Maintaining creativity and control in the just-in-case economyMaintaining creativity and control in the just-in-case economy

The following interview has been edited for length and clarity.

For decades, globalisation has bound nations through trade, efficiency, and interconnected supply chains. But we’ve experienced a series of fractures that only seem to have accelerated post-pandemic. So, have we entered a different international order? Is the era of globalisation and trade giving way to something new? 

That hyper-connected, just-in-time global supply chain model was great for productivity. But that was when things were relatively predictable.

Whether they like it or not, businesses are finding that they increasingly need more redundancy in the system to manage unpredictability. Whether it’s a pandemic, fresh international conflict, even wild weather, there’s a very real risk that if you don’t have the right resources, the right people to anticipate and cope with a crisis, things can get out of control quickly. 

This is a challenge globally, but the difference for Australia and New Zealand is basic geography. We’re just physically further away. While that helps shelter us from being directly drawn into conflicts, it also means that our supply chains are long and complex by nature. We’re increasingly reliant on our global trade partners, and we’re having to subtly adjust how we approach the rest of the world. 

The multilateral system, with its big trade coalitions and agreements, is on the decline. We're increasingly using either bilateral relationships, or sometimes plurilateral, smaller groups of cooperative nations.

The difficulty for business leaders is that a lot of those relationships are formed and managed at a political level. If a big change occurs in the domestic politics of a key trade partner, you're exposed. So not only is there a greater need for redundancy, but leaders also have to be tapped into their own supply chains, and maintain good relationships with suppliers, buyers, and allies downstream and upstream, so that if there’s a disruption, they immediately know who to call to find a fix. 

Is this a break with the past, or just a matured or adapted version of globalisation?

I don’t see this as a completely new approach. Clearly, we're still operating on a global stage. We’re interconnected, and that’s not easily changed. I don't think we're going to see markets switch back to highly domestic models. It's just that in times of pressure or tension, protectionism is heightened. 

You don’t have to completely rewrite the script, but you do have to be willing to unwind some of the productivity gains that came from globalisation. With the shift to a just-in-case model, you have to pay more for security. Whether that’s holding more stock, adding warehouses in different locations—that costs money. But it’s also your insurance policy.

You have to be planning for a risk, a curveball, a challenge every year. You need to factor in a disruption now as a matter of course, rather than your business continuity plan being a contingency on the off-chance that there's disruption.

There's a balance in terms of how to create that safety net without being wasteful. Does every business, every government department, every region need duplications of the same emergency kit? 

Let’s say we’re got a dozen retailers. Do each of them need to have a warehouse in every Australian state and in three locations in Southeast Asia, all with backups? Or do they all go in together on one warehouse, and manage capacity cooperatively? You want to have a reasonable and efficient approach to redundancy and security, but you don't want it to be so cosy that it triggers competitive concerns from regulators. 

Do you think that it's possible that that resilience might act as a cover, allowing governments to excuse protectionism, or companies to excuse underperformance? When is it smart strategy, and when is it just inefficiency?

Both businesses and government have a lot more cover, not only for becoming more protectionist, but also raising prices. We live in a more inflationary environment generally than we did 15 years back, so it’s easier for businesses to raise prices. The business discipline in the 2010s was: if we’re seeing pricing pressures or cost pressures, how do we become more efficient? How can we limit our costs, or drive revenue growth? Now I worry that more often, the response to cost increases is to pass it on. So that discipline around pricing has broken down. 

I also worry that through the pandemic, and now with the oil price shock, businesses have become a lot more willing to let government take the lead. I hear a lot of leaders say that they’re waiting for the latest government announcement, waiting for the election outcome. You need to take your own destiny in hand.

Look at productivity, which is a global talking point. It often feels like the onus to drive productivity falls squarely onto government, whether by improving the education system, infrastructure, or whatever else. And while those are all fundamental settings, my question to businesses is, are you investing enough in R&D? Are you training your staff in the right way? Don’t overlook the things that you can control.

 Do you think that the private sector is leading the transition to our new paradigm of resilience? Or is this mostly being led by governments pursuing national interests?

It's very much governments that are leading it. They’re willing to sink dollars into it, and businesses just take up the opportunities. There’s non-economic reasons for governments to undertake some of these investments. Do they stack up commercially, will they support growth in the long run? Or are they just there because it's a national security concern, and are you supporting domestic industry to compete more strongly? Or are you simply locking out foreign industry? 

A lack of competitive pressure is still a bad thing at the end of the day. You can make a case for national security, but definitively locking out overseas operators generally doesn't go well. When a company gets awarded a contract or its competitors are excluded, the government is effectively picking winners, and therefore creating losers. 

Then there's the opportunity cost of some of this funding. Plenty of businesses out there could make further investments, hire more people, if only the government subsidised them and gave them that boost. The public should understand why one specific industry is worthy of that help, and what they're delivering non-economically. It's taxpayer money at the end of the day, so what’s your social license to operate? What's your quid pro quo back to the community? Good business operators will be looking at how they give back.

We're in a high conflict world. But things can change very quickly, and we've certainly seen rapid reversals happen in the past. What could be the cost of restructuring your entire operating model around resilience as the priority, if we return to an environment that rewards those leaner supply chains and operations?

I don't think the leaner operation is necessarily a viable long-term option. You're effectively trying to capture enough money while things are good to get you through the tough times. I doubt that makes sense long-term given that disruptions keep popping up. 

I'd suspect that's more of a time frame issue. In any given month or year, it might feel like those leaner machines are better and that your more resilient operation is dragging the chain—until the world goes to hell in a hand basket again.

You saw this with the tariffs last year. Businesses looked to diversify, but in some cases, they tried to achieve that by pulling out of one country and pushing into another—pulling out of China because of tensions with the US, and going into Vietnam. Then Vietnam gets whacked with a big tariff. 

I think it's more that for businesses that are wanting to have that redundancy, doing it in such a way that you don't then close off one risk by creating another one. Just going with a different country, you’ve created new exposure. Australia has clearly at a political and geopolitical level ticked off a major trading partner, China, with devastating results for some industries. Now, you can't change politics, but you can diversify your opportunities so that you don't have that concentration risk in any one area.

If a resilience-first strategy is all about reducing risk, what about investment into experimentation and R&D? Can you have innovation while building resilience at the same time?

Absolutely, you can have both. I think often you need both. Otherwise, you go through those challenging times trying to build resilience. Then you realise you don’t have any runway ahead to take you further. At the moment, you want to be building that general resilience around your processes and ability to operate, lowering your cost structure. But then at the same time, you also want to focus on growth, how to lift the top line, the revenue numbers. You need the defensive and the offensive play. That means not quite splitting your team, but just being clear about who can execute best on those. But it's different people, different structures, different components who can manage those two strands.

The markets have been pretty rewarding for many investors in the recent past, particularly tech stocks. But defensively building in redundancy could mean accepting structurally lower margins. Is that going to be just too hard of a sell to your board, to your shareholders, to the market in general when they’ve gotten accustomed to high returns?

I hate to say it comes back to the time scale, but it does come back to the time scale. A board of directors could easily decide that you could double your prices right now, and for the next few months, make a killing before a competitor is finally able to overtake you and undercut you on price or services. So you can make money in the short term and burn out pretty quickly. But over a 3 to 5 year period, if you don't build some of that defensiveness or redundancy in there, you leave yourself defenseless. All of a sudden, a new policy is announced, or a major market drops off, and what you thought you were working on gets pulled out from under you. And the biggest part there is protecting your investment.

It's less about accepting low returns or losses, and more acknowledging that the only certainty these days is uncertainty. So how do we protect and use our investment when it comes time to execute? 

What one thing should leaders do differently to survive and succeed in our new environment?

Balance the doom scrolling with popping your head up every now and then. I talk to leaders who know their business very well. They know what drives sales, they know their industry inside out, but they don't often have that wider understanding of the operating environment.

And that can mean that they miss some of these potential challenges that come up. So there's a real need to scan the horizon, to get out of your industry a bit and see the upstream and downstream effects that might be three or four steps removed from you. 

But equally, given everything that's going on in the world, you don't want to get too bogged down in  it. Understand enough to recognise how you can use that knowledge, rather than becoming a political commentator. There’s a fine balance.