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Global macro & geopolitics from a small economy perspective

Governments and companies

David Skilling
13 April 2012

It is often argued that governments should learn from private sector best practice to improve their efficiency. That is true – and particularly necessary at the moment, but governments are more than inefficient versions of companies. In an increasingly complex private sector environment, companies also have much to learn from governments. And the strategic challenges facing many developed country governments mean that they also need to learn from companies in terms of building strategic capacity. So this week’s Observer offers some thoughts on what companies can learn from governments – and vice versa.

Comparing governments and companies
At one level, of course, governments and companies are very different. They have different objective functions (citizen welfare v shareholder value), national governments can’t go out of business (although borders can be fluid), the nature of shareholding is very different in the two contexts, and so on. Because of these differences, some argue that the ability to transfer insights between the two is relatively limited (outside of areas like operating efficiency improvements). But although care clearly needs to be taken in making comparisons, my sense is that understanding how governments and companies have been responding to the strategic characteristics of their operating environments can yield valuable insights for both.

In this respect, a useful comparison is between governments of small, advanced economies (developed countries with a population of less than 20 million people) and large multinational corporations. The market capitalisations of companies like GE, HSBC, and Shell are similar to the annual GDPs of small countries like Singapore, Denmark, and Finland; these companies and countries operate extensively across borders (the average exports/GDP ratio for small advanced economies is 73%) and are exposed to a wide range of external forces; and small countries tend to be high-performers in the global economy. And increasingly governments of successful small countries are deliberately seeking to position their countries to compete in the global economy. I call this approach the corporate state (not to be confused with state capitalism), which may mean even stronger similarities between companies and small country governments in the future.

Learning from government: operating in complex environments
There are two areas in which government experience may be of particular value to companies. First, governments operate in highly complex environments, with multiple objectives, many stakeholders, competing sources of authority (e.g. coalition parties, parliament), and across a very broad set of policy domains. Indeed, many activities are in the public sector exactly because they are too complicated for private markets to deliver effectively. The best small country governments respond to these complexities through: clear leadership and communication around a few key themes (managing short-term pressures, but with a sustained focus on the vital few strategic priorities); an ability to work in a whole-of-government way, where senior decision-makers develop broad perspectives; and well-developed listening/sensing capacity (both to stakeholders and the broader environment). As the context facing large companies becomes increasingly complicated (e.g. the stakeholder environment), there is much they can learn from high performing governments in how to respond. As many small country governments have shown, a more involved – and perhaps slower – decision-making process can create a sense of shared purpose that generates better outcomes. There is not an inevitable trade-off with performance, but it does require organisational change. And it is not easy; many governments clearly also struggle.

Second, governments tend to have a deep awareness of the important of context. Countries have cultures, institutions, capacities, and preferences that shape the feasibility and effectiveness of various policies. Countries operate and compete in different ways, depending on these factors. Indeed, there is significant policy variation across countries. Although there are some standard policy foundations (e.g. stable prices, sustainable fiscal positions), there is not a comprehensive set of universal best practice policies. The countries that succeed are those that are able to fit policy to national context. The centrality of context to decision-making may be a useful insight for companies, which may be more inclined to seek to adopt approaches of their competitors or peers – and may not spend enough time thinking through their specific context (which may be why much M&A activity fails to deliver). There are lessons for companies in how governments incorporate context into decision-making.

Learning from companies: strategic decision-making
In addition to learning from companies about efficiency-enhancing measures, an increasingly important set of corporate lessons for governments relate to strategic issues. The conceptual disciplines and approaches commonly used in private sector strategy development are of direct relevance to governments. Governments generate more value from getting the big strategic calls right than they do by improving the efficiency of their operations, necessary though that is. In an increasingly complex, competitive and turbulent environment, governments need strengthened strategic capacity to determine how to respond to the emerging challenges and opportunities. Strategic questions as to how to compete, how to manage and allocate risks, and to build external relationships, will become increasingly important for governments. However, many advanced economy governments have under-invested in the strategy function – and now need to build new strategic capacity.

Strategic analysis is a core function in large companies. Although not all companies do it well, and the public sector context is different, there are some valuable general lessons that can be drawn. First, the intellectual approaches and disciplines are useful: understanding the competitive environment and developing a value proposition, thinking about external relationships in a structured way, managing risks and building resilience, and so on. These ways of thinking are relevant even if the contexts are different. And second, the way in which companies organise their strategic processes: strategy needs to be hard-wired into government decision-making processes as well as resource allocation choices (through the budget process), rather than sitting to the side as an intellectual exercise. On both of these dimensions, private sector best practice is instructive for governments.