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SME Productivity is the Strategic Challenge

Fascinating to read the latest report from the UK Office for National Statistics (ONS) of productivity performance of business sectors. The comparison of foreign owned businesses based in the UK to British owned businesses is stark and demonstrates huge potential for productivity growth - especially for family owned SMEs.

Key to the survey report was trying to understand the correlation between the key Management practices and results for productivity measured by Gross Valve added (GVA).

Headline conclusions include:

  • Foreign owned large businesses (>250 people) are 2X as productive as domestically owned equivalents (mainly American, Japanese and German)

  • Foreign owned medium sized businesses (50-249) are 3X more productive than similar UK owned businesses

  • With a similar deficit to the above, Family owned business are indicated to be 20% less productive than their German counterparts

But why?

Best practice Business improvement approaches are well documented and reported by Management “Gurus” and readily available.

We know that multi-national American firms famously pursue a Total Quality / Baldridge approach and adopt lean principles to business improvement, Japanese firms practice variations of the Toyota Production system and German firms are characterised by long-term planning, technology investments and collaborative employee engagement. These practices are transferred to the UK and clearly successfully implanted into Plants by their foreign owners to drive results.

So how do these different Business improvement cultures manifest themselves?

To identify this the in ONS in partnership with the Economic Statistics Centre of Excellence, developed and conducted a Management and Expectations Survey (MES) across 25,000 UK based businesses to demonstrate the correlation of the level of deployment of specific Management practices and productivity performance.

The survey focussed on 4 key areas of Management practice:

  1. Continuous improvement practices – how well does the firm monitor its operations and use this information for continuous improvement?

  2. Key performance indicators (KPIs) – how many KPIs the firm has and how often they are reviewed

  3. Targets – are the firm’s targets stretching, tracked and appropriately reviewed?

  4. Employment practices – is the firm promoting and rewarding employees based on performance, managing employee underperformance and providing adequate training opportunities?

The conclusions of the survey responses translated into a 19% increase in productivity GVA between the management deployment score at the 25th percentile and the median, and a 12% further increase in labour productivity GVA between the median and the 75th percentile level of deployment.

Huge potential awaits.

The report also referred in their study of Family owned businesses (inter-generational) businesses, Lemos and Scur (2018) suggest that reputational constraints (costs) can hinder the adoption of more structured management practices help to explain the family firms’ productivity deficit.

Well perhaps. Entrepreneurial Business owners instinctively know that they have a productivity gap and tend to attempt to fill this with their personal intervention. Repeatedly this “day to day office management” takes the Entrepreneur away from the focus of growing Value in the business and building relationships with the Customer and, critically, disempowers employees to make a difference as they wait “to be told what to do”.

Key here is that Entrepreneurs often do not have personal working experience of effective Management systems that drive productivity improvement and, importantly, how to operate in this environment - these are the known unknowns for family owned businesses.

Time for a long hard look of how SME’s and family owned businesses can bridge the productivity deficit.

Over a 30-year career working within British and US multinationals in the UK, US, Switzerland, Germany and Italy I have been privileged to lead and successfully deploy these Business principles in varied cultures to drive productivity and GVA results. Interestingly I have found that they are equally as effective in all cultures when sensitively deployed working with the leadership and employees. In the last 6 years working with family owned SMEs in the UK, it has been apparent that purely copying Big Business approaches is not the way forward.

It is important to embrace the valued characteristics of Family owned business to lead the charge and demonstrate the way forward, this is the DNA of the business. Transferring successful habits through-out the organisation requires transforming the Management System and importantly liberating entrepreneur time to focus on Growth.

Driving this transformation to deliver productivity improvement requires strong leadership and making tough decisions based on data, coaching the business to embed underlying systemic success and utilising the collective intelligence of your whole team based on a shared understanding of the drivers of performance and the levers that must be pulled to achieve sustainable results.

My formula for success (the known unknowns) would be:

The UK Government has expressed concern of the UK productivity gap and slow productivity growth and have promised as part of the UK Industrial strategy White Paper to impact factors responsible for higher productivity. With a focus on continuing to promote foreign direct investment in the UK and in doing so increasing competitiveness it is believed this will drive overall productivity growth.

This is a clarion call for UK Family-owned SME Businesses that, more than ever, catching up in the productivity race is the sustainability and survival strategic imperative.

Article by Mel Mula at ConsultAvila, First published March 2019.

At ConsultAvila we are a team of experienced professionals who work closely with our clients to solve complex business problems. We have a track record of delivering SUSTAINABLECHANGE at pace in manufacturing companies. Our principal offerings are: Business and Operations strategy - from design to delivery; Business turnaround and programme recovery; End to end supply chain restructuring and cost reduction; and, Integrated business planning and inventory optimisation.

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