The Business Environment: Does Management Matter?

Transcription

1 The Business Environment: Does Management Matter? Nick Bloom, Stanford University and Centre for Economic Performance Christos Genakos, Cambridge University and Centre for Economic Performance Raffaella Sadun, LSE and Centre for Economic Performance John Van Reenen, LSE and Centre for Economic Performance

2 WE ARE EXTREMELY GRATEFUL FOR THE SUPPORT RECEIVED FROM OUR FUNDERS 1

3 WHY CARE ABOUT PRODUCTIVITY AND MANAGEMENT? Despite the importance of productivity our understanding of what causes productivity differences is poor Even after controlling for human and physical capital, there is a large unexplained residual (TFP) in productivity both between countries and within countries US productivity miracle (c ) partly due to the information & communication technology revolution? But this is common across the world: why have Americans managed to do I.T. better? Our approach: what is the role of management practices? 2

4 AGENDA Measuring management practice Evaluating the management measure Describing management across Firms and countries Explaining management across Firms and countries Management practices in the EU 3

5 ASSESSING MANAGEMENT PRACTICE Scoring management practice Created a robust assessment tool to score management of operations, people and performance Setting the sampling frame 4,000 medium sized* manufacturers across U.S., Asia and Europe Medium sized as only interview 1-2 plants per firm Manufacturing as productivity easier to measure Obtaining unbiased responses Conducted Double-blind interviews Managers unaware of the scoring methodology Interviewers unaware of corporate performance Executed by 51 MBA-trained interviewers with business experience Getting firms to participate Obtained Central Bank, Ministry and Employer Association endorsements * Median ~250 employees 4

6 TO SCORE COMPANIES, WE USED DESCRIPTIONS OF POOR, AVERAGE AND GOOD PRACTICE FOR EACH DIMENSION Management practices Example dimensions evaluated Dimension scoring criteria Operations management Performance management Quality of targets Interconnection of targets Performance tracking 1 3 Measures tracked do not directly indicate if overall business objectives are being met. Tracking is ad hoc Most key performance indicators are tracked formally. Tracking is overseen by senior management People management Time horizon of targets Consequence management 5 Performance is continuously tracked and communicated, formally and informally, to all staff, using a range of visual management tools 5

7 AGENDA Measuring management practice Evaluating the management measure Describing management across Firms and countries Explaining management across Firms and countries Management practices in the EU. 6

8 INTERNAL VALIDATION SUGGESTS THAT OUR ASSESSED MANAGEMENT PRACTICE SCORE IS INFORMATIVE Assessed management practice score* 1st interview 5 4 Correlation of nd interview * 222 firms interviewed by 2 different interviewers, interviewing 2 different managers 7

9 THE ASSESSED MANAGEMENT PRACTICE SCORE CORRELATES WELL WITH A NUMBER OF FINANCIAL PERFORMANCE METRICS Labour productivity* Sales growth (%) Assessed management practice score** Return On Capital Employed, ROCE (%) Assessed management practice score** Assessed management practice score** * Log scale ** Firms are grouped in 0.5 increments of assessed management score 8

10 THIS LINK HOLDS TRUE ACROSS DIFFERENT COUNTRIES AND CULTURES Labour productivity* 6.5 U.S. 6.0 U.K. Labour productivity* 7 CN JP Assessed management practice score** Assessed management practice score** Labour productivity* 7 FR DE SE PL 6 5 Labour productivity* 6.5 IT 6.0 GR PT Assessed management practice score** * Log scale ** Firms are grouped in 0.5 increments of assessed management score Assessed management practice score** 9

11 AGENDA Measuring management practice Evaluating the management measure Describing management across Firms and countries Explaining management across Firms and countries Management practices in the EU. 10

12 THERE IS SUBSTANTIAL INTER-COUNTRY MANAGEMENT PRACTICE VARIABILITY Assessed Management Practice Score by country U.S. Germany Sweden Japan Italy UK France Poland Portugal Greece China India distinct groups appear U.S., Germany, Sweden and Japan Italy, U.K., France, and Poland Portugal, Greece, China and India Source: Data collected from interviews as of Sept 24, 2007; team analysis 11

13 HOWEVER, MANAGEMENT PRACTICES VARY MUCH MORE WITHIN THAN ACROSS COUNTRIES Distribution of firm level management practice scores by country U.S. Germany Sweden Japan Italy U.K. France Poland Portugal Greece China India

14 HOWEVER, MANAGEMENT PRACTICES VARY MUCH MORE WITHIN THAN ACROSS COUNTRIES Distribution of firm level management practice scores by country U.S. Germany Sweden Japan Italy U.K. France Poland Portugal Greece China India

15 HOWEVER, MANAGEMENT PRACTICES VARY MUCH MORE WITHIN THAN ACROSS COUNTRIES Distribution of firm level management practice scores by country U.S. Germany Sweden Japan Italy U.K. France Poland Portugal Greece China India

16 THE LONG TAIL OF POORLY MANAGED FIRMS PULLS DOWN THE AVERAGE MANAGEMENT SCORE OF LOW PERFORMING COUNTRIES Assessed management practice score by country U.S. Germany Sweden Japan Italy U.K. France Poland Portugal Greece China India Score excluding firms scoring <2 Average score for all firms Source: Management Matters dataset; team analysis 15

17 THE U.S. IS NOT BEST AT EVERYTHING THERE ARE NATIONAL STRENGTHS & WEAKNESSES Average operations and people management practice scores* - by country Good 0.6 U.S. 0.4 People management Poor India Poland U.K. Japan Germany China France Italy Portugal Greece Sweden Poor Good Operations management *Z-scores, i.e. normalized to zero mean and standard-deviation 1 by question 16

18 AGENDA Measuring management practice Evaluating the management measure Describing management across Firms and countries Explaining management across Firms and countries Management practices in the EU. 17

19 WHAT WE THINK WE ALREADY KNOW wave 2 factors associated with better management practice Competition and free trade CEO selection: appointment based upon merit rather than eldest son (Primogeniture) 2006 wave Confirm key role of Competition and free trade CEO selection: appointment based upon merit Identify other key drivers Labour market regulation Ownership type Skills Find managers are poor at assessing their own performance 18

20 MORE INTENSE COMPETITION IS CLEARLY ASSOCIATED WITH BETTER MANAGEMENT PRACTICES Assessed management practice score Reported number of competitors 19

21 COUNTRIES WITH MORE RIGID LABOUR MARKET REGULATIONS HAVE LOWER PEOPLE MANAGEMENT SCORES Labour market rigidity* vs. people management practice score by country People management practice score U.S U.K. Japan Poland Germany Sweden France Italy 2.6 China India Portugal 2.4 Greece * World Bank Employee rigidity index Source: World Bank; Management Matters dataset Labour market rigidity 20

22 WE FIND MANAGEMENT PRACTICES TO VARY SUBSTANTIALLY BY OWNERSHIP TYPE Management practice score* by ownership type Dispersed Shareholders Private Equity/Venture Capital Family owned, external CEO Managers Founder owned, external CEO Family CEO Employees/COOP Founder CEO Government Family CEO, Primogeniture distinct groups appear Dispersed shareholders; Private Equity/Venture Capital; Family owned with external CEO; Managers Founder owned with external CEO; Family CEO; Employees/COOP Founder CEO; Government; Family CEO, Primogeniture *All 12 countries 21

23 MULTINATIONALS ARE WELL RUN EVERYWHERE Management practice score by country* Domestic firms Multinationals US Sweden Germany Italy UK France Poland China Portugal India Greece * Japan excluded due to low multinational sample size

24 BETTER MANAGEMENT IS LINKED WITH HIGHER SKILL LEVELS OF BOTH MANAGERS AND NON-MANAGERS Degree educated non-managers, % Management practice score Degree educated managers, %

25 THE AVERAGE MANAGER BELIEVES THEIR COMPANY HAS ABOVE-AVERAGE MANAGEMENT PRACTICE % Self-assessed management practice score 24

26 IT TURNS OUT MANAGERS APPEAR TO BE POOR AT SELF- ASSESSING THEIR FIRM S MANAGEMENT PRACTICE Labour productivity Self-assessed management practice score 25

27 AGENDA Measuring management practice Evaluating the management measure Describing management across Firms and countries Explaining management across Firms and countries Management practices in the E.U. and U.S. 26

28 MOST EU COUNTRIES OUTSIDE THE TOP (GERMANY & SWEDEN THE EXCEPTION) Assessed Management Practice Score by country U.S. Germany Sweden Japan Italy UK France Poland Portugal Greece China India distinct groups appear U.S., Germany, Sweden and Japan Italy, U.K., France, and Poland Portugal, Greece, China and India Source: Data collected from interviews as of Sept 24, 2007; team analysis 27

29 DIFFERENCES BETWEEN MANAGEMENT IN THE EU AND US US is at top, but Germany and Sweden in Premier League US excels at talent management (labour market flexibility) Germany/Sweden excel at shopfloor operations But most of EU languishes in middle tiers Three main factors: Product market competition Family firms much more prevalent in EU Lower skill levels these account for almost all the EU-US management gap 28

30 ONE REASON FOR U.S. SUCCESS COMPARED TO EU AVERAGE IS THE REMOVAL OF UNDERPERFORMING COMPANIES IN THE ECONOMY Distribution of firm level management practice scores France U.S Assessed management practice score Assessed management practice score 29

31 ONE REASON FOR U.S. SUCCESS COMPARED TO EU AVERAGE IS THE REMOVAL OF UNDERPERFORMING COMPANIES IN THE ECONOMY Distribution of firm level management practice scores France U.S Assessed management practice score Assessed management practice score 30

32 OVER 15% OF INDIAN AND CHINESE FIRMS ARE ALREADY BETTER MANAGED THAN THE AVERAGE U.S. FIRM U.S. firms Density U.S. average* Assessed management practice score Indian and Chinese firms Density Assessed management practice score *

33 CONCLUSIONS For Business leaders Firms can thrive even in tough conditions (MNEs) Managers selfassessment may be poor Meritocratic CEO selection important For Policy makers Competition vital Ownership Skills International competitors catching up fast 32

34 MY FAVOURITE QUOTES: The Swedish manufacturing goals Production Manager: Workers individual goals? They just want to go home! Americans on geography Interviewer: How many production sites do you have abroad? Manager in Indiana, US: Well we have one in Texas The difficulties of defining ownership in Europe Production Manager: We re owned by the Mafia Interviewer: I think that s the Other category..although I guess I could put you down as an Italian multinational? 33

35 MY FAVOURITE QUOTES: Staff rewards the American way Production Manager: For example, if an employee suggests a company slogan, and his name is used, he gets a TV. If he is employee of the month, he gets a parking space Staff retention the UK way Interviewer: How would you persuade your top performers to stay? UK Chairman: Sex is a great thing! If the employee finds a new girlfriend somewhere else, I can t do anything! 34

36 MY FAVOURITE QUOTES: The Indian alternative Production Manager: Are you a Brahmin? Interviewer Yes, why do you ask? Production manager And are you married? Interviewer No? Production manager Excellent, excellent, my son is looking for a bride and I think you could be perfect. I must contact your parents to discuss this 35

37 MANAGERS EVEN APPEAR POOR AT ASSESSING THEIR RELATIVE STRENGTHS AND WEAKNESSES Assessed gap operations vs. people management practice score Self-assessed gap operations vs. people management practice score 36

38 SWEDISH AND GERMAN FIRMS ARE ON AVERAGE BETTER AT SHOPFLOOR OPERATIONS Average operations and targets score by country Sweden Germany U.S. Japan Italy France UK Poland Portugal Greece India China Source: China: Chinese interviews as of 11/10/2007; U.S. and India: Interviews as of 21/09/

39 THE US IS NOT THE BEST AT EVERYTHING, ALTHOUGH IT IS DISTINCTIVE IN PEOPLE MANAGEMENT Assessed Scores across three dimensions by country Operations Sweden 3.50 Japan 3.25 US 3.26 Germany 3.35 Japan 3.35 US France Italy UK Portugal Poland Greece China India Germany Sweden US Italy France UK Poland India Portugal Greece China Targets Germany UK Japan Poland Sweden France China Italy India Portugal People Greece 2.48 Source: Data collected from interviews as of Aug 01, 2007; team analysis 38