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WHAT SETS SUCCESSFUL FIRMSAPART FROM THE PACK?
Presentation to University of CanterburyNovember 2005
Arthur GrimesMotu Economic & Public Policy Research; &University of Waikato
with
Richard FablingMinistry of Economic Development
Business Success
• NZ GDP grew faster than almost any other OECD country in last 5 yrs
• GDP growth is built on business success– I.e. built on: profitable firms expanding
&: new firms entering
• Which business practices create firm success?– What can firms do to improve chances of success?
• That is what we investigate here
Approach
• Examine broad-based experience:– Almost 3,000 firms
– Business Practices Survey, 2001 (Stats NZ/MED)
– Private sector firms with >5 FTEs
– Mainly SMEs; also large enterprises
– All sectors other than farming/fishing/forestry
Business Practices Survey (2001)
• Questions on “firm demographics”; e.g.– Sector– Age– Size– % family ownership– Competitive environment
• Plus 180 questions on business practices– 10 categories
Question Categories: 1 & 2
• Strategy– (E.g.): Over the last 3 years to what extent did this
business focus on new export markets?
• Leadership & planning– Does this business have a vision statement?
Question Categories: 3 & 4
• Customer focus– To what extent do staff other than sales & marketing
staff visit the firm’s major customers
• Supplier focus– How much does this business work with key suppliers
to improve each others processes?
Question Categories: 5 & 6
• Employee practices– Does this business systematically measure employee
satisfaction?
• Quality & process– Does this business have, or is it planning to implement
systems to gain quality management systems certification (e.g. ISO9000)?
Question Categories: 7 & 8
• Information & benchmarking– Have comparisons been made with competitors on
financial measures?
• Community & social responsibility– Over the last 3 years were measures to reduce the
environmental impact of this business in place?
Question Categories: 9 & 10
• Innovation– In the last 2 years how often did this business undertake
in-house R&D?
• Use of information technology– Does this business have computers that are connected
to a wide area network?
Business Results
• Also surveyed 7 business results:– Relative profitability– Relative return on investment– Relative productivity – Net cash flow – Market share change– Profitability change– Sales change
• We concentrate on:– relative profitability – relative productivity– market share
Framework
• Firms employ inputs (labour, capital) to produce goods/services– & attempt to maximise profits
• Firms differ in their productivity depending on:– Quality of labour (subject to hiring & training choices)– Quality of capital (subject to purchase & R&D choices)– Underlying management capability/productivity
• Productivity reflects internal resources/capabilities & external environment
• Examine associations first; then causality
Results: Associations
• 4 groups of internal practices are important:– Capital practices
– Labour (HR) practices
– R&D practices
– Market research practices
• Broader economy, industry & finance issues also affect performance
Capital Practices
• “Core equipment is fully up-to-date” (or no more than 4 yrs old) is significantly associated with each of:– relative profitability – relative productivity– market share
R&D Practices
• Each of the following significantly associated with at least 1 success measure:– Commissioned external R&D over past year
– Conducted continuous in-house R&D over past 2 yrs
– Firm used some method to protect inventions
– >20% of total exp. on development of new innovations
– >30% of sales from completely new products
Market Research Practices
• Each of the following significantly associated with one success measure (mainly market share):– A great deal of focus on new domestic markets
– Some focus on new export markets
– A great deal of visits to major customers
– Very close monitoring of competitors’ products– Industry NZ a very important source of innovation
ideas (-ve) [possibly a selection effect]
Labour (HR) Practices
• Each of the following significantly associated with one success measure:– Investment in innovation-related employee training– Performance pay for many or all staff– Measure employee satisfaction at least bi-annually– More than 50% of employees rotated over last year– Non-managerial staff have authority to contact
suppliers– Health & safety processes in place (-ve)
High vs Low PerformersMarket share
0
1
2
3
4
5
0.0 0.1 0.2 0.3 0.4 0.5 0.6 0.7 0.8 0.9 1.0
High performers
Low performers
Don't knows (out of sample)
Causality vs Association?
• Associations do not imply causality• We use additional techniques (IV) to predict
which firms will choose certain practices– based on underlying firm characteristics &
management capability
• Then examine whether predicted practice “causes” firm performance– over & above effects of general management
capabilities & firm characteristics
Human Resources: Causal Findings
• Two key HR practices:– Performance pay for most or all employees– Innovation-related employee training
• Also regularly measuring employee satisfaction
• Suite of high performance HR practices affects:– Relative profitability,– Relative productivity, &– Market share
How many firms adopt high performanceHR practices?
• 46%: innovation-related employee training
• 37%: measure employee satisfaction at least bi-annually
• 18%: performance pay for most or all staff
• 6%: all 3 of the above
• 34%: none of the above
Which firms adopt high performanceHR practices?
• Size matters– Large firms more likely than mid-sized firms– Mid-sized firms more likely than small firms
• Age matters– Start-up & old firms least likely to adopt
• Sector matters– “Hi-tech” services firms more likely than agriculture,
manufacturing, construction, or other services
Distribution of HR Practices
All firms (2742 obs)
Small, old, agriculture & manufacturing (318 obs)
Medium-sized & large, very young & young, high-tech
services (66 obs)
0
0.1
0.2
0.3
0.4
0.5
0.6
-2.1 -1.8 -1.5 -1.2 -0.9 -0.6 -0.3 0.0 0.3 0.6 0.9 1.2 1.5 1.8 2.1 2.3 2.6
SFEP
Ker
nel
den
sity
Innovation: Causal Findings3 key areas
• Investment in up-to-date core equipment– New technology
• Investment in marketing new products– New products & marketing both important
• Continuous in-house R&D– Raises issues of firm size & capability
• Almost 2/3 firms do at least one of these• Only 3% conduct all 3
Which Firms Innovate?
• Services firms innovate most
• Innovation mostly undertaken by firms that are: – Large & old [established firms]
– Medium-sized & young [successful entrepreneurs]
• Both crucial to a dynamic economy
What About General Management?
• Good general management underlies strong practices– E.g.: Infrequent, strategic planning processes
• “Guru” general management irrelevant– E.g. vision statements & company values