Nov 18, 2024 | Governance, Innovation, Leadership, Strategy
The latest economic complexity rankings put out by Harvard were recently released. Australia dropped from 93 in the world to 102. One place ahead of Yemen, one behind that manufacturing innovator, Senegal.
I had missed the report until an article in the auManufacturing LinkedIn group brought it to my attention.
The best that can be said about Australia’s drop from 93 in the previous ranking to 102 in this current ranking is that we have made possible the performance of the 101 countries that are above us.
This includes such stunners as Bangladesh at 100, Honduras at 97, Uganda at 96, and the home of Voodoo, ranking as one of the world’s poorest countries, Benin at 99.
To be fair, the ranking methodology struggles to adequately quantify the benefits accrued by services in its calculations. This compromises the ranking of Australia which has an advanced but hard to count services sector, while exporting mostly commodities, which is easy to count.
Nevertheless, while politicians are ensuring the public debate (aka playground squabbles) is around irrelevancies like the chairman’s lounge, long term challenges in education, aged care, housing, equality of opportunity, and economy wide productivity go uncontested.
Take education for instance.
This is a very substantial sector generating billions in economic activity by educating the children of our Asian neighbours. Many see it as a road to residence, which will benefit our economy doubly, as they have paid for their own education. However, many return home, enabling the ‘connections’ highlighted in the report as critical to complexity to be made. Meanwhile, for our own kids, we have continued to make getting an education more expensive to the point where it is becoming unaffordable in the absence of parental support.
In our wisdom, we are in the process of ringbarking this pathway to complexity.
How stupid can we be?
I recall in 1980 then Singapore PM Lee Kuan Yew warning that Australia was destined to become the ‘White trash of Asia’. It seems his warning is coming to pass.
PS. November 22. This ‘Visual Capitalist’ graph of the 30 largest exporters came into my feed today, adding some flesh to the bones of the index. The make-up of exports of several of them should lead to some deep thought. For example, Holland, Switzerland, Belgium, even the battered UK, where there are no hydrocarbons or minerals in the mix, outrank our commodity driven export mix. This is a solid indicator of the ‘complexity’ to which we should be building.
Nov 13, 2024 | Branding, Innovation, Strategy
One of the five costs in your business, in most cases, under recognised, under managed, and misunderstood, is Opportunity cost.
Doing A, means we cannot do B.
It is not always such a binary choice.
Opportunity cost is impossible to calculate with any precision, as it is forecasting the outcome of something you did not do, an opportunity forgone. It is however a critical component of any consideration of the manner in which the available capital of a business is deployed.
It is also driven by the strategy, which is another calculation of the shape of the future, and how you can optimise the leverage your resources deliver.
Commonly used models like discounted cash flows and the more demanding internal rate of return calculations are commonly used by accountants to make the choices between differing capital allocation options. Unfortunately, they both rely on cash forecasts, which are at best fragile. When the strategy calls for ‘innovation’ cash forecasts are usually over-optimistic, and the timing is wrong, so that beyond a ‘pin the tale on the donkey’ analysis, often grossly misleading. Such techniques favour doing more of the same, with at best incremental improvements. Deploying capital towards riskier uses means these calculations are less and less valid, putting off the risk averse amongst management, which is most of them.
We have a fantastic example facing us right now.
Intel used to be the dominating producer of semiconductors. ‘Intel inside’ remains one of the best known and respected brands around, and yet, Intel has fallen radically from grace.
Since the glory days, when they dominated the market, and had customers lining up to place orders years in advance, they are now struggling for relevance. The value of the business as reflected in the share market has plummeted, along with their market share in a market that continues to explode in volume and value.
Arguably, Intel should still be in the position now held by Nvidia, current market cap 3.64 trillion, and rising like a kite in a hurricane. Intel, while still worth over a billion dollars, is small by comparison.
Any calculation of the opportunity cost of strategic choices made in the past by Intel would make shareholders kick their cats. Intel delivered astronomical profitability resulting from then CEO Andy Gove making the choice to move away from memory chips and pioneer the semiconductor market. The emergence of the PC in the 90’s made Intel one of the biggest and most profitable businesses ever seen. They then missed the move to chip sets designed to enhance gaming, which doubled as the enablers of the exploding AI market.
At least Intel shareholders can feel better, as the missed opportunity club is a very large one, with some distinguished members.
Note: the graph in the header is the Intel stock price. $1 in 2000 is now worth $1.83 adjusted for inflation. In other words, the current year low price of $19/share is worth just over $10 in 2000 dollars after inflation. This is in a market Intel used to dominate, and that has exploded over the last 5 years, with Nvidia grabbing the chocolates. That is the opportunity cost intel has suffered.
Oct 29, 2024 | Innovation, Leadership
Evolution has given us this ability to act on ‘autopilot’, or habit, while subconsciously remaining attuned to our surroundings. Our brains have limited capacity, so it needs to save as much as it can to allow it the space to deal with the unexpected, crises.
Our ancestor woman while walking to the stream on autopilot is thinking about getting the water, wondering what the hunters might bring back for dinner, and how to keep the kids in the cave. A slight rustle in the grass, will immediately focus all her attention on where it came from, adrenaline rushing, just in case it is a predator.
This autopilot mode is highly beneficial for efficiency. It is the way we evolved. It frees up cognitive capacity for more immediately important things, consigning to habit the things that do not require the effort of thought.
It also obstructs innovation.
In our modern world, the predators in the grass have been largely eliminated, so we are not subconsciously looking for them anymore, and our situational awareness has degraded, creating ‘blind spots’. This prevents us from seeing opportunities for innovation. The problems we learn to work around become invisible, and the solutions we become accustomed to seem unchangeable.
Take luggage as an example. For decades, travellers endured dragging heavy suitcases through airports. In two iterations, 16 years apart, two people, thinking from first principles which is often an antidote to habitual thinking, added wheels. Vacuum cleaners all lost suction as their bags filled, until James Dyson challenged the accepted norm. The QWERTY keyboard, originally designed to prevent mechanical typewriters from jamming, is still used today despite its inefficiencies for modern typing.
Seeing hidden problems that become opportunities requires intentional, conscious practice.
- Regularly ask yourself, “Why do we do things this way?” Document even small points of friction. Observe how others interact with products or processes and take note of any struggles or workarounds.
- Approach familiar tasks as though you are experiencing them for the first time. Seek perspectives from individuals outside your field.
- Question assumptions, especially those that are widely accepted without scrutiny.
- Step away from problems periodically and return to them with fresh eyes. Study analogous challenges in other industries. Try explaining processes to a child—their innocent questions often expose hidden assumptions.
To innovate effectively, we need to develop our ‘peripheral awareness’: the ability to notice opportunities on the fringes of our focus. This requires maintaining a state of relaxed alertness, where you are engaged in the present task but also open to noticing details that others may overlook. I use my phone and notebook to note interesting things on the go. I regularly transfer these cryptic notes into an ‘ideas bank’ kept in One-note on my computer.
Every major innovation begins with someone questioning the status quo.
The next time you find yourself thinking, “That’s just the way it is,” take a moment to challenge that assumption. You could be on the verge of a significant discovery. While our brain’s efficiency is a valuable asset, it can also limit our potential. By honing our peripheral vision for innovation, we can transform these mental shortcuts from obstacles into pathways for creative thinking and, hopefully, distinctive, and innovative solutions.
Oct 8, 2024 | Analytics, Innovation, Strategy
Have you ever been in a situation where you just ‘know’ a course of action is right?
No data, no detailed scenario planning, you just know.
I have.
Where does that confidence come from, and is it justified?
Have you distinguished between genuine intuition, based on experience and knowledge, and the overconfidence that can arise from a lack of awareness of one’s limitations?”
In my experience which includes choices that have been both very good, and very poor, there are two qualitative drivers of those good choices.
Significant domain experience.
This experience does not come from being around for a while, it comes from taking action many times, and learning from the outcomes, resetting, and trying again.
For example: a seasoned chess grandmaster can often intuitively anticipate the best move without consciously calculating every possible outcome, drawing on years of experience and pattern recognition.”
Learning from analogy.
When you see a course of action succeed in other domains that have some similarity to your own, you can infer that the success may be repeatable in yours.
For example: The introduction of disc brakes in cars came from their development for use in stopping aeroplanes when landing.
In a world increasingly dominated by data, it’s crucial to remember that while numbers provide valuable insights, they should not be blindly trusted. True wisdom often lies in the delicate balance between data-driven analysis and the intuition honed through experience and learning from mistakes.
Chess is a game where a grand master has a store of intuition gathered and sorted by years of practice that is leveraged instinctively when playing.
Jul 10, 2024 | Innovation, Leadership
Roger Federer is the greatest tennis player I have seen in a long life of watching and playing the game. He may have been overtaken by Djokovic as the winner of the most grand slams, which seems to be the public benchmark of the GOAT, but he will remain the greatest to me.
His greatness is not just on the court, where everything seemed effortless. It extends to his demeanour and humility off the court.
In a recent commencement speech at Dartmouth College, he gave the graduates a critical piece of wisdom that applies widely to life:
“Perfection is impossible. In the 1526 singles matches I played in my career, I won almost 80% of those matches.
Now, I have a question for you.
What percentage of points do you think I won in those matches?
Only 54%.
In other words, even top-ranked tennis players win barely more than half of the points they play. When you lose every second point on average, you learn not to dwell on every shot.
You teach yourself to think, okay, I double-faulted … it’s only a point. Okay, I came to the net, then I got passed again; it’s only a point. Even a great shot, an overhead backhand smash that ends up on ESPN’s top 10 playlist. That, too, is just a point.
And here’s why I’m telling you this. When you’re playing a point, it has to be the most important thing in the world, and it is. But when it’s behind you, It’s behind you. This mindset is really crucial because it frees you to fully commit to the next point and the next point after that, with intensity, clarity, and focus’.
Those words resonated with me.
They resonated, not just because I lose way more than 50% of the points I play these days, and must accommodate that in my competitive brain, but because it applies to the way we all should live our lives.
It certainly applies to those I work with, where an obsession with the past often clouds the next move, and the one after that.
We need to understand why what we did worked out differently to the plan, and learn to adjust both on the run, and over time as we alter the mechanics and drivers of activity. Beyond that, the past is irrelevant. It is the past, unchangeable, immutable.
By contrast, what we do with the lessons of the past is crucial.
May 16, 2024 | Change, Governance, Innovation, Leadership, retail, Strategy
The recent declaration of “A Future Made in Australia” by the Prime Minister has put the future shape of the nation’s manufacturing sector back on the agenda.
There was however, nothing specific on the importance of agricultural innovation and value adding through the manufacturing sector, or the strategic value of food security.
The decline in Australian owned manufacturing in the food industry has been close to total. The FMCG manufacturing industry has seen input prices increase by 49% over the decade to 2020, while the wholesale prices received have increased by only 24% over the same period (Source: AFGC Sustaining Australia Food and Grocery manufacturing 2030 report) This downturn, and the 20 years prior which display similar trends has seen locally owned businesses either go bankrupt, or become subsidiaries of foreign conglomerates, relegating them to mere outposts.
From an era where medium-sized businesses thrived across various product categories, employing significant numbers in quality, engineering, the trades, and R&D, today these businesses have largely disappeared. This transition has been marked by a shift towards centralisation of product development and scientific research abroad, leaving Australian operations with minimal operational and decision-making authority.
This trend raises critical questions of how we feed ourselves, and make a useful contribution to the global food supply.
Notwithstanding the international ownership of most of food and beverage manufacturing, it contributes 6.5% of GDP, 32% of total manufacturing output, and employs 240,000 people, 40% of which are in regional areas. (source AFGC)
By any measure, the food manufacturing sector is profoundly important to Australians. Its future resilience and growth of sovereign capability should be paramount.
The lack of sovereign control of the resources and capital needs to generate growth is disturbing.
Central to an innovative and resilient manufacturing industry is the capacity to generate intellectual capital that translates into manufactured product. The progressive ‘internationalisation’ of company R&D noted above, has been matched by a progressive emasculation of the sovereign capability to generate the Intellectual capital necessary for long term growth. There is a significant number of SME’s in the sector, but collectively they contribute very little to the total of manufactured product. They are typically mixing often imported ingredients in low tech environments with a few employees and casuals. Distribution is largely through secondary channels like farmers markets, and local retailers and food service. They do not have the resources to compete with the R&D capability of multinationals, and the previously available intellectual assistance from federal and state institutions has been removed.
Take for example the CSIRO that in the past worked closely with business. Often this was in an informal and personal collaboration between individuals that enabled a thriving environment for problem solving and innovation. CSIRO’s sites in North Ryde, Werribee, and Canon Hill have either been downsized or sold off, and skilled, experienced employees made redundant. Contributing to this erosion of the collaboration that in the past generated much of the ‘ideation’ that sets the stage for innovation, has been the demands of successive governments for a ‘productivity dividend’. This was typically 2% annually which compounds quickly to a killer blow to capability. It is code for removing those informal but fundamental creative collaborations with domestic companies, and encouraging the multinationals to centralise R&D elsewhere.
The power of the supermarket chains, currently under scrutiny has also played a key role in this process. SME’s simply do not have the deep pockets required to generate and maintain traction through the retail FMCG oligopoly.
To be successful, SME’s need to be able to absorb the reality of this gross power imbalance with retailers. Financial capital is necessary to enable the generation of the Intellectual Capital that underpins genuine innovation. Further investment is required to design, build and install the equipment to produce the innovative product. Deep pockets are then required to meet the retail trading term and promotional demands, as well as investment in the advertising necessary to attract consumers to a new product. As the power of the retailers has overwhelmed the diminishing group of domestic suppliers, we have been left with multinational suppliers and retailer house-brands, themselves often manufactured offshore.
The focus of government policies remains short-term, driven by electoral cycles rather than the decades required to bridge the gap between science and commercial success. Differing jurisdictions follow their own nose, resulting in a siloed and fragmented effort across the country, rather than a coherent and coordinated effort. The outcome is a mix of differing priorities, investment plans and initiatives around the country, sometimes used as incentives for business location. The commercial equivalent would be if a conglomerate allowed divisions and locations to compete for resources with declining levels of investment in the total absence of a coherent strategy. No sensible commercial board of directors would put up with such a self-defeating arrangement.
Grant programs send the wrong message and encourage behaviour that rarely delivers the outcomes touted in the press releases.
Culturally and politically risk is toxic to the body politic. However, the acknowledgement and management of risk is a fundamental element in successful innovation.
Successful risk management becomes a function of the extent to which a whole range of data, combined with qualitative assessment of what the future will look like is considered. Removing the capacity to make those assessments severely compromises the value of any conclusion reached.
The only potential solution to those institutional blockages to innovation in manufacturing industries generally is a confronting one.
Government needs to ‘upskill’ itself to be in a position to substitute early equity funding for grant funding.
Such a change requires a cohort of skills and experience not currently available within government and bureaucracies, but selectively available in industry. The early equity would be recoverable by those that are successful at a pre-agreed point, at a pre-agreed rate. This removes the inertia and rent seeking evident in grant funding, replacing it with a modified form of Venture Capital.
In addition, FIRB needs to adjust the guidelines that currently rely on an intense focus on the economics of ‘Comparative advantage’. These rely on projections of current and past quantitative models of industries that usually bear little resemblance to what ultimately evolves. They never reflect the strategic value of sovereign manufacturing.
In the absence of meaningful strategic change, what remains of the domestically owned food manufacturing industry of any scale will disappear, and current and new SME’s will have no hope of replacing them.
Notes.
- The budget delivered on Tuesday night included a number of measures that should serve to give manufacturers some confidence that the government has recognised there is a problem, and that action was long overdue.
- A slightly edited (and improved) version of this post was published on Wednesday morning on the AuManufacturing website and Linkedin group.
