For governments to stimulate economies, they are going to have to find a way to increase productivity and the spending power of populations. The current remedy of pumping cheap money into the economy isn’t enough to do this.
One concerning message for the tech sector in these figures is that simply boosting productivity will not be enough to boost the economy. In fact widespread automation of existing jobs may make the problem exponentially worse.
The statistic that indicates younger workers are dropping out of the workforce to look after older relatives should be particularly worrying for economists and a warning to politicians that thirty years of the neo-Liberal model espousing smaller governments and reduced public services now threatens to change the political dynamic – something that the rise of Donald Trump is also a symptom of.
For policymakers, the question is how to employ people in jobs that give them enough income to support their families without ringing up huge debts.
Interestingly, much of the current tech mania is based upon the same credit based consumerism that’s driven the last thirty years of western economic growth. Apps like Uber, AirBnB and the countless delivery apps are good examples of businesses based on happy consumers jamming more on their credit cards.
The era of 1980s thinking is over, we’re going to have to rethink what policies encourage employment and wealth creation along with seriously considering what capitalism is going to look like in the mid-21st Century.
The tale of regulatory mis-steps and dashed political hopes of telecommunications policy illustrates the failure of Australia’s ‘go big, go global’ policies of the 1980s.
The concentration of Australia’s business power has its roots in the 1980s where the then Hawke Labor government decided the nation’s corporations couldn’t be globally competitive unless they had scale in the home markets, and so a wave of mergers and acquisitions started.
An industry that was particularly problematic was telecommunications. At the time Hawke came to power in 1983 there were three government owned telcos; Telecom Australia that operated the domestic network and the Overseas Telecommunication Corporation which handled the nation’s global links along with a small satellite provider, Aussat, intended for remote access and some defense functions.
David Havyatt at InnovationAus describes the late 1980s thinking that lead to Telecom and OTC being merged to become Telstra, the company that dominates the Australian telecommunications industry today.
The then political troika of Prime Minister Bob Hawke, Treasurer Paul Keating and communications minister Kim Beazley decided allowing OTC and Telstra to merge would give the company global scale, as Havyatt quotes from a policy discussion around 1990.
“A strong vertically integrated national carrier which is able to provide a one-stop-shop for Australia’s telecommunications services both domestically and internationally, providing economies of scale and scope and the prospect of a unified and enhanced international profile.”
Despite the lofty ambitions and a few half hearted attempts to grow global business operations, a quarter century on sees Telstra’s international returns at an almost derisory level.
Dodging global bullets
One could argue that Telstra’s shareholders dodged a bullet – Canada’s Nortel followed the same path and, after early successes, failed spectacularly in the early 2000s.
For Australians in general though, Telstra’s insular focus has been a disaster as maintenance and investments were deferred to make the company’s yields more attractive and the Howard government’s compounding the Labor party’s mistakes in fully privatising the business without breaking its monopoly power.
Which lead Australia into the folly of the National Broadband Network – while the original intention of investing in the telecommunication sector and breaking Telstra’s lock on the industry was a good idea and supported by this writer – it quickly morphed into a massive waste of money and remains so today. If anything, the NBN will only increase Telstra’s market power while delivering more expensive services to the nation.
Australian exports by sector: Department of Foreign affairs and trade
Notable in the above graph is how in the 1990s it appeared the ‘go big, go global’ was working but by the turn of the century, the combination of the mining boom and the nation’s business elites – particularly in banking, insurance, retail and media – had starting looking at exploiting their domestic markets rather than competing internationally.
While there have been successes such as Westfield in shopping centres, Lend Lease in construction and Brambles in logistics management, the bulk of Australia’s corporate leaders are inwardly focused on extracting maximum revenue from their captive local companies.
Global ownership
Increasingly, those dominant companies aren’t even Australian. The brewing industry is a good example where locally owned beer producers make up less than ten percent of the market dominated by New Zealand’s Lion Nathan and British based global conglomerate SAB Miller. Australians, it seems, cannot even brew their own beer any more.
Australia’s managers have been the greatest beneficiaries from the nation’s failed business policies as it’s insulated them from global competition, life is good when you’re the biggest fish in a tiny pond.
While good for managers, the lack of business diversity competitiveness and insular focus leaves Australia’s economy deeply exposed. The failure of the 1980’s grand vision where Australia developed a cohort of globally leading businesses is one that will be regretted by future generations as they pay higher prices for poorer products.
Schmidt’s interview is a great insight into managing fast growth companies,”almost all small companies are full of energy and no process”. While he reflects on his early days at stricken companies like Sun (“tumultuous and political”) and Novell (“the books were cooked, and people were frauds”).
Moving to Google he found all of his management skills exercised at a company with a unique culture and rapidly growing headcount.
One notable anecdote is how Larry Page kept a 100k cheque from an early investor in his pocket for a month before cashing it.
Compare and contrast that attitude with the current startup mania where by the end of that day a media release would be issued proclaiming the company to be a new unicorn on that valuation.
Schmidt’s view, like many others, is that the real key to success in the company is the people. This echoes the interview with Meltwater’s CEO earlier this week where Jørn Lyseggen described how the key to starting a venture in a new country was the first five people hired.
One great takeaway Schmidt has from his time at Google is how great companies are created through the Minimal Viable Product method, “the way you build great products is small teams with strong leaders who make tradeoffs and work all night to build a product that just barely works.Look at the iPod. Look at the iPhone. No apps. But now it’s 70% of the revenue of the world’s most valuable company.”
Ultimately though Schmidt’s advice is to make decisions quickly, “do things sooner and make fewer mistakes. The question is, what causes me not to make those decisions quickly.”
“Some people are quicker than others, and it’s not clear which actually need to be answered quickly. Hindsight is always that you make the important decisions more quickly.”
GE CEO Jeff Immelt sees a different world of investing and business in coming years where growth is slower
Today GE had their At Work conference in Sydney where CEO Jeff Immelt was interviewed by Westfarmers’ boss Richard Goyder.
One of the key messages from Immelt in his interview with the Australian conglomerate’s CEO was that finding growth in a flat global economy is going to take hard work and creativity; just relying on increased domestic spending is not longer an option.
Immelt was particularly pointed about the developed world’s economies, “the US is best since the financial crisis, growth is broad based but it’s still in the two to two-and-a-half percent range. It may be that’s the new normal.”
“Europe and Japan are pretty tough, forty percent of the world’s economy is still difficult, not going downward but stable and flat.”
Preparing for a slow growth world
“We’ve prepared ourselves for a slow growth world but one where you can invest in growth.”
“There’s still opportunities out there,” Immelt observed. “We’re going to have to make our own growth.”
Part of that growth story relates to the end of the consumerist era where debt funded consumer spending, particularly in the US, drove the global economy.
“We are coming out of a time period of the last ten or fifteen years where the US grew four and half percent every year with no inflation. So the US was the dominant economy in the world during the 1980s and 1990s.”
“We knew that was not going to be the same, so we’re in a world with no tail wind where we think greater focus on things like R&D, globalisation and things like that which will be critically important.”
Changing business focus
One of things Immelt did after the global financial crisis was to change the focus of the business away from the consumer finance division that had been a river of gold over the last thirty years back to being an industrial infrastructure company.
“Everyone needs to paranoid about relevancy and what they do great in the world today. There is no shelf life for reputation or anything else.”
“The engine of growth in the US when it was growing at its best was the US consumer, both in the combination of their own wealth and in taking on leverage. That was the engine of growth from 1980 to 2007.”
“It ended badly, but those were big engines of growth. What will be the next engines of growth?” Immelt mused.
Asian consumers to the rescue
Immelt sees the rise of Asian economies as being the next growth drivers with over billion consumers rising in affluence.
Whether those Asian economies can generate the growth that the hyper-developed economies of North America, Europe and Japan were able to provide during the past thirty years remains to be seen given China’s, and most of Asia’s, consumers having nothing like the West’s spending power.
The truth is we’re decades off Asia’s huddled masses having the economic strength to carry the global economy in the way the western world’s consumers did for the closing decades of the Twentieth Century.
For economies like Australia that are largely based upon domestic consumption funded by debt, this will mean a massive redirection of the economy away from renovating houses to investing in productive industries.
Immelt’s message to business leaders is clear; don’t rely on a rising tide of domestic growth to keep you afloat. Companies are going to have to find new markets and products if they want to grow, waiting for customers to arrive is no longer an option.
The Global Innovation Index rates nations on their ability to adapt and compete in the global economy, the authors believe the measure is more than just economics
Last Friday the Global Innovation Index was released rating nations on their ability to adapt and compete in today’s global economy, the authors though believe the measure is more than just economics.
The Global Innovation Index is a joint venture between Cornell University, INSEAD, and the World Intellectual Property Organization which measures 81 economic factors that across 143 countries.
Its release in Sydney last week was part of the B20 conference – the business offshoot of the G20 Heads of Government meeting taking place in Cairns later this year.
European countries top the list with Switzerland, the United Kingdom, Finland and the Netherlands making up the leading five. The US and Singapore break the European monopoly at the sixth and seventh positions.
As the results indicate, rich countries have a natural advantage in the index with index scores tracking national GDP – the highest ranked middle income country is China at 29th and the leading low income nation is Kenya at 85.
Innovation index versus GDP
Kenya, and Sub Sahara Africa in general, is one of the highlights of this year’s report with with countries in the regions being nominated as ‘innovation learners’ with them performing above their expected level of GDP.
“What we find in Africa is growth rates are stabilising,” says Francis Gurry, the Director General of WIPO in discussing the report. “That creates the space for better policy and investments.”
Smaller is better
A key finding in the report is that smaller countries tend to perform better; “there’s a slight bias in the index,” says Gurry “as there’s more evenness across the economy.”
This works against larger countries like the United States while favouring countries such as Switzerland and Singapore.
Being affected by the 2008 financial crisis doesn’t help economies either; “the countries you see on top like Switzerland and the Nordic countries have been less affected than countries like Spain and Greece” says Bruno Lanvin, the Executive Director of the ISEAD Global Index.
Europe’s growing divergence
“Yet Europe remains a land of innovation,” continues Lanvin. “Europe has no choice, it is an aging economy and it has to innovate its way out.”
“A divide has been recreated within Europe, the whole European edifice has been a terrific machine for convergence. This has disappeared with the crisis where we see a new divergence.”
“We see countries like Spain and Italy, not to mention Greece, where the proportion of research and development has been decreasing which has not been compensated by private investment.”
This lack of private investment is a concern that constantly came up in the B20 discussions; despite the world being awash with capital, little is finding its way into infrastructure funding and business lending.
Falling R&D spending
Another area causing concern for the index compliers is the falling rates of research and development spending, noting that support for R&D efforts seems to have lost momentum in some countries with most growth in this area over the near future expected to take place mostly in China, the Republic of Korea, and India.
Innovation by Region
Rank in Region
GII 2013 Overall Rank
Country Name
Central and Southern Asia
1
76
India
2
79
Kazakhstan
3
86
Bhutan
Sub-Saharan Africa
1
40
Mauritius
2
51
Seychelles
3
53
South Africa
Southeast Asia and Oceania
1
7
Singapore
2
10
Hong Kong (China)
3
16
Korea, Rep.
Latin America and the Caribbean
1
41
Barbados
2
46
Chile
3
52
Panama
Northern Africa and Western Asia
1
15
Israel
2
30
Cyprus
3
36
United Arab Emirates
Europe
1
1
Switzerland
2
2
United Kingdom
3
3
Sweden
Northern America
1
6
United States of America
2
12
Canada
While the index was notable for its stability among the top ranking countries, there were stand out performers with the United Kingdom charging from tenth in 2011 to third in 2013 and second this year.
Along with ethnic diversity, the advantages of having deep, varied economies and societies is emphasised by the report.
“When you’re measuring all of these, you’re measuring the ability of a country to compete;” says Gurry. “The intensity of competition will only increase between countries in respect to both regulatory regimes but also between enterprises.”
For all the talk about the importance of innovation Lanvin sees limits to what governments can do; “innovation is not a matter that can be decreed or implemented by governments alone, government can give the right signals and create an environment.”
Creating a mindset
“In the end it is the dynamics between business, government, academia and civil society that create the right mindset for a country to become an innovator,” continues Lanvin.
Lanvin also observes that innovation is about more than technology, “clearly technological innovation will remain a critical component, but you should expect to see social innovation and political innovation.”
“When we need to address the major challenges of this planet like the environment you need more than technological innovation; you need creativity, new mindset and new attitudes.”
That’s not to say those customers are wrong or bad, just that they are not the right fit for the long term objectives of your business.
Sometimes those customers are raving fans and passionate patrons are important; if you can meet your clients’ business and emotional needs then you, and your customer, are in a great place.
But not always, sometimes those fans are a boat anchor to your business.
In 1998 Steve Jobs announced he was ditching the Apple Desktop Bus (ADB) standard for Mac computers and moving to the USB standard for new computers. Thousands of outraged Mac fans swore they would never buy an Apple computer again.
Henry Ford is quoted as saying if he’d asked 1890s what they wanted, he’d have built a better horse cart rather than a motor car.
Sometimes customers don’t know what they want and sometimes those who do know what they want aren’t the customers you want.
If you have to make that decision, it has to be firm – blinking in the face of opposition doesn’t work. You’ve shown you’ve blinked on one thing and you’ll be blinking on more. You’re now owned by your customers and the most conservative, risk adverse ones at that.
Once you’ve given ownership of your business to your most conservative customers, you’ll have to fight to regain control.
It’s much better to make a calculated, informed decision and go for it – if you’re right, your business is going to be stronger without those risk adverse and often low margin customers.
A lot of people decided they wouldn’t buy Steve Jobs’ or Henry Ford’s products again. Eventually they did.
There are plenty of ways of raising money for a business; venture capital, bank loans, private equity and – by the far the most common – bootstrapping, where a company finances it’s growth through its own cashflow.
An article in Tech Crunch byAshkan Karbasfrooshan looked at the reasons why bootstrapping doesn’t work, his views are understandable Ashkan given his own business has raised $1.5 million in venture capital (VC) funding over the past four years.
Outside the Silicon Valley bubble, it’s worthwhile considering the real benefits and disadvantages to bootstrapping your business. As with any business tool there’s real pros and cons with all financing methods.
Benefits
There are a number of benefits with bootstrapping, in that it forces the business’ management to focus on the product and customers while giving founders full control of the business.
Total control
A bootstrapping business has total control over its destiny – the business owners answer to no VC, bank or outside imposed board of directors.
Those outside investors may also have different business objectives to the founders. Often a venture capital or private equity investor has a three to five year time frame while a founder may be looking further.
Also a mis-match between the founders’ and investors’ exit strategies will almost certainly be a problem should the opportunity to sell the business arise.
One of the biggest risks for a smaller business is banks can call in loans or ask for additional security – something that crippled many smaller businesses during 2009.
For those who’ve raised equity funding, founders can find their shareholdings diluted or even be fired from the business they created.
Customer focus
The business that is focused on funding itself pays close attention to the needs of its customers. The distraction of raising, and then managing, investors or lenders can distract from building the business.
Validating the business model
A successful business that has grown through funding itself is has, by definition, a valid and profitable business model. This is not necessarily true of VC or debt funded enterprises.
Overcapitalisition
In his Tech Crunch article, Ashkan quotes Marc Andreessen and Jason Calacanis as saying “raise as much money as you can.”
This may well be conventional wisdom in Silicon Valley though the reality is a business can have too much money, as we saw in the original dot com boom with businesses such as Boo.com lavishing money on founders and expensive frills.
A business can be crippled by having too much investment money that distorts the founders’ objectives and allows the company to lose focus on helping customers and getting the product right.
Generally with bootstrapping this isn’t a problem unless the founders have an insanely profitable business, which renders the need for outside investors largely irrelevant.
Disadvantages
For all of bootstrapping’s advantages there are real downsides as well including the risk of being undercapitalised and the difficulty in attracting diverse management.
Undercapitalisation
One of the main reasons for business failures is under capitalisation; simply not enough money to grow the enterprise or to put it on a sustainable footing. This is a constant risk for bootstrapped businesses.
Inability to focus
Many owners or managers of bootstrapped businessese focused on making sales so they can pay the rent and make payroll; this distracts management from executing the longer term aims of the business.
Expertise
In taking an equity partner – either in private equity, venture capital or angel investor – the founders get the benefit of the investors’ expertise.
A good investor who has similar objectives to the founders can add real value and complement the original team’s strengths and weaknesses.
No one size fits all businesses
Overall there’s no black and white to bootstrapping versus borrowing money or finding an equity partner; all of them have their risks and benefits.
As entrepreneur Steve Blank points out, there are six types of startup and only two of them; the scalable and buyable (born to flip) are suited to the Silicon Valley venture capital model.
The real risk in business is assuming one way or another is the only way to fund an enterprise, for many it’s a combination of some or all of the methods to raise funds.
It’s quite possible to see a business first bootstrap to get established, then get a bank loan to finance growth, followed by a VC or seed investment that finally sells out to a private equity fund.
For many business owners though, funding the business out of cashflow is the most sustainable way to grow and profit. If you’re happy with what you’re doing, there’s no reason to be hassling for equity or begging at the bank.
