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MANUFACTURING MANAGEMENT PRACTICES

Nick Bloom

Denver, November 2nd 2009

1. “Measuring” management practices

2. Evaluating the reliability of this measure

3. Describing management across firms & countries

4. Accounting for management across firms & countries

OUTLINE

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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)

THE SURVEY METHODOLOGY

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Score (1): Measures tracked do not indicate directly if overall business objectives are being met. Certain processes aren’t tracked at all

(3): Most key performance indicators are tracked formally. Tracking is overseen by senior management

(5): Performance is continuously tracked and communicated, both formally and informally, to all staff using a range of visual management tools

MONITORING - i.e. “HOW IS PERFORMANCE TRACKED?”

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MANAGEMENT SURVEY SAMPLE

• Interviewed 6188 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 currently extending to Schools, Hospitals and Retail)

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1. “Measuring” management practices

2. Evaluating the reliability of this measure

a) Internal/External validation

b) Measurement error/bias

3. Describing management across firms & countries

4. Accounting for management across firms & countries

OUTLINE

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12

34

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1 2 3 4 5management_2

INTERVAL VALIDATION: RE-SURVEY ANALYSIS

1st interview

2nd in

terv

iew

Re-interviewed 222 firms with different interviewers & managers

Firm average scores (over 18 question)

Firm-level correlation of 0.627

7

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EXTERNAL VALIDATION OF THE SCORING

Performance measure

ln(capital)

ln(materials)

management(average z-scores) ln(labor)

other controls

• Use most recent cross-section of data (typically 2006)

country c

• Note – not a causal estimation, only an association

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Dependentvariable

Productivity(% increase)

Profits (ROCE)

5yr Salesgrowth

Share Price (Tobin Q)

Exit

Estimation OLS OLS OLS OLS Probit

Firm sample All All All Quoted All

Management 28.7*** 2.018*** 0.047*** 0.250*** -0.262**

Firms 3469 1994 1883 374 3161

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 available

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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)

10

02

46

mea

n o

f p

ate

ntt

ot

1 1.5 2 2.5 3 3.5 4 4.5

EXTERNAL VALIDATION: WELL MANAGED FIRMS ALSO APPEAR MORE INNOVATIVE

Tot

al p

aten

ts19

96-2

004

Management score (rounded to nearest 0.5)Note: European firms only as uses the European Patent Office database 11

01

02

03

04

05

0m

ean

of

exp

ort

1 1.5 2 2.5 3 3.5 4 4.5

EXTERNAL VALIDATION: WELL MANAGED FIRMS ARE ALSO MORE LIKELY TO EXPORT

Sha

re o

f fir

ms

expo

rtin

g

Management score (rounded to nearest 0.5)12

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

Ene

rgy

use,

log(

KW

H/$

sal

es)

Management

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

13Source: Bloom, Genakos, martin and Sadun, NBER WP14394. Analysis uses Census of production data for UK firms

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1. “Measuring” management practices

2. Evaluating the reliability of this measure

3. Describing management across firms & countries

4. Accounting for management across firms & countries

OUTLINE

14

2.6 2.8 3 3.2 3.4mean of management

USGermanySweden

JapanCanadaFrance

ItalyGreat Britain

AustraliaNorthern Ireland

PolandRepublic of Ireland

PortugalBrazilIndia

ChinaGreece

MANAGEMENT PRACTICES ACROSS COUNTRIES

Notes:1)Uses firms with 100 to 5000 employees2)Australian data from MGSM/UTS

survey

Average Country Management Score

Not statistically different from Canada

15

16

0.5

10

.51

0.5

10

.51

1 2 3 4 5 1 2 3 4 5 1 2 3 4 5 1 2 3 4 5

Australia Brazil Canada China

France Germany Great Britain Greece

India Ireland Italy Japan

Poland Portugal Sweden US

De

nsi

ty

managementGraphs by country1

DISTRIBUTIONS BY FIRM ACROSS COUNTRIES

Firm-Level Management Scores 16

1. “Measuring” management practices

2. Evaluating the reliability of this measure

3. Describing management across firms & countries

4. Accounting for management across firms & countries

•Competition

•Family firms

•Multinationals

•Labor market regulations

•Education

OUTLINE

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TOUGH COMPETITION IS STRONGLY LINKED TO BETTER MANAGEMENT PRACTICES

Competition proxiesDependent variable:

Management

Import penetration(SIC-3 industry, 1995-99)

0.066**(0.033)

“1-Rents” measure1

(SIC-3 except firm itself, 1995-99)1.964**(0.721)

# of competitors(Firm level, 2004)

0.158***(0.023)

Observations 2499 2980 3589

Full controls2,3 Yes Yes Yes

1 1-Rents = 1- (operating profit – capital costs)/sales2 Includes 108 SIC-3 industry, country, firm-size, public and interview noise (analyst, time, date, and manager characteristic) controls3 S.E.s in ( ) below, robust to heteroskedasticity, clustered by country-industry

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0.5

10

.51

0.5

1

1 2 3 4 5 1 2 3 4 5 1 2 3 4 5

Dispersed Shareholders Family, external CEO Family, family CEO

Founder Government Managers

Other Private Equity Private Individuals

Density PEy

Graphs by Who owns the firm?

FIRMS WITH PROFESSIONAL CEOS ARE TYPICALLY WELL RUN. GOVERNMENT, FOUNDER FAMILY CEO MANAGED FIRMS ARE NOTDistribution 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 19

2.4 2.6 2.8 3 3.2 3.4

USJapan

SwedenGermany

CanadaAustralia

ItalyGreat Britain

FrancePoland

Northern IrelandRepublic of Ireland

IndiaChina

PortugalBrazil

Greece

MULTINATIONALS APPEAR ABLE TO TRANSPORT GOOD MANAGEMENT AROUND THE WORLD

Average Management Score

Foreign multinationalsDomestic firms

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Australia

Brazil

Canada

China

France

Great Britain

Germany

Greece

India

Republic of Ireland

Italy

JapanNorthern Ireland Poland

Portugal

Sweden

US

2.4

2.6

2.8

33

.23

.4pe

op_

me

an

0 20 40 60WB_RigidityEmployment

LIGHT LABOR MARKET REGULATIONS ALSO FACILITIATES GOOD CANADIAN MANAGEMENT

World Bank Employment Rigidity Index

Ave

rage

peo

ple

man

agem

ent

(hiri

ng,

firin

g, p

ay a

nd p

rom

otio

ns)

21

0

2040

6080

1 1.5 2 2.5 3 3.5 4 4.5

mean of degree_nm mean of degree_m

EDUCATION IS ALSO STRONGLY LINKED WITH BETTER MANAGEMENT PRACTICES

Management score (rounded to nearest 0.5)

Per

cent

with

a d

egre

e

Non-managers

Managers

22

-6-4

-20

24

labp

1 2 3 4 5management

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)

Management score

Log

of S

ales

/em

ploy

ee (

$’00

0)

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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

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0.1

.2.3

.4D

en

sity

0 2 4 6 8 10Their self-score: 1 (worst practice), 5 (average) to 10 (best practice)

MANAGERS GENERALLY OVER-SCORED THEIR FIRM’S MANAGEMENT

“Average”“Worst Practice”

“Best Practice”

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-6-4

-20

2la

bp

0 2 4 6 8 10Their self-score: 1 (worst practice), 5 (average) to 10 (best practice)

bandwidth = .8

Lowess smoother

SELF-SCORES ARE ALSO UNINFORMATIVE ABOUT FIRM PERFORMANCE

Labo

r P

rodu

ctiv

ity

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

Correlation0.032*

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MY FAVOURITE QUOTES:

[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….”

The traditional British Chat-Up

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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”

The traditional Indian Chat-Up

MY FAVOURITE QUOTES:

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

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

Americans on geography

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” ?”

The difficulties of defining ownership in Europe

MY FAVOURITE QUOTES:

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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…]

MY FAVOURITE QUOTES:

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