WHAT SETS SUCCESSFUL FIRMS APART FROM THE PACK? Presentation to University of Canterbury November 2005 Arthur Grimes Motu Economic & Public Policy Research; & University of Waikato with Richard Fabling Ministry 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 Performers

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 performance HR 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 performance HR 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

Innovation: Causal Findings 3 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