Keynote presentation by Phillip Ruthven from IBISWorld Pty Ltd giving his thoughts and perspectives on what keeps CEOs awake at night. 2011 actKM Conference. Melbourne, Australia. 10 October 2011.

1. 12th Annual Conference Research Lounge RMIT 5/28 501 Swanston St Melbourne 10 October 2011 What Keeps The CEOs Awake At Night Phil Ruthven, Chairman WHERE KNOWLEDGE IS POWER

2. Topics Sleepless Nights A New Age Business 3. The Intelligent Organisation 4. Innovation & Productivity 5. Keys To Success 6. Australia’s Global Context

3. 1.Sleepless Nights

4. Keeping Us Awake 1. What is happening to my industry and markets 2. Where is the economy going 3. What will happen to interest & exchange rates 4. Keeping good staff and getting more of them 5. Managing the Net Generation employees (< 28) 6. Government stability, sensible IR laws 7. More productivity to compete locally and overseas 8. Best way to grow the business 9. Raising capital (and at good rates if debt capital) 9. My kids, brother in law and mother in law! 11. Surprises, I don’t need them 12. Heaps of other things

5. 2. A New Age Business

6. Ages Of Economic ProgressGDP @ Constant F2011 Prices Australia 1788-2011 and onwards Hunting Age Agrarian Age Industrial Age Infotronics Age Enlightenment Age ? Industrial Age Agriculture, Mining, Banking, Commerce Transport the major utility Quaternary service industries Hunting, trapping, fishing, crafts, religion Quinary service industries Imbedded intelligence, neural network Programs. More electronic “guardian angels” and other new technologies An Industrial Age is when Manufacturing and Construction dominate the economy (c. 30-50%+ of GDP) GDP $ billion IC&T the Infotronics Age utility Electricity, gas & water, and telephony,the Industrial Age utilities Year, ended June IBISWorld 26/05/11

7. The Big Changes For Enterprises In The New Age, 1965-2040s Business reverses from production to market orientation Protectionism fades, and international trade grows Goods industries lose importance as share of GDP Over 100 new service industries emerge New utility (IC&T), adding to old (electricity, telephony etc) Outsourcing of non-core functions and activities Importance of intellectual property (IP) over hard assets OH&S becomes de rigueur; ditto world best practice (WBP) Old style employment gives way to contractualism SMEs increase share of economy (new industries, outsourcing) Emergence of franchising, and strategic alliances Adopting an information mindset, a condition of survival

8. Expectations of a New Age business Profitability and growth ROSF (after tax) of 4 times the bond rate Growth better than the industry average International expansion where possible Uniqueness in: Product, IP and operations Organisational culture World best practice in: Operations Value for money for customers Respect for the society in which it operates Relations with other stakeholders Treatment of the natural environment

9. Australian Profitability by Cohorts Return on Shareholder Funds (after tax), 1300Best Large Enterprises 5 years to F2010 183.1 23% > Best Practice (ROSF 22.4%) 34% > Average (ROSF 15.3%) 41% > Cost of capital (12.2%) 64% > Bond Rate (5.6%) 17% Losses 14.2 -12.2 -40.0 Percent Source: IBISWorld22/11/10

10. Australian Profitability By Major Industries Return on Shareholder Funds (after tax), Top 1350 businesses5 years to F2010 4.1 8.2 ROSF (%) Source: IBISWorld22/11/10

11. Australian Profitability By Major Industries Return on Shareholder Funds (after tax), Best 1005 years to F2010 4 companies 16 companies 3 companies 1 company 9 companies 21 companies 10 companies 6 companies 23 companies 1 company 4 companies 1 company 1 company Includes private enterprises 42.2 41.6 Percent Source: IBISWorld 25/02/11

12. Corporate Profitability to 2010 (Return on Shareholders Funds, after tax) USA Largest 30 Listeds ROSF (%) Australian Largest 30 Listeds

13. 3.The Intelligent Organisation

14. The Total Environment For My Business W O R L D N A T I O N A L R E S O U R C E S C O M M U N I T Y E C O N O M Y Marketplace Government Our Purchases Its Own Industry A N Z S I C C l a s s My Firm (Equity Debt) Finance Labour Services © IBISWorld

16. Sustained strong growth

17. Growth in services Vs goods

19. Skill shortages

20. Move to contractualism

22. Balanced/surplus budgets

23. Among lowest taxed in OECD

25. Offshore markets

26. Changing advertising mix

27. Rationalisation of markets

29. Lifecycle phase of industry

30. Service industries dominant

31. Rising foreign ownership

32. Less government ownership

33. ACCC & ASIC

34. Progressive rationalisationFinance Environment Managed funds growth Ease of access to capital Rising interest rates Exchange rate volatility Rising fees Services Environment Growth due to outsourcing Appetite for information/advice Rising legal and A/C costs Goods & Materials Rising commodity prices More sourcing offshore Falling importance within GDP

35. In the Industrial Age businesses generally planned and operated on an inside-outbasis. The external business environments were largely opaque to an enterprise which tended to be fortress style; and enterprises were opaque to outsiders who saw enterprises as secretive. In the New Age businesses must now forecast, plan and operate on an outside-in basis. The business environments are becoming transparent to enterprises, and in turn the enterprises are becoming more transparent to outsiders.

36. How much do weneed to know about . .. The Influential Environments (4) 1. The world environment,growth, regions, nations, demography etc. ? 2. National resources,developed(infrastructure, IC&T), natural (resources, ecology)? 3. Our community,its changing demography, lifestyles and spending ? 4. The economic environment,the “business weather” conditions? The Operating Environments (6) 5. The government environment,laws, taxes, policies, incentives? 6. The finance market,equity, debt, exchange/interest rates, treasury ? 7. The services market,to outsource none-core activities and functions ? 8. The labour market,for executives, employees and customers? 9. The purchases market,raw materials, semi-/finished goods, prices ? 10. Its market,local and global? The Immediate Environment Our own industry, WBP, size, growth & disposition, competitors? OurOwn Business Its IP, financials, sales, operations, TQC, productivity, R&D, HR etc. ?

37. The Key Questions I. What are the golden rules for being a successful and world best practice (WBP) business? II. What business or businesses are we in (as officially defined by ANZSIC class, not arbitrarily)? III. What makes our industry tick, and where is it going? IV. How well do we do in our industry and at large V. What market or markets do we serve? VI. What is happening to the business environment within which we operate? VII. Do we have a winnable strategy and business plan? VIII. Are we appropriately structured with a professional first line team and operationally managed to achieve a winnable strategy?

38. Business IntelligenceExpenditure on data and information,F2011(E) Sales analysis Personnel Internall y Generated 64.5% Operational analyses etc. 35.5% Externally Sourced R&D, Innovation Finance & Accounts 5.6% of all business revenue ($ 215 billion in Australia) IBISWorld 30/09/11

39. Nearly two thirds of all business data, information and intelligence in Australia in F2010 will be internally generated.How much value-adding do we do with this, to help with planning, efficiency, revenue growth, CRM and profitability?

40. Internally Generated Information? 65% of all business spending ICT Marketing & PR S t a f f & E m p l o y e e s R&D QC Distribution Human Resources Senior Mgt. CEO & Board Finance & Accounts CIO? Operations IC&T $140billion in Australia in F2011 © IBISWorld

41. Over one third of all spending on data, information and intelligence by enterprises in F2010 will be outsourced.This proportion has been steadily increasing from less than 10% half a century ago to an estimated 35.5% this year.We are spending more on information and also outsourcing more of it.

42. Note: 1 Public Relations Credit Agencies O ther 0.7 2 Includes accommodation, travel, registration fees, speakers etc Type Of Outsourced Business Information Australia F2010 (E) Exploratory News/ Books/ Mags. 1.2% Scientific Research Other1 Conferences/ Meetings2 Online Info 2.0% ISPs 1.7% Data Process 1.5% Mkt. Research 1.3% 2.2% 3.1% 5.8% Cons. Eng. + Architects 26.2% Data/Informn. 6.5% Associations 6.7% Env. Serv. 7.7% Accounting Services 20.3% Mgt. Consulting Legal Services 9.7% 10.6% Note: 1 Public Relations Credit Agencies O ther 0.7 2 Includes accommodation, travel, registration fees, speakers etc 2% of national revenue ($68.8 billion Expenditure) IBISWorld 18/11/09

43. Purpose Of Outsourced InformationAbout What?F2010 (F) Exploratory Government 1.0% World 0.8% Services 0.5% Resources 0.5% Community1.5% Labour2.0% Economy2.5% Purchases 2.9% Finance 3.0% Market4.0% Own Industry 9.8% 71.6%AboutOur Own Company1 From Accounting firms, Legal firms, Management Consultants, Consulting Engineers etc Spending on information about the external environment ($19.5 billion) is 28% of all outsourced spending and 10% of all spending $ 68.8 billion expenditure (Australia) IBISWorld17/11/10

44. Of all the business spending on data, information and intelligence - $195 billion - only 10%is spent on issues in the external environment. But this spending is growing nearly 2% pa faster than the economy in response to the need to plan on an outside-in basis, displacing the old inside-out approach of the secretive Industrial Age?

45. The Imperative of Going Up The Information Chain

46. The Knowledge Pyramid By Value By Volume Vision & Strategy Vision Vision Expert Opinion Unique IP Unique IP Decreasing Value Wisdom Wisdom Expert Opinion Expert Opinion Intelligence Intelligence Increasing Value Information Information Data Data Hearsay But interesting! Hearsay, Rumour, Scuttlebut Source: IBISWorld 18/11/09

47. 4.The Innovation & Productivity Imperative

48. Standard Of Living Ladder GDP/capita($USppp’000)2010 PopulationAustralia 22.5 12 of the Top 20 have populations smaller than Australia IMF: 04/04/11

49. Productivity GrowthChange inGDP/hours worked1903-2011 (3-year moving average) 1.7% per annum New Age average (1965- onwards ) Average to 1964 (the Industrial Age) 2.07 Average after 1964 (Infotronics Age) 1.65 Year Ended June ABS/IBISWorld 30/09/119

50. ProductivityGDP per hours worked (4-quarter moving average) to June 2011 New Age average 1.7% per annum Source: ABS Cat NO 5206.0IBISWorld 15/08/11

51. Australian Industries Productivity5 year growth to F2011, % p.a(IGP / hour worked) Long term average productivity 1.8% pa The shortfall of 1.2% pa over the past 5 years fully explained by Mining and Utilities which were both shockingly negative Percent Growth Source: ABS 5204.25 07/09/11

52. 5.Keys To Success

53. What the Best Enterprises Are Doing 1. They stick to one business at a time and do not diversify 2. They aim to dominate some segment (s) of their market 3. They are forever innovative,valuing the business’ IP. 4. They outsourcenon-core activities to enable growth. 5. They don’t own “hard” assets. 6. They havegood and professional financial management. 7. They plan from the outside-in not the inside-out 8. They anticipate any new industry lifecycle changes. 9. They follow world best practice for their own type of business. 10. They developstrategic alliances. 11. They develop unique organisational cultures. 12. They valueleadership first and management second.

54. 1. Stick To One Business At A Time(Focus) In the New Age, specialisation is critical - being in just one of the nation’s 465 classes of industry. It is very difficult to reach world best practice in even one industry class these days. Growth is best sought geographically (regional, global) rather than through diversification. And yes, there are some exceptions, but not many. See next slide.

55. The 100 Best CompaniesROSF after tax (%), 5-Year Average to F2010 By Focus Focused (mainly single industry class)99 74.0% Theme Conglomerates 1 117.3% Classic Conglomerates 0 - 100 74.2% By Ownership Foreign Owned5057.3% Private16 348.4% Listed34 59.0 % 10074.2% Notes:1 Excludes monopolies. Revenue $62 billion (1.7% of nation’s total revenue) Source: IBISWorld 23/02/11

56. 2.Aim To Dominate Something (Positioning) Secure a safe industry position in your chosen industry to be master-of one’s-own-destiny by dominating something. Domination can be of: the whole industry class (being a major); or one category in the industry (a niche player); or one product group1 (an ultra-niche player); or one product category ( a boutique operator). Note: 1 Or a customer segment; and occasionally a geographic area

57. Industry Share Strategy(positioning for a winnable war) No-man’s-land (un-winnableposition) Caught between nichers (“knee-cappers”) and ultra-niche players (“ankle-biters”) Ultra-niche specialist (1%) Niche Player Exotic/boutique operator (0.1%) 1-5 % 5% No-man’s-land Major Player 25-75% 5-25% No-man’s-land (un-winnableposition) Caught between majors (“sledgehammers”) and niche players (“knee-cappers”) Source: IBISWorld

58. A “major” player (ie25%+ of an industry’s revenue) needs to have 35-50% shares of the product groups in which they choose to compete. A “niche player” (5% of an industry’s revenue) needs to dominate a market segment (50%+ share), usually product based but can sometimes be geographic based. An “ultra niche” specialist (1% of an industries revenue) dominates a product group with a 75%+ share. A “boutique” or “exotic” operator (0.1% share of the industry’s revenue) owns a product line outright with no competitors.

59. 3.Forever Innovative(Pursuing Intellectual Property) Patents, formulae, unique technology, processesandbrands were valued in the Industrial Age, but rarelyreflected in balance sheets. In the New Age,intellectual property is a morecomplex“cocktail”. It consists of skills, specialcompetencies, unique systems, winning cultures - as wellas patents, copyright, unique formulae, uniquetechnology & processes, brand & mast-head strength etc. It is the "holy grail" of an enterprise, its core and its most valuable balance sheet asset - whether recorded as suchin dollar terms or not.

61. patents, trademarks & brands;

62. organisational culture, customer relation protocols;

63. vision, plans and documented achievable strategies.It is the "holy grail" of a enterprise, its core and its most valuable balance sheet asset, whether recorded as such in dollar terms or not.

64. 11. Developing A Unique Culture A unique culture is about attracting and keeping good people to your business, and helping develop ordinary people into extraordinary people. This is built on a base of world best practice principles of human resources management. But a unique culture goes well beyond the basics: it needs to have special elements of both a tangible and intangible nature. No matter how often we say it, employees are not a firm’s most valuable asset, since slavery has been outlawed for some considerable time! But they can be “valued”, and a unique culture is vital to this goal.

65. 12. Leadership Leadership sits above management. It is, by nature, demanding of special attributes such as loneliness in ultimate decision making (after full consultation), with no voting. And, sometimes, no consensus. It is non-gender specific (unlike management which favours females in the New Age of service industries). Leadership involves more external focus than internal: the opposite of management. Apart from listening to experts and confidantes, it involves communicating directly with major customers at least once a year.

66. 6.Australia’s Global Context

67. World GDP GrowthReal growth (PPP), 1950-2012(F) 2008 3.2% 2009 -0.7% * 4.1% 3.6% (F) 3.7% (F) Purchasing Power Parity (PPP) terms 1950-1969 growth in US$ market terms * The world decline in 2009 was -2.0% when measured in $US market price terms IMF/Economist//IBISWorld: 11/09/11

68. World’s 30 Largest Economies2011 (F) Netherlands0.9% Argentina0.8% Saudi Arabia0.8% Thailand 0.8% S. Africa 0.7% Egypt 0.6% Pakistan 0.6% Colombia 0.6% Malaysia 0.6% Belgium 0.5% Purchasing Power Parity (PPP) terms Rest of World (198 nations) 16.1% 19.4% USA 21 - 30th Nations 6.4% 11th – 20thNations14.6% 14.3%China Italy France Brazil UK Japan Russia India Germany 2.3% 2.6% 2.7% 6.4% 2.9% 3.9% 3.0% 5.1% Mexico 2.1% S. Korea2.0% Spain1.8% Canada 1.8% Indonesia 1.4% Turkey 1.3% Australia 1.2% 17th Iran 1.1% Taiwan 1.1% Poland1.0% World’s 228 nations US$ 78.1 trillion IMF/IBISWorld 08/02/11

69. World’s 30 Largest Economies 2015 (F) Netherlands0.8% Argentina0.8% Thailand 0.8% S. Africa 0.7% Egypt 0.7% Pakistan 0.6% Colombia 0.6% Malaysia 0.6% Nigeria0.6% Belgium 0.5% Purchasing Power Parity (PPP) terms Rest of World (198 nations) 13.7% 18.7% China 21 - 30th Nations 6.8% 11-20thNations14.0% Mexico 2.1% 18.1% USA France Brazil UK Russia 2.6% Japan India Germany 2.7% 2.9% 3.0% 3.5% 6.4% 5.1% Italy2.0% S. Korea1.9% Canada1.6% Spain1.6% Indonesia 1.5% Turkey 1.2% Australia 1.1% 17th Iran 1.0% Poland1.01% S. Arabia0.8% World’s 228 nations US$ 99.3 trillion Wikipedia & iBISWorld 08/02/11

70. The World’s Economic Regions In 2011(F)Share of World GDP (ppp basis) Eastern Europe 3.7% W&C Europe 21.7% North America 23.3% Indian S-C 6.8% ME 5.4% Asia Pacific 28.9% Africa 3.9% C&S America 6.3% 2011 World GDP, $US 78.1 trillion IBISWorld08/02/11

71. World Regions ImportanceChanging importance, % of World GDP (ppp terms) 1870 1913 1950 2015 (F) Year Nth America C & S America Western Europe Eastern Europe 3.6% 12.2% 7.6% 1.1 2.7 5.3 99.3 GDP (trillion) Source: OECD 08/02/11

72. Asia Pacific EconomyGDPppp terms2011 Singapore 1.4% Vietnam 1.3% NZ 0.6% Myanmar 0.4% Cambodia 0.1% Laos 0.1% PNG 0.1% Other 1.1% Phillipines Malaysia Thailand 2.8% Others 5% Indonesia Australia 4.1%% 1.9% 1.6% 2.8% 4.8% 47.2%China *Korea7.0% Japan 20.2% Taiwan HK 3.8% 1.5% *North Korea 0.19% South Korea 6.93% $21.2 trillion total Source: International Monetary Fund, Oct 2010

73. Asia EconomyAsia Pacific + Indian S-Cppp terms2015 (F) Other A-P 0.3% Other Indian S-C 3.1% Greater China 47.9% Singapore 1.0% Vietnam 1.1% Philipp 1.2% Malaysia 1.5%. Thailand 2.0% India 16.4% 44.0%China Australia 2.9% Indonesia 3.9% South Korea5.0% 13.0% Japan Taiwan NZ 0.4% 2.8% H/K 1.1% $US 38.9 trillion (39.8% of world GDP) Source: Wikipedia/ IBISWorld 18/02/11

74. Economic Growth:ChinaReal growth1950-2012(F) 8.2% average SSBC/IBISWorld: 18/09/11

75. Economic Growth IndiaReal GDP growth1950-2012 (F) Growing faster SSBC/IBISWorld: 18/09/11

76. Economic Growth IndonesiaReal GDP growth 1950-2012 (F) 6.0% average SSBC/IBISWorld: 18/09/11

77. Economic Growth JapanReal GDP growth 1950-2012 (F) 1961-1976 8.5% pa 1977-1991 3.8% pa 1992-2007 1.4% pa SSBC/IBISWorld: 27/09/11

78. Economic Growth: AustraliaReal growth 1961-2012 (E) 3.5% average SSBC/IBISWorld: 27/09/11

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