Poor leadership and a lack of regularly monitored key performance indicators are among the factors condemning Welsh firms to the bottom of the 海角视频’s productivity league table, shows new research.
An in-depth analysis of productivity of Welsh firms has been undertaken by Cardiff Metropolitan University in its latest research project funded by the Hodge Foundation.
It found that strategic management and leadership can be relatively difficult for many small firms where owner managers spend most of their time reacting to “adverse events or opportunities”.
It also says that relatively few firms articulate strategic goals and communicate them to staff.
To some extent, the report says this is a corollary of small size and limited managerial “bandwidth”.
Professor Brian Morgan of Cardiff Metropolitan University and member of the Hodge Project research team said: “While many firms in Wales consider productivity to be an important factor in shaping their overall performance, they often fail to identify and measure its various aspects so are not well placed to implement improvements.
“Leadership and management deficiencies are coupled with low levels of intangible capital investment, especially relating to investment in software, intellectual property and other forms of recorded knowledge.
“Such under-investment is likely to be a major factor hindering productivity gains and the growth of businesses. Underinvestment can be caused by lack of finance but also by lack of knowledge about the possibilities.”
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The interim also found that firms that had survived longer, and those that are larger, tended to have more productivity measures than younger and smaller firms.
Prof Morgan said: “They also tended to have tighter managerial control, for example, in that senior management teams met more often and regularly monitored financial accounts and key performance indicators (KPIs).
“In a number of sectors, it is important for firms to get over a size threshold that enables them to employ more specialist managers.”
The research also found that firms engaged in exporting tended to use more state-of-the-art management practices like lean production techniques and standard costing or other forms of benchmarking than firms with a purely domestic market.
To address the issues identified the report recommends that Welsh Government policymakers should focus on:
- Providing management education and training for firms to address their productivity challenge and to improve management skill levels:
Helping firms to benchmark effectively against frontier firms with regard to improving management practices and KPIs;
- Supporting firms to reduce the continued digital and technological deficit within the Welsh economy;
- Encouraging and assisting firms to export; and,
- Improving inter-firm collaboration and networking activity by improving the performance of trade associations and other similar organisations.
Prof Morgan said: “It is clear that one important underlying cause of the productivity gap in Wales relates to firm-level managerial skills.
“The potential benefits from raising productivity are significant and the knock-on effect that this could have on Welsh living standards is huge.
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“Therefore, improving management performance should be an important candidate for economic policy intervention in Wales over the next few years.”
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Professor Brian Morgan on the productivity riddle
A story on the Wales section of BusinessLive last week interesting opening statement: “The Welsh economy will grow at one of the slowest rates of any part of the 海角视频 next year, with poor productivity remaining a major issue”.
Based on research from professional advisory firm PwC, it was a timely reminder of an important economic problem that is undermining living standards.
It was also well-timed because, at Cardiff Met – through our Hodge Foundation Project funded by the Hodge Foundation – we have just completed a research project involving a survey of 74 companies to better understand the “productivity puzzle” in Wales.
The higher is productivity, the greater is the amount of output that can be produced for a given amount of labour.
Many factors can affect productivity, such as technology, skills and infrastructure but economists are agreed that improvements in productivity are the main source of increases in prosperity: over the last century the 海角视频’s national income has increased 20-fold but, without the increase in productivity, it would have barely doubled.
The problem is that since 2008, 海角视频 productivity has fallen behind its competitors and, in Wales, it is even lower.
Reasons put forward for this productivity slowdown at the macro-economic level, include: a lack of investment opportunities, diminished rates of innovation and globalisation. But none of these, on their own, can explain the evidence.
To further understand why Welsh productivity remains low, the Hodge Research Project has focused on analysing the micro-economic factors driving productivity.
The survey sought to capture specific measures related to the production process that provide a better understanding of how firms’ management practices affect productivity.
While many firms in Wales consider productivity to be an important factor in shaping their performance, the problem is that they often fail to identify and measure its various aspects so are not well placed to implement improvements.
Cardiff Met’s research has gathered new evidence on management practices in Wales against the background of our low productivity economy.
It finds a wide range of managerial skills being used in Welsh companies, but, rather worryingly, it also found that many firms exhibit poor strategic planning and have very rudimentary management systems in place to measure and control performance.
In many small firms strategic management issues are relatively difficult to address, especially when owner-managers spend a lot of their time reacting to adverse events or chasing new business opportunities.
Relatively few firms have the time to coherently develop strategic goals and even fewer firms manage to successfully communicate these goals to staff.
To some extent, this is a consequence of limited resources and the narrow managerial “bandwidth” that is typically found in smaller firms.
During our interviews, we were keen to explore the way in which the managers used performance measures to gauge success, the techniques they employed to control outcomes and whether they attempted to foster innovation within the company.
To this end, the survey considered issues such as changes to business organisation and management structures, leadership capacity and the development of new products.
The research found that the majority of business leaders consider themselves to be at the helm with regard to factors that improve performance.
However, a lack of strong strategic orientation throws doubt on the efficiency of this leadership.
This is a key problem that leadership initiatives such as the at Cardiff Met have sought to address. We found a number of other important obstacles to raising productivity.
For example, alongside a very limited focus on strategic issues, there was evidence of low levels of investment in intangible capital assets, such as software, information systems and intellectual property.
Such under-investment is likely to be a major factor hindering productivity gains.
The reasons for this underinvestment are diverse and it is often traced to lack of finance.
But it can also be due to more simplistic factors like a lack of knowledge about the possibilities that new software systems open up for performance improvements.
In various studies of low productivity growth in regions and countries such as Wales the focus has turned to how regional policies can be used to successfully upgrade the managerial performance of local firms.
These policies have been influenced by recent research from the OECD that has emphasised the performance gap between high performing firms, (the so-called “frontier” firms – the top 5%), and low performing firms (the “laggards” with below median productivity).
Over the last decade the increasing productivity gap between leaders and laggards appears to be a significant cause of low productivity growth.
But what distinguishes leaders from laggards? Frontier firms tend to be exporters who are open to international competition, are motivated to introduce new products and are often foreign owned.
The laggards on the other hand appear not to be focused on innovation. Indeed, the diffusion of new ideas to these firms seems to have stalled.
The evidence suggests that the majority of firms in the bottom 10% of the productivity distribution – the laggards – tend to be small, “micro” businesses (less than 10 employees).
Also that they are “younger” firms (one to five years old). The variation in performance between firms is large and there is “a long tail of extremely badly managed firms”.
The Welsh economy seems to have a large number of these “laggard” firms, putting it firmly in the bottom 10% of the 海角视频 productivity league.
Raising management performance in laggard firms could be the optimum policy response and various studies have identified poor management practices as a key reason for low productivity, for example McKinsey found that the best-managed companies – irrespective of their location, size or sector – scored highest on key business metrics, like sales per employee, growth in market share and rate of return on capital.
The results of our research appear to confirm these findings.
Firms that had survived longer, and firms that were larger, both tended to have more productivity measures in place than younger and smaller firms.
They also tended to have tighter managerial control in that the senior management team met more often and regularly monitored financial accounts and key performance indicators (KPIs).
In a number of sectors, productivity improvements appear to be on hold until firms reach a certain size threshold that enables them to employ more specialist managers.
In the survey, firms engaged in exporting tended to use more state-of-the-art management practices like lean production techniques and other forms of benchmarking than firms with a purely domestic market.
This indicates the benefit of competition in sharpening managerial performance.
Productivity was also affected by the types of supply-chains and networks in which firms are engaged.
A number of firms in our survey said they had been stimulated by demands or suggestions from customers or suppliers.
So trade associations and similar networks have an important role to play in improving the performance of firms in the long tail of the distribution.
They may need to focus more on working with small firms to gain the kind of knowledge that enables them to benchmark themselves against more successful firms and to act upon this information.
In the run-up to the general election, and with Brexit imminent, it is important that politicians pay attention to the underlying causes of poor productivity in the economy and work to address it by improving the level of managerial skills.
This will become even more imperative for Welsh firms as we leave the EU because they will need to improve their management systems to take into account the tax changes and new trading arrangements induced by Brexit.
Hence the Hodge report recommends that Welsh Government policymakers should focus on:
- Providing management education and training for firms to address their productivity challenge and to improve management skill levels;
- Helping firms to benchmark effectively against frontier firms with regard to improving management practices and KPIs;
- Supporting firms to reduce the continued digital and technological deficit within the Welsh economy;
- Encouraging and assisting firms to export; and
- Improving inter-firm collaboration and networking activity by improving the performance of trade associations and other similar organisations.
It is clear that one important underlying cause of the productivity gap in Wales relates to firm-level managerial skills.
The potential benefits from raising productivity are significant and the knock-on effect that this could have on Welsh living standards is huge.
Therefore, improving management performance should be an important candidate for economic policy intervention in Wales over the next few years.
The Hodge Foundation Project’s research team consists of Brian Morgan, Gerald Holtham, Selyf Morgan, Robert Huggins, Nick Clifton, Jeff Davies, Gary Walpole, Sandy Kyaw, Carla De Laurentis.