BAEP’s Beaumont on understanding the economics of innovation

1515326886990by Julian Beaumont

For all the interest in self-driving vehicles, blockchain, 3D printing and the like, very little time is spent by investors in understanding the economics of new innovation and who might actually benefit.

Most investors in these hot industries can’t fathom anything other than a bright future. With the benefit of hindsight, however, investing in the latest hi-tech industry isn’t necessarily the easy path to riches most might presume.

Looking out from the 1920s when air travel was just taking off and the commercial airline industry was attracting much excitement, few would have been disappointed by its subsequent growth or importance to society. Investors in airlines, however, have been losing money ever since. Indeed, many airlines have gone bankrupt, including Ansett and Compass, and most have at some time required bailouts.

Consumers, however, have benefited, especially through lower flight prices over time. And to prove innovation isn’t the key to success, the supersonic Concorde stopped its super-fast flights in 2003.

Similarly, automobiles, plastics, personal computers and dot-coms were all once new-age industries that have caused carnage for investors. Picking the few winners that will emerge from the hype is often difficult.

From the dot-com bubble, Amazon is obviously one. Other big tech winners, such as Facebook, Google and Netflix, weren’t even listed at the time.

To date at least, Amazon has won with profitless prosperity, with arguably little profits to show for its success. Online retailing has been a tough place to invest.

Here, the value of the innovation accrues to customers rather than shareholders, as those in Surfstitch and Temple & Webster can attest.

Improved range, searchability, price transparency and convenience all clearly benefit the customer, but come at a cost to retailers – particularly due to increased price competition and expensive delivery costs.

Interestingly, it has been bricks-and-mortar retailers like Zara and H&M whose fast fashion and express supply chains have been among the most profitable innovations in retail in recent years.

Right now, investors are enthusiastic about lithium stocks, disruptive tech names, pre-profit concept stocks and bitcoin. Of course, that which is new and lacks much historical track record allows this optimism, with little in the way of disproof.

The key for investors is not to focus exclusively on the importance, societal value or seemingly exponential growth of the innovation, but to understand the economics behind it.

For example, if lithium is ultimately plentiful, it won’t be lithium miners that will prosper from the electric vehicle revolution. Nor will it necessarily be Tesla, as incumbent auto manufacturers can just as easily go electric.

Ultimately, whether any one company truly benefits from innovation comes down to whether they have something unique – a competitive advantage – that limits the extent to which the value of the innovation is competed away or otherwise passed on to the customer.

A common example is where the innovation makes for a unique product or service. Often forgotten as innovators are a number of world class Australian-based healthcare companies that include Cochlear, Resmed, Sirtex and CSL.

They spend big on researching and developing new and better medicines and medical devices.

Their products are protected by intellectual property rights such as product registrations and patents, allowing them to reap the profits of their innovation. Interestingly, investors don’t seem to attribute much value to R&D spend, perhaps because it usually represents an expense and subtracts for profits.

For example, CSL’s pre-tax profits would be almost 40 percent higher but for its R&D investment, which is rarely raised by those focused on its apparently lofty earnings multiple.

Other examples on the ASX include Aristocrat, which is spending more than $300 million annually on developing new market-leading slot machines and online social games; Reliance Worldwide with its Sharkbite push-to-connect plumbing fittings that offer ease and time saving in installation, and which are taking share by disrupting the market; and Costa Group, with its intellectual property in blueberries that improves quality and all-year-round availability.

As these cases attest, seemingly boring innovation can produce exciting profits.

Another less risky way to play innovation is by understanding where it can augment a company’s competitive advantage.

For example, the stock exchange ASX Limited is soon to replace its CHESS settlement system with blockchain technology that is expected to reduce costs and provide added functionality.

Another good example is Domino’s Pizza Enterprises, which operates a franchise of pizza stores. The company has very profitably leveraged new innovation to improve the efficiency of its operations and the cost, convenience and appeal of its customer offer.

For example, new ovens cook pizzas in less than four minutes, its GPS tracker helps speed up deliveries and grows the appeal of using its online ordering app, and DRU (Domino’s Robotics Unit) delivery robots save on costs and are fun for customers.

Of course, it is hard to get ahead using innovation that is readily available – all supermarkets now get the labour savings of self-service checkouts, for example – but Domino’s has been ahead of the curve in integrating new technologies into its customer proposition and thereby advancing its competitive advantages.

There are two takeaways. Firstly, to profitably invest in innovation often means looking beyond the latest sexy sector, including to second derivative beneficiaries. And two, looked at this way, the Australian market is full of innovative companies that are worthy of investment. After all, miners like Rio Tinto have already started using driverless trucks and trains, well ahead of Silicon Valley.

Julian Beaumont is the investment director at Bennelong Australian Equity Partners.

Source: Australian Financial Review


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Supply Chain Planning & Optimisation Projections for 2018 – Back to the Future

By Henry Canitz, Director of Product Marketing and Business DevelopmentPicture1

I get a kick reading “prediction” articles both prior to the year start and then again after the year is complete. When it comes to predicting the very dynamic supply chain management industry, those after year reviews can be quite amusing. For even more fun look back 10 or more years to see where we all thought the industry would be. Therefore, it is with a bit of trepidation that I toss my hat in the arena and make my 2018 supply chain planning and optimization predictions.

From all indications, 2018 should be a very interesting year for supply chains and supply chain practitioners. I think there are a few advanced capabilities that will grow in importance but I also believe there is a growing awareness that to benefit from advanced planning and optimization capabilities a company needs to build a firm foundation. Companies need a robust integrated and highly functional supply chain platform that is operated by highly trained supply chain professionals. In a way, we need to go back to fundamentals to move forward to the future.

The Rise of Cloud Deployment and Heightened Security

The large number of major data breaches in 2017 has been the focus of many C-level meetings. In an interesting reversal, SaaS (software-as-a-service) solutions are now viewed by most as the least risky deployment option and this will increase in the year ahead. 2018 will bring a renewed emphasis on security for supply chain facilities due to the growing awareness that data breaches can originate through almost any type of connected system and the fact that more facilities are being opened in unstable geographies.

The Shift to Continuous Planning

The pace of the supply chain is increasingly driven by ever-growing customer expectations (Amazon Effect) making end of the day, week, or month periodic planning processes, while still important, no longer sufficient for today’s operations. The concept of continuous planning where planners address opportunities and disruptions as they happen will continue to gain ground in 2018. These efforts could be part of a Sales and Operations Execution (S&OE) process or tightly tied to building more robust digital planning and optimization capabilities. To facilitate continuous planning process companies will start to move towards cross-functional teams working in a control-room type environment to address global disruptions and opportunities using advanced planning and optimization capabilities.

Digitisation

You can’t open a recent supply chain periodical today without seeing something about artificial intelligence (AI). Advanced analytics, machine learning, algorithmic planning, and AI will all continue to capture a significant slice of attention in 2018. In the year ahead, this will require supply chains to shift how they operate. With digitization of the supply chain, the role of the planner will become one of solving problems using advanced analytics to make business decisions not just supply chain decisions.

The Internet of Things (IoT) will continue to drive supply chain execution innovation as companies find new opportunities in the wealth of data available. For many, the current state includes difficulties interfacing IoT data in a high quality, repeatable fashion. Most companies just aren’t at the point where consuming this firehose of data is feasible.

Supply Chain Data Quality and Ownership

Supply Chain Master Data Management (MDM) is quickly becoming a critical foundational requirement and I expect to see more interest in this area in 2018. Much of the data used for supply chain planning and execution comes from outside of a company’s ERP systems. Ask yourself, where is supply chain data maintained at your company today? The answer might surprise you. Effective supply chain planning and optimization requires high quality and consistent data and the ability to easily and quickly maintain and update that data. Inconsistent and poor quality data will degrade confidence in recommendations. One of my mentors once told me that, “One awe S#?* wipes out 1000 Attaboys (or Girls)”. One piece of bad data that tarnishes a recommendation will be difficult to overcome. To take full advantage of IoT data, supply chain organizations will need to invest in their Supply Chain Master Data Management capabilities and platforms.

Talent GapPicture12

You continually hear from hiring managers that there is a “War for Talent” driving increased salaries, benefits, and turnover rates for supply chain professionals. This will not change anytime soon. Actually, with a shrinking baby-boomer workforce the war for talent is only going to heat up in 2018 (read more here: The Talent Gap and here: Imagine 2030: Supply Chain Talent). Companies will need to find additional ways to attract and retain talent like rotational programs, clear-cut career paths, advanced degree support, and support for professional training. Another way is to provide advanced supply chain platforms that allow team members to work on more value-added activities. Yes, the ability to hire and retain talent could be another way to justify an investment in new supply chain planning and optimization capabilities.

Taking S&OP to the Next Level

I have personally seen the significant benefits of a well-run S&OP process and I know other practitioners have as well. I may be going out on a limb here but I think 2018 will be the year of renewed efforts around putting advanced S&OP capabilities in place including the ability to;

  • Optimize the end-to-end supply chain based on constraints and business objectives (minimize cost, maximize profits, meet customer service levels, etc.)
  • Analyze the impacts of product-lifecycle decisions, especially new product introductions
  • Align and synchronise strategic, tactical and operational planning
  • Collaboratively plan with partners and customers

A year from now I am sure we will all get a good laugh by revisiting this piece, but I am hopeful that a least of few of my predictions will hold true. Here’s to a happy and successful 2018.

About the author 

Hank Canitz PictureHenry Canitz is The Product Marketing & Business Development Director at Logility. To read more of Henry’s insights visit www.logility.com/blog.