INNOVATION NATION: These global trends show why Australian companies must innovate or die

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Australian companies face an increasingly competitive world. Technological and public policy advances are reducing information asymmetry between producers and consumers, bringing down the barriers to entry, eliminating transaction costs, and, as a consequence, increasing the number of firms in markets and the battles between them.

When economists first started theorising about competition, the concept was based on a fantasy of “perfect competition”. It was a hypothetical scenario against which everything else was judged. The scenario involved a huge number of consumers who had perfect information about price and quality, along with producers, so there would be little stopping competitors entering or exiting the market.

For most consumers and producers, however, at least until recently, the reality was nothing like that. A few years ago, a beehive inventor from the seaside country town of Byron Bay would not have had millions of consumers globally clamouring for his product before it was even commercialised. Even then, unless he was lucky enough to find a large national or international distributor, and have a multi-million marketing budget to drive sales, the target market would have likely been hard-core beekeepers who had found out about it through word-of-mouth.

Similarly, department store shoppers had little more than brochures and the reassurances of a salesperson to base their decisions on, and little clue about prices in other stores or countries. Finding the right deal was largely restricted to choosing from what was right in front of you.

And companies, especially those needing licenses or government approval to operate, faced numerous hurdles to enter new markets. Today’s startup mantra of going “global from day one” was less plausible in the pre-digital era of infrastructure investment.

All of this has changed. The online era has brought everyone closer to the world of perfect competition, providing both ample opportunity and challenges along the way.

Here are some of the key issues businesses face.

Lower barriers to entry

Barriers to international trade have been falling for decades, but the process has been ramped up through technology and trade deals.

In the last couple of years, Australia has signed free trade agreements with Japan, China and now 12 countries in the Pacific region. Tariffs and other constraints are diminishing on more than two billion new consumers for Australian entrepreneurs.

A good example of a company taking advantage of this shift is Guvera, a Gold-Coast based music streaming service concentrating on developing markets.

Low barriers mean the Australian market is largely made up by the dominant international brands such as Spotify and Apple. So Guvera pivoted from a “normal” streaming business model to target the billion-strong Indian market through deals with Bollywood record companies.

Technological innovations – think smartphones and app stores – have given Guvera access to a tremendous opportunity that its competitors weren’t taking.

“Our competitors mostly weren’t in those markets and we’ve been able to get a stronger footprint” says Guvera CEO Darren Herft.

“We’re the only label in the world that has label agreements with labels like Sony, on top of the biggest Bollywood label in India as well.”

Near perfect information

At the same time companies are being empowered by new technologies and international deals, consumers are being offered more information than ever and before they walk into shops for advice from a salesperson, they’ve done their research online using reviews, comparison websites and competitors.

A company’s competitors are no longer just the shops down the street or across town, smartphones mean everyone is competing against the world.

Drones, new business models and experiments by the likes of Twitter and Instagram mean the shopping experience is changing rapidly. Information is coming in different forms, and channels, and companies need to evolve to find and attract customers.

As a result, business needs to experiment and change models and offerings. Amazon does this regularly, pivoting into new verticals and even launching a physical store to capture segments of the market it misses.

“The thing about retail is, the consumer has near-perfect information,” said Paul Vogel, an analyst at Barclays recently told the New York Times.

“So what’s the differentiator at this point? It’s selection. It’s service. It’s convenience. It’s how easy it is to use their interface.”

Eliminating transaction costs

One of the most exciting things about the internet from a business perspective is that digital goods are infinitely replicable.

Once you create an app, video, or platform, the costs to service additional users are minimal. So a small team, or new app, can go global in a short space of time. Instagram had just a handful of employees when it surpassed the former giant of imaging, Kodak.

Along with the costs of distribution, the costs of doing business are also reducing. The “cloud wars” between Amazon, Microsoft and Google have brought down the cost of the infrastructure. Paypal, Square and Pin are reducing transaction costs. Google and Apple have developed world-wide marketplaces, providing access to billions for a small “tax”.

A reduction in transaction allowed a small team in Tasmania to build an app that takes on Adobe.

These global trends are both positive and negative. Lower barriers to entry cut both ways, meaning Australian businesses are constantly competing against the world, as well as gaining access to markets they wouldn’t have dreamed of taking on.

The issues facing entrepreneurs are no longer distribution or finding consumers, it is discovery.

The challenge for Australian businesses is finding a way to break through the noise from competitors. That requires innovation and differentiation, such as Guvera’s focus on India or the creation of the revolutionary Flowhive beehive, which captured the public imagination in a way few anticipated.

Because no matter what environment you’re competing in, success starts with great ideas.

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