The corporate state's strategic risk

I first learned to think about strategy as a schoolboy reading Sun Tzu’s Fourth Century BC classic “The Art of War”. London University Professor Lawrence Freedman’s monumental 2013 book, “Strategy: A History” reminds us that strategy is not just for the soldier or the captain of industry– doctors have clinical strategies and even social workers have counselling strategies. Indeed, “there is now no human activity so banal, or intimate that it can be reasonably deprived of a strategy”. 

Even courtship needs a strategy. Girl meets boy – how to court and how to exit are important decisions in life.

Managing strategic risk means thinking long term on the important issues facing you, not just the urgent and the short term.  It also means trying not to be in the wrong place at the wrong time, without any idea how to cope.  

Tactics are about dealing with the short-term issues, whereas strategy is about how these tactics fit into the grand scope of unfolding events. If things go continuously wrong and fail to meet expectations, it is time to review your strategy. 

The first thing to remember about strategic risk is that we all operate in an environment of uncertain information – or, as economists call it, information asymmetry. The assumption of perfect information in economics is interesting for the purpose of theorising but nonsense in practical terms. No one but God has perfect information, but a whole bunch of neoclassical economic models used today for decision-making and risk management is based on this flawed assumption. Even in a two-party game, you will never know for sure how your opponent will behave.

The second thing to remember is that you can take reasonable guesses on how your opponent may react, but not be sure how you should respond. That’s why Sun Tzu observed that as long as you know your enemy and yourself, you need not fear a hundred battles.  If you know yourself but not your enemy, you will lose half the battles; if you know neither, you will lose every battle.  

Of course, these days you can hire management consultants to advise you, but they are only as good as your willingness to hear the truth – especially about yourself and your weaknesses. Many companies are infatuated with the term “Big Data”, the ability of powerful computers to crunch new information from the Internet on consumer behaviour. Big Data, like small data, is only as good as your ability to use it. As most IT specialists will tell you, garbage in equals garbage out. But the smartest companies can make money out of garbage. 

The third truth about strategy is that it is only as good as its execution. American inventor Thomas Edison said that innovation is 10 per cent inspiration and 90 per cent perspiration. Chinese President Xi Jinping said in launching the Third Plenum plans that reform is 10 per cent planning and 90 per cent implementation.  

Strategic design, implementation and review are cyclical processes. Continual quality improvement is all about non-stop feedback on how the strategy, once decided, is being implemented and how good the results are. Most companies spend a lot of time on getting the strategy right, but not enough time on executing it properly.  

For successful companies or countries, the biggest strategic risk is failure to recognise change and the need to change a hitherto successful strategy. Kodak and Nokia were market leaders in their fields. No longer. 

No individual, institution or state can afford to rest on their laurels in this age of fast changes, especially from technology. 

Actually, the biggest strategic risk is whether your business model is sustainable – namely, viable over the long term.  

Companies fail when their products become unprofitable, and many small and medium-sized companies fail because they do not recognise that their business model, based on a few products or one or two key persons, cannot be sustained. Many charities and non-government entities fail because they are not just commercially non-viable, but because they cannot maintain their donor interest and support. Spend too much of your resources on fund-raising and you get donor cynicism: “why should I donate to charity when most of the money is spent on fund raising and administration?”

A sustainable business model is the biggest dilemma of the state- versus market-capitalism debate. We know that central planning fails because the state bureaucracy is inefficient and not responsive to market needs. At the other extreme, raw capitalism means that the poor are not helped and inequality increases. 

The real issue with a hybrid model, where the state operates to provide public goods yet leaves other activities to the market is this: Where do you draw the line and how do you price public goods, such as medicare? 

Hospital services in a hybrid model like Malaysia and Hong Kong face the problem of social and financial sustainability. Both countries have excellent public health services, where any citizen can get the best medical care at a fraction of the true cost. But these costs are getting fiscally non-viable in the long term. Both economies have excellent private hospitals, but that tends to push the cost of medicare higher and higher, driving more and more people who cannot afford such healthcare into crowded public hospitals. Doctors get paid so well in private healthcare that public hospitals cannot afford to hire the best.  

The United States spends 17 per cent of its GDP on medical care, but 5 per cent of the population with the highest spending are responsible for nearly half of all spending.  

Hence, the strategic question facing all societies is how do we provide affordable social services for all – such as medicare, education and the like – in the most efficient, just and sustainable manner? If the corporate sector is to provide such services, what is the right price to charge on a corporate social responsibility basis?  

That is the real strategic question facing today’s state.

 

Andrew Sheng is former president of the Fung Global Institute.