10 September 2014

Short Termism vs. Long Termism - in The Week before This Week

Power to the People

It’s been a few weeks since I have been inspired to put digit to keyboard.  Whilst there has been plenty going on in the world most of it struck me as “same old same old”.   TWb4TW tries to spot an aspect of recent news stories from which we can all learn something useful.   My feeling about most of the news over the last few weeks has been more “when will we ever learn”!
However last week the Times published an article from Sir Charlie Mayfield, Chairman of John Lewis, in which he advocates the need for a “surge in alternative ownership” of businesses.   By this he meant, employee owned businesses like John Lewis, mutuals and family owned businesses where ownership is passed down the generations.  His argument was that different forms of business ownership drive different behaviours with regards to whether a business is being managed for the short or long term.  Sir Charlie believes this is largely caused by how value is realised from different forms of ownership. Even though long termism is regarded as a “good thing” and short termism a “bad or at least less good thing” for most owners the primary means of value realisation is to sell the business to another business or to the public market.   It is therefore not surprising that many businesses are managed for short term results.
Because employee owned businesses like John Lewis can never be sold Sir Charlie claims that “they have no alternative but to focus on future earnings. This means that every one of our 90,000 partners at Waitrose and John Lewis has an incentive to make this Christmas better than the last one. Because we don’t have the option of selling our shares and investing in another business, we have no option but to throw all our energy, passion and talent into making this one better. Year after year”.

Now you see it, now you don’t
Sir Charlie then goes on to make what for me is the most significant point in his article.  “That relentless focus on continuous improvement is a powerful competitive advantage …”.  However the point then disappears because he then asserts that only alternative ownership, employee owned, long-term family owned etc., fosters a culture of continuous improvement over the long term. Whilst I do agree that ownership models have an influence I do not agree that this means that one ownership model will lead inexorably to short-termism, whilst another will guarantee long-termism.
For example the Co-op had an alternative ownership model, being owned by its members/customers.  It did have a long term perspective but this unfortunately went backwards over its 170 year history, resulting in inevitable decline and near collapse.  Conversely here are examples of public market owned companies who practice and thrive on long termism.
Berkshire Hathaway - Warren Buffet ONLY invests for the long term.  30 years ago one share in BH would have cost you $1,000. Today one share will cost you over $200,000!  Many employees are millionaires and his shareholders think Buffet is a god.
ARM Holdings - a great British technology success story that took on the mighty Intel and won.  ARM chip designs power the world's mobile phones, tablets and many other technology products.  Winning long term is the only game to play in their world. 5 years ago their shares were less that £2, today they are nearly £10, in spite of analysts from leading financial institutions and banks consistently talking the shares down.  Employees who hold the shares and have become millionaires were delighted to prove them wrong.
Next - Simon Wolfson has consistently under promised and over delivered. Without a single acquisition and just sticking to its retail knitting in stores and online Next is now more profitable than M&S and shares have risen from less than £20 five years ago to over £70 now.  This continuously improving profitability has delivered special dividends and share buybacks that have made Next shareholders very happy.
Toyota – need I say more!
A “relentless focus on continuous improvement” is the common factor driving the success of Berkshire Hathaway, Arm Holdings, Next, Toyota and of course John Lewis itself.  The Co-op did not and got left behind.

The proof is out there
So it is not necessarily the ownership model itself that determines whether a business is managed for the short or long term.  I believe that the main reason and this is worrying, is just how few people understand just how powerful a “relentless focus on continuous improvement” actually is, just how big a competitive advantage this can create and just how much more profitable those few businesses that practice a “relentless focus on continuous improvement” can become.
You don’t need to take mine or Sir Charlie Mayfield’s word for that.  More than 30 years ago Robert Buzzell and Bradley Gale proved the link between “relative perceived quality” and superior financial performance.  This was not just their opinion or even their direct experience.  It was from an analysis of the performance of over 450 companies in the PIMS (Profit Impact of Market Strategy) database at the Strategic Planning Institute.  Read their book “The PIMS Principles” to find out more.
This analysis was reinforced by the work of Vinod Singhal, professor of Operational Management at the Georgia State Institute of Technology in Atlanta. Singhal studied the financial performance of 600 companies who had won the major quality awards – Baldridge, Deming, Shingo and best supplier awards from major US companies.  He compared financial results over ten years of these award winners with those of 600 similar companies who had not had won awards.  This involved the analysis of over 12,000 sets of accounts!  This study demonstrated conclusively that the quality award winners outperformed the non-award winners by over 100% and more on all key financial measures.  Yes more than 100%, twice as profitable, successful and sustainable!

If it’s not long term it will be short term
Whilst there are many individual examples, experiences and anecdotal evidence that a “relentless focus on continuous improvement” creates powerful competitive advantage these are backed by solid in depth research and analysis that proves this to be a fact.  However actually achieving a “relentless focus on continuous improvement” and reaping the rewards takes time, hence long termism.
My view is that the biggest influence on whether a business is managed for the short or long term is not the ownership model but whether the leadership, investors and other direct influencers of the business strategy actually understand that “relentless focus on continuous improvement creates powerful competitive advantage” and know why this works.  Without this it is highly likely that the business will be managed for the short term, leading inevitably to underperformance and then failure over the long term.
Unfortunately not a lot of people know that, or more significantly understand that.  Hence short termism rules!

So that was something from  the week before this week that caught my attention. I hope you found some of the above thought provoking and useful for you and your business. I trust you had a good weekend and hope you have a great week this week - and through continuous improvement an even better week next week.

31 July 2014

Tales of the unexpected.

Looking back over the last two weeks ago I was struck by how much can happen in a very short time and by how much of this was not really expected.  I suppose it is a big world with infinite numbers of things going on in it so by the law of averages quite a lot can happen that we don’t expect.  In spite of this most of us run our lives, relationships, work and businesses on the basis that nothing unexpected will happen.

Looking at some of the big events one thing that continued entirely as expected is the ongoing tragedy that is Gaza.  One side started shooting at the other a few weeks ago, predictably the other side shoots back and away we go again.  I find it heart rending to look into the eyes of the children of Gaza on the news knowing that there seems no hope at all of this ever stopping.  Inevitably many of those young children will be operating the rocket launchers in 5 years or so – unless something changes.  Yet most of the main players involved just keep on doing what they have always done and expect the result to be different.  It seems to come as a surprise when yet again civilians do most of the dying and nothing changes.

On the subject of mindless violence what was not expected was the shooting down of the Malaysian Airways airliner over Ukrainian airspace.  I suspect that what many, like me, didn’t expect was that airliners were still actually flying over this conflict zone at all.  If before passengers boarded the flight they had been told they would be flying over a war zone, just how many would still have boarded the flight I wonder?

This unexpected and tragic event has triggered another unexpected event, namely the EU agreeing to impose tough economic sanctions on the Russians.  When I say “agreed” I think they have agreed they will do this.  However what they will do, to whom and whether they will actually “do” something is, in the tradition of EU decision making on anything other than the standard length of a cucumber, still ongoing.

If meaningful and tough sanctions really are imposed then this will have unexpected and unpredictable consequences for business, energy supplies, financial markets etc.  Putin’s attitude, and his government’s complete disregard for the rule of law meant that this would inevitably blow up in someone’s face eventually.  But I wonder how many governments and business had factored this into their dealings with Russia.

Here’s a couple more surprises.  Philip Clarke the now outgoing CE of Tesco, said just a few weeks ago that “he wasn’t going anywhere”.  It would be reasonable to judge him a little optimistic about his job security, but to be replaced so soon by a man from Unilever who knows nothing about retail?  In cricket England Captain Alastair Cook, after a string of poor batting performances and test losses was universally judged to be not up to the job and needed to be replaced, both in the team and as its captain.  There was the little matter of a dearth of competent candidates to replace him but you couldn’t argue with the stats.  What happened next?  Cook scored 95 in his first innings, 70 not out in the second and England won the test convincingly, levelling the series with India.

So as the last two weeks demonstrates the unexpected happens all the time, yet we mostly base our own plans and schemes on what we expect will happen.  But can you really plan for something you don’t expect, for something you don’t know is going to happen?  Well you can think about what might happen and what you would do to cope with it if it does.  You can also “prepare” for the unexpected.  Not for a specific event or outcome but by having a mind-set that is ready to respond and to do this fast.  The most significant factor in this mind-set is the willingness to accept the new reality the unexpected has created and then to deal with it.  And that's easier said than done!

So what are you NOT expecting to happen in the next couple of weeks?

So that was some of the two weeks before this week. I hope you found some of the above thought provoking and useful for you and your business. I trust you had a good weekend and hope you have a great week this week.

15 July 2014

Week ending 11th July 2014

The value of experience.

Looking back through the business news over the last two weeks I found myself thinking about “experience”.  This is generally perceived to be a “good thing”.  Even when things go wrong we comfort ourselves with the thought that we can “put it down to experience”.  However as I mentioned last week the FA have failed to win the World Cup in 15 out of 16 attempts, with 2014 being yet another opportunity to “put it down to experience”.  They must now be the most experienced (and well paid) supposedly top flight football governing body at NOT winning the World Cup that there has ever been!

For those of us with rather more grey hairs than we would like there is the comfort that these are the result of years of acquired experience.  We like to think that this experience is valuable because that means we too must be “valuable”.  So here are few of last week’s business stories where experience or the lack of it have played a part and from which we can perhaps learn how to really get value out of experience.

Pounding along

Poundland floated on the stock market earlier this year and unlike a number of recent IPO’s has proved successful.  The shares are up nearly 13pc on the IPO price with sales reaching almost £1bn in the year ending March 2014.  But it wasn’t always like this.  Poundland was founded in 1990 by Steve Smith but by 2006 its growth was stalling.  The current Chief Exec Jim McCarthy was brought in to turn things round.  McCarthy had been running Sainsbury’s convenience stores but had left the company to return home to the Midlands because of family illnesses.  He accepted an offer to become CE of Poundland because they were based in Wolverhampton.  So Poundland were able to attract a much more experienced leader than otherwise they might have.

However McCarthy did not solely rely on his own experience, being experienced enough to know he didn’t know everything.  He recruited directors with experience of working with other retailers and a new Chairman, Andrew Higginson, former finance and strategy director of Tesco.  He didn’t stop there.  He travelled to the US to learn from the experience of discount chain Dollar Tree.  Here he learned that Poundland had to learn to work with the biggest suppliers, rather than treating them as the enemy.  Today Poundland works with leading fast-moving consumer brands to develop unique pack sizes that it can sell for £1.

So experience, plus even more experience, plus a willingness to learn from other’s experience delivers success.

Safe pair of hands

Justin King has now left Sainsbury’s leaving the business in far better shape than he found it 10 years ago.  He is handing over to Mike Coupe the groups’ commercial director.  He was one of King’s first appointments when he joined Sainsbury’s in 2004 and has been his right hand man for nearly a decade.  So he certainly has plenty of experience and quite possibly the right experience.

However the times they are a’ changing!  Sainsbury’s has now had two consecutive quarters of falling sales so is feeling the effect of the intense competition.  In King’s own judgement growth in the sector will go largely if not entirely to online, convenience and the discounters.  Sainsbury’s is well positioned strategically in the first two and with the announcement of its joint venture with Netto appears to have created an opportunity in the discount sector.  So the pieces are in play but they will have to be played a little differently and at least one, Netto, is a new piece.

Succession at the top of well-established and currently successful business is a fine judgment.  Is it more of the same, which Mike Coupe’s appointment seems to be, or do you need something completely different?  I think his challenge will be can he do more of the same but differently enough to capture the growth that is not going to come from his supermarkets.  He will need his own and others’ experience to do this.

Slippering away?

M&S went through what is now becoming an annual festival of excuses for not quite hitting the targets it has set for itself.  This time its online business was down 8% due to “teething problems” with its revamped website, compared to double digit growth in retail as a whole.  Apparently customers had “taken time to establish how to use the new site”.  So this is all down to customers’ lack of experience it would seem and sales should rebound when customers make the effort to use the new website properly.

On the other hand just maybe a lack of experience in online retailing within M&S’ management is more the problem.  How else do you explain why existing online customers are required to re-register just because you have spent £150m revamping your website?

One interesting statistic slipped in by style director Belinda Earl was that one in five British men is wearing M&S slippers.  Now given that one of their key challenges is to get the fashion offer right I am not sure that boasting about how you are number one in men’s slippers exactly squares with that.  Is the experience of conquering the slipper market really what’s needed here?  Experience is all very well but it does need to be the right experience.

You have got to be Kiddiecaring!

Morrison’s is selling its Kiddiecare business taking £160m write off in the process.  It bought Kiddiecare in 2011 in an effort to boost its non-food and online offer.  In 2012 it announced the business would double in size as it bought a number of superstores from the failed electrical business BestBuy.  However less than two years later it is losing so much money, Morrison’s are having to offload it at a rock bottom price.

Quite rightly Morrison’s’ management recognised that it lacked “experience” in this sector and decided the way to solve this was to buy someone else’s (Kiddiecare’s) experience.  That is all very well but as this “experience” has shown to do this by buying into a sector where you have no experience at all is not the way to do it.  It is one thing to recognise you need experience, it is another to recognise what experience you actually need and how will you know it when you see it.

On that note

Here is a final thought from me.  I have a lot of experience in business from many years of getting things wrong in order to learn how to get them right.  That wasn’t necessarily the plan at the time but it seems to have worked out and some people have been kind enough to credit me with having a lot of experience.  However I always caution them not to think that all they have to do is to do what I did and they will get the same result.  The thing is that it is MY experience and it was THEN.  You are YOU and the time is NOW.  Some of what worked for me then will work for you now but not all of it.  So the final trick is to select what will work for you now from other people’s experience.  Something Jim McCarthy appears to be really good at.

1 July 2014

Week ending 27th June 2014

It’s all over for England – again!

A lot happens over two weeks.  For example two weeks ago England were still in the World Cup, poised to achieve one of their shortest survival times in this competition for many years.  Much has and will be written and spoken about why England did not do better.  I am not much of a football fan and certainly not a football expert but a few points do occur to me.

First we have been trying to win the World Cup for 64 years and have only managed to do it once, back in 1966.  The FA have been in charge of the England World Cup campaigns throughout that time and have failed 15 out of 16 times, yet it is assumed they will continue to be in charge of future campaigns.  If there was a World Cup for doing the same thing over and over again but not getting a different result, then the FA wins hands down.

Second this was probably the most highly paid squad of England players we have ever sent to a World Cup.  As a group their combined earnings as professional footballers are higher than most if not all of the teams from the other countries in the competition.  Yet their skills, pace and all round footballing nous are clearly not matching the standards of many other countries’ teams.  Even though we see this demonstrated every four years no one in football will recognise that we need to address the problem of “not being good enough”. Top dollar does not guarantee top performance, in fact it is the other way round.  Consistent and continuously improving top performance will deliver top dollar.

Juncker Muncker

Talking of not being good enough this is what our Prime Minister has been saying about Jean-Claude Juncker, the ex-Prime Minister of Luxembourg who, in spite of Mr. Cameron’s efforts has been nominated as President of the EU Commission.  Juncker himself seems to think he was already elected but there you go.

Cameron saw him as an arch-federalist who believes that more integration and regulation from Brussels is the future for the EU.  As usual with this kind of appointment no one had ever heard of Juncker when he was proposed for this post.  He ought to be grateful to Cameron because at least we all know who he is now – he is the man in the grey suit with a drinking problem.

In the end only Cameron and the Hungarian PM voted against Juncker.  EU leaders are now so used to fudges and compromise that they appear incapable of any other kind of decision or is it non-decision.  They seem more upset that Cameron forced a vote on the matter thus requiring them to make a decision than by his actual objections to Juncker having the job.  Whilst Cameron has had his critics for the way he has handled this in my view he has actually started from the right place.  When something needs to change but no one is prepared to recognise this then you have to confront those people with the need for change.  This is the only way of getting people engaged, even if initially this engagement takes the form of resistance to change and being pretty upset with you.  This is exactly what happened so I think Cameron has done this right.  My concern is does he know he has and does he know what to do next?  Or was he just being a politician and playing to the Euro sceptic gallery in the Tory party?

Tesco and its officer corps

The Tesco story continued with an understandably fractious AGM last week. However what interested me more were two appointments made in the latest reshuffle of Tesco’s top management.  They now have a “Chief Customer Officer” and a “Chief Creative Officer”.  The latter position was filled by Matt Atkinson, previously Chief Marketing Officer.  I hadn’t realised that Tesco had so many “Chiefs” and that they were all officers.   So many Chief Officers implies there must be lots of other “officers” around who, whilst they may not be Chiefs must still be officers and jolly important they sound too.

On the other hand though when a business is losing market share because it is clearly losing touch with its customers and where all its other ranks/Indians are looking thoroughly miserable is this Chief Officer stuff just a manifestation of the problem?  I mean I ask you, “Chief Customer Officer”!  Does that sound like an answer to the problem?

Strong pound – last thing we need!

With the British economy growing faster than any other in the so called developed world and good news coming so fast and so often that it almost becoming boring, there had to be some bad news in the mix somewhere.  It is creeping up on us in the form of a strong pound.  With the economy performing well and the prospect of interest rates increasing the pound will strengthen, making our exports more expensive with the risk that this will choke off both the recovery and the rebalancing of the economy towards exports.

For some reason in this country we seem to think we need to have it both ways, strong economy and a weak currency.  The fact is that if you have a strong, vibrant economy then you are going to have a relatively strong currency to go with it.  If we can only export successfully on the back of a weak currency then the reality is that we are just not competitive enough to achieve the long term and sustained rebalancing of our economy towards exporting.

The key factor is our productivity.  GDP is only just back above the point it reached before the financial crisis.  Spare capacity in the economy has so far provided all the productive capacity to achieve this.  Whilst there is now some tightening in certain sectors, overall businesses are still saying that they have capacity to fill.  What does not seem to be kicking in is an improvement in our economy’s ability to produce – productivity.  Interestingly studies show that successful exporters are often amongst the top performers in their sector – because they have had to be.  Exporting is good for your business because it forces you to be a better business, to cope with challenges like a strengthening currency.  If a stronger pound makes our exports too expensive then the problem is not with the currency, it is because we just aren’t good enough, like the England football team.

So that was some of the two weeks before this week. I hope you found some of the above thought provoking and useful for you and your business. I trust you had a good weekend and hope you have a great week this week.

18 June 2014

Week ending 13th June 2014

This week's TWb4TW looks back over the last “two weeks before this week”, partly due to me being on holiday.  I could extend this to “three weeks before this week”, but if I missed that deadline the next opportunity would then be “ten weeks before this week”.  That is not going to work, so as long as something from the last two weeks inspires me to put digits to key board TWb4TW will continue to look back over the last one or two weeks.

When will they ever learn?

War has been a feature of the news over the last two weeks, especially with 70th anniversary of the D-Day landings and 100 years since the outbreak of World War I.  Also a little known group of religious fundamentalists conquered a third of Iraq in a weekend, helped by the opposition simply running away!  I don’t mention a particular religion because the combination of “religious” and “fundamentalism” has consistently meant big trouble throughout human history.  These people seem to be able to build an effective fighting force from a disparate bunch of people, united only by a common cause which makes some kind of sense to them, however twisted that sense might be.  The UK equivalent would perhaps mean recruiting from a group of people who go to the same dodgy pub, support the same continuously underperforming football team and like fighting.

What this has done is to throw years of Western diplomacy in the Middle East out of the window.  Suddenly we are best mates with Iran.  After this and the Ukraine crisis, which is still rumbling on, you wouldn’t think there would be anyone left who does not now know why we need to push on with fracking and nuclear power.  However there are plenty left who will continue to oppose this.  I can only think that, even in this 70th year since the D-Day landings, these people still don’t understand that people just like them could have stopped Hitler in the 1930s, but they chose not to.  I wonder if any of the troops who jumped off those landing craft on to the Normandy beaches ground their teeth in frustration at having to do that job for them – the hard way!

It were better in my day

Talking of battles there has been a lot of news and comment about UK retailers over the last two weeks – who is up, who is down and who is going round in circles.  Tesco reported the biggest drop in sales (3.7pc) in the whole 40 years of CE Philip Clarke’s career with the retailer.  You would think this would lead Clarke straight to the exit but he announced “I’m not going anywhere”.  The analysts, commentators and Tesco’s major shareholders just about came down on his side for the time being, saying it is too early to judge whether his turn round strategy will work or not.  Bit like my tennis at the moment!  However for me there is one single thing that will tell me if and when Tesco has really changed.  Right now the staff in their stores do not look like they really want to be there.  If one day they do, then the strategy is working.  But if they continue to look like they have left most of their brains and motivation at home, then Tesco’s decline will also continue.

Former CE Terry Leahy announced that “as a shareholder I am very disappointed”.  You have to give full marks to Leahy for executing a strategy that built the Tesco ship into the world’s third largest retailer.  He gets less than full marks for not judging when this strategy had to change due to unforeseen rocks, such as discount supermarkets, online, Justin King at Sainsbury’s etc.  Same goes for launching the good ship Fresh ’n’ Easy in the US that went straight down the launching ramp and under the water.  He can probably quietly award himself full marks for handing over the ship just before anyone noticed these rocks.  He gets no marks at all for not keeping his mouth shut!

Morrison’s also had its previous Chairman and now Life President Sir Ken Morrison laying into current CE Dalton Philips after the company reported a loss of £176m and warned that profits this year would be half what the city had been expecting.  Sir Ken didn’t mince words saying that Phillips strategy was bulls**t and that he wasn’t capable of running the core business much less a chain of convenience stores.

Sir Ken conveniently forgets that it was he who was leading the company when Morrison’s bought Safeway.  Whilst the company could run the Morrison’s business effectively as it was then, it was not capable of pulling off the integration of Safeway, which dragged on for years.  Morrison’s antiquated systems, quite literally pen and paper systems in many cases were wholly inadequate for the larger business.  This produced a drag on the business that Sir Ken’s successors have been wrestling with ever since.  The consequences have included being very late getting into convenience stores, still having no online offer in spite of the fanfare announcement of the deal with Ocado and completely forgetting what used to make the business successful.

This is a classic illustration of a business that only finds out what its limitations really are when it has gone past them.  Dalton Phillips may or may not be the man to turn it round but in his shoes my response to Sir Ken would be “you are right about the bulls**t, I am still digging” and Philip Clarke might say “me too”.

No guarantees

Two weeks ago the shares of online fashion retailer Asos lost a third of their value after a fresh profits warning. However to put this in context Asos was trading at more than 100 times earnings, compared to Next, one of the most consistent retail performers whose shares trade at just 17 times earnings.  Fear and greed rule on the stock market with common sense only making rare and brief appearances.  Clearly greed drove the Asos share price to an unreal and unsustainable over valuation as if future growth was guaranteed.  Fear has kicked in now the totally predictable has happened.  We may be in for a brief period of common sense at which point the Asos share price will be about half of what it was at its height.

I sometimes wonder what it would be like to be the CE of a company where you know the market has massively overvalued your company.  It seems most go with the flow.  One who does not is Simon Wolfson of Next.  He has consistently down played market expectations and then consistently out-performed them.  I know where I would put my retail investment.

Is there a right business model for a retail business?

Current opinion amongst retail industry analysts and commentators on retail is that the only viable retail business model now is multi-channel - a combination of in store, online, click and collect etc.  It follows therefore that as Asos is only online it may be vulnerable to the likes of Next with their multi-channel offer.  British fashion brand Ted Baker has a multi-channel offer and recently reported a 19pc rise in sales with online sales up by 48pc.  So more support for the “multi-channel is the way to go” argument.  However Primark, whose sales grew by 14pc is about to close a deal to buy the Pavilions shopping centre in Birmingham.  Half the centre will be a Primark store (three times the size of its current Birmingham store) with the rest sub-let to other retailers.  This is a £60m investment in traditional bricks and mortar retail space from a company that has no online sales at all.

What this all tells us is that concentrating continuously on making your business better and better is the only fundamentally viable business model for any business in any sector.  In today’s fiercely competitive and fast moving business world if you are not getting better you are getting worse.  This is what Next, Ted Baker and Primark understand and Tesco and Morrison’s really don’t.  As for Asos it is more difficult to tell because that third of the share price that was lost was clearly never really there in the first place.  So we will have to wait and see how they respond.

So that was some of the two weeks before this week. I hope you found some of the above thought provoking and useful for you and your business. I trust you had a good weekend and hope you have a great week this week.

3 June 2014

Two Weeks ending 30th May 2014

No time for an article last week so looking back on the last 2 weeks in this week’s TWb4TW.  Here are some quick thoughts on:

UKIP if you want – and a lot of people did.

UKIP’s success in both local and EU elections was even bigger than many commentators had predicted.  It appears that the electorate is fed up with smart talking politicians in sharp suits so they voted for Nigel Farage.  Of course he is a smart talking politician who wears a sharp suit but he also drinks pints.  This seems to have persuaded people that he is “just like us” which of course he is not.  However he has picked on two big issues that many people believe really affect them, immigration and the EU.  His argument is very simple.  We can’t do anything meaningful about controlling immigration whilst we are required to follow EU rules and regulations.  So leave the EU and hey presto we can reduce immigration.

Immigration is a topic where opinion is driven above all by emotion, with fear being predominant.  Many people feel deeply uncomfortable about a “multi-cultural” Britain which they perceive has been imposed on them.  Add a widespread feeling of resentment towards the EU and the UKIP offer of a simplistic solution to make the fear go away appeals to a lot of people.  This is why so many think Farage is “just like us”.  Many voters have decided they can trust him even though he has done nothing really to win that trust.  It’s just that the others have done everything to lose it.

For me this is a reminder that “how people feel” can be a significant driver of people’s opinions and actions.  This something that has been ignored by the “we know what’s good for you” politicians and bureaucrats and many voters have demonstrated they have had enough.  For us in business it is a reminder that we don’t always know best with our customers, employees, shareholders etc. and maybe we should look and listen more carefully and perhaps with a little more humility.

Is the EU doomed?

The result in the UK was reflected across Europe where anti EU parties on both the left and right gained seats.  The exception was Italy which was about the only country where a pro EU party won the most seats in their EU parliamentary election.  As usual Italian politics are impossible to explain, so I won’t try.

Whilst the message to the politicians in the EU establishment is that voters want change the question that has to be asked is not what should change, but is the EU actually capable of changing in any meaningful way.  I have an awful feeling that the whole thing has now got so big and complex that is beyond human capability to bring about the change that is needed in an orderly way.  This means that either Europe continues into gradual but terminal decline or, because change will come whatever, the wheels fall off and it will get very messy.  For me this is the one compelling argument that says being out of it might just be a good place to be.

India shows what can be done.

The election in India, where the BJP party led by Narendha Modi won a landslide overall majority is interesting not just for the result but for how the election was conducted.  The 551m votes cast were counted by 1.8m electronic voting machines.  Turnout from 815m eligible voters was over 66% with the use of the new technology virtually eliminating electoral fraud.  This in turn has improved trust in the process and consequently in the election result.  For once the losers are not running around shouting “fix”.

We on the other hand are still putting crosses in boxes on a piece of paper, then folding it and putting it in a box.  Whilst the world’s biggest democracy is demonstrating that it is possible to use new technology to run elections, we still use the same old ways and wonder why we can’t get electoral fraud under control in places like Tower Hamlets and parts of Birmingham.  No one who should be taking responsibility for this appears the least bit bothered.  It is this sort of thing that destroys trust in the electoral system and why people turn to parties like UKIP.

Exclusive inclusive event

Prince Charles, BoE Governor Mark Carney, IMF MD Christine Lagarde and Bill Clinton were keynote speakers at the “Inclusive Capitalism” conference last week, attended by 200 specially invited business leaders.  The theme of the conference was economic inclusion and the integrity of the global financial system.  This all sounds like worthy stuff and Prince Charles managed to slip in quite a bit on climate change.  However it doesn’t sound like a very “inclusive” event to me.  You couldn’t buy a ticket so if you weren’t invited you couldn’t come.  The Inclusive Capitalism strap line is “building value, renewing trust”.  Holding a highly “exclusive” conference doesn’t sound like a good way to start doing this.   Whilst this may be well intentioned until these “exclusive” people start to see themselves as the rest of us see them, they are not going to make much of a difference, because we won’t trust them.


Halfords is the latest company to put the screws on its suppliers by demanding a contribution to its investment in new and refurbished stores equivalent to 10% of suppliers’ sales to Halfords over the last year.  Their (rather thin) argument is that the suppliers will benefit from increased sales from the investment in stores and should therefore contribute to it.

First of all this demonstrates an astonishing lack of understanding about their suppliers businesses.  Most of them will be doing well to making a profit before tax of 10% of sales so the contribution is the equivalent of handing over all their profit on their business with Halfords.

Far too many big companies are trying this on and in almost all cases the demands are retrospective on already agreed contracts.  It is not clever, though the companies that do this must think it is, because the proposition is always win/lose which destroys trust so almost always results in everybody losing in the long run.  It is possible to create a proposition of this kind that works on a win/win basis and that could potentially benefit all parties.  However because this requires more effort and the benefits are longer term, too many companies that should know better can’t be bothered and go for the short term hit.

Co-op “committeed” to values

On the subject of good intentions the Co-op Bank announced that Laura Carstenson a former partner in law firm Slaughter & May had joined their board and would be Chairman of their new “values committee”.  The Co-op successfully promoted itself for years as the “ethical bank” which did give it an edge and made it one of the most trusted brands in retail banking.  However the latest Which? Money Savings Satisfaction Survey published in April showed that the Co-op bank’s rating had dropped by 14% to 49%, below the average of 52%.

The bank’s recent high profile troubles have clearly diminished the level of trust it previously enjoyed.  So something needs to be done, but I am not sure a “values committee” is the answer.  Is this committee just a symbol of good intentions or is it actually being charged with achieving specific goals, such as restoring customer satisfaction ratings for its savings products?  Time will tell but given the Co-op Bank’s recent track record of failure to live up to good intentions, I am not confident.

Last one out turn the lights off

Centrica is now short of a finance director and a managing Director for British Gas and will lose its Chief executive when the current CE Sam Laidlaw leaves later this year.  There has been some comment in the business press that given the stick that Centrica top management gets from the media, government and just about everyone else it is not surprising that its top people find jobs in other lower profile companies attractive.

However there was an interesting comment from Martin Brough an analyst at Deutsche Bank.  He is calling for a change in strategy to focus on the core British Gas energy supply business in the UK and away from oil and gas exploration and production in Norway and the US.  At first sight this appears an odd proposal as Centrica have focused on these areas precisely to counter difficulties in its British Gas business where it is under unprecedented political pressure over profits and prices.  Mr. Brough argues that a “reinvigorated” British gas could “engage more effectively with the British public on energy issues than the political parties and could focus on selling home energy products”.  A “trusted and growing” British Gas could be worth 100p more per share claims Mr. Brough.

I do not know if Mr. Brough would be proved right or wrong about this, but there’s that “T” word again, “trust”.  Something that can take years to build but can be lost in no time at all, as the Co-op has discovered, but which mainstream politicians in the UK and the EU have yet to recognise.  The thing about trust is that it is not about good intentions, however worthy, it is about delivering on those good intentions.  To deliver you have actually have to have the capability, so be careful what you promise (Mr. Farage) you might actually be called upon to deliver it.

So that was some of the two weeks before this week. We hope you found some of the above thought provoking and useful for you and your business. We trust you had a good weekend and hope you have a great week this week.

20 May 2014

Week ending 16th May 2014


With the Bank of England delivering its latest quarterly Inflation Report last week it was no surprise that the business and political media was focused on what it would say about interest rates.  The level of unemployment had already dipped below the 7% point that BoE Governor Mark Carney had previously indicated could be a trigger for a rise in rates.

In the event Mr. Carney effectively quashed speculation that rates could rise before the end of this year.  He conceded that the day Bank Rate would start to rise is getting nearer but now was not the time to raise rates and when they did start to rise they would only do so gradually.  In the BoE’s judgement that there is still enough slack in the economy to enable it expand further without triggering inflation.  This is based on information from the network of BoE agents based all over the UK who talk to local business people about the prospects for their business and the sector they operate in.  The feedback is that generally most sectors are still highly competitive with capacity to fill and little prospect of being able to raise prices.

The exception seems to be the housing market.  Much has been written and said about this in recent weeks and what this could mean for interest rates and what the authorities should/can/can’t/want to do about it.  The British have national obsession with house ownership and consequently the prospect of even a small increase in interest rates is portrayed as apparent personal and national financial Armageddon.  In spite of all the speculation and bright ideas Mr. Carney repeated what should by now be the “bleeding obvious”.  Whatever the BoE can or can’t do about interest rates to influence the housing market, the core problem is that we are just not building enough houses to meet demand.

We have not been building enough for 30+ years and we know we haven’t.  This has not been for want of trying, or at least for want of target setting for house building by successive governments.  Whatever they said and whatever they intended, it just didn’t happen.  Yet still we have the Labour Party announcing it has the answer because if elected they will build 200,000 houses a year to 2020.  Well, what a brilliant idea, and thank God we have the Eds Milliband and Balls to think of these things for us!

The truth is that they have no more idea than their predecessors on how to actually achieve this.  There was a time when we could build houses at that sort of rate, so the conclusion is that we should be able to do it again.  However so much has changed since those times that the same approach will not deliver today.  And that is the real problem.  After so many years of repeated and almost continuous failure in this area there is only one possible conclusion.  As a nation we simply don’t know how to deliver enough houses to meet demand.  We did once but we clearly don’t now.  Now all is not lost because it is possible to find out.  However that is not going to happen until our political leadership actually recognises and crucially admits that it doesn’t know but that it has a plan to find out.

Sadly, with an election coming up next year finding a politician who will admit to not knowing how to do anything is about as likely as finding the Holy Grail.  In the meantime though for the rest of us, when we come up against a problem we just don’t seem able to solve, however hard and often we try, then maybe it’s time to ask ourselves if we actually know how to do what needs to be done.  If we can identify what we don’t know how to do then we can start the process of finding out.  Even the most complex problems and challenges can be tackled effectively if we start by admitting and identifying what we don’t know.  Try it sometime!

ONS on us

On the subject of house prices, last week the Office of National Statistics (ONS) informed us that twenty percent of adults who hold at least one university degree now have wealth totalling at least £1m.  Apparently the number of millionaires has risen by fifty percent in four years despite the recent financial crisis and almost a tenth of British adults own assets worth more than £1m.  The flipside of this is a stark gap in wealth between people with different levels of education, with only three percent of people with no formal education qualifications worth more than £1m.  This gap is widening.

David Willets the universities minister seized on this as justification for coalition policies to charge higher university fees and to push more school leavers to go to university.  They also seem to be pushing more people into apprenticeships which is a bit contradictory.  But as long as they are pushing the rest of us somewhere they seem to be happy.  The Labour party were a bit slow off the mark to pick up on the increasing gap between the wealthy and poor, but don’t worry they will!

Strangely the figures from the ONS take no account of liabilities, mortgages and other loans and debts.  This renders the figures meaningless.  A pensioner living in Middlesborough who has paid off their mortgage and with no other debt could actually have greater net wealth than someone living in London with their house mortgaged up to the hilt and in danger of paying a mansion tax.  They don’t FEEL like millionaires whatever the ONS says and that is what really matters for real people.

The ONS has a record of publishing statistics that are either late or wrong or both.  It has now added meaningless to its track record, except of course for politicians.  As we are paying for the ONS to do its work, we should expect something useful to come of it.

Pfizer - all pfizzle?

By the time you read this Pfizer’s bid for AstraZeneca may well have petered out, at least for the time being.  Last week both companies’ top management appeared in front of the Business Select Committee.  Pfizer boss Ian Read was vague on detail about potential job cuts and reductions in R&D investment, though he admitted there would be some.  His main argument appeared to centre on the combined businesses being “bigger” and therefore by definition “better”. He justified the unquantified cuts to jobs and R&D as “part of being efficient”.  As with “bigger” he appears to view the word “efficient” as a "good thing" so no need to spell out what it might actually mean.  He also insisted that Pfizer was a “company of high integrity focused on patients and delivering drugs to patients”.  He seemed oblivious to a track record that gives the perception of exactly the opposite.  His 36 years at Pfizer were definitely showing.

If I was an AstraZeneca shareholder that performance would be enough for me to say “no way”.  Of course that is not the only consideration.  AstraZeneca’s insistence that they would be better off as an independent company is founded on their claims for their research pipeline of products in development.  If a reasonable proportion of these reach the market then the future would look good for AstraZeneca.  The problem is that it is very difficult with pharmaceutical companies to predict whether this will happen.

However there is one party involved that must believe that these developments will be successful and that party is Pfizer.  Why would they be bidding to buy AstraZeneca now if they did not?  If they can buy them now before the pipeline is proven then they would win handsomely and put off the evil day when their own under investment in new product development catches up with them.  It means if Pfizer can buy AstraZeneca at or around their current offer they will either win, or not lose because they could hack out enough savings to redress any shortfall from the product pipeline.  All the more reason for AstraZeneca shareholders to say no, or at least to hold out for a substantially improved offer.


The French government has moved quickly to block the GE bid for Alstom by creating new powers to stop foreign takeovers of “strategic” industrial groups.  In fact they moved so fast I wonder if they are using some sort of “app”.  Something called “Legislation a Grande Vitesse” (LGV) perhaps.  You just put in what you don’t like the look of and then the app searches through the legal statutes to come up with the necessary legislation for you to put it right.  It also dates everything at around 1849 so it is very difficult for the EU commission to argue against.

Industry Minister Arnaud Montebourg stated “With this reform, France will have a clear and efficient legal framework comparable to other open economies within and outside Europe”.  Whilst our government talks about what they should/can/shouldn’t/can’t do the French just do it and then issue statements like this with a straight face!  As I said last week it helps if you know clearly what you want.

You heard it here first

In my previous article I said I did not like the look of the proposed Dixons Carphone Warehouse merger.  Well it seems I was not alone because when they officially announced the proposal for the merger last week, Dixon’s shares fell more than 10 percent and Carphone Warehouse 8 percent.  David Alexander, retail analyst at Conlumino acknowledged that “Although there are plenty of reasons to view the merger in a positive light, the history of M&A is littered with the corpses of failed unions”.  Says it all for me.

So that was some of the week before this week. I hope you found some of the above thought provoking and useful for you and your business. I trust you had a good weekend and hope you have a great week this week.