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.
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.
May 6, 2024 | Operations, Strategy
As we seek to move towards 3% of GDP as a measure of the R&D in the economy, we are assuming that simply increasing the percentage will increase the output, in some sort of linear manner.
Ranking as we do at 93 on the Harvard list, squeezed between Uganda on 92, and Pakistan at 94, we need to do something different.
We have not asked the question: what changes need to be made to the multi-jurisdictional, fragmented and short-term focused system we have currently.
In my view we should.
Before we throw more effort and money into the existing system, we should be questioning if the system is able to deliver the outcomes being sought in an optimised manner.
Assuming we elect to keep the existing system, (a given I suspect) we should start by asking challenging strategic questions about the technology domains we need to focus on, that contribute to the shape of the economy we envisage in a decade or two.
That is easy to say, sadly, it is extraordinarily hard to do. It is even harder for the answers that may emerge to get any traction, by way of public awareness and funding. Without exception, the questions we must ask will run against the readily available answers that reflect just the extrapolation of the status quo, perhaps with a few wrinkles.
Inevitably, multiplying the complexity of the challenges faced will present problems with no apparent answers, or they would have been answered before. That is why the cycle from science to commercialised product is so long, in most cases, 30 years or more.
Change needs a catalyst, which usually comes from unexpected angles.
Take the development of mRNA vaccines during Covid.
To most this was a rushed and half-baked process, as we all know that the pharma innovation cycle is at least a decade, from identification of a molecule of value, through product development and increasingly demanding levels of clinical trial. Here, it happened in 18 months.
Thing is mRNA vaccine development did not happen in 18 months.
The logic of what became mRNA was first articulated in 1956, and had been investigated continuously for the following 65 years. Suddenly the catalyst of Covid emerged, and the next decade or longer of development was compressed into the 18 months. This is simply because most of the work had been done, under the radar, and on a small scale, scientists knew it was extremely promising, they just lacked the catalyst and therefore the funds to prove it.
The question here was: can the expensive and technically very difficult production of mRNA be proved and scaled in 18 months? Clearly the answer was ‘yes’ and now we have mRNA as part of the pharma arsenal.
The PM has committed a billion dollars to developing a manufacturing plant in the Hunter that produces solar panels. On the surface, it is dumb, and has been condemned by many, including yours truly, and chair of the productivity Commission Danielle Wood.
However, what if we asked the mRNA question: Can the production of electricity from solar be re-engineered to use significantly advanced technology over what is currently available? If so, that may enable the plant to be a ‘next technology generation’ solar plant that sets a whole new standard.
The whole basis of the current argument that the investment can never be commercially viable because the Chinese have a stranglehold on the existing technology and cost structure is out the window. A new plant using new technology, delivering lower cost structures and capital productivity would make the current dominating technology redundant.
The intensity of intellectual effort required to ask and investigate these alternative questions is extreme.
The odds of one of them identifying an opportunity that is, with the benefit of hindsight, a ‘unicorn’ is tiny, so the political risk is significant. However, if we allow ourselves to be seduced by the fantasy of doing more of what has resulted in our current situation and expecting a better outcome, we will deserve the shellacking the investment will receive.
Two years ago I had a shot, and nominated three headline domains where we should be investing, and my views have not changed. Sitting under these three headlines are a host of opportunities for a focused R&D effort that should be considered by experts in the various fields, choices made, and long-term investment locked in.
Header is from the extensive StrategyAudit slide bank.
Apr 5, 2024 | Governance, Strategy
Democratic governments have always spent time talking about creating regulations to control monopolies, or at least the profits that can accrue to the monopolist.
In Australia, it has only been talk, and choices to sell public natural monopoly assets to private industry for short term cash. The new monopolist then exercises monopoly pricing power, while the seller governments bleat about market power, as Sydney airport, and electricity distribution have clearly demonstrated.
Elsewhere the examples of action beyond the exercise of the Legislative power to break up monopolies are few and far between. In the US, powers under the Sherman Act were used to break up Standard Oil in 1911, and AT&T in 1984. There was a failed attempt to break up Microsoft in the late 90’s, and currently there is much bleating about the power of Tik Tok, yet to see concrete action.
Beyond those examples, and a few fines of digital platforms under European legislation, little progress has been made. We may see some action in the US to separate the ownership of TikTok from its Chinese parent at some point.
Dictatorships tend to go the other way, with the person at the top holding the whip hand and amassing the profits.
Monopolies are huge profit generators.
Governments feel compelled to control them (until they sell them). So, it seems like a pretty good idea to me to find a market niche, or product category where you can hold a monopoly, or dominate such that you have price setting power.
Be the only solution to a problem, control the best itch scratcher available, and the profits will flow.
I suspect this may be a bit politically incorrect, but think about it.
Creation of something that is so good, so far in front of the competition, so irreplaceable, that there is no viable alternative is surely the objective of all commercial enterprises.
Mar 28, 2024 | Leadership, Small business, Strategy
Success of an SME means they have crossed that shark filled river where most SME’s fall over.
They have sufficient scale to employ functional personnel to address the day to day running of the business, and are returning the cost of capital and a bit more to the owner.
For some this is a level of comfort that is satisfactory, but to most who have strived to get across that river, it will not be enough, they are of a personality type that will be looking for the next challenge.
So where should they look?
Do yourself out of a job.
When you can go away for 3 months and wonder why nobody missed you, the business has reached the point where you are no longer needed daily. Accept that and get a life, or knuckle down to scale the business. For many that might mean becoming a non-executive chairman, staying engaged, but well away for the week-to-week challenges. You have created a manager system and ‘bench’ that does that. Leverage it.
Identify the industry constraints.
Every industry has a set of constrains that are rarely even noticed, they are just the edges of the status quo. Every useful innovation that has evolved, has done so by addressing a constraint that few, if any had even seen. The outcome of this insight is to deliver the opportunity for significant value addition.
The exempla was Steve Jobs. He saw the constraints in personal PC’s when he saw the work being done at Xerox Park developing a Graphical User Interface. When deployed in the Mac, the GUI changed Apple from a hobbyist into a leading PC. He repeated the magic with the original iPod, then the iPhone, and the App store. Each of them operated in an existing environment, with existing technology that could be deployed in ways that removed the accepted industry constraint, changing the face of that industry. You do not need to be a huge organisation to do this. In my local area there is a plumber who guarantees his work, and guarantees the time he will turn up to do it. Failure to address either means the client does not pay. He charges a significant premium, and now has a number of vans on the road, simply because he redefined an existing constraint in this local area.
Identify and remove internal constraints.
As with an industry, every business has a range of internal constraints that together become the culture and status quo in that enterprise. There are always opportunities to do things better, but are often overlooked, by simply not being seen, or miscategorised.
A former client removed an internal constraint and added 10% to his gross margin overnight by doing so. The business, a medium size in his industry had kept three suppliers of the core item in his manufacturing operations holding roughly equal share of his business, for roughly equivalent products. There was little to no internal competition, each of the suppliers did so from their price list, while maintaining very friendly relations with the MD and purchasing manager. We instituted a competitive bid for a guaranteed 80% of the purchases, with the remaining 20% to go to the runner up as a consolation prize, and ‘backup’ to the major supplier. The cost reduction that came from that relatively simple exercise dropped straight to the bottom line.
Currently the evolution of AI is creating huge opportunities for enterprises to deploy tools that will optimise existing processes and enable scaling at little or no added cost. There is a learning curve, an investment required, but not engaging means you will quickly fall behind competitors, while ignoring the opportunity to go quickly past them.
Build performance consistency.
For those with a view to one day selling the business they have built, there is no substitute for being able to show consistency of performance over time.
Even when an exit is not even contemplated, seeking ways to build consistency has the result of simplifying an enterprise which almost automatically adds margin and cash.
To build performance consistency takes time and effort. It requires a combination of being ‘in the weeds’ implementing processes that recognise and address tactical and operational improvements daily, and taking a ‘helicopter’ view that enables strategic positioning. This combination is easy to say, hard to do.
A buyer is buying two things, both of which are extremely valuable, irrespective of the inclination to exit the business:
- Optimise the existing business processes and infrastructure,
- Map the path that best delivers future cash flow.
Demonstration of positive performance consistency on both these parameters will give you back time, and optimise the buying price if and when you exit.
Header credit: My thanks to Hugh McLeod at gapingvoid.com
