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The Current State of Play 2012–13

Managing in uncharted waters Business sentiment in Australia, New Zealand and Asia Managing in Uncharted Waters Š November 2012

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Disclaimer Any reproduction of this material must credit Newport Consulting. For more information regarding the research please contact Gemma Manning at Manning & Co. on 1300 512 902 or at gemma@manningandco.com.au If you are an executive or business owner and wish to register your interest in participating in future surveys, please contact info@manningandco.com.au 2

Newport Consulting – The Current State of Play


Executive Summary  

Newport Consulting is pleased to present the fourth Current State of Play report, Managing in Uncharted Waters. For the first time, this year’s report includes data and insights from Asia, making it a truly regional outlook report aggregating and comparing business sentiment and mood in Australia, New Zealand and Asia. Since the report’s inception four years ago, there have been significant swings in the business community’s mood. In 2009, the business community was upbeat and positive, particularly SMEs coming out of the financial crisis. Business leaders held an optimistic outlook with bullish growth expectations, even though the world was in recession and struggling with difficult economic conditions. This was most likely because the probable recession of the Australian economy had been avoided. This optimism has subsided over the last two years. The 2011 report found companies less buoyant and more cautious in their economic and individual business outlook. Companies expected a modest growth rate of 10 to 50 per cent. Few companies expected overly difficult conditions or considered reducing staff. However, in line with their conservative forecasts, companies were opting to hire part-time labour, contractors or consultants rather than replace or reduce full-time staff. By contrast, this year’s report indicates a growing pessimism with businesses simply trying to stay afloat. The survey, of 259 business leaders from Australia, New Zealand and East Asia, represents large companies as well as SMEs. It reveals a significant increase in the number of companies expecting zero growth this year and a greater increase in the number of companies either reducing staff or not replacing staff, with two-thirds planning this course of action.

Managing in Uncharted Waters © November 2012

Another dramatic change in our 2012 report is the approach to pricing. Last year, businesses planned to increase prices in reaction to ever-escalating business costs. But this year there has been a strategic shift towards leaving prices unchanged or even decreasing prices. This suggests that companies have adopted a business model that will deliver leaner profits. This year’s report highlights the underlying issues and fragmentations within the region, particularly in Australia’s multi-speed economy. Australia’s mining sector is starting to show signs of distress, which is further exposing the difficult trading conditions of other sectors in the economy and being reflected in the government policies of nonmining states, such as New South Wales and Victoria. The picture is the same for New Zealand. The Current State of Play aims to not only accurately gauge business conditions, but also drive thinking towards how companies can navigate uncharted waters for future survival and growth. I’m sure this year’s report will ignite further discussion on the key business issues occupying the minds of organisational leaders and business owners throughout Australia, New Zealand and Asia.

David Hand Managing Director, Newport Consulting

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Contents Overview5 Annual Update

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Key Insights

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1 Business Outlook

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A pessimistic employment outlook

14

Decreasing confidence in the economy

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Growth forecasts sink further

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Growth is all about the top line

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Margins dry up as costs rise

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Uncharted waters ahead for business

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2 Challenges, Opportunities & Priorities

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Leaders challenged by a troubled economy

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Opportunity from company-level improvements

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Businesses prioritise an inward focus

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Minimal investment is key to staying afloat

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3 The State of Play on Productivity

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Productivity sails onto the radar

22

Businesses commit to productivity

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Making more with existing resources

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Measuring productivity remains tricky

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Social media linked to better business

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4 Business on Government

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Calls for more government support

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Immediate action on productivity reform

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Leaders demand better use of funds

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Research Methodology Survey questions

Cover Image: Wave crashing in Indian ocean waters

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Demographics30

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Newport Consulting – The Current State of Play


Overview ¬¬ Annual Update ¬¬ Key Insights

Managing in Uncharted Waters © November 2012

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Key Insights Choppy economic conditions ahead For the fourth consecutive year of the survey, business optimism is down. While 78 per cent of businesses described their outlook as very optimistic four years ago, in 2012 this figure stands at 20 per cent. Economic conditions for 2012–13 were described as challenging for a sobering 75 per cent of respondents in Australia, New Zealand and Asia combined.

Growth forecasts are being revised down Growth expectations have more than halved in the four years of the survey, with just 26 per cent of businesses expecting returns above 10 per cent this year. Ongoing economic uncertainty in Australia and around the globe, along with rising business costs, is impacting on the ebullience of small and large businesses alike.

Employment is set to stagnate or decline A hiring freeze seems to have hit the region, with twothirds of companies either replacing staff or not hiring at all, compared to last year’s more mixed outlook. Hiring intentions are down for all roles including full-time, parttime, casual and contract.

Productivity is finally in the spotlight The survey also reveals a growing awareness that productivity requires greater attention, and 76 per cent report that they have taken steps to address this issue within their organisation. To tackle the productivity challenge, our respondents identified steps such as eliminating waste (67 per cent) and improving customer service (57 per cent). Meanwhile, respondents also see the government as needing to assume a key role in ensuring ongoing economic sustainability, given the weight of factors beyond their control such as escalating business costs and difficult economic conditions.

Governments counteract business Throughout the region, the survey reveals a surprising level of discontent among businesses with their governments. Dissatisfaction with the government grew 7 per cent among respondents in Australia, New Zealand and Asia. A concerning 46 per cent of businesses in Australia and 54 per cent of businesses in New Zealand felt governments were working against their interests.

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1 2 3 4 5 Newport Consulting – The Current State of Play


Challenges posed by external factors In direct contrast to the internal changes that businesses are striving to make, most of the perceived challenges appear to be external ones. Their top three challenges were the economy (78 per cent), cost control (54 per cent) and recruitment and retention (48 per cent).

Opportunities in company improvements Businesses have revealed an inward focus to their strategy for navigating the uncertain economy, with the majority reporting they would address tactics such as lifting productivity (62 per cent), upgrading technology (60 per cent) and boosting customer satisfaction (68 per cent).

Growth driven by sales, not innovation Customer-centricity is a key strategy to managing through uncharted waters, with one-third of businesses anticipating gains to come mostly from sales to new and existing customers. Businesses appear to be shirking higher risk strategies such as launching new products and services or entering new markets, a trend that echoes regional forecasts for subdued investment to 2013.

Managing in Uncharted Waters Š November 2012

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Annual Update An annual report on how business is tracking The Current State of Play is an annual report that measures business confidence, trends and management behaviour of large companies along with small and medium enterprises (SMEs) in Australia, New Zealand and Asia. The study was conceived in 2008, during the height of the global financial crisis, and is designed to assess the state of play of companies emerging from the credit crisis and the subsequent economic downturn. The report is a useful portrait of a nation’s economic and business environment and its ability to achieve sustained levels of business growth and performance. In doing so, the report continues to be one of the most respected assessments of business sentiment in the Trans-Tasman region. This year, for the first time, the report includes the views and sentiments of companies operating in East Asia, which will make future renditions of the report an Asia-Pacific business outlook report. In the four years we have conducted the report, Newport Consulting has made modifications to the original suite of questions to capture new data points essential to the current mood of businesses and the economy. This year’s report, Managing in Uncharted Waters (2012–13), follows Managing in a Multi-speed Economy (2011–12), Managing in Uncertain Times (2010–11) and Managing through a Downturn (2009–10).

The report is a useful portrait of a nation’s economic and business environment and its ability to achieve sustained levels of business growth and performance.

The report examines business confidence in an ongoing climate of economic challenges and asks: Is the outlook for companies more cautious than last year? What key business strategies are companies are adopting to remain competitive? What are the differences between SMEs and large companies in their approach to managing growth? Finally, is productivity a critical business issue in the present climate?

The report’s primary objectives are to: ¬¬ Track business confidence and expectations over the next 12 to 36 months ¬¬ Report on management behaviour and identify trends between SMEs and large companies ¬¬ Report on management behaviour and trends among Australian, New Zealand and Asian companies ¬¬ Assess business sentiment towards government policies and reforms.

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Newport Consulting – The Current State of Play


Business Outlook ¬¬ Uncharted waters ahead for business ¬¬ Growth forecasts sink further ¬¬ SMEs and big business in the same boat ¬¬ Decreasing confidence in the economy ¬¬ Pessimistic employment outlook ¬¬ Margins dry up as costs rise ¬¬ Growth is all about the top line

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Managing in Uncharted Waters © November 2012

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Uncharted waters ahead for business Companies appear to be viewing the economy’s choppy waters with some trepidation. Their cautious outlook and business sentiment for the next 12 months is largely unchanged from the survey data of our last report in 2011, as shown in Figure 1.0. There is a dramatic shift in confidence when comparing this year’s data to when we first began the report. In 2009–10, an overwhelming 78 per cent of survey respondents were very optimistic about their business prospects, compared to only 20 per cent this year. Conversely, only 7 per cent reported they would face difficult conditions in 2009–10 compared to 26 per cent this year. Australian companies had the most negative outlook in the region, with 27 per cent indicating that they will face difficult conditions over the next 12 months, compared to only 6 per cent of New Zealand companies with the same view (see Figure 1.1). Around three-quarters of SMEs remain cautious or even negative in their outlook (57 per cent and 26 per cent respectively) as shown in Figure 1.2. This is considerably lower than post-GFC, when respondents anticipated minimal aftershocks and a fast return to pre-GFC trading conditions. At that time, 92 per cent of respondents described their outlook as very optimistic. Four years ago, there was also a notable difference between SMEs and large companies, with around half of all large companies (47 per cent) feeling very optimistic about their business prospects, compared with most SMEs (92 per cent). However, this year’s data suggests companies of all sizes are more aligned with their outlooks, with both groups expressing caution (Figure 1.3).

Perspectives on business confidence Figure 1.0 How confident are you about the growth? Very optimistic 20% 15% 44% 78%

Cautiously optimistic 54% 59% 37% 15%

Face difficult conditions 26%

2012–2013

26%

2011–2012

20%

2010–2011

7%

2009–2010

Figure 1.1 Regional snapshot Very optimistic 33% 18% 29%

Cautiously optimistic 42% 56% 65%

Face difficult conditions 25%

Asia

27%

Australia

6%

New Zealand

Figure 1.2 SMEs year-on-year Very optimistic 17% 12% 33% 92%

Cautiously optimistic 57% 60% 50% 8%

Face difficult conditions 26% 29% 17% 0%

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2012–2013 2011–2012 2010–2011 2009–2010

Newport Consulting – The Current State of Play


Figure 1.3 Large companies year-on-year Very optimistic 23% 18% 39% 47%

Cautiously optimistic 54% 59% 45% 30%

Face difficult conditions 23% 23% 16%

2012–2013 2011–2012 2010–2011

23%

Managing in Uncharted Waters © November 2012

2009–2010

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Growth forecasts sink further The growth forecasts of companies in the region are again trending downwards – a trend that has continued year-onyear since The Current State of Play commenced in 2009. Back in 2009, more than three-quarters of respondents (76 per cent) were expecting growth exceeding 10 per cent. Only 16 per cent expected growth of less than 10 per cent that year, but this figure has now climbed to 59 per cent (Figure 1.4). Overall, this restrained growth forecast signifies an underlying concern among companies in their financial and business prospects.

Growth expectations and comparisons Figure 1.4 How much do you expect revenue to grow by? Don’t expect growth 13%

Those SMEs who were nimble in their approach to surviving 2009’s downturn are clearly struggling in the present economic environment as they succumb to rising cost pressures and cautious consumer behaviour.

2011–2012

6%

2010–2011

8%

2009–2010

Less than 10% 59% 50%

SMEs and big business in the same boat Overall, businesses are showing greater signs of struggle compared to previous report findings. The number of SMEs who don’t expect any growth has climbed to 12 per cent, compared to 5 per cent last year, while the number of big businesses expecting zero growth now stands at 12 per cent, up from just 2 per cent in 2011. Correspondingly, the number of SMEs expecting greater than 10 per cent growth declined from 34 per cent to 26 per cent (see Figure 1.5). Large businesses are also struggling with their outlook and hold the same cautious view as SMEs (Figure 1.6).

2012–2013

14%

36% 16%

Greater than 10% 26% 35% 58% 76%

Figure 1.5 SMEs year-on-year Don’t expect growth 2012–2013

12%

2011–2012

5%

2010–2011

25%

2009–2010

0%

Less than 10% 62% 61% 61% 7%

Greater than 10% 26% 34% 14% 93%

Figure 1.6 Large companies year-on-year Don’t expect growth 12% 2% 6% 23%

Less than 10% 62% 66% 73% 31%

Greater than 10% 26%

2012–2013 32%

2011–2012

21%

2010–2011 46%

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2009–2010

Newport Consulting – The Current State of Play


Decreasing confidence in the economy Another indicator pointing to a restrained business outlook is the decreased confidence that companies have in the economy. Of the surveyed companies, 64 per cent feel that the economy will be stagnant, slowing or declining in the next 12 months. This is an 18 per cent increase on last year and a trend we have witnessed year-on-year over the last three years. As demonstrated in Figure 1.7, the past year has seen a fall of almost 20 per cent in the number of companies who think the economy is growing, representing a distinctly negative outlook on the economy. Where slightly over half of respondents had a positive view of the economy last year, that number has dropped to just over one-third this year, confirming the sense of an uncertain economy of uncharted waters. External factors such as local, regional and global economic uncertainty is largely impacting business outlook (see Figure 1.8). A quarter of respondents base their outlook on the macroeconomic global situation outside their country, and a further quarter (28 per cent) have based their outlook on the domestic economy. Close to one in six survey respondents would like to see more government intervention and are worried about a politically volatile and uncertain environment. Such views correspond with other findings of this year’s report, which reveal that businesses are looking to make a suite of internal improvements in the following 12 months in the face of unpredictable external factors (see Challenges, Opportunities and Priorities section).

Economic outlook and impacts Figure 1.7 How do you perceive the economy? Growing 37% 54% 65%

Slowing 26% 25% 15%

Stagnant 33% 18% 17%

Declining

2012–2013

5%

2011–2012

3%

2010–2011

3%

2009–2010

Figure 1.8 What is impacting your business outlook? Local economic conditions 28%

Global economic conditions 27%

Inadequate government direction 16%

Competitive landscape 7%

Escalating business costs 6%

Unknown 6%

Labour and skills 5%

Carbon tax 3%

Technology 1%

Weather events 1%

Managing in Uncharted Waters © November 2012

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A pessimistic employment outlook The employment outlook for this year suggests a hiring freeze has hit the region, with two-thirds of companies replacing staff or not hiring at all, compared to last year’s more mixed outlook. The survey responses confirm that companies are staffing to stay afloat in the marketplace, rather than to drive growth. Similar to last year, 15 per cent of survey respondents are planning to reduce staff this financial year while more than a third are not hiring at all. There has been a drop in the number of survey respondents who are hiring – either full time staff or part-time staff and contractors. Less than a third of respondents were hiring new full-time staff, down from 37 per cent, and only 17 per cent intended to hire part-time or contract staff compared with 22 per cent last year (see Figure 1.9). More than half of the SMEs surveyed are either reducing staff or not hiring at all (8 per cent and 50 per cent respectively), slightly up from last year as shown in Figure 1.10. Just less than half of large companies surveyed (46 per cent) are either reducing staff or not hiring, which is significantly up from 33 per cent last year (Figure 1.11).

Employment outlook Figure 1.9 What is your employment outlook? Reducing staff 15% 11% 3%

Not hiring 39% 31% 35%

Hiring non-permanent staff 17% 22% 25%

Hiring full-time staff 30%

2012–2013 37%

2011–2012

37%

2010–2011

Figure 1.10 SMEs year-on-year Reducing staff 8% 4% 4%

Not hiring 50% 46% 38%

Hiring non-permanent staff 23% 29% 38%

Hiring full-time staff 20%

2012–2013

21%

2011–2012

20%

2010–2011

Figure 1.11 Large companies year-on-year Reducing staff 25% 17% 4%

Not hiring 21% 16% 33%

Hiring non-permanent staff 10% 15% 7%

Hiring full-time staff 43%

2012–2013 52% 56%

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2011–2012 2010–2011

Newport Consulting – The Current State of Play


Margins dry up as costs rise Unlike last year, fewer companies are planning to increase their prices in the year ahead and more are planning to leave prices unchanged, as shown in Figure 1.12. Looking at fluctuations in pricing over the past three years from our survey respondents, it appears that businesses may have placed too much faith on the relatively strong growth of 2010 by attempting to pass on increased costs through higher prices. For SMEs, there is a shift back towards leaving prices unchanged or even decreasing prices, something that we saw in 2010 when we first introduced this question (see Figure 1.13). While close to half the large company respondents plan to increase prices, a core 11 per cent plan to decrease prices (Figure 1.14). This is shown by the recent focus on operating costs in the banking sector and now among mining and resources companies, where falling commodity prices have begun to make some mines unprofitable due to their inability to reduce costs enough.

Pricing outlook Figure 1.12 What are your plans with selling prices? No change 53% 44% 50%

Increase 41% 53% 46%

Decrease 6% 3%

2012–2013

4%

2011–2012 2010–2011

Figure 1.13 SMEs year-on-year No change 56%

This poses the question: How long can businesses absorb the increased costs of doing business without passing the price rises on to the customer?

53% 71%

Increase 40% 47% 29%

Decrease 4%

2012–2013

0%

2011–2012

0%

2010–2011

Figure 1.14 Large companies year-on-year No change 41% 43% 33%

Increase 48% 57% 60%

Decrease 11% 0% 7%

Managing in Uncharted Waters © November 2012

2012–2013 2011–2012 2010–2011

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Growth is all about the top line In an economy of uncharted waters, companies are focusing primarily on growth through sales from new client acquisition or from existing clients, rather than riskassociated strategies such as investing in new product or services development, or exploring new markets. Of the surveyed companies, 17 per cent expect growth from new customer acquisition compared with just 7 per cent last year, suggesting a renewed focus on the volume of sales (Figure 1.15). A further 17 per cent expect to grow via increased sales with existing customers, a marginal increase from previous years, suggesting that businesses are hoping to retain customers through improved service. Productivity is back on the agenda, with the number of respondents planning to drive growth through improved productivity rebounding to 16 per cent after an all-time low of 6 per cent last year, suggesting a refocus on operational excellence. These findings confirm the importance of customercentricity in businesses strategy to managing through uncharted waters. Recent reports have indicated that sales organisations, for example, are focusing on top-line growth through back-to-basics strategies such as winning new business through referrals and personal networks. As companies continue to sail into the uncharted waters of the 2013 economy, they should continue to ask themselves:

Growth sources Figure 1.15 Where will your growth come from? Increased sales via client acquisition 17% 7% 10% 12%

Increased sales with existing customers 17% 16% 14% 8%

Increased productivity 16% 6% 15% 25%

Improved product and service 16% 18% 14% 16%

New product or service 12% 25% 13% 14%

Increased market share 11% 12%

¬¬ How well do we understand customer priorities or build customer engagement? ¬¬ Are our operations aligned to delivering better customer service? ¬¬ What is our business strategy for realising companywide productivity increases, and are we operationally equipped to sustain it? This trend of focusing on revenue and sales echoes regional forecasts of subdued investment over the coming year. In Australia, investment outside the mining sector will be minimal, and the investment outlook for New Zealand and the wider Asian region also remains cloudy as policymakers respond to the ongoing European debt crisis.

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17% 14%

New markets 8% 11% 8% 4%

M&As or JVs 3%

2012–2013 5%

2011–2012 9% 7%

2010–2011 2009–2010

Newport Consulting – The Current State of Play


Challenges, Opportunities & Priorities ¬¬ Leaders challenged by a troubled economy ¬¬ Opportunity from company-level improvements ¬¬ Businesses prioritise an inward focus ¬¬ Minimal investment is key to staying afloat

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Managing in Uncharted Waters © November 2012

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Leaders challenged by a troubled economy We asked survey respondents to rate a number of issues impacting business as either challenges, opportunities or priorities for their operations. Foremost among their responses was the state of the economy and cost control. This corresponded with their main business priority for the coming year, which is to improve operational performance among the majority of businesses surveyed. The state of the economy was rated as a key business challenge for three-quarters of survey recipients – 75 per cent, compared with 52 per cent last year, indicating ongoing fears that the murky global economy will affect business (Figure 2.0). Only 15 per cent of companies felt the economy presented opportunities for business, down from 22 per cent last year (Figure 2.1). Cost management again ranked the second-highest challenge, with 54 per cent of survey respondents naming this category, consistent with our findings in several previous reports. The prevalence of this challenge reflects a number of factors at play in the region, including rising business and import costs in Australia and New Zealand, and rising labour costs in Asia (Figure 2.0). Clearly, cost control has become a sink-or-swim survival strategy. Sales growth and skills development are two challenges identified that have also increased in significance since last year.

Challenges Figure 2.0 What are your greatest challenges? Status of economy 75% 52%

Cost management 54% 51%

Recruitment and retention 48% 45%

Capital expenditure 45% 42%

Sales growth 41% 31%

Skills development 38% 23%

Ageing workforce 35% 33%

Credit availability 35% 31%

Productivity 28% 31%

Technology 24% 21%

Customer satisfaction 23% 25%

Environmental credibility 20% 22%

Innovation and R&D 19% 15%

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2012–2013 2011–2012

Newport Consulting – The Current State of Play


Opportunity from company-level improvements Our data suggests that working smarter and harder will be a mantra for many in 2013. Foremost among the business opportunities identified by survey respondents was customer satisfaction (68 per cent), followed by productivity (62 per cent) and adopting new technology (60 per cent) as shown in Figure 2.1. The data indicates that companies remain internally focused as a strategy to improve performance and profitability. They also indicate a desire to better use existing resources. The renewed onus on customer service among our respondents reflects other current reports, showing that customer service is an opportunity for companies to differentiate themselves in a highly competitive and technologically advanced marketplace.

Opportunities Figure 2.1 What are your greatest opportunities? Customer satisfaction 68% 57%

Productivity 62% 51%

Technology 60% 50%

Innovation and R&D 55% 49%

Skills development 48% 54%

Sales growth 46% 44%

Environmental credibility 38% 35%

Cost management 33% 29%

Recruitment and retention 28% 26%

Status of economy 15% 22%

Capital expenditure 13% 15%

Ageing workforce 12% 13%

Credit availability 10% 11%

Managing in Uncharted Waters Š November 2012

2012–2013 2011–2012

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Businesses prioritise an inward focus We also asked our respondents about priorities for the year ahead. This year’s report highlighted an overwhelming drive to improve operational efficiencies, with 71 per cent of businesses saying they would prioritise operational performance improvement and 60 per cent saying they planned to lift productivity. Both categories are a stronger priority compared to last year (Figure 2.2). Ranked as priority number three for the second year straight was the goal of reducing costs, named by 52 per cent of respondents. Further down the list of priorities were training and skills development (33 per cent), and finding, retaining and motivating staff that fulfil the business strategy (also 33 per cent). A major challenge in the 2010 report, this priority dropped to number three in 2011 before plummeting to eighth place this year, echoing a generally sluggish employment forecast for the region and the modest hiring intentions of our respondents in this report (see previous Figure 1.9 on page 14).

Priorities Figure 2.2 What are your business priorities? Operational performance 71% 64%

Productivity 60% 50%

Cost control 52% 50%

Cash flow 48% 45%

New markets or products 38% 45%

Training and skills development 33% 36%

Minimal investment is key to staying afloat Low items on the 2012–13 agenda included credit availability, considered a priority only for 13 per cent of companies, the lowest ranking in our four surveys to date and the third consecutive year of such behaviour. In line with their downward revision of growth forecasts, companies do not have expansion plans and are not actively seeking credit from financial institutions. Given the relative availability of credit, as interest rates remain low throughout Australia, New Zealand and Asia, this trend highlights an opportunity for policymakers to provide stimulus for investors and for companies to consider low-risk expansion plans.

Recruitment and retention 33% 35%

Organic growth 33% 32%

Credit availability 13% 14%

Ageing workforce 12% 14%

Growth via acquisition 10%

2012–2013

9%

2011–2012

Other priorities include skills development, recruitment and retention, and organic growth, all priorities among 33 per cent of respondents. With education and training cited as a key opportunity for economic growth in Australia by the government recently, this focus would benefit a range of stakeholders in business circles. Finally, in keeping with our findings over the past few years, growth via acquisition and the ageing workforce were again rated as low priorities by the surveyed Australian, New Zealand and Asian companies for the year ahead.

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Newport Consulting – The Current State of Play


The State of Play on Productivity ¬¬ Productivity sails onto the radar ¬¬ Businesses commit to productivity ¬¬ Making more with existing resources ¬¬ Measuring productivity remains tricky ¬¬ Social media linked to better business

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Managing in Uncharted Waters © November 2012

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Productivity sails onto the radar Productivity remains a key focus for companies for the second year running. Of the surveyed companies, 16 per cent said that productivity was a key source of growth for their business and 62 per cent identified it as an opportunity for the year ahead. Productivity is clearly on the radar for the majority of business leaders and managers – a timely emergence, given the region’s broader productivity challenge. Australia’s economy has long been characterised by low productivity – slightly lower than New Zealand’s, and substantially lower than Asian productivity.1 Australia’s economic prospects beyond the end of the current resources boom are dubious if the decline in productivity growth is not reversed. New Zealand’s economy, beset by a less favourable terms of trade than Australia, is exposed to a more pressing need to improve productivity and drive up real wages. Acknowledging the importance of productivity in business and the broader economy, last year’s survey also examined productivity in organisations. The survey revealed that both Australian and New Zealand companies were grappling with the issue of productivity and where the problems lay. This year‘s survey reveals an encouraging increase in awareness of productivity and its challenges. For the first time in the survey to date, all respondents could define productivity, with 53 per cent defining it as working smarter not harder (see Figure 3.0) and a quarter defining it as doing more with less.

Defining and meeting the productivity challenge Figure 3.0 How do you best define productivity? Working smarter not harder 53%

More with less 25%

Greater capability 11%

Technology and innovation 6%

Sales growth 3%

Input vs output 2%

Unable to define 1%

Figure 3.1 How do we meet the productivity challenge? Microeconomics (company strategies and changes) 76%

Macroeconomics (government policy, regulation and reform) 11%

Unsure 8%

Both macro and microeconomics 5%

Businesses commit to productivity Also of note this year was the large number of survey respondents (76 per cent) who view productivity as an issue to be addressed at a company and individual level, rather than at a national or government level. Threequarters of respondents feel that they have control of their business’s productivity performance and can action improvements from looking within. By contrast, only 11 per cent deem productivity as an area that needs to be addressed at a macroeconomic level by the government. Only 5 per cent see productivity as a challenge that needs to be addressed at both a business and government level, as shown in Figure 3.1.

1  ‘Global index of workplace performance and flexibility’, Economist Intelligence Unit on behalf of US Society of Human Resources Management and the Australian Human Resources Institute, August 2012, PP18–23. 22

Newport Consulting – The Current State of Play


Making more with existing resources Reinforcing their increasing commitment to productivity, top business strategies to lift performance in this category included using resources better (71 per cent), identifying hidden waste (62 per cent) and improving customer service (58 per cent), as shown in Figure 3.2. Improving quality is also up to 59 per cent, compared with 46 per cent last year. Investing in technology and increased training and development has slipped in importance as a strategy to improve productivity. This is in line with our findings that tightly managing costs are both a key challenge and a priority for businesses this year. Businesses are not spending as much and instead are focused on internal measures to improve their business performance and productivity. As was the case last year, recruitment strategies and investing in R&D rates as a lower priority in driving productivity, as is technology and training. This could be a reflection of budget constraints and tighter cost control, which has dominated other findings throughout this report. Clearly, businesses are returning to an inward operational focus.

Improving productivity Figure 3.2 What are your plans to improve productivity? Utilise existing resources 71% 79%

Identify inefficiencies 62% 67%

Improve quality 59% 46%

Better customer service 58% 59%

Invest in technology 39% 54%

Training and development 34% 54%

Invest in R&D 21% 19%

Recruitment strategies 13%

2012–2013 29%

Managing in Uncharted Waters Š November 2012

2011–2012

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Measuring productivity remains tricky Businesses appear to be divided in their approach to measuring productivity, with most businesses calculating it as output against input (54 per cent) or by service improvement (28 per cent). Close to a fifth of respondents (18 per cent) didn’t know how to measure productivity, as shown in Figure 3.3. Companies continue to grapple with the high cost of labour in Australia compared with New Zealand and Asia. This is driving more attention towards ways of leveraging expensive labour hours in relation to the products and services delivered. At the same time, Australian companies are also seeing that a simple focus on labour costs, such as off-shoring, does not translate into the improvements needed to carry their businesses forward. We expect the trend of companies shifting operations to New Zealand to continue, given that Australian labour costs remain high by global standards and companies are failing to use labour in a productive way.

Measuring productivity and impacts of new media Figure 3.3 How do you measure productivity? Output vs input 54%

Service Improvement 28%

Don’t know 18%

Figure 3.4 Impacts of new media Staying connected 24/7 29%

Flexible working conditions 21%

Better customer service 20%

Improved processes

Social media linked to better business With business uptake of social media growing at a high rate around the globe, we felt that this year marked a timely opportunity to ask respondents on the impact of new media on their productivity.

16%

Increased security risks 7%

Information overload 7%

An overwhelming majority (86 per cent) of surveyed respondents said that social media has made a very positive impact on business performance. According to these businesses, social media enables better connectedness with each other and with customers (29 per cent), makes work practices more flexible (21 per cent), improves business processes (16 per cent), or improves collaboration between the organisation and customers (20 per cent), as shown in Figure 3.4. Conversely, only 14 per cent viewed social media to have a negative impact, with 7 per cent saying that it increases the risk of security breaches and another 7 per cent reeling from information overload. While social media is still a growth industry and its long-term impact on productivity and business performance remains unclear, it is an area that we plan to monitor in future reports.

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Newport Consulting – The Current State of Play


Business on Government ¬¬ Calls for more government support ¬¬ Leaders demand better use of funds ¬¬ Immediate action on productivity reform

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Managing in Uncharted Waters © November 2012

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Calls for more government support Businesses continue to be wary of the government and its policies and reform agenda.

Business on government

This year has seen a 7 per cent spike in the number of companies who view the government as working against businesses to reach 48 per cent, marking a 17 per cent increase overall compared to when the report was first conducted in 2009. Correspondingly, there has been a sharp decline in the number of survey respondents who view the government as moderately supportive – down from 50 per cent last year to 41 per cent this year, as shown in Figure 4.0.

Figure 4.0 Business on government year-on-year

In Asia, an three-quarters of survey respondents said the government is working against businesses, while only 13 per cent think the government is supporting business through beneficial initiatives and policies (Figure 4.1). In New Zealand, the number of respondents that view the government as working against business has doubled this year compared to last year (54 per cent compared to 21 per cent), as shown in Figure 4.2. Similarly, the number of respondents who think the government is significantly helping business is just a quarter of what it was in 2010, standing at just 8 per cent of companies this year. It is likely that this finding represents a drop-off from the optimism that greeted the incoming Key government in 2008, and the demise of the Clarke Labour government. Respondents in New Zealand are recognising that government policy has limited ability to remove the global uncertainty that affects a trading nation like New Zealand. In Australia, business views of the government remain largely unchanged from last year, with a marginal increase in the number of companies who think that the government is supporting business through beneficial initiatives. Almost half of the survey respondents say that the government is working against business (Figure 4.3). Our findings confirm recent research on this subject, with one report in particular assigning low ratings to the government policy and regulatory frameworks in place for Australia, New Zealand and several Asian nations, including China, Japan, Singapore and Hong Kong. Factors blamed for Australia’s lacklustre placing include its highly criticised industrial relations practices.

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No, working against 48% 41% 43% 31%

Some action, need more 41% 50% 48% 55%

Yes, beneficial action 11%

2012–2013

9%

2011–2012

9%

2010–2011 15%

2009–2010

Figure 4.1 Regional snapshot No, working against 75% 46% 54%

Some action, need more 13% 42% 38%

Yes, beneficial action 13%

Asia

12%

Australia

8%

New Zealand

Figure 4.2 New Zealand companies year-on-year No, working against 54% 21% 7%

Some action, need more 38% 72% 59%

Yes, beneficial action 8%

2012–2013

7%

2011–2012 34%

2010–2011

Newport Consulting – The Current State of Play


Immediate action on productivity reform When asked which policy commitments governments should focus, on business leaders in the region selected those that would deliver immediate benefits and result in real productivity reform. Almost half of their priority areas (52 per cent combined, as shown in Figure 4.4) were business-related, including tax reform, business regulatory reform such as cutting excessive red tape, industrial reform and addressing under-investment in infrastructure – all of which are policy areas identified as vital to solving the region’s productivity challenge. Leaders concurred that the government needs to shape more productive, innovative and high-performing workplaces through sound policy commitments that will drive a more competitive and flexible economy. Further down the list of priorities were long-term knowledge development areas such as business innovation programs (9 per cent), skills development (8 per cent) and education (7 per cent). This further suggests that business leaders are seeking immediate action from the government to improve the current business and economic environment, and correlates to the economy being the biggest challenge keeping leaders awake at night. While leaders seek a sustainable economic performance and competitive environment, they want to see real change through immediate action.

Government policy priorities Figure 4.4 What are the key policies you want addressed? Tax reform 15%

Business regulation 13%

Industrial reform 12%

Infrastructure 12%

Innovation programs 9%

Skills development 8%

Education 7%

Strong long-term budget 7%

Job creation 5%

Health 4%

Trade policy 4%

Low wages 2%

Retirement age 1%

Figure 4.3 Australian companies year-on-year No, working against 46% 45% 48%

Some action, need more 42% 46% 48%

Yes, beneficial action 12%

2012–2013

9%

2011–2012

9%

2010–2011

Managing in Uncharted Waters © November 2012

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Leaders demand better use of funds Businesses also called for better use of public funds. Asked how the government could make a positive and sustainable impact on the economy, most respondents described the need for less waste in the public sector (50 per cent). This would be best achieved through driving greater levels of operational efficiency in government departments, with funds redirected to current areas of under-investment such as infrastructure and education. Businesses also demand more efficient of government spending (43 per cent), as shown in Figure 4.5. Other suggestions included more support of the export market, and increasing taxes to deliver key services.

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Government initiatives for economic growth Figure 4.5 What describes the best way forward? Operational improvement of government departments 50%

Increased efficiency through strong leadership and policy 43%

Other 5%

Increased taxes for key services 2%

Newport Consulting – The Current State of Play


Research Methodology ¬¬ Demographics ¬¬ Survey questions

Managing in Uncharted Waters © November 2012

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Research Methodology Survey questions

Demographics

1. How confident are you about the growth prospects of your company in the next 12 months?

The Current State of Play results are based on responses from an online survey canvassing the thoughts and views of 259 SMEs and large companies in Australia, New Zealand and East Asia, across a range of business issues.

2. How much do you expect revenue to grow in the next 12 months? 3. Where will your growth come from? 4. Looking ahead for the next three years, how do you perceive the economy? 5. What is impacting your business outlook? 6. What is your employment outlook for the next 12 months? 7. What are your plans with selling prices for the next 12 months? 8. What are your greatest opportunities and challenges for the next 12 months? 9. What are your business priorities for the next 12 months?

The survey was conducted between 1 June and 30 June 2012 and included questions on business confidence and productivity, as well as business expectations for the year to June 2013. The report outlines the findings and presents these in four broad sections: ¬¬ Business Outlook 2012–13 ¬¬ Challenges, Opportunities and Priorities ¬¬ The State of Play on Productivity ¬¬ Business on Government Survey participants can be broken down as detailed in the following graphs.

10. How do you best define productivity? 11. How do you think the productivity challenge is best addressed?

Figure 5.0 Company size

12. What are your plans to improve productivity in the next 12 months? 13. How do you measure productivity? 14. What are your thoughts on the impact of new media (smartphones, social networks, text messaging, etc) on productivity?

44% Large companies

56% SMEs

15. Is the government actively supporting business through its policies? 16. What are the key policy priorities you want the government to address? 17. Government activity significantly impacts the performance of an economy. What initiative best describes the best way forward for government to positively impact economic performance?

Please note The data reported in this paper is based on the responses of the companies that participated in our survey. Percentages are representative of the survey sample. Due to rounding, percentages may not add up to 100 per cent.

Figure 5.1 Company type

30% Listed (public) company

41% Private (non-listed)

30% Non profit Government 7%

Large companies are defined as those with more than 100 employees in Australia, and 20 or more employees in New Zealand. SMEs are defined as companies with between 1 and 99 employees in Australia, and up to 20 employees in New Zealand. 30

Newport Consulting – The Current State of Play


Figure 5.2 Employees

38% 1 to 10

16% 501 to 2000

51 to 200 8%

13% 11 to 50

201 to 500 9% 2001 to 5000 6% Over 5000 10%

Figure 5.4 Industry sector

Figure 5.3 Revenue

27% Under $1 million

14% More than $1 billion

12% $100 to $500 million 21% $1 to $5 million

10% Manufacturing $500 million to $1 billion 6% $50 to $100 million 5% $20 to $50 million 6% $5 to $20 million 8%

Managing in Uncharted Waters Š November 2012

10% Govt. services

35% Business and professional services

13% Education, 11% community Resource and health (mining, oil and gas)

Transport, utilities, retail, wholesale 8% IT and Telecommunications 6% Non profit 5% Other 3%

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About Newport Consulting is an operational management consultancy which helps companies to achieve operational excellence through aligning and optimising existing resources to achieve tangible, consistent and measurable business performance. Newport Consulting provides experienced and talented experts to work closely with companies to create sustainable and measurable business improvement. Established in 2006, Newport Consulting has worked with a number of large companies in Australia and New Zealand across a range of industries including mining, oil and gas, professional services and food manufacturing.

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Newport Consulting State of Play Report 2012-13