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Pricing and the fair deal

Posted on 03/07/09 by John Gaynard

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Prices for many everyday goods such as clothing and groceries have dropped radically, in real terms, over the past 20 years. Globalisation and more open trade have led to efficient commodity and product sourcing. The effect of this has been multiplied by improved logistics and comparatively cheap fuel for moving ships and goods around the world and within countries.

The proportion of unskilled jobs has dropped in Europe and the number of 'knowledge workers' with higher salaries has increased. New hotels and flights to foreign destinations have opened up to supply the demand as people find themselves having to pay less for the basic necessities and more for leisure. But what was once a satisfying situation of supply and demand for businesses has now become a problem of over-supply and falling consumer discretionary spending.

In this world of over-supply and rising unemployment, it is not surprising that prices should drop. The theory of price elasticity teaches that by lowering your price you will make more sales. However there is a limit to what the market can absorb. The idea of competitive advantage contains within it the idea that any price advantage one business holds over another will eventually be whittled down to zero by competition and some businesses will then cannibalise their capital base to stay in business. Customers realise that many retailers, airlines and hotel companies have their backs to the wall and they want the feeling that they are getting a fair deal.

Until the middle of the 19th century in France and the advent of the department store, as described by Zola in his novel Au Bonheur des Dames, prices weren’t displayed. The norm was to bargain for everything you bought, as in the markets of many developing countries today. In the UK, it was the Quakers who introduced the idea of the fixed price as part of their rule to ensure honesty and fairness in business dealings.

"there has always been a consumer segment that needs a hefty 'deal' before it makes a purchase"

Consumers in Western Europe and in the United States, by challenging the 'normal price' are reverting to type and doing what most other parts of the world have always done. David Roche, the President of Hotels.com said on the programme that there has always been a consumer segment that needs a hefty 'deal' before it makes a purchase. That percentage used to be 20 per cent and it is now above 50 per cent.

So, how should businesses react to this situation, in which there is no such a thing as “the normal price” but more than half the market wants an obvious fair deal?

In some areas of purchase, prices remain fairly constant. Nobody would accept to pay £5 for a box of 100 teabags one day, and £15 for the same teabags the next day, or even £15 one day and £5 the next. They would feel that they were being diddled. Yet we accept the fact that if we buy an economy class airline ticket for Spain four months before a trip we will probably pay £50 and if we wait right up until the last minute we will pay £250 or more. The way in which airlines and hotel companies have introduced revenue management and yield management has accustomed customers to the fact that prices will vary according to the time of year they make the purchase or the date of their holiday.

But other industries cannot use yield management. They have to lower their prices but avoid the perception that they are 'conning' their clients.

Expensive restaurants will do everything to maintain the usual price in a downturn, but the restaurateur will probably offer you a free bottle of wine to go with your meal. If he maintains his prices and doesn’t throw in an obvious gesture of good will, you will feel that he is not giving you a fair deal in a time of recession. This does not apply to places where there is a lot of pass-through traffic and no attempt to keep your loyalty. On a recent trip to Budapest, I saw that many restaurants in the tourist areas were displaying price cuts of 30-40 per cent in their windows.

With regard to the luxury goods industry, even in a downturn everything is done to maintain the price, the perceived integrity of the vendor and the value of the brand. If one customer remembers proudly paying £15,000 for a watch two years ago and meets a friend who paid only £5,000 for the same watch last week, he will feel cheated and vent his wrath on the seller of the item or on his own foolishness, never to visit that shop again. The well-known luxury goods providers will do anything to avoid a drop in price and accept a decrease in sales for quite a long period in the effort to maintain their reputation and the promise of their brand.

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About the author

John Gaynard is a management consultant and associate lecturer with The Open University Business School. He is based in France and tutors on the Creativity, Innovation and Change course in Brussels. He also does some teaching on the Master's programme at the ESIEE School of Engineers in Paris.

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Managerial style

Posted on 03/07/09 by John Gaynard

Blogging about

The Bottom Line

“How brutal do you have to be as a manager?” is a leading question that seems to expect an answer ranging from "slightly brutal” or “only occasionally brutal” to an extreme of “very brutal”. Many young managers, before they learn better, think that brutality has to be a part of the job, probably encouraged in that viewpoint by Alan Sugar in his TV job as the prototypical, patronising dictator on The Apprentice television show. Sugar’s viewers take sadistic pleasure from hearing him bark, “You’re fired!” at his hapless candidates for entrepreneurial stardom.

"brutal managers, who live in a black and white world, usually lack the skill of self-regulation"

The real world of management is very different. Daniel Goleman has argued that the difference between good and bad performance among leaders in the 21st century is down to their 'emotional intelligence', a term which encompasses self-awareness, self-regulation, motivation, empathy and social skills. Brutal managers, who live in a black and white world, usually lack the skill of self-regulation – defined by Goleman as “having integrity, accepting ambiguity and being open to change.”

As we heard on the Bottom Line, one managerial style will not fit all situations. Good managers, with a fairly high degree of emotional intelligence, all adopt "a contingency approach to management," in which their style varies according to the circumstances.

In 1991, Gareth Morgan highlighted the competencies that were then becoming evident for the modern manager, such as being able to read the environment, the ability to manage complexity and what he termed 'contextual competencies' – related to appraising the situation in which you find yourself and doing what is effective in that context.

You do not manage an apprentice in the same way as you manage a very competent and trusted colleague, who has come up with you through the ranks. But there was a strong opinion amongst The Bottom Line panelists that both should be treated with the same respect.

In the UK, at difficult stages of a company’s life it does seems permissible to shout, as long as it doesn’t become a habit and lasts only briefly, for example when a large company has become complacent and it needs to be brutally shaken out of its torpor in order to save it from itself. Such 'barking' should be used with parsimony and never descend to the level of brutality.

In companies that have to move extremely quickly all the time – for example those selling discounted hotel nights over the internet, or empty airline seats, where what is not sold today will never be sold – it also seems acceptable for a manager to raise his voice occasionally, especially when business has to be executed at a certain pace: when “slower than that won’t do”.

Is shouting at a colleague ever acceptable?

But in Japan shouting at a colleague of whatever rank is simply not done. In Japan, all is civility. Quite apart from the Japanese aversion to losing face, or making somebody else lose face, managers and employees know that it pays in the long run to be deferential to their colleagues of whatever level in the company. Companies, like trees, can die.

As explained by John McLaren, when a big change is to be decided, the metaphor of 'root wrapping' is used. Before a tree is moved its roots are wrapped in bamboo matting. The idea of change is carried around the company and its roots wrapped with increasing levels of consensus to protect it. Only when there is total agreement at the lower levels of the company will it be taken to the board. The role of the board is not to reject brutally what has been decided elsewhere, but to rubber stamp what has already been agreed by middle management, who favour a middle-up-down process such as that described by Nonaka & Takeuchi in their 1995 book, The Knowledge-Creating Company.

Boards do not act in the same way in the United Kingdom. But even here, there is also a wish to avoid conflict. If there is latent conflict that could lead to use of brutal language at a board meeting, it will usually be sorted out over dinner or drinks the night before. In fact, the governance of boards may be too 'clubby'. Important and valuable debates can be avoided out of the desire to not annoy people.

However some boards and business owners do seem to encourage brutality in their senior managers, feeling that there are (unproven) advantages from management by fear. These managers may seem to get good short term results – as in the case of Al Dunlap, who made himself a reputation in the 1980s and 1990s as a brutal turnaround artist, but most of the companies he purported to have saved went out of business a few years later; nearly all of the reductions in cost and workforce cuts he had conjured up proved to be value-destroying and ultimately fatal.

"talent has options, talent can walk"

The manager of an enthusiastic, growing company needs all the talent he or she can get, and she knows that even in the midst of the present downturn, as I heard on the programme, “talent has options, talent can walk”. And that is why the style of management recommended in today’s knowledge economy is one where the manager is first among a group of equals, for whom she is responsible but without whose willing cooperation she will not be available to get her job done. Brutality will be a hindrance, not a help in getting that job done.