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Enterprise and Productivity: Harnessing Competitive Forces - TPRP 08/04

New Zealand’s enterprise culture: a dearth of management skills?

As Schumpeter identified, it is individuals that drive productivity growth through the identification of new opportunities. This requires quite a unique skill set that not everyone will possess. The entrepreneur needs a range of skills to be successful: the vision to identify potential opportunities and the ability to analyse the likelihood of success or failure, the communication skills to sell that idea to managers (if the individual is in a large organisation) or potential investors (if the venture is a start-up) and the managerial talent to access and control the resources required to make it work.

New Zealand’s specific characteristics present extra challenges for managers

Some of New Zealand’s market characteristics are likely to impact on the required entrepreneurial skill set, such asthe small size of the domestic market, and therefore the relatively higher importance of exporting to achieve economies of scale. The skills required for building an outward-focussed business are likely to be different to those for an inward-focussed business. The relative absence of very large firms, as compared with other countries, implies there may be less opportunity for managers to acquire experience by moving through different levels of management within a firm.

These skills are difficult to define and even harder to measure. While not wholly sufficient for entrepreneurial activity, management and leadership capability (the skills and talents of the manager) and management practices (the business processes and structures) impact substantially on organisational performance. Skilled managers can create an environment where innovation and skill development can flourish.

Better management practices make better firms…

Strictly speaking, it is better management practices that drive improvements in firm performance. There is a big difference between the skills of managers and the management practices of the firm and evidence shows a much stronger link between management practices and firm performance than it does management skills and firm performance. Management practices are embedded in the organisational capital of the firm and evolve over time; good management practices may not solely be the result of good management skills in the current set of managers. A number of recent studies confirm the link between management quality and productivity. Bloom and Reenen (2006) find that management practices are linked to productivity, profitability and investment rates in the US, UK, France and Germany. Knuckey and Johnston (2002) find that in New Zealand, firms that implement better management practices are more likely to report increasing market share, productivity and profitability.

Objective internationally-comparable data on management skills and practices are not currently available, making measurement intrinsically difficult. The International Institute for Management Development (IMD) World Competitiveness Yearbook asks business executives to rate management quality in their countries. This approach is not entirely satisfactory, as perceptions may be biased, but it may provide some insight. The IMD ranks perceived management skill levels in New Zealand lower than Australia, the UK and many OECD countries. Massey et al (2005) conclude that a management capability problem exists and that the general consensus amongst experienced providers is that New Zealand lacks skilled managers. In a survey of international perceptions of New Zealand business cultures and values, New Zealand Trade and Enterprise (NZTE) concluded that businesses are perceived as lacking the hunger to be part of an international community and that they lack the preparation and research into a foreign country’s culture and specific market characteristics.

…but New Zealand may not have enough high quality managers

The evidence on New Zealand’s performance is small and largely subjective, but the general conclusions support the hypothesis that, on average, New Zealand suffers a dearth of high quality managers and entrepreneurs. This lack of managerial talent could be affecting both a firm’s ability to internationalise and also the average firm’s ability to identify new opportunities and grow.

Figure 4: Perceived availability of competent senior managers, 2004 and 2006
Figure 4:  Perceived availability of competent senior managers, 2004 and 2006.
Source: IMD World Competitiveness Yearbook 2006

The level of management skills is affected by both 'pull' and 'push' factors. The supply of management skills depends on factors such as the pool of potential managers, the level of management-related education and training, both on the job and in formal education, and less tangible concepts such as attitudes or aspirations. The demand for management skills depends on factors such as the level of market competition, ownership and corporate governance, and other less tangible concepts such as attitudes to dilution of ownership or perceptions of acceptable executive remuneration.

Above all else, competition drives performance, including managerial performance

Perhaps above all other factors, competition drives better management practices. The threat of entry or takeover focuses managerial efforts on improving firm performance and a key aspect of this is implementing better management structures and systems. Improvements in New Zealand’s management skills and practices can be driven by continued assessment of the competition regime to make sure that firms are open to international and domestic competition.

Policy institutions can influence the adoption of good management practices, and not solely through the provision of training programmes. Many of the factors that appear to encourage better management practices are amenable to policy. The promotion of competition, the provision of information on best practice management techniques, specific programmes focussed on those firms that would benefit most from improved management and measures to attract and create skilled managerial talent should all be considered as ways to improve New Zealand’s performance.

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