Week ending 16th May 2014

INTERESTing Times

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.

Meanwhile

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.

Week ending 9th May 2014

M&A Pfizzing!

For some time one of the frustrations for the UK government as they attempted to kick start the economic recovery was the huge cash balances being hoarded by many businesses which they seemed reluctant to spend.  Not only was this holding back growth, but also preventing the emergence of a more balanced economy.

Now with confidence returning companies in the UK and in other countries, notably the US are starting to invest again.  However they are not focusing so much on new plant, new premises, developing new markets etc. but rather on merger and acquisition.  M&A activity is now at its highest for over 6 years.  There were a number of big M&A’s making the business and political headlines last week with the real biggie on both counts being the Pfizer bid for AstraZeneca.

When I first heard about this I was puzzled as to why a fizzy drinks company would want to buy a pharmaceutical business.  Then I realised of course that Pfizer is actually a global pharmaceutical business, famous for those little blue pills that help gentlemen stand to attention even when all they want to do is go to sleep!  Apparently a Charles Pfizer was one of the co-founders of the company, so hence the name.  Quite an appropriate name when you think about the little blue pills!

Although a dominant force in the global pharmaceutical industry for decades Pfizer faces challenges as its patents run out.  The patent on its biggest selling drug Lipitor ran out in 2010.  To counter this since 2000 Pfizer has pursued a strategy of growth by acquisition, the last being Wyeth for US$68bn in 2009 and now it is after AstraZeneca.  Most analysts and business commentators judge that this strategy has destroyed shareholder value rather than created any.  Much has been written in the media last week about how Pfizer cut jobs and research capacity and investment as it chased the “synergies” from each acquisition.  Furthermore in 2009 Pfizer broke all records when it was fined $US2.3bn for illegal marketing of its products.  This was the fourth time it had been found guilty of this and similar illegal practice.

This is the core of the concern over the bid for AstraZeneca. Do we really want to let a company with this kind of brutal post acquisition track record and contempt for legal, never mind ethical business practice into our backyard?  To be fair to Pfizer it has new leadership today, but in spite of this and all the assurances from Pfizer if the fox is still a fox will we end up with a lot less chickens?

Should government intervene?

It is not surprising that this has become a political hot potato.  Even though AstraZeneca is an Anglo-Swedish company, run by a Frenchman, chaired by a Swede with operations in 100 countries, the Pfizer bid is being portrayed as an assault on British jobs and the British science base.  Ed Milliband has accused the government of “cheer leading” the bid and has called for a “national interest test” to be applied on all foreign bids to takeover British companies.  As usual with his bright ideas Milliband does not spell out exactly what a national interest test would be and he really needs to be careful what he wishes for.  If a national interest test had been applied to him, then he might well not be leader of the opposition!

The government is trying to give the impression that it is taking a “hard-nosed” approach to seeking assurances from Pfizer on jobs and research investment.  The question is how much can they trust Pfizer to deliver on its assurances?  The answer to this question is not a lot if at all.  Apart from the track record we have the wonderful answer given by Pfizer CEO Ian Read to a question put to him last week.  When asked whether Pfizer would break up AstraZeneca he replied “we will conserve that optionality”.  Now that tells you all you need to know.  The cunning fox is still a fox and if you let it into your backyard it will do what foxes do to your chickens, if and when it thinks it can get away with it.  So the only safe assumption is that Pfizer will at some point behave exactly as it has in the past.  So the question is can government do anything about it?

If AstraZeneca shareholders want to sell then there is not much strictly legally they can do to stop this and in a free society nor should they.  However this is where “having an industrial policy” comes into play.  This government and its predecessors claim to have one but it is difficult to see what it is exactly.  However in this case the implications are simple.  If you do not have a policy you just let whatever is going to happen, happen and use the desirability of preserving a free market as your excuse.  If you do have one then you can sit down with the parties involved and spell out the rules of the game.

One of the attractions of this deal for Pfizer is that they can move their HQ to the UK and enjoy our now low business tax regime.  Our government should tell Pfizer that whilst we are happy to welcome overseas businesses to the UK to enjoy the lower tax regime it is not available to just anybody.  In exchange for lower taxes we expect them to create extra value for the UK in terms of jobs, investment, skills and knowledge.  Where having an industrial policy comes in is that you can spell out clearly what that means when applied to a particular situation.

Government does not have a lot of “hard power” for this, but it does have buckets of “soft power”, if it cares to use it.

The French do this differently

Running almost unnoticed under the Pfizer/AstraZeneca story is a $US17bn bid from GE for French company Alstom’s turbine business, which includes its nuclear facilities and power grid businesses.  In spite of the Alstom board agreeing to the deal, assurances from GE on French jobs that go way beyond anything Pfizer has so far promised with AstraZeneca, the French government has said “Non”.  Any government that can declare a yogurt maker a “strategic industry” as the French did when blocking a bid for Danone a few years ago, is always going to say “Non” to any deal on Alstom.

They have gone further by demanding an “equal partnership” deal with GE (whatever that means!) and bringing in the combination of the two companies rail businesses.  As a final piece of confusion they have brought in Siemens as a counter bidder.  This seems to have come as bit of a surprise to Siemens who have enough problems of their own right now, without adding Alstom’s to them.

The French have an industrial policy which is very simple.  It’s going to be all or at least mostly French.  They are subject to the same rules and regulations as the British Government in all this, but the difference is that the French don’t think they apply to them.  In fact they KNOW they don’t.  This is the only explanation for why Peugeot Citroen are still in business.  Whilst I would not advocate going to the extremes that the French government employs it does demonstrate how the skilful use of “soft power” can get you what you want, if you know what that is.

L’Entente Impossible

10 months ago two of the world’s biggest advertising agencies, New York based Omnicom and Paris based Publicis announced they were to merge.  What’s more it was be a “merger of equals”.  Now this is a French company and an American company proposing to merge as “equals”.  What are the chances of that coming off?  Well last week it was confirmed that there was no chance when the whole thing was called off.  They couldn’t even agree on who should be the Chief Financial Officer of the merged group.  Perhaps Omnicom did not understand that Publicis meant CFO would stand for Chief French Officer!

If it had come off it would have created the world’s biggest advertising agency.  Well it has achieved that, only it is Sir Martin Sorrel’s WPP that has retained this title.  While negotiations dragged on, costing millions, WPP picked up clients like Vodaphone, M&S, Compare the Market and others from Publicis and Omnicom.  Samsung, the biggest advertising brand spender in the world has placed its account with Publicis under review.  Publicis and Omnicom have managed to destroy value without even merging!

Another outcome is that the financial advisors involved were likely to be on a “no deal no fees” deal.  As both parties have called this off it is estimated that around $US70m won’t be paid to advisors.  Perhaps there is a God after all!

CarphoneDixons

Well this is one “merger of equals” that looks like it could actually come off.  Whether this is a good or a bad thing for shareholders and customers, only time will tell.  However there is one reason why I am not optimistic.  In the past I have consistently criticised Dixons for their abysmal customer service.  Equally consistently they announced time after time that they were tackling this, but customers did not see a difference.  In the last 12 months or so I have discerned an improvement.  Staff in their stores actually seemed to know something about the product and even where the product you were looking for might be.  It wasn’t brilliant, but it was better and clearly something has changed.

Now they are merging with Carphone Warehouse to become CarphoneDixons.  Carphone’s own reputation for customer service was probably even worse than Dixons, which means they must have been trying hard to be that bad.  Given that post-merger performance standards tend to fall to the lowest common denominator rather than rise to the best, will Dixons nascent customer service improvement be strangled before it becomes fully established?

Why?

After reading the above you may be thinking “why do they bother”?  Well that is a good question.  The one aspect of M&A that is never mentioned is the fact, and it is a fact, that it usually doesn't work.  Research over many years has consistently shown that whether in good times or bad at least 50% of M&A deals result in destroying value and this can be as high as 80%.  So all the above with all the millions involved has at best a 50% chance of success.

For any of you who are currently in or are contemplating an M&A project here are some tips.

• If anyone mentions the word “synergies” take tight hold of your wallet
• If they go on to produce spreadsheets to demonstrate these synergies, suddenly remember you have to be somewhere else.
• If the value to the customer is not clearly set out and explained early in the proposal, forget the whole thing.  This will save you a lot of time and money.

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.

Week ending 23rd August 2013

The silly season continues.  Most of the business stories in the media are about the possibility of various football clubs paying vast sums of money for certain players.  However in the absence of meatier news to dissect the silly season does allow us time to ponder on matters that we would perhaps ignore at other times of the year.  There is one topic that most of us ignore most of the time.

Must try harder!

In last week’s TWb4TW I introduced you to the “productivity puzzle”.  This puzzle is that in spite of recent encouraging signs that economic growth is gaining some traction the fact is that on an output per worker basis UK companies require more staff to produce the same amount now than they did before the financial crisis.

But what is actually meant by “productivity” in this context?  In the boom years between 2000 and 2008 the economy was apparently able to produce more goods and services to meet the growth in demand, without price or wage inflation kicking in.  However much of this was achieved through cheap imports and cut-price foreign labour.  So whilst production and consumption of goods and services grew the actual “productive capability” of the UK economy did not, or at least not to the extent that it really needs to.

This is because we seem to think of productivity as being about “doing more” rather than “doing better”.  Ministers are telling us that we now have more people in work than ever before.  But is that really as good as it sounds?  I talk to businesses who, in spite of lower sales and profits than before the recession and not giving their employees a pay rise for three years tell me they are now “doing well”.  But is this kind of “doing well” what these businesses really need to be achieving?  We know that in the NHS, in spite of huge increases in spending and treating more patients than ever, productivity has been going backwards.

So do we just need to “try harder”, maybe get some “efficiency experts” in and tighten up those KPIs?  After all there are examples of high productivity companies out there; surely more of us could be like them?  Well in my experience it is worth looking at those companies, but it is not about what they do, it is about how they think.

A different way of thinking

Some years go I was lucky enough to spend some time at Toyota Manufacturing UK at their Burnaston plant near Derby.  I will always remember two statements from the then Operations Director when explaining how Toyota thought about productivity.

“Everyone at Toyota Manufacturing knows they have two jobs.  One is to make vehicles and the other is to find better ways of making vehicles.  The working day and the business processes are designed and structured to enable all our people to do these two jobs”.

“This way we can reduce the costs of making vehicles, enabling us to lower the price to customers who then buy more of our vehicles which lowers our costs even further”.

For me these two statements embody the principles required for achieving true productivity growth. These principles can be seen in the thinking of every “excellent” business I have been fortunate enough to have had contact with.  These organisations think first about how they can “do better” knowing that this is the route to achieve the sustainable capability to “do more”.  This “different thinking” is the key to the productivity puzzle.

Regrettably too few UK businesses think this way and even fewer areas of the public sector, where the primary purpose seems to be to exist rather than actually change anything.  This is in spite of the fact that research has proven consistently that businesses that achieve superior productivity growth are at least twice as profitable as the average.  Until the thinking changes I fear that the prospects for our economy achieving the level of true productivity growth we need to provide the standard of living we would all like in this country are remote.

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.

Week ending 16th August 2013

The silly season

Since returning from a week’s holiday in what turned out to be a very sunny Norfolk, I have been scanning the media for any stories that contain interesting topics with angles that could be worth exploring for the benefit of my discerning readers.  At first I found it difficult to find anything that caught my interest, until I realised that we are now in the “silly season” so it is not surprising there isn’t much to work with.  A sign of how silly it is was that the only reason Ed Milliband made the news at all last week was because a man threw eggs at him.  EM missed a trick by not having John Prescott with him at the time as this would have guaranteed the front page.  However amongst the silliness I found some news on the improving prospects for the UK economy that have potentially interesting and challenging implications for all of us in business.

Consumer confidence – of a sort

Only a few months ago official stats indicated we were in or about to enter a triple dip recession.  However since April things started to change.  First revisions to the figures showed there had been no triple dip and cast doubt on whether there had been a double dip.  If the authorities  were to continue this trend we may discover there was no recession after all, just a cunning plan by Cameron and Osborne to be able to keep “dissing” the previous Labour government.

More recently the news seems to just get better and better.  This is more in line with what my own network had been reporting previously on buoyant sales and general optimism about the way things were shaping up.  Consequently I am inclined to believe what is now being reported in the official stats.  One exception to this had been bricks and mortar retail, which still seemed to be struggling.  Recently however both sales levels and footfall have been increasing in many of the UK’s shopping centres with even town centre vacancy rates dropping from a record high in April.

So is this a sign that that elusive consumer confidence is really beginning to return?  Well as far as retail sales are concerned only up to a point.  Incomes are still not keeping up with inflation so consumers need a very special kind of confidence to start spending more of the cash they have less of.  What has provided this special confidence on this occasion is the weather.  We endured a cold and miserable spring but suddenly since early in June we have actually had a summer.  This means we became more confident that we were actually likely to wear the summer clothes we bought.  We could see ourselves actually using the new barbecues and garden furniture.  Most importantly the sunshine just makes us feel better about nearly everything and we become even prepared to actually “go shopping” as a leisure activity rather than through necessity.

However this kind of confidence will last only as long as the sun shines, if that.  In fact if the sun shines for too long sales of winter merchandise will suffer and energy companies will start muttering about having to increase prices because we aren’t using enough of the stuff.  At least global warming evangelists will feel vindicated.  The key point of all this was articulated a couple of weeks ago by Simon Wolfson Chief Exec of Next.  He said that whether influenced by weather or anything else consumers are deciding if to buy, what to buy and where to buy at much shorter notice and that this mindset was here to stay.  Those retailers who understand this and can provide what their customers with what they want, the way they want it and when they want it will be the winners.  There are already examples of winners are who are achieving this and proving the point.  This is more important for the future prosperity of the UK's retail sector than sales growth in the short term.

Growth is good for us.  Or is it?

In the great British tradition of reacting to good news by searching out the downside the business media last week were quick to find one.  The downside of all this better economic news is that it may result in interest rates increasing sooner rather than later.  Mark Carney, our new governor of the Bank of England had previously signaled that interest rates would remain low for some time to come and at least until unemployment drops to below 7pc (currently 7.8pc).  However all this good news is beginning to persuade markets that this could be achieved sooner than Mr. Carney had planned for, thus forcing up interest rates earlier than he would like.

Furthermore some commentators don’t like the shape and smell of the recovery that is taking place.  They point to a recovery led by consumer spending and rising house prices inevitably fuelled by debt which can only lead us back to where we started.  Clearly if that is all we get then it is not what we need.  What we need is growth from investment and exports and a rebalancing of the economy away from government and consumer spending.  This is a difficult course for Mr. Carney to steer.  In particular he needs to keep interest rates and the value of the pound low but he has to do this without increasing inflation. The key to this is finding the answer to:

The productivity puzzle

In a short article last week in the Thursday’s Daily Telegraph Philip Aldrick highlighted the “British productivity puzzle”.  This puzzle is “Why do companies require more staff today to produce the same amount they did yesterday?  On an output per worker basis, the UK is now 4pc less productive than it was in early 2008, has underperformed the G7 average and is way off the pace set by the US”.

Mr. Aldrick points out that no one really knows the answer to this puzzle and Mr. Carney has been wise to accept he doesn't either.   Setting the 7pc unemployment trigger before consideration of interest rate rises may provide the opportunity for him to get clear on what is really going on.  If the economy grows without a fall in unemployment this will mean the UK is making up the productivity lost ground and interest rates can stay low.  If unemployment falls fast then it means the economy has permanently lost potential and consequently inflation is a real threat.  However this would enable BoE to recalibrate monetary policy to tackle what is really wrong with the patient.

If the latter turns out to be the case, then taking the medicine will not be pleasant.  I will be exploring this productivity issue further in next week’s TWb4TW as I feel it is a crucial challenge for all businesses.  In the meantime read Philip Aldrick’s full article here.

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.

Week ending 26th July 2013

Bound to end in tears

China provides a news item most weeks but last week was a little different.  Instead of the focus being on the economy the big headline was about the accusations from the Chinese authorities that GSK executives in China had been bribing doctors and other medical professionals to prescribe GSK drugs.  This caused me to think about the nature of selling and sales people.

For many years there has been a school of thought amongst many business leaders and especially sales managements that sales people are primarily motivated by money and status.  The money being both the means of acquiring and of demonstrating status.  So generous sales commission schemes are devised often including other “perks” such as top of the range company vehicles and access to exclusive events in the name of corporate entertaining.  In many sales driven businesses such as the drug companies, computer systems and banks in recent years, sales people are seen as the king and queen pins and their reward packages and status in the company reflect this.

This has bred a culture where as long as you got the sale any questionable practices around how you got the sale would be overlooked or even encouraged.  If you incentivise people to earn a lot of money in a short time don’t be surprised if that is exactly what they go and do.  And, don’t be surprised about HOW they go about doing it!  Because it is all about money, moral and ethical considerations just get lost.

I believe GSK’s Chief Exec Andrew Witty is genuinely disappointed and shocked by what some of his people in China have been up to.  However when he looks closer he should not be surprised.  The cause and effect from the incentives for his sales people in an environment where medical professionals cannot make a decent living unless they accept kickbacks meant it was bound to happen.  What is more this is a classic example of how unethical practices will eventually turn round and bite you.  When appointed earlier this year President Xi Jinping announced that cracking down on corruption would be a priority for his administration.  So a crackdown involving a high profile foreign owned global business is just what the Chinese authorities would have wished for and will use to maximum effect.

Is there another way?

This leaves us with a question, just how do you motivate sales people?  If financial reward carries the risk of encouraging bad practices with expensive consequences just how do you get your sales force out of bed in the morning?

In my career I have come across a number of very successful sales people who do not seem to be motivated primarily by money.  Because they are successful they earn plenty of it, but it does not seem to have been their primary motivation for working hard and winning business.

What they seem to have in common is the conscious or unconscious understanding that selling is about understanding the customer’s problem first and then offering a solution.  They seem to be particularly skilled in “needs identification”, really getting to understand the customer’s needs and in many cases helping the customer to understand what their needs really are, as opposed to what they think they are.  These kinds of sales people seem to get a real buzz out of how this builds relationships with their customers and how this in turn drives sales success.

This switches the focus away from me and my needs on to the customer and their needs and this is what changes the moral and ethical dimensions in the relationship.  The process changes from “selling to” to “getting bought by”.  Ah, I hear you say what if the customer’s need includes a free holiday in the Bahamas?  However sales people who “get bought” seem to have the ability to differentiate between the needs of the customer as opposed to the personal needs of the individual buyers involved.  They seem to be able to spot when these cross the line when a buyer’s personal needs and motivations may be detrimental to the customer’s needs.  They become skilled in handling these situations, including being prepared to walk away from “bad business”.

Sales people who “get bought” invariably in my experience are amongst the top performers in most sales forces. However when they are successful a strange thing can happen.  Far from encouraging them to keep on doing whatever it is they are doing, their employers start making life harder for them.  Because they are earning lots of money from a commission structure designed to motivate the average performer to work a bit harder, they find their targets are increased whilst others are left alone.  They are required to report to managers who are far less experienced and competent than they are.  Often this involves them being subjected to sales performance management systems that have little to do with sales or performance management.

Inevitably this leads to these top performers leaving, either to retire early, join a competitor or set up their own business in competition with their previous employer.  Often this means they take the business with them because they have the relationship with the customers, their employer doesn’t.  They also know what their customers did not like about their previous employer’s offer, giving them an immediate competitive edge if they set up their own business.

Why does this happen?  Well I believe this is a demonstration of what happens when opposing moral and ethical outlooks collide.  The people who understand that doing the right thing and doing it really well delivers the best results vs. those who believe that doing whatever it takes to deliver results for them and now is the way to do things.  The lessons only get learnt when the consequences of the latter approach become apparent, possibly in the shape of a Chinese anti-corruption official.  By which time of course it is too late!

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.

Week ending 19th July 2013

Don't even mention more taxes!

Last week began with Dalton Phillips, Chief Exec of Morrison’s backing Sainsbury’s Jason King’s call for an online sales tax as a way of leveling the playing field between online retailers and those with physical shops.

Now the treasury is quite capable of dreaming up new taxes without any help from the rest of us.  I fear that Treasury officials will already be licking their lips over this one, so don’t encourage them.  Governments of all political persuasions just cannot resist taxing us any way they can and spending the money on our behalf.  They especially like taxing business because businesses do not have a vote.

So whilst George Osborne trumpets his reductions in corporation tax to “one of the lowest levels in the OECD” by 2015 he does nothing about business rates and employment taxes.  For those retailers that are physical space intensive and employee intensive these taxes are far more significant than corporation tax, and it is not dissimilar for many other sectors.  As business people and as individual voters we must hold government to task on the totality of the tax take.  Whilst recognising the need to tackle the deficit now in the longer term a “real” low tax economy for individuals and for business is a more likely means of securing and sustaining economic growth.

Dropping BRICs

It seems like only yesterday that we were all being urged to “rebalance” the economy and focus on the fast growing economies in Asia, South America and Russia.  Forget tired old Europe and clapped out USA, they said, the BRICs are where the action is.

Well Brazil’s growth has ground to a halt as the commodities boom fades.  Russia’s economy is entirely dependent on raw materials and energy exports with little sign of any reform of its business and industrial practices.  India is bedevilled with a political culture that is 30 years behind the game it now needs to play to fulfill its potential.

That leaves China.  At the beginning of last week it seemed that Chinese growth figures were coming in a bit higher than feared.  Mind you we seem to get Chinese growth figures of various kinds about twice a week, so which ones we should really take notice of is anyone’s guess.  What doesn’t help is the growing suspicion that the official figures are painting a much rosier growth picture than is actually the case.  (Surprise, surprise - or should that be supplies?)  By the end of the week some commentators were talking of just 2% growth or even that the Chinese economy was reaching the point of deflation.

The challenge for all the BRIC countries is that what has got them to where they are now is unlikely to get them much further.  What is needed is reform, political, economic and cultural.  However, as in Europe the politicians seem completely unable to face up to this, much less actually do anything.  So anything could happen, but it could be sudden, uncontrolled and not good for any of us.

Insurers opting out

The moral and ethical bankruptcy in the banking world that led directly to the financial crisis seems also to have infected the insurers.  Last week one of the countries biggest insurers Swinton was fined £7m by the Financial Conduct Authority (FCA).  This was for selling “add-ons" to customers that they had to opt out of.  This was not made clear to customers and Swinton made an extra £92m from selling policy add-ons that customers neither wanted nor needed.   To quote the FCA “Swinton did not place the customers at the heart of its business (no actual “heart” detected – my insert).  Instead it prioritised profit”.

The next day esure’s house broker JP Morgan announced that esure’s revenue growth this year would be two-thirds lower due to a regulatory market review into the sale of add-on opt policies.

In other words, “if the Swinton fine means esure are prohibited from stiffing their customers then they probably won’t make as much money”.  Are things that bad that the only way they can think of to make money is to cheat their customers and the only reason they might stop doing this is if the regulators ban them from doing it?  If financial services are to continue to be a significant component of our economy then this sort of behaviour has to stop.  Major reform is needed but will we get it?  Don’t hold your breath.

Co-op blues

Talking of stiffing customers the caring sharing Co-op is having to stiff a large number of pensioner bond holders in a desperate attempt to rescue the Co-op bank.  Who would imagine that the Co-op, the mutual which has been held up as the “ethical bank” is now punishing pensioners for being silly enough to believe that they were investing in a low risk investment with the Co-op.  I mean come on who ever heard of “high risk” and the Co-op being in anyway synonymous!  Even if you read the small print you wouldn’t believe it.

Just when you might have thought it couldn’t get much worse for the Co-op, it did.  Last month in their retail business, in spite of sales rising by 0.2pc after four months of decline, the Co-op’s market share fell from 6.6pc to 6.4pc.  The continuing loss of market share means that the Co-op is the worst performing major grocery retailer in the UK.

Things are bad for the Co-op.  It is by no means certain that they can get agreement to the rescue package for the bank and now that its core business is in decline, you can actually see the writing on the wall.  Again major reform will be needed, but is this organisation up for that?  Probably not.

Kate does the right thing

No not that Kate, but Kate Bostock, former head of M&S clothing who moved to Asos 6 months ago as head of product and trading.  Ms. Bostock has decided that “Asos isn’t the right place for me” and has left the online retailer.

Whilst she won’t be short of other offers I say respect to Ms. Bostock for realising she was in the wrong place and doing something about it.  No severance package either, bankers, the BBC, SFO, NHS and nearly everybody else take note!

One thought occurs.  Ms. Bostock has spent her career with bricks and mortar retailers like Next, George and M&S.  Does the fact that she found she could not adapt to a rapidly growing, highly innovative online business with a fast moving culture say something about why a number of established businesses have struggled with their online offers.  In order to create a different business successfully do you actually need a completely new business with new people?

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.

Week ending 5th July 2013

What’s Ocado?

Last week’s theme for TWb4TW was the reality of unreality in business, economics and especially politics today.  Along similar lines a few of last business stories I noted prompted the thought “what is really going on here?”.  The first of these concerned Ocado the online grocer.

Launched a decade ago and yet to make a full year profit Ocado claimed it would revolutionise the supermarket sector.  The foundation for the launch of the business was the deal with Waitrose.  This gave Ocado some scale in its early days and provided Waitrose with a short cut into an online business.  This all looked good at the time but since then Ocado somehow never seems to be quite getting there.  It is always the next investment, systems, distribution centre or whatever that will crack it, but still no profit.

So some excitement a few weeks ago when Ocado announced its deal with Morrisons giving them more or less the same leg up into online as it provided for Waitrose.  On the face of it this could provide the extra scale through Ocado’s operations to lift it into profit.   One small problem could be Ocado’s existing contract with Waitrose.  “Not a problem” they say, “we will have to look at this carefully” say Waitrose.  What this has prompted though is a change of view on where the value is in Ocado. Perhaps it’s not in being a stand alone online supermarket, but in its technology, systems and the facilities that Ocado have developed to power an online business.

Ocado Chief Tim Steiner has previously hinted that his company has developed superior systems and facilities to other online supermarket businesses.  I say “hinted” because he has not really spelled out precisely what is the competitive advantage this gives Ocado.  Nor have we seen a clear demonstration of this competitive advantage in action.  Perhaps Morrisons have seen it which is why they have done the deal with Ocado, although they have been surprisingly quiet since the deal was announced.

Last week Tim Steiner said that since the Morrisons deal Ocado has been visited by companies from around the world and “there was a lot of interest” from those looking to launch their own online ordering services.  So what is going on?  Is Ocado a stand alone online grocer or could it become a service provider?  Is it worth more for what it does or what it knows?  If it is worth more for what it knows does it know how to turn that into shareholder value?  So far it has failed to prove itself in this respect as an online grocer or service provider, a problem often found in businesses that are uncertain of what they are there for and what they are good at.

Battersea déjà vu

Last week we had the latest launch of an £8bn redevelopment project for Battersea power station, attended by the Prime Minister, Mayor of London and the Prime Minister of Malaysia.  The latter attended because last year a Malaysian consortium bought the derelict site for £400m.

David Cameron promised that this time the redevelopment will definitely happen.  Mr. Najib the Malaysian Prime Minister declared “we are partners in prosperity”.  Boris asked “Does anyone seriously doubt that this amazing scheme is actually going ahead? No is the answer”.

Well Boris, I for one do have doubts, because some of us are old enough to remember we have been here before - several times.  Since being decommissioned 30 years ago there have been three previous failed redevelopment proposals that never passed go and numerous discussions with interested parties that got nowhere either.  The main parts of the existing building are listed and some of the scaffolding on the site has been there so long it is probably listed as well by now.

So my question is what is so different this time?  What is going on with this deal that makes it any more likely to proceed and to be completed than any of its predecessors?  There was nothing in the political rhetoric at the launch last week that even hinted at what this might be and the event itself was no different to those that have preceded it.

One question I would like to know the answer to is has the Malaysian consortium actually paid over the £400m for the site?  They may well have in which case that would be the first step completed, some of the previous attempts didn't get that far. Or they may not have, which may be for perfectly good reasons at this stage.  However when projects like this unravel it is not uncommon to find that the basic first steps were never completed so unreality never got close to becoming reality.  We really need to know if this significant and important redevelopment project, with all the implications it has for jobs and growth has more than Boris’ enthusiasm behind it.

Business rates – the elephant on the high street?

Bricks and mortar retailers are getting hot under the collar about business rates.  Boots, John Lewis, Tesco and Sainsbury’s have all called for a rebalancing of the system, claiming the current system unfairly penalises retailers with physical stores compared with online retailers.

Last week Sir Philip Green, owner of Top Shop and Arcadia waded into the argument at a hearing of the Commons Select Committee on Business.  However rather than just continuing with the “unfair” line, he claimed that government is using the uniform business rate mechanism to keep business rates high and ensure they don’t lose any revenue.  For years retail property rents went only one way, upwards and upward only rent reviews were common in rental agreements.  Business rates went the same way as they were linked to valuation which in turn is determined by rental yield. Time went on and business rates became a major source of government revenue.  No one seemed to question this, even though it was clearly unsustainable.

This was proven to be unsustainable when following the financial crash in 2008, valuations and rents on retail properties in many areas went down, as tenants threatened to close units if landlords did not lower rents.  However business rates did not because, as Sir Philip pointed out the government “can inflate the uniform business rate above RPI, so keeping their tax revenues in line.  They fix it so they don’t lose any revenue”.  He gave the example of one of his stores where the rent has come down from £500, 000 to £125,000 over a 5 year period but the rates have stayed the same at £277,000.  Sir Philip believes this should now be nearer £50,000.  He also proposed a business rates freeze and that small retailers should only pay a nominal sum, both of which could be achieved without any legislative change.

The government claims to be concerned about the decline of the high street and has put up £1.2m under the High Street Innovation scheme to finance a number of “Portas Pilot” projects to revitalise a number of selected high streets. Also the Chancellor has brought forward phased reductions in corporation tax claiming that this will give the UK one of the most competitive business tax regimes in the developed world.  However as Alex Gourlay, Chief Exec of Alliance Boots pointed out that for his company of the total of corporation tax, business rates and employment taxes, two thirds is now made up of the indirect business rates and employment taxes.  Reducing the tax on profits which the government is making more difficult to earn by inflating occupancy and employment taxes is not a low business tax regime.

So what is going on?  Has it not occurred to those in government that they can reduce costs of occupancy and employment for shops?  Or perhaps it has occurred to them but they want to preserve the tax revenues, so teaming up with a TV personality to launch yet another “innovation” scheme is an attempt to distract us from what is really going on?  Sir Philip may well have lifted the lid on something really significant here.  Namely that it is the government itself that is making the disparity in operating costs between physical shops and online greater than it needs to be.

One for the Guvnor

Once again the BoE left base rates at an historic low.  On the face of it the first act by the new governor Mark Carney was to do exactly what his predecessor has been doing.  However there was a big difference because he followed up by stating clearly that interest rates would remain low for some time to come.  The reason for this is that the economic recovery remains weak so any upward move in interest rates would be highly detrimental for the foreseeable future.

So in stark contrast to his predecessor who never commented on the future path of interest rates, Mr. Carney has told us plainly what is going on and why.  What is more it all makes sense so a good start from the new governor.

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.