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MANAGEMENT DEVELOPMENT AND ORGANISATIONAL GROWTH IN EUROPEAN SMALL AND MEDIUM ENTERPRISES.
Dr. Colin Gray
Centre for Innovation, Knowledge and Enterprise
OpenUniversityBusinessSchool
Keywords: management development; SMEs; entrepreneur; organisational growth
1.Introduction
The past ten years have seen a steady increase in public policies aimed at improving European managers in terms of their competence, competitiveness, effectiveness, efficiency, innovativeness, leadership, quality and so on. The target attributes shift a little according to the other policies they are linked to but, in general, the main drivers spring from global competition and Europe’s competitive position vis a vis the US and eastern Asia. In Britain, the links between management development and competitiveness have been formally acknowledged in the UK since the 1994 Competitiveness White paper (DTI, 1994, 1998; DfEE/Pieda, 1998, CEML, 2002) and, at EU level, have recently been reinforced through the establishment at the recent (2002) Copenhagen EU Council of the EU Competitiveness Council.
Although the management development agenda is led by the larger enterprises and multi-national corporations, increasing attention is now paid to the management of small and medium enterprises (SMEs), the firms have fewer than 250 employees. This reflects a shift away from the policy focus of the 1970s and 1980s on employment and SMEs as the source of new jobs to a sharper focus on the entrepreneurial role of SMEs in promoting flexibility and innovation. However, it is also widely recognized that SME demand for and participation in management development has been significantly lower than that for large corporates and public organizations.
1.1SMEs in Europe
This current policy focus on innovation and competitiveness isless concerned with the size of the SME sector and more on promoting the smaller segment of SMEs that have the capacity and intention of competing, individually and with other firms, outside their local markets. Even so, it is worth noting that, of the 20 million or so firms in Europe, 99 per cent employ fewer than 250 people, accounting for two-thirds of the European workforce.However, roughly two-thirds of these firms employ no other people than the owner.The marginality and isolation (cultural, economic and personal) of these very small firms means that their strategic choices are limited. Indeed, the instability and uncertainties that riddle the secondary sectors in which most SMEs are located, means that notions of strategy itself - whether HR, marketing, production or overall business strategy - is alien to the vast majority.
In the sense that strategy implies intentionality and planning, most SMEs are reactive rather than strategic in their responses to changes in their business environments. This is particularly true of the self-employed and micro-firms with less than 20 employees. The main exceptions are SMEs that employ more than 20 people and are actively engaged in managing their sub-contractual arrangements with other firms or else producing leading edge consumer goods or services (Storey, 1994).
The second important point is that, in many cases, a self-employed or microfirm culture of individualism and anti-participation limits the economic role of many SMEs. The desire for personal independence is consistently the most commonly cited career-choice motive reported by SME owners (Bolton, 1971; Hakim, 1988; Gray, 1998). This is particularly linked to size of firm and has the effect of inhibiting cooperation with other firms, effective use of external support and effective delegation of responsibilities to subordinates(and their associated skills development). Linked to this, the smallest firms have been shown consistently over time to be generally growth-averse and resistant to training, staff development and other support initiatives (Bolton, 1971; CBI, 1986; Mangham and Silver, 1986: Constable and McCormick, 1987; Stanworth and Gray, 1991; Storey, 1994; Curran et al, 1996; Gray, 1998). The current economic downturn across the EU, with increasing levels of small business liquidations and personal bankruptcies, reveals that much previous growth in small firms was either not particularly resilient or else in exposed, low barrier-to-entry industries. By implication, therefore, most jobs within much of the SME sector are low skill jobs with few prospects for development. Fifteen years ago, Hakim (1988) demonstrated that most self-employed jobs are in the secondary sectors on the periphery of the core modern sectors which lie at the forefront of global competition. Apart from a few specialised high-technology and business services industries, little has changed since.
1.2Enterprise training and development in small firms
In Britain, one of the few organisations that has tried to track HRD nationally among its small firm members has been the national employers' organisation, the Confederation of British Industry (CBI) which found a consistent pattern of non-involvement in formal management development since the Bolton Report (1971) but did find interesting differences in management development needs and practices between the small and medium firms (CBI, 1986, 1995). Research conducted by the Small Business Research Trust (SBRT) among a broader more representative sample of smaller SMEs revealed clearly the size effects that influence training and development. The small firm human resource development (HRD) gap can be seen in table 1 which summarises multiple responses to the SBRT survey of the final quarter of 1995 on SME recruitment and staff development practices (SBRT, vol 11, no. 4).
Table 1. HRD approaches in SBRT sample 1995 (column percentages)
Staff development / <5 / 5 - 9 / 10 - 14 / 15 - 24 / 25 - 49 / 50+ / AllNo response / 24 / 7 / 6 / 3 / 7 / 9 / 15
No formal training / 43 / 36 / 29 / 28 / 16 / 14 / 36
Internal training / 9 / 20 / 36 / 29 / 48 / 51 / 19
External training / 18 / 34 / 45 / 59 / 65 / 63 / 32
Time off / 13 / 26 / 31 / 32 / 37 / 43 / 22
Other / 5 / 5 / 2 / 4 / 3 / 6 / 5
Sample (n) / 502 / 245 / 94 / 94 / 75 / 35 / 1045
Sample (row %) / 48 / 24 / 9 / 9 / 7 / 3 / 100
The survey covered both management and staff development and it is clear that microfirms are significantly less active than larger SMEs. Even excluding them from the sample, however, the expected size effects remain. There is a direct relation between the firm size and the provision of internal and external training courses, as there is in allowing employees time off to pursue their own development. However, many small SMEs are active in providing informal and on-the-job training and development. A 1996 survey by the University of Kingston found similar patterns with respect to formal management development but that some 80 per cent of small firms provide informal training to their staff and managers (Curran et al., 1996). More recently, the Council for Excellence in Management and Leadership (CEML, 2002) confirmed this pattern of non-engagement by UK SMEs, particularly the smaller firms, in external management development programmes, a pattern noted in 1988 by the National Audit Office. This is partly because the informality that characterises small business culture and partly because SME owner-managers are generally not keen on growth and few wish to do anything other than earn a living (Gray, 1998). Nevertheless, these reports also note that there is a minority of SMEs that is very active in providing HRD and that, generally, the preferred option is for internal, targeted courses or training. It is inevitable, perhaps, that these attitudes that so influence the practice of HRD among SMEs will be reflected in SME approaches to management development as well - small islands of progressive practice in a sea of reluctance and indifference.
1.3SME management development issues
In 1997, as part of a wider 10-year follow up to the Constable and McCormick (1987) management development study (Thomson et al, 1997), OUBS surveyed a sample of SMEs drawn from SBRT and CBI databases. The 389 respondents comprised 39 per cent manufacturers, 18 per cent broadly in the distribution sector and 41 per cent in services. More than half (58 per cent) had fewer than 20 employees where very few had written management development policies. The major difference between forms was however, less linked to size and more to their growth-orientation. Half did not expect to increase their number of employees but some 20 per centexpected rapid growth in the coming year, including the 12 per cent that reported an explicit intention to expand their workforce (whose responses differed considerably from the rest of the sample).
Table 2. Degree of management development by firm size (column percentages)
Formality of policy / 1-9 staff / 10-19 staff / 20-49 staff / 50+ staff / growth firms / response size (n) / %explicit formal policy / 5 / 6 / 11 / 11 / 19 / 32 / 8
informal policy / 33 / 46 / 44 / 39 / 42 / 158 / 41
none, react to need / 50 / 36 / 39 / 46 / 38 / 165 / 42
no system at all / 13 / 12 / 6 / 2 / 2 / 34 / 9
base size (n) / 117 / 108 / 109 / 54 / 48 / 389 / 100
row % / 30 / 28 / 28 / 14 / 12 / 100
As expected, the smallest firms were, on balance, generally averse to adopting a formal management development policy. Those above 20 employees were twice as likely to have written management development policies, a feature that was most striking in the high growth-oriented firms (where one in five had an explicit, written management development policy).This compares with the study’s parallel survey of larger organisations where 43 per cent report of large firms reported having a written policy (Thomson et al, 1997). Similar differences were observed in management development practices. Table 3 is based on multiple responses and shows the differences between the different categories of firm with respect to monitoring managers’ performance and the setting of management development objectives.
Table 3. Monitoring management development needs by firm size (column percentages)
Monitoring activities / 1-9 staff / 10-19 staff / 20-49 staff / 50+ staff / growth firms / response size (n) / %set individual performance targets / 38 / 43 / 46 / 56 / 58 / 170 / 44
appoint managers for specific jobs / 44 / 58 / 66 / 76 / 71 / 227 / 58
assess managers on performance / 51 / 62 / 70 / 65 / 81 / 238 / 61
managers assessed for training needs / 46 / 59 / 56 / 65 / 67 / 214 / 55
base size (n) / 117 / 108 / 109 / 54 / 48 / 389 / 100
row % / 30 / 28 / 28 / 14 / 12 / 100
There are clear size effects concerningindividual performance targets and the monitoring of management performance. To some extent this reflects fewer tiers of management in smaller firms (only 8% of micro firms had more than 2 levels compared with an average of 21% for the whole sample). It is interesting to note the high importance placed on management assessment by high growth-oriented firms. Indeed, growth-oriented firms were above the norm in all management development activities which suggests a linkage, in smaller firms at least, between management development practice and growth (though, in this study, the causal connections were not so clear). It is useful, therefore, to note that SMEs overwhelmingly use sales turnover, not numbers of staff or new sites, as their preferred measure of growth (Gray, 1998; EC, 2002).
The small firms with explicit management development policies generally had a stronger focus on meeting the development needs of both the organisation (47%) and of individual managers (58%). Another survey into the links between management development and performance (DfEE/Pieda, 1998a), found that management development activities were mainly used by UK firms to address such specific needs as to: (a) improve communication skills of managerial staff, (b) improve flexibility in responding to customer needs, (c) broaden managers' understanding of core managerial skills and (d) in small firms, to train non-managerial staff for future promotion to managerial levels. This study also found that in manufacturing firms the manager: employee ratio 1:9 led to a wider spread of management development benefits to more people in the firm. The generally low participation of small firms in formal management development activities was again confirmed.However, this study provided useful insights into the impact on SMEs of management development and concluded that its effects were most evident in:
- larger SMEs with between 50 and 100 employees;
- firms who are already active an sympathetic to human resource development issues in general;
- situations where the MD is delivered to individuals from a similar working environment, thus increasing the opportunity to share experiences informally in addition to the formal training being undertaken;
- firms already achieving significant growth in their sector, or those exhibiting relatively low or no growth at all.
What emerges from all these studies is that an interesting minority of larger SMEs with a strong business-oriented, growth strategy and with a strong internal HR-friendly organisational culture, adopt and make effective use of explicit management development activities. It is the main aim of this paper to explore the factors that influence management development in SMEs and what impact it has on SME performance. This is done in the context of the European Management Development project that is comparing management development across SMEs and large firms in seven European countries.
2.Methodology
2.1Description of EMD study.
Seven partners inBritain, Denmark, France, Germany, Spain and Romania, as part of the European Management Development (EMD) project under the EC’s LEONARO programme, each recruited and surveyedstructured samples of 100 firms. The aim was to construct samples distributed equally between the manufacturing/processing, distribution/transport and services sectors. To pick up small firm effects yet exclude the microfirms and self-employed, one quarter of firms were to have 20 – 100 employees. For the purposes of this paper, with its focus on the European dimension, the samples have been split, more or less evenly as Table 4 shows, between SMEs (less than 250 employees) and the larger firms with 250 or more employees. According to Eurostat (EC, 2002), there are in fact some 38,000 of these larger firms in the EU. This is less than one per cent of the EU’s 20 million firms but accounts for one third of the workforce and dominates the management development agenda.
Table 4. Size characteristics of SMEs vs. large firms.
SMEs mean. / Large firms mean / SME sample size / Large sample sizeNumber of employees / 110.89 / 4856.26 / 346 / 352
Number of managers / 10.60 / 437.58 / 341 / 342
Manager: employee ratio / 14.41 / 37.60 / 338 / 342
Days spent on management development / 11.85 / 13.92 / 332 / 333
Calculated on a firm by firm basis, managers in larger firms (38 per cent) appear to have an average management span more than two and half times wider than SME managers (14 per cent). This could account for (1) some of the economies of scale differences and (2) the stronger need for management development in larger firms.However, the 2 day difference in average days per manager spent on management development between SMEs (almost 12 days) and large enterprises (almost 14 days) was not significant (though the wider differences among large enterprises in their management development practice was reflected in a wide 34 day standard deviation, twice as wide at that for the SMEs). There were also no significant differences in business performance as measured by growth in sales turnover between the two sectors. However, it is worth noting that there was a significantly lower response rate to this question (291 SMEs and 302 larger firms). Although the fieldwork was completed 2001, when EU economies were beginning to slow down and the stock markets in US and Europe had already begun their slide, the most firms in the sample were buoyant in terms of sales.
Table 5. SMEs sector differences in past annual sales growth (column percent)
Sales change / SMEs / Large / Total / %Decreased / 10 / 9 / 67 / 10
Remained the same / 20 / 20 / 138 / 20
Increased / 71 / 71 / 496 / 71
Total / 349 / 352 / 701
Row % / 50 / 50 / 100
The high proportion reporting an increase in sales over the year diminishes the power of turnover growth as a discriminatory variable and may reflect a systematic sampling bias (only Britain stood out with a lower percentage of increases, even though the UK economy was performing better than its EU counterparts). This is slightly at odds with pattern of significant differences between SMEs and large firms when comparing the number of managers hired and fired over the year.
Table 6. SMEs vs. large firms decrease / increase in managers (row percent)
Recent changes / Future expected changesChange in number of managers / SMEs / Large Firms / Total / Column % / SMEs / Large Firms / Total / Column %
Decreased / 35 / 65 / 94 / 14 / 30 / 70 / 74 / 11
Remained the same / 54 / 46 / 359 / 51 / 54 / 46 / 461 / 65
Increased / 49 / 51 / 248 / 35 / 48 / 52 / 166 / 24
Total / 50 / 50 / 701 / 100 / 50 / 50 / 701 / 100
Chi2: 11.15df: 2p<0.004 / Chi2: 14.729df: 2p<0.001
Overall, there was a positive balance (per cent increasing less per cent decreasing) of 18 per cent of firms increasing their managers over the past year but, with expected management shifts in the coming year, this balance drops to 13 per cent, cause mainly by a 9 per cent drop in increases.. In fact, it appears that the respondent firms overall were expecting a reduction in activities, with two-thirds aiming to retain their numbers of managers at the same levels. However, there were significant differences between SMEs and large firms. The resilience of the SMEs, and their tendency to defend their status quo, stands out while the higher proportion of reduction in managers among large firms, and their lower rates of recruitment, do appear to reflect economic trends in the EU at the time of the surveys.
2.2Regional and sector differences
There were also significant differences between the national samples and between the three broad industry sectors. In Table 6, the German sample stands out with a significantly lower proportion of SMEs (conversely, more large firms) which is reflected in the wider average managers’ span of control and responsibility (average employee per manager). On this last measure, the national samples that stand outareSpain with a very high 68 employees per manager and Norway with its very tight 9 employees per manager.These significant differences seem to be only slightly related to differences in proportion of SMEs in their samples.
Table 6. SMEs national sample differences
Country / SMEs / Large firms / Employee/ manager / Sales balance % / Total (n)(row percent) / (mean) / Past / Future
Denmark / 52 / 49 / 12.75 / 69 / 83 / 101
France / 49 / 51 / 11.49 / 50 / 60 / 100
Germany / 37 / 63 / 42.96 / 57 / 60 / 100
Norway / 47 / 53 / 9.13 / 69 / 70 / 100
Romania / 54 / 46 / 24.33 / 80 / 88 / 100
Spain / 57 / 43 / 68.26 / 72 / 33 / 100
UK / 53 / 47 / 11.50 / 32 / 63 / 100
Total / 50 / 50 / 61 / 65 / 100
(n) / 349 / 352 / 26.08 / 701
The wide variance between national samples in their employee per manager ratios suggests (1) strong national or corporate influences and/or (2) definitional variations between countries on which roles are treated as management. There were also significant national differences in the balances – percent reporting increases less percent reporting decreases – of the past years sales (Britain very low and Spain and, especially, Romania high) and the balances for future expected sales (with Romania remaining high but Spain dropping dramatically).