How What Seems Like a Minor Irritation is a Sign of a Serious Problem for Business and for the UK


We have all had the experience of ringing a help-line and hearing:

“Your call is important to us. Please hold. We are currently experiencing a large volume of calls…”

In practice, in many sectors it has become impossible to speak to a human being without waiting for 20 minutes or more.

And that is frustrating, of course – but in a world where poverty is rising fast, public services are failing, climate change is not being seriously addressed, and democracy itself  is under threat, does it really matter?

It matters enormously because it is a tiny symptom of a vast problem too serious to leave unchecked:

  • It is a sign that many businesses have entered a doom-loop:
    • In a growing market there are many ways to increase profits;
    • In a stagnant market, for most businesses, there is only one;
    • This means that many businesses are forced – against their will – to play a game they cannot win;
  • We can already see the implications both for businesses and for families – while there will be winners, there will be many losers;
  • This poses serious challenges for an incoming government.

Many businesses have entered a doom-loop

In a growing market, if you can hold your market share and maintain prices, your revenue will grow along with the market, and you can expect your profits to grow year on year. And that opens up many different ways of competing successfully.

In his seminal book on Competitive Strategy, Michael Porter suggested that businesses have two fundamental choices: compete on cost or compete on differentiation – doing something which (at least a segment of) customers find distinctive and attractive. (He also subdivided these into broad scope and narrow scope, but that does not fundamentally alter the argument).

Since Porter wrote his book in 1980, the world has evolved, and a third means of competing which seems qualitatively different from other forms of differentiation has become more evident: system lock-in. In many technology industries, so-called ‘network effects’ are predominant, which means that ‘owning’ the standard is key. If I create a new presentation software package which is superior in many ways to Microsoft PowerPoint, it is nevertheless unlikely that it will achieve much market share, because most people use PowerPoint today, and they want presentations they can open and edit without having to install and learn new software. They are effectively locked-in to PowerPoint.

These three forms of competition have different dynamics:

  • In each market, there can be only one lowest-cost provider;
  • On the other hand, differentiation can take many forms depending on the needs and desires of customers. If we take cars as an example, customers may choose to pay quite a lot more for a car because:
    • It is faster;
    • It is safer;
    • It has greater carrying capacity;
    • It is more of a status symbol;
    • It is more environmentally friendly.

And this means that there can be quite a few firms who succeed in one market in the long-term, because they have staked-out a sustainably differentiated position.

  • Usually, there is only one dominant standard in a market – Windows for PC operating systems, Excel for spreadsheets, Photoshop for image processing, etc.

So, in a growing market, differentiation will for many firms be the best strategy.

But what about in a stagnant market? If the market is stagnant then, on average, turnover will be stagnant for the players in that market. If they want to grow profit, they have only one option: cut costs. And differentiating causes higher costs: it costs more to provide higher levels of service; it costs more to build a higher quality product; it costs more to make products more environmentally friendly; etc. So to grow profit, they must reduce their differentiation, and that reduces their attractiveness to customers – they are gradually forced into playing a game only one can win: the game of being the cheapest. They enter a race to the bottom which only the lowest-cost provider will win.

And the results are visible in the corporate bankruptcy statistics.

Corporate insolvencies in England and Wales

A graph showing that insolvencies are at record levels.

Source: Financial Times

As the chart shows, somewhat incredibly, we are now seeing higher rates of bankruptcy than during the Global Financial Crisis.

The implications are already visible

It is clear then, that the doom-loop creates losers; but there are also winners.

While, overall, many markets are stagnant, there are segments within them which have continued to grow strongly – the luxury segments. Between 2018-2023, the UK economy as a whole grew by only around 3% (after adjusting for inflation), but over the same period the UK luxury goods market grew by around 21% (also after inflation).

UK Luxury goods market

Source: Statista

For businesses serving the wealthy, the game has not changed. They are doing very nicely. For businesses serving the middle and lower classes, the market has become stagnant. And this is bad news for customers and, as we saw above, disastrous for many businesses – but great for some.

So we end up with fewer firms each with greater market power, higher profits and higher prices.

Is this really happening? Yes, in many sectors it is: as Barclays research said of the US,

“Rising industrial concentration could be benign if it is a sign of intense competition. But the observed decline of lower business dynamism, investment and labour’s share of income could in the long run hurt productivity and innovation, while also worsening rising income inequality.”

They showed how profits overall have risen:

Corporate Profit as share of GDP since 2000

Source: Barclays

The same is true in Europe:

“The results show moderately increasing average industry concentration in the last two decades, though the pattern is widespread across all industries. The share of high concentration industries, which are more likely in the focus of competition investigations, have increased substantially. Finally, aggregate profitability estimates also show an increasing trend, similarly to the US figures.”

Research by Unite confirms that a large part of the UK cost-of-living crisis is down to the winners in this increasingly winner-takes-all game using their growing power to push up prices.

Change in Median Margins by sector

Source: Unite

And, of course, the water companies provide a textbook example of how a monopoly, allowed to exercise all its market power can enrich its shareholders while providing an ever worse and more expensive service to customers.

To summarise, the impacts of stagnating markets and increasing inequality have produced winners and losers:

  • The winners include:
    • The very wealthy, who continue to see their wealth grow at an appealing rate;
    • Businesses which serve the very wealthy, whose market has not stagnated;
    • Businesses in technology sectors which benefit from system lock-in;
    • The lowest-cost producer in other sectors;
    • Monopolists and oligopolists;
  • The losers include:
    • Normal citizens, whose income has not been keeping pace with inflation;
    • Businesses which serve normal citizens but are not the lowest-cost provider or the beneficiary of system lock-in – ie normal businesses.

The losers are too numerous and too important for a responsible government to allow these dynamics to continue to play out.

This poses serious challenges for government

This is obviously a serious matter for normal businesses and citizens. But neither individual businesses nor individual citizens can fix the problem: it is systemic. Government must accept that it has a responsibility for fixing the problem.

How? There are two strands: regulatory and economic.

The issue with, for example, water companies and energy companies is largely regulatory. We demonstrably do not have regulation in place to prevent them from externalising their costs and driving up prices (and in the case of water companies, driving down the quality of what they deliver). And in fact, almost all areas of UK regulation are now inadequate for the task of protecting the national interest, as we argued recently,

“Finally, we need proper regulation of our major industries. Currently everything from Energy and Water to the Press is regulated in ways which satisfy the shareholders of the companies involved but do not meet the needs of the British people. A new and powerful independent Office of Regulation should ensure that regulators are both free from political interference and protected from capture by those they should be regulating.”

Tackling regulation is, however, necessary but not sufficient. In a stagnant market, many of the dynamics set out above will continue to play out. Many businesses will still be in a doom-loop. There is a fundamental economic issue. We need growth. And of course, it must be good growth, not bad growth.


An incoming government should have the courage to invest massively in a green transition, in tackling mass impoverishment and in fixing our failing public services – starting with the NHS, without which a sound economy will be impossible. Such a course of action will require both courage and strong leadership as those who are winning from the current arrangements will shriek about ‘unaffordability’ and ‘fiscal irresponsibility’. But the beneficiaries will be normal businesses and normal people.

As Keynes wrote in 1942:

“Assuredly we can afford this and much more. Anything we can actually do, we can afford. Once done, it is there. Nothing can take it from us. We are immeasurably richer than our predecessors. Is it not evident that some sophistry, some fallacy, governs our collective action if we are forced to be so much meaner than they in the embellishments of life?”

We have reached a point where the UK can no longer afford policy driven by sophistry and fallacy. It is time to break out of the doom-loop. It is time to rebuild.


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