Week ending 5th April 2013

Just imagine …

You are the finance director of a large conglomerate.  You joined the business over 2 years ago as part of a new senior team to turn the business round.  It has proved a mammoth task and although the business is stable it is showing little sign of getting back on to a growth track.  This has been reflected in the share price with two recent downgrades.

This was an old fashioned conglomerate with everything controlled from the centre by a large, bureaucratic and very expensive head office.  Managers running the trading businesses felt all they were there for was to feed this monster and just did what they thought they were being told to do.  You have made some progress in reducing the size and scope of the head office. Along with your CEO and Chairman you have been telling the managers that you want them to be freed up to run their business units with as little interference from head office as possible.

Your Chief Accountant who you inherited from the previous FD’s team has put forward a proposal for a major new “enterprise wide” IT system.  He has proved to be competent which is why you kept him on and his proposal appears to have a solid business case behind it.  He is confident the system will produce major savings at head office at the same time as providing up to date and accurate information on all the trading divisions.

The business logic seems to add up but it will require big changes in all the trading divisions which will take a lot of management time to implement.  Right now you want those managers to concentrate on increasing sales and profits in the businesses they lead.  They are showing signs of responding positively to the new freedoms they have been given.  However you are concerned that they may not have yet developed enough “changeability” to take on this new IT system as well and you feel it may send the wrong message, more control from the centre rather than less.  After careful thought you take the brave decision not to go ahead with the IT project but to focus on supporting the trading units in growing their businesses.

Meanwhile back in the real world …

Last week HMRC implemented the biggest change to PAYE for decades when the new “Real Time Information” (RTI) regime was launched.  Instead of reporting on wages and salaries and tax and NI deducted annually businesses are now required to report every time they run a payroll. This will be a minimum of 12 times a year but for many businesses it will be more often than this.  Failure to comply will result in fines.  HMRC claim they will make big savings in their costs and from increasing the tax they collect.

Now this may be true and I don’t argue that our tax system and regime need bringing up to date.  However given the extremely challenging business and economic climate and the exhortations from government to grow, export and all that good stuff is this really the right time to be introducing something like RTI?  Especially as this government has been banging on about how it is backing business and cutting red tape.  How does that rhetoric match with the requirement to do at least 12 times as much work complying with a PAYE regulation as there used to be?

Did I say something about back in the real world?

Going against the accepted wisdom

Recent readers of these articles will be familiar with my view that what really matters is getting the “business model” right.  I came across a good example of this last week in an unexpected business sector.

Currently about 18 pubs are closing each week, the victims of successive recessions, cheap alcohol from supermarkets and high beer duties.  The majority are those that only served drinks.  The accepted wisdom is that you cannot make money in pubs on drink sales alone and certainly you need a food offering if you are to grow.  Food is the “engine” for driving sales.

However a pub group called Amber Taverns set up in 2005 and which now has a portfolio of more than 80 pubs only sells drinks.  They don’t allow children in their establishments either which goes against that part of the accepted wisdom that says you have to attract families to make money.

There have been plenty of pubs coming on the market which is part of the business model logic so Amber can be picky.  They look for pubs within easy walking distance for a good number of people, with plenty of footfall and passing trade.  They refit the pub with good modern fittings and an array of TV sets tuned to the sports channels.  They offer their beer at competitive prices, nearly half price or less than a “gastro pub” and their managers know their regulars by name.  So you have what Amber owners describe as the modern social club for the 21^st century.

A time of change always offers opportunities and the growth of Amber taverns is an example.  However it is not just based on being able to acquire pubs at a good price.  It is based on a solid business model that delivers what a certain kind of customer wants and makes it easy for them to get it.  The right business model is a key component of “competitive strength”.

I wonder if there is an opportunity for a pub chain that does not allow children AND doesn’t have TV sets either!

Eastern promise

It’s worth paying some attention to what is going on in Japan.  This is a country whose economy, despite being one of the largest in the world, has been going nowhere for years in terms of growth.  Well if the bank of Japan (BoJ) has anything to do with it that’s about to change as it plans a massive hike in the country’s monetary base from 29% to 56% of GDP by 2014.  To show what an upside down world it is one the BoJ’s targets is to get inflation “up to” 2% in 2 years.

Monetary easing on this scale is so huge and unprecedented that none of the experts can really say what the consequences might be so I am not even going to try.  However one effect already has been that the yen has depreciated 32% against the euro since last July.  Is anyone going to buy a Peugeot ever again?

And finally

Nearly another 3 weeks gone and Italy still doesn’t have a government!

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.