Thursday, January 1, 2015

Some thoughts on industry policy in Australia

Shortly before Christmas 2014, Bernard Salt wrote an excellent column in The Weekend Australian titled ‘Nation may need to look after itself’.

He discussed the gradual loss of key national capabilities that may be seen as vital to an island nation that depends upon exports for its prosperity, and mentioned the importance of ‘retaining core capabilities for strategic reasons’. I wrote to tell him I couldn’t agree more, but I believe the issue goes well beyond the defence sector.

As a nation we are losing our ability to design and manufacture things. The economists would have us believe that we shouldn’t build anything that we can buy cheaper, but this (only relatively) sensible view seems increasingly to get mis-interpreted and re-stated incorrectly as ‘We shouldn’t build anything at all’.

A friend of mine, Peter Smith, has begun researching a doctoral thesis at the University of South Australia that partly addresses this topic. Peter has spent a lifetime in the aerospace and defence industries and recently made an excellent presentation at the University of Sydney’s 75th anniversary aeronautical engineering conference. He makes the point that government shouldn’t do for industry what industry should do for itself, but government must do for industry what industry can’t do for itself, citing the example of Canada, a country with a comparable population and level of technological development.

Government policy in Canada, which is designed to facilitate the development of a sustainable aerospace industry, has resulted in a sector that turns over $22 billion a year (Australia turns over $4 billion); employs 66,000 trained engineers and technicians (Australia employs 14,000), and exports 80% of its output (Australia exports 25%, at most). What a contrast in economic outcomes!

The University of Sydney likely has a copy of Peter’s presentation, if you’re interested.

The attitude of Australian officialdom to the manufacturing sector is extremely dry; it does not appear to be moistened by much in the way of insight or understanding. Yes, commodity-style goods such as cheap cars, consumer electronics and paper clips may best be imported from low-cost producers. But relatively high-cost producers such as Australia, Canada, Sweden and the UK can and do compete on value, not cost (though the distinction is sometimes ignored within policy-making circles), in areas such as aerospace, defence equipment, biotechnology and other high-end technical sectors.

Highly educated Australians are in demand overseas, working in these and other sectors such as Formula 1 motor racing. Why do we educate and train engineers and scientists, and complain loudly that not enough students are studying STEM subjects at school and then at university, if government policy, by a lazy or ignorant default, is to allow the manufacturing sector to wither and die in any case?
Is it government policy that the manufacturing sector should eventually fail? Do the policy makers actually understand what goes into creating and sustaining a credible industry capability, in any sector? And do they understand the benefits we as a nation will forego if our manufacturing industry is allowed to fade away? 

Peter Smith highlights the contrast between Australia’s aerospace industry policy, on the one hand, and the UK’s aerospace and high-technology industry sector policies, on the other, and finds us badly wanting, both in terms of policy development and the measurable economic benefits that flow from an enlightened policy position.

As a nation we’re not taking a mature, joined-up approach to this problem, and what debate there is in this country isn’t getting enough exposure on the air and in the public prints.

Sincere thanks to Bernard Salt for raising in a national newspaper an issue more people should consider in detail, not just comparing sound bites and the volume of the primal screams from some of the participants in what has been so far an unenlightened and unenlightening debate. 

Australian defence industry policy - some suggestions

In order to escape the many elephants in the Australian defence industry’s living room I have been doing some research into the technical history of two iconic aircraft, the Vickers Supermarine Spitfire and Hawker Hurricane.  Earlier posts describe some of the design decisions that were made in both projects, and how these were arrived at.

I’ve taken the liberty of rendering down some of the insights from this research into a dozen industry policy lessons for the monopsony customer who shapes and directs Australia’s defence market. 

  1. Industry capability (including R&D capability) cannot be sustained without a constant flow of work. (This was true in the 1930s and it remains true today)
  2. If industry capability gets run down it will take a long time to restore. (A lesson learned the hard way in the 1930s, and now confronting in the 21st century a customer who possibly doesn’t understand the level of control he exerts over the shape, size and capability of the industry.)
  3. If a nation’s industry capability is deemed to be sufficiently important then, in the absence of an efficient market of sufficient scale, it will be necessary for the government to make certain strategic investments or adopt certain policy settings in order to maintain it. (Nobody is suggesting that Australia’s defence industry needs or deserves direct financial support. At present, however, Defence industry policy seems designed to shield the Department and the ADF from any responsibility for the industry that sustains them – Defence’s policy priority is the defence of the realm, naturally enough, not the needs of industry; a wider, more mature debate on the role and importance of industry, not just to the defence sector but nationally, is essential, and long overdue.)
  4. Capacity and expertise in one industry sector are not automatically relevant in other industry sectors. (Look what happened in the 1930s when Lord Nuffield’s car people tried to build Spitfires; look what happens  today when construction and general sheet metal workers try to weld warship modules together. It takes time to develop skills and expertise, particularly in specialist fields.)
  5. A group of people in overalls and a factory building with some machinery inside it do not an industry capability make unless and until they embody the technical, design and management skills and equipment necessary to design, develop and manufacture the product (or service) the market requires. (See above; also, this reflects a tendency in public discussion to ‘commodify’ industry capabilities, to treat skill, quality and innovation as implicit and imperishable and that therefore the only measure that matters is raw numbers.)
  6. Customers shape the industry that supplies them. In a  technology driven monopsony a smart customer doesn’t allow his industry base to fall into a technical rut or to fall behind in a technology sense.  (This ought to be a truth universally acknowledged, but is not.)
  7. A smart customer must be able to strike the appropriate balance between setting requirements that push suppliers towards technology over-reach, on the one hand, and the fulfilment of disappointingly low expectations on the other. (One could discuss this endlessly – briefly, however, the Spitfire and Hurricane projects emerged from an RAF operational requirement, F7/30, that didn’t push the industry far enough. Once challenged properly, they responded well. Mastery of this balancing act will be essential if Australia is to get what it needs from the Future Submarine Project, Sea 1000, and the Future Frigate project, Sea 5000. There is a corollary to this rule: if the customer is ambitious then he needs an acquisition strategy that recognises the risk and unknowns and is sufficiently flexible to work its way around the inevitable difficulties without becoming bogged down in arguments over contracts and contractual process.)
  8. The risk appetite of an innovating company will be conditioned substantially by its existing capability (including its R&D capability).  (The Hawker Hurricane was built in the same way, in the same place, by the same people, using the same tools, processes and materials as its biplane predecessor. This was a very low-risk approach that enabled Hawker to meet the letter of the requirement with a very conservative design, but inherently self-limiting as the Hurricane had little performance growth potential. The Spitfire was designed from a clean sheet by a company that had never built an all-metal monoplane fighter before – the company’s risk appetite was very high, but it needed to be. More recently, Boeing and Northrop Grumman had a pretty healthy appetite for technical risk when they began the Wedgetail AEW&C project because they had developed similar systems before; but there was no point in them doing it unless they could improve measurably on what was already in service elsewhere and available for the RAAF to buy. They needed to take risks.)
  9. The innovator’s view of what is needed to meet the customer’s needs will be shaped by the company’s existing capability. (The Hurricane took Hawker’s then-current technology base to its limits, but was considered by its manufacturer sufficient for the RAF’s needs without forcing the company to adopt a new technological trajectory. Vickers Supermarine had no relevant technology base so considered the RAF’s requirements in a more fundamental way and designed the Spitfire from a clean sheet. As a result, it was a better performer with a much longer and broader development path. One might compare the US family of MRAP vehicles developed during the 1990s and early noughties with the Australian Bushmaster. The latter was a clean-sheet design by a company that hadn't built armoured vehicles before. It pre-dated the Coalition involvement in Iraq and Afghanistan and required time-consuming development, but was an outstanding performer once in service. The MRAPs were generally crude, compromised and in some cases deeply flawed, but they were designed and built quickly and in large numbers by the existing US heavy automotive industry, in response to a rapidly emerging threat, and were good enough for the job they had to do.)
  10. A company’s technological development course should be steered by its market knowledge as well as by its current technical expertise. (Another topic for endless discussion. Hawker illustrates the opposite case – to maintain its close relationship with the RAF and UK Air Ministry, it mirrored the RAF’s technological conservatism during the early-1930s and so never pushed too far ahead of its customer in technology terms. Conversely, CEA Technologies in Canberra understood the market's needs very well when it set out on the development path leading to the current Ceafar and Ceamount radars. Although treated initially with extreme suspicion by the RAN and DMO, these are the best of their kind in the world and now in service, after a lengthy, cautious development program which convinced the RAN and DMO that CEA Technologies had the correct solution.)
  11. If a company lacks capability and capacity in an area required by a customer, two outcomes are possible:  a timid, incremental approach that avoids undue risk, or a ‘clean sheet’ approach that drives the company into new areas of technology and capability - and risk. (Vickers Supermarine responded to Air Ministry specification  Target F7/30 with a monstrosity called the Supermarine Type 224. It was an inelegant, timid approach to a problem the customer still hadn’t come to grips with; Hawker, for its part, offered what it called a ‘High-speed Fury’ biplane (as if there could be such a thing as a high-speed biplane!). Both companies thought again (as did the customer!); Hawker followed an incremental development path to the Hurricane, Supermarine made the giant leap to the Spitfire.)
  12. The more a company depends upon technology development for its prosperity and growth, the more important it is for its management to understand that technology, not to be ignorant or dismissive of it, and not to be blinded by it. (That’s not so obvious, or widely acknowledged, that it doesn’t need to be repeated here. It applies in equal measure to the defence customer.)

So what do these lessons mean for Australia? Firstly, that Australia’s defence industry faces the prospect of a decline in both overall capability and size unless it can secure for itself more work, both at home and abroad. Secondly, that the industry needs to take a much wider view of what constitutes its market – the Australian Department of Defence alone won’t be a big enough market to sustain the industry.

Thirdly, the Australian government (and not just the Department of Defence) needs to decide whether or not this country needs a manufacturing industry and, if so, what policy settings, on the one hand, and attributes of a smart customer, on the other, are required to facilitate this economically and eficiently. At present, there’s a paucity of mature, reasoned debate and both government and industry are disadvantaged as a result.

Happy New Year, by the way!

A Happy New Year to all - here's wishing everybody the very best for 2015.

Innovation and Innovativeness

Innovation at its core is the implementation of change.  The ‘Innovativeness’ of an organisation or individual is a measure of their willingness to embrace all the possibilities of change.

An innovation isn’t necessarily an invention. It is something that’s new in its context – and that could be an invention, developed and applied to some practical purpose. More often that not, however, it’s something that already exists, used or applied in a new way. For example, airline pilots now use iPads in the cockpit to display maps, flight information and checklists. This has been an important innovation in the evolution of modern airline operations, but it wasn’t necessary to re-invent the iPad to achieve this.

Some innovators are naturally restless – for them, change is a constant and the steady state represents stagnation. But most individuals and organisations are not similarly driven. They are naturally conservative and risk-averse and the prospect (not to mention the process) of change is often troubling to them. They need to learn why and how to innovate. The ‘Why’ is simple: external change happens continuously. If you don’t adapt to change you’ll die, eventually. Either you’ll be crushed by external forces, or you’ll wither because the market has changed and you didn’t adapt – you didn’t identify and pursue the opportunities created by that change process. The ‘How’ is equally simple, though ‘simple’ doesn’t mean the same thing as ‘easy’.

All that is required to be innovative is to be aware of the imperative to change, and to be able to manage the change process.

It’s that ‘Awareness’ that is crucial: Self Awareness is about the innovator’s ‘internals’ – it tells the innovator what he’s capable of, or prompts him to ask if what he’s doing is all that he can do; and it tells him what he needs to change if he wants to do more, or do something quite different.

Situational Awareness is all about the ‘externals’: what is happening externally that may force a change, or that might present an opportunity? What is happing with technology, or the economy, or market conditions, or customer behaviour?

The two feed each other. The level of the innovator’s Situational Awareness determines his ability to expose and identify threats and opportunities; the level of the innovator’s Self Awareness will determine the nature of his response.

Challenge: Response; New Challenge: New Response. It’s an iterative process made fruitful if the innovator is sufficiently self-aware and has made a sufficient investment in his situational-awareness. Knowledge resulting from Situational Awareness will stimulate insights in Self Awareness, and vice versa.

The exact nature of any response to emerging insights - the opportunities and threats, essentially – resulting from the Innovator’s Self Awareness and Situational Awareness will be conditioned, and possibly determined, by the innovator’s Technical Mastery. 

No person or organisation exists in a vacuum: whether we’re talking about a charity, a government department, an elite sportsman, a star entertainer or a manufacturing company, the innovator’s activities almost always centre around a specialist domain that it must understand intimately – this is Technical Mastery.

In the case of an elite sportsman, for example, the domain is his chosen sport: its laws, the skills and physical and mental attributes required for success. In the case of a government department there might be more than one central domain: the portfolio itself – defence, perhaps, or housing, or health – and the arcane processes and the checks and balances of the parliamentary system. For the manufacturer it is the technology at the heart of his market, the technology embodied in his products and services, the manufacturing techniques that create saleable products and services, and the supporting and enabling technologies that allow the players in this market to survive and flourish.

A person or organisation wanting to be innovative needs a systematic approach to nurturing and if necessary growing Self Awareness, Situational Awareness and Technical Mastery. In a practical sense, the leaders and the internal culture they help create will determine how welcome and valued each attribute is within the organisation. Good managers will also create the internal processes and mechanisms and nurture the skills and specialist expertise necessary to exploit the insights they gather.

This ability to maintain an organisation’s openness to change, on the one hand, while managing its everyday activities as efficiently and economically as possible, while also developing timely responses to threats and opportunities, is a function of managerial and leadership excellence – call it Professional Mastery. This embraces business management, administration, human resources (recruitment and retention of the right people with the rights skills, and training where appropriate) and strategic planning. This applies to the lone innovator as much as it does to a large, complex organisation.

So, it can be seen that an innovator requires each of these four attributes in order to have any chance of sustained success: Self Awareness, Situational Awareness, Professional Mastery and Technical Mastery. Each informs and is shaped by the others. None of these four features of the successful innovator can survive in isolation, and none of them would be very useful if they could: they would lack either a purpose – in the case of the first three – or direction, in the case of the fourth. Their mutual dependence can be shown in a simple diagram.

The four attributes of an innovative organisation
Their relative importance will wax and wane as an organisation passes through the business cycle. All are essential, but Professional Mastery will help determine where the balance needs to be struck at any one time.