Services-led Growth Strategy: Take II

Written by Subhash Agrawal | Updated: Sep 23 2004, 05:30am hrs
What is Indias real edge in the global economy Do we have any How can we increase growth, employment and share of global trade The study of the competitive advantage of nations was a popular theme a decade ago, but it has now jaded a bit ever since the Asian crisis of 1997, a decade-long stagnancy in Japan and the galloping growth in China upset so many established economic mantras.

And even though the urgency of immediate issues rarely allows us to look at long-term scenarios, this question remains important to India: How do we compete in the future, especially with capital-rich and innovation-rich countries on the one side and many low-cost nations on the other side How can we become another Malaysia

A recent op-ed on these pages underlined the need for a services-led growth strategy, especially given the uncomfortable practicalities in several areas of manufacturing. This was a very timely reminder. Of course, no country can ignore manufacturing, but given some global and local realities there is a real need to broad-base, expand, deepen and improve the service economy. In effect, to move it beyond the hype of the IT/BPO sector and certainly well beyond the statistical mirage brought on by government jobs.

The service sector is far more than just finance, transportation, healthcare, hospitality and software the list of usual suspects and there is a large unorganised sector in the Indian economy that is primarily services-based, such as plumbers and auto mechanics. Furthermore, boundaries between services and manufacturing are becoming increasingly blurred. Every manufactured product requires a host of back-end functions, such as design, marketing and customer support. The pure cost of production of most products, be it a carpet, car, or industrial machinery, is generally in the range of 20 to 30% of final price, and the remainder 70 to 80% is represented by making the complex delivery system work. Thus it is perhaps more correct to speak of service activity v/s manufacturing activity, and not service industry v/s manufacturing industry.

The services versus manufacturing debate is thus misleading. In a country of Indias size, diversity and heterogeneity, no one-size-to-fit-all will work, and there has to be a sustained effort to improve quality and costs in manufacturing, and to improve per hectare yields in agriculture. But to move beyond the traditional export basket we have now will require a conscious effort to improve the services component, both to supplement export promotion and to make the product genuinely better in some way, such as costs. In fact, study after study the world over indicate that most customers remember how they were treated much more than how the product performed (a series of seminal studies done by the American Society for Quality Control show that twice as many customers leave due to poor service than any other reason). We ought to remember that next time somebody complains of Sri Lanka stealing away our share in tea exports or Dubai in garments.

Services are far more than finance, transport, hospitality and software
Boundaries between services and manufacturing are getting blurred
Most crucially for India, heres why services will be so important. The sum of global business trends suggest that product life cycles have reduced dramatically, so much so that over 50% of revenue of Fortune 500 firms come from products which are less than 5 years old. In this scenario, there are four generic competitive strategies that India can adopt, namely 1) Cost Leadership, 2) Product Innovation, 3) Product Quality, and 4) Service Quality. Innovation requires continuous R&D funding and a larger culture, which sadly we lack except in a few exceptional companies. Competing on costs works for a while, and is doing wonders for us in the BPO sector, but only till the next cheaper factory is built in the next nation. Plus, at least in manufacturing, cost leadership also requires both economy of scale and a cheap production environment, again neither of which India currently has.

Product Quality has now become such a baseline requirement for survival that it is no more a grand strategy. What the customer now seeks is added value and dependability which comes from the manner in which companies behave. The key to improving Indian exports in future may not be in trade pacts or WTO negotiations but in developing an international-quality service infrastructure and mindset.

The author is an analyst of Indian political and business trends