10th Nordic Conference of Small Business Research Växjö University, Sweden

OBSTACLES TO PRODUCTIVITY IMPROVEMENT IN SMALL AND MEDIUM SIZED ENTERPRISES

Mika Hannula Institute of Industrial Management Tampere University of Technology, Finland tel. +358 3 365 2679, fax. +358 3 365 2027 Email: [email protected]

Petri Suomala Institute of Industrial Management Tampere University of Technology, Finland tel. +358 3 365 2598, fax. +358 3 365 2027 Email: [email protected]

Abstract The main objective of this paper is to find out, which are the most important obstacles to productivity improvement in small and middle size manufacturing companies in Pirkanmaa, a province in southern Finland. The opinions of private entrepreneurs are the matter of primary interest. The questionnaire was sent to the managing directors or owners of the small and middle size manufacturing companies in Pirkanmaa. Pirkanmaa area is not defined here purely geographically but the selection of the companies is based on the address register of the local union of entrepreneurs, Pirkanmaan Yrittäjät ry. The companies involved are thus members of that organisation. Productivity is – by definition – purely a concept of real process. It is defined as the relationship of output to associated inputs. Real process that combines the inputs in order to make output includes practically all the activities of a company. The internal performance of activities such as manufacturing, marketing, selling and administration determines the level of productivity. The most significant obstacle to productivity improvement according to entrepreneurs was "Size of social security and the other side costs of wages ". Second was "Lack of time to improve productivity ". The third one was "General lack of resources in the firm". The order is based on the arithmetic mean values of the answers. However, one should notice that some of the obstacles that came up, are theoretically rather promoting factors than actual obstacles to productivity improvement. Based on the findings, it can be said that in real life the concept of productivity is still quite unclear; this is also one obstacle to productivity improvement as such. Too seldom entrepreneurs profoundly think what is really important for their business in long term. It is also quite obvious that the important role of measurement in productivity improvement is not well enough understood. The utilisation of different kinds of performance based salary structures in small and middle sized manufacturing companies is also quite rare.

TABLE OF CONTENTS

ABSTRACT 1. INTRODUCTION................................................................................................1 2. OBSTACLES TO PRODUCTIVITY IMPROVEMENT...................................2 2.1 PRODUCTIVITY IN GENERAL ..............................................................................2 2.2 OBSTACLES RESTRAINING PRODUCTIVITY IMPROVEMENT ..................................3 3. STUDY IN PIRKANMAA...................................................................................4 3.1 SMALL AND MEDIUM SIZED ENTERPRISES IN FINLAND .......................................4 3.2 RESEARCH METHOD...........................................................................................5 4. RESULTS .............................................................................................................6 4.1 INTERNAL OBSTACLES.......................................................................................6 4.2 EXTERNAL OBSTACLES......................................................................................9 4.3 GENERAL OBSTACLES .....................................................................................11 4.4 MOST SIGNIFICANT OBSTACLES TO PRODUCTIVITY IMPROVEMENT ....................13 5. CONCLUSIONS ................................................................................................15

1.

Introduction

Tightening of competition in both local and global markets has forced firms all over the world to concentrate more than ever before on the improvement of their overall competitiveness. One of the most important parts of overall competitiveness is price competitiveness. Traditionally the price competitiveness of Finnish products has not been very good from the global point of view. The main reason for the fact is the high level of the labour cost in Finland. The price competitiveness of our products can be improved by persistent productivity improvements, which lead to better overall competitiveness and better market positions for our companies. This is important for Finland not only at the firm level but also at the national economy level. When aiming to improve productivity at the firm level and especially in small and medium sized enterprises, there are a lot of obstacles to productivity improvement. Just to give some examples, lack of time, inadequate financing, the negative attitude of personnel or lack of know-how regarding productivity improvement can restrain firm’s ability to achieve the aim. In addition, there are some theoretical problems concerning productivity measurement, which can make it difficult to increase productivity systematically. There are some basic questions considering obstacles to productivity improvement: Which of the obstacles are the most significant ones from entrepreneurs’ point of view? Do entrepreneurs understand the nature of these problems and, what is more important, do they have the know-how to solve these problems? If we had more information about the actual obstacles restraining productivity improvement and more information about opinions of entrepreneurs regarding productivity related issues, it would be possible to eliminate at least some of the obstacles. What comes to restraints, which can not be eliminated, this information would help at least to plan and develop means how to prevent the effects caused by them.

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It is not possible to solve all of these problems by one single study, but we have to start somewhere. Thus the objective of this study is to find answers to the following question: Which are the most meaningful obstacles to productivity improvement in small and medium sized enterprises in Pirkanmaa? The subject of the study is small and medium sized enterprises representing industry sector. The study is based on a survey conducted by the authors in Pirkanmaa province in Finland summer 1997. Pirkanmaa is a region of 440 000 inhabitants located in southern Finland.

2.

Obstacles to Productivity Improvement

2.1 Productivity in General Productivity is one of the key factors affecting profitability and overall competitiveness of a firm. Improving productivity is not vital only for firms, but it is vital also to a whole nation. Changes in productivity have been recognised to be the major influence on many social and economic phenomena, like rapid economic growth, higher standard of living, improvements in a nation’s balance of payments, inflation control, and even on the amount and quality of leisure (Aggarwall 1981, p. 457, Wait 1980, p. 25). And moreover, the improvement in productivity by each individual enterprise is necessary for it to remain competitive and to improve its profitability. Improved productivity would result in higher wages to labour, more jobs and incremental gains in standards of living; greater profits for management through greater output at reduced costs; and lower prices to consumers (Mammone 1980, p. 36). Productivity is a rather common and extremely abused term (See, e.g. Sink 1983, p. 37 or Ghobadian and Husband 1990, p. 1435). It is a concept, for which everyone has his own meaning, but often no two meanings agree. Economists, politicians, engineers, consultants, etc use it. They all have their own idea of the nature of productivity and how to measure it. Definitional incongruency seems to be one of the most serious problems in productivity

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measurement and management (See, e.g. Hannula 1996, or Hannula 1998). Productivity can be considered in many ways and on different levels. In general we can determine productivity as the relationship between the outputs generated from a system and the inputs provided to create those outputs (Ammer and Ammer 1977, p. 377, Sink 1985, p. 3, Sutton 1992, p. 391). At the firm level productivity can be defined as the measure of a firm's ability to utilise the inputs to make as much output as possible (Rantanen 1995, p. 7). Changes of productivity can be measured on different levels of economy. The real changes are, however, mostly carried out at the level of individual work and machines in the firms. That is why the measurement and improvement of productivity usually have to happen at that level. However, we must always keep in mind that productivity or an increase of productivity is not the final aim of operation. These are only a way of striving for profitable action in a firm (Rantanen 1995. p. 12).

2.2 Obstacles Restraining Productivity Improvement There are several ways to improve productivity in firms (See, e.g. Sumanth 1984 or Sink 1985). Even the measurement of productivity as such is one way of increasing the level of productivity. Along with the methods of productivity improvement there are also several factors that make them ineffective or even prevent improvement actions. These factors can be called obstacles to productivity improvement. For example, lack of time and resources, passive attitude, or lack of know-how can be obstacles to productivity improvement. The obstacles can be classified into three categories: internal, external and general obstacles.1 The internal obstacles are factors that are inside the firms and it is possible to affect these by actions performed inside the firm. The management and the workers can eliminate these internal restraints or they can weaken the effects of these. Lack of knowledge and poor production methods are typical internal obstacles. The external obstacles are factors that are outside the firm. The firm cannot affect these factors directly: The only way is to attempt to affect via the unions or other similar interest

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Reg a rding the classificationof obstacles into three categ ories, see Ranta nen1997a. A classificationinto tw o categ ories is also u sed inthe literatu re. See, e.g ., Peltonen1984, p. 42-44 (InFinnish).

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groups. Usually the firm must adapt to this kind of restrains. The external obstacles put up the limits within which the firms must operate. For example legislation and action of trade unions are typical external restraints on productivity improvement. There are also some factors that are not so easy to categorise clearly to the above groups of obstacles. They can belong to both of these groups or neither of them, and we can call these general obstacles to productivity improvement. For example theoretical problems, measurement problems and lack of public information can be general restraints. The significance and affect of the obstacles usually depend on the point of view they are considered. For instance, high side costs of wages affect productivity improvement in many ways: According to substitution theory of productivity, an expensive input will be replaced with more inexpensive one: Labour input is replaced with machines. In practice expensive labour will lead to improving labour productivity by other means too. High side costs of salaries might also lead to lack of professionals capable of improving productivity. As shown by these examples, high side costs of wages and salaries could be a factor forcing a firm to improve productivity or it can be an obstacle restraining productivity improvement. Many of the obstacles are dualistic in their nature. In Finland these obstacles to productivity improvement are not widely studied in the field of industrial management. There are only few studies that touch on this subject. The main interest in these studies is on productivity measurement at the firm level (See, e.g. Hannula 1996) or the understanding of the concept of productivity (Korsman 1994).

3.

Study in Pirkanmaa

3.1 Small and Medium Sized Enterprises in Finland When aiming to improve productivity of a firm in the real world, there are numerous obstacles restraining the effort. The objective of this study is to find out which of these obstacles are the most remarkable ones from the entrepreneurs’ point of view. The scope of

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this research work consists of small and medium sized industrial enterprises in one region in Finland. The region analysed was Pirkanmaa, which is located in Southern Finland. Productivity improvement is one of the most important ways of developing the economic situation of the firm and the whole region. The depression in the early 1990’s had a bad affect to the unemployment rates in Finland. In June 1997 the unemployment rate figure in Pirkanmaa region was 18,5 %. The corresponding figure regarding the whole nation was 14,9 %. Pirkanmaa has thus, regarding the unemployment situation, suffered the recession even more than the nation in general. The questionnaire was sent to firms in June 1997.

3.2 Research method The questionnaire for the study was built up to be sent to small and medium sized enterprises representing industry sector. The questionnaire was based on a questionnaire made for a corresponding study carried out earlier in the same year in Päijät-Häme, another province in Finland (Rantanen, 1997a). The first survey was carried out in January 1997 in Päijät-Häme region, and the second survey was carried out in July 1997 in Pirkanmaa region. The questionnaires were not exactly identical. There were some minor changes done and also few questions added in our survey in order to improve the questionnaire and the replies. The comparability of the two surveys was maintained at an acceptable level. The questionnaire contained three groups of questions, which dealt with the obstacles restraining productivity improvement. In addition, there were questions regarding some detailed information on productivity measurement, the efficiency of operations, the attitudes and knowledge of personnel, and the financing of the firm. Also the line of business and the size of the firm based on sales were asked. In the questionnaire the possible obstacles to productivity improvement based on the theory were put in three groups. Closed questions were used to ask the significance of different productivity obstacles. There were also open questions used to find out such obstacles, which were not pre-determined. The obstacles were presented in the questions and the firms were asked to mark how significant each of the obstacles is for them. A scale of five

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possibilities was used: Number 1 means that the factor in questions is not significant as an obstacle restraining productivity improvement, and number 5 means respectively that the factor is a very significant obstacle to productivity improvement. Most of the obstacles given are dualistic in their nature. In these cases it is not exactly clear, if the obstacle is really restraining productivity improvement or is it on the contrary forcing a firm to improve productivity. The replies to the survey represent the subjective opinion of the firms. They are not objective and deeper analysis is needed to make any conclusions based on the results. The questionnaires were sent to 824 small and medium sized enterprises in Pirkanmaa region. The respond rate was 11%. The addresses of the firms were received from the union of entrepreneurs (Pirkanmaan Yrittäjät ry.). The questionnaire was sent to managing directors or owners of the companies. Thus the management’s and owner’s point of view is strongly highlighted in the answer causing some bias to the answers. The research method is descriptive. The results of the survey were processed with simple statistical methods. The mean and deviation in case of every obstacle were calculated. The most significant obstacles in different categories were found on the basis of the mean of the answers. If the mean of the answers was high, the restraint was meaningful. If the mean of the answers was low, that restraint did not have much importance. The results of the survey were also presented in graphic form.

4.

Results

The results of the study are presented briefly in this article. This study is reported thoroughly also in research report, which is published in Finnish by Tampere University of Technology (Hannula & Suomala 1997).

4.1 Internal Obstacles The internal obstacles are factors that can be affected by actions performed inside the firm.

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Table 1 presents the five most significant internal obstacles to productivity improvement in Pirkanmaa region. The mean (m) and the deviation (d) of the answers considering each obstacle are given after the obstacle. The most significant internal obstacles are also illustrated in figure 1.

Ta ble 1. The interna l obsta cles to produ ctivity im provem ent in Pirk a nm a a reg ion.

1.

Lack of tim e to im prove produ ctivity (m 3.62, d 1.18)

2.

G enerallack of resou rces inthe firm (m 3.56, d 1.24)

3.

There is no fu nds to hire m ore personnelto im prove produ ctivity (m 3.55, d 1.34)

4.

Lack of personnelresou rces (m 3.26, d 1.32)

5.

W ork ers' shortcom ing s w ith k now ledg e and edu cationonprodu ctivity (m 3.24, d 1.14)

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4,00

3,50

3,00

2,50

2,00 Mean Dispersion

1,50

1,00

Fig u re 1.

i Superiors' shortcomings with knowledge and education on productivity

i Personel's passive attitude and resistance to changes

i Workers' shortcomings with knowledge and education on productivity

i Lack of personnel resources

i There is no funds to hire more personnel to improve productivity

i General lack of resources in the firm

0,00

i Lack of time to improve productivity

0,50

The m ost sig nifica nt interna l obsta cles to produ ctivity im provem ent.

From entrepreneur’s point of view, lack of time to improve productivity and general lack of resources in the firm are the most significant obstacles to productivity improvement in Pirkanmaa. Also There is no funds to hire more personnel to improve productivity was found significant. All of these obstacles are actually resource related. They indicate quite strongly the opinion of entrepreneurs that the workload caused by operational issues seems to be too big taking into account the present resources in a typical SME. There were also two other obstacles found significant: Lack of personnel resources and Workers' shortcomings with knowledge and education on productivity. Thus, four most remarkable internal obstacles are all actually resource related. The fifth obstacle indicates the perceived complexity of productivity improvement; in addition, it points out the important role of the whole staff in productivity improvement process.

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In the questionnaire there was a possibility to present some additional internal restraints that were not predetermined. However, almost all of these were basically the same as the predetermined ones, but they were presented in other words. There were only a few that was special for the individual firms.

4.2 External Obstacles The external obstacles put up the limits within a firm must operate. They can not be affect directly by any actions performed inside the firm. Table 2 present the most significant external obstacles to productivity improvement in the region in question. The mean (m) and the deviation (d) of the answers considering each obstacle are given after the obstacle. The most significant external obstacles are also illustrated in figure 2.

Ta ble 2. Externa l obsta cles to produ ctivity im provem ent inPirk a nm a a reg ion.

1.

Size of socialsecu rity and the other side costs of w a g es (m 4.26, d 1.0 2)

2.

Hig h levelof corporate taxation(m 3.43, d 1.36)

3.

Leg islation(other thantaxation) (m 3.0 6, d 1.23)

4.

Prevailing payrollsystem s (m 3.0 0 , d 1.35)

5.

Depressioninthe early 1990 's (m 2.95, d 1.25)

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4,50

4,00

3,50

3,00

2,50 Mean Dispersion 2,00

1,50

1,00

0,50

0,00 e Size of social security and the other side

Fig u re 2.

e High level of corporate taxation

e Legislation (other than taxation)

e Prevailing payroll systems

e Depression in the early 1990's

e The actions of trade unions

The m ost sig nifica nt externa l obsta cles to produ ctivity im provem ent.

From entrepreneurs’ point of view Size of social security and the other side costs of wages are the most significant external obstacle to productivity improvement. High level of corporate taxation, Prevailing payroll systems and Legislation (other than taxation) were also found very significant. Size of social security and the other side costs of wages seems to be totally superior to other possible obstacles to productivity improvement. It seems that the theoretical nature of the concept of productivity is not well enough understood when this kind of obstacle is considered important. However, entrepreneurs seem to be so fed up with the level of social security and taxation that this kind of result was somewhat predictable.

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4.3 General Obstacles The general obstacles to productivity improvement do not belong to either internal or external obstacles or from some point of view some of them could belong to both of them. The connective characteristic is that it is difficult to categorise them to either of the above groups. The most significant general obstacles are presented in table 3. The mean (m) and the deviation (d) of the answers considering each obstacle are given after the obstacle. The most significant general obstacles are also illustrated in figure 3.

Ta ble 3. G enera l obsta cles to produ ctivity im provem ent inPirk a nm a a reg ion.

1.

Expensiveness of m otivating personnelby salary (m 3.45, d 1.32)

2.

Lack of produ ctivity data for com parison(m 3.0 9, 1.26)

3.

Difficu lty to u se produ ctivity as a basis for the payrollsystem (m 3.0 6, 1.23)

4.

Problem s inprodu ctivity m easu rem ent (m 2.92, d 1.19)

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3,50

3,00

2,50

2,00

Mean

1,50

Dispersion

1,00

g Problems in productivity measurement

g Difficulty to use productivity as a basis for the payroll system

g Lack of productivity data for comparison

0,00

g Expensiveness of motivating personnel by salary

0,50

Fig u re 3. The m ost sig nifica nt g enera l obsta cles to produ ctivity im provem ent.

Expensiveness of motivating personnel by salary was absolutely the most significant general obstacle. In this survey it was categorised to general obstacles, because depending on the point of view it can be considered an internal or an external obstacle. In addition, there were three other general obstacles, which were found rather significant. These were Lack of productivity data for comparison, Difficulty to use productivity as a basis for the payroll system, and Problems in productivity measurement. These obstacles are related to productivity measurement and utilising the results of measurement.

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4.4 Most significant obstacles to productivity improvement In table 4 there are the eight most significant obstacles to productivity improvement presented. They are also illustrated in figure 4. The mean (m) and the deviation (d) of the answers considering each obstacle are given after the obstacle. Furthermore, the predetermined category for each obstacle is also given.

Ta ble 4. The five m ost sig nifica nt obsta cles to produ ctivity im provem ent in Pirk a nm a a reg ionSM E's.

1.

Size of socia lsecu rity a nd the other side costs of w a g es (external) (m 4.26, d 1.0 2)

2.

Lack of tim e to im prove produ ctivity (internal) (m 3.62, d 1.18)

3.

G enerallack of resou rces inthe firm (internal) (m 3.56, d 1.24)

4.

There is no fu nds to hire m ore personnelto im prove produ ctivity (interna l) (m 3.55, d 1.34)

5.

Expensiveness of m otivating personnelby sala ry (g eneral) (m 3.45, d 1.32)

6.

Hig h levelof corporate ta xation(external) (m 3.43, d 1.36)

7.

W ork ers' shortcom ing s w ith k now ledg e and edu ca tiononprodu ctivity (internal) (m 3.24, d 1.14)

8.

Difficu lty to u se produ ctivity as a basis forthe pa yrollsystem (g eneral) (m 3.0 6, d 1.23)

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4,50

4,00

3,50

3,00

2,50 Mean Dispersion 2,00

1,50

1,00

Fig u re 4.

g Difficulty to use productivity as a basis for the payroll system

i Workers' shortcomings with knowledge and education on productivity

e High level of corporate taxation

g Expensiveness of motivating personnel by salary

i There is no funds to hire more personnel to improve productivity

i General lack of resources in the firm

e Size of social security and the other side costs of wages

0,00

i Lack of time to improve productivity

0,50

The m ost sig nifica nt obsta cles to produ ctivity im provem ent.

From respondents’ point of view, Size of social security and the other side costs of wages was absolutely the most significant obstacle to productivity improvement. The three other significant obstacles were Lack of time to improve productivity, General lack of resources in the firm, and there are no funds to hire more personnel to improve productivity. The mean value of the answers for these obstacles was over 3,5. One could notice that internal obstacles are significantly emphasised when the most remarkable obstacles to productivity improvement are in question. Productivity improvement and elimination of obstacles restraining productivity improvement does not primarily require any external actions. Primarily, productivity is an internal issue of a firm.

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5.

Conclusions

The main result of this study was to find out the opinion of the small and medium sized enterprises on the factors that restrain their ability to improve their productivity. It is important to emphasise that the results presented in the preceding chapter represent the subjective opinion of the respondents. It is obvious that most of the respondents did not realise the dualistic nature of some obstacles. However, one must remember that there is no absolute truth in this matter. The significance of an obstacle depends always on the point of view. In the real life, the concept of productivity is still somewhat unclear. Entrepreneurs are not always capable of distinguish the concept of productivity from for instance the concept of profitability. This is to cause difficulties especially in productivity measurement. In some cases, when productivity and profitability do not have clear correlation, this may restrain productivity improvement. The obstacle, which was found absolutely most significantly restraining productivity improvements in small and medium sized enterprises, was Size of social security and the other side costs of wages. However, in most cases expensive labour costs force to improve labour productivity by replacing personnel with machines or improving labour productivity by other means. On the other hand, entrepreneurs may be too cautious after a bad recession to hire more personnel. There is a chronic lack of personnel in a firm, and that’s why systematic operating deployment becomes a bottleneck. Without systematic deployment the situation becomes even worse and there is even less resources to improve productivity. High side costs of wages and salaries is a popular and easy subject to complain about, so the result is not very surprising. Three most significant obstacles to productivity improvement after the size of side costs are all internal ones. All of them are related to overall lack of resources of the firm. What comes to lack of resources, it may be a result of the depression in the yearly 1990’s, when the number of jobs in Finnish industry decreased. During the succeeding boom after the depression firms have not hired enough people, not only labour but also professionals to improve productivity. The lack of resources is also dualistic in its nature. If there is not

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enough personnel, the productivity of them must be improved. Entrepreneurs should show active behaviour instead of complaining. At the plant level labour productivity improvement means more sophisticated production technology, which requires more skilled labour: The respondents also found workers’ shortcomings with knowledge and education on productivity significant. One reason for this result might be the recession again: When the number of personnel is reduced, the younger ones have to leave first, because they have worked the shortest time for the firm in question. The problem is that the youngest generation has the newest education what comes to new production technology. Most of the significant obstacles could be categorised into the group of internal obstacles. The message is clear: It is up to the firms themselves to find the ways to improve their productivity. Also from the theoretical point of view this seems natural, because these are obstacles which firms can affect themselves. It would not be so easy to affect external obstacles, which put up the limits to firms to operate within. Improving labour’s know-how and integrating productivity measurement to the payroll system can not be done by anybody else than the management of the firm by itself. What is the lesson to be learned? When there is a lack of resources and nobody has time to improve productivity, what should the entrepreneurs do? One answer could be focusing on the core business and to re-engineer of the most important activities of the firm. Entrepreneurs should stop for a while and think carefully, what is important for their own business. Most of the Finnish industrial sectors have been booming for some years now, and the entrepreneurs should find back their capability to take risks and hire more personnel.

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