Creating An Enterprising Australia

Who will own Australia's next big idea?

 

Dr Terry Cutler

Managing Director Cutler & Company

 

Keynote Address To Manufesto '98

Melbourne, 23 September 1998

This conference, this exhibition and this creative marketspace, is all about building Australia's business future. No subject could be more important. Tax reform is important - especially business tax reform which is yet again put into the "too hard" basket rather than being singled out as a central and crucial platform for economic renewal - but action strategies for new enterprises for the new millennium should be a dominant theme in any election campaign that is serious about jobs, trade and economic renewal across Australia. It might be a bit fanciful to imagine we can redraw political agendas over the next week or so, but we can work to create community awareness and attention over the next months and the next year. This is the leadership challenge for all of us here.

The challenge is to build more new Australian enterprises. Next generation enterprises. The challenge is to nurture and promote a culture of innovation, a culture of entrepreneurialism, a culture of stretching ambition and high aspirations across our whole community. A culture that says our future is too important to be left to chance. The challenge we face is how we start to capitalise on Australia's frozen and undervalued assets of intellectual capital, skills, and community values.

The current situation

Australian businesses and industries today confront a new landscape, and new frontiers. It is an inescapable reality that the economic landscape is changing, changing because of the transition from a post-industrial scene of the post-war world to the new information economy of the next millennium.

The pessimists would say that this is not the time for an industry festival, for a trade show carnival of excitement about new opportunities. Last week Peter Roberts of the Financial Review wrote a truly depressing report card on the prospects for technology based ventures. Australia is a hostile base for growing technology businesses, he wrote, pointing out quite correctly that "few locally owned small companies grow to medium size, while those that do end up as takeover targets for overseas companies".

A profile of most areas of Australian industry shows activity is dominated by a few multinationals (one or two Australian owned), and a huge tail of sub-scale, undercapitalised small and medium enterprises with a domestic market focus.

Scoreboards and international comparative surveys show:

Against this background some industry participants seriously promote a "second best" future for Australia where we:

I hope that no one here would say that this "second best" future is desirable. But is this future inevitable? The answer is a definite no: other country models show that alternative futures are possible. (We need to bear in mind unique, country specific recipes for success, but all reference models share a common characteristic of seizing opportunities, including market discontinuities).

It is a fact of life that the United States is the dominant and defining market for the information economy: it dominates production (based on its capital resources) and global consumption (whether we are talking about Coke, cigarettes or PCs). The current balance of Internet trade in Australia favours the United States by a ratio of 7:3. The United States dominates the international trade in intellectual property and in software. The United States is dominant in the current main game, but it is not the whole game. The issue is whether Australia can carve out a distinctive place in the new world, or not. The answer cannot be that we do more of the same - this answer condemns us to the "second best" futures of those industry soothsayers who are profiting from the fire sale of Australian assets to the United States. The answer is how to get ahead of the game.

In getting ahead we need to target both new growth industries and the reconstruction of the old: the restructuring of, and the spin offs from, established firms. In moving from the post industrial to the information economy we need to be conscious that new economic value creation will be knowledge based, increasingly involving intangibles (rather than economic output you can drop on your foot), technology based, transaction based, and governed by new rules for economic value. These are all key parameters to keep in mind.

We need to keep reminding ourselves that most of the dominant firms of the 21st century don't exist today. So we need to break out of the mindset that says that the status quo is the natural state of affairs - for the future. It is not.

The new growth industries we talk about include all the information industries, health services and biotech, education and training, entertainment, tourism and lifestyle services, next generation transport, environment management, transaction management services and so on.

These growth industries, and the reinvention of existing industries, are fuelled by innovation and the opportunity for step-function discontinuities in market functions, like the Internet. Comparable discontinuities were created by technologies for fixing longitude which transformed maritime trade, or the shift from the "hardware" of the gold standard to the software world of floating exchange rates.

Innovation has the meaning of new or renewing: changing or altering. The challenge of innovation is relevant to all Australian businesses. The Shorter Oxford Dictionary also reminds us that innovator has an old meaning as a revolutionary. Innovations means changing markets.

To be successful change agents as innovators, we need to have a solid understanding of the emerging market environment, and the discontinuities which can be exploited. The environment for new ventures is the new information economy, and this new environment is complex and multidimensional. To be successful we need to come to grips with new definitions or meanings for the basic industry dimensions of time, distance and space, value and relationships.

Focusing on the new pillars for success means that we can try to anchor, to capture new wealth for and within Australia. For centuries Swiss banks used their reputation for trust and confidentiality as an anchor that made them dominant in international finance. What are the anchors that will help us hold onto the value of our ideas, our intellectual property, into the next century? Let me suggest that there are four dimensions of the new economy that new ventures must come to terms with.

1. The Time Dimension

The Internet symbolises the collapsing of time. We talk about Internet dog years, where old annual cycles reduce to two monthly anniversaries. Yesterday's Internet start up becomes tomorrow's IPO. A Cisco or a Dell leverages new business systems to create $billions in Web sales within a year or so. Business plans are torn up and rewritten regularly. An intelligent investor doesn't see any value in a company that doggedly sticks to the original business blueprint.

This time warp leaves Governments out in the cold, struggling to keep up. While the information economy collapses timeframes for businesses, political processes continue to grind slowly. As against Internet years, for Government policy it often seems to me that we need to blow out normal time by multiplying by 10!! The formula: time by 10 minus time divided by 7 is the equation threatening Australia's future in the information economy. This is the reason why it is very hard to get effective Government interventions.

In an environment where market timeframes have collapsed dramatically, the nature of business planning changes. Fixed strategies carved in stone are out. The new buzz word is how a firm can be "strategically opportunistic". The best formula for business planing is "long term vision and short term tactics = sustainable strategy".

In this world, time creates it own new markets. We now talk about Time Zone products: "out of time processing": global shift working. This is in contrast to other time zone defined markets that are really a function of culture and trading blocs: if you are an advanced call centre operator then you will probably set up centres in Europe, North America and Asia simply because of the persistence of different market cultures.

This dimension of time is tricky, and had many angles. There is a huge difference between innovation time and inspiration time (between the timeframes for the germination of an idea and its exploitation). Some of the best new ventures I have come across have been start ups which spent their first five or six years in highly targeted R&D to perfect technical solutions to an innovative marketing concept. This reverses old frameworks for thinking about the commercialisation of technology.

2. The Spatial Dimension (and the geography of new markets)

If time is tricky, then ideas about distance and the geography of markets are even more so. We all talk glibly about globalisation, but the current economic crisis reminds us that we have a very imperfect international market. Markets may be borderless (they alway have been) but they are not amorphous.

The most helpful development for a small market like Australia has been the breakdown of Government protectionist models that artificially propped up the unhelpful distinction between domestic and offshore markets. Market geography is not an issue if you operate in a huge market like North America, but for a small remote market like Australia it is crucial. Too many Australian ventures still focus on domestic demand.

The shift is from national monopoly markets to borderless customer markets defined around discrete "communities of interest" and related economies of scope. Global markets do not mean untargeted markets.

The "death of distance" is a much abused slogan. What is true of telecommunications costs (increasingly distance independent) is not true of total systems operation and investment attraction. Here the pertinent slogan is "think global; act local". Operating support systems and user applications infrastructures are local by nature. Suppliers and users must occupy a "shared space" - the same "psychological neighbourhood". Distance need not be a barrier if other mechanisms for remaining close can be implemented - hence the popularity of email for breaking the tyranny of time zones. The key to the new geography is the "the localisation of attention and decision making", or simply being close to the customer. It means distributed, networked business operations.

Networked, "cyberspace" business cannot ignore the old physical world of atoms and hard goods, even if much of these are now traded electronically. New fulfilment systems and physical logistics operations need to be developed and integrated within online markets. Federal Express, one of the great new information economy companies, is confronting a serious challenge from geography. Potential customers can access FedEx from anywhere, but FedEx cannot deliver everywhere. The moral is that every new venture must align the online and the old physical world. We can email in seconds, but take fourteen hours on a plane for a face to face meeting or the delivery of a parcel.

This relationship between geographic space and market space is also defined by information intensity and interaction : by "psychological space". What applies here is the iron law of propinquity: closeness in space or time; proximity; near or close kinship; similarity; affinity. The old law of being close to the customer.

Globalisation and localisation mean quite different things for different production and service operations. For example, financial institutions invest in private equities markets globally. Global financial institutions will, however, only invest in markets where there is a localised venture capital infrastructure, where the fund managers are close to the investee companies. Fund Managers themselves will not invest in distant markets: New York venture capital firms will not invest in West Coast start-ups, and vice versa. Globalisation, therefore, has a complex DNA.

Thinking about this tricky spatial dimension of new ventures raises the intriguing question of just how we define a company as "Australian" in this new world. Governments and regulators are really struggling here, and their attempts are not necessarily good for the health of Australian ventures. What we simply cannot afford is definitions of national interest that imply that a venture will be penalised if it does business outside Australia!

3. The Dimension of Property Rights: Ownership and control

The third tricky dimension is "Who owns what and how". What we know is that more and more of a company's value is represented by intellectual property, and trade based on intellectual property. Who will end up owning or controlling your next big idea? Patents, trademarks, trade secrets and copyright are key dimensions to doing business in an information economy.

In this complex area, there is a simple message for Australian companies. No small Australian start up can enforce its rights effectively on its own. This is an area where we need collective action, and Government support, to give protection to our big ideas. We need the best possible legal framework. We also need enforcement power. For one example, imagine the difference if the Government empowered an agency like the Industry Research and Development Board to become a joint party to the defence of any attacks on an Australian company's patents. Change the playing field.

This growing importance of "information capital" is also affecting the ways we need to think about company structures. We need a "thought control" campaign to get rid of the idea that entrepreneurs can hold onto ownership control and still grow successful companies. Successful growth and financing means sharing: "share the pain and share the gain". It means sweat equity for staff, partnership models for alliances, and stakeholder power sharing. You need to be ambitious but not short term greedy in the information economy, because if you have the right ideas you can rely on the new economic law of increasing returns to deliver the wealth if you get it right. Just ask Microsoft.

4. The Dimension of Relationships: Business values and ethics

The fourth dimension to being successful in the information economy is the dimension of relationships and business values. This is where everyone starts squirming in their seats but the truth is that, in an age of electronic interfaces, in a knowledge-based information economy, the business values and ethics of new ventures will be a powerful determinant of brand value and customer lock-in. For example, remember the customer uproar and revolt when America Online was tempted to abandon its customer privacy charter and sell its membership lists: America Online quickly rediscovered the value of the ethic of trust.

In the 1997 report from the Information Policy Advisory Council I set out what I described as the seven pillars for successful market relationships in the information economy, and since then I have become even more convinced that these seven core customer values are crucial to the design and operation of new ventures in the information economy.

Demonstrable user benefit and utility is a threshold requirement for market success. Usefulness is a necessary precondition, but then competitive differentiation will depend on how you take something to market. In an online and global marketplace, many of these other customer values become increasing important. These key market interface attributes are identified in the following exhibit, which highlights the linkages between user values and the market and technological functions that need to be addressed by business ventures.

Exhibit : The Key Attributes for Electronic Interfaces

The Key Attributes for Electronic Interfaces

Business systems which support these core values are key to creating successful partnerships and relationships within an information economy. I really look at a company's approaches to these issues when I assess long term business potential.

Industry and firm competitiveness: covering all the basics

If Australia is to own and exploit its own big ideas, then its new ventures will need to come to grips with the basic dimensions of the new information economy I have briefly described. But there are key areas where we need collective action to create a friendly environment for the success of new ventures.

If Australia is to be a hot house for new ventures and their global success then there are seven things that we must get right collectively:

  1. equity infrastructures - sources of finance
  2. equity market liquidity, to establish the true value of ventures
  3. information infrastructures - analysis and reporting for an informed market
  4. people - skills, experience, values and attitudes
  5. a supportive legal and regulatory environment
  6. vehicles and forums for making connections
  7. a community culture of creativity and risk taking

It is not enough to tackle one or another of these issues on an ad hoc and standalone basis: success requires action on all fronts and the alignment of all these factor inputs to an enterprising Australia. All of us here have a role to play in making sure we get it right. The challenge is simple: either we get smarter, or we accept the inevitability of the "second best" outcomes we have been warned about. If we are to earn a label as innovators, then we have to be change agents.