Finishing 1st from the Second Row

 

(The article was first published in "Boardroom" by the Institute of Directors in New Zealand and is under copyright. If you use or quote from this material please attribute it to the author and publisher.)

Three consequences of our slippage directly challenge every business:

• Shallow pockets: Our per capita income -- measured in purchasing power, not exchange rates -- is low. We have half the buying power of the United States, two-thirds that of western Europe and three-quarters that of Australia. When businesses compete internationally, resources are tight. And the profits to be made from selling goods and services locally are limited.
• Globalisation: New Zealand competes with larger and richer nations for mobile human and financial resources. Our economic base is smaller than an Australian state -- it's tough to achieve critical mass even on a regional scale. And after being "fashionable" during the 1980’s, we now battle dismay and scepticism.
• High capital costs: Local businesses face higher real interest rates than overseas competitors. That isn't the fault of our central bank. Simply, we are a small nation with the highest net foreign debt levels in the OECD. We choose to live well beyond our means, and our creditors charge accordingly.

"We don't have a lot of money, so we’ll have to really think..." Ernest Rutherford

In sport, we know that playing the game like our opponents want us to rarely leads to a win. But in business, we all too often do just that. We play the game instead of shaping it.

Most businesses recognise the need for "strategy". But annual strategic retreats easily become a stale ritual. Too often the strategic plan becomes just an annual business plan extended over several years, or a set of ideas that stay disconnected from business operations. To be effective, strategic thinking must generate a strategic action plan -- a series of projects that push strategic initiatives down and through operations. How can that be achieved?

In most aspects of business, we can realistically hope only to meet the competition. But while the "best practice" principle will be necessary for success, it will rarely be sufficient. Competitive advantage or disadvantage comes from what we do differently to others -- our competitive positioning.

We can beat the competition only through characteristics of our business that are distinctive, relevant and hard to replicate. Every business can build features like that. Exploiting them may be as simple as maximising a superior location, or as complex as developing a valuable brand. And to sustain an edge, we need to focus investment -- of time, energy and money -- on those special factors.

Of course, competitors will play in reverse. They will have areas of advantage that we cannot easily replicate. Usually we should counter those, not copy them. For example a services firm operating only in New Zealand faces a real disadvantage with customers headquartered overseas. But opening an overseas office is expensive and risky. The firm might instead demonstrate superior local knowledge and delivery, or build a partnership with an overseas firm that faces the reverse situation.

"It is not the strongest species that survive, nor the most intelligent, but the ones most responsive to change." Charles Darwin

The global economy is dynamic. Any business, however small, can respond well to change and apply "finishing first" techniques.

First, move your thinking point outside New Zealand. Look from the outside in. What advantages and disadvantages does a New Zealand location create? Which investments and activities look best from a global investor's perspective?

After thinking global, act local. Being niche demands being nimble. Whatever your ownership and governance structures, keep decision-making quick and effective.

Get properly capitalised. It’s unwise to rely heavily on debt financing when competitors can borrow cheaper.

Optimise size. Global capability requires a critical mass of people and skills. But management challenges grow exponentially with size. Nimbleness dwindles. Impersonality grows. Local managers may lack the skills and experience to run a larger business. In New Zealand, 50 to 250 staff may be the optimum range.

Look for ways to earn foreign currency but spend in local dollars. Exporting goods is the obvious route. But there are other ways -- supply exporters, export services or focus on local customers with global spending power.

Think in economic concepts. Financial accounting is useful mainly for scorekeeping and tax returns, not decision-making. Cashflow means more than profit. Consider:

• Inventories and assets in terms of market value, not book value
• Exports in the currency of purchase, not in New Zealand dollars
• People in terms of the future revenues they can earn, not what they cost today

Share "ownership". The founder-as-hero model of business development is inspiring, but it is better to grow an elephant than to hoard a mouse. Exporters and innovators need strategic partners to finance growth and make global rollout successful. And in any business, key staff need to "have a stake". That may mean financial ownership, or just better leadership, communication and motivation.

Make use of information technology a key investment. Applied well, information technology can add value and lower costs to generate not just customer benefit but also additional profits. Every business needs to make "e-commerce" part of the norm, not just an add-on.

Don't rely on competitive advantage from price. Devaluation is a defeat, not a victory -- it's just another way of competing on price. The more strategic question is "How can I add value that customers will happily pay more for?”

And to repeat the key theme -- work on the business, not just in the business. Yes, there's a living to be made through operational management -- doing the same thing better. But it’s hard to create wealth that way. Strategic management -- positioning your business to compete in a different way -- offers a better route.