Nick Bloom and John Van Reenen, Management Practices, Management Practices in Europe, the US and Emerging Markets Nick Bloom (Stanford Economics) John Van Reenen (LSE and Stanford GSB) Lecture 1

Nick Bloom and John Van Reenen, Management Practices, Course Objectives This course is built on 10 years of research by LSE, McKinsey & Stanford, with recent extensions with Accenture, Harvard Business School, the World Bank and the European Bank for Reconstruction & Development This course aims to provide to do three things: Provide a “management 101” overview of basic practices Explain how management practices vary around the world (and why) Introduce you to some management research techniques

Nick Bloom and John Van Reenen, Management Practices, Course Timing We will have 9 classes as follows: Core Management Practices: Jan 7 th Research overview; basic concepts in productivity & management; measuring management; Jan 12 th & 14 th talent management grid; cross-country management; self-scores; performance management grid Jan 19 th & 21 st Drivers of management (e.g. competition, governance, regulation); target management grid; policy Extensions: Jan 26 th Management experiments in India Jan 28 th Healthcare, retail and education Feb 2 nd Firm Organization: understanding decentralization; Feb 18 th Management practices and the US productivity miracle

Nick Bloom and John Van Reenen, Management Practices, Course Organization Nick Bloom (Stanford Economics) and John Van Reenen (Stanford GSB/LSE) will co-teach the course. There will be no take home work or exams Passing the class for credit simply requires: 1.Class attendance 2.Class participation a.Individual presentations b.Questions, experiences and response All slides will be put up within 24 hours of class on website

Nick Bloom and John Van Reenen, Management Practices, Class Presentations From Lecture 2 (Jan 12 th ) onwards there will be a presentation by someone from the class. There will be 8 presentations We will be asking for volunteers half-way through this lecture!

Nick Bloom and John Van Reenen, Management Practices, Class Presentations Structure (1/2) Present 6 slides on a firm you know, covering: 1)What the firm does: e.g. products, size, location, competitors 2)Your relationship to the firm (an employee, family firm etc) 3)Talent management practices: score and some examples 4)Targets management practices: score and some examples 5)Performance management practices: score and some examples 6)Your three tips to improve management in the firm Suggested guides: (1)All slides in 24 point font or greater (2)At least one picture per presentation (3)Be creative – make it interesting and engaging

Nick Bloom and John Van Reenen, Management Practices, Class Presentations Structure (2/2) The presentations should last about 10 minutes without questions, so about 20 minutes given we expect discussion. The preparation of the slides should take about an hour, certainly no more than 2 hours. In advance of presenting in class you are advised to have a practice run through with either of us ( to set up time to do this). We can give you some feedback and suggestions. This is supposed to be fun, helpful and a way to get excellent class involvement grades.

Nick Bloom and John Van Reenen, Management Practices, Course Timing Classes run from 8:15 to 9:45, Tuesday and Thursday John and Nick will also be around for as long as necessary after class to answer questions, and are happy to meet up at other times as well (again, just us). INTRODUCTIONS & QUESTIONS

Nick Bloom and John Van Reenen, Management Practices, Introduction Why care about management and productivity?

Nick Bloom and John Van Reenen, Management Practices, 2010 Productivity GDP per capita (Income per person) basic indicator of economic wellbeing GDP per capita increases by growth of inputs (e.g. more capital or labor) or higher Total Factor Productivity (TFP) 10

Nick Bloom and John Van Reenen, Management Practices, Some basic Productivity Concepts Output = Inputs + Total Factor Productivity (TFP) Labor Productivity= Output per employee = Inputs per employee + TFP e.g. Labor, capital, materials

Nick Bloom and John Van Reenen, Management Practices, 2010 Productivity “Facts” Macro: Productivity varies hugely across nations and over time –Robert Solow: TFP growth at least as important as growth of inputs in explaining economic growth –Cross country GDP/capita differences largely due to TFP differences –Productivity slowdown and “miracle” post 1995 Micro: Productivity varies hugely across firms 12

Nick Bloom and John Van Reenen, Management Practices, In long-run most countries have enjoyed catch up Growth with the GDP/head leader (US) but not all Source: Maddison (2008) Data is smoothed by decade

Nick Bloom and John Van Reenen, Management Practices, Large Income & TFP Differences between countries Source: Jones and Romer (2009). US=1

Nick Bloom and John Van Reenen, Management Practices, 2010 Why it matters for policy Increasing TFP means that the economic pie is bigger so more room for –Consumption –Tax cuts –Increases in public goods (e.g. Environmental quality) Harder to achieve if productivity stagnant But what can be done to increase productivity? 15

Nick Bloom and John Van Reenen, Management Practices, 2010 Factors increasing productivity Proximate factors: –Hard technology (e.g. R&D) –Skills (e.g. Expansion of college education) –Management (a technology & a skill?). Some deeper factors “driving” the above –Competition –Globalization –Regulations/policies –Culture 16

Nick Bloom and John Van Reenen, Management Practices, 2010 Productivity Differences across firms within countries is huge Census data on population of plants –US: plant at the 90 th percentile produced 4x higher labor productivity as plant at the 10 th percentile (Syverson, 2004) Controlling for other inputs –TFP difference 1.9 in US Not just mismeasured prices: in detailed industries (e.g. Boxes, bread, carbon black, block ice, concrete, plywood, etc.) productivity differences get bigger (Foster et al, 2008)! Not just temporary shocks Could account for large part of cross country differences 17

Nick Bloom and John Van Reenen, Management Practices, 2010 Distribution of plant TFP differences: Higher average US productivity due to fewer less productive plants Source: Hsieh and Klenow (2008); US mean=1

Nick Bloom and John Van Reenen, Management Practices, Big TFP dispersion among US ready mix concrete plants: More Competition means higher productivity (cut off lower tail) Source: Syverson (2004) High competition Low competition

Nick Bloom and John Van Reenen, Management Practices, 2010 How Total Factor Productivity increases Within Firms (Traditional view) –The same firms become more productive (e.g. new technology spreads quickly to all firms, like Internet) Between Firms (Schumpeterian view) –Low TFP firms exit and resources are reallocated to high TFP firms High TFP firms expand (e.g. more jobs), low TFP firms contract (e.g. less jobs) Exit/entry 20

Nick Bloom and John Van Reenen, Management Practices, 2010 Example of How Total Factor Productivity increases –Firm A twice as productive as firm B 21 Period 1 ABTotal Productivity output/jobs 21 Jobs10 20 Output Aggregate productivity 1.5 (=30/20) Aggregate (weighted) productivity is 1.5

Nick Bloom and John Van Reenen, Management Practices, 2010 How Total Factor Productivity increases – both firms increase TFP by Period 1Period 2 ABTotalAB Productivity Jobs Output Aggregate productivity 1.5 (=30/20) 2 (=40/20) Aggregate productivity increases from 1.5 to 2 (one third)

Nick Bloom and John Van Reenen, Management Practices, 2010 How Total Factor Productivity increases - reallocate all labor to firm A 23 Period 1Period 2 ABTotalAB Productivity2121 Jobs Output Aggregate productivity 1.5 (=30/20) 2 (=40/20) Aggregate productivity increases from 1.5 to 2 (one third)!

Nick Bloom and John Van Reenen, Management Practices, 2010 Some Empirical Evidence on reallocation Need large-scale database of many firms/plants observed over time (panels) Reallocation appears to be an important factor: –In aggregate US productivity growth: c.50% of aggregate TFP growth in a 5 year period in typical industry due to reallocation (Bailey et al, 1992) –Following trade liberalizations: about half of productivity gains due to shrinking/exit of less productive plants (e.g. Pavcnik, 2002) –For certain sectors: In retail trade, just about all of labor productivity growth is due to exit/entry of stores (Foster et al, 2006) Caveats –Reallocation is not immediate (e.g. trade dislocation) –Some shocks can destroy valuable “specific capital” 24

Nick Bloom and John Van Reenen, Management Practices, 2010 Management Case studies management in similar industries and positions respond differently –Toyota and General Motors –Goldman Sachs and Lehman Brothers Obviously management matters but –how to generalize? –how much does it matter? –what causes the differences? 25

Nick Bloom and John Van Reenen, Management Practices, 2010 Break and pick presenters 26

Nick Bloom and John Van Reenen, Management Practices, 2010 Examples of management as a technology? Waves of management technologies have arisen over time American System of Manufacturing (1850s) Taylor’s Scientific management (1900s) Mass production (1920s) Alfred Sloan’s M-form firm (1930s) Demming’s quality movements (1950s) Toyota production system (1970s) 27

Nick Bloom and John Van Reenen, Management Practices, 2010 What we need A way to quantitatively benchmark management practices –At the firm-level –Across countries and sectors –That can be matched with firm performance data 28

Nick Bloom and John Van Reenen, Management Practices, 2010 Conclusion Looked at why productivity was important for the wealth of nations Discussed factors that might influence productivity, in particular considered management 29