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MANAGEMENT
DR REBECCA HOMKES
Rebecca Homkes Centre for Economic Performance 2012 Making the Case for the Social Sciences Management 18 June 2012
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
Homkes, Centre for Economic Performance 2011 6
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
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
Possible
Ownership
Skills level Firm size
impact?
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
2.7
2.8
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
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
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
Management practice score 1.5 2.0 2.5 3.0 3.5 4.0 4.5 5.0
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*
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
This research and data is provided in detail on the World Management Survey (WMS) website
Link www.worldmanagementsurvey.com
Backup
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
Full research and survey details on www.worldmanagementsurvey.com Data from 9,079 firms
People management (hiring, firing, pay & promotions) operations (monitoring, continuous improvement and Lean)
.2
.4
6.5
US UK
7
CN JP
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
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
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
5 1
5 1
MANAGEMENT PRACTICE SCORING GRID COVERS 3 INTER-RELATED DISCIPLINES OPERATIONS, TARGET AND PEOPLE MANAGEMENT
23
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
24
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
Homkes, Centre for Economic Performance 2011 24
24
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%
Top 20%
These management practices are strongly linked to innovation: better run firms spend more on R&D
800
0 Bottom 20%
200
400
600
Top 20%
18.9
22.3
58.7
11.2
23.3
65.5
8.6
17.6
73.8
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.
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
Profits 5yr Sales Share Price (ROCE) growth (Tobin Q) OLS All 2.018*** 1994 OLS All 0.047*** 1883 OLS Quoted 0.250*** 374
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)
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
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
Homkes, Centre for Economic Performance 2011 31
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
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.
Irish manager: : 24 years Interviewer : Brilliant! Irish manager: : Brilliant? Id be out of prison at this stage.
Homkes, Centre for Economic Performance 2011 33
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
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!
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
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
.5
Founder
1
Government
Managers
.5
Other
1
Private Equity
Private Individuals
0
1
.5
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
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
MANAGEMENT