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WHY DO MANAGEMENT PRACTICES DIFFER ACROSS FIRMS AND COUNTRIES? Nick Bloom (Stanford University & SIEPR) Blackrock, M PowerPoint Presentation
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WHY DO MANAGEMENT PRACTICES DIFFER ACROSS FIRMS AND COUNTRIES? Nick Bloom (Stanford University & SIEPR) Blackrock, March 16 th 2010. MOTIVATION. Large persistent productivity spread across firms and countries Britain less productive than the US since about 1900

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slide1

WHY DO MANAGEMENT PRACTICES DIFFER ACROSS FIRMS AND COUNTRIES?

Nick Bloom (Stanford University & SIEPR)

Blackrock, March 16th 2010

slide2

MOTIVATION

  • Large persistent productivity spread across firms and countries
    • Britain less productive than the US since about 1900
    • Firms at 90th percentile of productivity distribution about twice as productive at those as the 10th percentile
  • Could this be in part because of differences in management?
  • Summarize a ten-year LSE, Harvard, Stanford and McKinsey project to measure management across firms and countries
slide3

“Measuring” management practices

  • Evaluating the reliability of this measure
  • Describing management across firms & countries
  • Accounting for management across firms & countries
  • 5. Different sectors and evidence of causal impact

OUTLINE

3

slide4

THE SURVEY METHODOLOGY

  • 1) Developing management questions
    • Scorecard for 18 monitoring, targets and incentives practices
    • ≈45 minute phone interview of manufacturing plant managers
  • 2) Obtaining unbiased comparable responses (“Double-blind”)
    • Interviewers do not know the company’s performance
    • Managers are not informed (in advance) they are scored
  • 3) Getting firms to participate in the interview
    • Introduced as “Lean-manufacturing” interview, no financials
    • Official Endorsement: Bundesbank, PBC, CII & RBI, etc.
    • Run by 75 MBAs types (loud, assertive & business experience)
slide10

MANUFACTURING SURVEY SAMPLE

  • Interviewed 7000 firms across Asia, Europe and the Americas
  • Obtained 45% coverage rate from sampling frame (with response rates uncorrelated with performance measures)
  • Medium sized manufacturing firms:
  • Medium sized (100 - 5,000 employees, median ≈ 250) because firm practices more homogeneous
  • Focus on manufacturing as easier to measure productivity(but show results for Schools, Hospitals and Retail)
slide11

“Measuring” management practices

  • Evaluating the reliability of this measure
    • Internal/External validation
    • Measurement error/bias
  • Describing management across firms & countries
  • Accounting for management across firms & countries
  • 5. Different sectors and evidence of causal impact

OUTLINE

slide12

INTERVAL VALIDATION: RE-SURVEY ANALYSIS

Re-interviewed 222 firms with different interviewers & managers

Firm average scores (over 18 question)

Firm-level correlation of 0.627

2nd interview

1st interview

slide13

EXTERNAL VALIDATION OF THE SCORING

Performance measure

country c

management

(average z-scores)

ln(capital)

other controls

ln(labor)

ln(materials)

  • Use most recent cross-section of data (typically 2006)
  • Note – not a causal estimation, only an association
slide14

EXTERNAL VALIDATION: BETTER PERFORMANCE IS CORRELATED WITH BETTER MANAGEMENT

Includes controls for country, with results robust to controls for industry, year, firm-size, firm-age, skills etc.

Significance levels: *** 1%, ** 5%, * 10%.

Sample of all firms where accounting data is availableStandard errors clustered by firm

slide15

EXTERNAL VALIDATION: FUTURE STOCK RETURNS

Most intriguingly, for an earlier (summer 2004) survey cohort of publicly quoted US firms we find correlated future (2005) stock holding returns

4

29

57

58

49

37

19

# of firms

Significant at 1% level

Stock holding returns over 2005 (%)

Management score (to nearest 0.5) assessed in summer 2004

slide16

EXTERNAL VALIDATION – ROBUSTNESS

  • Performance results robust in all main regions:
    • Anglo-Saxon (US, UK, Ireland and Canada)
    • Northern Europe (France, Germany, Sweden & Poland)
    • Southern Europe (Portugal, Greece and Italy)
    • East Asia (China and Japan)
    • South America (Brazil)
slide17

EXTERNAL VALIDATION: WELL MANAGED FIRMS ALSO APPEAR TO BE MORE ENERGY EFFICIENT

1 point higher management score associated with about 20% less energy use

Energy use, log( KWH/$ sales)

Management

Source: Bloom, Genakos, martin and Sadun, NBER WP14394. Analysis uses Census of production data for UK firms

slide18

“Measuring” management practices

  • Evaluating the reliability of this measure
  • Describing management across firms & countries
  • Accounting for management across firms & countries
  • 5. Different sectors and evidence of causal impact

OUTLINE

slide19

US MANAGEMENT BEST ON AVERAGE WITH A TAIL OF DEVELOPING COUNTRIES

Average Country Management Score

slide20

US SCORES HIGHLY BECAUSE OF FEW BAD FIRMS

Firm-Level Management Scores

slide21

COUNTRY LEVEL RELATIVE MANAGEMENT

Relatively better at ‘operations’ management (monitoring, continuous improvement, Lean etc)

Relatively better at ‘people’ management (hiring, firing, pay, promotions etc)

People management (hiring, firing, pay & promotions) – operations (monitoring, continuous improvement and Lean)

slide22

“Measuring” management practices

  • Evaluating the reliability of this measure
  • Describing management across firms & countries
  • Accounting for management across firms & countries
    • Competition
    • Family firms
    • Multinationals
    • Labor market regulations
    • Education
  • 5. Different sectors and evidence of causal impact

OUTLINE

slide23

TOUGH COMPETITION LINKED TO MUCH BETTER MANAGEMENT PRACTICES

Various ways to measure competitive intensity (long-run market profits, trade-openess, market concentration, surveys etc.)

In every case more competition leads to better management

slide24

OWNERSHIP MATTERS – FIRMS WITH PROFESSIONAL CEOS ARE WAY BETTER RUN THAN FAMILY, FOUNDER OR GOVERNMENT FIRMS

Distribution of firm management scores by ownership. Overlaid dashed line is approximate density for dispersed shareholders, the most common US and Canadian ownership type

Average Management Score

slide25

Foreign multinationals

Domestic firms

MULTINATIONALS APPEAR ABLE TO TRANSPORT GOOD MANAGEMENT AROUND THE WORLD

Average Management Score

slide26

LIGHT LABOR REGULATION ALSO FACILITIATES GOOD MANAGEMENT (PITY THE FRENCH)

Average people management(hiring, firing, pay and promotions)

World Bank Employment Rigidity Index

slide27

Non-managers

Managers

EDUCATION IS ALSO STRONGLY LINKED WITH BETTER MANAGEMENT PRACTICES

Percent with a degree

Management score (rounded to nearest 0.5)

slide28

“Measuring” management practices

  • Evaluating the reliability of this measure
  • Describing management across firms & countries
  • Accounting for management across firms & countries
  • 5. Different sectors and evidence of causal impact

OUTLINE

slide29

ALSO RAN A SMALLER RETAIL MANAGEMENT SURVEY (USING AN ALMOST IDENTICAL GRID) WITH BROADLY SIMILAR RESULTS

Retail

Found a strong correlation between management and profits and productivity in retail

United States

Canada

United Kingdom

Overall management scores

slide30

RECENTLY ALSO BEEN RUNNING A HOSPITAL MANAGEMENT SURVEY

Hospitals

Again, found a strong correlation between management and performance (e.g. patient survival after heart-attacks)

Management practice scores

major reason for high us scores are private hospitals are much better run
MAJOR REASON FOR HIGH US SCORES ARE PRIVATE HOSPITALS ARE MUCH BETTER RUN

Hospitals (US data)

Private

Public

Average management score

slide32

ALSO RUNNING A SCHOOLS MANAGEMENT SURVEY, IN WHICH US MANAGEMENT SCORES ARE POOR (THINK RUBBER ROOM & UNIONS)

Schools

Again, found a strong correlation between management and performance (e.g. pupil exam grades)

Average management score

slide33

FINALLY, IN SEARCH OF CAUSATION WE ARE RUNNING MANAGEMENT EXPERIMENTS IN INDIA

To investigate the causal impact of management I am working with the World Bank to run experiments in large Indian firms

Find large performance impact from improving basic management for operations, quality, inventory and HR

Outside a typical Indian factory in our experiments

Inside a typical Indian factory in our experiments

33

slide34

Many parts of these Indian plants – as in most developing countries - were dirty and unsafe

Garbage outside the plant

Garbage inside a plant

Flammable garbage in a plant

Chemicals without any covering

34

slide35

The plant floors were also disorganized – the land that Lean forgot

Instrument not removed after use, blocking hallway.

Old warp beam, chairs and a desk obstructing the plant floor

Dirty and poorly maintained machines

Tools left on the floor after use

slide36

The inventory rooms had months of excess yarn, often without any formal storage system or protection from damp or crushing

Yarn without labeling, order or damp protection

Yarn piled up so high and deep that access to back sacks is almost impossible

Different types and colors of yarn lying mixed

A crushed yarn cone, which is unusable as it leads to irregular yarn tension

slide37

Not surprisingly, modern management practices led to large performance improvements – e.g. defects down by 50%

Start of Diagnostic

Start of Implementation

End of Implementation

97.5th percentile

Control plants

Average (♦ symbol)

2.5th percentile

Quality defects index (higher score=lower quality)

97.5th percentile

Average (+ symbol)

Treatment plants

2.5th percentile

Weeks after the start of the intervention

Notes: Average quality defects index, which is a weighted index of quality defects, so a higher score means lower quality. Plotted for the 14 treatment plants (+symbols) and the 6 control plants (♦ symbols). Values normalized so both series have an average of 100 prior to the start of the intervention. Confidence intervals from plant block bootstrapped.

37

slide38

SUMMARY

  • Variations in management practices (for monitoring, targets and incentives) account for large differences in performance
  • Huge differences in these management practices across organizations in every sector and country we have looked at
  • Competition, ownership, regulations and education seem key factors in explaining these differences
  • Quotes:
slide39

MY FAVOURITE QUOTES:

The traditional British Chat-Up

[Male manager speaking to an Australian female interviewer]

Production Manager: “Your accent is really cute and I love the way you talk. Do you fancy meeting up near the factory?”

Interviewer “Sorry, but I’m washing my hair every night for the next month….”

39

slide40

MY FAVOURITE QUOTES:

The traditional Indian Chat-Up

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”

slide41

MY FAVOURITE QUOTES:

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” ?”

Americans on geography

Interviewer: “How many production sites do you have abroad?

Manager in Indiana, US: “Well…we have one in Texas…”

slide42

MY FAVOURITE QUOTES:

Don’t get sick in Britain

Interviewer : “Do staff sometimes end up doing the wrong sort of work for their skills?

NHS Manager: “You mean like doctors doing nurses jobs, and nurses doing porter jobs? Yeah, all the time. Last week, we had to get the healthier patients to push around the beds for the sicker patients”

slide43

MY FAVOURITE QUOTES:

The bizarre

Interviewer: “[long silence]……hello, hello….are you still there….hello”

Production Manager: “…….I’m sorry, I just got distracted by a submarine surfacing in front of my window”

The unbelievable

[Male manager speaking to a female interviewer]

Production Manager: “I would like you to call me “Daddy” when we talk”

[End of interview…]

slide45

WE USE LARGE SAMPLES BECAUSE THE WIDE VARIATION IN MANAGEMENT MEANS SMALL SAMPLES CAN BE POTENTIALLY MISLEADING

Case studies provide rich firm-level details, but the variation in management practices means these can easily be misleading(e.g. Enron, was a case-study favorite with many HBS Enron cases)

Log of Sales/employee ($’000)

Management score

we also got managers to selfscore themselves at the end of the interview
WE ALSO GOT MANAGERS TO SELFSCORE THEMSELVES AT THE END OF THE INTERVIEW

We asked:

“Excluding yourself, how well managed would you say your firm is on a scale of 1 to 10, where 1 is worst practice, 5 is average and 10 is best practice”

We also asked them to give themselves scores on operations and people management separately

managers generally over scored their firm s management
MANAGERS GENERALLY OVER-SCORED THEIR FIRM’S MANAGEMENT

“Worst Practice”

“Average”

“Best Practice”

self scores are also uninformative about firm performance
SELF-SCORES ARE ALSO UNINFORMATIVE ABOUT FIRM PERFORMANCE

Correlation

0.032*

Labor Productivity

Self scored management

* In comparison the management score has a 0.295 correlation with labor productivity