Towards Business Excellence in Australia

© Copyright 2013 ProVeritas Group

Towards Business Excellence in Australia: A Strategic Approach

WHITE PAPER Written by: Dr Ruby Campbell Revised: December 2013

Australia lived up to its reputation as the ‘the lucky country', not only escaping a recession but indeed enjoying moderate economic growth after the Global Financial Crisis. The OECD gave Australia a positive report however, there was one major concern: productivity. The nation’s productivity has decreased from 1.6% (in the 1990s) to 0.6% this decade. This White Paper looks at Australia’s competitiveness in the global market and suggests a number of evidence-based strategies to close some of the biggest gaps currently facing senior executives.

© Copyright 2013 ProVeritas Group Towards Business Excellence in Australia

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Challenges in the 21st Century Global competitiveness: where does Australia rank? According to the 2010-2011 Global Competiveness Report by the World Economic Forum1, Australia now ranks 16th, down one position, in the Global Competitiveness Index (GCI) – a highly comprehensive index for measuring national competitiveness. The World Economic Forum (WEF) defines competitiveness as the set of institutions, policies and factors affecting the level of productivity of a country. Switzerland retained its 1st place position because of its excellent capacity for innovation and its business sophistication, according to the report. On the other hand, while Australia was praised for its dynamism and strong banking sector, it was highlighted that the country would need to increase the sophistication of its businesses and strengthen its innovation capacity in order to progress further. In terms of innovation, firms in Australia must design and develop cutting-edge services, products and processes to maintain a competitive edge. This requires an environment that is conducive to innovative activities, supported by both the public and the private sectors. Innovation in Australia has been receiving a relatively high degree of attention over the past few years, as evidenced by the number of Innovation courses offered by the country’s top business schools and the emphasis from government through initiatives like Innovation Australia2. As such, this paper will instead focus on the less-understood topic of business sophistication, and its impact on productivity, in Australia. First, it is worthwhile to briefly discuss why productivity growth is so important to Australia.

Productivity in Australia: why so important now? In general terms, productivity is determined by:

The available technology or know-how for converting resources into the desired outputs in an economy; and

The way in which resources are organised in firms and industries to produce goods and services

According to a recent Treasury report3, Australia’s population over age 65 will increase from 13% to approximately 25% of the total population by 2050. There will be a smaller proportion of working Australians supporting those over 65, who will need increasing health care, aged care and retirement income. Forty years ago there were 7.5 people in the workforce for every one over 65, today it is 5.5 and in 2050 the number will drop to 2.7. Furthermore, due to technological advances, real health spending on those aged 85 and over will increase 12 fold. Add to this the reduction in the workforce generating tax revenue and the magnitude of the problem becomes significantly larger.

“If productiv ity growth increased to an average of 2% per annum over the next 40 years, the economy would be over 15% larger, with GDP per person around $16,000 higher than otherwise” - Gary Banks, Product ivity Commission


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The government report3 set an aspirational goal of 2% productivity growth for the Australian economy into the future. This means that if productivity growth increased to an average of 2% per annum over the next 40 years, the economy would be over 15% larger, with GDP per person around $16,000 higher than otherwise. The elevation of productivity in government discourse is a welcome development, given its importance to income growth and living standards over the long term, as echoed by the Productivity Commission Australia4.

The Current Situation Australian organisations: how productive are they? Achieving productivity growth is clearly a challenge that needs to be faced by all sectors: business, government and non-profit organisations. Hence it was not surprising to find that, according to the 2010 Telstra Productivity Indicator (TPI) annual report5 – a study investigating productivity in large organisations and large government departments – improving productivity is the second highest priority for senior executives in Australian organisations in general; the first being improving customer service, as illustrated in Figure 1.

Figure 1 Key priorities of senior executives

Source: Telstra Productivity Indicator (TPI) 2010

Furthermore, the study5 found that there is significantly less emphasis on programs to improve individual productivity - divisional or business units - and instead there is greater emphasis on organisational productivity, reflecting an evolution towards organisation wide or enterprise programs. However, many organisations seem to lack a specific productivity strategy with a clearly defined execution plan, as evidenced by the fact that only 42% are properly equipped to measure productivity and identify improvements that link to strategic objectives.


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This relates back to the recommendation in the 2010-2011 WFI Global Competitiveness Report1 that in order for Australia to make further progress, and ideally increase its level of global competitiveness, the degree of sophistication of its businesses will need to increase. Business sophistication is concerned with: 1) the quality of a country’s overall business networks; and 2) with the quality of individual firms’ operations and strategies. Firstly, the quality of a country’s business networks and supporting industries is measured by the quantity and quality of its suppliers and the extent of its interactions. The Treasury report3 identifies macro and micro economic reforms, including infrastructure, which the government has undertaken in order to improve national productivity, which in turn will have a significant impact on the country’s overall business networks and consequently, on business productivity. Secondly, individual firms’ operations and strategies (e.g., leadership, customer focus, marketing, innovation, workforce management, knowledge management, process management) all lead to sophisticated and modern business processes that are conducive to higher efficiency in the production of goods and services. This leads to the compelling question: how can Australian organisations achieve a higher level of business sophistication?

Lessons from the past: searching for excellence The central notion of making processes as efficient (maximum output) and effective (minimum defects, high quality) as possible has been paramount for decades. When “In Search of Excellence” was published in 1982, the book resonated with the Quality movement, which was very much in vogue at the time, striking a nerve with US and European executives who were anxious for insights that would help them defend against Japan’s manufacturing muscle resulting from their adoption of breakthrough quality culture and practices that ironically came from leading American management consultants Edward Deming and Joseph Juran during the 1950s. Since then, hundreds of books, models and methods have been published confirming that new generations of executives want help in making sense of an increasingly global business world.

In the United States, Congress passed the Malcolm Baldridge National Quality Improvement Act in 1987 to enhance the competitiveness of US businesses, with its scope expanded to health care and education organisations in 1999, and to government and non-profit organisations in 2005. The Baldridge Award criteria for Performance Excellence6 is based on a non-prescriptive holistic business framework that business leaders can use to achieve continuous high performance. Over the last 10 years, the focus has been on balancing all aspects of organisational performance, including leadership, growth, market share, employee morale, innovation, profitability, and a variety of other factors.

“The single greatest challenge facing managers in the developed countries of the world is to raise product ivity of service and knowledge workers. It wil l dominate the man agement agenda for the next several decades, determine the competit ive performance of companies, and determine the very fabr ic of society and the quality of industr ial ised nat ions” - Peter Drucker


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Specific tools such as Lean and Six Sigma are not included in the criteria; being immune to buzz words has allowed the Baldridge criteria to be the most widely used model for continuous performance improvement, with over 60 business excellence frameworks in other countries being modelled almost exactly on the Baldrige criteria, according to the Centre for Operational Excellence Research (COER)7 based in Massey University, New Zealand. It was not surprising to find that all top ranking GCI countries have a national business excellence framework modelled on the Baldrige criteria, including Australia. Refer to the “Business Excellence Framework: A Strategic Approach” panel for an overview of its key principles. It should be noted that, for the purposes of this paper, ‘operational excellence’ and ’business excellence’ are not viewed as two separate concepts and are indeed used interchangeably.

A Strategic Approach to Business & Operational Excellence in Australia In Australia, the concept of using a business excellence framework as a holistic approach to achieving sustainable high performance may not be as mature as it is in the top GCI ranking countries (refer to the panel “Business Excellence Framework: A Strategic Approach” ). This may be due to a combination of several factors such as cultural, historical (Australia is a fairly young country), geographical and/or possibly because the Award is not as prestigious or well recognised, and it is not directly endorsed by the government. In the US, for instance, the award recipients are announced in the national media and the award is presented by the President of the United Sates at a prestigious ceremony. Although what works in the US, Europe, Singapore and Japan often works in Australia, it may not always be the case, or in full, as reported by change management experts who have researched Australian models of change9. In fact, Australia faces a unique set of challenges when dealing with business transformation and change management in general. Australia is part of Asia Pacific and is therefore a key player in the region however its historical, cultural and ideological roots stem from, and are more closely aligned with the Northern Hemisphere. Therefore in order to achieve the level of business sophistication required to become more globally competitive, Australian organisations will need to adopt a uniquely diverse approach to driving business improvement and other change initiatives. This makes the task of driving business change programs quite a complex task within an Australian setting, given the starting premise that, according to empirical evidence, only about 30% of change initiatives achieve any success at all10. The reasons for this are extensive and are beyond the scope of this paper, although they will be briefly touched upon below. This however stresses the point, presented by previous change management experts 9,11 , that it is not always wise to follow prescriptive, off-the-shelf methods when driving organisational change. One size does not fit all.

"The rate of change is not going to slow down anytime soon. If

anything, competition in most industries will probably speed up

even more in the next few decades” - John P. Kotter


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Business Excellence Framework: A Strategic Approach Any of the national business excellence frameworks modelled on the Baldrige criteria are based on

a unified theory of management and is supported by a published body of research that underpins

all similar frameworks around the world, for example the Singapore Business Excellence Framework; the European equivalent: the EFQM Excellence Model; and Australia’s own Business

Excellence Framework. When understood and effectively applied across an organisation, the principles provide a powerful and integrated philosophy of leadership. An amalgamated version of

the key principles is:

Leadership & Strategy

Lead by example, provide clear direction, build organisational alignment and focus on sustainable achievement of goals. This area is also concerned with how the organisation

develops strategic objectives and action plans.

Customer Focus

Understand what markets and customers value now and into the future, and use this to drive organisational design, strategy, products and services. This looks at how the

organisation listens to the voice of the customer.

Systems Thinking & Process Management

Continuously improve the system. An excellent organisation will view itself and the environment in which it operates as a system. This area looks at the design, management

and improvement of key organisational work processes.

People

Develop and value people’s capability and release their skills, resourcefulness and creativity to change and improve the organisation.

Continuous Improvement

Develop agility, adaptability and responsiveness based on a culture of continual

improvement, innovation and learning.

Information and Knowledge Improve performance through the use of data, measurement, information and knowledge

to understand variability and to improve strategic and operational decision-making.

Corporate and Social Responsibility

Behave in an ethically, socially and environmentally responsible manner. An excellent organisation behaves responsibly as a ‘corporate citizen’ and is perceived to do so by

customers, suppliers, employees, critical stakeholders and the wider community.

Sustainable Results

Focus on sustainable results, value and outcomes. An excellent organisation that survives and thrives in the global market is distinguished by the actual value it creates and sustains

for its customers, shareholders, suppliers, partners, employees and other stakeholders.

A review of the literature on the application of business excellence frameworks by organisations

around the world, together with findings from recent research by the COER7 and by a financial services research organisation commissioned by the Australian Business Excellence Committee8,

point to the fact that organisations that embrace and effectively apply holistic business excellence Frameworks at a strategic level have achieved outstanding performance improvement and

sustainable results (4 to 16 years).


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Business change and transformation: success or failure? As mentioned earlier, evidence shows that most change initiatives, be they downsizing, restructuring, M&As, efforts to change the corporate culture, introduction of new (IT) technology, introduction of new tools such as Six Sigma (SS), Lean Enterprise or Lean Six Sigma (LSS), have very low success rates. Furthermore, there is evidence12 that demonstrates that often popular business improvement programs like Lean, Six Sigma, or both, generate only half the potential savings they are supposed to uncover for the organisation. The reasons for such overwhelmingly disappointing results have been distilled into one compelling challenge for senior executives: integrating the so called “hard” skills - for instance technical skills like Six Sigma - with the “soft” skills – for instance dealing with conflict, managing resistance to change effectively, and coaching to embed a new mindset throughout all levels of the organisation. Over the past 5 years or so, Australian companies in the service sector – banking, financial services, telecommunications, insurance – have emphasised the technical aspects of their business transformation programs by undertaking large training initiatives in SS yellow belt, green belt and black belt certification. That is understandable as technical solutions are objective and straight forward and once these tools and experts are available, they are actually invaluable in diagnosing and improving business performance. Unfortunately, and as learnt by US based organisations who followed a similar approach 10-15 years ago, overlooking the soft skills drastically lowers the program’s potential to be successful.

Empirical evidence demonstrates that when companies focus predominantly on hard skills without ensuring that employees and leaders alike are able to work in a completely new and different way, implementation becomes a frustrating process wrought with even greater anxiety, creating improvement fatigue, cynicism and even greater resistance to change, resulting in a negative spiral. Often, senior executives erroneously conclude that these initiatives simply do not work and end up abandoning all efforts, albeit temporarily until they learn of a competitor’s new tool, which they proceed purchase, and so the negative spiral continues. This brings us back to the premise that for business excellence initiatives to be successful in Australian organisations we need to adopt tailored change management models that suit our unique business environment, as well as the unique nature of the organisation in question. For instance, it is important to recognise that, while there are several parallels and valuable lessons to be gleaned, implementing Six Sigma in a manufacturing business “looks and feels” quite different to the implementation in a service business13. This lack of adaptation and tailoring certainly helps explain the number of unnecessarily onerous, and often failed Six Sigma implementation attempts observed in recent times in Australian service organisations.

Empirical evidence demonstrates that when companies focus predominant ly on hard ski l ls without ensuring that employees and

leaders al ike are able to work in a completely new and different way, implementat ion becomes a frustrat ing process wrought with even greater anxiety , creating improvement fatigue, cynicism and even greater resistance to change , result ing in a negat ive spiral .


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The role of change management in operational/business excellence initiatives It is not all doom and gloom. Yes, it is important to acknowledge that achieving operational or business excellence is a challenging journey – and it is a journey because it can take several years, depending on the size, complexity and maturity of the organisation. However, by developing change capability within the organisation and ensuring that operational improvement initiatives are driven from a change management perspective, the odds of success will dramatically increase. The world renowned change management thought leader and practitioner John P. Kotter, maintains that regardless of the type of change, it is important that the transformation be viewed as a process, not as an event 14. This means that successful implementation depends on the leader’s ability to advance through each stage of his Eight Steps to Transforming Your Organisation (refer to panel on next page), ensuring that the stages build on each other. The evidence indeed suggests that leaders will need to be prepared for the transformation to take years if need be, and not allow to be pressured to accelerate the process, skip stages, or take short cuts. Furthermore, he stresses that, according to the evidence, failure to achieve any of the stages will invariably result in failure. Whilst it is important to bear in mind that each organisation is unique and, as pointed out earlier, so is the Australian business landscape, Kotter’s eight stages all deal with the soft skills that are indeed necessary to drive change. Clearly, in order for any organisation to achieve successful business improvement, it will require internal change capability. This further stresses the importance of the change management function in strategic transformation initiatives, such as driving an enterprise business excellence mindset and organisational high performance.

The way forward: Towards Business Excellence in Australia Australian organisations need to become more productive; this will greatly contribute to our ability to compete in the global market and ultimately to the future economic well being of the nation. To become more productive, which is one of the top priorities for senior executives in Australia at present, businesses need to become more sophisticated – that is, develop world class strategies, operations and business processes. As suggested by the evidence, the improvement in business sophistication needed by Australian organisations might be achieved by adopting a strategic approach to business excellence at the executive level, embracing world class business excellence principles. However, both soft skills and hard skills will need to be appropriately combined in the transformation efforts in order to successfully embed a business excellence mindset and achieve sustainable organisational high performance. To avoid becoming another “change failure” statistic, it is advisable for business or operational excellence initiatives in Australian organisations to be driven from a change management perspective.

Guiding change may be the ult imate test of a leader – no business survives over the long term if it can’t

reinvent itsel f – Best of HBR


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The Eight Steps to Transforming Your Organisation 1. Establish a sense of urgency

Examine the market and competitive realities for potential crises and untapped

opportunities

Convince at least 75% of your managers that status quo is more dangerous than the

unknown

2. Form a powerful guiding coalition

Assemble a group with shared commitment and with enough power to lead the change

Encourage them to work as a team outside normal hierarchy

3. Create a vision

Create a vision to help direct the change effort

Develop strategies for achieving that vision

4. Communicate the change vision

Use every vehicle possible to constantly communicate the new vision and strategies

Have the guiding coalition role model the behaviour expected of employees

5. Empower others to act on the vision Remove or alter systems or structures undermining the vision

Encourage risk taking and non-traditional ideas, activities, and actions

6. Plan for and create short-term wins Define and engineer visible performance improvements

Visibly recognise and reward people who made the wins possible

7. Consolidate improvements and produce more change Use increased credibility from early wins to changes systems, structures, and policies that

undermine the transformation vision

Hire, promote, and develop people who can implement the change vision

Reinvigorate the process with new projects, themes, and change agents

8. Institutionalise new approaches Articulate the connections between new behaviours and organisational success

Create leadership development and succession plans consistent with the approach

Source: adapted from Best of HBR, Leading Change, John P. Kotter14


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References:

1. World Economic Forum, The Global Competitiveness Report 2010-2011, http://www.weforum.org/en/initiatives/gcp/Global%20Competitiveness%20Report/index.htm

2. Australian Government, Department of Innovation, Industry, Science and Research, AusIndustry http://www.ausindustry.gov.au/InnovationAustralia/Pages/InnovationAustralia.aspx

3. Australian Government, The Treasury, Australia to 2050: future challenges, 2010 http://www.treasury.gov.au/igr/igr2010/Overview/pdf/IGR_2010_Overview.pdf

4. Statistics, productivity and reform, Productivity Commission Australia, Speech by Chairman Gary Banks, 2010, http://www.pc.gov.au/__data/assets/pdf_file/0004/96097/20100324-statistics.pdf

5. Telstra Enterprise & Government, Telstra Productivity Indicator 2010 http://www.telstraenterprise.com/researchinsights/Pages/TelstraProductivityIndicator.aspx

6. Baldrige Performance Excellence Programs http://www.nist.gov/baldrige/

7. Business Performance Improvement Resource, Centre for Operational Excellence Research, Massey University, NZ, http://www.bpir.com/all-about-bpir-bpir.com.html

8. The Business Excellence Framework, March 2007, Published by SAI Global Limited, Australia

9. Stace D. And Dunphy D., 2007, Beyond the Boundaries, Leading and re-creating the successful enterprise, 2

nd Edition, McGraw-Hill Australia.

10. Nohria, N. & Beer, N. 2000, ‘Resolving the tension between theories E and O of change’, in Ed M. Beer

& N. Nohria, Breaking the code of change, Harvard Business School Press, Boston, Massachusetts.

11. Waldersee R, Andrew G, Lai J, Jan 2003, Journal of Applied Management and Entrepreneurship

12. The McKinsey Quarterly, Operations, November 2008, ‘From lean to lasting: Making operational improvements stick’, McKinsey & Company

13. George L.G., 2003, Lean Six Sigma for Service, The McGraw-Hill Companies, New York, NY.

14. Kotter, J.P., January 2007, Best of HBR, Leading Change: Why Transformation Effort Fails, Harvard Business Review

About the author: Dr Ruby Campbell is Managing Director of ProVeritas Group Pty Ltd, a specialty consultancy firm specialising in executive coaching and business excellence solutions. She is also Adjunct Faculty at AGSM Executive Programs at the Australian School of Business, University of New South Wales. For more information please contact Dr Ruby Campbell at: ProVeritas Group Suite 1A, Level 2, 802 Pacific Highway, Gordon, NSW, 2072 Tel: +612 8011 3063 Website: www.proveritas.com.au | Email: [email protected]

http://www.weforum.org/en/initiatives/gcp/Global%20Competitiveness%20Report/index.htm

http://www.ausindustry.gov.au/InnovationAustralia/Pages/InnovationAustralia.aspx

http://www.treasury.gov.au/igr/igr2010/Overview/pdf/IGR_2010_Overview.pdf

http://www.pc.gov.au/__data/assets/pdf_file/0004/96097/20100324-statistics.pdf

http://www.telstraenterprise.com/researchinsights/Pages/TelstraProductivityIndicator.aspx

http://www.nist.gov/baldrige/

http://www.bpir.com/all-about-bpir-bpir.com.html

http://www.proveritas.com.au/

mailto:[email protected]

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Towards Business Excellence in Australia