Business Radar April 2024

BUSINESS RADAR

Understanding the businesses driving Australia’s economy

About this report

Pitcher Partners Business Radar canvasses the trends, challenges and opportunities experienced by Australia’s middle market businesses. Independently commissioned, our most recent snapshot was conducted in February 2024 and surveyed over 150 business owners and leaders.

This is the first in this year’s series that deep dives into business leaders’ confidence, considering their organisation, their industry and the economy as a whole. It also delves into the topic of productivity – supposedly a critical challenge for the Australian economy, but is it really?

Key findings

• A dipping of overall confidence may be resettling after unexpected heights of 2023.

• The confidence boost of strong demand is tempered by the increased cost of doing business.

• Australia’s middle market may not be as challenged by productivity issues as the wider economy.

Read on to learn how you can proactively address these challenges and ensure your business continues to thrive.

Are we back to precedented times?

A return to ‘normality’ sees confidence resettle after 2023 peaks

The last four years have been a rollercoaster of a ride – conditions that usually set business owners on edge.

Throughout, the resilience and optimism of our middle market business leaders has stood out, with consistently higher confidence levels than pre-pandemic and a surprisingly big spike in May 2023.

In this snapshot, confidence continues dipping from those heights, perhaps a sign of things settling down rather than worsening – we might be coming out of the upheaval of unprecedented events and back to something closer to stability.

Steady as she goes

The first Business Radar report of 2024 sees the downward trend of late 2023 business confidence continue, although this ‘dip’ still shows higher confidence than the levels of early 2023 and before.

Segment splits make a U-turn

Segmented by state, size of business and age of business leader, the data shows an interesting split – and a U-turn on the previous September 2023 results.

Similarly, the confidence of businesses with fewer than 100 employees jumped from 7.64 in September 2023 to 7.88 in this report, while decreases are seen from those running larger businesses (8.18 down to 7.64) and those aged over 35 (8.25 down to 7.69). This was the opposite in September 2023 – smaller businesses and younger leaders had sagging confidence, while the confidence of larger firms and older leaders inched up.

While overall levels are holding strong, we are beginning to see confidence steadily erode for middle market business leaders. The all-encompassing ‘cost of living’ and ‘cost of doing business’ is a major cause of this, as well as the seemingly constant change and challenges leaders are battling. 7.84

Aussies keep backing themselves to grow

As in previous surveys, we asked business leaders to consider growth prospects at a more macro level over the coming 12 months. Responses show a drop in confidence in their own industry and the Australian economy, but both are still higher than in February 2023 and before. Both also remain higher than growth prospects for the global business economy, which has dipped below 7 to 6.84. However, the trend is worrying and could be a sign of continued difficult business conditions.

Middle market confidence in 12 month growth prospects

Costs, consumers and tech remain top drivers

Considering the external factors most impacting business confidence, our respondents’ answers focused on three things: everything costs more, technology keeps advancing and – perhaps not unrelated to these two factors – consumers’ expectations are shifting.

Last year, leaders stopped considering the pandemic as a major factor affecting business confidence, pointing more towards the impact of the global response: inflation and higher interest rates. Now, business leaders focus squarely on local factors – managing increased demand and the cost of doing business. The increased demand for products or services is driven by stable economic growth and recordbreaking population growth, which reached a high of 2.5% in September 2023.

Consumer tastes join technological advancement as the only two of last report’s top five factors to retain a position. Most interestingly, 83% of respondents agreed that consumers want more community involvement from businesses. This aligns with what Pitcher Partners experts are seeing in the market – consumers will trust brands that have values reflecting their own.

83%

of respondents agreed that consumers want more community involvement from businesses

Here’s just some of what our respondents said:

“Entering the international market, enterprises can face more consumers, expand sales channels, and expand product sales.”

“The market demand is growing increasingly, providing an opportunity to expand sales for the business.”

“Having a relatively stable economic and political environment is conducive to attracting business investments and promoting commercial activities.”

Survey respondents

We are integrating AI as it will lower business costs and means fewer workers to hire. We offer digital products only, keeping costs as low as possible.

Survey respondent

A jump in demand, but it costs more to deliver

Looking deeper into the influential factors an interesting story emerges.

Demand for products and services took the top spot with a whopping 43% of respondents placing it in their top three – more than double the 21% seen in September 23.

However, the confidence boost from a jump in demand is clearly tempered by the fact that it is more expensive to do business. The top four factors negatively impacting business confidence are all cost-related – operating and labour costs, inflation and interest rates are all up. Operating costs, in particular, have made a big jump, with 32% rating them as a top-three negative influencer, compared with only 18% in the last report.

It’s worth noting that although tech advances have slipped back in the overall rankings (previously number one), more respondents (38%) in this report than last (34%) consider them in the top three positive factors influencing business confidence.

The foreign exchange rate as a positive factor has also reduced in relevance from 21% to 7%, possibly due to businesses adapting to the relative stability of the Australian dollar over the past 12 months.

When looking at the larger businesses, those with more than 200 employees, it’s interesting to note that they put tech advancement as a positive influencing factor at number one, with labour conditions in second place. Their negative factors also look different, with inflation moving to the top spot and operating costs coming in third, behind labour costs.

Our experience tells us larger businesses are more likely to have sufficient funds, strong technology systems and processes that support the adoption of new technologies like Microsoft’s GenAI tool Copilot.

For these companies, Copilot could create incremental gains across their processes, allowing resources to be focused on more productive activities.

Martin Koval, Pitcher Partners Melbourne Client Director

The Copilot crossroads: what businesses

need to know,

2023

4

top factors negatively impacting business confidence were all cost-related: operating and labour costs, inflation and interest rates

Efficiency is make or break, but is it the best productivity strategy?

Last year’s final report saw strong customer relationships get a big bump in importance, becoming the top driver of success. This year’s first set of numbers reinforce that place – 35% of respondents say it’s in their top three.

However, operational efficiency is clearly top of mind for our middle market leaders with a substantial jump from 25% to 32%, taking it into the second spot. Investment in technology – arguably a related factor – inches up to 28%.

Taking a holistic view of both the drivers and barriers of success, all are factors that influence productivity. If business leaders widened their lens to have a deliberate focus on productivity, as opposed to just operational efficiency, they could potentially achieve better outcomes. Cost control has limited upside. Making better decisions about where to spend to ensure incremental returns is the heart of productive strategy and likely to contribute to stronger long-term gains.

Strong leadership becomes more important

While previous respondents emphasised short-term business concerns like cashflow and sales, we’re seeing a shift to longer-term considerations in 2024, centred around leadership. Poor financial management, lack of vision and leadership not adapting to the changing environment appear in the top six barriers to success.

26% agreed that clear vision from leadership was a driver of success.

This could be explained by a postpandemic recalibration – our leaders were in crisis mode, fighting immediate fires. Now, in a business environment challenged by strong demand and high costs, they can see the benefit of longer-term planning. Middle market leaders are on notice: they need to deliver strong and clear leadership that their people can see and buy into.

Top drivers of business success

(Sep 2023:

Top barriers to business success

Attracting talent

Supply chain management

Poor financial management

Cashflow problems

31% (Sep 2023: 32%) 26% (Sep 2023: 21%)

Lack of vision and strategic plan

26% (Sep 2023: 19%)

Leadership not adapting

(Sep 2023: 25%) 24% (Sep 2023: 19%)

Confidence down, but not out

As this gentle downward trend continues, it won’t be surprising to see confidence numbers dip more over the coming year. Time will tell if this represents a resettling after the highs of 2023 or a sign of coming woe.

The pressures of productivity

– what the middle market can do to move the needle

Australia’s agriculture, manufacturing and resources industries have long delivered the lion’s share of our country’s productivity gains, while service productivity falls behind. This reflects the global trend, with service industries around the world continuing to be highly reliant on labour.

It’s the likely explanation for a surprising overall increase in reported productivity we saw in our most recent survey of middle market businesses. 64% of middle market businesses reported that, by comparison, their business operations were more productive than they were two years ago. While the snapshot canvassed over 150 businesses across industries, sizes and states, the sample did have some bias towards those industries most likely to see overall productivity growth, according to the Australian Bureau of Statistics

Smaller middle market businesses are faring better – 15% of larger middle market businesses and 14% of medium sized middle market businesses are experiencing some decrease, compared to 4% of smaller middle market businesses.

Here’s just some of what our respondents said:

“Higher productivity levels can contribute to overall economic growth in Australia, attracting investments and creating job opportunities.”

“Productivity has been fluctuation lately, however the overall results have proven consistent.”

Survey respondents

20%

Increased significantly

44%

Increased slightly

25%

Remain unchanged

6%

Decreased slightly

4%

Decreased significantly

15% of larger middle market businesses are experiencing some level of decrease in productivity

Productivity panics

Despite the generally positive view on productivity gains, our middle market business leaders are worried. 52% are extremely or very concerned about the levels of productivity in their business, although larger businesses are less so (33% are not concerned vs 22% overall). So, what’s driving these concerns?

We asked leaders to name the internal factors that most impact their productivity, and labour issues are looming large. They see difficulty attracting and retaining talent as the greatest challenge to productivity (30%), with employee burnout and engagement issues taking two more of the top five spots. These labour issues are likely amplified by labour market shortages and skills gaps, identified as the key external factors impacting productivity.

Extremely concerned

Employees are an important part of productivity – their quality and work attitude directly affect production efficiency.

Survey respondents

Size matters

When comparing responses across business size, we see that smaller organisations are disproportionally impacted by government policies, perhaps because they’re used to operating more nimbly.

Larger businesses ranked geopolitical instability as their second most influential factor – overall businesses put it way down in the eleventh place. This may be because larger businesses are more likely than smaller businesses to be trading internationally.

Here’s just some of what our respondents said:

“Complex regulations and red tape can create challenges for businesses in terms of compliance costs and administrative burden.”

“The labour costs are relatively high, labour laws are stringent and compliance costs are elevated.”

Survey respondents

Here’s just some of what our respondents said:

“To improve productivity, business needs to clearly define roles and responsibilities and have a set of SMART goals to measure performance.”

“My priority would be improving standardised operations and providing training for employees.”

A nuanced view from those with productivity gains

For those who’d seen no productivity gains, labour was top of mind: difficulty attracting and retaining talent and employee burnout. Respondents agreed that major external factors included skills shortages and complacency in Australian society. Institutional training gaps were also a top factor (24%), echoing recent comments from Productivity Commissioner Catherine de Fontenay

Businesses reporting productivity gains also agreed the skilled labour shortage was a factor (34%). However, this group seems to have a more nuanced view. They’re concerned with getting more from existing employees and see innovation as important as labour issues. 27% named both declining employee engagement and the absence of employee training programmes as influencing factors. Respondents agreed that a lack of focus on innovation and limited investment in tech was impacting productivity.

28% respondents who’d seen productivity gains agreed supply chain dynamics were an influential factor Internal factors impacting productivity:

Perhaps more a comment on their industry than their outlook, 28% of respondents who’d seen productivity gains agreed supply chain dynamics were an influential factor, compared with only 16% of those who’d seen no gains. Supply chain dynamics also featured more strongly in respondents’ top three (32% vs 24%), along with a lack of leadership focus on productivity (28% vs 19%).

Survey respondents

External factors impacting productivity: Businesses that have seen productivity gains vs those who haven't

No silver bullet

Interestingly, no single factor was put in the top three by more than a third of respondents. This spread of factors suggests there’s no easy productivity fix for middle market businesses. With different situations requiring different solutions, it’s paramount that business leaders look deeply at their processes across the whole spectrum of their business. They should seek external analysis to understand what is occurring more broadly, and to help uncover their unique productivity roadblocks.

Time to stop cracking the whip?

It’s easy for business leaders to draw a link between productivity and employee effort. And in many cases, this is true –but it has its limits. A February 2024 report from the Productivity Commission showed a 6.7% increase in hours worked over the 2022–23 financial year, but without a corresponding uplift in output.

The commission’s deputy chair, Alex Robson, told the Guardian that low capital expenditure was to blame.

“Employers didn’t invest in the equipment, tools and resources needed to make the most of employees’ skills and talents.”

Supporting this hypothesis, employee burnout was highlighted as one of the top internal factors impacting productivity: more pressure on employees isn’t an easy fix.

Innovating for smarter working

Another report from the Productivity Commission says 98% could see “much productivity improvement [from] the adoption of established, even dated, technologies and practices.”

It’s a message that businesses are already starting to take on board. When asked about steps they’re taking or intend to take to improve productivity, the top two were focused on technology – employing new technology and introducing new collaboration tools. And 33% of respondents named management attention to productivity, putting it in third place.

However, initiatives to get people working more productively still made up half of the top 10 – investing in training, changing incentives, exploring working models, and implementing well-being initiatives and feedback mechanisms.

This points to a continued acknowledgement on the importance of labour – however our respondents see that productivity improvements will come from other areas.

Respondents were asked to suggest one change or reprioritisation for their business that would enhance their business productivity. When asked whether suggestions from other respondents would apply to their business as well, internal innovations dominated: introducing new technology and digital tools, investing in technology, improving production processes, eliminating unnecessary tasks, and streamlining processes.

Initiatives to get employees working more productively are still present, but these make up four, rather than five, of the top 10 and are positioned much lower in the rankings –hire new talent, staff training, flexible work and increased employee benefits.

Over 80% agreed that each of these changes would improve their business productivity, starkly contrasting with the lack of consensus over factors impacting productivity. This suggests that while each business has its own context and productivity challenges, they’d benefit from similar solutions.

It is about continuously training and developing employees’ skills and knowledge, motivating them to perform better.

Survey respondent

Innovation doesn’t need to be groundbreaking. This is a potential antidote to the core barrier to action on innovation to deliver productivity. There is a fear and intimidation that comes with the expectation of needing to create something new or invest heavily to obtain it. One leading

business’ status quo is an aspiring business’ treasure.

Nick Bull Pitcher Partners, Melbourne Partner

It’s not about working harder. The data suggests more hours are being worked, however there doesn’t seem to be a corresponding increase in output. Leaders need to help employees be more effective with their time. Focus needs to be on simplifying and improving processes, ensuring training and development activities are targeted and effective to upskill your people, and make sure your teams are healthy and happy. This all helps to promote good decision making and focus on producing great work in the areas that matter.

90%

89%

88%

85%

85%

84% Invest

Gavin Debono Pitcher Partners, Melbourne Partner

Key areas of prioritisation to enhance productivity

Insights for business

Mind your Ps: processes, platforms and people

People will always form the core of business productivity, especially those in service industries. Motivating, engaging, and supporting are key. However, these will only take you so far.

Once your team is working at its peak, your productivity gains are capped. Pushing beyond this can often be counterproductive – you burn through goodwill, minimising future efficiency, engagement and retention.

The answer is to build systems, processes and technology around your people to help them work smarter. These innovations don’t even need to be ground-breaking – they just have to help your people do more with less.

Actions you can take

Review your business processes, especially your supply chain management, to uncover any that are slow, redundant, are too manual or are prone to error.

Get a leadership team in place that takes a strategic and clear-eyed view of your business and makes productivity a priority.

Build KPIs around productivity indicators like production output, sales conversions and customer service response times. This will help keep everyone focused and let you spot issues early.

Invest in good financial management processes, people and systems.

Collect and analyse your production, sales, inventory and customer data to spot inefficiencies and bottlenecks.

Look into your software systems, tools and equipment – are the platforms effective? Does the data flow freely between systems? Is the equipment reliable and in good repair? When your tools, both analogue and digital, work as they should, your people spend less time plugging gaps and managing delays.

Pay attention to customer feedback and complaints – any that come up often around product quality, delivery times, customer service or more may highlight where you can improve.

Invest in your people – schedule regular performance reviews, build upskilling and team building into your business as usual, and take steps to support their health and wellbeing

Build a culture of innovation. This begins with leadership setting specific innovation goals and objectives, then training people in creativity and experimentation, allocating resources, and rewarding and communicating innovative improvements.

Check against industry benchmarks and your competitors. These may highlight where you can improve.

Learn from others. Engage in conversations with fellow business leaders, gaining insights into their experiences and the strategies they’ve employed to enhance productivity.

Get external help – a fresh expert pair of eyes may see productivity-boosting opportunities you might have missed.

Meet our middle market businesses

This report defines mid-market businesses as employing 20–200 people with annual revenue of $2–$500 million. While their operating models, sizes and industries vary widely, these businesses can be categorised into four lifecycle stages.

A range of business structures

A range of business lifecycle stages

Seed

Operating for less than two years. Focus on establishing business model and reinvestment of profits.

Business profile

25%

Growth

Gaining traction in market with recent, consistent growth. Reinvest profits to support expansion.

Contribute approximately 25% of Australia’s total revenue

Mature

Consistent and stable revenue. Working on a business-as- usual basis.

20-200

Typically employ 20-200 staff

Transition

Focused on evolving the business model, or selling / winding down the business.

$2-$500m

annual revenue with a growth mindset and the ability to adapt quickly

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Gavin Debono Partner – Melbourne

p +61 3 8610 5331

e gavin.debono@pitcher.com.au

Jyotika Rangel Partner – Sydney

p +61 2 8236 7811

e jyotika.rangel@pitcher.com.au

Kylie Lamprecht Partner – Brisbane

p +61 7 3222 8437

e klamprecht@pitcherpartners.com.au

Robert Prince Executive Director – Perth

p +61 8 9322 2022

e princer@pitcher-wa.com.au

Peter Lawrence Partner – Newcastle

p +61 2 4923 4000

e peter.lawrence@pitchernewcastle.com.au

Chris Hanna Principal – Adelaide

p +61 8 8179 2800

e chris.hanna@pitcher-sa.com.au

Nick Bull Partner – Melbourne

p +61 3 8610 5287

e nick.bull@pitcher.com.au