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.