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New ideas, new products, new models: The challenge of re-invention

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1© The Economist Intelligence Unit Limited 2018


About the researchChange drivers is a series of articles from The Economist Intelligence Unit and commissioned by the Commonwealth Bank of Australia, that examines how change-oriented the entertainment, education and retail industries are by determining the extent to which organisations in them have changed their product and service portfolios and their revenue models in recent years.

The Economist Intelligence Unit bears sole responsibility for the editorial content of this report. The findings do not necessarily reflect the views of the sponsor. Denis McCauley was the author of this report and Charles Ross was the editor.

The research draws on a survey conducted in March 2018 of 420 senior executives in Australia, Hong Kong, Japan, New Zealand, United Kingdom and United States. Interviews were also conducted and supplemented with wide-ranging desk research.

Our thanks are due to the following interviewees for their time and insights:

• Russel Zimmerman, executive director, Australian Retailers Association, Australia

• James Hutchin, associate, UTS Business School, and senior research fellow at Temple University’s Fox School of Business, Australia

• Angela Stengel, head of the Content Ideas Lab, Australian Broadcasting Corporation (ABC)

• Helen McCabe, digital content director, Nine Entertainment, Australia

2 © The Economist Intelligence Unit Limited 2018


1 The industry-specific research results will be examined in detail in three separate articles.

Introduction

In the digital era, to say that change is constant is an understatement. The Internet, smartphones, cloud computing, social media and other technology advances have given organisations of all sizes the ability to change what they sell and how they operate without massive investments of time and money. These advances have also spawned challenger companies that are disrupting markets and forcing change on older, traditional players. This programme of research explores how change-oriented Australian companies are in comparison with those from other developed countries. It focuses in particular on two indicators of change: firms’ introduction of new products and services and their willingness to alter their revenue models. The research encompasses three industries which have experienced high degrees of digital disruption in recent years: retail, entertainment and education1.

The centrepiece of the research is an online survey of 428 executives that was conducted by The Economist Intelligence Unit in March 2018. Australia accounts for the largest number of respondents—28% of the sample—with the balance roughly evenly split between the US, UK, New Zealand, Japan, Singapore and Hong Kong. Just over half the respondents (54%) work in small and midsize companies (with annual revenue of US$250m or less), while 17% are from companies with revenue of $1bn or more. The sample is also senior: 55% are C-level executives

or equivalent, and the others are vice-presidents, directors, and heads of business units or departments.

This summary presents the key findings of the survey.

How change-oriented are firms?

Do companies in the retail, entertainment and education sectors feel themselves under pressure to change? Judging from the survey results, the answer for the majority is yes. Across the overall sample, 63% of executives think their industry is more competitive than it was three years ago. This figure is higher for Australia-based respondents at 66% (including 25% who express strong agreement with the sentiment). Only in Singapore and the UK is the figure higher. (Figure 1) Australia’s established retailers, for example, are feeling under pressure from the entry into that market of overseas online players, according to Russell Zimmerman, executive director of the Australian Retailers Association. (See “Making up for lost time: Retailers embrace the need for change”.)

Meanwhile, only a minority of respondents say that their companies have grown in the past three years, whether in terms of revenue, profitability or number of employees. Although the latter is not necessarily an indicator of improved performance, revenue and profit growth usually are. In this context, the Australian



firms in the survey are underperforming their peers in several countries. For example, fewer Australian executives report revenue growth (34%) than their peers in most other countries in the survey, and substantially fewer than those in the US (56%) and UK (50%). Profit growth is reported by 43% of Australian respondents compared with 54% of those in the US and Singapore, 48% in the UK and 46% in Japan.

Taken together, these findings suggest that Australian organisations may find themselves under greater pressure than those elsewhere to adapt to market change. Experts interviewed for this research from the retail, entertainment and education sectors testify that such pressure is building. In education, for example, James Hutchin, faculty associate at UTS Business School, foresees some universities closing

their doors in the future due to model changes they are unprepared for. (See “Learning to change: Education sector responses to disruption”.)

How are the surveyed companies adapting to change in their markets? The most common measure taken (cited by 54% of respondents overall) has been to introduce new products and services. If the survey results are a judge, organisations in the UK, Hong Kong and US have been more active than those in other countries in bringing new products to market. Just over half of Australian respondents say their organisation has introduced new products or services in the past three years. (Figure 2)

Other common approaches taken include entering new product or service markets, discontinuing existing products, and

Figure 1: A competitive landscape Share of respondents agreeing: “Our industry is more competitive today than it was 3 years ago”

Somewhat agree Strongly agree

20%

43%

25%

41%

14%

47%

34%

42%

12%

49%

10%

36%

16%

42%

26%

42%

6%

33%

17%

42%

Overall Australia New Zealand Singapore Hong Kong Japan US UK Annual revenue Annual revenue less than $500m more than $500m



withdrawing from product markets in which they had previously competed. These measures could be indicators of a more radical response to change on the part of companies, as entering and exiting markets are often (though not always) related to strategic decisions made at the highest management levels.

Model experimentation

Altering the revenue model may be a more reliable indicator of an orientation to change, and roughly one-quarter of survey respondents report that their firms have taken such steps in recent years. Shifting the company’s primary distribution channels (from offline to online, for example) is one such step, taken by 39% of Hong Kong firms and 25% of Australian ones. Some companies, especially in the retail industry, are integrating digital channels into

their store environments to create a unique customer experience which their online rivals cannot match. An example is SuperCheap Auto, an Australian automotive components retailer. (See “Making up for lost time: Retailers embrace the need for change”.)

Pricing model changes, meanwhile, have been particularly common amongst Hong Kong and British firms (42% and 40%, respectively, of those countries’ respondents), considerably more than amongst Australian ones (23%). (Figure 3)

The survey provides a detailed picture of the types of changes those companies are making to their pricing models. The most common measure, taken by 40% of respondents’ organisations (47% in Australia) that have adjusted their pricing models, has been to enable personalised pricing down to the level of individual customers, a capability that has only

Figure 2: Adapting to change by introducing new products Share of respondents whose companies have introduced new products or services in the past three years

UK

Hong Kong

US

New Zealand

Australia

Japan

Singapore

64%

61%

60%

51%

51%

50%

48%



become widespread since the growth of online distribution platforms. Digital technologies have also enabled companies to complement or replace product pricing

with “pay as you go” or subscription-based pricing—39% and 35% of respondents’ firms have gone down this route. (“Pay as you go” is a model change adopted by 35%

Figure 4: Personalised pricing leads the way Pricing model changes introduced by Australian companies in the past three years (share of respondents)

Figure 3: Changing the model Share of respondents whose companies have taken measures to change elements of their business model in the past three years

Changed our pricing model

Created option(s) for shared use of our products or services

Changed our primary distribution channels forproducts or services (e.g., to digital/online)

26%23%

42%26%

40%

24%24%

49%22%

14%

22%22%

39%18%

14%

Overall Australia Hong Kong US UK

Personalised pricing

Fee-for-service (“pay as you go”)

Fee-based advertising

Subscription pricing

“Freemium"

Donation model

License fees

Advisory fees

“Pay what you want” (PWYW) pricing

47%

35%

24%

18%

18%

12%

12%

12%

9%



of Australian firms, although only 17% have gone in for subscription pricing.)

Another significant adjustment to revenue models is monetising the data that companies gather in the normal course of their work. For example, with the help of powerful analytics tools and APIs (application programming interfaces), retailers can offer real-time insights to suppliers on product preferences and spending trends. Entertainment providers can create similar revenue streams by providing data on, for example, viewing preferences. They can also learn from digital rivals, such as Spotify, who have proven to be masters of using data to build more relevant playlists for customers. Only a few of the companies in our survey, however (10% overall and in Australia), have thus far taken this step.

Developing new products

It is time to take a closer look at companies’ product development performance and practices. The first thing that becomes apparent from the survey is that there has been a considerable degree of flux in product and service portfolios. Over the past three years, seven in 10 respondents (71%) overall say their firms have increased the number of products and services they offer; with 24% saying the increase has been significant. There has also been an increase in product upgrades, although to a lesser extent than that of new product

introductions. Product and service upgrades have increased at six in 10 respondent firms over the past three years, and the rise has been significant at 11% of them. (The Australian figures broadly accord with the overall ones cited here; elsewhere, new introductions appear to be more frequent in Asia than in Europe or the US.)

One possible explanation for why new introductions have outstripped upgrades is that digital technologies have greatly simplified—and in some cases reduced the cost of—new product development. If a product or service is software-based, as many in the retail, entertainment and education industries today are (think of retailers’ “click and collect” services, or universities’ online courses)—it can be developed, tested and taken to market in days or weeks, rather than months as had been the norm in pre-Internet days.

Few in the survey have attained such speed. Only 11% of respondents say their firms can bring a new product to market in less than a month. Nearly three-quarters of respondents’ firms (74%) take three months or longer, and 16% take more than a year. The ranks of the fastest—those which can get a new product to market in two months are less—feature considerably more respondent firms from the UK (36%), Australia (35%) and the US (34%) than from Asia or New Zealand. (Figure 5)

Some media and entertainment providers are seeking to streamline content development by introducing “agile”



development practices borrowed from the software industry. An example is the Australian Broadcasting Corporation. Angela Stengel, head of the ABC’s Content Ideas Lab, believes applying agile principles can help it get new content to market quickly in a low-risk way. (See “Fighting fire with fire: Digital responses to change in the entertainment industry”.)

When companies in the three industries of focus introduce new products or services, the greatest influences on their nature and characteristics have been customers, whether through digital channels (cited by 45% of respondents overall, including 46% in Australia and as high as 66% in the US) or more traditional end-user focus groups (cited by 42%, including 38% in Australia and 64% in Japan). Internal R&D is far less prominent at most firms today, mentioned by only 24%.

It is worth noting that a small number, 16% of respondents (12% in Australia and 25% in

the US), also point to predictive analytics as an influence on new product development. This can be expected to rise in the coming years, especially since many companies (38% overall and as high as 56% in Singapore, although only 31% in Australia) have been making use of other types of data analytics to improve their product development capabilities. Social media and smartphones have also been influential in boosting capabilities, according to 42% and 39% of respondents (43% and 46% in Australia), respectively.

Obstacles and remedies

What’s holding firms back from improving their game in new product and service development? Survey respondents’ biggest complaint (especially in the US and UK) is of a lack of funding. But that’s far from all. A shortage of innovative ideas and of people with the requisite skills (both cited

Figure 5: Speed to market Share of respondents’ organisations that take two months or less on average to bring new products or services to market

Less than a month 1 to 2 months

15%

11%

16%

20%

18%

17%

20%

14%

16%

10%12%

2%

12%

2%10%2%

Overall UK Australia US Japan Hong Kong Singapore New Zealand



by 27% of respondents overall) are almost as common hindrances amongst surveyed companies. A lack of innovative ideas appears to be a tougher obstacle to better product development performance in Asia than elsewhere. (Figure 6) Risk-averse cultures (cited by 22%) also hamper many companies.

Shortages of funding, skills and innovative ideas appear to hamstring new product development at Australian firms in almost equal measure. Fewer Australian respondents (20%) than in other country, however, feel held back by risk aversion or cultural resistance. The latter does rear its head in the country’s businesses, however. For example, Helen McCabe, digital content director at Nine Entertainment, points to the existence of “old” and “new” schools in the industry with differing views on the best tools to use to gather viewer feedback on content, and the two often find it difficult

to talk with each other. (See “Fighting fire with fire: Digital responses to change in the entertainment industry”.)

To overcome these impediments and bring fresh impetus to their new product development efforts, many companies are looking beyond their own walls, or believe they should be doing this. Just over one-third (35%) of respondents overall say their R&D or product development teams are insulated and need to be more outward-looking. Even more (37%, including 34% from Australia) already say that their best product ideas come from outside the organisation. For 44% of respondents (33% from Australia) recruiting talent from other industries is considered critical to upping their game in new product development. z

Figure 6: Short on funding, ideas and skills The biggest barriers to introducing new products or services (share of respondents)

Overall Australia New Zealand Singapore Hong Kong Japan US UK

31%27%

39%

32%

19%

28%

38%42%

27%25%

22%

38%42%

26%22%

18%

27% 26%

31%

26%

30%

22%

36%

18%

Lack offunding

Lack of peoplewith the

requisite skills

Lack ofinnovative ideas



ConclusionA few observations can be drawn from the survey about Australian firms’ penchant for change amid disruption in their markets. One is that many executives are feeling strong pressure to change, acknowledging that their businesses are not growing while competition in their respective industries is intensifying.

At the same time, Australian firms cannot altogether be considered laggards in model experimentation or new product development. For example, although a comparatively small number in the survey have altered their pricing models, those that have are experimenting widely, introducing personalised and pay-as-you-go pricing as a complement to, or even substitute for, their existing mechanisms. Australian firms are also just as fast in bringing new products to market as US and British ones, and faster than respondents’ firms in Asia. Customer feedback channels (including digital ones) are just as central to the product development processes of surveyed Australian firms as they are to those in other countries. The former, however, appear to have some catching up to do in integrating data analytics into product development.

Finally, although they may feel constrained by a shortage of talent and funding for product development, Australian companies are not unduly hamstrung by a lack of ambition. Their will to change is apparent; finding the resources to do it is currently the bigger challenge.

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