That was week ending 24th August 2012

China cracks?

Last week the media headlines were big on the need for the government to get stuck into a growth programme for the UK economy. Well, they were up until those photos of Prince Harry appeared anyway!

However there was another growth story that surfaced in the business press and it’s about what is happening in the Chinese economy. We have all marvelled at the Chinese economic miracle and accepted that it was only a matter of time before China became the world’s leading economy. However when looking at the Chinese economy we need to remember that this growth is both politically and economically driven and is a key part of Chinese Communist Party’s (CCP) strategy to continue as the only political power in China.

Over 30 years ago Deng Xiao Ping worked out that you cannot contain the aspirations of billions of Chinese citizens within the confines of an economic backwater and get away with it indefinitely. He concluded that a capitalist economic model that would unleash the full potential of growth for the Chinese economy and deliver prosperity for Chinese citizens was the answer. This required spectacular growth rates if it was going to deliver but so far it appears to have worked.

However too much of a good thing usually carries a sting in the tail. A property and construction boom became a bubble and although the Chinese authorities took measures to deflate this, the effects of their actions are now spilling into the rest of the economy (sounds familiar?). Construction, exports and manufacturing activity are going only one way – down. The original growth strategy based on cheap labour and imported technology cannot carry the country much further and some estimates predict economic growth in China falling to just 6% over the next 5 years. For China, which is still a relatively poor country, this is not enough to maintain the prosperity growth the CCP needs to sustain its political strategy. With exports at a world record of 49% of GDP the recessions in western economies are making this worse. For some time China has been trying to rebalance the economy in favour of more domestic consumption. However they have failed to turn a sufficient proportion of their population into middle class consumers and they may now be running out of time to do this. Also, within three years the ratio of working age people to dependants will turn negative and go into sharp decline as a consequence of the one child policy.

The Chinese authorities have reversed their reform measures and are throwing several kitchen sinks at the problem in the shape of massive new infrastructure investment. However will this produce more young workers or significantly more middle class consumers? It is not surprising that some commentators are saying to investors, but now for completely different reasons, forget about Europe for now and look more closely at Asia.

Growth – bigger or better?

We have our own growth challenge in the UK, how to actually achieve any. Whilst the last quarter’s contraction in the economy was revised to 0.2pc lower than originally estimated (whoopee!), instead of repaying debt in July the government had to borrow £600m more (whoops!).

We came across some interesting research from Bain last year. It was a repeat of research they had carried out in 2001 and ten years later they found the results to be the same. One of these was that of all the profits generated by 2,000 businesses in their database over 10 years, over 90% were captured by just 20% of the companies. Right now Apple is demonstrating just that in the mobile phone market, which explains why Nokia and Blackberry are having such a hard time getting out of the hole they find themselves in. Those 20% of companies that capture 90% of the profits focus primarily on being better and then getting better still and their growth is an outcome of this process.

I believe this research should prompt us in the UK to think about our economic growth strategy differently. First I believe we need to think about growth more in terms of “better” rather than “bigger”. Second, based on the better rather than bigger thinking we need to focus the start point on the reality of where we are and the constraints we are under. We don’t have the number and size of kitchen sinks to throw at the problem as the Chinese do and our political context is entirely different

For example on infrastructure this would mean forgetting about HS2 for the time being and focusing on upgrading more of the existing rail network. As I am based in the East Midlands I would of course cite the example of electrification and upgrading of the London to Sheffield line. However this really would deliver significant economic growth in our area relatively quickly and for much less investment than HS2. The same goes for Heathrow where expansion there will clearly deliver growth, better, faster, cheaper than “Boris Island”.

It works for business too. The next time you are working on your “growth” strategy try thinking about it in terms of a “making your business better” strategy starting from where you happen to be rather than where you would like to be. You may be surprised how this changes your thinking and the difference this will make to your growth, even in the current no growth environment.

So that was some of the week 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.

That was week ending 17th August 2012

Invisible Transport Secretary

It was announced last week that FirstGroup had won the new franchise to run the West Coast line, outbidding the current operator Virgin Trains. The deciding factor appears to be First Group’s offer of £5.5bn for the franchise, 15pc more than Virgin’s. However the more I look at this the weirder the whole thing becomes.

The award of a rail franchise of this importance and value is a heady brew of business, the economy and politics. The interests of the taxpayer are not just about maximising the revenues from the franchise. This service and its operations are important national assets which must be sustained and enhanced into the future. And yet the government has accepted the highest bid from an operator with debt of 170pc of its market value and a revenue plan based on almost everything going right. Moreover FirstGroup would only have to pay £245m to hand the franchise back to the government if things don’t work out, so that is the extent of their risk. A case of heads they win, tails they don’t lose much. This happened with the East Coast line and that is still with the taxpayer 3 years later. At this rate the railways will be re-nationalised by stealth in about 10 years!

FirstGroup’s CEO Tim O’Toole says their bid is a “deliverable proposition” but Sir Richard Branson says it runs the risk of “almost certain bankruptcy”. They both would say that wouldn’t they. Sir Richard has cleverly almost attained the status of national treasure to become about the only high profile business person who currently could claim to be trusted by the public at large. Indeed if a public vote had been used to decide who should get the West Coast line then Virgin Trains would have won by a landslide. Curiously though Virgin have spent over £60m bidding for rail contracts over the last few years and failed to win a single one of them. What is it that the government and the transport ministry in particular don’t like or trust about Sir Richard and Virgin?

This is where the Transport Secretary Justine Greening comes in, or at least where she should come in. I cannot yet find a single statement or even a single word from her on the outcome of the West Coast Franchise bid. Usually when I dig into a politician’s background these days I invariably find that they are professional politicians who have never done a proper job. However not so with Ms Greening. She has an economics degree, an MBA and trained and qualified as an accountant. She worked as an accountant and finance manager for PWC, GSK and Centrica before going into politics. Consequently she should be perfectly capable of explaining to us ordinary mortals why accepting FirstGroup’s bid is in the interests of the taxpayers. Whilst she is at it she can also explain the logic of the latest fare increases. If they are needed to provide further investment in the rail system, then a bit more on how this is supposed to work would be welcome. Frankly I think it is the least she should do, otherwise what the hell is she there for? In fact is she actually there at all?

I predict this one will end in tears, though it may take some time before the tears begin to flow, by which time all the key players, including Ms Greening will have moved on.

The invisible CEO

Before Facebook’s IPO I urged anyone even vaguely contemplating buying the shares to go nowhere near them. Last week the shares dropped to $19.69, nearly half their listing price. Now I am not a professional share tipper or anything remotely like it but I can apply commonsense. One of the reasons I urged people to avoid the IPO is that Facebook’s CEO Mark Zuckerberg had declared himself not interested in making money. My reasoning was that if he is not interested in making money then that is exactly what is likely to happen. I don’t mind him not making money for himself, but I do mind him not making it for me.

Anyway his goal has been achieved, he is not making money and neither is anyone else. However just like our transport secretary we have heard nothing from him. He got married and went in his honeymoon immediately after the IPO, which is a pretty smart move in the light of what has happened to the share price. Surely he must be back from honeymoon by now and he must have some views that he could share with his deluded shareholders? However if he is not interested in making money then perhaps he feels it is all going according to plan, so what’s to say!

Invisible crisis

The tactic of sending all the Eurozone governments on holiday at the same time seems to have worked because for more than a month now it as if the financial crisis had never happened. Just occasionally there has been the odd bloop of news bubbling up like in a very slow cooking Bolognese sauce, but nothing to get alarmed about. Last week Greece even managed to sell €4bn worth of bonds which means they won’t default on an ECB bond repayment due this Monday. Borrowing money in order to pay money back is classed as good news now. Further “good news” was that Spain borrowed a record €402 from the ECB during July.

The Greek PM travels to Germany this week to meet Angela Merkel to ask for extra time (at least 2 years) to meet the austerity targets set in the second Greek bailout. A spokesperson for stern Auntie Angela declared “The German position, which is the European position, is based on the memorandum of understanding, which is the foundation”. A small prize to anyone who can tell me what that actually means, though to me it sounds like “flogging will continue until moral improves”. Which is not much comfort for the Greek PM?

And finally – the disappearing Dandy

The really sad news last week for any of us over 50 (or possibly 55) is that the Dandy comic is to cease publication. We may not have read it for many years but we would like to think that it is still there. When I read what they have tried to do to maintain its readership, introducing celebrity themed comic strips featuring Simon Cowell, Jamie Oliver and Jeremy Clarkson I realised where they have been going wrong.

They have been trying to appeal to children, when of course their real market is with adults who have never grown up, i.e. most men. By just sticking to their tried and tested formula with Korky the cat, Desperate Dan and Lord Snooty and his friends the Dandy would have been what it has always been and might still be there. Sometimes the real customers for your product or service may not be who you think they are.

There is some hope however in a witty observation from Letty Sykes from Rainham in Essex. In her letter to the Telegraph she writes “For me Desperate Dan will live on as long as Wayne Rooney Plays football”.

Have a good week.

So that was some of the week 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.

That was week ending 10th August 2012

Lessons from the Olympics 2 – the ethical dimension.

The second week of the Olympics saw more British success. We had a slight moment of panic midweek when we went almost 24 hours without a medal, but the winning conveyor belt restarted and more gold, silver and bronze went to British athletes.

The other success that continued was the almost universal praise for staff at the Olympics venues, especially for the volunteers, armed forces and police. “So friendly, helpful, smiling, brilliant” were just a few of the almost embarrassingly un-British like adjectives that visitors and spectators used to describe their experience of the welcome and service they received. This got me thinking about “employee engagement”.

Personally I don’t like the term but it won’t be long before the HR/training/consultancy world spots the potential for promoting the connection between the Olympics and employee motivation and engagement. However the volunteers were not “employees”, at least they were not getting paid and the armed services and police were only there because they had been sent there. So there had to be something more than just “engagement” to generate such brilliant attitudes and commitment. The Olympics is an inspiring undertaking and therefore a significant motivator for anyone involved to do their best to deliver. But there is a further factor that makes all the difference.

In 2002 Tomas Gonzalez and Manuel Guillen published a research paper on the “Leadership Ethical Dimension” in relation to the implementation of Total Quality Management (TQM). From their research they argued that whilst TQM can be presented and perceived as a “good thing” this is insufficient to maintain the engagement of people without this “ethical dimension” being demonstrated by the leaders of the enterprise.

Gonzalez and Guillen described this as “the right decisions and actions combined with good intentions accompanied by moral correctness of behaviours”. They went on to state that “when doubts arise referring to the honesty or the goodness of the leader’s behaviour, the moral trust, based on the ethical dimension, is shattered”.

Overall in my view the leadership of LOCOG got this pretty much right. In particular I think Lord Coe has played a blinder in this respect. He has been consistent in his approach that this is about delivering a great Olympic Games for London, Britain and for all the people involved. He has been visible in all the venues not just watching the events but walking about talking to staff and volunteers, thanking them for their efforts and reinforcing the message they were all engaged in something that was really worth doing. This achievement and maintenance of “moral trust” is all the more remarkable given the less than” moral correctness of behaviours” that pervades in the IOC itself and some of its associated organisations.

“Ethics” is a big issue for business right now which the business world is slowly waking up to and realising is going to be major factor in their ability to successfully sustain their businesses into the future. Gonzalez’ and Guillen’s research shows that it starts and ends with the leaders. It also shows why the bonus culture, whereby a few received rewards out of all proportion to results achieved is now unsustainable. It just cannot be perceived and justified as “good intentions accompanied by moral correctness of behaviours”.

So the next time you want to “engage” your employees think hard about what they think about what you want them to engage in and why.

Now you see it, now you don’t.

On Friday evening my wife and I went for a curry with my brother and sister-in-law. We had a very good meal and an enjoyable evening which was made even better by a magician called Magic Amit. He performed some very clever conjuring tricks at our table and in spite of four pairs of eyes watching his every move we could not spot how he did them. The quickness of the hand really did deceive the eye.

It reminded me of the story about Knight Capital a US market maker which lost $400m in a few days caused by a computer error. This loss was three times Knight’s profit for the whole of last year. Although the firm has been rescued by several other Wall Street firms it will, for all intent and purposes cease to exist. This has raised concerns that America’s financial markets have become too dependant on computers for trading with too much emphasis on the speed at which trades are executed.

So why do these market makers want their trades to be executed faster and faster? Could it be that the faster they go the more the rest of us, including regulators find it impossible to see what is really going on? We think it is time this was all slowed down, giving time for good judgement and honest dealing to be applied rather than leaving it all to computers. A couple of years ago Tony Ericson, one of my business partners wrote an article on this. Tony is an engineer and he pointed out that as an engineering “system” goes faster, unless some damping is introduced it will ultimately shake itself to pieces. This is what happened to the financial markets in the credit crunch and on a smaller scale what happened to Knight Capital. Tony’s simple solution was to ban anyone selling any asset they do not own. Because this would be difficult to define and police he came up with the even simpler solution that there should be a 24 hour delay from time of purchase of any asset before you could resell it.

Probably too simple for all the clever people in the financial sector but this simple “damping” would very likely have saved Knight Capital. I am sure that Magic Amit’s secret to his conjuring tricks is also “simple” so maybe we should try simple for a change.

Prudential KISS

Talking of simple last week saw some impressive figures from Prudential. Since 2007 when the credit crunch hit the Pru’s was worth £17bn and it is now £20,5bn. In contrast Aviva’s worth has halved over the same period.

But it could have been very different. A few years ago the Pru’s Chief Exec Tidjane Thiam proposed a $35bn bid for AIA along with a rights issue of $21bn to pay for it. Whilst the bid was a bold, game changing and audacious idea Thiam failed to take his shareholders with him and the deal collapsed with costs of £450m. It cost the Pru’s Chairman his job and very nearly did the same for Thiam. However he was given another chance and appears to have learned from it. Under his leadership the Pru has stuck to what it does well and now does it even better, including rapidly growing its business in Asia, which was what the AIA deal was all about. So “keep it simple stupid” or KISS has once again proved its worth.

So that was some of the week 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.

That was week ending 3rd August 2012

A lesson from the Olympics

The Olympics just cannot be ignored this week; the greatest show on earth really is the greatest show on earth. The challenge is what to write that hasn’t been or will be written.

The event from last week that got me thinking was the expulsion of the Chinese, Indonesian and South Korean badminton players for trying to lose in an attempt to manipulate the draw for the knock out stage. The Chinese and South Koreans were actually playing each other. When both teams are trying to lose just who actually did win is an interesting question.

Also last week we learnt of further eye watering provisions from RBS and HSBC for mis-selling PPI and interest rate swaps. This is on top of the fine for HSBC for money laundering. Barclays and Lloyds have already increased their provisions and many experts predict that even these will prove to be insufficient. The Libor scandal has further to run as well.

So what do banks and expelled badminton players have in common?

I suggest it is about winning. Not what you win but HOW you win.  Regrettably the culture within the banking sector transformed over time into one where it became all about the banks winning and it did not matter how that was achieved. The bonus culture reinforced this by enabling a small number of people to win disproportionately to nearly everyone else.

Winning in sport is on the face of it a clearer proposition. Most of us accept that top sports people must really want to win and this means they must beat their competitors, who by definition, lose. However what we also expect is that there will actually be a real contest, because sport, especially at top level, is massively devalued without it.

This is where the badminton players crossed the line. They abused the core value of sporting competition to enhance their own chances of winning. The spectators spotted this and quickly expressed their disapproval, soon followed by the umpire and then the Olympic authorities.

However there are no actual rules in badminton that expressly prohibit players from trying to lose. What the Olympic authorities enforced was the “spirit” of competition which is about HOW you win. I fear that just introducing more rules and regulations on our banking sector is not going to be the answer to restoring the “spirit” of fair dealing and sound business practice that we really need.

Sharp shooting

Congratulations to Peter Wilson, our gold medallist in the shooting double trap. However at one point it looked doubtful that he could even continue with his sport, never mind actually compete in the Olympics.

Following the lack of shooting medals in 2008 Games his funding from Sport England was withdrawn. With some real “out of the box” thinking Wilson approached Ahmad Mohammed Hasher Al Maktoum, a member of the ruling family of Dubai and the 2004 Olympics gold medallist in the double trap. He did not ask for nor did he receive financial support from Maktoum but he did persuade him to become his coach. With his coaching secured Wilson then managed to raise enough funding himself to get into the British team for the Olympics and then to become the first British shooting medal winner since the 2000 Games.
This was an outstanding example of “where there’s a will there’s a way”. Get really clear about what you want to achieve and that you really want it and then tackle the problems and challenges that must be overcome to make it happen. In particular be ready to think differently about what the solution might be. It would have been so easy for Peter Wilson to see his Sport England funding as the only route to a place in the Olympics and to give up when this was no longer available. There is always a way, we just have to find it.

Falling off.

Congratulations also to our men’s gymnastic team for winning a bronze medal, our first medal in this event for 100 years. At one point they were awarded silver before a protest from the Japanese team secured an extra 0.5 points for the pommel horse gymnast, which gave them the silver.
Now here is a bit of rant from me about this. I watched this part of the contest and whilst I am no expert that Japanese bloke “fell off” the pommel horse at the end of his routine, he did not “dismount”. The fact that his falling off coincided with his dismount does not change my view on this. The Japanese maintained he should be awarded some points for his dismount as he had landed on his feet. Well you would expect a top athlete to land on their feet in most situations. I have seen jockeys “dismounting” at Beechers Brook in the Grand National in a similar fashion to this Japanese gymnast.
A case of applying the letter of the rules rather than the spirit in my view. However given the avalanche of medals that British athletes have collected so far, I guess I don’t have that much to complain about.

So that was some of the week 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.