Oct 18, 2023 | Governance, Strategy
Australia is an economy that has allowed the big to get bigger to such an extent that the barriers to entry in many vital and emerging industries are simply too high for new domestically funded entrants to swallow. This has led to multinationals buying their way into our market, further reducing competition. The latest is the purchase of ASX listed Origin Energy by serial asset accumulator and tax avoider Brookfield.
We are all used to thinking about economies of scale, the bigger we get, the greater the opportunity to spread the capital cost incurred over a wider base. The obvious example is IT, the costs can be huge, but they scale rapidly downwards as the number of nodes in use increases. It costs less to run each node as you increase numbers than it cost to run the first one.
This ignores the natural increase in transaction costs that used to occur when you scaled, but the use of IT, when done well, radically reduces the friction caused by transaction costs.
When you consider the economics of scope, the same sort of thinking applies, but you seek to leverage the capabilities built in one domain into others. Amazon is the poster child, leveraging the automation of their book selling IT investments into operating the Amazon store, then into Web services, retailing, hardware, and many other products and services.
What has happened is that we have seen the two types of economies of scale and scope give each other a dose of steroids.
Take a step further back, and you see that the expansions of scope are generally coming from adjacent markets that are fragmented, and often regulated.
Fragmented markets naturally coalesce into markets that are increasingly dominated by a few firms. The power of scale in a market overwhelms the fragmentation, and you end up with fewer firms competing, and taken to its logical conclusion, you have an oligopoly. In some cases, oligopolies end up as a monopoly by another name, such as Google in search, Microsoft in office software in the 90’s. They have been ‘defragmented’ by the application of capital that delivers economies of scale.
Then follows the search for scope, the usage situations where capabilities from one market are extended to other markets, at a lesser cost than the adjacent markets could do on their own.
Into this mix you throw regulatory barriers.
The cost of managing compliance is going up and up.
Corporations as they scale apply capital to the management of their compliance, and the wider the scope of activities, the greater leverage they get from that investment.
Look at the fossil fuel companies in Australia. Largely they are multinationals with huge scope and scale, too big for governments to take on. As a result, the increasing returns on the capital employed historically in scale and scope, are now being applied to compliance, particularly tax compliance, as they seek lower tax regimes that insulate returns. The purchase of Origin Energy is a further example of the process.
The strategic policy dilemma for Australia is clear.
For the long-term health and innovative vigour of the economy necessary for us to climb out of the basement in the innovative economy list, there needs to be tough decisions taken that will have a short-term cost, while increasing the odds of a long term benefit. Unfortunately, there are no votes in that equation.
Oct 13, 2023 | Governance, Innovation, Strategy
Australia has a problem, a big one. Our KAP Gap is huge and becoming ‘huger’ by the month.
Knowledge-Attitudes-Practise gap is the difference between what people say they will do, and what they actually do.
At some level, we understand what needs to be done, but are so cemented into the good life that we cannot see our way to absorb the pain necessary if our grandchildren are to continue to enjoy the fruits of this country.
How do Australians respond to the reality of the latest Harvard Complexity report which records a slip from 60th in 2000, to 93rd in 2021? Being sandwiched between the manufacturing goliaths of Uganda and Pakistan is hardly a point of pride. (Perhaps we are getting used to it, given the slip of Australian rugby from the top tier to a nation ranged with the minnows of world rugby, but that is another post)
There is a notable reluctance to embrace change. Inevitably, change makes some uncomfortable, so we substitute a fuzzy slogan. There needs to be meat on the bones of an effective slogan that resonates on a deeply personal level, or it remains just fuzzy words. This applies equally to big changes as it does to the little ones we are asked to make every day, it is just that the latter are rarely seen and measured.
How is it that we are still seen as a wealthy nation?
I have an acquaintance who is wealthy, always has been, but he is a lazy sod, pretending to work, being involved in stuff that amuses him. Luckily for him, his father and grandfather were of a different sort. They accumulated wealth from hard work, taking risks, and learning from their mistakes. My acquaintance is wealthy because he is lucky in his parentage, just as Australia is lucky in its abundance of stuff we can dig up and flog that the rest of the world wants.
Little of that nasty four letter word ‘Work’ involved.
Tomorrow, as this is written, there will be a referendum. Irrespective of the view you hold, and the way you will vote, it is hard to argue that the policy choices, and their implementation has not been at an acceptable level to date. You only need to look at the ‘Gap’ between first Australian incarceration rates, suicides, domestic violence, education, and others to come to that conclusion. What this vote will have articulated is the willingness of the Australian population to accept that change is necessary. It may not always be good for everyone, and indeed, will never receive complete agreement of the detail. However, if we reject all change, we also reject all opportunity, which is rarely a good strategy.
Oct 11, 2023 | Governance, Leadership, Marketing
These two words are often wrongly used as similes.
Complicated implies interdependence, you cannot pull it apart, and then put it back together in exactly the same form. Think of a knitted jumper.
Complex implies it can be simplified, much as you unfold a sheet of paper, then are able to refold it and end up in the same place.
Complex and complicated are at either end of a continuum, and rarely is something just complex, or just complicated.
Depending on where a situation or question sits in the continuum, you may be able to simplify somewhat, but not completely before you alter the form of the problem or task. It is rarely a binary choice.
Another way of describing this is the commonly used phrase ‘Think from first principles’.
Our brains have evolved a range of heuristics to deal with variables. However, depending on the people and the context of the variables, our brains can deal with only 3 to 5 at any one time before overload kicks in and confusion, procrastination, and poor choices result. By simplifying, we remove the need to consume cognitive capacity for those things we have classified as benign, to be allocated to the unexpected variables that present either danger or opportunity to us.
Simplicity enables optimisation, repeatability with little or no thought, as it is stable, and predictable. However, we are then tuned to miss the very things that can harm us, and sometimes offers opportunity.
Think about that first time you drove to a new destination. You are following a map or instructions, looking for street signs, and hazards of various types, you are concentrating on the drive. Now consider the same drive when you have been doing it every day for a while. The car seems to be on autopilot, and you are thinking of other things, only superficially aware of your surroundings. Your cognitive capacity is being used for purposes other than navigating you safely to your destination.
Therefore, the state we should be seeking is resilience. The fine line between optimised, but still vigilant to the unexpected variables and able to react to them in ways not locked into the way we did it before.
We need to be able to adjust quickly in a world of constant change, just to keep up.
Header credit: Hugh McLeod at gapingvoid.com
E&OE October 21. It has been pointed our to me that I got complex and complicated the wrong way around in the post above.
Dumb mistakes not picked up by editing do occasionally slip through. When you read the post, just reverse the meaning of the words Complex and Complicated. I considered rewriting the post, but am prepared to wear my mistakes, so left it as written. Also, I cannot help but wonder if Seth Godin saw the post, shook his head, and wrote a better one.
Aug 4, 2023 | Governance, Strategy
Every year the American History Business Centre a non-profit run by Gary Hoover, puts out a chart that updates the market capitalisation of Americas top 20 public companies.
The 2023 version has just arrived in my inbox.
I find the path of the evolution astonishing, even in the relatively short time since the turn of the century to now.
A few things that pop out, at least to me.
- The acceleration in the rate of increase since 2000
- The absolute dominance of the Tech giants Apple, Microsoft, Alphabet and Amazon, that has driven the market cap, especially since 2010. The growth rate is so fast that the numbers are already out of date. Apple broke the 3 trillion dollar mark, the first to do so, in January. It has bounced around that benchmark a bit, but is today is 3.011T.
- The emergence of Tesla from nowhere 5 years ago to 7th today, a market cap bigger than the other US carmakers combined, who outsell Tesla by a big margin. However, Tesla unit sales have taken off with the opening of Chinese manufacturing, delivering 710k units worldwide in 2022.
- The absolute contrast to Australia’s top 20, dominated by financial institutions and commodities.
Have a look at the graphs in the link, and consider the implications for the competitive position and ‘re-industrialisation’ of this country.
The most recent Harvard economic complexity report puts Australia at 93 on the list, bracketed by Uganda at 92, and Pakistan at 94. Stellar company indeed.
The government appears to be taking the problem seriously, with the $15 Billion National Reconstruction Fund announced in the October 2022 budget, but is it enough, and is the support the right kind of support required to stimulate the domestic economy to build the complexity that will act as an insulator to the types of global disruptions that seem now both inevitable and more frequent?
While we are distracted by short term political wrangling, point scoring and pushing of social agendas that are truly relevant only to minorities, the big-ticket items, those that will determine the shape of the country over the coming decades, go begging.
Our so-called leaders lack the vision, commitment, and coconuts to take a hard look at what needs to be done, and then get on and do it, short term political polling be damned.
Jul 17, 2023 | Change, Governance, Leadership
Executing a culture change in an organisation is the first port of call in most improvement projects. Sometimes it is a minor task, often it is the major one.
There have been libraries written on the challenges of culture change, from ‘The 10 best ways to’ blog posts to great books that point us to new ways of thinking and dealing with the challenges.
I have contributed my share.
The common feature of all these is that it is very easy to talk about, very hard to do.
However, having done this continually over many years as part of almost every project, changing culture is a task that can be broken down into its component parts, and done bit by bit.
Culture is the word we use to describe the collective ‘The way things are done around here’. The clue is in the word ‘Done’.
Getting things done requires a process.
That process can be as organised and repeatable as a written process that is always followed, to the seemingly random, chaotic scrambling to get the necessary activities completed that I see most often.
Either way, there is a set of activities that must be completed, one way or another, in a sequence that can deliver a product to a customer, for what they are prepared to pay.
Individual activities can be isolated and subjected to improvement techniques. Improving the processes, as a focus of activity of all people involved in them, with the support and engagement of management will over time improve performance, and ultimately culture.
Culture is an outcome of the performance of processes, and how those performing them feel about themselves, and their place on the hamster wheel.
Digitisation makes this a bit easier, as we can track process performance in real time, rather than as in the past, collecting data, doing some analysis and cause and effect thinking, then make another change to test the outcome. This used to take weeks, perhaps months, but in some cases can now be done almost on the fly.
Like almost everything, our view of the time frame necessary for effective culture change has been shortened in most peoples’ minds. However, it seems to me that the time necessary for a robust culture change is one of the few things that has not accelerated in this digitised world.
I wish the incoming Governor of the reserve bank good luck in her culture change challenge, the body politic will be watching with a gimlet eye for early and rapid signs.
Cartoon credit: My thanks to Scott Adams’s avatar Dilbert
Jul 15, 2023 | Governance
The execution of Philip Lowe on Friday displays what is to me a worrying dismissal of the responsibilities the government holds over the fate of the economy.
This is despite the polite words of mutual admiration and respect, that is what it was, an execution. While not unexpected, one party just decided it was not in their interests to have the other around any longer.
It is not just this current government, but the 4 or 5, or is it 6, previous ones that have seeded the field that is now being so bitterly harvested. The rot seems to have started in the latter stages of the Howard government, when the kindergarten defence: ‘it was the other kid‘, became the norm.
Nobody in power seems to be able to shoulder responsibility for anything anymore, always pointing fingers, rarely (if ever) offering thoughtful commentary on alternative choices. Meanwhile, they stand in line for a medal if anything, even well beyond their control goes well, claiming that despite all evidence to the contrary, the good outcome is the result of their farsighted and selfless dedication to the common good.
I am not an economist, and have little beyond common sense and a wide range of commercial experience gained over a long period. However, if I was asked to manage a company while being given only very indirect control over the drivers of revenue and expenditure, I would have to politely decline.
The reserve bank governor is the spokesperson for the bank, an independent body charged with managing the cost of doing business in the economy: the cost of money. That is all it can do. Every other lever of control of economic activity is in the hands of others.
Those others have done a ‘Lady McBeth’ washing their hands of any responsibility for the current difficulties, while celebrating the change. The elevation of the current deputy governor Michele Bullock to the top hot seat and expecting her to fix problems of their making better than her predecessor, is a hollow hope. Meanwhile, on top of the day job, Ms. Bullock is being tasked with the redirection and renewal of the culture that delivered the top job to her, while overseeing the changes in the operational processes recommended by the Reserve bank review.
Good luck with all that herculean set of tasks, but somebody has to be in line to be the fall guy. I keep on having visions of deck chairs and icebergs.
Cartoon credit: John Kudelka ‘Friendly fire’ April 8 2011.
