With major employers heading offshore and employment numbers decimated, what will emerge from the ashes of Australia’s manufacturing industry? And what role should manufacturing play in the federal government’s competitiveness agenda? In this Reinventing Manufacturing series, we look at the case for retaining the industry, and how it can transform itself into a high performance, advanced and productive sector.
If international comparisons are anything to go by, Australia has more than its fair share of entrepreneurs. The Global Entrepreneurship and Development Index, ranks Australia second behind only the US. Similarly, the Global Entrepreneurship Monitor positions Australia as a place that supports and nurtures entrepreneurship.
But a closer look at these indices and rankings reveals these “animal spirits” that drive innovation and economic growth are not evenly distributed across all industries. This appears particularly so in the manufacturing sector, which has the second lowest rate of business start-ups in Australia.
Essential to the development of advanced manufacturing is the development and diffusion of new technology. Yet, Australia ranks poorly when it comes to technology-based entrepreneurship. New-to-market product innovation and advanced manufacturing do not appear strong either.
These signs indicate a major challenge if Australian manufacturing is to reinvent itself – the creation of an industry culture that encourages and supports entrepreneurial activity.
Animal spirits
This will require cultivating a new breed of manufacturing businesses that have a bias towards innovating and improving continuously, and a willingness to take risks and explore new market opportunities.
This is not simply about what firms do, and requires a shift in the way the industry as a whole operates. It will inevitably require some tolerance for failure, and finding ways in which businesses can learn from failed attempts at innovating to continue to improve and succeed. It requires a different approach from equity markets to funding for the development of new technologies and business ideas.
A new approach to value
Perhaps most significantly it will require a different mindset to how value is perceived and created, which is essential to the development of new business models.
Traditionally, manufacturing firms have pursued value creation through transforming raw materials into something that customers are willing to pay for. This approach is limiting in that it focuses on the exchange transaction and the related (often short-term) financial returns, tends to neglect what happens to value after the transaction (e.g. during the use of the product), and disregards non-customer stakeholders.
If we want to build a strong Australian entrepreneurial manufacturing sector with firms able to create new, innovative business models, we need to overcome these limitations and develop an extended, more entrepreneurial approach to value creation.
Value is much more than financial returns and every stakeholder can see value in a different way. It is important to be aware of these different perceptions of value and consider that firms and products can both create and destroy value affecting many stakeholders, not just customers.
Value should be perceived as co-created within the networks of stakeholders and considered over a longer period of time rather than enclosed in a product during production with focus on short-term financial gains.
For example, value of a phone is co-created over time with the network of providers who determine where the phone can be used and how much it costs to use it, application developers who determine many of the phone’s functions, and users themselves who apply the phone for different purposes and in different contexts.
Users’ knowledge, experience and imagination are particularly important sources of innovation. For example, Lego has been able to develop successful products like Lego Friends, designed to appeal to girls, by actively engaging users in product co-creation.
Changing the approach value
In order to shift to the new, extended approach to value, businesses can start with pursuing profits FOR a purpose instead of pursuing profits AS a purpose.
The preliminary results in a study of manufacturing businesses using the extended approach to value in the USA, Europe and New Zealand that we are conducting reveal that firms see their profits as a tool to create a greater overall value. Managers of these firms recognise that doing so contributes significantly not only to a strong ability to innovate but also to high employee loyalty and overall economic success.
Industry as a whole can support the shift to the extended approach to value in several ways. It needs to find better access to patient capital that does not expect high, short-term, financial returns. It also needs to enhance collaboration and knowledge exchange between different sectors. Great inventions and opportunities often come from non-experts. For example, the first optical device that allowed seeing single-cell organisms was invented and built by a linen merchant. Organisations such as Carlton Connect and other collaborative university/industry hubs can help in this process.
Finally, governments can help in the shift by providing funding for building multi-sector partnerships where success is defined and measured by the extent to which particular problems are solved and needs satisfied rather than by short-term financial outcomes.
Failing to adopt an extended approach to value is likely to erode firms’ capacity to create new, innovative business models, and will mean Australian manufacturers will inevitably be stuck in catch-up mode instead of becoming entrepreneurial, global leaders in value creation.