Jun 19, 2024 | Change, Governance, Leadership
Many years ago, I worked for Dairy Farmers Ltd. It was a large dairy co-operative operating in the dying days of milk regulation in NSW. The business had two divisions, reporting at EBIT. The first and biggest by a very large margin was the regulated milk business.
All milk produced in NSW at that time was by regulation vested in a statutory authority, which then ‘sold’ the milk to processors to be processed and distributed as fresh milk. It was a highly regulated and price-controlled industry from the cow to the consumers fridge.
Milk in excess of the requirements for fresh milk was termed ‘manufacturing’ milk. The farmers were paid directly by processors at a market rate.
At the time, the price paid by the diary corporation for fresh milk was roughly 2.2 times the price the co-operative paid for manufacturing milk by the second division, the Dairy Foods division that produced all dairy products beyond fresh milk.
Manufacturing milk was unregulated in any way beyond food safety.
The commercial imperative for the dairy farmers was clear, albeit not viable long term.
After 8 years of struggle, the Dairy Foods division had recovered from being a commercial basket case, one step from the corporate mortician to a significant and profitable player in the national market. The culture that supported that huge improvement was highly competitive, productivity focused, and financially disciplined. By contrast the milk division was a cost-plus business operating as a regulated monopoly, and so had become fat and lazy.
A newly arrived Managing Director decided to merge the two divisions. His reason, supported by a report by a highly paid consultant, was that the commercial culture of the dairy foods division was needed to be patched onto the milk division, facing the reality of deregulation at some point.
As a newly appointed GM of the dairy foods division after those 8 long years of struggle, I resisted this change as strongly as I knew how. I argued that culture could not be ‘copied and pasted’ from one organisation to another, even those working under a common ownership and centralised head office structure that allocated capital. It seemed to me that the much larger still regulated business would reject the completely different culture of the smaller unit, which would in turn erode the competitive culture of the dairy foods division they were trying to spread.
That is what happened, resulting in Dairy farmers becoming another sovereign corporate casualty.
- Processes that ordered, allocated and paid for milk for the regulated fresh market dominated the cash flow of the merged divisions. The Dairy Foods division cash flow processes and management became lost in the quagmire of the regulated cash flow of the much larger former milk division. Focus and discipline went out the window.
- The board of the business, was made up of farmers with 2 exceptions, the chairman and MD. The rest of the board were dairy farmers who unanimously rejected the notion of deregulation. It was clearly in their short-term financial interests to retain the existing regulated system. There was simply no formal recognition that the regulated system was an economic basket case. Privately, several of the board members did recognise that fact, but the power of the status quo prevailed formally.
- Major customers, the supermarket retailers were able to bring significant pressure onto trading terms given the previously completely separated divisions were now one. This pressure seemed to me to be a catalyst that brought forward the date of deregulation. The retailers started to bring fresh milk across the border from deregulated Victoria, and discounting in NSW in defiance of the state regulations, citing Section 92 of the Australian constitution, which bans constraints on interstate trade.
- The financial discipline beyond managing cash flow exercised by the former Dairy Foods division was lost as the reporting was merged. It was further complicated as Dairy Farmers set about ‘merging’ (Co-Operative speak for taking over) other Co-ops in NSW, QLD and SA. These co-ops were all different, but all were afflicted by lack of commercial and competitive focus on customers and consumers.
All of these point to the fact that culture is organic, and like all organic systems requires time, investment, alignment across the broad stakeholder population, and nurturing.
What should have happened but did not.
- There was no attention paid to the differing cultures that existed. Little useful thought was given to the practical challenges of merging them. The merger came via announcement, and a revision of the organisation chart. The two were simply incompatible. While a sensible review would have highlighted that fact, it was ignored.
- There was no integration plan that ranged from the strategic to the tactical and operational. Again, it was driven by the revised organisation chart, with little effort made to successfully articulate the reasons for the merger to anyone, including senior management.
- Any attempt to articulate a ‘vision’ for the merged entity was missing in action. The justification was all about the imagined financial benefits that would flow, and the risk mitigation coming from the probable deregulation of the fresh milk business at some future point. Both were reasonable expectations, but there was no thought about how to turn reasonable expectations into cash. Somehow, by some unknown osmotic process, it was supposed to just happen.
- There were no objectives for the integration that reflected the strengths of both, the holes that needed filling, and the resources necessary to achieve the restructured strategic objectives.
- There were no financial or operational objectives beyond budgets generated by spreadsheet aiming at an EBIT that was by decree, rather than by any disciplined process. The budgets of the two separate divisions were just merged, with the mythical improvement index applied.
- There was always going to be considerable resistance from both sides of the merger. Almost universally, (most certainly by me) the merger was seen as a retrograde step, ignoring the very different challenges faced by the two entities.
The great irony I see from the perspective of 30 years, is that Bega Co-operative virtually broke on the back of cheese factory expansion that had run significantly over budget, was saved by a cash injection by Dairy Farmers. Bega has since evolved into a major producer of branded packaged goods to supermarkets. Dairy Farmers has disappeared as a commercial entity.
The lesson: Cultural change is complex, messy, and potentially terminal in the absence of skilled leadership, complete transparency, and what at the time would seem to be significant over-communication.
Header cartoon credit: www.Gapingvoid.com
Jun 17, 2024 | Change, Strategy
80% of Googles revenue comes from advertising. The obvious question is how the explosion of AI after the release of ChatGPT will impact on that revenue, and virtual monopoly of search that delivers it.
Rather than typing in a query and getting pages and pages of options for an answer, headed by 5 or six links that have paid to be at the top of the first page, AI will give you an ‘exact’ single answer.
At least you hope it will be the right answer.
If it is a simple black and white question, like what is the capital of Australia, you can be pretty sure it will be right, but if you want a detailed explanation of the science of climate change, it will be insufficient, and potentially misleading.
However, in a world of instant gratification, the first answer that appears right will be accepted, and as the late Daniel Kahneman demonstrated, we like the quick, ‘fast’ response in favour of the considered ‘slow’ answer.
Google has responded to this existential threat to its profitability with a tool called ‘AI Overviews’, currently in beta. It summarises search results and presents them as a single answer to the query.
‘Overviews’ It operates on the principle of “satisficing,” or providing quick, decent answers rather than a range of options.
Presumably, the ‘toll-booth’ will still be at the point of click through, while advertisers will be given the option to be on the ‘satisficing’ menu, for a price. Not a lot of change from current, frankly.
However, the tectonic forces driving the adoption of Ai will have impacts across the face of business, government and our personal lives, few of which are easily forecastable.
Darwin’s dictum that it is not the biggest or fastest that survive, but the most adaptable to change will really be tested in the coming decade.
Jun 3, 2024 | AI, Change, Leadership
My time is spent assisting SME’s to improve their performance. This covers their strategic, marketing, and operational performance. Deliberately, I initially try and downplay focus on financial performance as the primary measures, as they are outcomes of a host of other choices made throughout every business.
It is those choices around focus, and resource allocation that need to be examined.
Unfortunately, the financial outcomes are the easiest to measure, so dominate in every business I have ever seen.
When a business is profitable, even if that profit is less that the cost of capital, management is usually locked into current ways of thinking. Even when a business is marginal or even unprofitable, it is hard to drive change in the absence of a real catalyst, such as a creditor threatening to call in the receivers, or a keystone customer going elsewhere.
People are subject to their own experience and biases, and those they see and read about in others.
Convention in a wider context, status quo in their own environment.
Availability bias drives them to put undue weight in the familiar, while dismissing other and especially contrary information.
Confirmation bias makes us unconsciously seek information that confirms what we already believe, while obscuring the contrary.
Between them, these two forces of human psychology cements in the status quo, irrespective of how poor that may be.
Distinguishing between convention and principle is tough, as you need to dismiss these natural biases that exist in all of us. We must reduce everything back to first principles, incredibly hard, as we are not ‘wired’ that way.
The late Daniel Kahneman articulated these problems in his book ‘Thinking fast and Slow’ based on the data he gathered with colleague Amos Tversky in the seventies. This data interrogated the way we make decisions by experimentation, which enables others to quantitively test the conclusions, rather than relying on opinion.
That work opened a whole new field of research we now call ‘Behavioural Economics’ and won Kahneman the Nobel prize. Sadly however, while many have read and understand at a macro level these biases we all feel, it remains challenging to make that key distinction between convention, the way we do it, the way it has always been done, and the underlying principles that should drive the choices we make.
As Richard Feynman put it: “The first principle is that you must not fool yourself—and you are the easiest person to fool. So, you have to be very careful about that.”
May 21, 2024 | Change, Strategy
A short time ago I sat in a workshop where one of the featured speakers continued to conflate strategy and execution into the one process. Those who know me watched with amusement is I tried to maintain a philosophical silence. Rather than jumping up and pronouncing that such conflation is muddle headed at best, destructive at worst, I managed to maintain my seat.
This general lack of understanding that strategy and execution are separate processes has evolved from a number of sources.
Communication. Poor communication of the strategy, and separately, the role each function and individual have in the execution of the strategy via budgets and other means of resource allocation is unclear. Is unreasonable to expect those further down in an organisation to execute on a strategy they do not clearly understand, and even if they do, their role in the execution is unclear.
Size does matter. Organisations as they grow become more complex. As those complexities grow the difficulty of translating strategies into actual tasks that compound to deliver the strategic objective also compounds. Aggressive simplicity is the only antidote, and a huge challenge for management.
Technology overload. Technology often complicates clear communication, despite its ability quickly and efficiently to reach people. The fragmentation and complexity of communication channels serves to dilute the power of a simple message. In the absence of a clear articulation of the problem to be solved, job to be done, and recognition of existing conditions, people determine independently what a message means to them.
Turf wars. Unfortunately, in all organisations beyond about 30 people, politics and turf wars are common. In many large organisations, perhaps most, advancement and the trappings of that advancement go to the most effective political operatives. Merit in getting the job done often runs a long second. Turf wars by their nature work against a coherent collaborative strategic resource deployment.
Resources. In almost no organisation I have ever seen is there sufficient effort made to ensure aligned and consistent understanding of the strategies. That effort to communicate clearly is critical to enabling the allocation of necessary resources, at the optimum time, to deliver the envisaged outcome. Most often the communication morphs to resemble hyperbole.
These factors contribute to the general notion that strategy by itself is an exercise in obscure articulation, while execution is left to the ‘quants’ among us.
Effective strategic deployment requires that the causes of the mismatch noted above are reversed. This requires a culture that insurers feedback loops, flexibility, excellent and consistent communication, all of which come from a single source: leadership.
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.
Apr 17, 2024 | Change, Leadership
The following is a post that I drafted at the beginning of the Corona epidemic but did not post.
It is a personal reflection on ageism, that becomes increasingly relevant as older, retired workers I see around me now going bonkers from boredom. Few want the pressures they had as youngsters climbing the slippery corporate pole, or struggling to manage and grow an SME, but they do wish to remain useful, relevant, and earning a bit of pocket money.
By ignoring this growing cohort, we are also ignoring the wisdom of hard-won experience, and 4 years later, thought it worth the question.
At 34 I landed my first job as Marketing Manager of a stand-alone business, a significant FMCG manufacturer.
The business was an absolute basket case, and in the middle of a major investment in new facilities in Western Sydney that was financially and operationally irrational. However, the move of location encouraged a number of the marketing personnel I inherited to leave. This gave me the opportunity to recruit people who I thought had the skills and mindset to contribute to the massive task of rebuilding.
The process was a standard one for the 1980’s, via a head-hunter who provided a big list of potential people against the brief I had provided. Amongst the guidelines was a requirement that he find people who had a different background and skill set to my classic FMCG marketing history. On that list was an older bloke, late forties, who fitted pretty well the profile of what I was looking for, and who in addition, was desperate for the job. His previous employer had ‘re-engineered,’ which was one of the management fads at the time, and he had been a victim of that ‘re-engineering’.
I had several conversations with him over a couple of weeks, and eventually decided against hiring him. At the time, I rationalised this decision as being sensible, as he was late forties, seeking a job for which he was overqualified in a number of ways, working for someone who was significantly his chronological junior. I assumed he would move on as quickly as he could, leaving me with a problem I simply did not need.
Even at the time, in the back of my brain, I also knew I was intimidated by someone so much older, with far more experience across a range of areas where mine was lacking. How would it look, risking being shown up by someone who formally reported to me?
Over the subsequent 10 years as we dragged the business kicking and screaming into the 20th century, as Marketing Manager, but also controlling several other functional areas for 8 years, then GM for 2 years, I reflected on my decision about this man. How much would his experience have contributed, even if just for a short time, as we transformed the business from the basket case it had been, to the much larger and very successful business it had become.
Almost exactly a decade later, I found myself ‘re-engineered’ after ongoing differences of opinion with the Managing Director of the corporate of which we were a division, reporting at the bottom line.
It was then that the frustration and desperation he must have felt really hit home. I discovered I was too experienced to be a Marketing/Sales manager, but too inexperienced to be a General Manager/MD. It is also possible that the reality is that I am not as ‘pretty’ as some, and believe strongly in expressing views in as frank and open manner as possible. This is a toxic combination in an interview process for a corporate role.
It also seemed that at 46, and dispirited, which I had become after 18 months of relentless looking, I was too old.
Ageism had a face, and it looked back at me every morning as I shaved. In no way was that ageism deliberate, or even more than partially recognised at the time, but it was there, lurking in the background.
As a result I started to take seriously some of the conversations, advice, and a few paid ‘quick fixes’ I had delivered over the 18 months of ‘gardening leave’. The paid ones utilised not only my skills and experience, but attitude. None evolved into a long-term job. However, they paid some of the bills piling up with a young family, which was at the time gnawingly stressful.
I look on now and consider the manner in which the carnage being wrought by the Corona Virus will impact on a huge number of peoples lives. I shudder at the number who are experienced, qualified, and who will not be able to regain employment that leverages those skills.
At 68, I think I am in a better place to make a contribution than I was at 45, 55, or even 65. (I am now 72, and the observation holds)
I wonder how many Millennial, or Gen Y managers will want to risk being shown up by someone who has seen and survived a bunch of booms and their subsequent busts over a long commercial life? Just as I feared I would be shown up back in 1985.
Despite the progress made over the last 25 years in recognising the value to be contributed by genuine diversity, I fear that as we start the long road to recovery, ageism will again rear its ugly head. It will leave huge amounts of experience, resilience and capability withering in the lines of unemployed, or at best, underemployed.
