We know that the UK has a ‘long-tail’ of low productivity firms. The ability of these firms to increase their productivity has become a considerable concern for policymakers and is the subject of the Government’s soon to be published Business Productivity Review.
It is now recognised that one of the keys to raising productivity within firms is the adoption of good management practices. Two issues are important here: first, the skills of the managers who administer the practices matter. Second, there are differences in the types of management practices that are most effective in firms of different sizes.
In a recent ERC research project we looked at the links between management skills, management practices and productivity in SMEs, matching survey data with turnover and employee data from the Inter Departmental Business Register. This enabled us to examine the impact of management skills and practices on SME productivity over a three-year period.
We measured four aspects of management skill: entrepreneurial; leadership; organisational; and technical; and we measured four clusters of practices: HR practices; strategy centralisation; strategy formalisation; and strategy responsiveness. Analysing over 1,800 responses from firms with single lead managers we estimated the impact of management skills on practices as well as the impact of management practices on productivity.
We found that those SME managers reporting higher entrepreneurial skills, leadership skills, organisational skills and technical skills were more likely to adopt more management practices in both HR and in strategic management.
Second, we found that greater HR practices, strategy formalisation and strategy responsiveness boost productivity. In fact, adding an extra HR practice, like regular formal performance appraisal for example, adds about 2% to productivity over three years. But we also found that strategy centralisation has no effect. This means that when skilled managers keep strategy to themselves as the decision-maker they have no impact on their organisation’s productivity.
Third, we also found differences in firm size. In firms with greater than 50 employees, HR practices matter more for productivity; but in smaller firms, formal strategy and responsiveness have a greater impact.
In terms of policy implications, our findings suggest that increasing management skills on their own is not enough. Mentoring and coaching is crucial to encourage managers to adopt and successfully put into place appropriate management practices. Moreover, especially for the smallest firms, spreading this support to those beyond the CEO is of real benefit, because to increase the productivity of small firms we need to promote the message that ‘strategy is for sharing’.
Please note that the views expressed in this blog belong to the individual blogger and do not represent the official view of
the Enterprise Research Centre, its Funders or Advisory Group.