Productivity matters: A new era for Scottish businesses
Scottish SMEs can significantly boost economic growth through more structured management practices, says Patrick Macdonald.
The general election has produced a new administration, one which has put productivity at the heart of ‘mission-driven Government’. The first mission in Labour’s manifesto is to ‘kickstart economic growth to secure the highest sustained growth in the G7 – with good jobs and productivity growth in every part of the country making everyone, not just a few, better off.’
Why does productivity matter for Scotland’s economy?
And productivity matters, a lot. Looking right back to 1850, UK GDP per capita has risen approximately 20-fold, lifting millions out of poverty and significantly raising living standards for all. Without productivity improvements, however, GDP per capita would have only risen two-fold (i.e., doubled), leaving us all stuck in the living standards of the late-Victorian era.
Productivity enables us to beat inflation, the latest challenge to buffet the economy. When wages increase without corresponding productivity improvements, we all end up in the same place: purchasing power diminishes as each pound buys fewer goods and services. Conversely, if productivity grows, each pound earned yields more goods and services, allowing wages to rise without escalating costs. This leads to improved living standards and inflation is tamed.
So, how has Scottish productivity performed since the last Labour government was elected? Between 1998 and 2010, productivity increased by an average of 1.7% per year, gradually closing the gap with the rest of the UK. However, since 2010, productivity growth has slowed to just 0.6% per year, and Scotland continues to lag behind the UK as a whole.
Why is Scotland’s productivity record so mixed? On the surface, the country possesses many of the necessary conditions for success: a stable government, the rule of law and a low cost of capital. Additionally, Scotland’s workforce is well-qualified, boasting a high proportion of tertiary qualifications and an array of world-class universities. However, Scotland falls short in other areas. Investment levels (including research and development), the rate of business startups and the adoption of digital technologies are all low. Moreover, a relatively large portion of the economy is concentrated in low-productivity sectors such as hospitality.
What structured management practices can boost productivity in Scottish SMEs?
98% of Scotland’s businesses are small and medium-sized enterprises (SMEs), with a disproportionate number of low-productivity firms. SME are at the heart of innovation and entrepreneurship, yet research indicates that SMEs are less likely than larger companies to implement structured management practices that positively impact business growth and productivity. These practices include data collection and analysis, recruitment tests, staff training, performance appraisals, performance-related pay, and performance target-setting.
What, then, can entrepreneurs and SME leaders do to raise productivity and growth, boosting prosperity for all? One immediate opportunity, readily available to all enterprises, is to introduce structured management practices, particularly staff training, performance targets, and performance-related pay. If implemented properly, the culture of the entire organisation will become more productivity- and growth-focused, raising staff morale and retention. People much prefer working for an organisation on the front foot.
Change takes time – the sooner leaders start on the journey, the better. Productivity growth is an opportunity waiting to be tapped into by each and every Scottish SME, and there is no better time to start than now.
Patrick Macdonald FRSE, Founding Partner of School for CEOs; Non-Executive Director of NatureSpace; Chair of Moneypenny and Arcus FM; former Chair of the Institute of Directors; new Fellow of the RSE, 2024
This article originally appeared in ReSourcE summer 2024.
The RSE’s blog series offers personal views on a variety of issues. These views are not those of the RSE and are intended to offer different perspectives on a range of current issues.
