1. 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

2. 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

3. 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

4. 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

5. 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?

6. 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?

7. 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)?

8. 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?

9. 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?

10. 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

11. 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

12. 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

13. 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

14. 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

15. 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]

16. 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)

17. High vs Low Performers

18. 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

19. 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

20. 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

21. 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

22. Distribution of HR Practices

23. 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

24. 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

25. 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

26. 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