Graeme Philipson
May 31, 2016

Innovation threat to mid-sized firms

Mid-Market

Innovation threat to mid-sized firms

Martin Seward: 'Mid-sized organisations need to look beyond the here and now'

More than half of Australia’s mid-size companies don’t believe they are evolving as quickly as they should, and 40 per cent admit they have failed to bring a new product or service to market in the past three years.

A new report from American Express says many mid-sized Australian companies are stagnating through ‘an alarming lack of internal investment in innovation.’

The company’s CFO Future-Proofing Survey, released yesterday, surveyed 250 CFOs from Australian companies with revenues of between $2 million and $300 million. The report comes in the middle of an election campaign in which innovation and the tired ‘jobs and growth’ mantra is centre stage.

It even has a Foreword by the Minister for Industry, Innovation and Science, the ever smiling and omnipresent Christopher Pyne.

Mr Pyne’s short piece extols the virtues of his Government’s innovation policy, but his optimism is belied by the findings of the survey, which makes sobering reading. It found an alarming lack of company investment in the innovation that it says is necessary to drive the sources of future revenue.

Nearly three quarters (70 per cent) of the mid-sized businesses surveyed say they intend to invest less than $100,000 on innovation in the next year. For a business with an annual turnover of $50 million, typical of many mid-sized Australian companies, that’s just 0.2 percent.

“Compare that to the average amount spent on research and development by the world’s top ten most innovative companies at 7 per cent, which is 35 times that amount,” the report says.

This lack of investment in innovation is constraining the mid-market at a time when the research shows their number one focus is growth. Of the 40 per cent of businesses that had not brought a new product to market in the previous three years, more than half did not intend to do so in the coming year either.

The majority of CFOs surveyed admit that for the most part, their company’s approach to innovation is ad hoc, rather than strategically planned.

“It’s no longer adequate for Australian mid-sized businesses to have a short term view,” says Amex Australia’s vice-president and general manager for SME’s, Martin Seward.

“Looking at the here and now or only a couple of years ahead is jeopardising their ability to innovate.

"Businesses also need to consider their long-term road map. It’s clear that those with a long-term strategy are delivering game-changing growth and effectively evolving to withstand aggressive competition in cluttered markets. They are the ones that will survive and thrive.”

The research also shows that access to capital is an important factor in enabling mid-market innovation. Poor access to funding is a key factor slowing mid-sized companies’ ability to innovate.

While 70 per cent say they plan to source external funding to deliver their business plan, with bank loans and overdrafts the number one source, 60 percvent admit difficulty in securing the required funds. This difficulty is prompting many small and mid-sized companies to look beyond traditional financial options for funding.

“The findings in the report suggest Australia can be a tough place to bring new ideas to market and our innovation performance may leave us vulnerable to new threats,” says Mr Seward. “Australia has one of the weakest levels of networking and collaborative innovation in the OECD.”

A major part of the problem, according to the research, is the high number of mid-sized businesses that do not have any formal business strategy (what the report calls a ‘game plan’). Less than one quarter (23 per cent) have none at all, and another third or more (37 per cent) say that it is only short or medium term.

Unsurprisingly, half of those with no plan anticipate zero growth for the year ahead. Those that do have a plan are more likely to expect their business to grow. The 40 per cent that have a comprehensive, long-term business strategy are most likely to predict double digit growth, and are more likely to prioritise innovation.

That leads to the report’s key recommendation, targeted at CFOs. “Australian industry is at a critical point of change and re-orientation as we respond to unprecedented world events. To thrive, mid-sized organisations need to look beyond the here and now. Those companies that have adopted a long-term plan are performing strongest against their peers and have the following powerful indicators of future success.

“Today, the CFO’s role is to help create a culture of growth and innovation by managing expectations between short-term earnings and long-term growth. CFOs who take the time to plan across all of these business priorities, are better equipped to ensure their organisations remain agile, and respond fast to new market opportunities and threats.

“Many CFOs are doing just that, while others in our survey spoke frankly about the challenges of short-term decision making and responding to competition, rising costs and economic uncertainty. As the Government rolls out its National Innovation and Science Agenda, CFOs have an opportunity to fire up their organisation’s innovation engine and lead this cultural shift.

“The question remains: will CFOs adopt a long-term view of innovation and invest enough funds to compete with the dynamism of fast-moving start-ups, or the bigger budgets of corporate Australia?”

The report is available at www.chieffutureofficer.com.

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