Leadership and management skills, management practices and firm performance and growth in Scottish SMEs

The report was produced as part of a number of research projects that aim to build understanding of the impact improved leadership skills have on company performance. There is an increasingly widespread view that deficiencies in management and leadership skills are a key constraint on business performance in the UK, especially for SMEs. The existing evidence is generally consistent in suggesting that there is a problem with management and leadership skills amongst UK SMEs, the evidence base is partial and piecemeal and is generally based on qualitative or small scale studies. There are often difficulties in accurately measuring and quantifying management and leadership skills and practices. Accordingly, it is not clear that there is definitive evidence on the nature and extent of any problem in the UK. Similarly, there is only limited evidence to show what types of intervention are effective in addressing these issues and what impacts interventions can have on firm performance and growth. Scottish Enterprise and the Department for Business, Innovation and Skills jointly commissioned this comprehensive study to provide a definitive understanding of the impact of leadership and management skills on business performance.

The research was conducted in three stages. An indepth literature review documented the nature and extent of deficiencies in management and leadership skills amongst UK SMEs and the impacts on firm performance of these skill deficiencies. This was followed, in Scotland, by a survey of over 540 Scottish SMEs where owners/managers self assessed their skills, and stated whether specific management practices were in place. For many companies where there was a top management team, more than one individual was surveyed. Further analysis was then undertaken using the survey results and other external sources of data to assess the impact of management and leadership skills in key business performance measures, e.g. productivity, profitability and sales and employment growth.

The research clearly demonstrates that well-developed entrepreneurial and leadership skills are positively related to SME performance through their influence on good management practice. So, it is the combination of entrepreneurial and leadership skills and good management practices that drive company performance. However, entrepreneurial and leadership skills and the adoption of management best practices are relatively under-developed in many SMEs, suggesting that this is constraining the performance and growth of a large number of Scottish SMEs (although the picture is similar to that in England). Of the leadership and management skills, those related to entrepreneurship and leadership are most important in improving company performance, with technical and organisational skills having a weaker relationship. Of the set of management practices, the most influential are strategy formalisation, strategy responsiveness and HRM.

Increasing the performance of these skill sets and practices will improve the growth and productivity of SMEs.