Management practices and SME performance
| Published date | 01 September 2019 |
| Date | 01 September 2019 |
| Author | Alex Bryson,John Forth |
| DOI | http://doi.org/10.1111/sjpe.12209 |
MANAGEMENT PRACTICES AND SME
PERFORMANCE
John Forth* and Alex Bryson**
ABSTRACT
We examine the association between management practices and SME performance
in Britain over the period 2011–2015, using a unique dataset which linkssurvey data
on management practices with firm performance data from the UK’s official busi-
ness register. We find that SMEs are less likely to use formal management practices
than larger firms. However, such practices appear to have demonstrable benefits for
those SMEs who use them, being positively associated with firm survival, growth
and productivity. Our results add further weight to policy initiatives which seek to
encourage SMEs to improvetheir management skills and capabilities.
II
NTRODUCTION
Small and medium-sized enterprises (SMEs) have long been viewed as an
important source of job creation and output growth (e.g. Birch, 1981; OECD,
2002; Hijzen et al., 2010; Criscuolo et al., 2014). Indeed, over 70% of the
growth in UK employment between 2010 and 2016 was located within SMEs;
turnover in SMEs rose by almost one firth over the same period (NESTA,
2017). However, as concerns about the UK’s persistently weak productivity
growth have deepened, attention has increasingly turned to small and med-
ium-sized firms’ over-representation within the long tail of low-productivity
firms (Aradanaz-Badia et al., 2017).
At the same time, a growing body of evidence has emerged to show that firms
which engage in more extensive use of data collection and analysis, target setting
and performance-focused human resource practices are more productive –and have
higher levels of productivity growth –than firms with fewer of these formal man-
agement practices (see Bloom et al., 2014, for one review). The evidence is particu-
larly strong for manufacturing industries, where the majority of these recent studies
have been located, but it is growing for service industries too (ibid., pp. 23–24).
Most of the accumulating evidence is, however, based on samples of med-
ium-sized and large firms.
1
It is apparent from survey-based studies that
*City University of London
**University College London
1
The World Management Survey only samples firms with between 50 and 10,000 employ-
ees. In their original paper, Bloom and Van Reenen (2006) report that responding firms had
a mean size of 1,984 employees.
Scottish Journal of Political Economy, DOI: 10.1111/sjpe.12209, Vol. 66, No. 4, September 2019
©2019 Scottish Economic Society.
527
smaller firms make less use of formal management practices (e.g. Forth et al.,
2006), but it is less clear whether such practices really benefit those that use them.
One perspective sees practices such as target-setting, training and performance
management as universally applicable, such that firms of all sizes should see posi-
tive returns from their implementation. Under this perspective, the lesser use of
formal management practices among smaller firms might be attributed to a lack
of knowledge about their benefits or greater difficulties in adopting new methods
(Bloom et al., 2011). An alternative perspective argues that small firms have dis-
tinctive characteristics which can make the extensive use of formalized practices
inappropriate (e.g. Kitchingand Marlow, 2013). Greateruse of such practices can-
not then be expected to deliver performance benefits and may even be harmful.
We contribute to the literature by examining the association between man-
agement practices and firm performance among SMEs in Britain over the per-
iod 2011–2015, using a unique dataset which links high-quality survey data on
management practices with longitudinal data on firm performance from the
UK’s official business register. This linked dataset provides us with detailed
information about the internal organization of the firm alongside longitudinal,
accounting-type data on the firm’s employment and sales. We find that SMEs
are less likely to use formal management practices than larger firms. However,
such practices appear to have demonstrable benefits for those SMEs who use
them, being positively associated with firm survival, growth and productivity.
The returns appear to be strongest for those investing in human resource
management practices, such as rigorous recruitment and performance apprai-
sal, and those setting formal performance targets.
Ours is the first study (that we are aware of) to investigate the association
between formal management practices and firm performance among SMEs in
Britain using a nationally representative sample which has longitudinal,
accounts-type data on performance outcomes. Our results do not have a strict
causal interpretation, but they extend the growing body of evidence on the
benefits of formal management practices in large firms, suggesting that such
practices also give positive returns among SMEs. The findings thus add fur-
ther weight to policy initiatives which seek to encourage SMEs to improve
their management skills and capabilities.
The paper proceeds as follows. Section II reviews the existing literatures on
the impact of management practices and discusses the potential for hetero-
geneity by firm size. Section III introduces our linked data on management
practices and firm performance, and outlines the methods used in our quanti-
tative analysis. Section IV presents the results of our analysis of the preva-
lence of formal management practices among SMEs and of their association
with SME performance, based on the linked dataset. Section V concludes and
discusses some of the implications of the analysis.
II THEORY AND PRIOR EVIDENCE
In recent years, there has been a growing interest in the potential benefits that
may accrue to firms that make extensive use of ‘formal’ management
528 JOHN FORTH AND ALEX BRYSON
Scottish Journal of Political Economy
©2019 Scottish Economic Society
practices. Motivated in part by a substantial body of evidence which docu-
ments persistent heterogeneity in the performance of firms, even within nar-
rowly defined industries, this literature has focused on the extent to which
such heterogeneity may be explained by observable differences in firms’ use of
operational and human resource practices (see, for example, MacDuffie, 1995;
Ichniowski et al., 1997; Lazear, 2000; Black and Lynch, 2001; Bloom et al.,
2016a; Brynjolfsson and McElheran, 2016a). Whilst the proposition that man-
agement matters is far from new, the development of datasets that link infor-
mation on management practices with accounts-type data on firm
performance has allowed this aspect of the firm to be subject to a greater
degree of formal scrutiny.
One strand of research in this vein has focused primarily on human
resource management (HRM) practices. Studies in this area have sought to
investigate the contention that HRM practices can aid firm performance by:
(a) helping the firm to acquire and develop its human capital; (b) structuring
jobs in such a way as to encourage employee participation in process improve-
ment; and (c) motivating employees to direct their efforts in line with organi-
zational goals (see Bailey, 1993; Appelbaum et al., 2000). Research has thus
focused on the performance effects of practices such as: recruitment tests and
structured employee training; team-working and quality circles; and appraisal
and incentive pay. Huselid (1995), for example, studied a cross-sectional sam-
ple of 1,000 US companies, finding that greater use of such HRM practices
was associated with higher productivity (sales per employee) and better finan-
cial performance (Tobin’s qand gross rate of return on assets). Guest et al.
(2003) undertook a similar study of 366 UK companies with longitudinal data
on firm performance; in their sample, an index of HRM practices was posi-
tively associated with profitability (not productivity) but the association was
non-significant after controlling for prior performance. A third study is that
of Black and Lynch (2001), who analysed a sample of 636 US manufacturing
establishments, again with longitudinal data on firm performance, finding that
regular work-focused meetings and the use of profit-sharing schemes were pos-
itively associated with productivity, but other practices such as teamworking
were not. The evidence from this strand of work on the performance benefits
of HRM practices has thus been somewhat equivocal.
Another strand of research has focused primarily on operations manage-
ment practices and performance incentives. The work of Bloom et al. (2012,
2014, 2016a,b) is prominent in this field. Building on discussions with manage-
ment consultants and prior academic research, their work focuses on the per-
formance effects of 18 practices under three broad headings: (a) performance
monitoring (i.e. information collection and analysis); (b) target setting; and (c)
people management (i.e. selection, development and performance-focused
reward). The proposition is that those organizations which continuously mon-
itor their processes, set comprehensive targets and pay close attention to the
performance of their workforce will perform better than those which do not
monitor their operations, have few targets and do little to address employee
under-performance. Such management practices are thus viewed as being akin
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Scottish Journal of Political Economy
©2019 Scottish Economic Society
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