its revenue by making available to investors differentiated, world-class but low cost port/shipping, aviation, transport, tourism and real estate/housing services in which the state has invested heavily; these infrastructure facilities (which have been extended to other parts of the world due to their differentiated quality and competitiveness) also help Dubai to boost its profit approach. In the case of Sri Lanka much headway has yet to be made in the sphere of physical infrastructure to lower costs and improve connectivity to the hinterland in the northern, central and eastern areas of the country to attract both domestic and foreign investments; capital expenditure by the state in this connection has been quite low (due mainly to the tendency of lowering budget deficits by cutting down on such investments), while management of these facilities has been very poor due to heavy politicization and corruption resulting in sustained losses as well as low quality services in contrast to those of Dubai, which as stated earlier generates most of its revenue from hiring such services. In other words profits from infrastructure facilities and achievement of low cost and differentiated/high quality services is a distant dream unless there is a complete change of attitude and management of these facilities is placed in the hands of personnel recruited purely on merit and promotion is on the basis of positive results.
Dubai has strengthened its people's approach by extending to its citizens a social welfare package, which includes health, education and housing facilities as well as unemployment and pension benefits paid by the state. Besides contributing to low costs, these incentives are differentiated due to the effort made by the state at its expense towards maintaining the traditional Islamic culture of it citizens and for providing educational facilities which are comparable to the best in the world for generating technical skills and management capabilities demanded by foreign investors.
Even for its expatriates Dubai extends low cost and differentiated facilities; these foreigners like the locals do not pay income taxes, enjoy cheap but modern housing, (which they can own outright); in addition they have the opportunity of enjoying aspects of a cosmopolitan culture (western and eastern) available in their own countries like music, food and even an ice skating facility! The Sri Lankan government spends a large portion of its budget in providing subsidized social welfare and cultural facilities to citizens. This tends to contribute ultimately to low cost for investors through expenditure on wages. But firstly it has to be examined whether the rest of its laws and policies here achieve differentiation to enable people of all communities to enjoy equal democratic rights and the freedom to create the emotional and social stability to move forward without fear as a nation by saving investing, innovating, using opportunities/incentives being made available and sharpening their inborn talents; obviously many reforms are needed here to differentiate and attract the Diaspora and foreigners to invest in Sri Lanka.
Secondly it has to be asked whether the quality of education is able to create the values required to enable peaceful social relations, technical skills, management expertise and foreign language (particularly English) proficiency required by investors as in other countries of repute such as Singapore.
There are other problems. Unlike in Dubai foreign skilled employees/managers brought in by investors have to pay personal taxes; they can acquire properties as in Dubai but have to pay a 100% tax (however free repatriation of profits and capital is possible).
Questions should also be raised whether foreigners and their employees feel secure anywhere in the country and their properties are safe from expropriation and other types of damage as well as whether we maintain good relations with the governments of the rest of the world for us to obtain positive assistance mainly with regard to investments and trade.
We should also find out what facilities are required in Colombo and the major towns to provide a cosmopolitan culture for the enjoyment of expatriates and tourists like in Dubai. Education has definitely to be upgraded and the other problems mentioned here have to be resolved since it is our people approach that can be differentiated by making this country a lovely place to live and work for all, irrespective of race or religion, so that we can make it the focus of attention for investors and tourists as well. Sri Lanka is a small country without a significant domestic market to enable demand to generate economic growth; it has to therefore open up to the rest of the world, like Dubai and Singapore by aligning the three approaches- value, profit and people approaches -to achieve low cost and differentiation to side-step competition from countries such as Singapore and Hong Kong in order to attract long term investments particularly FDIs (especially the reputed 'Fortune 500' types) who possess the necessary capital, technologies, skills, access to global markets) to fill the prevailing investment gap, for exports to expand several fold from the meagre17% or so of GDP at present, bridge the balance of payments deficit and also provide considerable employment opportunities - to absorb the excess employment in agriculture; this is the responsibility primarily of the leadership. There is no other way for achieving 'miracle' economy status or at least to realize the important target of doubling the per capita income (in real terms) and alleviating poverty by 2016 or thereabouts, as the present trend of high economic growth could fizzle out once existing capacity is fully used.
(The writer is a senior economist)