TMG January 2011

In 2009, we wrote about strategy in the face of the “Global Financial Crisis” (GFC)  (See Recession Strategy)  In 2010, we wrote about strategy coming out of the GFC.  (See Strategy post global economic uncertainty)  Now, in January 2011, we feel the need to comment on strategy as Australia enters a “Golden Age” created by the current mining boom, post GFC stimulus to the US and China’s economy and the continuing acceleration of science and technology.

Under these circumstances, many more Australian businesses should extend their competitive advantages and produce well above industry normal profits.  Shareholders should be demanding it.  Paying attention to good strategy formation can deliver it. The big challenge is whether or not Australian management can fully grasp both the value of Australia's current economic strength as well as the reality that all competition is now global competition and strategy must now defend against global forces just as much as local.

The Golden Age Window

Australia has relatively, a very low level of government debt to GDP and a very high standard of education and healthcare.  We have strong banks, a strong currency, entrenched rule of law, well functioning institutions (regulators, statutory authorities, etc) and a good work ethic.  We are self sufficient in energy generation, speak a single language, computer literate and we are geographically located in close proximity to several of the fastest growing and largest consumer markets in the world.  Those markets desperately need Australia’s mineral resources in quantities greater than at any prior time in any nation’s history and for probably another decade.  This generates favourable terms of trade, strong capital investment flows and state and federal government tax receipts for the foreseeable future.  Those same markets are forecast to have 25 years of rapidly rising consumer demand creating a wealth of business opportunities.

We’ve had mining booms before, but not on this scale, not supported by dramatic economic growth so close to our shores, not in an age of accelerated development, discovery, financial flows, not when we have been so widely connected to technology and innovation around the world and not when so many other advanced economies are burdened by local economic malaise.

This is a big opportunity.  Australian businesses have the opportunity to successfully realise greater ambitions and in so doing, create great wealth, for themselves and the Australian community.

In short, Australia has entered a “Golden Age”, primarily as an accident of history.  We neither created the mineral resources nor the populations in China, India and Indonesia who need them. We are a very small player in the creation of the government debt burdens of advanced economies. Nevertheless, the circumstances have not only diluted the effects of the GFC for Australia, but over the next decade, will drive our economy forward.  Although selling newspapers requires regular crises, scandals and imminent doom to be reported constantly, the reality (which would not sell newspapers) is that, in aggregate, we can expect to have a remarkable period of economic opportunity in the decade ahead.

(The caveat we [TMG] put on that is that Australian governments do not embark on a debt fuelled plan for re-election dressed up as economic stimulus, nor keep finding reasons to add to tax and on cost burdens for business.  Dear Julia and Tony, if you must stimulate something, stimulate commercialization of innovation – it may not get you re-elected but history will judge you to have been instrumental in our nation’s future economic prosperity and that is worth a lot more than the ‘boiled lolly’ of being re-elected)

However, the opportunities and successes that arise during this “Golden Age” will not be evenly spread.  Australia is debating slowing its population growth.  Australian innovation too often is commercialized 'offshore' where access to development capital is better.  The current mining boom and rising Australian dollar exchange rate is hurting other Australian exporters.  With a relatively small population (albeit wealthy), Australian business suffers when it thinks only locally, rather than developing strategy aimed at a world of opportunity.“Fortune favours the bold”. Australian business leadership, business owners and strategists have the opportunity to do two great things;

1. Pressure our governments to use this period of supra normal national income to support building global industrial competitive advantage in many industries other than mining, to sustain economic growth and work opportunities for our children and grand children, (something we have failed to do adequately in each prior boom) and
2. Pressure ourselves, as business leaders and business owners, to think bigger about what we can become on the global stage and take action – Sense the importance of this period in history to the advancement of our national economy and the uniqueness of the potential on offer for the strategically competent.

The situation

The US is likely to have low economic growth for a decade or more as it slowly deflates its debt via money supply, slows spending growth, increases taxes, of necessity, under invests in innovation to create growth industries and argues with itself about how to (politically) lay blame.  In Europe, the survival of the Euro and the need to avoid civil unrest will result in a very gradual trend toward averaging wealth as Germany in particular but others as well, financially support the weaker economies.  So Europe too will have a sluggish and weak decade.  Asia's low cost base and growing middle classes provide both export demand and local consumption demand that will be greater than supply for a while yet - so high growth will be sustained.  Australia's economy is large, has low debt, an educated workforce, the capacity to invest in creating global businesses, lies in proximity to markets with money to spend and could grow much as the US did in the 1950s and 1960s, creating global corporations.  The BIG QUESSTION is will we?  "Do we have the ticker for it?"  Or will we rely on our comparative advantage in mining and live up to the saying; "she'll be right mate"?

Today, Australia’s GDP ranks in the top 20 countries in the world in purchasing power and per capita income among more than 190 countries.  It is a strong position.

However, as a national economy within a global system, we are competitively, under achieving.  Our world ranking in GDP is falling as other countries (including China, India, Brazil and Indonesia) rise in economic influence. (See Table 1)

Table 1 

In 1980 Australia’s economy had the 8^th fastest growth rate in the world.  (We were in the grip of a mining boom)  In 1990 we came in 31^st and in 2000, 42^nd. The table below illustrates average annual growth rate trends. Over the last 30 years, Australia’s relative economic size is shrinking and our economic growth rate falling.  Unless our population is also shrinking (which it is not), then our standard of living will rise more slowly than elsewhere, potentially even fall. (See Table 2)

Table 2

Other reports confrim the risk that the "status quo" in our strategic appetite, our inability to capture the commercial value of competitive advantage, will see us diminish in economic power and ulimately in standard of living. (See PWC example ) Right now, however, we have to use the sustained resources boom as a stimulant for accelerated development of big, globally competitive advanced industries in Australia.

As already noted, Australia can of course do this.  Our numerous Nobel Prize winners exemplify a strong record of innovation and intellectual capability – too much of which, is exported to major corporations headquartered outside Australia where the lion’s share of the benefits are reaped.  Australians punch above their weight in sport, medicine, economics, the arts and in so many fields.  Yet, too much of this skill and knowledge ends up as a business located elsewhere where the bigger profits are made.  Remaining behind in innovation and its commercialization ultimately leads to a weaker economy - and quickly when the mining boom cools.

Australian business and government has remarkable opportunities it remains willing to squander.  For example, in export education (which we have shot in the foot with mismanaged quality, onerous student applicant provisions and a failure to curb our racism), tourism (a field in which we are internally focussed on repeatedly dubious marketing campaigns and unable to create a nationally co-ordinated experience), biotechnology (where we develop breakthrough research and export its value to markets more willing to fund these developments than we are prepared to do locally), uranium (where 30 years ago we were amongst the leaders at university education level but today have barely one course in the field despite having the world’s biggest deposits or  this important future energy resource) and many other examples perhaps less obvious such as in small grid technology, e-health, marine agriculture and intelligent energy to name a few.

Our failure to harness these opportunities to create large enough numbers of globally competitive, internationally focussed, businesses comes at an economic and social cost long into the future.  The problem can be redressed by leveraging this next decades “Golden Age”.

The economic and social imperative

Economically, our industrial and economic base is progressively weakening in comparison to the rest of the world.  Just as it takes decades of accumulating success on this front to progressively become stronger relative to the world, it takes decades for the cumulative effect of not doing so to become apparent as a relatively weakening economy.  The current resources boom, on the back of a long, debt fuelled period of economic growth (debt that remains on balance sheets today) creates an illusion of success.  And it is short term success – but it can be leveraged for long term economic strength in tens of thousands of globally competitive businesses based in Australia.  Instead of slipping down the GDP international ranking, this Golden Age can be used to reverse our declining ranking in GDP. (Table 2).  Without effort and ambition, across a wider range of industries, Australia's relative wealth will not automatically remain this high.

Socially the cost is even greater.  The best jobs of the future, higher paying jobs, will be increasingly, outside Australia if we do not build more globally focussed companies.  A growing number of today’s parents will rarely see their children and grand children who will live elsewhere in pursuit of career and income opportunites far greater than those available in Australia.  Meanwhile, at home, the gap between rich and poor in Australia will continue to widen, housing affordability slip away, (we are already a world leader in unaffordability), employment growth will be fastest in lower paying jobs (retail, healthcare and hospitality for example) and the proportion of part time employment rise.

This is not imaginary. We are simply under ambitious when it comes to our economic future.  We seem to be unable to nationally, at SME, corporate and government level, see ourselves as anymore than a minnow.  Our small population and arid land have produced a top ten world economy.  As business relinquishes this status, future generations will find it harder to build and compete.

There is however, in TMG’s view, no reason to be negative about the future, not to flagellate ourselves over where we have arrived as somehow inadequate.  There is simply a need to learn from history, move forward from here and leverage the current “Golden Age” as TMG has labelled it.

The role of strategy in the Golden Age

Strategy is about reliably achieving higher than industry average returns in a sustained and corporately responsible way over an extended period.  But it is also about recognising market forces, informed insight on future conditions and investing in shaping opportunities.

To do that requires (with the requisite competencies and resources) the commercialization of competitively advantaged, defendable, big thinking, customer value innovation.  Innovation provides the prospect of new value being created so that higher than average returns can be achieved.  Sustained innovation delivers sustainable superior returns.  Foresight, the ability to interpret change into the future, is a pivotal input.

Strategy that seeks to create globally competitive businesses through new value creation (innovation) must be undertaken by a far greater proportion of Australian businesses (or business units in the case of corporations)

Good strategy (more than incremental leveraging of existing technologies and business models) is the means by which the economic and social imperative can be addressed.  Now, whilst we are entering a “Golden Age”, is the time to do so.

Leaders in business and government need to work at capturing the public imagination and national ambition.  Investors need to sieze the opportunity to create great wealth and new, global industrial powerhouses.

Reviewing the work of Gans & Hayes on Australia’s innovative capacity, since 1975, the change in Australia’s ranking in comparison to other countries on the Innovation Index is negligible. The aggregate behaviour of Australian business is not getting better than other nations at the most widely recognized primary driver of value creation – innovation.

Examine this month’s release of the GE Global Innovation Barometer in which 1,000 senior corporate executives were interviewed.  Innovation is confirmed as the primary source of value creation.  Strategy development simply must begin with the identification of innovation and its commercial potential.

The strategy development process, in a far greater proportion of businesses, needs to give a lot more emphasis to the role of foresight and insight in strategy formation. (See TMG Article on Strategy Formation)

In summary

As TMG sees it.  The economic outlook over the strategic planning horizon (say 3-10 years depending on your industry) is very favourable.  Global engagement in innovation is getting easier.  If we don’t create new, globalised value through innovation at an accelerating pace, the Australian economy will be sharing in the spoils of a relatively smaller pie inthe decades ahead.  If you think your business can succeed without an increased engagement with new value creation through innovation, then don’t hire TMG as a consultant.  We’ll drive you mad!

Peter Boyce is Director of Consulting at TMG and can be contacted by using Contact Us on the menu bar above.

1 https://www.cia.gov/library/publications/the-world-factbook/geos/as.html 
2 http://stats.oecd.org/Index.aspx 
3 http://stats.oecd.org/Index.aspx
4 http://hdrstats.undp.org/en/indicators/161.html 
5 Assessing Australia’s Innovative Capacity: 2007 Update Joshua Gans and Richard Hayes, Centre for Ideas and the Economy, Melbourne Business School, University of Melbourne
6 http://files.gereports.com/wp-content/uploads/2011/01/GIB-results.pdf 

 

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