How much does management matter?, Nicholas Bloom
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How much does management matter?
Nick Bloom (Stanford)working with Raffaella Sadun (HBS) & John Van Reenen (LSE)
OECD-NBER, September 26th 2014
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Long debate over the importance of management for growth and development
Francis Walker wrote a paper called in 1887 in the Quarterly Journal of Economics called “The Sources of Business Profits”
Walker argued that management was the key driver of differences in firm performance
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“No potential driving factor of productivity has seen a higher ratio of speculation to empirical study”
- Chad Syversson (2011, Journal of Economic Literature)
But there is still a wide debate – many people claim management is all “hot air” or “BS”
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1) Measuring management
2) Impact of management on performance- Regression results- Field experiments
I will try to summarize 10+ years research in 2 areas
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World Management Survey has covered about 20,000 manufacturing firms globally since 2004
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1) Developing management questions• Scorecard for 18 monitoring and incentives practices in ≈45 minute phone interview of manufacturing plant managers
2) Getting firms to participate in the interview• Introduced as “Lean-manufacturing” interview, no financials• Official Endorsement: Bundesbank, RBI, PBC, World Bank etc.
3) Obtaining unbiased comparable responses, “Double-blind”• Interviewers do not know the company’s performance• Managers are not informed (in advance) they are scored
Basic survey methodology – 3 key steps
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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
Example monitoring question, scored based on a number of questions starting with “How is performance tracked?”
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Examples of performance metrics – Car Plant
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Examples of a performance metrics – Hospital
9
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Examples of performance metrics – Retail (Ctrip)
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Examples of performance metrics – Heathrow T5
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Example of no performance metrics: Textile Plant
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Score (1) People are promoted primarily upon the basis of tenure, irrespective of performance (ability & effort)
(3) People are promoted primarily upon the basis of performance
(5) We actively identify, develop and promote our top performers
Example incentives question, scored based on questions starting with “How does the promotion system work?”
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Examples of performance reviews – Retail Bank
14
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16
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Wide spread of management in manufacturing
N=84N=100
N=58N=108N=130
N=102N=152
N=180N=840
N=1150N=569N=755N=269N=322N=107N=611N=160
N=307N=136N=150N=323
N=364N=523
N=455N=313N=632N=1208
N=412N=403
N=658N=176
N=1289
2 2.5 3 3.5Average Management Scores, Manufacturing
MozambiqueTanzania
ZambiaGhana
EthiopiaNicaragua
KenyaColombia
IndiaBrazil
ArgentinaChina
GreeceTurkeySpainChile
Republic of IrelandPortugal
Northern IrelandNew Zealand
SingaporePolandMexico
AustraliaItaly
FranceGreat Britain
CanadaSweden
GermanyJapan
United States
Africa
Asia
Australasia
Europe
Latin America
North America
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Average manufacturing management scores across countries are strongly correlated with GDP
Ethiopia
Ghana
Kenya
Mozambique
Tanzania
Zambia
Australia
New Zealand
China
India
Japan
Singapore
France
Germany
Greece
Italy
Poland
PortugalRepublic of IrelandSpain
Sweden
TurkeyArgentinaBrazilChile
Colombia
Mexico
Canada
United States
22.
53
3.5
Ave
rage
man
agem
ent p
ract
ices
7 8 9 10 11Log of 10-yr average GDP based on PPP per capita GDP(Current int'l $ - Billions)
AfricaAustralasia
Asia
EuropeLatin America
North America
management x log of GDP PPP per capita
Note: April 2013, World Economic Outlook (IMF) indicator
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Management also varies heavily within countries0
.51
1.5
0.5
11.
50
.51
1.5
0.5
11.
5
1 2 3 4 5 1 2 3 4 5 1 2 3 4 5 1 2 3 4 5 1 2 3 4 5
Argentina Australia Brazil Canada Chile
China France Germany Greece India
Italy Japan Mexico New Zealand Poland
Portugal Republic of Ireland Sweden United Kingdom United States
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Also been looking at other sectors: hospitals
Randomly surveyed population of hospitals in each country that offer acute care (take emergencies), and have an orthopaedics and/or cardiology department. Total of 1687 hospitals.
1.9
2.2
2.4
2.5
2.5
2.6
2.7
2.8
3.0
1.7 1.9 2.1 2.3 2.5 2.7 2.9 3.1Average Management Score
India
Brazil
France
Italy
Canada
Germany
Sweden
UK
US
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Again see a very wide spread in hospitals
Source: www.worldmanagementsurvey.com
0.5
11.
50
.51
1.5
0.5
11.
5
1 2 3 4 5 1 2 3 4 5 1 2 3 4 5
1 US 2 UK 3 Sweden
4 Germany 5 Canada 6 Italy
7 France 8 Brazil 9 India
Graphs by Country
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Also been looking at other sectors: high-schools
2.94
2.82
2.80
2.78
2.55
1.99
1.72
1 1.5 2 2.5 3 3.5
Management Score
UK
Sweden
US
Canada
Germany
Italy
India
School Management Scores, by Country
91
77
138
287
n
232
127
323
Randomly surveyed population of high schools in each country with 100+ pupils aged 15.
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So we find a huge spread in management practices across firms and countries….
….but does this matter?
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1) Measuring management
2) Impact of management on performance- Regression results- Field experiments
I will try to summarize 10+ years research in 2 areas
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Management score decile
Pro
duct
ivity
Pro
fit
Out
put g
row
th
Exp
orte
rs
R&
D p
er e
mpl
oyee
Pat
ents
per
em
ploy
ee
These management scores are positively correlatedwith firm performance
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These management scores are positively correlatedwith firm performance – even with many controls
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This positive correlation with performance has been pretty much true in every sector examined
For example, higher management scores correlated with:
• Hospitals: Higher case-mix survival from heart-attack & surgery
• Schools: Better test scores
• Retail: Great profits and sales
• Universities: Higher research rankings
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Of course this correlation may not be causal.
So I’ve also been working with the World Bank on management randomized control trial
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1) Measuring management
2) Impact of management on firm and national performance- Regression results- Field experiments
I will try to summarize 10+ years research in 2 areas
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Took 28 large textile plants near Mumbai and randomized into treatment (improved management) & control (same as before)
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Inventory Control: Before
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Inventory Control: After
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Factory operations: Before
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Factory operations: After
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Spare parts: Before
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Stores: After
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Stores: After
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Factory information: Before
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Factory information: After
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8010
012
014
0
-15 -10 -5 0 5 10 15 20 25 30 35 40 45 50 55 60
These simple management improvements increased productivity by 20% within 1 year alone
Control plants
Treatment plants
Weeks after the start of the management experiment
Pro
duct
ivity
(out
put p
er w
orke
r)
Source: Bloom, Eifert, Mahajan, McKenzie & Roberts, forthcoming Quarterly Journal of Economics
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Combining this data we estimate management accounts for about 25% of the differences in productivity across firms & countries
Country Share of TFP gap with the USdue to Management
US baselineSweden 7.8%Japan 10.4%Canada 22.4%Great Britain 36.5%Italy 47.7%France 38.7%Brazil 16.9%China 14.9%Argentina 20.6%Portugal 48.2%Greece 32.4%Unweighted av. 25%
Source: Bloom, Sadun & Van Reenen (2014), “Management as a technology”
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So why don’t firms just improve their management practices – one reason is they cannot self assess
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We asked at the end of the survey:
“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”
In fact we formally investigated if firms can self-assess their management practices….
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0.1
.2.3
.4D
ensi
ty
1 2 3 4 5 6 7 8 9 10Self scored management
…and found firms are too optimistic on management
“Average”
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…and self-scores show no link to performance-2
00
2040
60P
rofit
s (R
OC
E)
0 2 4 6 8 10Self scored management
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So how can we work to improve management – in our research we find four key factors:
1) Education (of both managers and non-managers)
2) Free markets (competition and strong legal systems)
3) Professional management (not family-firm CEOs)
4) Light government regulation (notably labor regulations)
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Further reading – good recent summary
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More research, policy briefs & media available here www.worldmanagementsurvey.com
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MY FAVOURITE QUOTES:
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 Iguess I could put you down as an “Italian multinational” ?”
The difficulties of defining ownership in Europe
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Interviewer : “Do you export any of your products?”
Factory Manager: “No, our products only cater for tastes in ourlocal market”
German Sex Toy Manufacturer
MY FAVOURITE QUOTES:
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Interviewer : “Do staff sometimes end up doing the wrong sortof work for their skills?
NHS Manager: “You mean like doctors doing nurses jobs, andnurses doing porter jobs? Yeah, all the time. Last week, we hadto get the healthier patients to push around the beds for thesicker patients”
Don’t get sick in Britian
MY FAVOURITE QUOTES:
Don’t do Business in Indian hospitals
Interviewer: “Is this hospital for profit or not for profit”
Hospital Manager: “Oh no, this hospital is only for loss making”