This picture is supported by a report by Towers Watson, Global Markets Overview, which records that big companies have been able to control their costs. “Globalisation has allowed many large multinationals to produce in low-cost geographies and protect profit margins.”
In Australia, the imbalances created by globalisation can be seen in the two-speed economy. The resources sector has benefited from fast growth in the developed world — especially China, which has benefited from providing cheap labour to Western corporations. But the rest of the Australian company has suffered from the kind of pressures that are more typical of what is occurring across most developed economies – weak demand and high household debt. This is one of the main reasons for the slowing earnings growth reported by Macquarie.
How are Australian leaders likely to respond to the pressure to keep dividends up in an environment of slowing profit growth? Graham Haines, consultant and author of Execution to Die For, says that faced with pressures to repatriate more profits to shareholders, the likelihood is that management will cut costs. “I think cutting costs has an enormous impact on the ability of the company to execute. There is often simply not enough people at the coalface of the organisation serving the customer. Another common problem is that investment that should take place gets cancelled.”
Taking a more aggressive approach in difficult economic times can yield results, says Haines. “If you look at Apple, when you go to their shops you are overrun with people wanting to serve you. They are a company that offers fantastic customer service because they are prepared to pay the cost.
“In Australia you get a lot of oligopolies, and I just sense that a lot of people pay lip service to meeting customer needs, but the standard is actually fairly low. For all the talk about leadership, teamwork and employee empowerment, it is really quite poor.”
A potential danger is that managers will become overly short term in their focus. Sean Spence, director of consultancy Sean Spence & Associates, says managers have to match the abstract idea of building for the long term with the short-term need to satisfy shareholder expectations.
“It is a hard call to cut dividends,” he says, adding that it can create unhealthy thinking in managers. “At exactly the time you need to be creative and have a sense of agency, your brain shuts down. If the organisation’s senior team is put under stress they can start to eat their young.”
Spence says executives placed in pressured situations tend to hang onto what they have, becoming negative about new ideas. “That can often lead to active discord in the senior management team. Small issues can be argued over with extraordinary intensity.”
Myriam Robin is a reporter for SmartCompany and its sister site LeadingCompany. She has degrees in economics, international studies and journalism. She likes writing about businesses taking risks and doing new things.
