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

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1

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3

4

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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

Lessons

• Innovation is crucial to firm success• High performance HR practices also crucial

– Especially for hi-tech firms

• Differentiate your firm on product, quality, service, etc

• Encourage & reward staff for performance

• Integrate innovation & HR practices