We interrupt this disruption … to bring you a special bulletin

EDITORIAL

WHERE TO from here, Australia? A saying used a lot in Australian business right now goes something like this: When you are going through hell, keep going.

As told in detail the Business Acumen issue 75 print edition, 2014 is likely to go down as the most disruptive year for Australian business ever (or, on record, as they like to say in the climate change business).

We have already seen what was unthinkable a decade ago, in business, become disturbing fact and history. The reasons are many, but all are impacted and accelerated by digital technology.

Who would have thought that cold milk would not only retail for less per litre than petrol, but cost 25-30 percent less? And who would have imagined that this could have come about through the same supermarket duopoly of Coles and Woolworths cross-selling in the food, petroleum and liquor markets? (Now they supermarkets are into insurance and financial services – and pharmaceuticals are within grasp.)

Who would have thought Holden – Australia’s dinky-di car maker linked comfortably with football, meat pies and kangaroos – would close its 65-year-old local car manufacturing operations … for good … no comebacks?

And who would have thought Holden could have understood so little about the Australian psyche that it could immediately after the announcement produce an advertising campaign telling the very loyal people who had subsidised General Motors Holden not to worry … because even though they don’t make cars in Australia any more, they will always make the best cars for Australia.

What a howler. It will come as little surprise if local products are punished hard, possibly bringing on plant closures earlier than the predicted 2017, because Holden has shown it actually does not understand its relationship with Australian customers. So, we’re not worth it, eh?

SAVE US, PLEASE, NEW BUSINESSES

Governments know what they have to do, for the income fabric of Australia is being torn apart – they have to stitch up ways to help create jobs.

So personal taxes can be paid. So GST can be generated. So companies can pay 30 percent on profits. So the Federal Government can pay off the almost $400 billion national debt. So it can subsidise the essentials – like the agribusiness sector – that are not only vital for the health of Australia but also show increasing and sustained export prospects.

But governments don’t actually know how to do it. They sort of understand new businesses are emerging all the time, many riding a constructive part of the digital business wave that has engulfed others.

Australian government leaders, by now, must surely have read and understood the Kauffman Foundation research in the US utilised by President Barack Obama – which shows entrepreneurs and early stage businesses are where all the jobs growth is.

Big business is, today, all about generating productivity by automating, ‘downsizing’ and shedding jobs. Start-ups need skilled, energetic and enthusiastic people to grow – and they need more of them to keep on growing. They are too busy driving new business by increasing staff numbers to measure ‘productivity’.

These businesses have a major advantage over pre-digital legacy organisations.

Start-ups are born in the digital world, where they begin by delivering what the customer wants. They know what the customer wants, more than at any other time, because they communicate with them, listen to them, collaborate with them and watch what their customers and potential customers say through social media.

Australia has always been a market in which recommendation is the most powerful sales force. Australian is uniquely placed to exploit this in the digital age. So, of course, is North America, where US and Canadian entrepreneurs are really forging ahead.

PLAYING THE ADVANTAGE

North America right now is undergoing economic recovery by utilising the benefits of this tech-entrepreneurial revolution. But the US, in particular, has a few advantages that Australia is missing or, worse still, ignoring.

First, the US has a low-cost energy advantage, mostly because of new technologies to harvest shale oil and natural gas. In the US, this month, they were complaining that ‘gas’ pump prices were outrageously higher than last year … yes, they have now reached about $1.09 per litre (US$4.15 per gallon). Last year they were almost as annoyed by US$3.45 per gallon … which was about 91 cents per litre in our money.

With Australian fuel prices hovering at about the $1.60 level at the pump, we are only about 50 percent more expensive.

As an aside, a new challenge for Australia is the demise of oil refineries, with recent closures announced in South Australia and Queensland. We hear the old multinational oil company view that things will be fine and, in fact, petrol will probably be cheaper because it can be produced more efficiently at the new technology refineries in Singapore. We'll just have to store lots of it here. Give ourselves a three-month supply buffer. How about that? Might end up being five cents a litre cheaper ....?

Even if we ignore the arguments of energy security and the recent wild ride of the Australian dollar, here is a little fact out of the US: The three consistently cheapest states for fuel prices happen to be those that have the most refineries. Wyoming has six refineries, Montana has four and Utah has five. How many refineries does, er, the whole of Australia have, again?

While Australia has similar oil and gas reserves as the US (including Linc Energy’s massive oil reserves in South Australia) the benefits are slow in coming and are mostly earmarked for export – so there is no local advantage to manufacturing, power generators or the public. Zero.

For example, Queensland’s new hi-tech gas-fired power turbine at Stanwell Power station has been turned off and the old coal system re-deployed, because the cost of local gas was climbing in line with international prices.

US giant Dow Chemical CEO, Australian Andrew Liveris, warned of this several years ago, saying Australia would be “crazy” if it did not hive off a portion of the coal seam gas windfall and stock it to develop manufacturing – especially market leadership in petrochemical-based materials manufacturing.

Well, Australia is officially crazy.

MONETARY, MONEY TEARY

A key challenge for SMEs, especially early stagers, is financial support. The big banks play around the edges and create various tech start-up competitions, but beyond that the doors are closed to any sort of business case that does not involve mortgages on the directors’ homes.

Again, the US has this covered with a thriving venture capital, angel investor and philanthropic movement, most notably orchestrated through California’s Silicon Valley. Australia’s angel investors have a few wins under their belts, but in relative terms do not have anywhere near enough money in the market.

Venture capital, in a form that works for start-ups, is almost non-existent in Australia – which is why Silicon Valley venture capitalists and firms conduct periodic raids on Australian early-stagers, with great success.

We Are Hunted, for example, originally backed by Wotif.com founder and philanthropist Graham Wood, was a nice addition for Twitter last year.

State Governments like Queensland closed their venture capital operations, back in 2010, in spite of a decade-long record of relative success, nurturing Alchemia, Aurion and Technology One, among others.

More fundamental – and something the Federal Government can do something about – are Australia’s taxation rules on staff and supporter equity shareholdings and options.

Many ‘garage start-ups’ in the US made it because they issued shares for services where there was no cash available – take Hewlett Packard, Oracle, Microsoft and Google. This option is fraught with danger in Australia due to a tax regime that, especially since Labor Government changes in 2009, wants payment for value before those early-stage shareholdings have earned any real money.

These kinds of taxation barriers have been known about for a long time but, like the coal seam gas opportunity, are constantly missed by governments deflected by poor planning and rear window advice. Some argue that the loss of skills and experience in the public service sector, Australia-wide, may now have come home to roost.

AUSTRALIA: EXTRACT THE DIGIT

In the middle of graphic change there is always opportunity, but business leaders are going to have to innovate and collaborate like they have never done before to steer a course through this storm.

We live in a society, not an economy. ‘Digital’ bridges both in ways that have never been experienced before.

The fundamental change afoot is not about the technology at all. It is the way digital technologies influence and modify the behaviour and relationships of people. Specifically, the people you do business with.

The power is now in the hands of the customer. Start-ups understand this.

The great thing about digital technology is that you have more ways than ever before to find out what the customer wants and to communicate with them. The customer has more ways than ever to find out your story, too – what is special about your business – and figure out whether they want to have a relationship with your business, and at what level.

The bad news is that if you are not providing that special ‘relationship’ they are looking for, it is easy for them to search elsewhere and take in recommendations from their trusted other sources.

Digital business is actually more about relationships than business has ever been before.

The basics of getting close to your customers still apply, but the methods are evolving. The scale is greater than ever before, as is the risk and as is the opportunity, as you will read in Business Acumen issue 75’s feature reports and subscriber-only extended reports.

Anticipate and embrace digital disruption before it throttles you. Then you’ll find you can open up the throttle that is digital business, to accelerate.

- Mike Sullivan, Managing Editor, March 2014.