Compete to prosper improving Australia’s global competitiveness

McKinsey Australia

Compete to Prosper: Improving Australia's global competitiveness

July 2014

McKinsey Australia

Compete to Prosper: Improving Australia's global competitiveness

John Lydon David Dyer Chris Bradley

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Preface

As the rapid economic growth fuelled by high commodity prices and capital investment in resources projects abates, many Australians are asking where the next wave of growth will come from. The rapid growth of emerging markets, particularly in Asia, means there are enormous opportunities for Australia to grow through trade. Increased trade, which allows countries and firms to play to their strengths, creates wealth. If Australia continues to open its economy and plays to its comparative advantages in natural resource endowments and a highly skilled workforce, Australian businesses can access new markets and create new, more productive jobs. Australia can continue to raise income and employment levels, which raises living standards and promotes social inclusion.

This growth is not assured. The basis of international competition is changing rapidly. In an ever more connected world, disruptive technologies and lower transportation costs means international competition is moving to the level of individual jobs. Many sectors and tasks which were previously insulated will become trade-exposed. Firms which are able to innovate and differentiate will thrive; others will not survive. The challenge for Australia is to create an agile, flexible economy capable of adapting to the inevitable rise in competition.

Purposeful action is required. Australia faces a pervasive competitiveness problem. Many sectors of the economy lag behind international benchmarks. By focusing on its comparative advantages, raising productivity and improving competitiveness, Australia can continue to prosper. But complacency, or a focus on protecting the status quo rather than embracing the opportunity global trade presents, risks a painful correction through rising unemployment, falling wages and lower living standards.

Australia has the endowments of skills and resources to continue to compete and prosper. A clear sense of purpose and decisive action by policy makers, business leaders, research institutions, educators and individual workers will be required to make the most of these endowments.

This paper is the result of a research effort conducted by McKinsey Australia. Throughout the process we tested our ideas with multiple sources, including the Business Council of Australia, its President Catherine Livingstone AO and Chief Executive Jennifer Westacott. It is intended as a contribution to determining the ways of enhancing growth in Australia, including as an input to the BCA's program of work.

John Lydon, Managing Partner of McKinsey Australia and New Zealand, oversaw the work along with partners, David Dyer (Melbourne) and Chris Bradley (Sydney), supported by Eleanor Brown, Alice Hudson, Stephanie Madner, Kirstin Mennella and Yannick Spencer.

We are grateful to colleagues in the McKinsey Global Institute, especially Fraser Thompson, and in the McKinsey Australia office, Simon Blackburn, Damien Bruce, Jules Carrigan, Angus Dawson, Ryan Geraghty, Stephan Goerner, Brett Grehan, Ben MacLean, Milosh Milisavljevic, David Pralong, Joanna Rhodes, Tom Saar, Robert Skeffington, Charlie Taylor and Naveen Unni, and alumnus Donald Simpson.

The Innovation Taskforce of the Business Council of Australia, chaired by Andrew Stevens, were thought partners. Taskforce members:

Andrew Barkla, President and Managing Director, SAP Australia and New Zealand; Simone Carroll, General Manager Human Resources, REA Group; Anthony Claridge, Senior Vice President Global Supply Operations, ResMed Limited; Peter Crowley, Managing Director, GWA Group Limited; Ahmed Fahour, Managing Director and Chief Executive Officer, Australia Post; David Knox,

McKinsey Australia

Compete to Prosper: Improving Australia's global competitiveness

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Managing Director and CEO, Santos Limited; Catherine Livingstone, AO, President, Business Council of Australia and Chair, Telstra Corporation Limited; Pip Marlow, Managing Director, Microsoft Australia; Sean O'Halloran, President and Managing Director, Alcatel-Lucent Australia; Chris Roberts, CEO and President, Cochlear Limited; Steve Sargent, President and CEO, GE Australia and New Zealand; Andrew Stevens (Chair), Managing Director, IBM ; Giam Swiegers, CEO, Deloitte; Ziggy Switkowski, Chairman, Suncorp Group; Paul Thorley, CEO, Capgemini Australia and New Zealand.

We also interviewed BCA members, economists and business and public sector leaders who generously offered perspectives and practical insights.

Gary Banks, ANZSOG; Rufus Black, Melbourne University; Graham Bradley, AM, Stockland; Mark Burns, TMT; Michael Chaney, AO, Woodside Petroleum; Anthony Claridge, ResMed Limited; Peter Cooper, StartupSYD; Professor Richard Cooper, Harvard; Alan Cransberg, Alcoa; Peter Crowley, GWA Group Limited; Mark Cully, Department of Industry; Ralf Dicke, Leighton Holding; Simon Duggan, Treasury; Henry Ergas, Economist; Saul Eslake, Bank of America; James Fazzino, Incitec Pivot; Michael Fraser, AGL; Elmer Funke Kupper, ASX; Richard Goyder, AO, Wesfarmers; Bob Gregory, Australian National University College of Business and Economics; David Gruen, Treasury; Nick Gruen, Lateral Economics; Peter Harris, Productivity Commission; Johnathan Hauser, Independent Director of the Organic Dairyfarmers Cooperative Australia, formerly Burra Foods; Mike Hirst, Bendigo Bank; Graham Hodges, ANZ; Graeme Hunt, Transfield; Murray Hurps, #StartupAUS; Ken Jones, Leighton Holding; Rod Jones, Navitas; Peter Kerr, Independent Dairy Industry Consultant, formerly Murray Goulburn; Grant King, Origin Energy; Rod Maddock, Monash University School of Business and Economics; Steve McCann, Lend Lease; Mick McMahon, Skilled Group; Rohan Mead, Australian Unity; Ainslie Moore, Universities Australia; Nicholas Moore, Macquarie; Ian Narev, CBA; Sean O'Halloran, Alcatel-Lucent Australia; Paul O'Malley, Bluescope; Nev Power, Fortescue; Hugh Richards, TMT; Chris Roberts, Cochlear Limited; Steve Sargent, GE Australia and New Zealand; George Savvides, Medibank; Tony Shepherd, BCA; Andrew Stevens, IBM; Giam Swiegers, Deloitte; Ziggy Switkowski, Suncorp; Yasushi Takahashi, Mitsui; David Thodey, Telstra; Michael Wilkins, IAG; Dr Alex Wonhas, CSIRO.

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Compete to Prosper: Improving Australia's global competitiveness

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Contents

Executive summary 1 1. Raising competitiveness is job number one for Australia's long-term prosperity 5 2. Australia should focus on the sectors and tasks where it can win 19 3. Improving the competitiveness of individual sectors 29 4. Taking a purposeful approach to raise Australia's global competitiveness 41 Appendix 54

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