Academic journal article The McKinsey Quarterly

What Ails Australia?

Academic journal article The McKinsey Quarterly

What Ails Australia?

Article excerpt

A potential prosperity gap of US$22 billion

Government regulation is partially to blame; so are the low aspirations of business leaders

Case studies in retailing, banking, aviation, construction, and processed food

Over the past 15 years, the Australian economy has undergone a transformation. The government has introduced reforms in the financial system, business regulation, and industrial relations, and reduced trade protection. In parallel, business practices and relationships between employers, employees, and unions have seen significant change. Yet despite these efforts, the nation's relative economic prosperity has not altered since 1970. Its gross domestic product is still 30 percent behind that of the United States, the most prosperous country in the world [ILLUSTRATION FOR EXHIBIT 1 OMITTED].

This prosperity gap has two main causes: poorer labor productivity in the Australian economy, and lower employment per capita. If Australia is to raise its standard of living, it must address these issues - productivity in particular. To investigate what actions by corporations and government might promote productivity growth, the McKinsey Global Institute compared Australia's performance in labor productivity and employment with that of other leading economies.(*) It focused on five industries: processed food, construction, retail, banking, and aviation (see case studies on pp. 98-102). Together, these industries make up about 18 percent of the economy [ILLUSTRATION FOR EXHIBIT 2 OMITTED].

The nature of the challenge

The principal research findings were:

* Australia trails behind the global benchmark, the United States, in both labor productivity and employment in all the industries studied except construction, where it is close to best practice.

* Among external factors, the market conditions that Australia can do little to change - its relatively small population, its geographical location, its lower income levels - are less important than those that lie under the direct control of government, such as product market regulation (Exhibit 3).

* Within firms, the prime causes of poor labor productivity are low management aspirations and a lack of innovation.

* If Australia tackles the key performance inhibitors and makes substantial productivity gains, it will not necessarily incur a large net fall in employment. Growth in productivity can be combined with growth in jobs, especially in the service sector.

[TABULAR DATA FOR EXHIBIT 3 OMITTED]

Limited aspirations and innovation

Though lower capital intensity and smaller scale explain part of Australia's productivity deficit, they are much less important than lower management aspirations and limited innovation within businesses. The industries studied were characterized in the main by:

* A slowness to adopt innovative new processes developed overseas. In retail, for instance, many best-practice management methods from America have yet to be imported into Australian stores. In banking, mobile mortgage salesforces first appeared a decade ago in the United States, but are only now being introduced in Australia as a high-productivity alternative to conventional branches. By contrast, the construction industry has been quick to adopt efficient new production processes, a trait reflected in its near-benchmark productivity.

* Laggardly product and service innovation. Australian retail is some 15 to 20 years behind the US industry in adopting productive store formats such as the category killer. In food processing, firms have been much slower than their American counterparts to rethink product categories and innovate to meet new customer demand, which has prevented them expanding their existing markets.

* A limited use of supplier relationships. In food processing and specialty retail chains, there is a tendency to keep suppliers at arm's length rather than build collaborative relationships that yield opportunities to improve products and processes. …

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