Management Matters in New Zealand Findings from the Management Practices and Productivity Global Benchmarking Project April 2010

Background Developed by McKinsey and Co, and London School of Economics Focused on key management practices 152 NZ manufacturers with more than 50 staff International research - 17 countries Key management practices - Looking for actual management practices, and how well embedded they are in the in the businesses Blind interview - Interviewers not aware of the performance of the firm; Interviewees not aware of the focus of the interviews Avoids pre-conceptions and telling them what they want to hear Double scoring - 2 interviewers scoring each interview Research is Not focusing on Quality of managers Managers skills Availability of skilled managers and workers Views on the business environment

Management Practices McKinsey reviewed international research and narrowed it down to the 18 key management practices Grouped around - Operations Management - manufacturing process Performance Management - goals People management - managing talent

Scoring Example Scoring Scale 1 - 5 Score of 1 - management practices are ad-hoc, unclear, Score of 3 - management practices are overseen by senior managers, tracked formally Score of 5 - management practices are continually tracked and communicated to all staff - it goes through the whole organisation Copies of the Scoring Grid for the 18 Dimensions available - it will give you an idea of what they were looking for in the interviews

NZ Firms’ Performance New Zealand firms = doing well Operations Management = mid-range with the Performance management = low end of range for People Management - particularly, = retaining high performers, = installing a talent mind mindset = rewarding top performers They were looking for the management practices in place to do these tasks, not the availability of skills, talented people, or the talented people going to Australia etc. While firms have room to improve in all areas of management, particular attention is needed in the area of people management. This is the key to building higher order competencies and dynamic capabilities in firms.

International Comparisons Some management practices, NZ up with the game, close to best practice. = Adoption of Lean Manufacturing = Rationale for adoption is well understood = Clarity of goals Others, we are off the pace - significantly Even when the international level is middling - we are still off the pace We seem to be better at setting up establishing the systems, but not as good with the follow through While firms have room to improve in all areas of management, particular attention is needed in the area of people management. This is the key to building higher order competencies and dynamic capabilities in firms.

Spread of NZ Respondents Bunched in the middle While we do not have the best practice, we also do not have a long tail. Peak just below the middle - so a relatively small improvement with those firms would have a significant improvement for NZ. Indian and Chinese firms are coming up fast - installing western management practices 59% of Australian firms are better than half of NZ firms 64% of Japanese firms 75% of US firms These are firms with NZ firms are competing against in international markets. Investing time and effort in improving management practices is shown to to have real benefits for firms Moving from the back-of-the-pack (25%), to the front-of-the-pack (75%), equivalent to moving from a score of 2.5 to a score of 3.2, is like a 77% increase in capital and a 41% increase in labour force.

NZ Firms’ Self Assessment We tend to over rate our management practices Good - in the sense that we want positive managers We need to be open to ongoing improvement Ron’s America example

Management Practices impacts on … - Profit per employee - Sales - Number of employees The results demonstrate a strong positive correlation between effective New Zealand management practices and various firm performance indicators, particularly the profit per employee, firm sales and number of employees. These results are consistent with findings from other international research.

Improved Management Practices Impact on Capital and Labour +77% Capital-Management Practice Equivalency % Base level of Capital and Management Practice Score at ‘25th percentile’ Level of Capital to achieve an equivalent level of firm output if Management Practice Score increased from the 25th to the 75th percentile 100 177 Base level of Labour and Management Practice Score of ‘25th percentile’ Level of Labour to achieve an equivalent level of firm output if Management Practice Score increased from the 25th to the 75th percentile 141 Labour-Management Practice Equivalency % +41% Contribution of management practice to the firms productive output is equivalent to large increases in existing labour or capital Investing time and effort in improving management practices is shown to have real benefits for firms Moving from the back-of-the-pack (25%), to the front-of-the-pack (75%), equivalent to moving from a score of 2.5 to a score of 3.2, is like a 77% increase in capital and a 41% increase in labour force. The quality of management has a real impact on firm performance.  If firms increased their management capability from the lower to the upper quartile (which is a movement in the average management score from 2.5 to 3.2), the impact would be equivalent to increasing their workforce by two-fifths (41%) or their investment in capital by almost three quarters (77%) (Exhibit 15 of the report). New Zealand manufacturers would benefit by focussing much more on the development of management capabilities within their firms. This calls for a more systematic approach to benchmark management performance, identify performance gaps and make improvements as a ‘way of life’. The results demonstrate a strong positive correlation between effective New Zealand management practices and various firm performance indicators, particularly the profit per employee, firm sales and number of employees. These results are consistent with findings from other international research. While firms have room to improve in all areas of management, particular attention is needed in the area of people management. This is the key to building higher order competencies and dynamic capabilities in firms. Focussing on management capabilities is vital for improving performance among New Zealand manufacturers. While firms have room to improve in all areas of management, particular attention is needed in the area of people management. Furthermore, the majority of New Zealand manufacturers overestimate their management performance. This should alert firms to the need to design internal policies, systems and processes to benchmark their management performance, identify performance gaps and make improvements. Such practices should become a ‘way of life’ for enterprises seeking to be competitive and create sustainable value.

Speakers Tom West Ministry of Economic Development Tom.West@med.govt.nz Craig Armstrong NZ Trade and Enterprise Craig.Armstrong@nzte.govt.nz Research report available on www.med.govt.nz Copies of research are available on our website www.med.govt.nz Copies here of Scoring Grid for the (18) Management Dimensions - to give you an idea of what they were looking for. We are interested in your feedback How realistic does it seem to you? All firms are different - What does it mean for your firms? How would you apply these findings in your firms ?

NZ vs Australia New Zealand is ranked lower than Australia in all management areas (Exhibit 41). However, the scores of New Zealand and Australia are statistically on par in the areas of overall management, operations management and performance management. New Zealand performs statistically worse than Australia in people management, an area where there is significant scope for improvement. The positive association between management practices and productivity is consistently evident in both New Zealand and Australia, but there are still some differences in the results of the econometric analysis between the two countries. Interestingly, while the relative association between management practices and labour is the same for both New Zealand and Australia, the impact of increase in management score on capital is far higher in the New Zealand context[1] (Exhibit 42). [1] This result for invested capital, which is high compared with other surveyed countries, is likely to be the result of limitation in availability of firm capitalisation data used in the analysis.

Business Assessment of Performance Business Operations Survey 2009 Business Operations Survey - 5,000 firms with more than 5 staff In general, when assessing performance, businesses put the most focus on financial performance and the least focus on innovation. Two thirds of all firms surveyed reported that when assessing their performance they put a great deal of focus on financial performance, while only 15 per cent emphasised innovation. Twenty per cent reported that they did not focus at all on innovation.

Business Assessment of Performance Business Operations Survey 2009

Business Improvement Practices Business Operations Survey 2009 Management and skills development are at the bottom Strategy, goals and planning Has a clear mission statement 56 Quality and process Documentation of operating processes 62 Measures to reduce environmental impact 47 Quality management certification 20 Information and benchmarking System for storing and retrieval of information 79 Regular assessment of goal achievement 59 Employees and customers Processes to manage health and safety 89 Set procedures for customer complaints 78 Systematic assessments of skill gaps 45