A business situation.
[image © copyright Photos.com]

One effect of the global recession is that employees are being asked to work short-time or take unpaid leave, rather than being made redundant. Recent examples from the UK include Honda and British Airways, among others.

The management of companies who undertake this response justify their actions on the basis that they cut their workforce too deeply in the last recession, thereby constraining their ability to exploit the following upturn, when it occurred. This strategy is expressed in terms of being a win-win situation: management cuts costs and employees get to keep their jobs.

It is being reported in fairly uncritical terms, like much of the media coverage of the corporate sector which had tended to lionise the masters and mistresses of its universe before the financial and economic crisis. It could be claimed that this helped create an environment in which "business as usual" (despite a broken model) can be resumed in the upturn. Interviewing a few "business leaders"  appears to conform to the philosopher Betrand Russell’s epigram “personal experience is a bad basis for science” and does not greatly contribute to a public understanding of and education in complex business and management issues.

The key question is, whether this short-term response is the basis of a sustainable strategy and whether this is sector-specific or a general solution to the challenge of controlling employment costs.

At the aggregate level of the economy, this is not sustainable as lower incomes lead to lower demand, lower output and slower growth. At the level of the individual company, there are some more fundamental issues at play, particularly for managers in British-owned companies. Underlying this key question is a number of subsidiary ones:

• How does senior management stay in touch with its workforce, particularly in the threatening environment of a recession?

• Faced with the prospect of short-time working and unpaid leave, have the workers been asked what they think?

• Is consultation with the workforce a didactic (“we’ve told you what we are going to do, so you have been consulted”) or an interactive process?

People in the workplace.
[image © copyright Photos.com]

Talking to the staff appears to be an obvious thing to do but, in the absence of formal procedures and channels in which real dialogue takes place, one has to take management’s word for it that their talking is effective. Organisations that are smart at working are far more likely to be productive and sustainable, as the recent Chartered Institute of Personnel and Development (CIPD) report, Smart working: The impact of work organisation and job design, demonstrates. Among its conclusions is that process and management innovation are key components of productivity improvements. Yet, as numerous studies over many years have shown, there is a UK productivity problem. British-owned firms are less productive than foreign-owned ones operating in the UK.

One conclusion is that non-UK owned firms work smarter and view their workforces as a key asset and not a cost liability. Another is that the relationship that Masters and Mistresses of the Corporate Universe have with mere mortals may need to be changed or even reversed. If there is such a thing as the knowledge economy, this appears to be the bottom line for a restructured business world that is less volatile and sustainable in the longer term.

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About the author

Leslie Budd is Reader in social enterprise at The Open University Business School. He is an economist and has written extensively on the relationship between regional and urban economics, and international financial markets.

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If there’s one constant in these turbulent times, it’s change. The huge shifts in political, economic and social factors that strategists call the “remote environment” are changing the behaviour of customers and competitors, the so-called “task environment”.

To survive, companies have to adapt to their new conditions. People like me study how some do and why some don’t, so we can help companies survive in the business equivalent of the great extinctions that led to the demise of the dinosaurs.

Two recent and contrasting news stories illustrate both the need for change and the barriers to it. British Airways, along with most of its rivals, has reported an 8.2% drop in passengers and an operating loss of £150m. The main cause of this is a decrease in the profitable long-haul, premium customers in business class. As I know from the firms I work with, many executives are now discouraged from travelling unless really necessary and, when they do, have to fly economy. Worse still for the airlines, this doesn’t look like a short-term market blip but a permanent shift in customer behaviour.

BA planes. [image by Matt Hintsa, some rights reserved]

This compares with Intel, the big chip-maker. It too has suffered from the economic conditions, reporting a huge reduction in profits and announcing the closure of 5 plants as both firms and individuals buy fewer computers. Unlike BA, however, Intel is showing some signs of adapting to the future by looking for new markets. One example is its recently announced tie-up with General Electric’s medical division. Together, they plan to create new technology that will reduce healthcare costs by allowing doctors to monitor and diagnose patients remotely.

Since most healthcare spending is on patients with chronic (that is, serious, long term but not life-threatening) conditions who are at home, this looks like a business opportunity that will only grow and be relatively immune to market conditions.

BA and Intel, both global businesses staffed by bright people, seem to have very different abilities when it comes to adapting to the market. In the jargon of academics, they exhibit different adaptive capacities. Why  is this so complicated and interesting? Simply put, adaptive capacity is a combination of obvious practicalities and less obvious embedded habits.

For instance, BA’s primary assets are its planes, routes, airport slots and brand. Intel has some of these “fixed assets” of course but it’s really a “knowledge-based” company. Its biggest asset resides in the kilo or so of grey mushy cells that sits between the ears of its employees. In practice, this means that, whilst Intel can switch where to apply its assets relatively easily (from one area of computing to another in this case). It’s much harder for BA. To attack a new market, they would need to scrap or adapt planes, sell slots and routes and reposition the brand, all of which is difficult and expensive. And those are just the obvious difficulties.

A computer chip. [image courtesy of Intel]

Adaptive capacity is also the result of organisational culture, the embedded habits of the whole company. Intel, for example, is committed to technical excellence but cares less about where it applies that excellence. BA’s culture is all about a premium service, especially on long-haul. This shows in everything it does and would be difficult to change.

Academics have studied the idea of adaptive capacity for many years. They identify as important things like having time to think about change and the ability to make sense of the market. However, as even the best companies find, the complex mix of fixed assets and organisational culture make changing to fit the market a very difficult challenge.

Further reading

BA to Miss 2008 Revenue Targets 

Intel works with GE on healthcare

Formulating adaptive marketing strategies in a global industry, an article by Tung-lung Chan in the June 1995 issue of International Marketing Review.

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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In the first blog in this series I discussed the lamentable failure of Europe and the UK to develop start-up companies into large gorilla-sized organisations similar to American companies such as Microsoft, Intel, Apple, Oracle and Google. Apart from a few recent exceptions, such as Vodafone, Nokia and SAP, Europe and the UK have lagged far behind. A number of plausible reasons why UK and European technology companies have failed to become world-beaters on the same scale as their US counterparts have been forwarded and include:

• A lack of appropriate funding and tax arrangements
• The absence of a large homogeneous home market
• An inability to bring products rapidly to market
• A lack of entrepreneurial culture and spirit

Doug Richard.

The current UK scenario, however, is not all doom and doom as the Cambridge University technology cluster, famously known as Silicon Fen, starts to come of age after thirty years of development. According to Doug Richard, founder and chairman of Library House and former judge on Dragon’s Den:

“The Cambridge cluster has just tipped over and a period of explosive growth is ahead. It manages to attract a very large quantity of capital without variation”. 

Cambridge has already spawned a number of successful £1bn companies such as Arm, Autonomy and CSR radio. So do we have a Silicon Valley in the making or is this simply California dreaming? If Silicon Fen is to provide a lead role in nurturing the next generation of “gorillas” there are still a number of obstacles in its way. For example:

• There is a tendency for early stage entrepreneurs to exit their businesses through trade sales rather than undertaking a public flotation (this usually means selling-out to a larger US firm). According to Walter Herriot, head of St. John’s Innovation Centre in Cambridge: “If too many Cambridge companies are acquired by foreign companies the people and the intellectual property will disappear”.
• There is a tendency for European venture capital groups to invest smaller sums than their US rivals. The differential can  sometimes be as high as 50%.
• There is a failure of leading UK companies to invest in entrepreneurial start-ups. Cisco invests in start-up companies which benefit from the funding they receive whilst Cisco gains access to cutting-edge research.
• There has been a failure on the part of European stock exchanges to attract young companies. Neither the LSE nor AIM are considered to be as attractive as the Nasdaq where new listings are able to achieve higher valuations.

Another way of interpreting the superior growth trajectory of US start-up companies is the American business culture itself. Europeans do not lack technical expertise (and Silicon Fen is living proof of this) but does Europe have the same level of ambition and attitude to risk as the USA? According to David Wither, CEO and founder of UK technology company Sarantel:

“In the US, you know from the start you are on your own. Nobody is going to look after you – there is no healthcare or safety net. It breeds a competitiveness, which is part of the culture.” 

It might also be said that UK and European entrepreneurs are acting wisely by avoiding head-on competition with major organisations by adopting niche and complementary strategies, thereby avoiding conflict with larger rivals. This was a lesson that was learned by the pioneering UK personal computer companies such as Acorn, Sinclair and Apricot. Another interpretation is that by selling out early UK entrepreneurs are behaving in a totally rational manner. True serial entrepreneurs are good at starting and growing businesses but not well equipped to professionally manage them, so their early departure is not such a bad thing after all.

The problem is that they are not being acquired by other UK or European companies or as Walter Herriot, head of St. John’s Innovation Centre in Cambridge once commented: “I am slightly concerned that we are selling off the family silver”.

So should Europe be written off as a promising location for technology companies and is Silicon Fen really on hold until key obstacles are removed from the equation? 

Further reading

• 'Fen tries to be a valley' by Maija Pesola in the Financial Times on 16th Feb 2005
• 'The fertile soil of Silicon Fen' by Maija Pesola in the Financial Times on 9th Feb 2005
• 'Why progress requires ambition and risk' by Alan Cane in the Financial Times on 11th Feb 2005

About the author

Nigel Walton is an associate lecturer for the Open University and the University of Worcester, specialising in strategy, entrepreneurship and international marketing. He previously worked as a management consultant, primarily advising medium-sized companies with growth problems.

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