How Small Business Can Stay in Business

AIM in Victoria played host to the first Management Today Roundtable last month, discussing productivity and innovation with Federal Minister for Small Business Bruce Billson and executives and management experts. By Tom Skotnicki

Australia’s manufacturing industry is under stress following the decision to cease local vehicle production. The mainstay of industry policy for the past 60 years is about to disappear.

The answer lies in more innovation and increased productivity. However, a recent study of almost 2500 businesses conducted by AIM and Melbourne University found management is not up to the task of introducing and maintaining an innovation culture.

Last month a roundtable of luminaries led by the study’s author, Professor Daniel Samson, discussed a range of issues including cost-competitiveness, the need to focus on niche markets and the value of an export focus. It also illustrated the importance of an enduring commitment to innovation from the top down and from the bottom-up if Australia hopes to improve its competitiveness.

The following transcript brings the discussions from the roundtable to Mt online.

Federal Minister for Small Business Bruce Billson: Over the past six years there have actually been 412,000 jobs lost in small business. Now, that doesn’t hit the front page of the media because there are two here, one there, a family business that’s folded, a small enterprise that’s had to lay off a staff member or, more worryingly, entrepreneurial people with ideas and enterprise and a sparkle in their eye and fire in their belly choosing not to embark on what for many is a courageous journey of self-employment and creating their own opportunities and wealth and prospects for others as well.

So that 412,000 contractions… actually seeing small business employment as a share of the total workforce contract quite dramatically, it was 53 per cent where every private sector job was in small business. Now that’s 43 per cent and there are today 3000 fewer small businesses employing people than was the case in 2007. We need to turn that around.

Daniel Samson, Professor of Management at Melbourne University: Cost-competitiveness, this is where I think the heart of Australia’s challenge is. This is a very expensive place to do business. I don’t need to tell you business people that but let me just throw it on the table because it ought to be said.

Now, I personally don’t want us to reduce a whole lot of our wages because we like to live the way we like to live, but there is a lot that can be done about cost. Other research I’m deeply involved in shows Australian organisations on average waste a third of their resources and a lot of that can be captured back. We could do so much better by getting things right the first time, by eliminating the many different sources of waste that occur in our organisations and there are no exceptions to that. I’ve studied 400 companies, mostly medium-size to large, but it’s everywhere. There is a lot that can be done about cost, but it’s quite difficult to get that implemented.

Whether we’re talking large or small or construction projects, project-based organisations or repetitive manufacturing organisations or service organisations looking at the services sector, there are massive issues associated with cost. We see the telcos, we see the banks closing down, reducing their operations here, laying off people here by the thousands, unfortunately, and moving their operations to India if it’s IT, China if it’s manufacturing, the Philippines in the last couple of years.

I also do a lot of work with consulting, like consulting engineering businesses shutting down their drafting and design engineering here and moving that stuff over to places like the Philippines where the cost differences are nothing less than dramatic, so that’s part of the issue. The second way an organisation can compete in any market is through superior quality. And quality means a lot of things to a lot of people, but let me just say we used to think we had superior quality but those countries to our north where cost is much lower are catching up fast. For example, we should know all of our Apple devices, which are very precise manufacturing goods, which are mostly made in China. If there was a quality superiority, that gap is closing fast.

Grant Anderson, group CEO of ANCA Group: One of our customers who supply to Apple are now putting automation in. They were relying on their low labour costs. They no longer want machines without robots. Every one of them has a robot on it. In fact, they have developed their own robot and they are currently putting in 110,000 robots into their plant. (The company has said its aim is to eventually have one million robots on its assembly lines.)

Samson: It’s innovation where we don’t have a natural disadvantage; it’s a relatively level playing field that we have if we could just get our act together as a nation where we need a national innovation system that’s very powerful.

I talk about systematic innovation because I don’t think your business should be interested in having the occasional lucky break and I know in Grant’s case it’s not. They have a systematic approach. In Phil’s case, a smaller business, less formality to it, but also he’s got a systematic approach.

The core elements quickly are these: first, I like to start with an organisation’s overall strategy, its business strategy. To what extent is innovation prioritised, at board level, at CEO level, at senior management level… which translates into setting the direction… that’s what strategy is all about, and in setting that direction, to what extent does that include some aspects of prioritising innovation. And then we get on to the hard part… formulating strategies is the easy part, the hard part is the implementation. To what extent is there some resource, some budget and some activity… and some processes put in place to turn those words in what I’ll call the strategy into some sort of process and reality. The third thing I see that’s in place is that we measure it.

Billson: I thought you were Danny Deming, the love child of the great Total Quality Management messiah there for a while, which was terrific about the measurement and the “do it once, do it right”, but the really significant bit about embedding that as a core purpose of the organisation, and then not just the back swing – the follow-through is very powerful because people react to what is perceived to be valued. At a national level that’s a conversation we as a nation need to have.

Samson: Yeah, our research actually showed the best of our entrepreneurial and innovative companies are as good as the best anywhere. What we need to do is use our best much more to demonstrate, first, that it can be done, and I think confidence is a lot of it, actually, and maybe that’s part of the reason why fewer people go into entrepreneurial start-ups than we would probably like.

Anderson: I think in terms of that prioritisation, too, there is an important element. We can’t compete with the Chinese in high-volume consumer product, but we can compete on niche and to me the opportunity for Australia is really to focus on innovation of niche products. We don’t have to be high volume, we can be mid volume or low volume, but be very creative and I think that’s an important element to focus on. Unfortunately, I think some of our governmental support systems for R and D through the university systems don’t support that. I’ll give you an example: most of the grants that are around today in the university systems are around collaborative research. That means a number of companies have got to get together and collaborate on research. Now, that’s not going to be niche.

Phil Butler, director, Textor Technologies: Our engineering and science skills in Australia are highly innovative as we take a broader view when compared to the larger economies where these skills are becoming more specialised. Due to our market size we have to cross fertilise our thinking from one market to another and I am gobsmacked at how clever our people are. I wonder in our journey that the innovation thing is really important, but it worries me now what we do after the innovation? Like we’ve done the fancy thing, what do we do? Do we outsource it? As a family company, we want to be here in Australia, we want to be in Tullamarine making product and the thing that worries me is whether we’ve got the right cultural fit to actually implement the innovation, whether we’re really interested in the efficiencies of production … or do we just want to do the sexy bits and then hand it over to China or Taiwan to do it and that to me is a major, major problem.

Abigail Forsyth, founder and owner of KeepCup: I agree completely with that. Our product is made in Victoria and we deliberately chose to make it here because sustainability is the premise of the entire business. The guys who are making it, I take my hat off to them, they are absolute geniuses. They are interested in production, they are interested in the gains they can make in building efficiency, but the band is made from silicone. There is no silicone manufactured in Australia so we had to go to China. We wanted to do a carry bag, we couldn’t find anyone to produce it in Australia so we had to go to China and yet we speak to our Chinese suppliers, they’re awesome. If I said to them, “I want to build a paper rocket to the moon,” they’d be like, “No worries, Abi, we can do it”. So there is just that can-do approach that you see and here in Australia there is a real reticence to take on someone with an idea.

Butler: Just following up on that point, to manufacture something involves a lot of capital and a lot of risk and I also think the world is moving so quickly that things like depreciation rates need to be taken into account because mechanical things you’d depreciate over 13 years don’t last 13 years anymore. The innovation cycle is so quick. So imagine a mobile phone, I mean I would only use a Nokia – well, Nokia’s finished. The moulds and the machinery that made this product do not have a 10-year life span, they have a 12-month life span.

Bill Angelidis, founder of IT services company ASTA Solutions: Professor, what is the link between, if any, during the research between what the minister said earlier in regards to 412,000 positions lost in the last six years and the innovation curves we’re no longer going through for small business?

Samson: I think that it all comes around to one single idea and that is overall competitiveness. I think wherever you are it comes down to cost, quality and to some extent let’s call it innovation or innovative features of your offering.

Tom Skotnicki, editor-in-chief of Management Today: Daniel, your survey of 2500 companies, how many actually were close to the cutting-edge of innovation?

Samson: When I thought of that pyramid, yes, there is a small number who are superbly innovative. When I think about the case studies that I’ve done, I was delighted to see companies still existing and prospering in the textile industry but they are small, niche organisations doing special stuff.

Angelidis: And services compared to products, in the pyramid up the top?

Samson: In the services sector we are doing much better. We have a very, very robust financial sector here in Australia, but not so much because it’s innovative, but because it’s just been stable and conservative and it’s relatively protected.

Daniel Musson, group CEO of the Australian Institute of Management: Bruce, we tend to find that where we champion entrepreneurship in our society it is frequently in IT areas rather than some of the areas we’ve talked about. Someone makes an app and gets a headline. How do we structurally change that focus?

Billson: I don’t think it’s good when governments start deciding where the next big thing is, but I think we should also focus on our strengths. Some of them are those areas, but food – we’re supposed to be feeding, you know, 200 million, 300 million middle-class people and we can’t manage to get our own costs to be … enough to compete for our own domestic share. Agriculture is very important, but you know, you’d never have had a conversation 15 years ago about the economy without someone mentioning value- add. Most of the value-adds in these areas are happening somewhere else and there is an opportunity there, the mining industry we think. In 2007 I think we were 16 per cent cheaper to construct; that’s all the front end, capex, which then gets amortised over the life of the mine, 16 per cent cheaper to construct a coal mine in Australia than North America, so we could contest and win that investment. Today, we’re 66 per cent more expensive and you wonder where that next investment is going to land so I’d like to think we should celebrate entrepreneurship wherever it’s found.

Musson: I think you’ve got to have pathway frameworks so you’ve got to be starting at a diploma level sort of framework that is going to encourage small business and entrepreneurship. But the masters level is about people like us creating cultures and frameworks for those people to allow entrepreneurs to build in their organisations and that’s just as important because they’re going to, if we’re going to create the future for the next 10 years, they’re going to create it for the next hundred, so I think you’ve got to get all those pieces to align.

Tony Gleeson, executive general manager of AIM Victoria and Tasmania: Also, on the theme we’ve just begun there, I’m mindful that when our readers look at this, it would be a good opportunity if we could suggest some ideas that those in small businesses could try. If they were sitting out there, a forum of maybe hopefully a couple of hundred thousand small business people, what would we say to them that they could take away from this today?

Billson: I’d do three things. One, if you’re going to go duck hunting, you go where the ducks are and that is about going into the economy and seeing where those adaptive opportunities are. I find a lot of small businesses look to their industry associations and you end up with a vanilla-isation of those insights, when really the best thing a small business person can do is be out of their business, growing their business, looking for that next opportunity rather than sitting and waiting for an industry association to say, “Oh, have you heard about,” which is the same message that probably a thousand others will get. Second, stalk me. If you’ve got regulatory impediments and grief, share them. The last thing I would do is realise that there is no one with more skin in the game than themselves and that gives us strength and a credibility when they’re talking with other people who value what they do, who value local production, who want to understand where their stuff has come from, that authenticity that sits right alongside the nimbleness.

Authenticity and nimbleness I think is the pathway for small businesses into the future and so much of what we’ve talked about today is how do you inculcate nimbleness and systemise it.

A seat at the roundtable

Bruce Billson: Federal Minister for Small Business: registered his concern at Australia’s fall from 12th to 21st in the World economic Forum and the proliferation of government regulation and its effect on stifling small business innovation.

Daniel Samson: Professor of Management at Melbourne University and author of a recent study with AIM on innovation practices in Australian organisations.

Phil Butler: Director, Textor Technologies, manufacturer of nonwoven textiles, hydro-entangled or through air-bonded products for healthcare and hygiene, cleaning, filtration, food packaging, agribusiness and the environment. Produces components for diapers, incontinence aids and medical products for domestic use and export globally.

Carolyn Viney: Former chairman of AIM Victoria and Tasmania, recently appointed CEO of Grocon, one of Australia’s largest privately owned construction companies and an innovator in environmental design.

Grant Anderson: Group CEO of ANCA Group, manufacturer of precision machine tools, 99 per cent of which are exported. Has distribution centres, service centres and application centres in China, Germany and the US. employs 800 people, half of whom are based in Australia where its manufacturing and R&D facilities are housed.

Mark Smith: Chairman of Patties Foods, which includes Four ’n Twenty, Patties pies and sausage rolls and Herbert Adams. Operates a manufacturing business in Bairnsdale, employs about 600 people and has a turnover of almost $250 million a year.

Bill Angelidis: Founder of IT services company ASTA Solutions, which introduces innovative technology to small and medium-size enterprises.

Abigail Forsyth: Founder and owner of KeepCup, the world’s first barista-standard reusable cup. A lawyer by training, she is working on the release of further innovative products.

Daniel Musson: Group CEO of the Australian Institute of Management following the merger of the state divisions (excluding WA). AIM as a training and professional organisation is uniquely placed to help managers improve the productivity of their organisations.

Tony Gleeson: Executive General Manager of AIM Victoria and Tasmania. Previous experience with Deloitte, PricewaterhouseCoopers and CPA Australia.

Tom Skotnicki: Editor-in-chief of Management Today and has held senior editorial positions with Fairfax and News Ltd in Australia and overseas.

This article appeared in the March 2014 edition of Management Today, AIM’s national monthly magazine.