Of course celebrating the New Year with your friends is fun, but the truth is the future is restarting every day. Stay locked in to last year's thinking and you are driving with your eyes on the past!
At the B20 Summit, Joe Hockey stood up and said that Governments have borrowed all the money they can afford to borrow, central banks have printed all the money they can reasonably print, and now we need the private sector to step up, borrow money and build the infrastructure we need to support growth.
The development of this infrastructure - the right infrastructure - is, of course, important to Australia's long term development. Australia, with its growing population, needs this infrastructure to support long term economic development and social welfare. The same is true for many countries around the world - whether in the East, where societies are industrialising and infrastructure is needed for the first time, or in the West, where nineteenth century and early 20th century infrastructure badly needs rebuilding.
From a political point of view, this also translates into supporting economic growth - the siren call of endless increases in annual GDP. Growth is an attractive concept, indeed deceptively so in my view. If we earn more, we can afford to borrow more. If we borrow more, we can afford to spend much, much more. And if we borrow to spend, then we will, whether as parents or businesses or as a society, leave a much, much larger legacy of debt to future generations. If we also leave those generations the income they require to pay back both the principal and interest, then well and good.
But, as Dan Mitchell has highlighted, finding new ways to support more spending is not the answer - rather we must find new ways - absolute ways - to control spending. In particular, we need to ensure that in the good years, spending is held back, allowing debt to be repaid or surpluses to be built up. In the bad years, spending needs to be able to continue, to provide support where required in the darker days.
This creates incredibly big challenge for the politicians of today. Simply put, how can lower spending win votes? The pain of a strategy based on lower spending will be felt over the short term, whereas the rewards will emerge over the much longer term. In contrast, it is much easier to make promises now that begin to deliver a benefit to one interest group or another in the short term. Meanwhile the ever growing costs of such promises will be felt over the longer term.
And all of this must be done in an environment where, inevitably, the minority pay proportionately more tax, and the majority pay proportionately less tax. This is simply the 80:20 rule in action in relation to income and economic advantage, from which no economy can escape.
The answer? Ultimately individuals and businesses and Governments must build their faith in the benefits of choosing strategies and policies that are aligned with long term results. As I've written in "The Long Term Starts Tomorrow", this may be uncomfortable, but the opportunity lies in the fact that long term outcomes are driven by making short term decisions which lead directly towards the right end destination.
The challenges faced by Qantas continue to mount. The rejection by the Australian Federal Government of the request from Qantas for financial support, in the form of a debt guarantee, has begun to focus minds on where the real challenges of the organisation lie. As reported in The Australian today, the input from external advisers (my firm Pottinger included) has reflected a consistent view that the organisation faces strategic and operational issues, and that support for financing would have a minimal impact. So what is the root cause of all this?
As it happens, I wrote about this in "The Long Term Starts Tomorrow" under the heading "Blowing with the winds of corporate destiny".
Excerpt from The Long Term Starts Tomorrow (p141 & ff)
"How many organisations have inherited a legacy of market position, business model and strategy which is an accident of the past? Think about airlines for a moment. The world's great airlines of the post war era were located at the end of the world's major air routes, many of which emanated from the UK in the dying days of the British Empire. British Overseas Airways Corporation and British Caledonian operated romantic long distance routes in the 1950s and 1960s that stopped in locations now hardly visited at all by long haul travellers. As a child, I lived in Bahrain, once one of three or four stops on the all-important long distance journey to Australia. Bahrain was then a vibrant meeting point, visited by travellers from many nations travelling East and West.
Then, in 1970, the 747 was born. This was the world's first wide body jet, and has remained in service ever since. At the time, Boeing thought that only around 400 would be sold before the aircraft was made obsolete by the advent of wide-spread supersonic travel. In practice, over 1,400 have been built, and the "jumbo jet" has been in commercial production for over 40 years.
The first variant, the 747-100, had a range of 9,800 kilometres, just long enough to fly from London directly to Bangkok. In 1975, the 747 SP was introduced, with a range extended to 10,840 kilometres with a full load of 331 passengers, and significantly more with lighter payloads. This allowed non-stop flights between London and Hong Kong (remembering that in those days Russian airspace was closed, necessitating much longer routes over India and the Middle East).
Bahrain's role in long haul international travel ended almost overnight – it was no longer needed as a staging post on the way to Asia. Ironically, in the modern world, jets with ranges of 15 flying hours or more now mean that you can fly direct from the Middle East to nearly everywhere, and airlines such as Emirates have capitalised on their location as a global hub, opening up direct routes from Dubai to places as far away as San Francisco and Sydney. But Bahrain has never recovered its place as one of the world’s major air hubs.
Australia's own national champion, Qantas, was once at the terminus for one of the world's key air journeys, the Kangaroo route from Sydney to London. But in an environment where the winners are located at the hubs of long distance travel, Qantas now suffers from being at the end of a long spoke that leads to nowhere but regional Australia and New Zealand.
How can Qantas ever build a successful long haul airline, when it only naturally serves a local customer base of some 25 million people, compared to the 6 billion reached by Emirates or Etihad? By its own admission, it needs to start from somewhere else and is exploring new hubs in Asia. But then what does it bring to those hubs and consumers in those countries? It has to pack its corporate bags, get on its own long haul flight, and set up in an entirely new market, serving entirely new customers, armed only with its experiences and impeccable safety record. Make no mistake, Qantas may achieve this, but to embark on this journey requires a level of corporate bravery rarely seen in today's global leaders. Meanwhile, it has partnered with Emirates from Dubai, effectively exiting from the routes to Europe, opening up the possibility to focus more on a more diverse Asian route network and leaving behind nearly a century of corporate history."
The world is changing more and more rapidly – and decision-making is becoming more and more complex for Governments and companies and even for individuals. Humans are hard-wired to prefer approaches that are tried and tested – in other words, to be able to rely on instinct and past experience as a guide to what will work well in the future. This has worked well for animals, relying on their habitual evening walk to the watering hole, down a path worn by dozens of earlier generations. So too has it worked well in large organisations for hundreds of years – in many industries a business plan laid out in 1805 would have been just as relevant to the world ten or twenty years later, as the pace of change was so much slower.
But a slavish reliance on instinct and experience is not as well suited to a data rich and deeply interconnected world. It gives a monochromatic view of opportunities, and allows organisations to be blown along by the winds of their own history. If you do this, your destiny will be chosen by the many accidents in your history, and managers will be nothing more than passengers on an unpiloted vessel.
The solution is simple to enunciate. It involves focussing much more strongly on the future. And, critically, it involves seeking to look further ahead, to compensate for the challenges that come from operating in a fast moving environment. Does this sound counter-intuitive? If you drive down a motorway, you must look further ahead if you are to avoid any obstacles on the road in good time. Staring at the bitumen thirty feet in front of you would be suicide. So too it has to be in business. Focussing on the short term, in the form of quarterly earnings reports and near term budgets, simply increases the risk of a corporate crash and increases the chance of your organisation facing its own Nokia moment. As a reminder, barely a decade ago, Nokia was the clear world leader in mobile phones, with a market value of around $100bn. Since then, Nokia’s market value has fallen by some 90%. Meanwhile, over the same period, Apple re-imagined its business thanks to the relentless and innovative vision of Steve Jobs. This included entering the mobile phone market and launching tablet computers, becoming one of the most highly valued companies in the world as a result with a market value of over $470bn. Whether it can continue to innovate and focus on the future, of course, remains to be seen.
Some may say that this is much harder to do in practice. With technological change and innovation continuing to accelerate, how on earth can you reliably predict developments five or ten years ahead? As almost any entrepreneurial scientist and innovator will tell you, you very frequently can. Apple’s revolutionary smart-phone was envisioned by technologists a decade or more in advance of its launch. Its timing was driven principally by the miniaturisation of computers (in size and power usage), improving battery technology and the refinement of touch screens. Indeed Nokia had experimented with a product that looked to all intents and purposes exactly like an iPhone some four years previously. As another example, we know today that 2020 will see the advent of the next big revolution in televisions, a format known as Super Hi Vision. This has four times the resolution of the latest 4K televisions, and was already used to broadcast parts of the London Olympics. In essence, this is IMAX for the living room - unsurprisingly it eats bandwidth, so you will need a fibre connection for it to work properly. The date of its launch is known now as the pathway from lab experiment to fully commercialised product is well known.
With this in mind, I had the pleasure of attending the 2013 TCS Innovation Forum in Silicon Valley. From machine to machine communications, virtual architectures, the internet of things and computer learning to mobility, social media, cloud, big data and Bayesian statistics, a heady cocktail of themes were discussed. These are already well-worn buzz-words, not just in large enterprises, but also in day to day media commentary about many subjects. The implications of these trends are, however, much more subtle and will have profound implications for many organisations.
At the deepest level, the fundamental building blocks for any enterprise won’t change. There will still be customers, employees, suppliers, processes and decision-making. But where and how and why interactions occur and decisions are made will evolve dramatically. Social media and online inter-connectivity will accelerate, to touch many more areas of people’s lives, as the sophistication of the relevant products and platforms improves. These interactions will happen everywhere, all the time, showing the importance of mobility. And data will be gathered on almost everything. In passing, I note that this highlights the importance of understanding that big data is nothing more than a buzzword for a large bucket of information. What really matters is big analytics – using Bayesian statistics and other advanced statistical techniques to extract information, meaning and insight.
As a result, the mindsets of Boards, managers and employees must become fundamentally more flexible. Every individual must find ways to embrace continuing change. This implies a need for a dramatic socialisation of business processes at all levels – whether the transaction layer, the collaborative layer or the intelligence layer. The practical implications of all of this are entertaining to speculate about – dramatic changes in business models, service robots and drones delivering pizza.
The forum provided a compelling window on the importance of managing your business through the front windscreen, and not the side windows or rear view mirror. Corporate decision-making must become much more flexible and creative in exploring the opportunities that arise and in driving rapid adaptation. It is telling that the most spectacular successes in creating corporate value over the last twenty years have been dreamed up by college graduates (and dropouts!) in the proverbial garages, powered by a combination of instant noodles, red bull and venture capital, and unconstrained by historic experience the successful business models of the past.
Another week – another leading company waxes lyrical about the opportunities presented by “Asia”. Somewhere up in management consulting nirvana, faceless men in dark suits have constructed a parallel universe in which the 50+ countries in Asia have been seamlessly blended into a single market, with a single currency and a single culture. Excited corporate executives venture on overnight flights of fantasy to the new capitol of Asia, an unknown city at the centre of a non-existent country whose main airport lies conveniently right at the foot of the rainbow. The streets are, of course, paved with gold.
At some point this reverie will be shattered by the harsh ringing of an old-fashioned alarm clock. As the grey, smoke-tainted dawn light filters in, the would-be corporate heroes of the next decade will realise that Asia is not a place. It has no capitol. Every country has different competitors, different market dynamics, different consumer preferences and different cultures. Indeed larger countries such as China, Japan and India have almost as much diversity internally as is seen between countries in the region. This is in stark contrast to the more Westernised countries in the region – in Australia, the weather and the road signs and the preferred football code may vary from State to State, but there is enormously commonality of consumer mores and cultural preferences.
Here lies the greatest existential challenge for Australian corporates – and indeed their peers from North American, Europe and beyond. Far and away the largest growth prize, in both relative and absolute term, lies in Asia in both the next two decades. Consumer wealth is exploding, market sizes are expanding dramatically, and average wages are still half an order of magnitude lower than the West. This part of the dream is true – the streets really are paved with gold. And yet these streets are unfamiliar, and the gold is hard to find, let alone pick up. Overlay the parallel explosion of online activity, not to mention the dramatic impacts of the impending energy revolution as the world moves to lower cost renewable energy (yes, you’ve read that correctly) and the environment for corporate decision making now resembles nine dimensional chess.
Nine dimensions? If this sounds extreme, think of this. Different historical context. Different cultural evolution. Different physical environments. Different economic advantages. Different competitive dynamics (and different competitors). Different market structures. Different rates of development. Different currencies. That’s nine and I didn’t even have to stop to think. These all add together to create dramatically different opportunities, with different levels of capital investment, different business models, different profitability and different returns over different time scales.
For one of the world’s most successful twentieth century companies, this is a veritable nightmare. For the corporate leaders of today, who cut their management teeth in the 1970s and 1980s, it is a world that was unthinkable even twenty years ago. But a ten hour flight to any of the fifty largest cities in Asia will prove beyond a shadow of a doubt that it is true.
The only solution to this intricate and tangled web of growth prospects is to embrace complexity. Companies need to complexify their thinking and strategies. They need to abandon the desire to make simple choices driven by base case scenarios and welcome in to the Boardroom the vast range of outcomes that is possible in real life. This isn’t easy. The old fashioned appraisal tools of medium term forecasts and discounted cash flow models simply won’t cut it. These are 1950s technology at best (indeed the origins of the thinking goes back to the late nineteenth century). If your decision-making doesn’t employ Monte Carlo simulations and Bayesian statistics, then you’re just playing spin the bottle, $100 million dollars at a time. Big corporates have engaged big data when it comes to exploring consumer preferences – now they need to embrace strategic analytics and bring big data into the boardroom. Without it, they will follow once great companies such as Nokia, Kodak and Lehman in the graveyard of once great companies who kept their eyes focused on the near distance whilst accelerating down the motorway.
Innovation is like a mountain river. If you stand on the river bank watching, you will never get anywhere. If you jump in, the ride will be bumpy, and the water may be incredibly cold, but if you survive the journey, you will be way ahead of your competitors.
The conservative, big business incumbent may find this ride too frightening and risky, and prefer to set up camp on the river bank. The cold, hard truth is, however, that the people that sleep on the river bank every night will still be there a year later. The aggressive innovators will be two thousand miles ahead, having traveled at a few miles an hour, day by day, month by month. Customers will stop visiting the river bank, way up in the mountains, and choose the cool new option that's floating past their town.
In this way fortune favours the innovators and the new. Although the voices of vested interest are powerful and well financed, there are many, many examples where their wealth of experience and retained profits are squandered on living out the last days of the cash cow raj, allowing small, nimble, imaginative innovators to create whole new industries that quite simply plunder what should have been the inheritance of previous industry leaders.