I am pleased to report that there's an unrecognised dynamism at work among Australian businesses, at odds with the uncompetitive old economy image often used to portray Australian industry.

This news comes from the latest Australian Business Foundation research conducted by the Australian Expert Group in Industry Studies (AEGIS) at the University of Western Sydney under the leadership of Professor Jane Marceau. The study, funded over two years by the Australian Research Council and with the Australian Business Foundation as industry partner, is published in a report called Selling Solutions: Emerging Patterns of Product-Service Linkage in the Australian Economy.

Let me share with you the headline messages from this research.

• Contrary to popular belief, manufacturing in Australia is not in decline.

Current perceptions of the decreased importance of Australian manufacturing and the arrival of the 'service economy' are found to be too simplistic.

To the contrary, both manufacturing and service firms are responding to the competitive challenges of tough and crowded markets by linking products and services in innovative ways. This blurring and bundling of products and services is reshaping not only manufacturing industry, but the pattern of competitive business activity in Australia.

• Australian firms are devising new competitive strategies that are creating fresh customised business offerings by linking products and services together in diverse ways to meet customer needs.

Product-service packages were found to be widespread and diverse. Nearly ¾ of the manufacturing firms surveyed as part of the study reported that they incorporated and sold services in their product offerings to customers.

Typically these included engineering, prototyping, design and testing services during the production process, and services like maintenance, training and information/help desks at or close to point of sale. This was the case across the board – from metal manufacturers to electronics firms to pharmaceutical companies.

Service firms were also adding value to physical products acquired from manufacturers by bundling them with a vast array of services. Typical cases include computer and telecommunications companies selling total solutions of hardware, customised software, finance, technical support and upgrades. Another example is that of the hospital surgical supplies provider now sourcing a variety of products and linking them into packages which have just the right number of sutures, instruments and so on for a given surgical procedure.

Large scale, complex and unique construction or infrastructure projects (like building, owning and operating an airport or a sports stadium) provide yet another example of the mixing of products and services to deliver an entire, highly customised, once-off or small batch project.

• This emerging pattern of product-service linkage is a sign of a modern dynamic economy transforming itself to meet the demands of new markets where the customer is king.

Firms are blending and bundling products and services to:

• retain their customers;
• add value, while reducing costs and risks; and
• distinguish themselves by expanding and customising their offerings.

Such behaviour is evidence of new competitive strategies being adopted by Australian firms so they can succeed in an increasingly volatile and globalised business environment of cheaper products, shorter product cycles, faster business imitations and saturated markets.

• Competing by linking products and services drives Australian firms to be more innovative and knowledge-intensive.

Devising new product-service packages stretches the technical, managerial and marketing capabilities of firms, resulting in distinctive know-how and intelligence which in turn, drives their innovation and competitiveness.

Innovation through product-service packaging has far-reaching effects on business competitiveness as the firms involved tend to:

• collaborate with others, including customers, at home and abroad and so, increase their level of knowledge or technical proficiency;
• retain customers and thus spend less energy on recruiting new ones;
• generate new skills inside their enterprise, notably through different mixes of technical and market-related skills; and
• be flexible in reorganising their operations to suit and satisfy customer needs.

Such innovation, because it does not always require R&D investment, often goes unrecognised in Australia.

Australian businesses can use the lessons about new competitive strategies from this study as a yardstick to improve the performance of their own enterprises.

This study holds a warning against making business strategy (and public policy) decisions based on a simplistic view of manufacturing in decline and services on the rise.

The reality is an emerging convergence between manufacturing and services that points to new competitive capabilities in Australian firms.

To foster such capabilities, the messages for all Australian businesses, irrespective of their sector of the economy, are:

• Collaborate with other firms and organisations, like research and education bodies.
• Increase the number and broaden the range of services you offer.
• Stay close to customers.
• Re-think the internal organisation of your firm's activities.
• Invest in new skills.

The Australian Business Foundation believes the findings of this study are important because it allows us to better understand the rich dynamic between manufacturing and services in Australia and the new competitive capabilities emerging. This makes a refreshing change from fruitless debates about whether Australia is an old or new economy.