Business 21C - Published by UTS Business

‘Australia needs to boost productivity to return to long-term sustained growth…’ OECD, Australia: Towards a Seamless National Economy, 2010.

Since the last Labor government’s microeconomic reforms of the late 1990s, Australia has slipped from an enviable position as one of the OECD’s productivity leaders to a laggard, well behind the US, Britain and Japan. In fact, between 2001 and 2006 our rate of productivity growth was about a quarter that of South Korea.

This structural deterioration in the Australian economy has been masked in recent years by windfall gains from the commodities boom, which reversed the longstanding decline in our terms of trade and reduced the policy focus on management and productivity.

The 2008 Review of Australia’s National Innovation System, Venturous Australia, alluded to the possible source of Australia’s productivity woes: ‘Many… programs in Australia are directed at technological or scientific innovation while only a few are directed at strengthening innovation management inside organisations, including leadership and culture…’

Last year’s innovation white paper Powering Ideas: An Innovation Agenda for the 21st Century not only lifted our sights with a 10-year program for public research and business innovation, but also recognised that innovation is more than science and technology and increasingly encompasses ‘organisational innovation’, including new business models, systems integration and high-performance work systems.

Further to the white paper, a team of universities including UTS used methodology developed by the London School of Economics and McKinsey & Co, to identify determinants of high performance and to benchmark Australian firms against the global best.

The London School of Economics and McKinsey undertook a six-year study with 6000 observations in 16 countries (not including Australia) of the relationship between management practice and increases in productivity and output. Management practice was aggregated into 18 factors that were investigated in an interview-based survey in each of these countries.

The survey provided an important opportunity for us to build on the international research results, which suggested that superior management behaviour and techniques and their adoption are correlated with higher productivity gains. A single point improvement in the management practice score was associated with the same increase in output from a 25 per cent increase in the labour force or a 65 per cent increase in invested capital.

The results

The findings show that overall, Australia is certainly not at the top of the list, but we’re not at the bottom either. However we’re certainly not in the top tier of countries when it comes to management, leadership or our ability to translate innovation policy into action at the workplace level.

While some of our firms are as good as any in the world, we still have a substantial ‘tail’ of firms that are mediocre, especially in their approach to people management. This is a key differentiating factor between Australia and better performing, more innovative countries.

Linked to that is the critical finding that a majority of Australian enterprises are actually unaware of their management standards and are operating under the false premise that their performance is better than it really is. Managers generally over-scored their firm’s management capabilities and their self-assessed scores were not well correlated with the firm’s assessed management scores.

Size does matter! The survey revealed that publicly owned companies outperform other types of companies in Australia including privately owned firms and family owned firms. This finding was consistent with results from the previous LSE project conducted in other countries. Australian public companies, in an effort to meet shareholder expectations and deliver strong market performance, are generally more likely than other types of firm to adopt modern management practices.

Interestingly, among the family-owned firms, those who engage an external professional manager as CEO, deliver relatively better performance compared to those family firms which are both owned and managed by an internal family member.

Other key determinants of management and firm success include the level of education and skills among managers, degree of plant level autonomy, effectiveness of people management and share of export markets.

The conclusion of the LSE-McKinsey study was that government policy directed at good management behaviour may be the single most cost-effective way of improving the performance of economies. Furthermore, it confirmed the findings of an earlier LSE study which found that ‘improving management practice is… associated with large increases in productivity and output.’

There are certainly challenges to overcome if Australia is to be successful in its performance transformation. Government must consider more explicitly how it can contribute to the development of innovation capability and performance at the enterprise level; business leaders must transform their attitudes to people management; and educational and research institutions must focus on enhancing management performance.

But there’s no question that these challenges must be met. As Venturous Australia reminded us: ‘Australia’s innovation system will need to work better if we want to maintain the way of life we value so much.

This article was taken from an address by Roy Green, Dean of UTS Business, at Skills Australia, Using Skills Productively Conference, 6 and 7 September, 2010.

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