Enterprise Product Strategies and Employer Demand for Skills in Britain: Evidence from the Employers Skill Survey

It is now widely recognised that employer demand for skills in Britain is quite low by comparison with several other industrialised nations, reflecting the fact that a large proportion of British enterprises have adopted relatively low value-added product (or service) strategies. In many companies, therefore, production tends to be concentrated towards the more standardised and less complicated end of the quality spectrum for which skill requirements are relatively low. At the same time there are certain industries where many British-based suppliers have apparently been pushed into higher value added activity as a result of competitive pressure from lower-cost foreign producers of low value added products.

To date much of the evidence on the incidence of product strategies has been based on international comparisons (typically involving case studies). There has been little quantitative research investigating differences between British-based companies in the links between product strategies, skill levels and indicators of economic performance.

This paper makes use of new measures of product strategy and workforce skills derived from the 2001 Employers Skills Survey to submit two widely-argued propositions to empirical scrutiny at establishment level:

  • All else being equal, high (low) workforce skill levels are positively associated with high (low) value added product strategies
  • All else being equal, high (low) value added product strategies are positively associated with a high (low) degree of exposure to foreign competition

Both these propositions receive support from multivariate analysis which controls for employee size-group, sector, regional location, site function, recent sales growth and a number of other factors that influence skill requirements and export performance. Among other things, high-specification, high-skill product strategies are found to be highly correlated with a focus on national and international product markets rather than less competitive local and regional markets.

Estimates of the impact of changes in product strategy on skill requirements suggest that, when enterprises do seek to upgrade their product strategies, the process may have a polarising impact on demand for skills. In sectors characterised by relatively high proportions of firms deploying high value added skill-intensive product strategies, further efforts to move up-market in response to competitive pressures are associated with disproportionately large increases in employers’ demand for skills. Conversely, in sectors where low-end product strategies currently predominate, the impact on demand for skills of firms upgrading their product strategies appears to be relatively modest.

The paper identifies a striking amount of within-industry variation – as well as between-industry variation -- in the degree of specialisation in ‘high’, ‘medium’ and ‘low end’ activities along the product quality spectrum, with associated variation in skill requirements. While there is clearly some form of correspondence between product strategy choices and skill requirements, the sheer diversity of such correspondences between and within industries shows that there is no question of an entire national economy (or even regional economy) being locked into any single kind of product strategy/skills ‘equilibrium’.

One key issue for policy-makers concerns the sustainability of the product strategies underlying different types of production. In product areas where local, regional and even national demands for basic-quality standardised goods and services are strong, product strategies based on low-skill, low value added production may well be viable into the foreseeable future for many firms. Such firms are likely to be resistant to government policy designed to encourage moves to more skill-intensive product strategies.

However, the analysis also finds that high-end (low-end) product strategies are positively and significantly associated with recent growth (decline) in sales and with a relatively high (low) level of capacity utilisation. This implies that a significant proportion of British firms pursuing low value added product strategies could in fact enhance their competitiveness by moving to higher specification, more skill-intensive products and services.

Two challenges for policy-makers are, therefore, to be able to identify the types of enterprises whose existing product strategies are unsustainable and, secondly, to develop new strands of education, training and industrial policy which will help to ensure that the future skill needs of such employers can be met.

Publication number: 
50
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Publication Date: 
01 June 2004
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Institution: 
National Institute of Economic and Social Research
Publication Type: 
working paper