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12th Annual Conference Research Lounge RMIT 5/28 501 Swanston St Melbourne 10 October 2011 What Keeps The CEOs Awake At Night Phil Ruthven, Chairman WHERE KNOWLEDGE IS POWER Topics 1. Sleepless Nights 2. A New Age Business 3. The Intelligent Organisation 4. Innovation & Productivity 5. Keys To Success 6. Australia’s Global Context 1. Sleepless Nights Keeping Us Awake 1. 2. 3. 4. 5. 6. 7. 8. 9. 9. 11. 12. What is happening to my industry and markets Where is the economy going What will happen to interest & exchange rates Keeping good staff and getting more of them Managing the Net Generation employees (< 28) Government stability, sensible IR laws More productivity to compete locally and overseas Best way to grow the business Raising capital (and at good rates if debt capital) My kids, brother in law and mother in law! Surprises, I don’t need them Heaps of other things 2. A New Age Business Ages Of Economic Progress GDP @ Constant F2011 Prices Australia 1788-2011 and onwards 2200 2000 Hunting Age Agrarian Age Industrial Age 1800 1400 1200 1000 Enlightenment Age ? Age Hunting, trapping, fishing, crafts, religion Agriculture, Mining, Banking, Commerce Transport the major utility 800 600 400 An Industrial Age is when Manufacturing and Construction dominate the economy (c. 30-50%+ of GDP) Electricity, gas & water, and telephony, the Industrial Age utilities Quaternary service industries IC&T the Infotronics Age utility Quinary service industries Imbedded intelligence, neural network Programs. More electronic “guardian angels” and other new technologies 200 0 1780 1790 1800 1810 1820 1830 1840 1850 1860 1870 1880 1890 1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000 2010 2020 2030 2040 2050 2060 2070 2080 2090 2100 GDP $ billion 1600 Infotronics Age Industrial Year, ended June IBISWorld 26/05/11 The Big Changes For Enterprises In The New Age , 1965-2040s Business reverses from production to market orientation Protectionism fades, and international trade grows Goods industries lose importance as share of GDP Over 100 new service industries emerge New utility (IC&T), adding to old (electricity, telephony etc) Outsourcing of non-core functions and activities Importance of intellectual property (IP) over hard assets OH&S becomes de rigueur; ditto world best practice (WBP) Old style employment gives way to contractualism SMEs increase share of economy (new industries, outsourcing) Emergence of franchising, and strategic alliances Adopting an information mindset, a condition of survival Expectations of a New Age business 1. Profitability and growth ROSF (after tax) of 4 times the bond rate Growth better than the industry average International expansion where possible 2. Uniqueness in: Product, IP and operations Organisational culture 3. World best practice in: Operations Value for money for customers Respect for the society in which it operates Relations with other stakeholders Treatment of the natural environment Australian Profitability by Cohorts Return on Shareholder Funds (after tax), 1300 Best Large Enterprises Best 50 2nd 50 3rd 50 4th 50 5th 50 6th 50 7th 50 8th 50 Average 9th 50 10th 50 11th 50 12th 50 13th 50 14th 50 15th 50 16th 50 17th 50 18th 50 19th 50 20th 50 21st 50 22nd 50 23rd 50 24th 50 25th 50 26th 50 5 years to F2010 183.1 51.3 34.5 23% 34% 41% 64% 17% Percent -60 > Best Practice > Average > Cost of capital > Bond Rate Losses 29.2 25.3 22.3 20.4 17.2 16.7 15.5 (ROSF 22.4%) (ROSF 15.3%) (12.2%) (5.6%) 14.2 12.6 11.6 10.5 9.4 8.4 7.1 6.1 4.9 4.0 2.8 1.6 0.4 Includes private and government businesses -1.1 -4.4 -12.2 -40.0 -50 -40 -30 -20 -10 0 10 20 30 40 50 60 Source: IBISWorld 22/11/10 Australian Profitability By Major Industries Return on Shareholder Funds (after tax), Top 1350 businesses Mining Retail Trade Communications Hospitality Finance & Ins Construction W'Sale Trade Average Prop & Bus Serv Agriculture Other Services Utilities Cult & Recn Serv Manufacturing Education Health Transport Government Admin. ROSF (%) 5 years to F2010 29.2 22.2 21.0 17.3 17.2 14.7 14.1 12.2 11.2 9.7 9.6 8.6 8.1 Are there bad industries, as suggested by this chart or really a number of industries with bad management practices, oldfashioned traditions and/or interfered with by governments and their debilitating bureaucracies ? 7.1 4.9 4.9 4.1 8.2 3.0 0 5 10 15 20 25 30 35 40 Source: IBISWorld 22/11/10 Australian Profitability By Major Industries Return on Shareholder Funds (after tax), Transport 4 companies Prop & Bus Serv 16 companies Cult & Recn Serv 3 companies Best 100 5 years to F2010 85.4 69.6 79.8 1 company Healh Finance & Ins 9 companies Manufacturing 21 companies 63.8 57.5 57.5 All Industries 58.2 Retail Trade 10 companies Construction 6 companies Wholesale Trade 23 companies Other Services 54.0 52.5 51.6 1 company Mining 49.0 4 companies Communications 1 company Education 1 company Percent 56.1 0 10 Includes private enterprises 42.2 41.6 20 30 40 50 60 70 80 90 100 110 Source: IBISWorld 25/02/11 Corporate Profitability to 2010 (Return on Shareholders Funds, after tax) USA Largest 30 Listeds Australian Largest 30 Listeds 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 30 28 26 24 22 20 18 16 14 12 10 8 6 4 2 0 3. The Intelligent Organisation The Total Environment For My Business My Firm Our © IBISWorld Some of The Developments & Challenges World Environment Economic Environment High confidence levels Rising energy prices Impact of BRIC Emerging borderless world Terrorism and epidemics Resource Environment Sustained strong growth Growth in services Vs goods Rising trade as % of GDP Emerging sellers market Ecological challenges Community Environment Skill shortages Move to contractualism Lifelong education & training Living longer, ageing Government Environment Geographic shifts Generational differences Changing spending patterns Polarisation of incomes & wealth Rationalism Vs humanism Balanced/surplus budgets Among lowest taxed in OECD Excessive laws & regulations Basaically strong growth Mining, Infrastructure, IC&T Labour Environment Finance Environment Marketplace Environment Managed funds growth Service products dominant Ease of access to capital Rising interest rates Exchange rate volatility Rising fees Offshore markets Changing advertising mix Rationalisation of markets Importance of CRM programs Services Environment Industry Environment Growth due to outsourcing 465 classes of industry Appetite for information/advice Rising legal and A/C costs Lifecycle phase of industry Service industries dominant Rising foreign ownership Less government ownership ACCC & ASIC Progressive rationalisation Goods & Materials Rising commodity prices More sourcing offshore Falling importance within GDP In the Industrial Age businesses generally planned and operated on an inside-out basis. The external business environments were largely opaque to an enterprise which tended to be fortress style; and enterprises were opaque to outsiders who saw enterprises as secretive. In the New Age businesses must now forecast, plan and operate on an outside-in basis. The business environments are becoming transparent to enterprises, and in turn the enterprises are becoming more transparent to outsiders. How much do we need to know about . . . The Influential Environments (4) 1. The world environment, growth, regions, nations, demography etc. ? 2. National resources,developed (infrastructure, IC&T), natural (resources, ecology) ? 3. Our community, its changing demography, lifestyles and spending ? 4. The economic environment, the “business weather” conditions ? The Operating Environments (6) 5. The government environment, laws, taxes, policies, incentives ? 6. The finance market, equity, debt, exchange/interest rates, treasury ? 7. The services market, to outsource none-core activities and functions ? 8. The labour market, for executives, employees and customers ? 9. The purchases market, raw materials, semi-/finished goods, prices ? 10. Its market, local and global ? The Immediate Environment Our own industry, WBP, size, growth & disposition, competitors? Our Own Business Its IP, financials, sales, operations, TQC, productivity, R&D, HR etc. ? The Key Questions I. What are the golden rules for being a successful and world best practice (WBP) business? II. What business or businesses are we in (as officially defined by ANZSIC class, not arbitrarily)? III. What makes our industry tick, and where is it going? IV. How well do we do in our industry and at large V. What market or markets do we serve? VI. What is happening to the business environment within which we operate? VII. Do we have a winnable strategy and business plan? VIII. Are we appropriately structured with a professional first line team and operationally managed to achieve a winnable strategy? Business Intelligence Expenditure on data and information, F2011(E) 5.6% of all business revenue ($ 215 billion in Australia) IBISWorld 30/09/11 Nearly two thirds of all business data, information and intelligence in Australia in F2010 will be internally generated. How much value-adding do we do with this, to help with planning, efficiency, revenue growth, CRM and profitability? Internally Generated Information? 65% of all business spending CEO ICT & Board CIO? $140billion in Australia in F2011 © IBISWorld Over one third of all spending on data, information and intelligence by enterprises in F2010 will be outsourced. This proportion has been steadily increasing from less than 10% half a century ago to an estimated 35.5% this year. We are spending more on information and also outsourcing more of it. Type Of Outsourced Business Information Australia F2010 (E) Exploratory Online Info ISPs Data Process Mkt. Research 2.0% 1.7% 1.5% 1.3% Conferences/ Meetings2 Scientific Research 5.8% News/ Books/ Mags. 3.1% 1 1.2% Other 2.2% 26.2% Cons. Eng. + Architects 20.3% Legal Services Accounting Services 10.6% Note: 1 Public Relations Credit Agencies O ther 0.7 2 Includes accommodation, travel, registration fees, speakers etc 2% of national revenue ($68.8 billion Expenditure) IBISWorld 18/11/09 Purpose Of Outsourced Information About What? F2010 (F) Exploratory Government World Services Resources Own Industry 9.8% 1.0% 0.8% 0.5% 0.5% 71.6% About Our Own Company1 From Accounting firms, Legal firms, Management Consultants, Consulting Engineers etc Spending on information about the external environment ($19.5 billion) is 28% of all outsourced spending and 10% of all spending $ 68.8 billion expenditure (Australia) IBISWorld 17/11/10 Of all the business spending on data, information and intelligence $195 billion - only 10% is spent on issues in the external environment. But this spending is growing nearly 2% pa faster than the economy in response to the need to plan on an outside-in basis, displacing the old inside-out approach of the secretive Industrial Age? The Imperative of Going Up The Information Chain The Knowledge Pyramid By Volume Vision By Value Vision & Strategy Vision Decreasing Value Unique IP Wisdom Unique IP Expert Opinion Wisdom Expert Opinion Expert Opinion Intelligence Intelligence Information Information Data Data Hearsay, Rumour, Scuttlebut Hearsay Increasing Value But interesting! Source: IBISWorld 18/11/09 4. The Innovation & Productivity Imperative Standard Of Living Ladder GDP/capita ($USppp’000) 2010 Qatar Luxembourg Singapore Norway Brunei USA Switzerland Australia Canada Austria Ireland Kuwai Sweden UAE Denmark Iceland Belgium Germany UK Taiwan Population Australia 22.5 12 of the Top 20 have populations smaller than Australia 0 10 20 30 40 50 60 70 80 90 IMF: 04/04/11 Productivity Growth Change in GDP/hours worked 1903-2011 (3-year moving average) 10 9 8 7 6 5 4 3 2 1 0 -1 -2 -3 -4 -5 Percent 1.7% per annum New Age average (1965- onwards ) 1900 1905 1910 1915 1920 1925 1930 1935 1940 1945 1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015 2020 2025 2030 Average to 1964 (the Industrial Age) 2.07 Average after 1964 (Infotronics Age) 1.65 Year Ended June ABS/IBISWorld 30/09/119 Productivity 5.0 4.5 4.0 3.5 3.0 2.5 2.0 1.5 1.0 0.5 0.0 -0.5 -1.0 -1.5 -2.0 June 2011 New Age average 1.7% per annum 1960 1962 1964 1966 1968 1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020 % GDP per hours worked (4-quarter moving average) to Source: ABS Cat NO 5206.0 IBISWorld 15/08/11 Australian Industries Productivity 5 year growth to F2011, % p.a (IGP / hour worked) Communications/Media 5.2 Agriculture 4.8 Finance & Ins 3.5 Retail Trade 2.4 Admin Serv 1.3 Manufacturing 1.2 Construction 1.1 Arts & Recn 0.8 Transport GDP W'Sale Trade Prof & Tech Serv Long term average productivity 1.8% pa 0.6 0.6 The shortfall of 1.2% pa over the past 5 years fully explained by Mining and Utilities which were both shockingly negative 0.3 0.3 0.2 Govt Adm/Def Health 0.0 -0.1 Education Other Services -1.4 Hospitality -1.9 -2.2 Real Estate/Rent Utilities Mining Percent Growth -8.4 -11.0 -12 -11 -10 -9 -8 -7 -6 -5 -4 -3 -2 -1 0 1 2 3 4 5 Source: ABS 5204.25 07/09/11 6 5. Keys To Success What the Best Enterprises Are Doing 1. They stick to one business at a time and do not diversify 2. They aim to dominate some segment (s) of their market 3. They are forever innovative, valuing the business’ IP. 4. They outsource non-core activities to enable growth. 5. They don’t own “hard” assets. 6. They have good and professional financial management. 7. They plan from the outside-in not the inside-out 8. They anticipate any new industry lifecycle changes. 9. They follow world best practice for their own type of business. 10. They develop strategic alliances. 11. They develop unique organisational cultures. 12. They value leadership first and management second. 1. Stick To One Business At A Time (Focus) In the New Age, specialisation is critical - being in just one of the nation’s 465 classes of industry. It is very difficult to reach world best practice in even one industry class these days. Growth is best sought geographically (regional, global) rather than through diversification. And yes, there are some exceptions, but not many. See next slide. The 100 Best Companies ROSF after tax (%), 5-Year Average to F2010 By Focus Focused (mainly single industry class) Theme Conglomerates Classic Conglomerates 99 1 0 74.0% 117.3% - 100 74.2% Foreign Owned 50 57.3% Private Listed 16 34 348.4% 59.0 % 100 74.2% By Ownership Notes: 1 Excludes monopolies. Revenue $62 billion (1.7% of nation’s total revenue) Source: IBISWorld 23/02/11 2. Aim To Dominate Something (Positioning) Secure a safe industry position in your chosen industry to be master-of one’s-owndestiny by dominating something. Domination can be of: the whole industry class (being a major); or one category in the industry (a niche player); or one product group1 (an ultra-niche player); or one product category ( a boutique operator). Note: 1 Or a customer segment; and occasionally a geographic area Industry Share Strategy (positioning for a winnable war) 5% 1-5 % No-man’s-land Major Player 25-75% No-man’s-land (un-winnable position) Caught between majors (“sledgehammers”) and niche players (“knee-cappers”) Source: IBISWorld A “major” player (ie 25%+ of an industry’s revenue) needs to have 35-50% shares of the product groups in which they choose to compete. A “niche player” (5% of an industry’s revenue) needs to dominate a market segment (50%+ share), usually product based but can sometimes be geographic based. An “ultra niche” specialist (1% of an industries revenue) dominates a product group with a 75%+ share. A “boutique” or “exotic” operator (0.1% share of the industry’s revenue) owns a product line outright with no competitors. 3. Forever Innovative (Pursuing Intellectual Property) Patents, formulae, unique technology, processes and brands were valued in the Industrial Age, but rarely reflected in balance sheets. In the New Age, intellectual property is a more complex “cocktail”. It consists of skills, special competencies, unique systems, winning cultures as well as patents, copyright, unique formulae, unique technology & processes, brand & mast-head strength etc. It is the "holy grail" of an enterprise, its core and its most valuable balance sheet asset - whether recorded as such in dollar terms or not. Intellectual Property Intellectual property can best be described as a “cocktail” of: • skills, special competencies, unique systems; • patents, trademarks & brands; • organisational culture, customer relation • protocols; vision, plans and documented achievable strategies. It is the "holy grail" of a enterprise, its core and its most valuable balance sheet asset, whether recorded as such in dollar terms or not. 11. Developing A Unique Culture A unique culture is about attracting and keeping good people to your business, and helping develop ordinary people into extraordinary people. This is built on a base of world best practice principles of human resources management. But a unique culture goes well beyond the basics: it needs to have special elements of both a tangible and intangible nature. No matter how often we say it, employees are not a firm’s most valuable asset, since slavery has been outlawed for some considerable time! But they can be “valued”, and a unique culture is vital to this goal. 12. Leadership Leadership sits above management. It is, by nature, demanding of special attributes such as loneliness in ultimate decision making (after full consultation), with no voting. And, sometimes, no consensus. It is non-gender specific (unlike management which favours females in the New Age of service industries). Leadership involves more external focus than internal: the opposite of management. Apart from listening to experts and confidantes, it involves communicating directly with major customers at least once a year. 6. Australia’s Global Context World GDP Growth Real growth (PPP), 1950-2012(F) 12 10 2008 2009 2010 2011 2012 Purchasing Power Parity (PPP) terms 8 6 3.2% -0.7% * 4.1% 3.6% (F) 3.7% (F) Per cent 4 1950-1969 growth in US$ market terms 2 0 -2 * The world decline in 2009 was -2.0% when measured in $US market price terms -4 -6 -8 -10 IMF/Economist//IBISWorld: 11/09/11 2030 2025 2020 2015 2010 2005 2000 1995 1990 1985 1980 1975 1970 1965 1960 1955 1950 1945 1940 -12 World’s 30 Largest Economies Netherlands Argentina Saudi Arabia Thailand S. Africa Egypt Pakistan Colombia Malaysia Belgium 0.9% 0.8% 0.8% 0.8% 0.7% 0.6% 0.6% 0.6% 0.6% 0.5% 2011 (F) Purchasing Power Parity (PPP) terms Rest of World (198 nations) 16.1% 19.4% USA 11th – 20th Nations 14.6% 2.3% India 3.9% Mexico S. Korea Spain Canada Indonesia Turkey 2.1% 2.0% 1.8% 1.8% 1.4% 1.3% Australia 1.2% 17th Iran Taiwan Poland 1.1% 1.1% 1.0% 5.1% World’s 228 nations US$ 78.1 trillion IMF/IBISWorld 08/02/11 World’s 30 Largest Economies Netherlands Argentina Thailand S. Africa Egypt Pakistan Colombia Malaysia Nigeria Belgium 0.8% 0.8% 0.8% 0.7% 0.7% 0.6% 0.6% 0.6% 0.6% 0.5% 2015 (F) Purchasing Power Parity (PPP) terms Includes H/K (0.4%) and Taiwan (1.1%) Rest of World (198 nations) 13.7% China 2.6% 18.7% 5.1% Italy S. Korea Canada Spain Indonesia Turkey 2.0% 1.9% 1.6% 1.6% 1.5% 1.2% Australia 1.1% 17th Iran Poland S. Arabia 1.0% 1.01% 0.8% 6.4% World’s 228 nations US$ 99.3 trillion Wikipedia & iBISWorld 08/02/11 The World’s Economic Regions In 2011(F) Share of World GDP (ppp basis) Eastern Europe W&C Europe North America 3.7% 21.7% Indian 23.3% ME 5.4% S-C 6.8% Africa C&S 3.9% Asia Pacific 28.9% America 6.3% 2011 World GDP, $US 78.1 trillion IBISWorld 08/02/11 World Regions Importance Changing importance, % of World GDP (ppp terms) 1870 1913 1950 2015 (F) 12.7% 2.0% 22.8% 30.5% 3.5% 33.6% 21.9% 6.0% 6.7% 19.0% Year Nth America C & S America Western Europe 35.5% 27.3% 7.6% 5.5% 4.1% 3.6% 12.2% 4.0% 8.6% 7.7% Eastern Europe Middle East Africa Indian S-C 9.6% 2.7% 3.6% 7.6% 4.2% 17.0% 16.3% 1913 2.7 1950 5.3 26.1% 1870 1.1 31.8% 2015 99.3 Asia Pacific GDP (trillion) Source: OECD 08/02/11 Asia Pacific Economy GDP ppp terms 2011 Phillipines Malaysia Thailand Australia 2.8% Indonesia 4.1%% Singapore Vietnam NZ Myanmar Cambodia Laos PNG Other 1.4% 1.3% 0.6% 0.4% 0.1% 0.1% 0.1% 1.1% Others 5% 4.8% *Korea *North Korea 47.2% 7.0% 0.19% South Korea 6.93% China $21.2 trillion total Source: International Monetary Fund, Oct 2010 Asia Economy Asia Pacific + Indian S-C ppp terms 2015 (F) Other A-P 0.3% Singapore Vietnam Philipp Malaysia Thailand 1.0% 1.1% 1.2% 1.5%. 2.0% Other Indian S-C 3.1% Greater China 47.9% India 16.4% 44.0% China 13.0% Japan NZ 0.4% 2.8% H/K 1.1% $US 38.9 trillion (39.8% of world GDP) Source: Wikipedia/ IBISWorld 18/02/11 Economic Growth: China 24 20 16 12 8 4 0 -4 -8 -12 -16 -20 -24 -28 SSBC/IBISWorld: 18/09/11 2022 2018 2014 2010 2006 2002 1998 1994 1990 1986 1982 1978 1974 1970 1966 1962 1958 1954 8.2% average 1950 Per cent Real growth 1950-2012 (F) SSBC/IBISWorld: 18/09/11 2018 2014 2010 2006 2002 1998 1994 1990 1986 1982 1978 1974 1970 1962 1958 1954 16 14 12 10 8 6 4 2 0 -2 -4 -6 -8 -10 -12 1966 Real GDP growth 1950-2012 (F) 1950 Per cent Economic Growth India Economic Growth Indonesia 6.0% 2018 2014 2010 2006 2002 1998 1994 1990 1986 1982 1978 1974 1970 1966 1962 1958 average 1954 18 16 14 12 10 8 6 4 2 0 -2 -4 -6 -8 -10 -12 -14 1950 Per cent Real GDP growth 1950-2012 (F) SSBC/IBISWorld: 18/09/11 Economic Growth Japan SSBC/IBISWorld: 27/09/11 2018 2014 2010 2006 2002 1998 1994 1990 1986 1982 1.4% pa 1978 1992-2007 3.8% pa 1974 1977-1991 8.5% pa 1970 1961-1976 1966 1962 1958 1954 16 14 12 10 8 6 4 2 0 -2 -4 -6 -8 -10 -12 1950 Per cent Real GDP growth 1950-2012 (F) Economic Growth: Australia 2018 2014 2010 2006 2002 1998 1994 1990 1986 1982 1978 1974 1970 1966 1962 1958 3.5% average 1954 16 14 12 10 8 6 4 2 0 -2 -4 -6 -8 -10 -12 1950 Per cent Real growth 1961-2012 (E) SSBC/IBISWorld: 27/09/11 To download this presentation go to: www.ibisworld.com.au Enter details here to download presentation ruthven ACTKM