Draws are not good enough if we want to improve our world ranking

Two months ago I wrote about an international study on the importance of management to business and economic performance (Dominion Post, 17 April 2010).  I concluded by saying that it would be nice to see how the management of New Zealand firms compared with those in other countries.  What I did not know was that the Ministry of Economic Development had already commissioned the same research team to replicate the research in New Zealand and that they were just about to release their report: Management Matters in New Zealand: How does manufacturing measure up?

The report uses the same methodology developed at the London School of Economics with McKinsey & Company, and the same research team from the University of Technology Sydney that conducted the survey of Australian manufacturing firms.  The results from studying 152 media to large-sized manufacturing firms in New Zealand during 2009 allows us to come as close as possible to making authentic comparisons of management performance in New Zealand relative to that achieved in similar businesses in 16 other countries.

As I surmised two months ago, by comparing relative measures of per capita GDP, New Zealand's management performance is at the tail end of the middle cluster of management performers (see graph).  The quality of management in New Zealand manufacturing businesses appears to be akin to that found in Australia and European countries like Italy, France, and the UK.  It is generally of higher quality than firms based in emerging economies such as India, China and Brazil, but a level below the quality found in the high cluster of Japan, Germany, Sweden, Canada and the US.

As I noted previously there appears to be a strong correlation between management performance identified in this study and overall economic performance, as measured by per capita GDP.  It is less clear why such a strong relationship should exist. Manufacturing is just a small part of modern economies, representing only 13% of New Zealand's national output in 2009.  The sample of firms investigated represented just 14% of the employment in manufacturing and less than 2% of total employment in New Zealand in 2009.  Yet it appears that the quality of management in these businesses is, at the very least, symptomatic of the type of things that are important for determining overall economic performance.

Another point worth noting from the graph is that the management performance indicator is a poorer guide to economic performance for some countries than it is for others.  For example, economic output in Japan appears to be 22% lower than its management performance indicator suggests is possible, and Australia's appears to be 27% higher: further support of the theory that Australia really is the lucky country.

So how do we raise our management performance to catch up with countries like Australia or Canada?  The Management Matters report indicates that our people management skills are a critical weakness.  We are particularly poor at addressing and correcting poor performance, and at rewarding and retaining high performers.  We put up with poor performance and we put insufficient effort into ensuring that the people valuable to the organisation wish to remain.  For a low-population country with a limited supply of skilled workers, who are typically very mobile, it seems odd that we should be so cavalier about retaining our high achievers.  With further globalisation and expected declines in the size of the work force in Europe, labour mobility is only likely to increase in coming decades.  So how long can this cavalier attitude persist?

Another critical factor for New Zealand manufacturing firms appears to be a lack of corporatisation.  Firms based in New Zealand that have a dispersed shareholder base achieve management performance scores that are comparable with those recorded in the elite nations.  It is in firms owned by individuals and families where poor management performance is concentrated.  A key difference with overseas evidence is that external CEOs do not appear to materially raise the performance of family-owned businesses in New Zealand.  Overseas, it seems that family firms can improve their management performance by hiring an external CEO, but this does not seem to work in New Zealand.  Potential reasons for this may be that the pool of external talent in New Zealand is no better than the internal talent, New Zealand family business owners do not give hired CEOs sufficient management freedom, or the small size of New Zealand family businesses means that there is less scope for specialisation within management teams.

John Key's National Government would like to see New Zealand’s economic performance catch up with Australia's by 2025.  A prerequisite of achieving this goal would seem to be a need for us to raise our management performance to that of the world's elite nations.  Without relying on luck, that means aiming for Canada, not Australia.  If the relationships in my graph hold, to match the performance of the Australian economy we need our management teams to outperform their Australian counterparts.  Managing our businesses as well as Australian firms are managed may only get us half way there.

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