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May


Britain is a rip-off. Why?

Sun, 1st Aug 2004

IN 1750, RECOUNTS the great historian Eric Hobsbawm, the first things the foreign visitor to England noticed as he or she stepped ashore in Kent were the tidiness of the countryside and the eye-watering prices of the inns.

Nothing much new there, then. In its latest annual calculation of living costs, Mercer Human Resource Consulting reported in May that London is now the second-most expensive capital city in the world, 19 per cent dearer than New York, the baseline, and trailing only Tokyo.

'Start the morning with a glass of orange juice and you can forget about that vacation. Restaurants should just merge with second-mortgage companies,' gagged a Time correspondent. Others gasp at the world's highest rail, Tube and taxi fares. Last winter, two enterprising Londoners won headlines (but little astonishment) by recounting how they had saved money on a trip to Liverpool to watch a football match by flying via Belgium rather than taking the train.

Prices that are out of whack with the UK's no-more-than-average wages are storing up problems for the future.

The spiralling price of housing in southern England is now both socially divisive and economically dangerous, according to Shelter. One supermarket group buses staff from Tottenham (north London) to Croydon (south London) because the low-paid can no longer afford to live near their work. Officials admit that London's reputation for costliness is driving away not only businesses and tourism, but its own citizens: up to a third of UK residents are thinking of leaving the country in search of a lower cost and higher quality of life, according to one recent survey.

Meanwhile, a committee of MPs concluded this week that Britons aren't saving enough because they don't trust financial service companies not to rip them off in the future, as they have done in the past. Price comparisons and other new services that would make markets work better are stunted by telephone companies keeping broadband prices two or three times higher than in France, for example.

In theory, prices that are too high can't exist for long in a competitive marketplace. Consumers will stop buying and new entrants will be attracted by fat profit margins. As Adam Smith pointed out, the rate of profit is naturally higher in poor countries than in rich ones, where it is normally competed away.

In a few cases, this happens according to the textbook. In scientific publishing, traditional high-price, high-margin incumbents are being challenged by new entrants with a lower-cost distribution model built round the internet. The newcomers insist they will still be profitable - but margins will be thinner.

Or take the UK's private healthcare industry. When the government initially asked for tenders from private firms to carry out day surgery for the NHS, no domestic company made the list: UK consultants, it transpired, charged double the rates per operation of their foreign counterparts. In a more recent contest, however, UK firms were more competitive. The consultants had brought their charges into line. More cynically, you could say they couldn't get away with it any more. And here's a clue.

Part of the reason for high prices is high costs - at least some of which is down to poor management. The counter-intuitive lesson of 'lean' production methods is that poor service is always more expensive to produce than good service. Too few UK companies are lean, a factor that is reflected in the country's poor relative productivity performance.

But another factor in price levels is the intensity of competition. Competitive intensity has several elements, one of the most important being customer expectations. Good firms tend to have demanding customers, which stands to reason: picky customers keep you up to the mark by requiring value for money and telling you if you don't give it.

And we are not demanding enough customers - something that enrages visitors almost as much as the prices. As the Time writer put it: 'New Yorkers believe an almost-sort-of-affordable city is a civil right, and anyone who threatens that right deserves to be screamed at and tipped really poorly. Londoners believe a city is a noble and costly test of endurance.'

There is academic support for the idea that this does us no favours. Customers, says Chris Voss, professor of operations management at London Business School and leader of a team which has compared consumer behaviour in the UK and US, play a vital part in develop ing service quality. Confirming the stereotype, his research found that the British complain less about poor service than do Americans. 'We don't give as much feedback, so organisations have less knowledge about how to improve service: sometimes managers don't know just how bad it is,' Voss says.

The cause is cultural, but the result is a self-fulfilling prophecy: service is bad because that's what we expect and let companies get away with. Alongside government and managers, consumers can't escape their responsibility for making the economy more competitive.

You can see what's coming next. If we get the service we deserve, the conclusion is self-evident. Stop suffering in silence. Loosen the stiff upper lip. Go on: rant, rave, whinge, moan, shout, scream and complain. Be as embarrassing as possible. It'll make you feel better - and it's your personal contribution to raising the standard of British management.

The Observer, 1 August 2004


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