Download Australia: Taking Bigger Steps

Australia:
Taking Bigger Steps
In many ways, Australia is the envy of the world.
But the country could do much more to prepare
for the imminent wave of technology disruptions.
Are Australia’s best days behind it? Or do they
still lie ahead?
Australia: Taking Bigger Steps
1
The Strategic Transformation Imperative
After 25 years of uninterrupted growth, Australia and its companies are in a position of strength.
Over the next decade, however, corporate leaders face a pivotal choice: adopt a defensive,
risk-averse position and protect the country’s good fortune, or go on the offensive, by doubling
down on innovation, aggressively entering international markets, and insisting on world-class
standards in everything they do.
Today, Australia ranks in the second quartile in productivity, innovation, and globalisation
among the world’s 40 largest economies. The country is in the early stages of a downturn in the
commodities super-cycle, with the full force of a decelerating Chinese economy and a wave of
new disruptive technologies about to hit its shores. We believe that, without a compelling
strategy to improve its long-term competitiveness, Australia is at risk of decline.
Recently, we discussed our analysis with more than 20 CEOs and board chairs from the major
Australian economic sectors who collectively control or influence close to 10 percent of the
nation's economy. While reactions vary—we explore these in more detail on page 16—everyone
agrees that the next decade will reset the nation’s trajectory with significant implications for
generations of future Australians.
Have the best days slipped by, or can
Australia act now to ensure that the best
are still ahead?
Positioning the economy for the future begins at the firm level. For Australian companies to
reach their full potential, corporate boards, CEOs, and executive teams must adopt more
expansive, dynamic, and potentially higher-risk five- to 10-year strategies with more aggressive
execution programs. Now is the time to pursue sustained strategic transformation, taking
bigger steps in three areas:
Productivity. Australia risks losing its cost competitiveness. Companies must therefore
radically reset their cost structures by redesigning their work practices, operating models,
and collaboration arrangements, taking advantage of the full range of digital possibilities.
Innovation. Rather than offering lip service to innovation, corporate leaders must be more
methodical in building innovation into their end-to-end management systems, including
outlining how innovation is defined, measured, and rewarded as well as how it is developed
and unleashed.
Globalisation. Australia’s relatively small market and modest growth rate will not be enough to
sustain success. For long-term survival, companies must tap into the scale and growth of other
select markets. Beyond this, strategies must be forged within the context of profound uncertainty about the future path of globalisation.
Have the best days slipped by, or can Australia act now to ensure that the best are still ahead?
In this paper, we begin with a wide lens to look at global trends and future scenarios for the
global operating environment. Then, we narrow the focus to Australia’s strengths, vulnerabilities,
Australia: Taking Bigger Steps
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and risks of disruption. We also discuss 12 disruptive technologies and how they will impact the
economy, offering deep dives into three vital sectors. Finally, we lay out the over-arching choices
leaders face—in the board room and the executive suite—and show where bigger steps must be
taken to promote future competitiveness and business success.
Zooming Out: Global Scenarios
The global geopolitical and macroeconomic environment will have profound implications for
Australian companies. As Australia has matured, its role in world affairs has become more interconnected, with a rise in the flow of ideas, people, capital, goods, and services. Globalisation is
mostly beneficial for Australia and Australians. Will it continue as an interminable force? Or like
the tide, has it begun to recede after reaching its high water mark? Since the fall of the Berlin
Wall, we have seen three distinct phases of globalisation:
Globalisation 1.0 (1989 to 2000) occurred when the former Soviet bloc countries and China
liberalised their economies and integrated into the Western-led global economic system.
Global trade grew by 85 percent, and the flow of foreign direct investment (FDI) rose by an
astonishing 580 percent.
Globalisation 2.0 (2001 to 2008) began with the back-to-back shocks of the US dotcom crash of
2000 and the terrorist attacks of September 11, 2001. Soon the rapid economic development of
Brazil, Russia, India, China, and South Africa became the new fuel driving the engine of global
growth and integration. International trade in goods hit an all-time high of 52 percent of GDP in
2007, and FDI inflows peaked at more than US$2 trillion.1
A global pause ensued after the 2008 financial crisis. Although the global economy managed to
return to modest growth in 2010, thanks in large part to strength in emerging markets (particularly China), profound cracks were seen in many of these same economies by 2015. Now, seven
years since the financial crisis, global trade in goods and the flow of international investment
remain well below the peaks experienced before the crisis. The seemingly constant march of
globalisation has been slowed or even halted.
Since the financial crisis, the world economy has been in intermission. Economist Herbert Stein
famously observed, “If something cannot go on forever, it must stop.” The current global
economic pause cannot continue, so eventually it too will stop. What will come next? And what
are the implications for Australia?
Scanning the future: four scenarios for the global economic order
A variety of emerging forces could push the economic order in wildly divergent directions (see
figure 1 on page 3).2 Two unknowns will shape the global economic environment over the next
decade and beyond: the degree to which geopolitics continues to fragment the international
system and the overall level of global economic growth.
The first scenario, Globalisation 3.0, is a renewed chapter of cross-border integration in which
systemic deficiencies are corrected and a new era of continuously rising cross-border movement
begins. The second future, Polarisation, marks a return to historical normalcy in which rising
geopolitical tensions and economic rivalries divide the global economy into competing blocs
All monetary amounts in this paper are AUD unless indicated US$.
1
See "From Globalization to Islandization," Global Business Policy Council Perspective, January 2016
2
Australia: Taking Bigger Steps
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High
Figure 1
Four economic scenarios could play out on the world stage
Commonisation
Addressing climate change
Rise of knowledge economy
Globalisation 3.0
Automation and 3D printing
Increased prosperity
Geopolitical cohesion
Growth in sharing economy
Regional
trade
agreements
Dramatic improvements in ICT
Low commodity prices
Polarisation
Islandisation
Rising
inequality
Persistent
macroeconomic
uncertainty
Heightened nationalism
and protectionism
Low
Return of geopolitics
Low
Economic growth
High
Note: ICT is information and communication technologies.
Source: "From Globalization to Islandization," Global Business Policy Council Perspective, January 2016
of countries. Islandisation is the third potential future, in which nationalism gains ground in key
economies around the world, leading to dramatic protectionist measures and drastically reduced
global economic flow. The fourth possible future represents a greater break from the past than
ever before. We refer to it as Commonisation because it entails the rise of a new global common
featuring additive manufacturing and the sharing economy and a corresponding fall of consumer
capitalism that has defined the recent past. Each of these possible futures is plausible based on
a variety of leading indicators present in today’s global operating environment.
In Globalisation 3.0, restored geopolitical stability is paired with renewed high levels of
economic growth—a welcome return to pre-2008 dynamics. Multilateral and regional trade
agreements, low commodity prices, and a growing global middle class present opportunities
for growth. Furthermore, dramatic improvements in communications technologies allow for the
emergence of new business models and create a competitive global environment that is more
challenging and diverse than it was in the 1990s and 2000s.
In Polarisation, the world is defined by low geopolitical cohesion combined with high levels
of economic growth. Increasing competitive friction and animosity between the United States
and China hinders business strategies—both in globally integrated supply chains and in growth
from sales in diversified markets around the world. Trade agreements are predominantly regional,
while heightened nationalism and protectionism fuel continued macroeconomic uncertainty.
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Islandisation is a more extreme scenario: the global economy contracts, and countries
fracture geopolitically. Identity politics drives regional, country, and sub-state fragmentation
and atomisation, resulting in protectionist measures that reduce the flow of global trade and
capital. Consumer preferences turn against goods manufactured abroad, giving an advantage
to smaller firms with local identities. Economies with vast resources, particularly in energy and
agricultural production, fare much better than others as each country relies more on its own
resources for the necessities. Macroeconomic uncertainty persists as commercial and geopolitical distrust of outsiders fuels an atmosphere marked by fragility and fear.
The final scenario is Commonisation, a post-capitalist world of local, low-cost production and
more modest patterns of consumption. Although economic growth is low, advanced technologies and new youth attitudes and behaviours cause high levels of geopolitical cohesion. As the
sharing and knowledge economies proliferate, more people are neither traditional consumers
nor traditional employees, which disrupts business strategies. Digitisation reduces overall costs
by removing the middlemen, but these vanishing businesses and service firms represent
growth slowdowns.
The implications for each scenario vary (see figure 2). Which scenario is most likely to unfold?
Unfortunately, since 2014, evidence has been mounting that Islandisation is most likely.
Consider these trends and indicators:
• Global trade is falling, and protectionism is rising. Global trade in goods peaked in 2008 at
52 percent of global GDP, reaching only 49 percent in 2014 after falling each year since 2011.
According to the Organisation for Economic Co-operation and Development (OECD), of the
1,244 trade-restrictive measures implemented by G20 economies since the financial crisis,
only 282 have been eliminated.
• Many traditional fiscal and monetary policy instruments are no longer as relevant.
Negative interest rates and quantitative easing demonstrate how difficult a task central banks
have to respond to the current disruptive environment.
Figure 2
The outcomes for each scenario are significantly different in the next global economic order
Globalisation 3.0
Polarisation
Islandisation
Commonisation
Economic
growth
High
Moderate
Low
Low
Unemployment
Low
Moderate
Moderate
Low
Inequality
Moderate
Moderate
High
Low
Trade flow
High
Moderate
Low
Moderate
Capital flow
High
Moderate
Low
Low
International
migration
High
Moderate
Low
Low
Regulatory
convergence
High
Moderate
Low
Low
Source: “From Globalization to Islandization,” Global Business Policy Council Perspective, January 2016
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• Fringe and populist political movements are ascendant. Cosmopolitanism has given way to
nationalist, fundamentalist, xenophobic, and sectarian identity politics, including in leading
democracies with politicians such as Donald Trump and Marine Le Pen.
• Geopolitics have returned. From Russia’s invasion of Crimea to China’s militarisation of
disputed islands in the South China Sea, global tensions and rivalries—some familiar, others
new—have appeared. They make all the more complicated the new challenges of dealing with
pan-regional terrorist groups such as Al Qaida and ISIS.
• The international system is under serious strain. Multiple forces are tearing at the fabric
of international institutions, with the Syrian conflict, the European migrant crisis, an Ebola
outbreak, and the potential fraying of the European Union as the latest examples of existing
architectures and approaches that are unable to deal with the challenges of the moment.
The dangers of Islandisation
The drivers and characteristics of Islandisation—turning inward, self-optimising, and tolerating
structurally low growth—are very real risks to Australia and evident in today’s political and
economic issues. The degree to which these risks materialise will largely depend on the courage,
ingenuity, and commitment of Australia’s political and corporate leaders to address them.
Politically, labour reform continues to be the third rail of Australian politics. Following the
senate's rejection of a bill aimed at establishing greater oversight of the construction industry,
and unions in particular, the Australian government will hold a double-dissolution election for
the first time in almost 30 years. This spirit of protectionism remains pervasive in Australia,
resulting in more rigid labour laws and ultimately higher labour costs. Meanwhile, despite
Australia's relative safety (ranked fifth-safest large country in the world by the US Federal Bureau
of Investigation), the spectre of ISIS and Islamic fundamentalists continues to amplify a sense of
vulnerability. Australian political leaders will need to adroitly balance legitimate defence issues
on the one hand with sustaining personal freedoms on the other.
Economically, Australia has the opportunity to further increase its trade with Asia through the
pending ratification of the Trans-Pacific Partnership, a regional free agreement that will cover
40 percent of the global economy and affect more than $100 billion in Australia exports. Unlike
many European economies, Australia maintains relatively low unemployment rates and continues
to sustain steady increases in its median wage. However, with China's decelerating economy,
the falling price of commodities, and an end to the capital boom, Australia's industrial sector is
now beginning to reveal how deep the impacts could be. This is evident in the recent display of
Arrium and Queensland Nickel going into administration. More bankruptcies will follow. From a
wealth perspective, Australia's current median home price is $660,000, which is the third-highest
in the world.3 New home buyers are increasingly being priced out of the housing market, which
not surprisingly is fueling a heightened sense of cynicism among Millennials and Gen-Xers
about the “great baby boomer swindle.”
All of these political and economic issues are creating a toxic environment that is ripe for the
rise of reactionary fringe movements such as those seen in several European countries and in
the United States. Australia must resist the temptation to settle for similar base forms of response.
For continued prosperity and to achieve its full potential, Australia must build on—but not rely
on—its wealth of natural resources while doubling down on new growth industries and working
toward continued reforms.
Median house prices are as of June 2015. As of September 2014, the International Monetary Fund ranked Australia the third most
expensive place to buy a house, and the Bank of International Settlements ranked Australia second most expensive.
3
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Zooming In: Australia’s Diagnosis
Billionaire Warren Buffett once quipped that he won the “ovarian lottery” by being born in the
United States in 1930. Under the current circumstances, it begs the question: What country now
offers the best future to its newly born citizens?
The Economist Intelligence Unit tried to answer this question by reviewing a variety of forwardlooking indicators covering not only material well-being but also quality of life, political freedoms,
quality of community life, and gender equality, among others. Australia ranked second after
Switzerland, making the country in many ways the envy of the world (see figure 3).
Figure 3
Australia is the second best place in the world to be born
8.5
1st Quartile
8.0
2nd Quartile
3rd Quartile
4th Quartile
7.5
7.0
6.5
6.0
5.5
Russia
Pakistan
India
Indonesia
Egypt
Philippines
Turkey
South Africa
China
Thailand
Colombia
Mexico
Argentina
Brazil
Saudi Arabia
Malaysia
Spain
Poland
United Kingdom
Japan
France
Italy
Chile
Israel
South Korea
United States
United Arab Emirates
Belgium
Germany
Ireland
Austria
Finland
Canada
Netherlands
Denmark
Singapore
Norway
Sweden
Australia
Switzerland
5.0
Sources: The Economist, The lottery of life; A.T. Kearney analysis
Can Australia maintain this position? Will future generations enjoy the same potential? Are
Australians who are in decision-making positions today making the same degree of sacrifices
for their grandchildren as their grandparents made for them to ensure future prosperity?
A formula for sustained prosperity
While the where-to-be-born index provides a useful snapshot of who is winning today’s ovarian
lottery, Australia must also think about how to win tomorrow. Digging deeper and using more
of a forward-looking economic growth and wealth creation lens, three dimensions stand out as
important drivers of sustained prosperity: productivity, innovation, and globalisation. These
three dimensions are intrinsically linked and essential to resisting the centripetal force of the
Islandisation vortex. Nobel Prize-winning economist Paul Krugman wrote, “A country’s ability to
improve its standard of living over time depends almost entirely on its ability to raise its output
per worker.” Improved productivity enables Australian companies to offer more competitive
Australia: Taking Bigger Steps
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prices, both at home and abroad, and to accumulate cash to invest in innovation. Innovation is
essential for creating new products and services (or new approaches to productivity) that are
especially valuable in the face of oncoming disruptive technologies. And globalisation gives
Australian industry access to larger, faster growing markets, while keeping companies at home
fit and competitive.
Australia’s relative positioning on these forward-looking dimensions of sustained prosperity
does not appear as strong. When compared to the world’s 40 largest economies against
productivity, innovation, and globalisation, the country is in the second quartile in each
dimension (see figure 4).
Figure 4
Australia must raise its game to achieve its full potential1
Productivity2
Q1
1 Norway
1 Switzerland
1 Ireland
2 Netherlands
2 Netherlands
3 United States
3 Sweden
3 Belgium
4 Netherlands
4 United Kingdom
4 Austria
5 Ireland
5 Ireland
5 Singapore
6 France
6 Germany
6 Sweden
7 Germany
7 United States
7 Denmark
8 Denmark
8 Finland
8 Switzerland
9 Switzerland
9 Finland
10 Canada
11 Singapore
11 Israel
11 Spain
12 Austria
12 Norway
13 Finland
Q4
9 South Korea
10 Denmark
12 Austria
14 Australia
Q3
Globalisation4
2 Belgium
10 Sweden
Q2
Innovation3
13 Singapore
13 United Kingdom
14 China
14 France
15 Canada
15 Canada
15 Australia
16 Spain
16 France
17 Australia
16 Italy
17 Italy
18 United Kingdom
18 Norway
18 Malaysia
17 Poland
19 Japan
19 Japan
19 Germany
20 Israel
20 Belgium
20 United Arab Emirates
21 South Korea
21 Spain
21 United States
22 Turkey
22 Italy
22 Israel
23 Poland
23 Malaysia
23 Chile
24 Chile
24 Saudi Arabia
24 Thailand
25 Malaysia
25 Turkey
25 Turkey
26 Russia
26 Chile
26 Russia
27 Argentina
27 Russia
27 Japan
28 Mexico
28 Thailand
28 Saudi Arabia
29 South Africa
29 Mexico
29 South Africa
30 Brazil
30 Poland
30 South Korea
31 Colombia
31 South Africa
31 Mexico
32 Thailand
32 Argentina
32 China
33 Indonesia
33 India
33 Brazil
34 Philippines
34 Brazil
34 Colombia
35 China
35 Colombia
35 Argentina
36 Pakistan
36 Philippines
36 Indonesia
37 India
N/A Egypt
37 Indonesia
37 Philippines
38 Egypt
38 Egypt
N/A Saudi Arabia
39 United Arab Emirates
39 Pakistan
N/A United Arab Emirates
40 Pakistan
40 India
Top 40 countries by 2015 GDP selected for comparison
Ranking based on labour productivity per hour worked in 2014 US$ (with updated 2011 PPPs) for year 2011 and year 2015; source: The Conference Board
3
Innovation change from 2009 to 2012; source: GII Index (2015)
4
Globalisation change from 2009 to 2012; source: KOF Index (2015)
Source: A.T. Kearney analysis
1
2
Australia: Taking Bigger Steps
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In a world that is nearly standing still, such second-quartile performance and incremental
improvement might be enough. But in the face of unprecedented disruptive technologies and
other shocks from elsewhere in the world, there can be little doubt that a new and intensified
period of creative destruction with more firms going bankrupt—and getting created—lies ahead.
Combined with the volatility in the global operating environment, 20th-century economist
Joseph Schumpeter’s gale of creative destruction could become Schumpeter’s hurricane.
The Coming Disruptive Technologies
The wave of disruptive technologies approaching the shores of Australia (and the rest of the
world) is unprecedented in its scale, scope, and speed. Over the next 10 years, 12 disruptive
technologies will cross the chasm, gaining adoption not just from technology enthusiasts but
also from the majority of early adopters, with profound implications for the structure of the
Australian economy (see figure 5).
Figure 5
12 disruptive technologies are hurtling towards Australia; four are already here
Near term (now)1
Medium term (<5 years)
Longer term (>5 years)
Mobile
technology and
applications
Cloud
technology and
applications
Virtual reality
3D printing
Autonomous
vehicles
Advanced
robotics
Connected mobile
devices and
supported
applications
Data, applications,
and services stored,
secured, managed,
and accessible
remotely
Simulation of
physical presence
in a real or
imagined world
Successive layers
of material formed
under computer
control to create
an object
Driverless or
self-directed
machines
Machines with
enhanced senses,
dexterity, and
intelligence
Internet
of Things
Renewable
energy
Blockchain
Energy storage
Genomics
Artificial
intelligence
Objects transferring
data to one another
Systems that
generate electricity
from non-depleting
natural resources
Mechanism of
storing ledgers
across a network
of connected
computers
Devices that capture
energy produced
at one time for use
at another
Reading and
writing the genome
of organisms,
including humans
Computer system
capable of
generating its
own insights
Technologies are grouped by the estimated time it takes for the technologies to “cross the chasm” between the early adopters (technology enthusiasts) and
the early majority (pragmatists). The idea of such a chasm is introduced by Geoffrey A. Moore in his book Crossing the Chasm, HarperCollins, 1991
Source: A.T. Kearney analysis
1
These 12 technologies have a double edge: they could negatively impact or even eviscerate
elements of Australia’s economy, or they could offer unprecedented opportunities to achieve
accelerated growth on a global scale. This is not necessarily an either-or proposition. These
technologies could positively impact one industry and adversely impact another. For example,
electric car batteries will positively impact the electricity and solar power industries but will
negatively affect the oil and gas industry.
Australia: Taking Bigger Steps
8
One need not look far to see how these technologies are rapidly combining to change how we
operate as individuals, businesses, and as a society. Today, Australians can go to the beach, park
the car, and pay for parking by inserting a credit card into a solar-powered parking meter that
remotely connects to a network and debits the transaction from a financial platform. By 2025,
Australians will be able to order driverless, battery-powered vehicles for a ride to the beach and
pay for the trip using a cryptocurrency.
These disruptive technologies will not come all at once but in waves. The first wave is already
here. Mobile technology and applications are enabling consumers to digest digital information
and entertainment anytime, anywhere, while enabling industry verticals to monitor performance of machines in the field (for example, logistics supply chains) or improve workforce
safety and productivity (such as police officers on the beat). The Internet of Things (IoT) is
connecting our homes, our cities, our pets, and even ourselves with wearables such as Fitbits
and Apple Watches. Cloud technology and applications are enabling businesses to bypass
expensive infrastructure investments and pay for computing power and storage on a usage
basis and allowing consumers to store personal information in cloud platforms that do not
become obsolete every time they upgrade their hardware. Though adoption is slower than
predicted and heavily subsidised, renewable energy continues its march forward, generating
14 percent of Australia’s electricity in 2015 and forecast to generate 24 percent by 2020.
By 2025, Australians will be able to order
driverless, battery-powered vehicles for
a ride to the beach and pay for the trip
using a cryptocurrency.
The second wave is still emerging, but adoption is accelerating. Though yet to gain wide-spread
application, virtual reality offers a new genre of entertainment, but perhaps its most significant
impact will be in online learning and education and in transforming business communication.
The initial foray of virtual reality into education is centred on the hard sciences, such as biology,
but the opportunities are immense. Imagine students learning about the wonders of the world
by being virtually transported to the Pyramids of Giza. A large number of manufacturing
companies are exploring the use of 3-D printing for prototyping; lower costs, better speed, and
greater ease of use will drive the large-scale adoption of industrial 3-D printing capabilities. For
example, Anatomics, a Melbourne-based medical device company, used 3-D printing to create
a metal vertebra that has been implanted into a patient’s spine, and L’Oréal has announced
plans to 3-D print skin.
Cryptocurrencies elicit sceptical reactions from many financial industry experts, but companies
such as Expedia, USAA, and 1-800-Flowers are already allowing customers to make purchases
using Bitcoin. Underlying Bitcoin is a technology with a much broader application. Blockchain,
a distributed database that maintains a ledger of transactions, will impact not only finance
services, but also the luxury goods, media, and health industries, among others. More Australians
are adopting new forms of energy storage; there are already almost 4,000 fully battery-powered
vehicles on the road. Industrial use of energy storage such as grid-scale backup power in a local
distribution network are still further out.
Australia: Taking Bigger Steps
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Technologies in the third wave are more than five years away but merit the attention of today’s
corporate boards, executives, and strategy teams. Autonomous vehicles are one example,
with Google leading the way, as its autonomous fleet powered by Google Chauffeur has clocked
more than 2.3 million kilometres in California. In January, Google’s DeepMind artificial intelligence (AI) program used deep neural networks to beat the world champion at Go, the ancient
Korean game that, unlike chess, relies on intuition because it has an incalculable number of
permutations. DeepMind’s victory was achieved 10 years faster than most predicted.
Advanced robotics combine many of the above technologies—AI, mobile, cloud, IoT, and
energy storage—into a wide variety of emerging prototypes, including robots that can clean
the house, play in a band, help autistic children, provide therapy to the elderly, and remediate
a chemical weapons site. Finally, genomics is experiencing a cost curve that rivals Moore’s
law, which says computer power doubles every two years at the same cost. The Human
Genome Project took 13 years and US$2.7 billion to complete; today, a human genome can
be sequenced for US$1,000 in a few hours. Synthetically rewriting human or animal DNA is
still in the early stages of development, but it introduces profound metaphysical questions:
are we creator, healer, designer, or destroyer? For example, the new CRISPR/Cas9 gene
editing technique promises to usher in a new era in biotechnology, from curing diseases
to designing babies.
Collectively, these 12 disruptive technologies create an astounding set of implications for
Australia, both for individual businesses as well as for the country’s overall economy.
The Industrial Impact
No Australian industry is immune from these 12 disruptive technologies (see sidebar: The Silicon
Valley Earthquake). By segmenting Australia’s $1.5 trillion economy and 11.9 million-person workforce into its respective industries and mapping these industries against the 12 technologies,
one thing is clear. It is not a question of if each industry will be disrupted, but rather when it will
be disrupted, how many technologies will affect it, and to what degree each technology will
have a positive or a negative effect (see figure 6 on page 11). The following is an exploration of
how three Australian industries could be affected.
Retail has been going through the shift from bricks to clicks and now to apps for almost a decade.
However, Australian retailers have been slow to embrace their customers’ e-commerce preferences: the country’s Internet retailing is 6.7 percent of the total versus 10.1 percent in the United
States and 14.5 percent in the United Kingdom.
The Silicon Valley Earthquake
At A.T. Kearney’s annual global
partner gathering in San
Francisco in June, we met with
more than 25 disruptive organisations, including Google,
Facebook, Adobe, and Singularity
University, to take a close look
at Silicon Valley, a source of
profound change—like viewing
an offshore earthquake before
it creates a tsunami. Along with
other global innovation hubs
such as Tokyo, Boston, and Tel
Aviv, the area is incubating
disruptive technologies that
promise to transform business
and society in far-reaching ways.
Visiting the epicentre of those
changes was an emotional
experience: some people left
the meeting feeling daunted,
others inspired. But no one was
unmoved. We collectively
realised that no industry is
immune from these disruptive
technologies, including
management consulting.
Australia: Taking Bigger Steps 10
Figure 6
No Australian industry is immune to technology disruption
Disruptors
Genomics
Advanced robotics
Artificial intelligence
Autonomous vehicles
Longer term
Energy storage
3D printing
Blockchain
Virtual reality
Medium term
Renewable energy
Cloud technology
Internet of Things
Mobile tech
Disruption impact
Near term
Select
disruptive
players
GDP
($Bn)2
Number of
employees
(k)3
Retail
72
1,277
Kogan.com,
Amazon.com
Health
105
1,522
Scanadu
Manufacturing
100
848
Stratasys
Telco
and tech
47
223
WhatsApp,
Snapchat,
Google
Utilities
44
140
Tesla, Nest
Finance
141
450
Bitcoin, Nest,
Simple
Logistics
74
609
PiggyBee,
FedEx
Education
76
937
Khan Academy
Mining
139
226
Komatsu
Professional
services
96
1,020
Xero
Agriculture
36
309
The Climate
Corporation
Tourism
39
823
Airbnb
Others1
544
3,514
Total
1,512
11,900
Industry
High
Med
Impact:
High
Low
Others include construction, wholesale trade, transportation, real estate, and government
ABS Cat. No. 5206.0, table 37, Jun 2015
ABS Cat. No. 6291.0, table 04 (seasonably adjusted), Nov 2015
Source: A.T. Kearney analysis
1
2
3
Australia: Taking Bigger Steps 11
Technologies will disrupt the entire end-to-end retail value chain. Mobile and social media are
increasingly influencing consumer buying behaviours through platforms such as Groupon,
Pinterest, and Facebook. Retailers can continually yield new marketing insights on shoppers
by harnessing the vast information trove of customer data and location-based services stored
in the cloud. IoT will enable more precise, faster, and cheaper movement of goods from
production to consumption. For example, Amazon’s Dash Button and Echo bypass computers
and put ordering directly into the hands of the customer. In addition, 3-D printing will alter the
fundamental process of production, individualising it with shorter and faster fulfilment. Nestlé
and Hershey are already experimenting with 3-D printing chocolate. Lastly, renewable-fuelled
food production systems such as Sundrop Farms can generate fresh year-round produce using
solar energy and desalinated water at greenhouses located in desert areas.
Financial services has already embraced many new digital technologies to enhance the
customer experience. Today, a customer can open an account, transfer money overseas,
and manage investments in real time on a mobile phone.
However, disruptions to financial services may have only just begun. The category killer has
yet to emerge, but payments, loans, and even insurance are on the verge of being offered over
the top (OTT) of mainstream financial institutions, which are also regulated. Insured assets and
their movements can be monitored remotely to increase an actuary’s ability to measure the risks
of accident or theft or to improve asset recovery rates. Cloud technology reduces the IT infrastructure costs of the big and small players alike and increases the chances of new entrants,
including the aforementioned OTT players. Robo-advisers are helping investors increase their
returns and reduce their fees, while robotic process automation is reducing back-office costs.
Lastly, blockchain-secure cryptocurrencies such as Bitcoin could significantly reduce highly
profitable fees incurred from a variety of transactions, including foreign exchange, merchant
services, and card networks.
Mining and other traditional heavy industries will also be affected. The contribution of Australia’s
mining investment grew from 2 percent of GDP in 2002 to 8 percent in 2012, largely driven by
significant capital expansion to cater to demand from China. However, China’s economy
continues to decelerate, weakening total global demand for natural resources and driving prices
down as producers chase tonnes to prop up bottom-line results. Consequently, the focus has
shifted toward productivity necessary to maintain returns. New techniques, processes, and tools
will be needed to create a sustainable commercial model for this new normal.
Mobile machine-to-machine technology enables mining vehicle assets to be constantly
connected and remotely monitored and tracked from a central control centre, measuring for
optimal capital efficiency and anticipating vehicle maintenance requirements to minimise
downtime. Drones can survey new areas and existing operations from the air, relaying information to cloud-based, solar-powered storage facilities where sophisticated data analytics
techniques can be applied in real time to uncover new operational performance insights.
More vehicles are becoming autonomous as Komatsu and Caterpillar demonstrate their greater
productivity, and robots can be used to improve productivity in the field, especially in the
dullest, dirtiest, and most dangerous jobs.
The three industries highlighted above are symptomatic of the potential disruption to all of
Australia’s key sectors. While the extent of risk (or opportunity) may vary by specific disruption
and industry, no industry is immune, highlighting an urgent call to action.
Australia: Taking Bigger Steps 12
Figure 7
Australian companies must take bigger steps in three key areas
Discrete, business
unit-led programs
Productivity
Australia-focused
innovation
Innovation
Smaller, low-risk bets,
proximal markets
Growth and globalisation
Whole-of-company
mega transformation
Innovation
for the world
Bigger, long-term
investments
Source: A.T. Kearney analysis
Will Australia Rise to the Challenge?
The next 10 years will transform Australia’s corporate landscape, for better or for worse. We
anticipate an increasingly winner-takes-all competitive dynamic where the best offensive
approach offers the best defence. In the boardroom, patience and prudence are indeed virtues,
but in the face of a crisis, they can induce paralysis or even cause death. Over the next decade,
the businesses that play it safe and fail to anticipate—and embrace—these emerging technologies are likely to fail (see sidebar: Australia’s Choice: Defensive Crouch or Aggressive
Offense on page 14).
Boardrooms must outspokenly advocate to their shareholders that an offensive approach with
a higher risk appetite or a much longer time investment horizon will be required for success.
And in a context supportive of pursuing bigger returns, albeit with greater risks, companies
must launch sustained strategic transformations and take bigger steps in three areas: productivity, innovation, and globalisation (see figure 7).
Productivity is the platform of a sustainable strategic transformation—productivity gained
from the core business can be invested in innovation or translated into lower prices to make
products more competitive at home or overseas. Based on our work with thousands of organisations worldwide over the past 90 years to improve productivity performance, we offer
several lessons learned:
• Unproductive companies die sooner or later. Productivity is one of the vital signs of a
company. If it dips too low, the company will not survive. Growth and efficiency must go
hand in hand.
• Productivity must be CEO owned and involve the entire company. A top-down, ongoing
target with full CXO backing and written into performance metrics offers the greatest
chance of success. Unless there is a strong economic rationale to remove it, all structural
measures should be on the table, including divestiture, automation, product portfolio,
Australia: Taking Bigger Steps 13
Australia’s Choice: Defensive Crouch or Aggressive Offense
David Campese may have been
Australia’s most dazzling rugby
player. Nominated as Man of the
Tournament for the 1991 World
Cup champions the Wallabies, he
symbolised a plucky, irreverent,
aggressive, goose-stepping style
of play for which the Wallabies
have become renowned. He
scored six tries during the
tournament, but perhaps the
most scintillating moment came
in the semi-finals against the All
Blacks when Campese gathered
up a chip-kick from Michael
Lynagh, side-stepped oncoming
full-back Kieran Crowley, then,
while being tackled by Timu,
blind-threw the ball over his right
shoulder to Tim Horan, who
scored a try. Horan commented
years later that it was the best 40
minutes of rugby the Wallabies
had played in about five years.
When the Wallabies needed to
rise to the occasion, they did—
and they did so on their own
terms.
Contrast that with the Wallabies’
style of play during the 2003
World Cup (see figure). The 2003
team was no doubt one of the
great Wallabies teams—with
Sterling Mortlock’s strength up
the middle, the pace of Tuqiri,
Sailor, and Rogers out wide, and
the ferocity of George Smith and
Phil Waugh in the back row.
However, they failed to secure a
World Cup victory, even on home
soil. In the final match versus
England, England’s coach Sir
Clive Woodward, a technician
who had studied American
football training techniques,
dictated the game plan, not
Australia’s coach Eddie Jones.
Woodward played England’s
game—scrum-oriented, structured, disciplined, awaiting a
mistake to extract a penalty.
In the end, the Wallabies lost.
So what is the lesson from this
aside into Australia’s rugby
legacy? To win, Australians must
focus on their own strengths and
use an offense-first strategy.
What does a full-throated
Australian-style offensive
look like?
Figure
Australia faces two legitimate choices: protect its position, or launch an
aggressive offense
Global offensive
Defensive crouch
1991 World Cup
David Campese, Man of the Tournament; INPHO
2003 World Cup Final
The Wallabies pack down against England; Newspix
• Focus and invest in R&D and innovation
• Take risks and embrace disruptions
• Double down on traditional core business
• Pursue new international opportunities
• Structurally insulate from imminent disruptions
• Limit or exit international investments
Higher risk, higher growth potential
Lower risk, lower growth potential
Source: A.T. Kearney analysis
Australia: Taking Bigger Steps 14
pricing, sales force effectiveness, consolidation, reengineering, incentives, outsourcing,
offshoring, and sourcing.
• Productivity is a strategic capability, not a program. Many organisations attempt to address
productivity by launching a 12-to-24 month tactical program to reduce costs. True productivity is a strategic capability and a competitive advantage, but it takes many years to build
and, when attained, is difficult for the competition to beat.
• Productivity focuses on both the inputs and the outputs. Most productivity efforts focus on
cost inputs, not revenue outputs, but both should be looked at in equal measure. For example,
productivity is hugely sensitive to sales force productivity and pricing. Conversely, cutting
into capabilities that detract from long-term top-line growth is penny wise but pound foolish.
In the face of disruptive technologies hurtling towards Australian businesses, innovation is more
essential than ever. A.T. Kearney has been systematically tracking global innovation performance
for more than a decade with its Best Innovator competition, which encompasses more than
2,000 large companies in more than 20 markets. The Best Innovators have outperformed the
market by a factor of five since we began tracking them in 2003.4 What do Best Innovators do?
• Think 10X. The scale, scope, and pace of the wave of disruption is fundamentally different
from the past, requiring a new mind-set and new behaviours from board members and other
leaders. Incremental adjustments will be inadequate; much bigger bets are needed.
• Ready, fire, aim. “Innovation is 5 percent analysis and 95 percent fast and focused implementation,” said Rolf Hollander, chairman of Best Innovator winner CEWE, the European online
print services company that anticipated and capitalised on the rise of digital photography.
Meanwhile, Kodak went bankrupt after 124 years of success.
• Apply the 70-20-10 rule. Google invests 70 percent of its projects in the core, 20 percent
adjacent to the core, and 10 percent unrelated to the core. Best Innovators seek to create
a culture of yes and “what-if” thinking.
• Systematically manage innovation from the market to the market. Best Innovators clearly
define their innovation strategy and search fields; collaborate widely and source ideas from
suppliers, customers, and employees; beat their competitors to market with better products;
and exploit the products in the marketplace longer to achieve maximum profit.
Globalisation will also be essential to success. Australia has a $1.5 trillion economy with 24 million
people and a 2 to 3 percent average annual economic growth rate. Its economy accounts for
only 2 percent of the world’s GDP. This relatively small market structure eventually becomes
a constraint to growth, and leaders must look abroad to find larger, faster-growing markets.
Globalisation is not new to Australian companies, but it is the area where they have had mixed
success. This is especially the case in Asia, where the most proximate—and in our view, most
significant—opportunities lie. Engaging Asia requires a more nuanced approach than Australian
companies have pursued in the past. Forward-thinking business will need to recognise a few truths:
• There is no such thing as Asia. Asia consists of 29 countries and autonomous regions with
3.9 billion people. Twenty one Asian countries have populations larger than Australia. Each
market has a different competitive set and requires an individualised strategy.
• Both the investment timeline and the appetite for risk need to be reframed. Asian
investment offers both strategic and financial returns; the former could express itself in higher
Kai Engel, Violetka Dirlea, Jochen Graff, Masters of Innovation: Building the Perpetually Innovative Company; LID Publishing, 2014
4
Australia: Taking Bigger Steps 15
multiples, the latter in the income statement. This view can be hard to navigate for companies
focused on quarterly earnings. If existing ratios and targets are used to assess Asian investments, there will be a temptation to focus only on Australia.
• Drag-and-drop business models do not work. The value proposition, the delivery model,
and the decision to build, buy, or partner and other aspects of the business model must all
be deconstructed and reconstructed inside each market to arrive at the best strategy and
business model.
• A sense of humility goes a long way when dealing with Asian leadership. Just like Australian
corporate leadership, Asian leaders are proud of what they have achieved, are well-respected
in their communities, and have developed sophisticated cultural protocols for engagement.
Seek to understand these subtle norms. Market experience in the specific Asian markets at
all levels—from the board to the leadership team to the team on the ground—will help, but
Australian leadership must also embrace these different cultural dynamics.
The Outlooks of CEOs and Boards Must Change
We recently met with more than 20 CEOs and chairpersons to discuss their roles in determining Australia’s future. Part of our discussions centered on strategic vision and decision
making, specifically, why business continues to produce short-term answers at the expense
of long-term solutions.
From these conversations, three structural factors stood out. First, the ASX dividend yield
(at 5.5 percent) is the highest in the world—as capital markets desire it, and Australian boards
and CEOs are committed to delivering it.5 Second, less than 15 percent of ASX 200 board
members are from other countries, and less than 5 percent are from Asian countries.6 This lack
of international experience can result in a failure to identify an international opportunity or
worse, steer management away from pursuing a good one. Finally, board cultures tend to be
over-indexed to the three Cs: consensus, caution, and compliance. Chairs point to directors
who play it safe to protect their careers, and directors point to chairs who frown on provocative
outside challenges. Both admit to concerns about personal liability, with 85 percent of directors
Joe Skrzynski, AO, Co-Chairman
and Co-Founding Partner,
CHAMP Private Equity
Leigh Clifford, AO, Chairman, Qantas;
Director, Bechtel Group
Libby Roy, CEO, Paypal Australia
and New Zealand
Bloomberg, January 2015
5
6
“The Challenges of Attaining Growth,” Blenheim Partners & Macquarie University Greater School of Management, 2016
Australia: Taking Bigger Steps 16
Andy Holmes, President, BP Australasia; Peter Munro,
Partner, A.T. Kearney; Nigel Garrard, Managing Director
and CEO, Orora Limited
Ziggy Switkowski, AO, Chairman, nbn; Chairman,
Suncorp; Chancellor, RMIT University
pointing to personal liability as the reason for overly cautious decision making.7 No wonder
fewer than half of Australian CEOs believe they are adequately supported by their boards to
pursue more than incremental growth, and instead are relegated to a steady low-growth,
low-risk path.
What will it take to break out of this cycle and free Australian business of the three Cs? A wide
range of regulatory and policy issues must be dealt with—from director liabilities and franked
dividends to tax policies and labour laws. However, CEOs must be the catalyst to start the process.
CEOs and their management teams must produce bolder, more compelling and dynamic strategic
narratives that empower boards to offer shareholders and capital markets a long-term vision to
actively opt into. Yes, there will be challenges. Announcing a strategy that reduces near-term
dividends to fund long-term investments is anathema to many Australian boards and could
mean a CEO loses his or her job. But as one CEO put it, “that's what we’re paid for.”
Together, we devised three ways in which boards can immediately help their CEOs deliver
sustained long-term success:
• Stretch the time horizon of expectations; short-term incentives for CEOs and executive teams
are too big and planning cycles are too short
Peter Harmer, CEO, IAG
Paul Laudicina, Partner and Chairman Emeritus,
A.T. Kearney; Chairman, Global Business Policy
Council
AICD, Director Sentiment Index, November 2015
7
Australia: Taking Bigger Steps 17
• Focus on the real audience—on shareholders who want long-term gains rather than highvelocity day traders
• Actively engage with government to help instigate the needed reforms to labour, tax, and
other industry impediments
In the end, we all agreed that for Australian corporations to grow and prosper, boards and CEOs
need to take a good long look in the mirror. “If we want change, the change begins with us,”
explained one executive. Another quipped: “If not you, then who? If not now, then when?”
Carpe Diem, Australia
The wealth and prosperity Australia currently enjoys come partly from good fortune and partly
from design. With abundant land and natural resources, a stable government, a strong sense of
civic duty, and generally sound business practices, Australia is in many ways a role model for
other countries. Indeed, the country offers a great future to its children and grandchildren.
However, in the next decade and beyond, the global operating environment will experience
a fundamental dislocation from the past. Disruptive technology will create fewer but bigger
winners and more losers. Success will require increasing Australian businesses’ risk appetite,
discovering more profound ideas, pursuing more radical business models, and taking bigger
steps. Perhaps the biggest challenge for all of us will be doing things different.
The question is, in the face of future adversity, how will Australian leadership respond?
Authors
Paul Laudicina, partner, chairman
emeritus of A.T. Kearney and chairman
of the Global Business Policy Council,
Washington, D.C.
[email protected]
Erik Peterson, partner and managing
director of the Global Business Policy
Council, Washington, D.C.
[email protected]
Adam Dixon, partner and leader of the
Australia-New Zealand Communications,
Media, and Technology practice, Sydney
[email protected]
Sarovar Agarwal, principal,
Melbourne
[email protected]
The authors wish to thank Peter Munro, Nigel Andrade, Chong Feng, Ariel Hersh, Sally Yue, Samuel Brannen,
and Terry Toland for their valuable contributions to this paper.
Australia: Taking Bigger Steps 18
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