The valuation of brands and other significant intangibles has been controversial since the 1980s when international businesses started to buy national or regional brands and extend them globally. That process made it clear that some companies had significant assets whose value was not shown in the balance sheet and was not reflected in share prices either.

The value of brands - BA and Virgin airlines.

A number of competing models have been advanced to grapple with the measurement problem. A simple one would be to assess the ‘rent’ that can be earned from a branded good. This asks how much the consumer would pay for a branded good, say a Philips long life light bulb (€8 in my supermarket) as against the supermarket’s own brand (€5). The €3 difference, after adjusting for the retailer’s margin, is the rent. You then multiply this by the expected volume over a forecasting period (say five to ten years) and discount to get a present value.

Another way of getting at it is to look for an independent lamp-manufacturing business within Philips (a cash generating unit in the jargon) and look at its income and expense. Once you have deducted direct costs, depreciation for equipment and cost of capital for the tangible assets involved, whatever margin is left can be considered to be the brand value. As before, this needs to be forecast for a period ahead and discounted to give a capital value.

Both of these are approximations, and assume that what is left after deducting observable inputs to the model can only be the brand, whereas a more sophisticated analysis would suggest that there are a number of other potential contributors to this difference.

Brand valuation models look at the current value of the brand, and approximate what it would cost to buy the brand at that time. However, most elements of company balance sheets reflect the cost of acquiring assets at the time they were bought (i.e. ‘historical cost’), not at their current value (known as ‘fair value’ in accounting).

This causes an inconsistency in accounting because only the brands a company acquires in the market place appear in its balance sheet. A brand the company has itself built up over time is not reflected. Its costs have been expensed as incurred and so there is nothing to put in the balance sheet. You will look in vain for Cadbury or Nestlé in their owners’ balance sheets.

Is this a problem? Arguably this is where analysts earn their money, by pointing out value drivers not visible in the balance sheet. Also the balance sheet is not expected to show the current value of the company’s assets. Standard-setters see it as an inconsistency, but have more important inconsistencies to occupy their minds.

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Professor Peter Walton is a member of the Accounting & Finance Unit at the Open University Business School. His research interests are in comparative international accounting and financial reporting in an international context.

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The term ‘hedge fund’ is a misnomer. It must be, or the number of hedge funds would not have halved in the past two years. If they had been ‘hedged’ against risk, those hedge funds which are now fully or partially closed would still be running other people’s money.

Hedge funds were promoted as the new asset class for institutional and large private investors. Yale University’s endowment funds invested in hedge funds which earned annual returns of over 20 per cent for more than a decade. Why buy equities when they earned less, were more volatile and could crash as in the dot com boom?

So investors piled in. And since institutional investors, in particular, tend to follow the herd, it became difficult not to invest in hedge funds. Such was the demand that traditional fund managers left the sinking ship of conventional equity fund management and started their own hedge funds. The rewards for them were much higher, not only a higher management fee – two per cent a year instead of, say, half a per cent – but also 20 per cent of the upside against a not very challenging benchmark such as the cash interest rate. And investors had to ask permission to get their money back again.

What happens to a hedge when there's a crash?
[image by The_repairman, some rights reserved]

Instead of sticking to borrowing a little and buying equities, many hedge funds chose to borrow a lot (interest rates were very low) and invest in bonds – often linked to the US subprime market. When this market collapsed, hedge funds were asked for more security to back their loans and had to sell equities to cover their commitments. Many have either folded or have refused to return money to shareholders, saying they will just have to wait until – or if – times get better.

It now seems so obvious it was madness to give large sums of money to a few people who said they could reinvent investment returns with no regulatory framework, no published accounts, and no transparency on fees and commissions paid. How could sophisticated banks invest their clients’ money in hedge funds such as that run by Madoff, which had improbably consistent performance figures? It helped that they earned good fees for so doing.

Hedge funds are now one of the main scapegoats for our credit crunch woes. European governments are planning to introduce regulation to stop fraud if not incompetence. But this is closing the stable door after the horse has bolted. When the markets turn up again, these fund managers will reinvent themselves – just watch for the next fashion in fund management!

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Janette Rutterford is Professor of Financial Management at the OU Business School, having previously worked in corporate finance and investment. Jannette's research includes pension funds, equity valuation and investment history, in particular the history of women and wealth.

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The UK economy is going through a tough time and this is affecting many businesses very directly. Several well known businesses have already floundered in recent months, others are reporting a severe drop in business. It is not obvious that the world economy is going to recover very quickly, so we must expect to see more businesses struggling in the coming months, perhaps even years.

Struggling businesses all too often translates directly into job losses. Thousands of people lost their jobs when Woolworth’s closed, many more are being made redundant from struggling car manufacturers. RBS has also announced its intention to lose a large number of jobs as part of its restructuring.

Is it right for companies to make thousands of workers redundant or do they have a duty to protect their employees in difficult economic times? This is actually not an easy question. Business ethics suggests different answers to it, depending on the ethical perspective you take, and also depending on the circumstances in which the company and its employees find themselves.

Employment definition in a dictionary.
[image © copyright Photos.com]

On the one hand, a utilitarian perspective suggests that companies must do what brings the greatest benefit and the least costs for all concerned. This might well mean having to reduce their workforce if this means the company can stay afloat and thus continue to offer employment to the remaining employees.

On the other hand, care ethics suggests that companies have a particular responsibility to those who are dependent on them, which would normally include their employees.

It may not be reasonable to expect companies to keep employing people if there is a serious downturn in business, which is expected to be more than a momentary blip. But if the company is not actually facing closure and particularly if it is a large and profitable company, perhaps it is not unreasonable to expect it to put some thought into how it can help employees threatened by unemployment, so that the transition is eased and they may find other employment more easily.

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Anja Schaefer is a Lecturer in Management at the Open University Business School. She’s been lecturing in marketing and corporate social responsibility for eight years. Anja has published material on consumer behaviour, sustainable consumption and corporate environmental management.

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According to the French anthropologist Claude Levi-Strauss, we cook to show we are civilised. So the rise of the Superchef must say something about how much we value the idea of civilisation. Whether on television, web, books or gadgets, they inspire us to see the preparation and presentation of food not just as a necessary chore, but a potential pleasure and focus for friendship, family life and fun.

Collins English Dictionary’s listing of ‘doing a Delia’ (meaning to cook ‘properly’) demonstrates just how engrained the Superchef has become in contemporary British culture. However much we love take-aways and convenience foods, our fascination with these gastronomic gurus reveals a profound desire to connect with each other via the kitchen.

The link between cooking and our desire to be civilised is not just about throwing chic dinner parties, of course. Food is a deeply political issue, raising all sorts of moral and ethical questions. It’s interesting to note how several celebrity chefs have stepped out of the kitchen and on to the campaign trail to back causes from animal welfare to healthy eating.

Consider Jamie Oliver, whose 2005 efforts on behalf of the nation’s school-dinner eaters (however reluctant some of them might have been!) prompted pledges by the UK Government to invest in the quality of school food. More recently he has campaigned to spread basic cooking skills amongst the population. The better we are at cooking, the more choices we have about what we eat – which must be a good thing if we want to move towards healthier or more sustainable diets.

Food is a deeply political issue, raising all sorts of moral and ethical questions

Campaigning and social marketing (i.e. using marketing techniques to further socially desirable objectives) are important areas of teaching and research at the Open University Business School and our partner organisation the Institute for Social Marketing. I thought it would be instructive in this blog to analyse Jamie Oliver’s work in the light of some of the theory we profess.

For example, the Campaign Diamond (Baguley, 2007) is a simple model which can be used by organisations and individuals to gauge how likely a campaign is to succeed before they commit valuable time and resources to going public with it. The model depicts the ‘space’ available for an effective campaign as dependent on four ‘facets’ of a diamond. A balanced profile across each facet is a good indication that your campaign will fly.

The first facet is the problem underlying the campaign. This has to be something significant you can articulate clearly and unambiguously, or you risk demotivating distortion as the campaign develops. For example, some critics accused Jamie Oliver of selectively stereotyping ‘unhealthy eaters’ in his recent campaign.He’s hit back that he was presenting a balanced snapshot of a the issue of poor diet which affects people from all sorts of backgrounds, and that perhaps his detractors just don’t want to admit it. This kind of single-minded focus on a problem can appear simplistic, but has the long-term benefit of maintaining clarity of message.

Jamie Oliver tasting a cocktail.
[image © copyright BBC]

The second facet is social authorisation. This is to do with judging the zeitgeist relative to a particular issue. Mounting concerns about the future health of the nation because of diets high in fat, salt and sugar (mainstays of the processed food of which the UK is disproportionately fond) have led to public anxiety about nutrition. Social authorisation is essential to a campaign’s credibility with news media and decision makers. The political impact of the school dinners crusade is testimony to Jamie Oliver’s good judgement in this respect.

The third facet is operational capacity. This means the ability to convert the enthusiasm generated by the campaign into action. It’s hardly worth firing people up about an issue if you then can’t give them the opportunity to do something about it. Here Jamie Oliver scores a blinder – harnessing the power of social networking so that those reached by his recent campaign share their cooking skills with others. The internet is a powerful tool in this respect, and has the further advantage of popularity with groups that more staid calls to action might not reach.

The final facet of the diamond is the opportunity for social value. This boils down to how big a difference you think the campaign will make. It helps to be as sure as you can about what a campaign will achieve before you launch it, and to have an evaluation method in place in advance so you can see if and when it’s worked. This is where many worthy initiatives come unstuck.

On the other hand, the precise effect of ventures such as Jamie Oliver’s cooking campaign must be hard to calculate in advance simply because of the potential numbers involved. It may be that the most lasting impact lies beyond the relatively straightforward metrics of participation or media coverage in long-term political effects (witness the Essex Superchef’s influential audience with the Commons Health Select Committee in November 2008).

There’s a lot to be learned from these examples, even for those of us without access to the impressive resources which Jamie Oliver has exploited so imaginatively. Articulating a compelling case, making sure it resonates with people, having systems in place which can convert sympathy into action, and being clear about what you are trying to achieve, are as important to someone campaigning for a new zebra crossing as they are to a Superchef bent on changing the nation’s eating habits.

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Terry O'Sullivan is lecturer in marketing at the Open University Business School. He researches and teaches in the fields of fundraising, marketing communications and non-profit marketing.

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“It is a terrible thing,” said Oscar Wilde, “for a man to find out suddenly that all his life he has been speaking nothing but the truth.” I’m not sure many of our current politicians, bankers or journalists are likely to be troubled by this trauma. After reading the accounts offered in a recent book by David Shulman called From Hire to Liar: The Role of Deception in the Workplace it is unlikely that many of us will have either. Shulman examines the intriguing topic of telling lies in the workplace. While fibs and fabulations are usually frowned upon as activities we ought best to avoid, Shulman’s study reveals deception to be an important glue for holding organizations together.

In socio-speak, Shulman argues that “deceptive behavior [has] an integral and functional role in social interaction”. That is, lying and deception ought not necessarily to be seen as bad or wrong but as an essential component of communication and maintaining social order. We do it because we have to.

Deception in the workplace.

 

Of course when fat-cats and managers lie and cheat in order to deceive their employees, or obtain some personal or corporate gain, we quite rightly condemn them. But on a everyday basis, workers must themselves rely on deception – maybe to dodge work or protect their own nefarious schemes, but more often for good and noble reasons, such as to do their jobs effectively, to avoid unnecessary conflict, to protect the feelings of others, or simply to make the monotony and grind of work easier to endure. Telling white lies is what gets us through the day. Come on, you know you’ve done it (I know I have, but I’m not telling when).

In his book Shulman shows how lying pervades a variety of workplaces, such as real estate management (no surprises there I hear you thinking), private detective work but also more ‘ethical’ occupations such as environmental activism and work in the not-for-profit sector. Throughout Shulman takes a pretty dispassionate view of workplace deception, neither subscribing to conservative views of deceivers as ‘bad apples’ to be stigmatized or ejected from the workplace, nor overtly celebrating workers’ own deceptions as evidence of resistance or subversive radicalism. Of course, he’s not endorsing a relativistic position – we still have to make decisions about what constitutes appropriate behaviour. Nevertheless, he accepts lying for what it is – a necessary part of everyday life. So don’t feel too bad next time you pull a fast one over your boss or workmates, in this regard you’re just like the rest of us – and you might well be doing it for the best of reasons.

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Mark Banks is Reader in Sociology at the Open University. His research interests include the cultural and creative industries, popular culture, cities and urban space.

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The crisis in the financial sector and the rapid descent into recession of the UK economy in the past six months have reinforced the downward momentum in the property market that commenced in 2007.

The focus of the media has been very much on the collapse of prices and of the volume of transactions in the residential market where average house prices are now around 20% below their peak in autumn 2007. But arguably the state of the commercial property market is in an even more parlous state.

The findings of market specialists including the Royal Institute of Chartered Surveyors (RICS) paint a truly grim picture:

• Available commercial, property space is rising at a record level with Central London being the worst spot geographically and retail being the hardest hit business sector – particularly following the high profile demise of a number of high street chains.
• Occupier demand and enquiries are now running at their lowest levels for over 10 years
• Activity across all areas of the commercial property market is in decline and the deepening recession seems set only to accentuate this downward spiral.
• Property owners are having to offer increased incentives to secure lettings

In the good times, pubs borrowed money against their property

But this decline in the commercial property market does not just adversely affect those looking to let property space (whilst benefiting those looking for space).

In the boom years, supermarkets and pub chains became so-called ‘property plays’. In a rising property market, they could make easy profits from selling and then leasing back properties. But in a falling market, their share prices have because of the importance of property in the balance sheet. Particularly, as did the pubs, when they borrowed on the strength of their property portfolios.

Indeed, it is partly the leverage behind the pub chains which has led to 39 pubs closing per week! Both shareholders and the lending banks – and HBOS was a major lender on property development – have got their fingers well and truly burnt.

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Martin Upton is lecturer in finance at the OU Business School. Previously he spent 20 years in treasury management, including 12 years as Treasurer of Nationwide Building Society. Martin's particular interests are financial services, the housing market, financial markets and risk management.

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Negotiation is central to business - but how to do it is where parties disagree.

Psychologists suggest that a good way to start is to first seek out areas where you agree, and to acknowledge these communal values and/or interests; then to address the minor disagreements; before attempting to deal with any more major disagreements.

This allows time for some rapport and trust to be built up and means major disagreements are more likely to be dealt with in a more rational and adult manner than would otherwise be the case. Faced with an extremely recalcitrant opposite number across the table, instinct may be to trade verbal insults, but this risks developing into a vicious and escalating cycle - better to hold fire, take the high road and disarm the other party by giving them something they want.

hold fire, take the high road and disarm the other party

Generous opening gestures can break a deadlock. The story goes that in the very difficult Israeli-Egyptian peace talks between Begin and Sadat in the late 1970s little progress had been made. With 13 days of the two-week process gone, Carter presented autographed photos to Begin, personally addressed to each of Begin’s grandchildren.

Here, as elsewhere, the intrusion of interpersonal concerns into the political area reputedly changed the mood and opened the way to move forward and reach agreement. Negotiations reportedly moved on in earnest only after this personal touch.

Presently, a number of companies are faced with the unpleasant task of balancing books in a time of falling orders. Since staff costs are often a major component of total costs, changes to staffing levels often ensue.

Some companies tell staff they are going to be made redundant at the last minute, perhaps partly in an attempt to minimise any unpleasantness between staff and management, or to prevent staff taking company data with them.

Companies with a more self-organising ethos sometimes present the bottom-line figures to workers and ask them what they wish the company to do to balance the books.

Different divisions may take different paths: some cut hours, others lay-off staff early on with a view to avoiding prolonging the pain, others give staff an extended holiday. At Semco, staff have been allowed to use company premises to get other work.

Whatever the outcome, most staff prefer to be consulted and feel better and more respected if they have been included in the negotiation process.

The more Machiavellian amongst us can try using non-verbal communication to assess the progress of negotiations.

When someone feels attracted to us, or agrees with, and is engaged with, what we are saying, they are more likely to mirror our postures and gestures. For example, they might lean in at a very similar angle and cross arms when we do.

Likewise where they disagree, it is common for people to move away slightly at the time the statement is made.

To assess if another party is feeling sympathetic to your line uncross your legs or straighten your glasses and see if the other person moves something themselves immediately after. If they do popular wisdom has it they are either attracted to you or fairly persuaded by your arguments, that or they have an itch. Or that they have studied non-verbal sales 101 too!

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What’s the difference between trading and investing? Investors have money which they invest; traders have very little capital but borrow in order to invest.

How can this be? The answer is easy. Traders borrow using the security of the securities they are going to buy! How does it work? Well suppose you think Marks & Spencer shares are going to rise in value. You buy them, then immediately pass them to a bank which in return provides cash. You then use this cash to pay for the securities you have just bought! This is called repo (short for ‘sale and repurchase’) and is exactly like secured lending. Everyone is happy. The lender has security in shares to cover the loan, and you have been able to borrow to speculate on shares rising.

But traders are not always bullish. Sometimes they want to bet on shares going down, In this case, the reverse transaction takes place. You sell shares you don’t own – called selling short. You immediately borrow the shares from another institution and hand them the money you’ve received from the share sale. When the price has – you hope – fallen, you buy back the shares at a lower price and close out your position.

Another way of speculating when you don’t have much capital is to use derivatives. These are synthetic securities which can be traded in the same way as shares, but where you only have to pay an initial deposit (margin) which is as little as 1% of the underlying value. If the price goes the way you have bet, then you need put no more money in, just take the profit when you sell the shares. But if the price goes against you, you have to top up the account to cover the losses on a day to day basis. But in general, derivatives allow you to leverage up by factors of 50 or more.

In recent years, hedge funds, who are investors in that they manage a pool of money, saw the profits that could be made through leverage and began to behave like traders. All went well until the credit crunch. But when things go wrong, leveraged traders can be wiped out very easily. The hedge funds run by Madoff used derivatives to enhance return supposedly without taking on too much risk. Yet anyone in the business knew that there is no holy grail. You can make fat profits in the good times only if you take on risk – and that means there is always the chance of going bust.

About the author

Janette Rutterford is Professor of Financial Management at the OU Business School, having previously worked in corporate finance and investment. Jannette's research includes pension funds, equity valuation and investment history, in particular the history of women and wealth.

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January 20th 2009 was a momentous day with the inauguration of Barack Obama as the President of the United States of America. Around the world millions of people watched this historic moment, sadly my home was not one of them.

Don't get me wrong, I had finished my work early, switched off the computer and dashed back home for the historical moment. With my cup of tea I entered our front room only to be confronted by every parent’s nightmare, my son was demanding to watch his favourite children’s television programme ‘Big cook, little cook’, whilst my daughter was demanding that she should be allowed to watch for the umpteenth time ‘High School Musical’ on DVD. In the middle of all of this was my mother-in-law, trying to convince everyone that she should watch her daily drama on Zee TV (an Indian language television channel). Faced with a barrage of ‘I never get to see what I want’ from three people, I made a swift exit to the kitchen to console myself with a packet of biscuits.

Children and a dog watching television.
[Image © copyright Photos.com]

If I had been able to see Barack Obama’s inauguration I would have been spoilt for choice on what television channel to watch. Thanks to the magic of cable TV I could have watched it on BBC 1 as well as the BBC news channel, along with many different news and language channels. That’s the joy of cable television; there are channels dedicated to history, drama, cooking, news, music, ethnic minorities, sports, films and so on. Central to this barrage of choice is Rupert Murdoch and News International Corporation, which through Sky television, led the beginning of Britain’s television revolution.

Rupert Murdoch, however, does not believe the revolution in British television is over. A regular critic of the BBC, which he argues is a subsidised, state funded monolith, he calls for the BBC to be forced to compete as a commercial organisation.

This would mean an end to state funding and potentially the inclusion of advertisements on BBC television channels. Compounding the BBC’s problems has been the growth of differing television channels and the continued growth of DVD sales (High School Music included). What then is the future for British television?

Those fearing an invasion of American television programmes and the demise of home grown television shows need not panic. After a decade or so of questionable television programmes, the future of British television can be encapsulated in one show: Dr Who. When it was launched five years ago it was BBC Wales, a regional outpost of the BBC, which undertook what it described as the biggest gamble in its history.

Derided in the 1980s as old fashioned, Dr Who had been off British televisions for nearly twenty years. The result? Four series later, Dr Who regularly pulls in audiences of 10 million viewers and often accounts for over 70% of British television viewers when aired. The moral of this story? People will continue to watch and want high quality television that offers family appeal. To parody Barack Obama (who parodied Bob the Builder) can quality British television survive? Yes it can!

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There are several things a business can do in a recession to protect the bottom line, although some may have negative consequences for the long term. The first issue is, are you are aiming to down-size or are you looking for temporary measures that will help while you wait for sales to pick up again?

If you are down-sizing, then think – like GE - about what parts of the business you could most easily sell or close down, and what parts of the business you want to keep for the long haul. If the business is large enough, you may have loss-making divisions: these should be moth-balled at once.

If you are trying to maintain capacity, you need to look at discretionary costs that are not essential to stay in business. These are things like advertising, research and development, staff training, long term maintenance which are important in the long term but can be suspended temporarily.

Cutting advertising is potentially dangerous but, if customers are sitting on their hands because of the recession, this should be looked at. Cutting research and development will have long term consequences for the evolution of the business, but much of the expenditure, including the launch or trial of new products goes straight through to the bottom line. You should ask yourself if it could be deferred.

A cash conserving tactic is to defer routine capital expenditure. Supposing your policy is to renew your computers every three years, you could keep them longer. This keeps cash in the company and may also benefit the bottom line if they are already fully depreciated.

Finally, a delicate question is what you do with your staff. Loyalty and quality of service from staff is not helped by making them redundant! One possibility is to suggest they go on to a three- or four-day week, or take three months off, as have the Financial Times and KPMG in recent weeks. It is difficult and expensive to rehire staff when – and if - the boom times return.

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Professor Peter Walton is a member of the Accounting & Finance Unit at the Open University Business School. His research interests are in comparative international accounting and financial reporting in an international context.

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In times of crisis decisions become critical. What is the best strategy to deal with the bottom line to cut costs, examine the options carefully or act on your gut feel? Many managers, such as Toni of the Toni and Guy hairdressing business, rely heavily on intuition - and for good reason.

Experiments show that we implicitly understand complex, uncertain and novel situations long before we can explicitly articulate why this is so. And intuitively-based judgement is able to take account of much more information than conventional approaches. Researchers have found that a higher proportion of people are happier after making a gut decision than when explicitly weighing the pros and cons.

In contrast, in situations where the expertise needed to make an investment decision is spread across a number of different people or organisations, a more deliberate form of decision making is needed. In such situations, the rationale for different aspects of the case needs to be made explicit and brought together for the decision maker to weigh it up in a more considered fashion. In many large scale innovative projects it is often very hard to determine in advance which development project will pay off and it is important to be seen acting fairly, to keep stakeholders who favour an alternative project on side.

Crises also bring opportunity, the demise of one era leaving space to create something different. In a crisis, we may well be more open to new approaches than in the good times. For example, the environmentally conscious have been calling for investment in renewables for some time, but it is only now that various governments are prepared to invest large sums, for example, in insulating and upgrading our ageing housing stock. Now is a very good time for most of us to listen to our gut. It may know something we don't!

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Jane Henry is an applied psychologist. She chairs the Open University Business School Creativity, Innovation and Change programme.

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Among all of the changes in the publishing industry at the moment, one of the most salient for me as an academic writer and a teacher is the notion of e-books. It seems like the next logical step for technology, and it’s been on the horizon for well over a decade now. Interestingly, the longer we go without a viable e-book technology, it seems like an odd sort of confirmation that it’s beyond our capabilities to produce such a beast.

“Don’t worry,” some of my colleagues confidently tell me. “We’ll never give up our books.” And yet while e-books aren’t quite the everyday piece of technology that our mobile phones and laptops have become, they’re slowly starting to filter into the edges of the consumer landscape.

Old books.
[Image © copyright Photos.com]

In the US, for example, Amazon released its popular Kindle electronic book almost two years ago (and it’s still only available there). It’s been so popular that it’s been backordered ever since. Perhaps most importantly, the company was able to garner endorsements from die-hard book traditionalists: Pulitzer Prize and Nobel Prize-winning author Toni Morrison, for example. Though the company won’t report details about its sales, various estimates peg the number of Kindles sold at around a quarter of a million. The fact that Amazon offers over 200,000 book titles for the device and free wireless access to its site over a proprietary mobile data network may have something to do with its initial success. Just this week, in fact, Amazon has announced a new version of the device. As is often the case with new iterations of technology gadgets, it is thinner, lighter, faster, and has a better screen and longer battery life than its predecessor.

The promise of the e-book is so tempting: it can hold several hundred titles in a package that, at 300 grams, is lighter and more convenient to carry than the average paperback title. Imagine an entire library in your briefcase or rucksack, and the ability to quickly and easily download a new title whenever you want it. What about for students? The notion of putting all the reading materials that a student might need for a course onto a single device is tempting for me as a teacher.

No worries about further expensive books, or problems with distribution of materials. And for a student, it could be a single easy-to-carry volume with all the study materials they might need. Finally, the economics of an electronic book are hard to dispute: they’re cheaper to produce and distribute, and they use far fewer resources to put the content into users’ hands.

But the Kindle, and other e-book technologies like the iLiad, which is growing in popularity in Continental Europe as a platform for newspaper subscriptions, have yet to match the tactile and visual joy of a traditional book. I never have to charge a book, or worry about its files getting corrupted. Even when I rest a cup of tea on the pages of a book, the resulting brown rings end up making it comforting and familiar, rather than the cause for a trip to the helpdesk.

the economics of an electronic book are hard to dispute: they’re cheaper to produce and distribute

And as the ever growing world of digital media struggles with rights issues, e-book devices have to take care of those rights too. Rights notwithstanding, I get a tremendous amount of joy from loaning a well-read book to a friend to enjoy. How can I do that with an e-book? What about libraries? Can we have e-book libraries? If not, how can we imagine life without that fantastic system of the collective acquisition of books for sharing knowledge with our communities?

Unlike some of my colleagues, I’m fairly certain that these issues will be negotiated and that e-books will come into the mainstream relatively soon. In a generation, I expect that e-books will become the norm, especially in education. But books, that 400-year-old technology that we have grown to love, and that often have pride of place in our homes, will not become redundant relics of years gone by. On the contrary: like many other technologies have shown, books will co-exist with their e-counterparts, and we will have the best of both worlds!

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• Has Sony killed the book as we know it?
• The world according to Google
• Statistics and the media

About the author

Gabriel Reedy is a lecturer in learning and teaching innovation in The Open University Business School. His research focuses on the social and cultural impacts of teaching and learning technologies, and he studies how technology can support professional learning.

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Dr Brian D Smith looks at what a market is and why it matters.

Amid all the gloomy stories of lay-offs and losses, it’s hard to find any positive news. Some stories stand out not because they are good or bad, but because they are counter-intuitive, not what you would expect in the current conditions. For example, Harley Davidson has just received a cash injection from Warren Buffet, by many counts the world’s richest man, often known as the “Sage of Omaha”. Now Buffet didn’t get his nickname or his wealth from throwing money at lost causes and one might expect gas-guzzling Harleys to suffer the same fates as SUVs and other big cars, so what’s going on here? And how does management theory throw light on the situation?

Harley Davidson
[image by Eduardo Mueses, some rights reserved]

It turns out that the answer lies in how we choose to define markets. In common parlance, we might talk about the motorbike market, or the holiday market or whatever but this, it turns out, is a handy but misleading shorthand. In a seminal paper almost 50 years ago, Ted Levitt pointed to the fact that we confuse markets with products. Motorbikes and holidays are products by his definition. Markets, on the other hand, are groups of people trying to satisfy a need. Motorbikes are a way of satisfying the transport market, for example, and holidays are way of meeting the relaxation market’s needs.

When I first read this, my healthy Geordie scepticism crept in and I saw it as academic semantics. It wasn’t until years later, when I ran a marketing department, that it dawned on me how useful Levitt’s ideas were, how needs-based definitions of markets help us to explain the competition and why some firms succeed and others don’t. For example, I once advised a large regional development agency on how to grow the embryonic science park they had next to their new University. Situated in the affluent South-East of England, they struggled against heavily subsidised competitors in Eastern Europe and even Northern England. They couldn’t uproot and move to some deprived, de-industrialising region, so what could they do?

The answer lay in market definition. Their rivals were selling space and labour but my client couldn’t compete in either of those markets. But it did have a great University, several world leading research centres and, as a result, the highest concentration of PhDs (in a certain field) in the world. They weren’t in the labour or space market, they were in the knowledge market. This insight made a huge difference to which firms they targeted, how they designed their offer and who they competed against. I’m proud to say that they are now thriving.

It’s market definition that helps explain why Buffet invested in Harley Davidson. They’re not in the ailing motorcycle market, they’re in the “big boys’ toys” market which, whilst not immune to the credit crunch, has much better long term prospects than thirsty bikes. And market definition can have big implications for most other firms too. For example, the market for video recording is actually about “enabling viewing management”, hence the impact of Sky + and other on-demand services. In almost every market, defining the market as customers with needs, not products to be sold, helps firms to understand what they have to do.

Don’t take my word for it; try it for the organisation you work for. What market is it in, if you think of customer needs rather than products? How does that definition help explain what’s happening in the market and who is competing with you? If you’re clever about it, market definition might just help you see your way out of the credit crunch.

Find out more

‘Marketing Myopia’ by Ted Levitt
published in Harvard Business Review, 38, 45-56

Marketing in practice

About the author

Dr Brian D Smith is a Visiting Research Fellow in The Open University’s Marketing and Strategy Research Unit. He is the author of over 100 books and articles and runs PragMedic, a specialist strategy consultancy.

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Blogging about

Money Programme

Get the facts behind the big business and finance stories from around the world – and down your street, in The Money Programme.

A journalist-turned-economist wonders if network economics has overturned journalism. Google’s chief executive, Eric Schmidt, seems an unlikely defender of newsprint. His company has spearheaded the conversion of news into a free online resource, while also capturing a large share of the advertising on which traditional media depend to keep down their cover prices.

But Schmidt says newspapers’ disappearance would be a “real tragedy”, and his company is exploring ways to form partnerships to shore up their revenue. Google gladly attacks the revenue streams of academic publishers, telecoms and TV broadcasters. So why the worry about flattening Fleet Street?

Newspaper circulations were showing signs of decline before the arrival of the search engine, but their problems have escalated since. Easy access to ‘free’ news blunts people’s appetite to buy the printout, and reader loyalty is harder to build with rival titles just one click away.

Newsstand
[Image © copyright,
Photos.com]

Going online has in many cases boosted the number of readers, while accelerating the loss of subscribers – widening exposure for those who spin the words, but ultimately erasing the return on investment for those who own the keyboard.

The instant availability of news, from reliable sources at no cost, looks like a triumph for the freedom of information - complementing the rise of ‘freeware’ as an alternative to expensive proprietary software. But providers of free online news and digital archives are getting genuinely worried about their impact on the paper-based article. They’ve realised that news is a ‘public good’ in its economic, as well as its literal sense.

Once information exists, society benefits by making it available to everyone. Yet if this stops news gatherers recovering the costs of assembling and checking the information, they’ll cease to do so. Free online channels, and the search engines that retransmit them, might find that they’ve killed the media goose by relaying the golden eggs.

Opinion palls

The legendary Guardian editor CP Scott famously observed in 1921 that ‘Comment is free, but facts are sacred.” The downside is that facts are also expensive. Because the same breaking news travels quickly down all wires, newspapers distinguish themselves by the quality and quirkiness of their analysis and interpretation.

But the centrefold opinion pieces can go bizarrely off-beam if the front-page facts they pick up are not accurate. If the costs (and insurance premiums) of sending correspondents to the front line keep rising, while the revenue from selling their stories is driven down, an ever taller tower of free comment will be built on an ever less solid reporting foundation.

In the past, newswire errors with global repercussions – such as the Chinese re-attribution of an 80s heart attack from skiffle king Lonnie Donegan to president Ronald Reagan – were rare enough to make headlines in themselves. Newspapers’ nightmare scenario is that, with commercial pressure shifting resources from costly news to free comment, such misapprehensions could become commonplace and increasingly unnoticed.
Substituting blogs for professional journalists’ reports, and mobile footage for a camera crew’s, can make for further-flung and faster-delivered as well as cheaper coverage.

But it isn’t clear that these new, subject-generated news sources are as accurate or objective as the old professionally mediated ones. If the old don’t survive, there will be no way to check. Even where professional journalists are retained, and not drawn into the blogosphere, their dwindling numbers reduce the scope for monitoring colleagues’ fact-finds, or countering the spin applied by organizations and politicians increasingly skilled at squeezing self-penned news through the Fourth Estate’s unguarded gates.

Restoring the public good?

titles are coming under pressure as falling revenue meets rising print and distribution costs

With other costly-to-produce but freely accessible resources, like roads and policing, the ‘public goods problem’ is solved by having governments pay for provision. But democracies have long rejected state-sponsored news media, regarding the BBC as an exception and Soviet-era Pravda as the truth-twisting rule. Public agencies are trusted to build communication channels – including the internet – but not to sponsor or supply the messages that flow down them.

Private, profitmaking news media are rarely free of bias, and some of the best-read newspapers disappeared because their literate but low-paid readers weren’t the type the sponsors valued. Against this, media historians like the economist James T Hamilton have shown that newspapers’ coverage broadened, and grew less partisan, when the need for advertisers forced them to seek a wider audience. And private lossmaking media may have an even worse impact.

The problem, as Google’s Schmidt confessed recently to Fortune magazine, is that the new channels now swiping papers’ subscribers and advertisers have no way to put the genie back in the news-stand. “Google can’t make the cost of newsprint go down. We also can’t materially change the way consumers behave… We have a mechanism that enhances online subscriptions, but part of the reason it doesn’t take off is that in the culture of the Internet, information wants to be free.”

After decades of investment in reputations and brand-names, the big newspapers still have a significant hold over electronic news flow. They might solve the cashflow problem if, OPEC-like, all agreed to start charging for stories that currently circulate freely. But coordinating such a move is near-impossible. And if achieved, it would soon be undermined by new channels conveying similar items free of charge.

So some of the best known titles are coming under pressure as falling revenue meets rising print and distribution costs. America’s Christian Science Monitor is ending its print edition, while Britain’s The Independent is forced into a resource-sharing arrangement with the rival Mail. The New York Times’ abandonment of charges for its op ed pages means only the financial press still dares to charge for online access.

But even the Financial Times is downsizing in line with its deflating subject matter, and other broadsheets are unable to adopt the tabloids’ shape without suspicion of a matching diminution of content.

At least that’s one upside from the credit crunch. It used to be feared that the wealthy investor class would continue to get an accurate picture of the world through their paid-for pink pages, while the rest had to settle for an ever more diminished and distorted view via station-platform freebies.

Now it’s clear that those who paid twice the price for their news feed, plus an expensive Bloomberg screen, were no better financially informed than the average Metro reader. Perhaps we’re all being made to pay for that free information.

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Alan Shipman is lecturer in economics at the Open University, and a former financial journalist. His books include The Globalization Myth, The Market Revolution, and Transcending Transaction. He is involved in OU's new courses on personal finance, and research on insurance pools, 'chaos pricing' and Eastern Europe.

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