GB discusses competitive advantage, the wealth of firms, and the theatres in which they will compete with the Financial Times’ most worldly philosopher

GB: Over the next 10 to 15 years, what will international business competition look like? What will be the stakes, and who will be the major players?

JK: One has to start by asking what has changed. There are two big changes that are likely to continue to play themselves out. The first would be the change that arises as a result of bringing many more people into the market economy. The world is potentially talking about a market sector of the global economy that is several times larger than what we had experienced up to the 1980s and 1990s. The second continuing trend is the extent to which value-added in manufacturing – the value-added in economic activity generally, as it were – depends less and less on the actual physical content of products, and more and more on what people add to it with their skills and capabilities. This obviously has big consequences for the structure of business in the rich West: business clearly becomes more global, but it also becomes more and more specialized for both companies and countries. Inequality widens in rich countries because the labour force that is introduced into the global economy competes strongly in commodity-type activity, and much less at the top. One therefore sees more and more firms and groups of firms within countries moving into market niches. This movement comes with big pluses and minuses – depending on what business you are in. If you have material that comes with irreproducible competitive advantages, then you benefit from this process. If you do not, then you lose.

GB: Will the nature of competitive advantage change over the next couple of decades?

JK: Not in a fundamental sense – and not very much. I have in the past described competitive advantage as resting on three or four groups of factors whose common characteristic is that they are relatively distinctive to the individual firms and groups of firms that hold them; that is, they are hard for people to reproduce, and remain hard to reproduce even after people realize the benefits that they create for the firms that enjoy them. The categories of competitive advantage typically include brands and reputation; strategic assets like access to particular resources and groups of resources that other firms have difficulty accessing; and also innovations of various kinds – even if innovations are always fragile sources of competitive advantage, because innovations are easily replicable. A large category of competitive advantages is also what I have called ‘architecture,’ which has to do with the structure of relationships within a company, between the company and its suppliers, and between a company and its customers. The main categories of competitive advantage that I have mentioned remain valid today and tomorrow – even if the particular sources of competitive advantage within these general categories will change over the next 10 or 20 years, just as they have changed every decade or two in modern business history.

GB: Will certain countries, types of industries, types of firms, or even cultures be influencing competitive advantage and changes in competitive advantage over the next couple of decades?

JK: I am not sure. If one looks at how sustainable these kinds of sources of competitive advantage are, and looks for them on a national basis, one finds that different countries tend to have different categories of competitive advantage. One looks to the US as the constant fount of innovation that has really been the main source of business innovation for the Western world for a century. This is likely to remain the case – for reasons embedded in American history and culture in a way that cannot be easily reproduced either in Europe or in Asia or anywhere else. American competitive advantage has rested very largely on innovation and innovation-related activities. In Europe, competitive advantage is more diverse in source. To be sure, there are, for example, the German and Swiss competitive advantages in precision engineering and specialty chemicals. Competitive advantages will truly arise from having a workforce that has taken levels of scientific education down to wider swathes of the population. And, of course, these sound like vulnerable sources of competitive advantage in a world in which the education systems of Asian countries seem as capable of generating these kinds of capabilities as Western countries.

GB: What is the future of profit? How will it be understood and framed over the next 10 to 15 years?

JK: One of the very large issues – particularly for the US and the UK – is that we have let the financial sector in these countries really get out of control. The sector has become a monster that is almost threatening to devour real business. We have an excessive financial orientation for essentially large listed companies. I have been talking about the strength of business consisting in the building of competitive advantages. And yet we have seen far too much of the idea that running businesses is about financial engineering or about mergers and acquisitions. This is what we may term ‘meta-portfolio management,’ in which managers see themselves as managing portfolios of businesses, just as fund managers see themselves as managing portfolios of shares. I hope that we have gotten over the peak of this financial approach to business, but I am very far from confident in this. I also fear that we are in for a series of further and possibly more acute financial crises in North America and Western Europe – crises that are closely bound up with the developments that I am describing. For me, successful business – including profitable business – is, in the long-run, about focussing on building competitive advantages.

GB: Do you see any pronounced evolution by Western or even Asian firms in favour of a social motive for business, in addition to a profit motive?

JK: It depends on what you mean by social motive of business. I think that the business of business is business, by which I distinguish it from doing good, on the one hand, or simply making money, on the other. That, for me, is the critical element: to find the balance between these two. But not only do I think that business is not there to do good, but I am very suspicious of business that would have doing good as its objective. Having said this, the business that is actually purely about profit is not very successful in the long-run. Recall that Bear Stearns famously had the slogan: “We make nothing but money.” They did not make very much of it in the end.

GB: Why do you think that is?

JK: A business that is about nothing but making money was in the end torn apart essentially by the greed of its own employees. In the end, the idea of making money for shareholders is not something that is going to make anyone jump out of bed in the morning to go to work. But that, of course, is what we actually need if we want to build products that people value in the long-run.

GB: What does that state of affairs depend on? Is it leadership, culture, regulation, competition or indeed other events and forces?

JK: I do not think that you can achieve it by regulation. We exaggerate the role of leadership, because we have tended to believe – in the last 10 to 20 years – in the role of the heroic CEO. This heroic CEO is an overstated feature of business. In the end, success is a feature of the culture of the organization itself – a culture that is very hard to create. That goes back to this key issue of competitive advantage in business depending on finding things that are characteristic of the business, that are hard to replicate, and that remain hard to replicate even after people understand the benefits that they generate for the company that has them. That is why the cultures of successful businesses are typically developed over generations. They are not things that are created by leaders holding events with lots of fancy visuals and music.

GB: What will be the evolution of the relationship between firm and state – over the next 10 to 15 years – in the West and beyond?

JK: The largest regulatory imperative is to get the financial sector under control. That, in itself, is an element of getting rid of what some people call our version of crony capitalism – a capitalism in which there is too strong an association between the interests of large firms and the purposes of regulation. For me, there is some confusion in being ‘pro-market’ and ‘pro-business’ in the face of the fact that many of the interests, and much of the evolution, of the market economy are articulated through the eyes of the established large firms in an industry. We know that, while some of the innovations and changes that make our economies dynamic come from large firms, the bulk of these generally comes from outsiders and newcomers. That has certainly been the history of the industry that has generated the most change in the last couple of decades – the information technology industry.

GB: What should be the education of business leaders and practitioners over the next 10 to 15 years?

JK: They should know less about finance, and more about a great many other things. I am thinking back to classical university education. The job of a great university is not to teach people about business as such, but rather about how they ought to think about the issues that they will face in business. That is an entirely different agenda from the present one in many realms of business education.

GB: Do you see the future of international business as being anchored increasingly in the Asian theatre, or is it still the American-European theatre that will matter?

JK: We have essentially added an Asian theatre to the American and European theatres. We had a market economy that had approximately a billion people in it. We now, potentially, have a market economy that has three billion people in it. That is a big change.

GB: But is the Asian plane overstated by contemporary analysts, or is it really the big add-on among the international theatres for the foreseeable future?

JK: I think that, just in terms of numbers, it has to be the big add-on. But people are perhaps overly sanguine about that at the moment. We talk not just about India and China, but also about Brazil and Russia, and these are countries in which politics has messed up economic development for two centuries or more. At the moment, they seem to be somewhat freed of their political handicaps, but I think that we are overconfident that this will remain true forever.

GB: Do you have views about the magnitude or importance of other economic theatres like Eastern Europe and, say, Africa and the Middle East?

JK: For Russia and Eastern Europe, there are a variety of different stories. You have parts of Eastern Europe – much of Poland, or the Czech Republic – that are essentially places that were torn away from the mainstream development of Western Europe, and that are now moving themselves back into it. That is a different matter from places further east that were never part of that pole of economic development at all, and that would be moving into a market economy and really a modern industrial society for the first time. I am not sure that we have done a terribly good job of handling that transition. In Africa and the Middle East, I know that GB regularly talks to people who understand the politics of these areas much better than I do. But to repeat an earlier theme, in talking about places like India and China and other emerging theatres, we should never underestimate the capacity of politics to mess things up.

GB: What will be the evolution in corporate boards and board-CEO relationships over the next 10 to 15 years?

JK: That is a British and American issue – and particularly an American one. It is essentially the problem of self-aggrandizing CEOs. That has to be gotten under control not just from the narrow perspective of running corporations better, but also because I think that this kind of behaviour is capable of threatening the whole legitimacy of capitalism and the market economy.

GB: What behaviour in particular?

JK: Executive remuneration – most of all; that is, the extent to which people are diverting the resources of corporations for their own individual benefit.

GB: We talked about different geographic theatres. What about specific future industrial products or services as theatres of competition?

JK: The distinction between service and manufacturing becomes very artificial in the world that I was describing earlier; that is, when most of the value-added of a product is not the physical content of a product, as it were. At core, though, this really is a crystal-ball question, and we do not really know which of the various incipient technologies that we have are actually going to be the ones that take off into commercial products in the next 20 or 30 years. If you look back into people’s histories of trying to project these things, they have mostly gotten them pretty badly wrong.

GB: What does a retreat from the hyper-: of business that you describe look like?

JK: I would not necessarily go with much tighter regulation. I am much less concerned with the size of companies than with their scope. Should we go back to a world with silos instead of financial conglomerates? We have specialist institutions performing particular functions, and they are smaller for that particular reason. They are not smaller because we are imposing size constraints as such. And that would essentially take us back to a financial system that is simpler and more focussed on the specific needs of the non-financial economy. In this sense, I am saying something that is not very different from Eliot Spitzer.

John Kay is a columnist with the Financial Times. His most recent book was Obliquity (Profile Books, 2010). He currently chairs the Review of UK Equity Markets and Long-Term Decision-Making.

(Photograph: Courtesy of John Kay)