Poor management skills hampering growth of SMEs

26 May 2015

Many small and medium-sized businesses in the UK are being held back by current levels of management and leadership skills, according to Warwick Business School research.

The UK economy may be growing faster than any advanced nation, but productivity is a problem with output per hour worked still two per cent below its pre-crisis level according to the Office of National Statistics.

A survey saw English small and medium-sized enterprises (SMEs) identify poor management skills, especially entrepreneurial skills, as hampering their growth. According to the Department for Business Innovation and Skills (BIS) there are five million SMEs in the UK, although only approximately 1.27 million of these have any employees.

The report entitled Leadership and Management Skills in SMEs: Measuring Associations with Management Practices and Performance identified a number of reasons the UK SME sector is currently underperforming.

Professor James Hayton, of Warwick Business School and the report’s author, said: “The research shows that, when looking at the distribution of skills in the population, there is currently a ‘long tail’ of SMEs not employing management best practice. This is important because the research also shows that well-developed skills are associated with the use of and management best practices and consequently with firm performance and growth.

“In this sense, the evidence shows under-developed leadership and management skills and a widespread failure to adopt management best practices are constraining the performance and growth of a large number of SMEs.”

The research involved a survey of approximately 2,500 English SMEs across all sectors with between five and 250 employees.  A total of 2,948 interviews were conducted. These included 371 interviews with a second senior manager in businesses that had a ‘senior management team’ rather than being led by a single individual.

To better understand the SME sector, Professor Hayton examined the association between entrepreneurship skills, leadership and management skills, the implementation of management best practices and how these factors are related to three measures of firm performance: turnover, productivity and employment growth.

The results clearly demonstrate leadership and management skills are relatively under-developed in many SMEs argues Professor Hayton.

Furthermore, the study showed a generally low uptake of important practices such as formalised strategic management, and many of the so-called ‘high performance’ human resource management (HRM) practices such as information sharing, participation in decision making, training and employee ownership.

Professor Hayton said: “Of all of the dimensions measured, the most important predictor of positive performance is entrepreneurship skills. There is a strong argument that entrepreneurship skills are positively associated with good strategic management practices, good HRM practice, and ultimately firm performance.

“Across all firm types and contexts the benefits of top managers with good leadership and entrepreneurship skills appear in terms of both revenues and growth, as well as indirectly with productivity and turnover via its effect on good people management practices.

“Skill levels and the adoption of best practices are uneven across the SME sector. This means there are long tails of businesses with poorly developed skills, many of which do not use management best practices.

“The research also shows that variations in leadership and management skills are associated with variations in SME performance; both directly and indirectly through an increased propensity to adopt management best practices.”

In the study, entrepreneurship skills were consistently positively related to both turnover and productivity.

“The results indicate skills matter, but not all skills matter equally,” said Professor Hayton. “Given limited resources, especially time, SME owner-managers may benefit most significantly from ensuring that their entrepreneurship skills and leadership skills are well polished.

“An important practical takeaway from this research therefore is owner-managers should understand the fundamental benefits of a formal approach to strategic planning, communication, and adaptation, as well as being able to connect HRM practices to the strategic planning process.

“There is growing evidence that entrepreneurship skills are trainable. Entrepreneurship education is becoming widespread and is accessible not only within schools, further education and higher education institutions, but is also accessible through established sources of business support. Many managers may benefit from taking advantage of this type of personal development opportunity.”

Professor James Hayton teaches Strategic Human Resource Management on the Executive MBA. He also teaches on Warwick Business School's Executive Education programme

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