Week ending 10th May 2013

Feeling flat

Looking back on last week, apart from Leicester Tigers beating Harlequins to go through to the Aviva Premiership final I found little to get excited about.  We had the Queen’s speech at the state opening of parliament but this was so uninspiring that now I can’t remember what was in it.  We discovered that we did not after all have a double dip recession and were therefore never in danger of having a triple dip.  However I can’t feel inspired or even relieved about something that didn’t happen, even if this means something else isn’t going to happen.  The FTSE 100 climbed back over 6600 for the first time since October 2007, but so what, after all we have been here before.  We might or we might not have a referendum on our membership of the EU and we had yet another report, this time from the Transport Select Committee on what to do or not do about a third runway at Heathrow.  Wouldn’t it make a change if just for once someone produced a report on what to do and we just got on and did it!

So, from what for me was a week that I have already almost forgotten, here are a few items that I believe do merit some attention.

It’s the productivity stupid!

Politicians and the media do seem to get excited over 0.1pc differences in GDP, one way or the other.  However what really matters is the actual growth potential in the UK economy.  Currently that growth potential is only about 2pc per year.  Anything over this, whilst it can feel good in the short term, risks overheating, which manifests itself in inflation and/or some form of bubble, such as in property or the financial sector.  This is because we just don’t have the economic “competitive strength” to sustain growth much above this level, because our national productivity is not increasing sufficiently to underpin higher growth levels.

So 0.1pc is a whole twentieth of our current growth potential, which is or should be a bit alarming if you think about it.  Even if we could achieve and sustain growth of just 2pc per year this would still mean a steady long term decline in living standards, so the productivity issue really matters.  For government improving productivity would mean that instead of just producing reports on a third runway we would actually build one.  For the individual business it means continuously improving everything you do – people, processes, customer satisfaction to deliver long term sustainable growth in financial returns.  Now that would be a bit more exciting!

Delicate China

Still on the growth theme reports last week indicated that China’s economic growth is beginning to falter again.  Everything is relative so even though the economy grew by 7.7pc in the first quarter which may look a lot to us this was lower than expected.  Lead indicators point to further slowing of growth which could take GDP down towards just 6pc.  This is the point at which the Chinese economy would struggle to deliver the rate of growth in living standards that the Chinese Communist Party (CCP) sees as being essential to its own long term survival.

Not so long ago most economic experts believed the question was not if but when the Chinese economy overtakes the US to become the biggest in the world.  That view is now changing to maybe never.  Loss making and inefficient state owned enterprises continue to dominate key sectors and have grown fourfold since 2003.  The ageing population means that the workforce actually contracted by 3.5m last year.  The growth from “catch up growth” based on cheap exports and imported technology is fast running out of steam.

Huge cultural and structural changes in the economy and politics will be needed to counter these headwinds.  Whether these will be achieved will depend on the outcome of a power struggle between reformists and anti- reform hardliners in the CCP.  We may well need to revisit the China factor.  It is not just the economics, the politics really matter, much more so than in our own economy.

Be careful what you wish for

More than 20 years ago when I was working as a management consultant I had a meeting with a senior director of Co-operative Insurance (CIS).  He believed the organisation needed to change but was not hopeful that it ever would.  The huge inflow of premiums on millions of small policies from millions of policy holders had created a highly complacent culture.  “What we need” he told me “is one really bad year”.

Well it has taken over 20 years but last week we learnt that they finally achieved this.  It may have taken a long time but they really have tried hard.  First they merged CIS with the Co-op bank for no apparent good reason and then in 2009 acquired Britannia Building Society, again for no apparent good reason.  Finally they went for the 632 Lloyds branches under Project Verde.

Two weeks ago Co-op pulled out of Project Verde citing the worsening growth prospects in the UK.  Last week it had to admit to problems of its own mainly with the Britannia commercial property portfolio, resulting in impairment provisions of £469m.  There was also the little matter of £250m spent on a new IT system.   So finally they achieved their “really bad year”.

Unfortunately this was such a bad year that the Co-op has gone from “challenger bank” to a bank with a big hole in its capital base and “definitely not needing a government bailout” in just 2 weeks.  It may be that the only solution for the Co-op will be to sell off the bank, but with rather a lot of banking businesses (around 10) likely to come into play over the next year, the prospects for a sale are not encouraging.

The Co-op’s “ethical banking” positioning appealed to a lot of customers and there is no doubt it achieved a high standards of customer service which are valued by its customers.  In spite of this the bank did not achieve the level of “Changeability” it needed to make a success of the projects it embarked upon. Lloyd’s staff and regulators working on Project Verde found that the integration of Britannia had barely begun and there was no concept of what had to be done to fix the business.  Thus proving once again that whilst it is right to be “doing the right thing” in banking as in any other business you have to do it really well if it is to pay off.

BT’s sporting bet.

Last week BT announced that it would be offering its 3 new sports channels “free” to BT broadband customers.  In spite of losing a little ground on fears of a price war with Sky, BT’s shares are at a 5 and half year high.

The bet they are placing is that in return for making little or no profit from its TV business it will attract large number of customers to its broadband service.  Whilst not perfect, the BT broadband service is better than most and certainly as good as any so the platform is there.

Also like Sky they understand that if you attach football to a media offer for some reason it seems to work.  BT will show 38 Premier League matches a season, the first time these games will have been available free since the foundation of the Premier League.  So this is a game changer and it remains to be seen how Sky will respond.

What is a first in my view is that BT has actually finally come up with a commercial proposition that could make real sense to a lot of customers.  This really is about winning and keeping customers not just about managing a decline in its customer base.  So has the giant finally awoken?  Well there are still those call centres to sort out!

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 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.