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MAKING THE CASE

FOR THE SOCIAL SCIENCES

MANAGEMENT

Better management can save UK jobs and boost the recovery


Director, Management Project Centre for Economic Performance

DR REBECCA HOMKES

Management Matters: Impact of better management in the UK

Rebecca Homkes Centre for Economic Performance 2012 Making the Case for the Social Sciences Management 18 June 2012

DO MANAGEMENT PRACTICES DIFFER ACROSS FIRMS AND COUNTRIES?


HOW CAN WE MEASURE IT?

AND, HOW MUCH DOES IT MATTER?

ASSESSING MANAGEMENT PRACTICE

Scoring management practice

Created a robust assessment tool to score management of


operations, people and performance

Setting the sampling frame

9,000 + medium sized* manufacturers across the US, Asia, Europe


Latin America and Australia Medium sized as intra-firm practices more homogeneous Manufacturing (originally) 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 MBA/ PhD trained interviewers with business experience, in native firm language

Getting firms to participate

Obtained Central Bank, World Bank, Ministry and Employer


Association, etc endorsements Managers ensured confidentiality
Homkes, Centre for Economic Performance 2011 5

* Median ~250 employees

TO SCORE COMPANIES, WE USED DESCRIPTIONS OF POOR, AVERAGE AND BEST PRACTICE FOR EACH DIMENSION
Example dimensions evaluated Quality of targets

Management practices

Dimension scoring criteria 1 Measures tracked do not directly indicate if overall business objectives are being met. Tracking is ad hoc 3 Most key performance indicators are tracked formally. Tracking is overseen by senior management 5 Performance is continuously tracked and communicated, formally and informally, to all staff, using a range of visual management tools
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Operations management

Interconnection of targets Performance/ Target management Performance tracking Time horizon of targets Consequence management

People management

WORKING WITH MCKINSEY FOR OVER A DECADE, WE FIND LARGE MANAGEMENT DIFFERENCES ACROSS COUNTRIES
U.S. Japan Germany Sweden Canada Australia Great Britain Italy France New Zealand Mexico Poland Republic of Ireland Portugal Chile Argentina Greece Brazil China India
Average management practices scores (in Manufacturing)
Full research and survey details on www.worldmanagementsurvey.com Data from 9,079 firms

2.6

2.8

3.2

3.4

BUT MANAGEMENT PRACTICES VARY MUCH MORE WITHIN THAN ACROSS COUNTRIES
Argentina 1 Australia Brazil Canada China

.5

France 1

Germany

Greece

India

Ireland

Density 0 1

.5

Italy

Japan

Mexico

New Zealand

Poland

.5

1 Portugal 1 Sweden UK US

0 1 2

.5

1 2 3 4 Management

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Full research and survey details on www.worldmanagementsurvey.com Data from 9,079 firms

WE OBSERVE A SET OF POSSIBLE DRIVERS THAT INFLUENCE THE IMPACT OF MANAGEMENT PRACTICES
Structural and conduct factors

Competition and international


presence

MNE (and their presence)


Identify main findings and gaps between best and worst practice

Possible

Ownership
Skills level Firm size

impact?

Homkes, Centre for Economic Performance 2011 9

FAMILY AND FOUNDER OWNED FIRMS TYPICALLY HAVE WORSE MANAGEMENT, IN MANUFACTURING AND RETAIL
Dispersed Shareholders Private Equity Family owned, non-family CEO Managers Private Individuals Government

Family owned, family CEO


Founder owned, founder CEO

2.7

2.8

Management score (by ownership type)

2.9

3.1

3.2

Management scores after controlling for country, industry and number of employees. Data from 9085 manufacturers and 658 retailers. Founder owned , founder CEO firms are those still owned and managed by their founders. Family firms are those owned by descendants of the founder Dispersed shareholder firms are those with no shareholder with more than 25% of equity, such as widely held public firms. Homkes, Centre for Economic Performance 2011 10

MULTINATIONALS ARE WELL RUN EVERYWHERE


Average Management Score
Foreign multinationals Domestic firms

US Japan Sweden Germany Canada Australia Italy Great Britain France Poland Northern Ireland Republic of Ireland India China Portugal Brazil Greece 2.4 2.6 2.8 3 3.2 3.4

Homkes, Centre for Economic Performance 2011 11

Full research and survey details on www.worldmanagementsurvey.com Data from 9,079 firms

BETTER MANAGEMENT IS ALSO LINKED WITH HIGHER SKILL LEVELS OF BOTH MANAGERS AND NON-MANAGERS

Degree educated managers, %

Management practice score 1.5 2.0 2.5 3.0 3.5 4.0 4.5 5.0

Degree educated non-managers, %

Homkes, Centre for Economic Performance 2011 12

Full research and survey details on www.worldmanagementsurvey.com Data from 9,079 firms

THE ASSESSED MANAGEMENT PRACTICE SCORE CORRELATES WITH A NUMBER OF FINANCIAL PERFORMANCE METRICS
Labour productivity*

Sales growth (%)

20

4 1
ROCE (%)

15
2 3 4 5
Assessed management practice score**

10

20

5 15 1 2 3 4 5
Assessed management practice score**

10

5 1 2 3 4 5
Homkes, Centre for Economic Performance 2011 13 Assessed management practice score**

* Log scale ** Firms are grouped in 0.5 increments of assessed management score

MANAGEMENT PROJECT ALLOWS USIMPLICATIONS MANAGEMENT AND SKILLS: TO EXPLORE AND ANALYSE DIFFERENCES ACROSS FIRMS AND COUNTRIES
KEY INSIGHTS:

Substantial intra-country variation in management practice UK lags, mainly due to the tail of lower performing firms
Sources of productivity growth are innovation (well-studied) and management (less studied):

Strong management practices correlated with firm performance Management could be improved via reforms to competition, tax reform,
universities, R&D

Need for more empirical research, e.g. field experiments (Indian textile firms
showed 18% productivity improvements) Skills major driver of management, and constraint faced by managers: Firm with ~100-300 workers face largest constraints for skills & information: Focus here on business support Facilitate the creation of management education courses and facilities as a measure for increasing the supply of capable managers for small firms Expand supply of human capital by allowing university and increasing the availability of travel/work visas for experienced managers from other well managed countries such as the US.Homkes, Centre for Economic Performance 2011 14

Our tool assesses management across countries

This research and data is provided in detail on the World Management Survey (WMS) website

Link www.worldmanagementsurvey.com

Homkes, Centre for Economic Performance 2011 15

Backup

Homkes, Centre for Economic Performance 2011 16

MORE COMPETITION IS ASSOCIATED WITH BETTER MANAGEMENT PRACTICES


Assessed management practice score

3.5 3.4 3.3 3.2 3.1 3.0 2.9 2.8 2.7 2.6 2.5 0 2 4 6 8 10 or more

Reported number of competitors


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Full research and survey details on www.worldmanagementsurvey.com Data from 9,079 firms

COUNTRY LEVEL RELATIVE MANAGEMENT


Sweden France Australia Italy Portugal Germany Japan Greece Canada Great Britain Brazil Northern Ireland US Republic of Ireland China Poland India

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

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


-.4 -.2 0 mean of peo_ops
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People management (hiring, firing, pay & promotions) operations (monitoring, continuous improvement and Lean)

.2

.4

THIS LINK HOLDS TRUE ACROSS DIFFERENT COUNTRIES AND CULTURES


Labour productivity* Labour productivity*

6.5
US UK

7
CN JP

6.0 5.5 5.0 4.5 4.0 1 2 3 4 5


Assessed management practice score** Labour productivity*

6 5 4 3 2 1 2 3 4 5
Assessed management practice score** Labour productivity*

7
FR SE DE PL

6.5
IT PT GR

6.0

5.5
5

5.0

4 1 2 3 4 5
Assessed management practice score**

4.5 1 2 3 4 5
Assessed management practice score** Homkes, Centre for Economic Performance 2011 19

* Log scale ** Firms are grouped in 0.5 increments of assessed management score

ONE DRIVER OF THE U.K. AVERAGE MANAGEMENT SCORE IS ITS RELATIVELY LOW SKILL LEVELS IN MANUFACTURING FIRMS
Share of employees with degrees by country, %
Managers Non-managers

India Japan Poland Germany Greece U.S. France Portugal ROI Italy NI Sweden China Great Britain

82.8 70.5 69.5 66.3 65.1 59.6 59.5 51.9 51.6 50.9 49.2 46.6 42.5 41.7
57.7

Japan Sweden Poland India Italy France U.S. Germany ROI China Great Britain NI Greece Portugal

24.1 15.6 15.5 13.9 13.9 13.9 13.7 11.4 10.4

11.8
Homkes, Centre for Economic Performance 2011 20

Full research and survey details on www.worldmanagementsurvey.com Data from 9,079 firms

Figure 12: Productivity improvements in a randomized field experiment on the adoption of modern management practices
140
Total factor productivity (normalized to 100 prior to diagnostic)

Treatment plants

120

Control plants

80
-15

100

-10

-5

10

15

20

25

30

35

40

45

Weeks after the start of the management changes


Notes: Weekly average total factor productivity for the 14 treatment plants which adopted modern management practices for quality, inventory and production efficiency and the 6 control plants. All plants make cotton fabric near Mumbai, India, with between 100 and 1000 employees. Values normalized so both series have an average Centre for Economic Performance 2011 21 intervention. Homkes, of 100 prior to the start of the Confidence intervals we bootstrapped over firms. Source: Bloom, Eifert Mahajan, McKenzie, Roberts (2011).

The US has Few Badly Managed (Manufacturing) Firms, while Brazil, China and India have a Tail of Badly managed Firms.
US
0 .2 .4 .6 .8

Brazil

China
Bars are the histogram of firms in each country Line is the smoothed US density, shown on every figure to aid comparison

Fraction of Firms

.2 .4 .6 .8

UK

India

Greece and Portugal

5 1

5 1

Firm management scores, from 1 (worst practice) to 5 (best practice)


Note: 4930 observations from manufacturing in total.
Homkes, Centre for Economic Performance 2011 22

MANAGEMENT PRACTICE SCORING GRID COVERS 3 INTER-RELATED DISCIPLINES OPERATIONS, TARGET AND PEOPLE MANAGEMENT

23

Lean shop floor operations

How many lean principles are being used and how effectively, e.g., Just-in-time? Level production? Awareness? How clearly does the company understand and communicate How value is created? How to set targets? How to measure and review performance? What is the companys attitude towards and process for Attracting and retaining talent? Recognising and rewarding performance? Managing under-performers?
Homkes, Centre for Economic Performance 2011 23

People management

Target management

SKILLS, MANAGEMENT AND FIRM PERFORMANCE

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Skills and management

Education of both managers strongly correlated with management


scores Strong correlation with worker skill levels: suggests implementing practice easier with knowledgeable work force
MBA strongly correlated with management, but even business education could substantially improve firm management This is especially case for developing countries (India interventions)

Skills: Degrees

Skills: constraints

Greatest constraint for improving management is an inadequate supply of managerial human capital Second most is worker skills, then information barriers

Future research

Type and level of skills Industry-specific market failures that lead to under-supply of managerial skills to smaller firms
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These management practices are strongly linked to innovation: better run firms take out more patents
10 20 30 40 50 60 70 80 90 100
Bottom 20%

Total patents granted

Top 20%

Firm-Level Management Score (by quintile)


Full research and survey details on www.worldmanagementsurvey.com Data from 8,316 firms.

These management practices are strongly linked to innovation: better run firms spend more on R&D
800

R&D expenditure (2010, $m)

0 Bottom 20%

200

400

600

Top 20%

Firm-Level Management Score (by quintile)


Full research and survey details on www.worldmanagementsurvey.com. Data from 806 publicly listed firms

MANAGERS WITH RIGHT SKILLS BIGGEST CONSTRAINT ON IMPROVING MANAGEMENT IN THE UK


Hiring mgrs with the right skills 29.2 22.7 48.1

Hiring non-mgrs with the right skills

18.9

22.3

58.7

Knowing what new mgmt practices to introduce

11.2

23.3

65.5

Obtaining cost-effective consultancy

8.6

17.6

73.8

Employment laws and regulations

7.6

26.6

65.8

Trade unions

2.3 11.4

86.4

10

20

30

40

50

60

70

80

90

100

Major Obstacle

Minor Obstacle

No Obstacle

Note: After discussing different aspects of management we asked plant managers to reflect upon the constraints they might face while trying to improve their management practices such as , 1) Hiring managers with the right skills, 2) Hiring non-managers with the right skills, 3) Employment laws and regulations, 4) Trade Unions, 5) Knowing what new management practices to introduce, 6) Homkes, Centre for Economic Performance 2011 27 Obtaining cost-effective management consultancy. Data from 265 companies interviewed in 2006 and 2009/10.

MANAGEMENT RELATIVELY STABLE ACROSS TIME (20062009) ACROSS COUNTRIES


3.37 3.37 3.20 3.28 3.06 3.17 3.02 3.03 2.84 2.84 2.68 2.89

US

Germany

UK

France

India

But those who improved most were those that upgraded skill level the most

China

2.5

2.7

2.9
2006

3.1
2009/10

3.3

3.5

Note: Data from a total of 1,718 firms interviewed in 2006 and 2009/10 (263 US, 118 German, 253 UK, 157 Homkes, Centre for Economic Performance 2011 28 French, 197 Chinese, 107 India firms).

These practices are linked to productivity, profitability, growth, share-price (for quoted firms) and survival

Dependent variable
Estimation Firm sample Management Firms

Productivity OLS All 28.7*** 3469

Profits 5yr Sales Share Price (ROCE) growth (Tobin Q) OLS All 2.018*** 1994 OLS All 0.047*** 1883 OLS Quoted 0.250*** 374

Exit Probit All -0.262** 3161

Results from 5 regressions. Each regression includes controls for country, industry, year, firm-size, firm-age, skills etc. Sample includes all firms (public and private) for which accounts data is available Significance levels: *** 1%, ** 5%, * 10% (clustered by firm)

Full research and survey details on www.worldmanagementsurvey.com

THE AVERAGE MANAGER THINKS THAT HIS OR HER FIRMS MANAGEMENT IS WELL-ABOVE AVERAGE,
.3

Response to the Question Excluding yourself, how would you rate your companys management from 1 to 10, one being the worst and ten being the best?

Share of firms

Worst Practice

Average

Best Practice

.1

.2

10

Management self-score
Homkes, Centre for Economic Performance 2011 30

AND THIS OVER CONFIDENCE OCCURS IN EVERY COUNTRY OF OUR SAMPLE

Brazil Greece India Portugal China Republic of Ireland Northern Ireland Australia Canada Italy Great Britain Poland Germany Japan Sweden France US 0 .5 1 1.5

mean of gap Self score (normalized to 1 to 5 scale) less the assessed Management score
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THESE MANAGERS SHARED SEVERAL MEMORABLE QUOTES

Americans on Geography

French secretary: You want to talk to the plant manager? There are legal proceedings against him, so hurry up!!

Interviewer: How many production sites do you have abroad? Manager in Indiana, US: Wellwe have one in Texas

The difficulties of defining ownership in Europe


Production Manager: Were owned by the Mafia Interviewer: I think thats the Other category..although I guess I could put you down as an Italian multinational ?

Homkes, Centre for Economic Performance 2011 32

AND DURING OUR IRISH INTERVIEWS, WE HEARD SOME OF MY PERSONAL FAVOURITES .


Moneys a sensitive topic to the Irish.
Interviewer: Would you mind if I asked how much your bonus is as a manager?

Irish manager: I don't even tell my wife how much my bonus is! Interviewer: Probably the right decision...

No fault attrition
Interviewer: Have any managers left within the last 12 months?

Irish manager: One died Interviewer: I wont count that one. Irish manager: And one fell in love with a girl a long way away. So there was nothing I could do.

Position fatigue in Ireland.


Interviewer : How long have you been with the company for?

Irish manager: : 24 years Interviewer : Brilliant! Irish manager: : Brilliant? Id be out of prison at this stage.
Homkes, Centre for Economic Performance 2011 33

TALENT MANAGEMENT ACROSS COUNTRIES?


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 cant do anything!

Homkes, Centre for Economic Performance 2011 34

CONTACTS AND FURTHER READING


1. Enhancing management quality: the potential for productivity growth after the recession 2. 3. 4. 5.
Rebecca Homkes, March 2011 Centrepiece Paper No' CEPCP328 Nicholas Bloom and John Van Reenen (2010) Why do Management Practices Differ across Firms and Countries?, Journal of Economic Perspectives 24(1): 203-24 Bloom and Van Reenen (2007) "Measuring and Explaining Management practices across firms and nations" Forthcoming, Quarterly Journal of Economics, Centre for Economic Performance Discussion Paper No. 716 http://cep.lse.ac.uk/pubs/download/dp0716.pdf Bloom, Sadun and Van Reenen (2007) Americans do IT better Centre for Economic Performance Discussion Paper No. 788 http://cep.lse.ac.uk/pubs/download/dp0788.pdf UK productivity improvements : http://cep.lse.ac.uk/briefings/pa_uk_productivity.pdf

www.worldmanagementsurvey.com http://cep.lse.ac.uk/_new/research/productivity/management.asp

DR REBECCA HOMKES
Director, Management Project and Research Officer Centre for Economic Performance London School of Economics & Political Science Houghton Street, London WC2A 2AE TEL: 44 (0)207 955 7803 (955 6848, FAX) r.l.homkes@lse.ac.uk http://cep.lse.ac.uk/
Homkes, Centre for Economic Performance 2011 35

FURTHER INTERNAL VALIDATION SUGGESTS THAT OUR ASSESSED MANAGEMENT PRACTICE SCORE IS INFORMATIVE
Assessed management practice score*
1st interview

5
Correlation of 0.63

1 1 2 3 4
2nd
* 222 firms interviewed by 2 different interviewers, interviewing 2 different managers Source: Data collected from interviews as of September 2008; team analysis

5
interview

Homkes, Centre for Economic Performance 2011 36

FIRMS WITH PROFESSIONAL CEOS ARE TYPICALLY WELL RUN. GOVERNMENT, FOUNDER, FAMILY MANAGED FIRMS ARE NOT
Distribution of firm management scores by ownership. Overlaid dashed line is approximate density for dispersed shareholders, the most common US and Canadian ownership type

Dispersed Shareholders
1

Family, external CEO

Family, family CEO

.5

Founder
1

Government

Managers

.5

Other
1

Private Equity

Private Individuals

0
1

.5

Homkes, Centre for Economic Performance 2011 37

Average Management Score

FAMILY OWNERSHIP IN THE U.K. SAMPLE IS MORE THAN THREE TIMES THAT OF THE U.S. SAMPLE
Percentage of firms family-owned Sweden Poland US China Germany Portugal France Italy UK Japan India Greece
Homkes, Centre for Economic Performance 2011 38

COMPETITION, FAMILY FIRMS, MULTINATIONALS & LABOR REGULATIONS ACCOUNT FOR COUNTRY SPREAD

US Germany Sweden Japan UK France Italy Poland Portugal Greece China


Marginal R-squared on country fixedeffects reduced by 45% after controlling for number of competitors, family management and primo geniture, multinational status and labor market regulations

India
2.4 2.6 2.8 3 3.2 management predicted from comp, family, MNE and regulation raw management data
Homkes, Centre for Economic Performance 2011 39

3.4

MAKING THE CASE


FOR THE SOCIAL SCIENCES

MANAGEMENT