Question the Obvious

After seven years of research on contemporary and emerging business issues by the Australian Business Foundation as an independent, business-sponsored think tank, we have learned something about innovation and Australian firms competing in a knowledge-based economy.

The overwhelming intelligence from the Australian Business Foundation's research is that the reality is not what it seems. Don't be satisfied with conventional wisdom and glib answers. Probe beyond the obvious.

Among the myths about Australian innovation are the following:

• Australians are great inventors but poor commercialisers.
• Manufacturing and old industries are in decline and service industries are on the rise.
• All the action for future competitiveness lies with clever emerging frontier technologies.
• Real red-blooded innovation comes only from new scientific discoveries and technological breakthroughs.

Any innovation worth its name is transformational or disruptive, not just tinkering with incremental product enhancements.

In short, a clear distinction is made between the old economy and the new high tech knowledge age in which we are living. Well, the Australian Business Foundation contends that the picture of Australian innovation and the knowledge economy is messier, richer and much more interesting. In fact, the new economy is exactly like the old economy – only faster, more interconnected, with blurred boundaries and with more diverse ways for enterprises to create value and wealth from their know-how and know-who.

Let me share with you key insights from the Australian Business Foundation's body of work on two fronts:

• perspectives on the critical drivers and forces for change impacting most strongly on Australian businesses now and in the immediate future; and
• understanding about the realities of business innovation and how to boost innovation in Australian enterprises.

Drivers of Change


The key factors at a societal level that are impacting most on business competitiveness emerge particularly from an Alternative Business Futures to 2015 study done by ABF with futurists, Global Business Network Australia. The key factors are:

• Globalisation – the increasing free flow of goods, services, information, capital and skills around the world and the debates about who wins and who loses from the effects on national sovereignty, cultural identity, political decisions, global trading arrangements and the speed and ease of business imitations.
• The sheer transforming power of advances in information and networking technologies to the way we do business, the things we produce, how we act as consumers and the very bases of competition in industry and commerce. Related to this are the new skills and competencies required to compete in this environment.
• The power of the new consumerism, with production decisions shifting increasingly from producers and owners of capital to consumers who are invariably better informed, more articulate and aware of their bargaining power.
• The rise of the knowledge economy and the ascendancy of intangibles, where what you know is more important that what you own and use. The creation, use and diffusion of knowledge is more decisive to successful business performance than the traditional means of production.
• Both the advent of new technologies such as microelectronics, nanotechnology, genetics, new materials and biotechnology and the convergence and recombination of old technologies in the areas of multimedia, information technology, and telecommunications are likely to revolutionise old industries and preconceptions about how we go about our daily lives.
• The rising importance of continuous innovation and lifelong learning in a world competing on the basis of wide and fast dissemination of information and knowledge. But, at the same time, recognising the limits to the value of intellectual property and its protections, given the relative ease of information flows and loss of first mover advantage. Related to this is also the recognition of the limits to the power of governments to effectively regulate the online, open, connected knowledge economy.
• Rethinking international business location decisions, where "place" is less significant than "people". This has implications not only for immigration, but for investment attraction and foreign ownership policies.
• Consideration of Australia's place and scale at the fringes of geopolitics, where in global terms Australia is a taker, not shaper, of trends. This extends beyond the political arena to issues of organisation and location of global enterprise and brands, positioning of economic power in the newly rearranged value chains of the knowledge economy and access to commercial advantages from new technologies.
• The likely impacts on social cohesion of the way the world is moving, whether it's the gap between the information rich and the information poor, or the increasing mainstream concern with environmental issues and the social record of businesses.

Current Business Issues – these have been identified from more recent work undertaken by ABF with ABL, our principal sponsor, based on intelligence from its member companies.

• Businesses are faced with challenges on all fronts that make their competitiveness difficult, intense and complex:
• Structure and patterns of work are transforming. This is seen in increasing competition for talented employees, skills shortages, more labour mobility and lack of loyalty, more employee bargaining power at the expense of employers, and new work/life balance pressures. All of which necessitates fresh approaches to HR practices, training and people management.
• Fundamentally new ways of doing business are becoming more common – electronic transactions, online and virtual markets. But, at the same time, many businesses have been burnt by IT project failures that never live up to their promises. In fact, IT is not delivering any of the expected cost savings and productivity benefits, but in the hard light of day, is just another cost of doing business. Projects are costly, budget blow-outs are the norm and new IT projects always require large amounts of management attention.
• Consumers are getting more pushy, knowledgeable, demanding and footloose.
• The very basics of doing business are shifting. More firms are collaborating as well as competing with their traditional competitors. Suppliers and customers are having an equal say with managers on production decisions. Business alliances with strange bedfellows are succeeding. Products and services are being blurred and bundled together, so you can't easily say whether a company is a manufacturer or a service provider. It's not so clear what customers value and are prepared to pay for.
• There are more competitors as world markets open up and more external exposure, both to low cost production globally and to world financial markets.
• All this means that doing business is more complex and requires a wider, long-term view, which most enterprises can't focus on because of the pressures for short term results.
• The regulatory and compliance burden on firms is growing, both in time and cost. OHS and labour issues, new ACCC and ASX rules, more onerous environmental standards, tougher corporate governance measures, new ratings agencies that test corporate ethics and social responsibility – to name a few in our increasingly litigious society.
• More is expected of business these days. Governments are privatising many functions and business is expected to take up the slack. There is more social and environmental consciousness and activism in the community, which lifts the standard business is expected to meet even higher. Growing distrust of business is lifting the bar for governance, transparent reporting and a whole host of corporate social responsibility demands.
• With these pressures, pared back resources and an extremely competitive market, firms realise they need help from outside their business – but on their own terms and only from trusted advisors from whom they expect the best. Firms need information and services from trusted expert sources. They need clout with governments. These days firms need alliances and partners just to do business successfully. And they haven't got much spare time to source this help or to spend on relationship-building.

What are the conclusions that the Australian Business Foundation draws about innovation in light of these forces for change impacting on businesses?

• There's no substitute for having a global mindset. Even if you are a domestic enterprise and not exporting, what's happening internationally can impact on you – new low cost competitors; emerging markets like China and India moving into high value-added branded products and services, not just commodities; Free Trade Agreements bringing both new opportunities and threats, to name a few.

On the upside, globalisation and massive ICT advances make us both more mobile and more connected. They allow Australia to create our own truly international brands and companies and to position ourselves in the value chains of large global enterprises and in distributed production supply lines worldwide. Intangible assets can create wealth too. Australia can capture value not only from exporting products and services, but also from leveraging our capabilities and our ownership of global assets and intellectual property.

• The reality of knowledge being an increasingly decisive business resource is demonstrated in the widespread evidence of companies across sectors finding new imaginative ways of doing business and performing better than their competitors. ABF's own intelligence was well captured by Stan Davis and Christopher Meyer in their 1998 book called "Blur – the speed of change in the connected economy", where they discerned new business models that were re-defining notions of innovation. Mass production, segmented pricing, neat supply chains, standardised jobs and one dimensional buyer-seller relationships giving way to merged offers of products and services, customers making production decisions, floating prices set by online auction and real time information, employees who are also entrepreneurs and messy economic webs of buyers, partners and stakeholders which involve not just economic returns, but value generated from the information and emotional attributes of the business offering.
• Finally, you can't do it alone. Collaboration has been described by the OECD's entrepreneurship expert Alistair Nolan at an ABF function as "the oxygen of innovation". Clusters, networks, alliances and other collaborations facilitate the flow of ideas, knowledge and people central to turning a brainwave into a real business opportunity – backed by the business, production, distribution and marketing systems that ensure a decent return to the participating business enterprises.

Realities of Business Innovation

This backdrop is the starting point for questioning the common myths about Australian innovation referred to earlier. The most significant insights from the Australian Business Foundation's research can be summarised as follows in three key messages:

Don't equate innovation with novel technologies, science and research.

Business innovation is rarely driven by scientific discovery, rather firms seek to develop new concepts for products and services, based on learning and customer problem-solving. Firms use their knowledge of markets, consumer preferences and demands and customer feedback to create viable and valued business offerings that are superior to their competitors and for which customers worldwide are prepared to pay.

ABF research shows that successful Australian business innovations, even those with technologically advanced products like Resmed and Cochlear, consistently feature an early and pervasive focus on the needs of customers and an ability to find distinctive solutions to problems. Witness Australia's success in mining and exploration software, scientific and medical instruments, defence electronics and value-added agriculture, like wine.

Professor Keith Smith of the European Commission Joint Research Centre, writing for ABF on innovation and the knowledge economy, points to strongly performing and growing firms, many in traditional old industries, that are low on R&D, but high on knowledge. Their knowledge comes from learning by doing, by using technology and equipment which gives them new capabilities, and by interacting with others like universities, research and professional bodies, consulting engineers or standards organisations.

While science and technology-based industries are very important, they form a very small part of most OECD economies, including Australia's. To be a prosperous nation, our innovators must not be restricted to the usual high tech suspects. They must be evident across all industries from food processing, timber products and mechanical engineering to hospitality, transport, health and finance services.

Unrecognised incremental innovation is transforming the pattern of competitive business activity in Australia.

Most public attention still focuses on the narrow view that innovation equals science and R&D, and that the single biggest challenge is to link researchers and universities to the business world so that research ideas can be successfully commercialised.

The reality is that most innovation does not happen in this simplistic linear fashion. The key driver for business innovation is what customers demand, not what scientists supply.

Innovation involves businesses adapting and improving their operations and processes, their ability to engage with their customers, suppliers and alliances of other partners and stakeholders, and their proficiency in sustaining all the everyday business systems and management competencies to get attractive products and services to market. Further, innovation involves the ability of firms to respond speedily to changes in market conditions or consumer preferences with continuous improvement and adaptation in their business offerings.

Such operational business innovation which involves competency-building and learning by firms is far more than a matter of entrepreneurial attitudes and commercial flair. It rests on deliberate and long term strategies that support investment in the enterprise's tangible and intangible assets, eg training and skills acquisition, recruitment, organisational design, technology transfer, specific production and managerial capabilities and so on.

This largely unrecognised type of innovation is transforming the pattern of competitive business activity in Australia and highlights the importance of customer problem-solving as a prime motivator for business innovation. This is substantiated in a 2002 ABF study, Selling Solutions by Professor Jane Marceau at al at the University of Western Sydney which marshalled evidence of the bundling together of products and services into packages to meet total customer needs. This, plus customised once-off large scale infrastructure and construction projects were reported as widespread and driving businesses in the discovery and implementation of novel solutions for customers, and generating new mixes of technical, managerial and collaboration skills in the process. The ANU Innovation Systems study, in which ABF is a partner, confirms this pattern in Australia of innovation by problem-solving, which is boosting the global competitiveness of traditional sectors like agriculture and mining, showing some success in ar
eas like biotech and pharmaceuticals and strengthening capabilities in key service industries like consulting engineering and advanced commercial services.

Successful firms compete by their superior ability to learn and to harness and use their own distinctive sources of knowledge.

Knowledge is at the heart of business innovation. The knowledge and relationships that firms have are increasingly significant in how they can deliver value to customers and make money from their businesses. Competing on know-how and innovation gives better returns than cost efficiencies alone. There is a body of intelligence from both economic theory and business practice showing that knowledge is increasingly important for superior business performance and international competitiveness. ABF's current research on innovation and on knowledge management, like the latest study by Dr Richard Hall of acirrt at the University of Sydney, backs this up.

Today, assets are mobile; so what makes an enterprise distinctive becomes crucial, eg market intelligence, skills, technical know-how, experience, customer relationships and learning from past mistakes and failures. Harnessing this distinctive knowledge can give a business its competitive edge, attracting customers to buy and to keep coming back for new and better offerings; and it is hard for other competitors to copy.


Conclusion

The clear pattern emerging from the Australian Business Foundation's body of research intelligence is that innovation is a survival strategy in an increasingly globalised and volatile business environment. But, it presents a more complex and more inclusive picture of what constitutes innovation. Innovation is becoming the tool of trade for the many, not just for the gifted high tech few.

The knowledge economy is not a foretaste of tomorrow's high tech advances, as much as a description of the contemporary reality for the wide range of unsung, innovative competitive industries that exist today.