Opportunities for innovation in Australia

The Australian startup ecosystem is growing too slowly, but existing firms are becoming more interested in innovation as a source of competitive advantage.

MBS students brainstorming during the Innovation Bootcamp
Students brainstorming during the MBS Innovation Bootcamp

Australia performed poorly in the global startup ecosystem ranking 2015 which was published recently (http://goo.gl/UXcGcO). Sydney fell 4 spots and now ranks 16th in the world, while Melbourne fell entirely out of the top 20 despite being on that chart in the previous version of the report published three years ago. The study expresses concerns about the Australian ecosystem that echo those in other studies performed by academics as well as in the Australian Government’s Innovation System Report (http://goo.gl/kvQZhK). The 2014 AIS report sums it up nicely: “Australia performs relatively poorly on ‘new to market’ innovation”.

Yet on the ground, interest in innovation and startups has never been stronger than before in Australia. Compared to five years ago, we now have many more ‘meetup’ groups in Melbourne and Sydney for founders and entrepreneurs, a variety of incubators and accelerators, and a number of innovation-oriented programs at leading universities including Melbourne, UTS, Swinburne and QUT. There is strong interest in courses on “design thinking” and “lean startups”. MBS has our innovation bootcamp for MBA students, while the University of Melbourne now has an accelerator and is about to launch a new Masters in Entrepreneurship program. A growing number of entrepreneurs are contacting me to discuss new business models, market entry and how to protect their innovations. These will take time to bear fruit.

How do we reconcile the weak findings at the ecosystem level with growing interest at the ground level? Part of what’s happening is that other startups ecosystems are maturing faster than the one in Australia. Many ecosystems abroad have continued to enjoy stronger government support, better access to venture capital and closer industry-university linkages. The most successful ecosystems (including Silicon Valley, New York, Los Angeles, Boston, Tel Aviv) have continued to develop and reinforce a coherent system for connecting resources, talent, funding and market access. Here in Australia, we have bits and pieces that are good in each major city, and we also have specific firms and sectors that are incredibly innovative. But that distribution is uneven and the parties involved are not as seamlessly interconnected as they could be.

A second part of the explanation is due to the business environment in Australia. Given our small domestic market, many of our startup entrepreneurs will continue to sink at least one foot (if not both feet) into other ecosystems. This makes sense from the point of view of being close to market and expertise.

A big change however is the growing interest in innovation by existing firms. In recent years, incumbent firms in industries ranging from retail to energy, news and financial services have been jolted out of a comfortable (often monopolistic or duopolistic) existence due to the threat of entrants, both online and offline.

The embrace of innovation by Australian firms has taken a long time, partly due to the difficulty of changing the mindsets of senior executives who run these organizations. However, it is clear that in a variety of industries across the globe, the terms of competition have changed and Australia is no exception. In conversations with senior managers at Australian organizations, I am discovering a growing interest in innovative strategy, business transformation, ‘design thinking’ and ‘business model innovation’. These conversations often begin with a reactive or defensive tone reflecting a need to respond to market or technological threats. However at some organizations the discussions have begun to advance beyond that stage: managers at some firms start to view innovation as an opportunity to reconsider their existing ways of doing things, engage new stakeholders and to develop new capabilities.

In the short run, I see a good opportunity in helping existing Australian firms learn to innovate and become more agile and competitive. In the longer run, it would be nice to see the startup ecosystem flourish in Australia, but that is something that will take time and sustained effort.

Note: I was invited to write this article for the Melbourne Business School student newsletter. It is reprinted above, sightly edited.

“Blue Ocean” strategy? Actually it does not matter what colour your ocean is

Blue Ocean strategies promise to break the tradeoff between costs and willingness to pay. But they don’t really. The tools offered by the blue ocean approach are useful such as the strategy canvas and ERRC framework, but irrespective of whether your ocean is blue, red or some other colour.

Ocean View, Mt Eliza
The blue yonder, Mt Eliza

Yesterday my MBA students and I discussed “Blue Ocean Strategy”, a popular book on strategic management by Kim and Mauborgne. A good thing about the book is that it encourages managers to be innovative and to pursue new markets rather than competing in highly competitive existing arenas, i.e., playing in “blue oceans” instead of “red oceans”. According to the authors, this way of thinking has served well for companies like Cirque du Soleil, Nintendo and Casella, an Australian firm that has succeeded in selling easy-to-drink wine in the US. Managers are encouraged to use the Strategy Canvas as an organizing framework (see here for an example). This encourages managers to ask themselves whether their products and services are really distinct after all, and along what dimensions they actually differ from the competition.

So far so good. But the problem is that in their enthusiasm, Kim and Mauborgne go on to make a tantalizing claim that the blue ocean approach allows you to break the tradeoff between pursuing differentiation and low costs. This puts them at odds with many leading strategy textbooks, which argue that it is often difficult for firms to increase consumer “willingness to pay” (WTP) while simultaneously reducing cost, all else being equal. You usually have to spend money on R&D, marketing and better execution in order to increase WTP. The “blue ocean” claim leads to all sorts of confusion among MBA students.

Does the blue ocean approach actually offer a silver bullet? Unfortunately not. The truth lies in the details. For a blue ocean strategy to work, you aren’t just supposed to add new activities that increase willingness to pay. You are also supposed to look for opportunities to eliminate or reduce others in order to cut costs. This is presented as the “ERRC” framework (pg 35 of the book) which asks managers to raise and create new dimensions for their product/service, while eliminating or reducing others. For example, Cirque du Soleil increased willingness to pay by introducing broadway-style themes, artistic music and dance, and better stage lighting to their productions. Meanwhile they reduced costs by eliminating animal shows and star performers, both of which are expensive cost components for a circus.

From the above it should be apparent that you still face a tradeoff between costs and willingness to pay. But you are just avoiding it by removing some of the costly activities. In other words, it isn’t the case that all else is equal. If Cirque du Soleil were able to offer all the new features in addition to having animals and circus stars (but at no marginal cost), then it would be legitimate to make a claim that the cost-WTP tradeoff had been broken. But fundamentally this tradeoff remains, and while the exciting new features enabled Cirque du Soleil to differentiate themselves from ordinary circuses and to increase ticket prices, the removal of animal shows and star performers inevitably meant that some customers who valued those things were now less willing to pay for a show.

Overall, the strategy map and blue ocean approach are useful because they encourage managers to think outside the box when looking for new competitive opportunities. But personally I find the distinction between blue and red oceans somewhat forced, especially when you realize that a firm produces multiple products, and these are likely to fall along a spectrum ranging from red to blue and beyond. So while the Nintendo Wii was blue ocean in approach, other Nintendo products at that time such as the DS were clearly not. In a fundamental sense, increasing WTP and reducing costs are complementary (Athey & Schmutzler, 1995). Hence, finding new and innovative opportunities to increase WTP and reduce costs should be something a manager ought to do anyways, regardless of whether their ocean is blue, red, purple or some other colour.

“What really went wrong for Borders and Angus & Robertson” on The Conversation

Final Closing Down Sale at A&R

Today, Melbourne University along with 8 other University partners and CSIRO launches a new media venture, The Conversation. It will present independent commentary by academics and researchers. The Business+Economy section features my article on “What really went wrong for Borders and Angus & Robertson.” Using publicly available data I explore several explanations for the demise of REDgroup, the firm which owned and operated the Borders and A&R stores in this region. Drop by to read the article and share your thoughts at:
http://theconversation.edu.au/articles/what-really-went-wrong-for-borders-and-angus-and-robertson-301

New Models for the Book Industry

IPRIA Seminar- Books
MBS/CMCL/IPRIA Seminar on Book Publishing. 9 Feb 2011

Traditional book publishers have been increasingly challenged by e-books and other digital technologies. We decided to organize a public seminar with industry participants to learn about new opportunities in this area.

A common theme among our speakers was of the growing fault lines between those who create content and those who distribute it. From the point of view of content creators, digital technology is not a bad thing. It presents new ways to reach customers. To a firm like Lonely Planet, printed books, e-books and apps are alternative and useful delivery mechanisms. The heterogeneity is a good thing since each delivery mechanism has its strengths and weaknesses. For example a map-based application on your mobile phone may be useful for navigating the streets of Melbourne, while a printed travel book might be preferred if you are traveling the Australian outback (books are more durable than electronic devices; they also require no electrical power).

Authors are beginning to explore new pricing schemes. For example several authors are trying to sell a larger volume of e-books at lower prices (around $2.99 – $3.99) instead of a small number of regular books at higher prices (say, $10). Other authors are trying “pay what you want” schemes. Our guest speaker Max Barry will be selling his next book as a real time electronic serial, distributing it directly from his website in small chunks and for an attractive price ($6.95). It is too early to know which of these will work well and for whom because the book industry has many different segments of customers with different needs. Furthermore, there are concerns with e-books around the issue of digital piracy. However, we were reminded by one of the speakers that for many authors, obscurity is worse than piracy. Besides, piracy has long been a threat even with printed books: you will of course remember the photocopy machine which has existed for quite awhile, as well as those suspiciously inexpensive textbooks printed on poor quality paper brought in from various developing countries. It seems to me at least that in the digital world, selling a large volume of e-books at a low price makes a lot of sense. In this context, the serialized e-book has an added advantage because it builds a repeated interaction between the reader the author. Over time this may help create loyalty towards the author.

I see three areas of opportunity and these arise along the fault lines described above.

The first opportunity is with “apps”. It crossed my mind earlier this month that simply repackaging a book as an app gives the author tremendous freedom. With books, the author is stuck with publishing delays, parallel import laws and other legal impediments, not just the need to physically deliver products. With apps, all that is gone. Re-purpose a book as an app and it morphs into a software program, so different rules apply. If you go one step further and make the app exciting to use, you can counteract the myth that printed books are superior. Those who have tried The Elements on an iPad will find it hard to go back to a printed Periodic Table. Similarly, having compared both this app and the book version, I much prefer learning about photography using the app version which is more interactive and has built-in videos.

A second opportunity lies in offering new skills combinations. In order to serialize his next novel, Max Barry combined his computer programming expertise with a passion for writing: he is essentially selling each subscriber a private RSS feed as a separate product. Most people do not have this combination of skills, especially the generation of authors that went to journalism school and did not acquire a technical background. An opportunity exists for people who can bridge this divide and provide new tools and services to help content authors to craft their products and reach customers easily. For example, Graeme Connelly spoke to us about the new “expresso printer” at Melbourne University Bookstore which produces small print runs that were uneconomical in the past. I believe this is only a starting point, e.g., we don’t yet have the equivalent of WordPress for creating books with existing tools being either too complex or too amateurish.

The third opportunity lies in further disaggregating the value chain. I learned from the session that one of the benefits to authors of going with traditional book publishers is their expertise in editing. Publishers convert the messy raw material that is a manuscript into a curated experience that is proof-read, edited and checked. I suspect that the editing activity will split apart into a distinct industry segment, just as has happened in other industries such as semiconductors, which used to be vertically integrated but which now has some firms focusing exclusively on system development and others on chip design or manufacturing. This is pure speculation on my part, but I don’t see why the editing process, while valuable, needs to be tied much longer to the manufacture and distribution of physical products.

It is hard to predict how things will work out and I don’t think the traditional book will completely disappear. This industry is definitely going to be interesting to watch over the next few years.

Assessing the benefits of the NBN

richardhayesMy colleague Richard Hayes is working on a project to analyze various methodologies that could be used for assessing the benefits of a national broadband network (a companion project exists on the cost side). Richard recently described key aspects of his project on ZdNet’s Twisted Wire program.

The main thing I’ve learnt from that podcast is that an accurate and precise measure of the NBN’s benefits will be difficult to calculate. There are two constraints, the first being the availability of data and the second being our difficulty in estimating externalities across economic sectors. For example, one approach would be to estimate a discrete choice model, asking people to choose between hypothetical bundles of broadband options. This would provide an estimate of their willingness to pay for specific characteristics. The approach would require data that does not currently exist, and even if such data were obtained (e.g., through surveys), it is unclear people can accurately assess their utility for some broadband-related goods/services that do not yet exist. A broader approach involves using a Computable General Equilibrium model which would yield an economy-wide estimate of the NBN’s impact on activity, but is especially difficult to implement where there are lots of interdependencies (such as with broadband). I also learned from the podcast that some benefits are easier to quantify than others, especially those that are already in use by large existing organizations.

It’s not entirely clear what this implies. However, it seems to me we can learn from parallel situations of how R&D projects are managed within large firms. Perhaps, we should stop looking at the NBN as an all-or-nothing investment. It is perhaps not realistic to do a complete analysis and match incremental costs to incremental benefits ex-ante. However, by breaking the project up into stages (geographically or by some other criteria), one could postpone the decision of whether to do later stages until additional information is obtained. Consider the example of Google’s decision to build a fiber broadband network for communities in the US. It would be difficult for Google to value the overall benefits of this network ex-ante. But that hasn’t stopped it from trying out this “experiment” with a few communities initially with the possibility of scaling up later. Shouldn’t we take a similar approach with the NBN?

e-books are overtaking printed books

Australia Radio National recently did a radio program on e-books at the Brisbane Writers Festival. Of the 4 panelists, only one actually owned an electronic book reader. A number of benefits were cited of e-books, including convenience of purchase, lower book prices (especially compared to the prices of printed books in Australia), and better access from rural locations. However, the overall the impression was that printed books and traditional bookstores will continue to exist for some time. One of the panelists stated that printed books will still constitute 70% of the market within a decade. Another panelist felt that bookshops will continue to exist because they are a nexus of social activity.

Let me be the first to say I love bookshops and have a large library of printed books. That said, these people clearly did not get the memo from Jeff Bezos that the number of e-books sold by Amazon has already overtaken hardcover books and it will overtake paperbacks by next year. The recent launch of the ipad, multimedia e-books, and this week’s launch of the third generation Kindle (only US$139) are going to accelerate the process. Having used both e-books and printed books for some time, all I can say is that many of the complaints people mentioned in the podcast have been addressed, or are being addressed, in the newer ebook readers. Change is happening faster than many people think. This week alone I bought 7 books on Kindle for a course I’m teaching, and I have no complaints.

One way to address the gap between perception and reality is to allow more customers to get their hands on an e-book reader, such as at retail outlets and other public places. From personal experience, people who complain about e-books are often surprised by how usable they are after I’ve put an actual device into their hands for the first time. I’ve also noticed that at a lot of places where e-book readers are sold, they are displayed all wrapped up or inside glass cabinets, rather than in a way that invites people to experience them. This is is something e-book retailers such as Amazon and B&N should address, maybe taking a page out of Apple‘s book to make the shopping experience much more hands-on.

NTP Sues Apple, Google, Motorola, HTC, LG, Microsoft

Last year David Weston and I wrote a teaching case on how in 2000, NTP sued Research in Motion (makers of the popular BlackBerry device) for infringing its patents that cover the wireless delivery of email (free download from WIPO). Well, NTP is at it again, and has just sued a number of firms including Apple, Google, LG, Motorola, HTC and Microsoft that make smartphones. The Washington Post has a brief description of the patents. The earlier case ended with a $600+ million settlement, but that large amount was partly the result of (a) RIM was found to have willfully infringed NTP’s patents and attempted to deceive the court when presenting evidence of “prior art” in 2002, and (b) as the case escalated, RIM faced the very real threat of having its US operations closed down in 2005. A number of the original patent claims were subsequently revoked, but I imagine that NTP is hoping that the larger base of email users these days will give it enough licensing revenue from each of the mobile operators. If you haven’t heard of NTP, that is because the company is sometimes thought of as a patent troll and is not well-loved. In my opinion, the lawsuit also highlights a more subtle problem with the patent system. When successful firms like RIM and Nokia choose to settle with companies like NTP, it gives NTP an incentive and the financial resources to then attack a broader group of other firms. A precedence is also set. It would be better if such firms fought back, e.g., by establishing prior art that invalidates such patents or by pushing back on the claims.