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Archive July to September 2011



The impact of minimum pricing on alcohol

August 31


The Scottish government announced that it wants to introduce minimum prices on alcohol with the aim to reduce excessive drunkenness. Health groups believe that minimum prices on, for example, beer would reduce binge-drinking, and thus reduce a major health problem in Scotland (and other countries with long winter nights). Let's leave the health implications to the pertinent experts; how about the complaints by the drinks industry and retailers that they would suffer from this policy? I find most of their arguments flawed. A fundamental problem with statements from industry associations is that they focus on the impact on their weakest members - while those set to gain remain unmentioned. So what is the likely impact of minimum prices?


Minimum prices are a distortion of the market that reduces the premium of premium-brands over mass-market brands, and (like on labour markets) those offering quality below what buyers expect at the minimum price cannot sell their produce; markets don't "clear". This suggests that the negative effects will affect some industry players and not others, and some drinkers but not others.

  • The Scottish Whisky Association complains about the purported impact on their sales. Yet, for all I know, Scottish Whisky is competing in the premium segment, as are locally brewed beers. If the price difference is reduced, these premium brand producers should if anything see an increase in sales because of the reduced relative attractiveness of cheaper brands.

  • Cheap beers are likely to see reduced demand - that's basically supermarket own brands, and other mass produced beers - but (normally) not wine and whisky.

  • Retailers will no longer be able to offer special offers. This reduces their marketing strategies of attracting youngsters with special offers of cheap beer - Thus the ASDAs and Aldis of Scotland may suffer. Yet, this may actually be in the interest of brand manufacturers because they usually don't like their brand being sold "too cheap" because it harms their brand image. 

  • The Scottish Whisky Association also complains about the possible negative indirect impact on their exports because other countries might introduce similar legislation, and that would harm Scottish exports (alcoholic beverages account for a large share of Scottish exports). For example, Russia recently tightened up it regulation of the sales of alcoholic beverages by raising taxes and limiting sales form small kiosks and the like, which affected mainly less expensive beverages produced locally (Carlsberg, the market leader of locally produced beer in Russia thus suffered a substantial drop in its share price). However, the impact on imported beverages - who compete in the premium segment - is minimal. As the UK drinks industry is generally positioned in premium segments - Whisky rather than beer - I don't see why they would suffer substantially. In fact, they should gain relative to local producers.

  • Finally, it is claimed that the policy affects mainly poorer people, and young people: Middle class citizens will continue to sip their wine or whisky, while working class folks end up paying more for their pint in the pub. This seems to be true. But then, binge drinking is also a working class phenomenon, and young people shouldn't really be partying with too much alcohol anyway (and certainly not when under age). 

A completely different issue is whether this policy would be judged as anti-competitive by the EU competition authorities. This could be the case if it was found to favour local producers over foreign producers. The drinks industry claims that local industry would suffer, which suggests the opposite, while they simultaneously emphasizing the supposed illegality. This is rather contradictory.


In conclusion, while lobbyists enjoy the limelight, most of what they say is internally inconsistent, and thus best ignored - unless your are a mass producer of cheap booze, or a supermarket using special offers on beer to attract customers. 

  • Lucas, L. & Bolger, A., 2011, Scots renew drive for minimum price on alcohol, Financial Times, August 31, page 2.



Trying to discontinue a broadband subscription

August 30


I am blogging this as I am put on hold by my broadband service provider. They have a fancy website with lots of options to subscribe to additional services, but nowhere does it state where to cancel the service. There is only on 0845 phone number (which is an extra-expensive number where the service provider charges callers by the minute) - which after 2 minutes takes you to on one person, who turns out not to be in charge, and then another wait ... to another person who asks all my details and then passes me on to another person, who asks all the same details again ... and 12 minutes after picking up the phone I finally being told than my service is being cancelled (not without several attempts of selling me new services along the way).


As I was hanging on the phone with nothing else to do, I was thinking about the service I have had from the over the years. The broadband worked alright, no complaints, but the fees went up several times - First, I wasn't given the introductory offer that had been advertised at the time - but the difference was too small to bother complaining. Some time later, they increased the fee unless I switched to paperless billing; and although I did that the fee was still 2.50 higher than before. And, I ended up not seeing the bill because it went an e-mail the broadband provider had set up, but which I never used and had long forgotten the password to. Meanwhile about twice a month, I received advertising through the letter box advertising yet more services.


Why do service providers like telecoms and utilities (and banks aren't much better) treat their customer like that? If it was truly a competitive industry, they'd be providing service customers want - easy to use customer service and no spam mail in electronic or paper form! But switching costs are high, alternatives are few in a de facto oligopolistic industry, and consumer associations are weak in the UK, so companies push their luck... I am tempted to say, "never again Virgin Broadband" - but then I suspect the others won't be any better either.



Limits to outsourcing!

July 30


Last week I had an experience that many consumers are familiar with: you call up a company you have been doing business with to get something done, and the person you end up talking to (after first answering half a dozen questions from a computer) seems to have no idea about you and what discussions you've had with the company in the past. There seems to be no continuity of staff, and people in different parts of the organization don't seem to know what the other units are doing. The underlying issue is, of course, that some of the people you talk to are contracted to do specific bits, and indeed don't know more than the specifics of what they are contracted to do - and what they see on the computer in front of them. 


In business, it's called outsourcing, and some seem to think it is the magic bullet to lower costs. However, as The Economist out it this week: "Service companies, for example, contract out customer complaints to foreign call centres and then wonder why their customers hate them". In the case of my phone call this week, indeed, the lady spoke with a strong accent and seemed to have a problem understanding why I was unhappy with the handling of a request I had put in a phone call three days earlier. I'll just be gradually downsizing my business with this particular bank...


In another case, I have long running arguments with a publisher where things seem to get lost. While my main contact person stays the same, specific tasks seem to be routinely contracted out to individuals or small firms - some in the UK, other in India or the Philippines. This results in people doing specific tasks having no idea of the project as a whole, or of issues that had been discussed and agreed ages ago. As an author, I end up spending a lot of time chasing avoidable mistakes ... it might save the publisher money, but costs me a lot of time.


The biggest issue is that braking up a work process, especially in service industries, into small bits that can then be outsourced can result in a lack of coherence of the entire process, lack of continuity over time, and in very unpleasant customer (or business partner) experiences - and extra costs in fixing what went wrong. Big service companies that lock customers into (de facto) long term contracts, or industries where all major players agree that lousy service is acceptable, often get away with that. In truly competitive industries, I would quickly sell my shares when I experience lousy customer service, because customers won't be hanging around for long.

  • The Economist (2011): Schumpeter: The trouble with outsourcing, July 30th.



Downward Spiral? UK Loosing Equality of Opportunity

July 29


As governments across Europe are fighting their budget deficits in the aftermath of the financial crash of 2008/09, a major concern is that the cuts mainly hit is relatively least well-off in the society. This is a particular concern in the UK where, more than elsewhere, the government is committed not to raise taxes, and cutting across the board government services (including local government services) that many of the poorest depend on. The government is concerned that some of the richest taxpayers might leave and for low-tax "havens" - but what are the consequences if basic social services such as family support, state schools or local libraries are reduced? 


I have repeatedly written about the importance of investing in education, as a foundation for future property, and for earning the incomes that would allow to sustain the current living standards in a competitive world. But there is also a social implication that is possibly even bigger. It is important for the coherence of a modern society that, even if not every one can be rich, at least there is something approaching "equality of opportunity" - that is even if you are poor, society provides with opportunities to reach leading roles in business, academia, professions, government etc.


In this context, I found some shocking evidence for the UK in an unlikely source: The Alumni Newsletter of London Business School. I had heard before that in many professions, such as journalism or law, the chances for people from non-privileged background are worse today then they were in the 1950s. However, now I see concrete data. For example, at Oxford University "in the late 1960s, two-thirds of the student body were from state schools, including direct-grant schools. By 1997 it was down to 46%". This is reflected in this Alumni's personal experience: "When I was there, we had a lot of kids from South Wales who were brilliant and who have done extremely well ... [today they have] not one in ten years. They are not applying and when they do they're not of the right standard." The underlying issue is that in the UK primary and secondary education has become more segregated over time as fees for the better schools went up, while state schools in many parts of the country are suffering from lack of funds. Hence, how much you parent earn and invest in your education determines your chances of getting into a good university. To some degree that is unavoidable, but nowhere in Europe this discrepancy is so big as in the UK.


The LBS Alumni article focuses on one Alumni, Sir Peter Lampl, who has succeeded of rising from South Wales to business leadership, and now set himself the goal to reverse the trend, mainly through a charity that gives scholarships and special training to talented youngsters. Such philanthropy increasingly fills important gaps in British society (as it has in the US for a long time), and with government policy needs for philanthropic help will be increasing sharply. But can philanthropy make up for the gaps in the state educational system? Shouldn't all youngster enjoy the opportunities of education? Shouldn't society invest in its own future by investing in all young people?

  • London Business School Alumni News (no. 126, 2011) "Fighting Disadvantage", p. 28-29.


Can Engineers really become Entrepreneurs?

July 20


A few weeks ago, Lord Alan Sugar dismissed one of the candidates of BBC show "The Apprentice" with very disparaging remarks about engineers, seemingly suggesting that an engineering education and running a business just wouldn't match. That ruffled a few feathers amongst some of my friends. To be fair, teaching business to engineering students is not popular among business school lecturers (though less in Bath than in my previous places of work): It requires a very different way of thinking: In engineering classes, students learn a strictly logical, mathematical way of analysis - and there is normally only one correct answer. In business, decision makers have to deal with a lot of information, and a lot of uncertainty, and consequently it is all about managing this information overflow, and making decision under uncertainty without being sure what exactly the outcome will be.


Yet, while engineering students are very different from business students, there are actually a lot of engineers that eventually turn into successful business persons. Lord Sugar came around the acknowledging the entrepreneurial spirit of an engineering-trained inventor when he announced the winner of this years' The Apprentice: Tom Pellereau. In Bath, this was reason to celebrate as he holds a MechEng degree from the University of Bath.


However, engineers becoming entrepreneurs is actually far from unusual, even in England. For a recent research project, we interviewed a number of entrepreneurs who had set up their own business in high tech activities such as semiconductor design, cancer drugs, or micro-energy generation. Their businesses are highly specialized (as you would expect for a start-up) but they have global ambitions - and if they succeed they will contribute to the economy beyond their personal interests. As it turned out, all of the key people were either engineers or pharmacists by training.


However, they did not come straight out of university: they build their competences in a distinguished career, often combining large corporate and small biz experience. They have been working in their industry, and through the global linkages in the industry, they also build a lot of international experience, and they have been moving from pure technology roles to more commercial roles such as sales. Hence, for the entrepreneurs in our study, it was the combination of engineering training with experience in the industry, in commercial roles, and in international activities that enabled them to setting out on their own, and attract funding for their business idea. Some of our entrepreneurs added an MBA, but most learned about business by doing it. The following quote from one of our interviewees captures the essence:

"It is a fascinating circle for me, because I started out here [University of Bath] as an electrical engineer. I went to my early technology industry and moved much more into a management and sales role. But with this [start-up] business, ... it takes me full circle to where I started from, in some strange respect. But I am a little different, I come at it from the experience of running global businesses at the management side, but having the technical grounding is a actually really core for ... being able to understand the industry and understand the technology. It is a pretty important piece of making the whole [start-up business] successful. But you have to learn how to apply that to markets, of course."

Compared to these entrepreneurs, Tom Pellereau is still special: He set out directly from University to become an inventor and bring products to market. His curved nail file is rather low tech compared to a cancer drug or a semiconductor, but it still holds global market potential. My advise to engineering graduates would be to strategically build a portfolio business competences to complement your technical expertise: and when you know how to do it, you are ready to take the jump.



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Klaus Meyer, 2006-2011