THE BIG PICTURE
CBI: 50 Years of Business Innovation | chapter name
“As an organisation, we have never been satisfied with the status quo and have consistently advocated the case for change�
John Cridland UK macroeconomy UK business sectors
THE BIG PICTURE
CBI: 50 Years of Business Innovation | the big picture
Ensuring the UK steers the right economic course John Cridland Director-general of the CBI
When the CBI was established 50 years ago,
that was protected and resistant to innovation
The fundamental choice for the British economy
Britain was a country that was in decline and
and change. Now we have a strong emphasis on
was between state capitalism and market capitalism
puzzled by that decline, yet unable to find a way
small business start-ups and growth, a greater
and that issue was settled by the 1980s. Since then
out of that downward spiral. Today, we live in a
appetite to take risk and a renewed confidence
there has been a prevailing cross-party consensus
country that is more comfortable in its skin, one
in our ability to invent, exploit, commercialise
that the market can be nudged, encouraged, cajoled
that has found its niche within the global economy
and market ideas.
and facilitated – and occasionally corrected – but
and developed a growth model that has generally
What has the CBI’s role in that process
that it cannot be managed or ruled.
been on an upward trajectory since the mid 1980s.
been? As an organisation, we have never
The critical periods, in retrospect – from an
been satisfied with the status quo and have
After the storm
intellectual rather than a political point of view
consistently advocated the case for change.
While the UK economy has benefited from the
– were the first two Thatcher administrations,
For the first 15 years, we were a reluctant
supply-side revolution, you do not need me to
which oversaw wide-ranging reforms of the
participant in corporatism because it was clear
point out that the ride has been anything but
economy. Whether by accident or design those
that structure did not work. My predecessors
smooth. So what should we make of what went
reforms of product, labour and capital markets
argued for a pro-enterprise culture and a
wrong in the run-up to the crash of 2008 and what
released the animal spirits of an entrepreneurial
pro-enterprise tax system. Of course, in the
has happened since? While some commentators
society that had lain dormant for the first
early years of the Thatcher revolution the
have rushed to say it shows that market economics
15 years of the life of the CBI.
CBI was shocked by the impact that the high
have failed, I disagree. I believe we have the right
From a business leader’s viewpoint, the
interest rates and exchange rates needed to
engine for long-term growth but we had the
contrast is equally dramatic. Five decades ago,
curb inflation were having on manufacturing.
calibration wrong. What we saw was unbalanced
there was a less solidly based entrepreneurial
However, it soon became clear that supply-side
growth with too much dependence on financial
culture, a relatively sparse seedbed for small
reforms in the form of privatisations, cuts to
services, excessive reliance on public and private
companies, a dependency on established – and
taxes and liberalisation of financial services
debt, and an exuberance that fuelled short-
establishment – businesses, and an economy
were key dynamics of a new growth model.
term speculation. »
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John Cridland | First person
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CBI: 50 Years of Business Innovation | the big picture
“The CBI has been very active in promoting a new economic model that puts investment and trade as key drivers alongside consumption�
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John Cridland | First person
We have learned some painful lessons that
lesson is that we must reorientate the UK away
This is why the CBI’s task has shifted from
explain why the recovery has been slow and
from an overdependence on advanced economies
the early days of our struggle to win the right to
unspectacular. The damage done to the economy
towards playing a greater role in serving the
be entrepreneurial to today’s fight to retain and
was quite deep. The CBI has been very active
new middle classes of the emerging world.
sustain that right. As the body that sits on the
in promoting a new economic model that puts
The two lessons for government are hardy
nexus between business and government, our
investment and trade as key drivers alongside
perennials: invest in education and invest in
fundamental challenge is to promote long-term
consumption. As the economy continues to
infrastructure. These were priorities for the
policies and encourage ministers to stick with
recover, we believe this is an opportune time
CBI in 1965, and the irony is that, after 50 years,
those plans. Many of these targets – exports,
for both businesses and government to take
we have still not got our education system right
industrial strategy, education, infrastructure
on board five lessons from the crisis.
and have not invested sufficiently and effectively
and science – need a consistent approach
The first three lessons are for businesses,
in our national infrastructure. There is a lot of
over a 10- to 20-year period. However, we are
and can be summarised as being clear about:
remedial action to be taken.
aware that we live in a political democracy that favours short-term political interventions
what UK plc has to sell, who will produce it and who will buy it. On the first point we have identified
Fundamental challenge
and constant change.
half a dozen capabilities where the UK is truly
While the debate over the causes of the crash,
I hope that, like an anchor on a ship, we
world-class, ranging from aerospace to the
and its consequences will continue, it is clear that
can continue to provide a secure mooring for
creative industries. Our national industrial strategy
Britain’s businesses are now fitter than ever and
the political establishment. We will ensure our
needs to focus on supporting these activities.
are well placed to exploit the opportunities of
messages to government are consistent and
I have been unashamed about promoting
economic recovery. Even so, we should not delude
persistent – almost to the point of being dull!
Britain’s mittelstand of medium-sized companies
ourselves that the coming period will be without
As the pace of change has accelerated over the
as the key sector for delivering these goods
risks. Business is under challenge as never
past 50 years, we have learned the need to be
and services. These 10,000 businesses with
before, and the CBI and individual companies
as nimble and agile as other civil society groups
turnovers of £20 million to £120 million have
must become better at explaining why businesses
if we are to win the debate over pro-enterprise
long been Britain’s forgotten army. The third
exist and what benefits they bring to wider society.
policies that sustain living standards for all.
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CBI: 50 Years of Business Innovation | The big picture
The UK is one of the 10 largest economies in the world – a position it has held fairly consistently over the last five decades. Yet that apparent
Britain’s drive to remain in the economic elite
stability hides a myriad of structural and cyclical changes that have buffeted Britain and put pressure on businesses and the CBI to respond. Delivering strong and consistent economic growth is one of any government’s most important responsibilities. If real income in the UK grows at 1 per cent a year, it will double in 70
UK macroeconomy
years; if it grows at 3 per cent, it will double in just 24 years. It is this phenomenon that led Nobel laureate Robert Lucas to declare: “Once one starts to think about [growth], it is hard to think about anything else.” British governments of all main political persuasions are united in seeing their role as one to steer the country towards growth, and the CBI has been determined to act as the evidence-based voice of business during good times and bad. Fifty years ago Sir Maurice Laing, the first president of the newly formed Confederation of British Industry, said in its inaugural 1965 annual report: “By far the greatest problem that faces the new government is the efficient management of the economy and taking of the necessary steps, however unpalatable, to bring the economy under control.” Almost half a century later Sir Mike Rake, the CBI’s president, wrote in the 2013 annual report: “It is critical that the benefits of our recovery now start to be shared by everybody in the UK. We will continue to use all our endeavours to ... see that the interests of industry – which are also the interests of the nation – are constantly kept in front of the government.” The language and the context may have changed but the concerns are similar. The longterm growth rate of the UK economy between 1965 and 2012 at around 2.5 per cent has been lower than many other capitalist economies over that period. The recent recession is a reminder that the economy is subject to swings between boom and bust that wreak havoc on growth, wealth, jobs and the lives of ordinary families up and down the country. Boom and bust Although growth was strong and stable in the two decades after the end of the Second World War,
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UK macroeconomy | in focus
as the UK embarked on major reconstruction and
just 1.3 per cent in July 1965 but by July 1985 had
Economic Development Council – better known
investment after the years of conflict, rough times
reached 11.6 per cent. The figure for June 2014
as Neddy – a corporatist forum set up to bring
were ahead. The UK economy would suffer a
was 6.5 per cent.
together management, trades unions and
succession of booms and busts in the early years
This pattern has been matched by major
government. The CBI played a major role in
of the 1970s, 1980s and 1990s before enjoying
changes in beliefs held by academic economists
this process. However these decades also saw
almost two decades of stability that ended with
and policymakers in the government and the
British companies fall behind their international
the onset of the global financial crisis in 2008.
Bank of England about the best way to run the
rivals in the development of human resources
The extreme ranges of performance are highlighted
economy. The post-war period was the heyday
and application of technology and therefore
by the fact that the fastest growth rate was 7.4 per
of Keynesian economics in the UK and other
in productivity.
cent (achieved in 1973), while the worst was the
Western economies. Governments believed
Once inflation started to rise in the late 1960s
5.1 per cent contraction in 2009.
they could use fiscal and monetary policy to
and early 1970s and was aggravated by the first oil
As the economy moved from boom to bust,
achieve the desired mix of growth, employment
price hike of 1973, policymakers found they were
inflation and unemployment also suffered wild
and inflation.
helpless to deal with it. When the authorities in
swings, bringing hardship to different sectors
The early years of the CBI were steeped
the UK and elsewhere intervened to curb inflation,
and regions of the UK. While inflation measured
in the politics of corporatism and the tripartite
they found that unemployment rose sharply at the
by the retail prices index (RPI) has averaged
relationship between government, the CBI
same time. As CBI President Michael Clapham »
almost exactly 6 per cent over time, this has
and the Trades Union Congress (TUC). In 1965
varied from 25 per cent in 1975 to below zero in
the government was implementing a prices
Opposite: The Bank of England. Above: Oxford Street,
2009. Meanwhile the unemployment rate was
and incomes policy overseen by the National
a barometer of consumer confidence
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CBI: 50 Years of Business Innovation | The big picture
said at the end of that year: “For British business,
entrepreneurialism into the UK. Sales of shares
manage, reversing the tide of industrial decline
1973 was a good year that ended deplorably.”
to the public in utilities ranging from British
that had taken hold in the UK.”
As faith in Keynesianism crumbled, the focus of
Airways to the regional water companies created
On the economic front she implemented
economics shifted towards monetarism, which
a generation of private shareholders. Crucially it
a monetarist financial strategy that controlled
prioritised using monetary policy to target the
liberated the talents of managers and employees,
public spending and which brought down RPI
money supply and thereby control inflation.
stimulated investment and generated levels of
inflation to the 4-5 per cent range for the middle
customer service not previously thought possible.
part of the 1980s. However there was a price to
Thatcher revolution
The reforms also injected a new spirit into
be paid. As the government tightened monetary
The arrival of Margaret Thatcher heralded a
the business world. As Sir Roger Carr wrote in
policy in a struggle to meet its money supply
sea change in UK economic policy and the wider
The Sunday Telegraph just after her death in 2013:
targets, unemployment surged, breaching three
business culture. She embarked on a series
“It was Lady Thatcher that inspired, energised
million in 1983 and remaining there until 1987.
of policies – including sales of council homes,
and empowered [us], creating a new generation
The government hiked interest rates to as
privatisations of state-owned utilities and curbs
of ambitious business leaders who were willing
high as 17 per cent and sterling soared to DM4.75
on trade union power – that injected a spirit of
to seize the opportunity and recover the right to
to the pound in 1979. The impact was as tough on the manufacturing sector, especially in the Midlands and the north of England, as it was on inflation. Against the background of what was then the worst recession for 50 years Sir Terence Beckett, who had only just taken over as CBI director-general, caused a huge storm with his 1980 CBI conference speech. “We have got to take the gloves off,” he said, warning against Tory policies. “We are in a bare-knuckle fight in some of the things we have got to do.” However the government stuck to its plan and, during the mid-1980s, the economy recovered and unemployment began to fall. The government felt able to cut interest rates from 11 per cent in 1987 to 7.5 per cent by the middle of 1988 even as domestic demand was accelerating. At the same time the public sector budget moved into » The consensus politics, represented by Neddy (left), was challenged by Margaret Thatcher (opposite)
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UK macroeconomy | in focus
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CBI: 50 Years of Business Innovation | The big picture
“ONce one starts to think about growth, it is hard to think about anything else�
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UK macroeconomy | in focus
a surplus, enabling the government to cut taxes.
2007 inflation (as measured by the RPI) and
However, in September 2008 the authorities
The resulting upturn is now known as the “Lawson
economic growth have both averaged close to
took the decision not to intervene to help Lehman
boom” after the then Chancellor Nigel Lawson.
3 per cent, just before the global financial crisis
Brothers. The collapse of that bank triggered what
In response the government started hiking
hit. Unemployment fell from a peak of 10.7 per
became known as the “great recession” that saw
interest rates in late 1988 to control inflation and
cent in February 1993 to around 5 per cent in 2007.
the UK economy contract by 5.2 per cent in 2009 while unemployment hit 2.68 million.
joined the European Exchange Rate Mechanism in October 1990, which tied the pound to the
the Great recession
The Bank of England cut interest rates to
German mark. However this move came at a
The stable “NICE” decade – an acronym for
0.5 per cent in March 2009 and pumped £375 billion
time when the UK and German economies were
“Non-Inflationary Consistently Expansionary”,
into the economy by purchasing financial assets.
moving in different directions. As boom turned
coined by Bank of England Governor Mervyn King
While inflation-targeting remains at the heart of
to bust, the UK again went into recession – this
– came to an abrupt end in 2007. An intense period
monetary policy, the Bank has been given powers
time accompanied by a crash in house prices.
of financial innovation, which had accelerated
to deliver financial stability by removing or reducing
Unemployment surged back above three million.
during the seemingly endless years of economic
systemic risk in the financial system. The Coalition
Attempts to keep sterling in the ERM at the rate
stability as investors looked for imaginative
government embarked on its austerity programme
of DM2.95 to the pound proved unsustainable
ways of making money in a low interest rate
to cut state spending and reduce the public-sector
and, despite raising interest rates to 15 per
environment, resulted in an unparalleled
deficit – a strategy endorsed by the CBI.
cent to defend the peg, sterling crashed out of
financial crisis. On 9 August 2007 a French bank
As Britain enters the eighth year after
the system on 16 September 1992 – a day now
unexpectedly announced that its investors could
the onset of the financial crisis, the economy
known as Black Wednesday.
not withdraw money from two of its funds because
finally looks set for sustained economic growth.
The ignominious events surrounding the
of a “complete evaporation of liquidity in the credit
The challenge will be to achieve steady growth
ERM exit left what CBI director-general Howard
market”. Adam Applegarth, then CEO of Northern
that boosts everyone’s living standards while
Davies called an “uncomfortable vacuum of
Rock bank, described it as the “day the world
avoiding the risk of a repeat of the boom and
policy”. The vacuum was filled by the strategy of
changed” and a month later saw a run on his
bust, especially in the housing market. As the CBI
targeting a measure of inflation using changes
bank – the first in Britain since 1866.
set out in its 2011 report, A Vision for Rebalancing
in the Bank of England’s interest rates supported
The credit crunch that ensued forced the UK
the Economy, at the heart of this is the idea of
by economic forecasts published by the Bank.
government to intervene to save Northern Rock,
rebalancing the economy so that the engines
This was reinforced by the decision of the Labour
Royal Bank of Scotland, Lloyds Bank and a host of
of growth are more balanced – in particular,
government in 1997 to give the Bank the power
smaller institutions. Other European governments
with greater support coming from stronger
to control interest rates. Between 1993 and
followed suit while, across the Atlantic, the US
exports and investment. The scale of the
government stepped in to bail out a series of
challenge is considerable but the prize will
The 2007 run on Northern Rock (opposite, top), and
banks including blue chip names such as Bank
be the long-term sustainable growth that
City victims of the banking crisis (opposite, bottom)
of America, JP Morgan and Morgan Stanley.
will boost living standards for all.
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CBI: 50 Years of Business Innovation | the big picture
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UK Business Sectors | in focus
finance, IT and telecommunications. But the story is a lot more complex than that. The UK has moved into areas that make
How business has flourished over 50 years
greater use of high skill levels, the latest technology and sophisticated manufacturing operations. Analysis by the Department of Business, Industry and Skills shows how relatively higher technology-based industries have grown in size while relatively low-tech ones have declined. While traditional sectors such as leather
UK Business Sectors
products, clothing, textiles and basic products all shrank by at least 40 per cent between 1994 and 2009, hi-tech industries such as medical and precision instruments; chemicals, pharmaceuticals and bioscience; and aircraft, rail, marine and motorcycles saw rises of 10 to 50 per cent. Manufacturing has changed too. While it still includes established industries such as food and drink and automotive, new industries are based
The past five decades have witnessed a revolution
drinks company Distillers remains as part of
around emerging technologies. These include low
in the make-up of British business. Some sectors
Diageo and Glaxo has become GSK. Today’s FT30
carbon and green technologies, biotechnology,
have vanished but new players have emerged,
includes seven financial services companies,
nanotechnology, and digital and advanced
while the whole structure of business in the
three energy firms, two telecoms providers, an
materials such as composites.
UK has undergone a dramatic transformation.
advertising giant, an IT firm and a property group.
A bowler-hatted stockbroker leafing through the
Adding value
But what about services? They make up almost
share prices of the companies in the FT30 equity
The startling change in the top-flight
four-fifths of today’s economy and include
index in his copy of the Financial Times in 1965
index highlights one of the most dramatic
activities from hairdressing to horticulture with
would have found a portfolio very redolent of the
transformations of the UK over the last five
whole swathes of financial services in between.
make-up of British industry of that era.
decades: the decline of manufacturing and
Britain has seen a faster growth in services
At the time, around two-thirds of the FT30
industry and the rise of sectors such as
employment than its international peers. »
Services revolution
came from the industrial sector – one third retailers, one-third from the food and drink sector – but none from finance and energy. No one had heard of information technology. Fifty years ago the UK business scene was dominated by a small number of large companies concentrated on traditional activities such as manufacturing and heavy industry. Blue chip companies such as Leyland Motors, Dunlop Rubber, machinist Alfred Herbert and paint manufacturer Pinchin Johnson & Associates have disappeared. Some, such as ICI and Harrods, have been bought by foreign companies. Only two are in today’s FT30 – steelmaker turned aerospace manufacturer GKN, and Tate & Lyle – while the The FT from the year the CBI came into being (opposite) featured an FT30 dominated by heavy industry (right)
033
CBI: 50 Years of Business Innovation | the big picture
The sector accounts for 83 per cent of jobs
past would have prized a lifetime career at
Since the start of this decade the CBI has
– it was less than 50 per cent in 1960 – and
a traditional blue chip company. The CBI’s
been urging politicians to tilt the playing field
registered a trade surplus of almost £58 billion
membership now includes universities, charities,
in industries where the UK has competitive
in 2011. It is plainly the engine of growth in the
social enterprises and health providers as well as
advantage and significant expertise. In its
modern British economy.
more traditional businesses familiar from 1965.
2012 report, Playing Our Strongest Hand, the
Because it makes up such a vast share
Thanks to a concerted campaign by the CBI,
CBI suggested that the government should
of the economy, it is impossible to look at
there is now a real focus on the importance of
maximise existing strengths in strong sectors
the sector as one large, amorphous body.
medium-sized businesses – the British equivalent
such as aerospace, automotive, agri-food,
Services vary hugely in terms of the levels of
of the German mittelstand. Incoming director-
green technology and services, creative
technology and innovation they use and develop,
general John Cridland took a positive decision in
industries, chemicals and pharmaceuticals,
and in the wages they pay. The largest share
2011 to highlight the importance of this “forgotten
and knowledge-intensive business services.
of the private services sector, which makes
army” of medium-sized businesses (MSBs) which
That message has been heard and the
up 72 per cent of all services, is drawn from
represent less than 2 per cent of businesses but
main political parties have moved towards a new
professional, technical and support services,
generate 23 per cent of economic revenue and
industrial strategy that emphasises linking up
followed by business services and finance.
16 per cent of all jobs.
policies in areas like skills, infrastructure and
The sector includes highly skilled activities
The result was a major report, Future
regulation that deliver benefits across sectors.
in which the UK has a global lead, such as
Champions, which showed how harnessing
Rather than picking winners, the government
architecture, advertising, insurance and legal
MSB potential would unlock £20–50 billion
must ensure that British businesses in any
services, to name just four. But the private
of economic output, create job opportunities
sector compete on a level playing field.
services sector also includes the vitally
across all regions of the UK and help rebalance
The commensurate decline in the number
important sub-sectors of transport, storage,
the economy and close the gap with our main
of people working in factories and the increase
retail, communications, hotels and restaurants
rivals. It set out a 12-point plan that included
in office workers has struck a chord with people
as well as the leisure and culture industries.
recommendations to the government to:
concerned about the loss of Britain’s industrial
Britain has realised the future lies in high-
•m ake bond markets more accessible to MSBs
heritage. However, the message of the 50 years
value manufacturing, financial services and
• encourage large firms to work with MSBs
since companies such as Leyland Motors and
value-added businesses such as electronics,
in their supply chain to share best practice
the London Brick Company graced the FT30
ICT and biotechnology. The route to success
and increase levels of leadership, innovation,
index is that the UK has a greater depth and
is by ensuring that organisations in the services
exports, recruitment and financing
diversity in its business sectors than would
sector – both public and private – continue to focus on delivering excellent quality in a
• recruit more MSBs to the Prime Minister’s Business Advisory Council.
way that will both attract overseas buyers and deliver affordable solutions to consumers
The report and the research behind it have
and other businesses.
clearly influenced political thinking amid signs that the government recognises the needs
Forgotten army
of MSBs. In November 2011, it published its
The fast-growing businesses of today are in niche
Mid-sized Businesses Growth Review and,
areas such as website management, IT design,
the following month, Business Secretary Vince
e-commerce and the creative industries, areas
Cable announced a £125 million fund to support
that did not even exist 20, let alone 50, years
UK advanced manufacturing sectors such as
ago. They are attracting the highly educated,
aerospace, automotive and chemicals. The 2012
skilled and ambitious candidates who in the
Budget included an allocation of £700 million for the Business Finance Partnership to provide
Right and opposite: The FT30 equity index is now
alternative sources of finance to small and
dominated by hi-tech, knowledge-based industries
medium-sized firms.
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have been found in 1965.
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UK Business Sectors | in focus
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