The UK is at a Crossroads

The UK is at a competitive crossroads. Even at the start of 2020, Britain risked losing its competitive edge, faced with Brexit uncertainty, rapid digitalisation and a frustrating productivity slump. Then, COVID-19 struck, sending shockwaves through our service-led economy. For example, 54% of UK leaders surveyed said they had seen a decrease in revenue in 2020. Furthermore, more than one in five (22%) had to scrap an existing business model within days of entering lockdown. Also, 41% of UK leaders say the current economic climate is a crucial barrier to competitiveness, above COVID-19 and Brexit. Shockwaves carried on seven months after the pandemic began because of the second wave of the virus, mounting public debt and renewed Brexit concerns. In 2021, the global stage will test the nation’s competitiveness like never before. As a result, businesses must find a new way to stay competitive.

Can UK businesses stay competitive?

So is the UK ready and willing to compete? What must organisations do to transform? And what does competitiveness mean in our digital age? This blog seeks to answer those questions, incorporating input from renowned experts on competitiveness from Harvard University, the CBI, OECD and Tech Talent Charter and organisations such as Sainsbury’s and Admiral. Furthermore, academics from Goldsmiths, the University of London and Microsoft came together to create a new model for UK competitiveness to help companies remain afloat and stay competitive to help our economy grow out of this crisis and build a better future. 

Creating a Blueprint for UK Competitiveness

How was this report created? Microsoft’s report brings together insights and interviews from renowned industry experts on competitiveness from Harvard University, the CBI, OECD and the Tech Talent Charter. It uses data from a survey of 1,713 senior decision-makers and 2,470 employees from UK organisations conducted in partnership with YouGov. Furthermore, it includes practical insights and interviews from a range of leading British organisations, including Sainsbury’s and Admiral.

Methodology

Microsoft carried out this research over the summer and autumn of 2020 in partnership with Dr Chris Brauer, Director of Innovation, Goldsmiths and the University of London. They led a team of economists, psychologists, data scientists and social scientists. Furthermore, the team used a mixed-method approach to build a model, scorecard and blueprint to help UK businesses stay competitive. 

The study includes:

• A barometer surveys among 1,713 leaders and 2,470 employees
• An in-depth literature review of academic, industry and media knowledge and data sources on competitiveness
• Also, interviews with academics, professionals and UK company leaders, who discuss the research model and findings of the project

Stay competitive: Align determination with action

In such challenging times, the research reveals UK organisations are hurting. However, there is some promise of progress. For example, the crisis has accelerated the digitalisation of vast swathes of the economy, as leaders sought new, digital growth models to stay afloat: 

• Nearly two-thirds of leaders (61%) are currently using collaboration tools at work, a 10% increase on pre-coronavirus levels. 
• 30% of those who took part in the research also identified investment in new technologies as an action their organisation has taken to stay competitive in the current climate. 

And against all the odds, they still have hope. For example, the belief that the nation can survive and thrive remains high: 

• Two thirds (66%) of UK leaders have confidence in their organisation’s ability to navigate COVID-19. 
• 73% of Leaders think they will be able to withstand a resurgence of the virus. 
• Employees, too, have faith. 

Despite this, organisations must align determination to recover with action, and Microsoft research shows UK leaders are lagging: 

• While nearly half (49%) of UK leaders have confidence in technology’s ability to support businesses through COVID-19, more than three in five (62%) insist they have no plans to hire more technology scientists. For example, data analysts, system engineers and developers as a result. 
• Only a third (35%) of UK employees believe their organisation adopts new technologies and systems quickly enough.
• Over half (54%) dedicate 5% or less of their revenue to R&D, lagging behind other G7 nations.

So, is the UK ready, willing, and able to lead internationally? The answer, it appears, is not yet. With 45% of UK leaders saying their business model will cease to exist in 5 years (up from 33% last year), UK firms must take steps to ensure recovery starts today to stay competitive.

A new model of competitiveness for the digital age

So, how should we be quantifying our competitiveness to improve it?

Driven by a desire to understand what it means to be competitive in today’s digital age, Microsoft commissioned an exhaustive literature review on the topic by an academic team led by Dr Chris Brauer, Goldsmiths and the University of London. Through extensive investigation, Goldsmiths’ researchers found that the UK’s benchmarks for competitiveness haven’t changed much since the 18th Century and fail to account for the transformational impact of technology.

Instead, they view digital systems as additional to the traditional drivers of competitiveness: capital and labour. As a result, the researchers determined that addressing the UK’s productivity paradox, combined with the twin challenges of COVID-19 and Brexit, requires a new approach.

The basis of the new model for competitiveness is around three core elements, all underpinned by the ecosystem in which firms operate. These are:

• Talent: leaders must be responsive, foster a diverse and inclusive workforce and create an environment where they work with employees to innovate and share knowledge.
• Technology: create a solid digital infrastructure to boost productivity, efficiency, and collaboration. Tech needs to be at the heart of an organisation, not restricted to limited functions or departments.
• Future Readiness: Leaders need to show agility to navigate disruption. Be ready to quickly identify and grasp fresh growth opportunities and adapt to new challenges or changes.

These three dimensions must work together, with none more crucial than nor distinct than the others. 

The road to recovery

As organisations begin the rebuilding process in the wake of the COVID-19 pandemic, the research uncovered two distinct strategies emerging:

Hollow growth

Sustainable growth 

These two strategies have alarmingly different outcomes that could impact the UK’s future prosperity, but only one drives recovery and helps build a better future.

Firms pursuing a Hollow Growth strategy:

• Typically extract as much value as possible from people to reduce costs
• Offer little support to employees to adapt to new conditions 
• Focus technology investments in siloed areas of the business to solve individual challenges
• Benchmark future readiness by traditional productivity measures 

On the other hand, firms pursuing a Sustainable Growth strategy:

• Strive to maintain resilience and have a capacity to adapt
• Adopt leadership defined by empathy and decisiveness
• Nurture a culture of trust, empowerment and inclusivity
• Consider the impact of technology across their organisations as part of their strategic approach

The good news is that sustainable growth strategies consistently predict business growth in the current climate. Furthermore, these strategies can drive recovery in our economy and help us drive UK prosperity. 

”If we look at COVID-19, the people who have been brilliant leaders are those who have been ridiculously inclusive in their input, ridiculously empathetic in their awareness and ridiculously decisive. In a dynamic world, empathy is as important as decisiveness.” – Blair Sheppard, Global Leader of Strategy and Leadership for the PwC Network.

Almost half (46%) of UK firms fall into the bottom quadrant of competitiveness, posing a risk to UK prosperity.

The researchers identified a clear correlation between the strategy adopted by organisations and their current competitiveness levels:

Frontrunners: 15% of UK organisations, currently enjoying turnover growth of 5% to >15% in the current climate. 

This group is most likely to:

• Be pursuing a Sustainable Growth strategy
• Have a solid digital infrastructure and be faster to adopt new technologies
• Do business overseas
• Invest strongly in R&D
• Have a diverse workforce and feature empathetic leaders

Challengers: 27% of firms 

This group is most likely to:

• Have started to adopt many of the typical characteristics of Sustainable Growth. 
• Have a turnover that has remained steady or increased up to 5%.

Survivors: 12% of organisations

This group is most likely to:

• Be showing signs of adopting Sustainable growth but with attributes of Hollow Growth too. 
• Be experiencing minimal turnover declines – up to 5% down on last year. 
• Survivors are slower to adopt new tech, and only three in 10 (31%) have more than ten patents. 

Endangered: 46% of UK organisations

This group is most likely to: 

• Demonstrate strong Hollow Growth characteristics.
• Be experiencing a falling turnover, from 5% or more decline. 
• Appear financially vulnerable and is not prepared to face the future due to less diverse talent, a lack of digital infrastructure and expertise and rigid organisational structures.

So is the UK on its journey to sustainable growth? Well, we could do better. Just 15% of UK organisations are firmly pursuing a sustainable growth model, enjoying a turnover growth rate of between 5% and upwards of 15%. And when we look at the crucial components to competitiveness:    

Talent? 

We see a skills mismatch. Inspirational leaders are also hard to find outside of small firms/start-ups.

Tech? 

Adoption is slow. Only a third (35%) of employees believe their organisation is adopting tech quickly enough. 

Future Readiness? 

Most organisations are dedicating 5% or less of their revenues to Research & Development, an indication of why the UK’s innovation capacity is far from satisfactory.  

The bad news: 46% of UK firms fall into the least competitive quadrant of the new competitiveness model, rendering them endangered in today’s economy. Indeed, this group has suffered a 5% or more turnover decline this year.

Note about the typologies: Naturally, Microsoft expect to find exceptions to these classifications. Industries such as hospitality and tourism are a positive case in point. For them, following a sustainable growth strategy is not enough in itself to protect against volatility. Such organisations should be supported and encouraged to rethink themselves within their market, identifying diversification opportunities that can help ensure they survive in the short term and thrive over an extended period. 

48 Billion Reasons To Change Now

So, what could we gain if UK organisations actively sought sustainable growth? A £48 billion economic opportunity. Microsoft economists estimate this boost to the UK economy would accumulate if every leader took even basic and low-investment steps by moving towards sustainable growth practices. 

So, what is the impact of a £48 billion boost? Well, just three-quarters of this figure would have covered the entire cost of the government’s furlough scheme until mid-August (£35.4 billion). And if they used only 10% of the total figure to fund new hires by UK business leaders, it could create as many as 128,920 full-time jobs at the average annual adjusted salary rate of £37,428. 

As a result, this can be a significant shot in the arm for the UK’s recovery. And it’s just the starting point, based on organisations making the minimal interventions right now, this figure could grow if organisations drive longer-term investments in competitiveness and sustainable growth.   

Note about the figure: To arrive at the UK’s £48.2 billion economic opportunities, Microsoft economists used data from the ONS detailing the turnover of all the nation’s active VAT-registered businesses. They then calculated the average increase in revenue for different sized companies, ceteris paribus, where they follow the minimum sustainable growth interventions in each of the dimensions of the new model of competitiveness: talent, technology and future readiness. To make the calculation, microsoft also used the minimum figure in each turnover size band. 

These interventions can – and should – be made now and do not require the organisation to incur any extra costs. 

Sustainable Growth Extends Beyond the Bottom Line

Moving towards sustainable growth extends beyond the bottom line. We see a win-win for society and the economy. 

Microsoft research shows that only by adopting a socially progressive and digitally-enabled approach to competitiveness can we unlock the value of this economic potential. 

The path to rebuilding the economy is also the path to building back a better society. The research maps four clear opportunities: 

• Inclusivity in the digitally competitive economy: overall gender split in organisations’ workforces, gender in technical/scientific occupations, gender pay gap and BAME composition.
• Mobility for workers and employability perspectives: work and pay prospects in digitally competitive firms.
• Work-life balance: digital work enabling under-represented groups to improve work-life balance. Including support with child/elder/health care.
• Overcoming regional inequalities in skills and resources: digitally competitive organisations need not be clustered all in the same area, despite the strong network effects this creates. 

Steps to take now

The types of incremental changes UK organisations could make to stay competitive relate to the Talent, Technology and Future Readiness dimensions of the new model for competitiveness for the digital age.

Recommendations made in the report include:

Talent: 

• Focus on responsible and empathetic leadership
• Address the state of diversity in your workforce and boost STEM staff by 5% by urgently addressing the pay gap and state of diversity within organisations by increasing the number of female STEM graduates.
• Empower staff with remote working technologies

Technology: 

• Speed up the transition to new technologies by three months, building on current R&D ideas and inventions, for example, migrating more functions to the cloud to increase agility. 
• Shift your mindset and place tech at the centre of a culture of innovation
• If possible, embrace the cloud to increase agility.

Future Readiness:

• Invest in R&D, including creating innovation clusters led by STEM or highly skilled staff to drive in-house R&D at a low cost.
• Assess your business strategy and consider how to bring culture and technology to the forefront 

Ecosystem: 

• Be part of government-led conversations about recovery
• Reassess your operations and be prepared to pivot 

What’s next?

As the Brexit transition period comes to an end and the shockwaves of COVID-19 continue to spread, our future resilience will be a test like never before. 

Recovery rests on choosing the right path, and there are 48 billion reasons to do so. 

Accelerate your journey towards sustainable growth by reaching out to Northstar today. Read more about digital transformation here, or contact us directly. 

”Small changes in approach to investment, people and technology can quickly boost the UK’s competitiveness, giving our economy the best chance of success in the post-COVID and post-Brexit era.” – Clare Barclay, CEO, Microsoft UK