MANAGEMENT AND PRODUCTIVITY GLOBAL STUDY Rebecca Homkes LSE and Centre for Economic Performance 2010 Management Matters

1 WHY CARE ABOUT MANAGEMENT AND PRODUCTIVITY Despite the importance of productivity, our understanding of what causes productivity differences is poor: Even after controlling for human and physical capital, there is a large “unexplained residual” in productivity across firms, both between countries and within countries Productivity stories across the US, Europe and Asia: Is the US productivity miracle due to the information & communication technology revolution? But this is common across the world: What explains the US takeoff? Why do others lag? Could this be in part because of differences in management? Historically there has been no international management data Our approach Role of management practices? 6 year Centre for Economic Performance & McKinsey project to try to measure and explain management practices

2 AGENDA Measuring management practices Evaluating the management measure Describing management across firms and countries Explaining management across firms and countries Future research and key takeaways

3 ASSESSING MANAGEMENT PRACTICE Scoring management practice Created a robust assessment tool to score management of operations, people and performance Obtaining unbiased responses Conducted ‘Double-blind’ interviews –Managers unaware of the scoring methodology –Interviewers unaware of corporate performance Executed by >50 MBA/ PhD trained interviewers with business experience Getting firms to participate Obtained Central Bank, Ministry and Employer Association endorsements Managers ensured confidentiality 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 as productivity easier to measure *Median ~250 employees

4 INTERVIEW METHOD FOCUSES ON MAIN AREAS OF MANAGEMENT Processes and behaviours that: Optimise production lines Create maximal value from physical assets Processes and behaviours that: Optimise quality of workforce Maximise human capital Processes and goals that: Mesh physical and human aspects of business Align efforts of the whole organisation Performance and target management Talent management Lean operations Interviews of about 45 minutes were conducted to examine managerial practices in three main areas

5 TO SCORE COMPANIES, WE USED DESCRIPTIONS OF POOR, AVERAGE AND GOOD PRACTICE FOR EACH DIMENSION Dimension scoring criteria Example dimensions evaluated Quality of targets Interconnection of targets Consequence management Performance tracking People management Management practices Operations management Performance management Time horizon of targets Measures tracked do not directly indicate if overall business objectives are being met. Tracking is ad hoc 1 Most key performance indicators are tracked formally. Tracking is overseen by senior management 3 Performance is continuously tracked and communicated, formally and informally, to all staff, using a range of visual management tools 5

6 TO GENERATE THE OVERALL MANAGEMENT SCORE WE TOOK THE AVERAGE OF ALL 18 DIMENSIONS MEASURED Perform- ance and target manage- ment Talent manage- ment Lean shop-floor operations Dimensions Score Overall management score, on scale of 1–5, is calculated from average of all 18 dimensions 1.Introduction of lean manufacturing 2.Degree of lean principles used 3.Documentation and improvement of processes 4.Performance tracking 5.… Consequence management 8.Quality of targets 9.Target stretch 10.Clarity of goals and measurement 11. … Importance of human capital 14.Reward of high performers 15.Rewarding poor performers 16.Promoting high performers 17.…

7 Manufacturing firms with 100 (50)-5000 employees Scope Identify formal universe Conduct Interviews Confirm eligible firms Verify sample is representative Defined as manufacturing firms from ORBIS databases Confirmed if currently operating with manufacturing facility in country of focus Schedule interviews directly Compare distribution of firms with eligible universe on key dimensions ResultApproach WE DEFINE SAMPLE FIRMS FOR STUDY AND THEN NARROW TO ONLY ELIGIBLE MANUFACTURING PLANTS

8 THE DATABASE NOW CONTAINS OVER 8,500 INTERVIEWS* ACROSS 20 COUNTRIES * This presentation uses a sample of companies with 50 to 4999 employees; total number of interviews exceeds 5,000 firms Source: Data collected from interviews as of September 2008; team analysis Number of interviews - by country US Canada GB06 Brazil China India Germany France Sweden Poland Italy Greece Portugal GB08 ROI NI Japan Note: Chart not updated to reflect countries surveyed

9 AGENDA Measuring management practices Evaluating the management measure Describing management across firms and countries Explaining management across firms and countries Future research and key takeaways

10 1 st analyst (interviewer) Correlation of 0.63 ASSESSMENT TOOL CONTINUES TO PROVE ROBUST Assessed management practice score 2 nd analyst (silent listener) Correlation of 0.92 Source: Data collected from interviews as of September 2008; team analysis

11 * 222 firms interviewed by 2 different interviewers, interviewing 2 different managers Source: Data collected from interviews as of September 2008; team analysis 1st interview Correlation of 0.63 FURTHER INTERNAL VALIDATION SUGGESTS THAT OUR ASSESSED MANAGEMENT PRACTICE SCORE IS INFORMATIVE 2 nd interview Assessed management practice score*

12 Assessed management practice score** Labour productivity* * Log scale ** Firms are grouped in 0.5 increments of assessed management score THE ASSESSED MANAGEMENT PRACTICE SCORE CORRELATES WELL WITH A NUMBER OF FINANCIAL PERFORMANCE METRICS Assessed management practice score** ROCE (%) Assessed management practice score** Sales growth (%)

13 * Log scale ** Firms are grouped in 0.5 increments of assessed management score Assessed management practice score** Labour productivity* THIS LINK HOLDS TRUE ACROSS DIFFERENT COUNTRIES AND CULTURES Assessed management practice score** Labour productivity* Assessed management practice score** Labour productivity* Assessed management practice score** Labour productivity* USUK FR SE DE PL IT CN JP PT GR

14 AGENDA Measuring management practice Evaluating the management measure Describing management across firms and countries Explaining management across firms and countries Future research and key takeaways

15 WE FOUND THERE IS SUBSTANTIAL INTER-COUNTRY MANAGEMENT PRACTICE VARIABILITY Average Country Management Score Not statist-ically different 3 distinct groups appear US, Germany, Sweden and Japan France, UK, Italy, Poland and Portugal Brazil, Greece, China and India

16 AND THIS HOLDS ACROSS OUR UPDATED SURVEY WAVE AS WE EXPANDED INTO NEW COUNTRIES # of obs

17 MANAGEMENT PRACTICES VARY MUCH MORE WITHIN THAN ACROSS COUNTRIES …..…… Firm-Level Management Scores

18 …..AND WHILE CERTAIN COUNTRIES SHOW HIGH LEVEL OF UPPER PERFORMERS, THERE IS A LONG TAIL OF UNDERPERFORMERS IN OTHERS Distribution of firm level Management Practice scores – by country Source:Interview data as of October 2008; team analysis 19% of firms 7% of firms 1.9% of firms 12% of firms GlobalGermanySwedenJapanGB FrancePortugalItalyPolandGreece ChinaNIIndiaROIU.S.

19 THIS LONG ‘TAIL’ OF POORLY MANAGED FIRMS PULLS DOWN THE AVERAGE MANAGEMENT SCORE OF LOW PERFORMING COUNTRIES Assessed management practice score – by country Average score for all firms Score excluding firms scoring <2 US Germany Sweden Japan France Italy Great Britain China NI ROI Poland Greece India Portugal

20 Source:Data collected during interviews as of October 2008; team analysis ALTHOUGH THE US IS DISTINCTIVE IN PEOPLE MANAGEMENT, SWEDISH FIRMS OUTPERFORM IN OPERATIONS Average practice score People managementOperations managementTarget management Greece2.58 Portugal2.59 India2.71 China2.71 France2.75 ROI2.77 Italy2.78 Sweden2.79 Japan2.84 NI2.88 Great Britain2.89 Germany2.92 Poland2.93 U.S.3.27 India2.20 China2.49 Poland2.64 ROI2.70 Greece2.72 NI2.83 Portugal2.85 Great Britain2.91 France3.04 Italy3.13 Japan3.20 U.S.3.25 Germany3.28 Sweden India 2.44China Greece2.55 ROI2.67 Portugal2.68 NI2.73 Poland2.87 Great Britain2.87 Italy2.97 France2.98 Japan3.17 Germany3.17 U.S.3.18 Sweden3.24

21 In the second phase of our interviews, we asked questions about firms’ organisational aspects: Firm slope and span – Number of layers below and above plant manager – Changes in layers in the last three years – Span of control (How many people report directly to the plant manager?) Plant managers: – Hiring and firing autonomy – Introduction of new products – Maximum capital expenditures without signoff from corporate HQ – Sales and marketing autonomy Workers: Who sets the pace of work? Who decides how tasks are allocated? Autonomy Hierarchical Structure ORGANISATIONAL PRACTICES ACROSS COUNTRIES VARY AS WELL

22 Average managerial hours/weekAverage non-managerial hours/week THE HOURS WORKED BY BOTH MANAGERS AND WORKERS VARIES ACROSS COUNTRIES SURVEYED Source:Data collected from interviews as of September 2008; team analysis 54.5India 52.5Italy 52.0Germany 51.5Greece 51.1 Ø Japan 50.6US 49.1China 48.6Poland 48.2ROI 47.5Sweden 47.0NI 46.7Great Britain 45.7France Portugal 52.5India 47.4China 46.5Japan 44.8US 41.7Portugal 41.1NI 41.1Great Britain 41.1Poland 41.0ROI Ø 42.4 Italy 40.6Greece Germany 35.9France Sweden Comparison of managerial and non-managerial work-hours per week – by country

23 AS DOES THE GAP BETWEEN MANAGER AND NON-MANAGER WORKING HOURS Poland Portugal France China India Japan UK US Sweden Greece Germany Italy Gap between manager and non-manager hours – by country Source: Data collected from interviews as of September 2008 team analysis

24 Average duration of interview AND THE INDIANS ARE WILLING TO TALK FOR AN ABOVE AVERAGE PERIOD OF TIME (AS ARE THE MOST ASIAN FIRMS…) Source:Data collected during interviews as of September 2008; Team analysis India Great Britain 06 Germany France Italy US China Poland Canada Greece Great Britain 08 Northern Ireland Republic of Ireland Portugal Sweden Japan Brazil

25 AGENDA Measuring management practices Evaluating the management measure Describing management across firms and countries Explaining management across firms and countries Future research and key takeaways

26 Competition and international presence MNE (and their presence) Firm size Ownership Skills level Management selection/ appointment Labour rigidity Identify main findings and gaps between best and worst practice Structural and conduct factors Possible impact? WE OBSERVE SEVEN STRUCTURE AND CONDUCT FACTORS THAT INFLUENCE THE IMPACT OF MANAGEMENT PRACTICES

27 Assessed management practice score Reported number of competitors MORE INTENSE COMPETITION IS CLEARLY ASSOCIATED WITH BETTER MANAGEMENT PRACTICES Correlation of Source: Data collected from interviews as of September 2007; team analysis

28 MULTINATIONALS ARE WELL RUN EVERYWHERE Average Management Score Foreign multinationals Domestic firms

29 Domestic Firms Foreign Multinationals Distribution of management scores* Density Density *Note: Based on giving an approximate overall score to each firms interview response. AND THERE IS NO TAIL OF REALLY BADLY RUN MULTINATIONALS Source: Data collected from interviews as of September 2007; team analysis

30 Mean management practice score – domestic firms, by country Share of MNEs in country, % China Greece India NI PortugalROI Poland France Great Britain Italy Germany Japan Sweden US WE ALSO FIND A LINK BETWEEN MORE MNEs IN A COUNTRY AND IMPROVED MANAGEMENT PRACTICES AT DOMESTIC FIRMS Source:Interview data as of October 2008; team analysis

31 Employees Assessed management practice score Employees Assessed management practice score Full survey * Lowess regression fit; Size significant with step-wise linear regression, cut-off point 500 employees Source: Data collected from interviews as of Jan 15, 2007; team analysis Full survey Firm size vs. assessed management practice score* MANAGEMENT INCREASES WITH SIZE BUT SLOWS AT 500 EMPLOYEES …

32 Employees Standard deviation* of management practice Full survey. Variation in firms’ management practice vs. assessed management practice score** * Note that decreasing variance may well be a purely statistical effect (“fringe effect”) due to limitation within 1-5 band ** Lowess fit Source:Data collected from interviews as of January 15, 2007; team analysis …BEYOND ~500 EMPLOYEES FIRMS OF SIMILAR SIZE SHOW REDUCED VARIATION IN THEIR MANAGEMENT PRACTICE

33 Average Management Practice score by ownership type, controlled for size MANAGEMENT PRACTICES TO VARY SUBSTANTIALLY BY OWNERSHIP TYPE Founder CEO Government Dispersed ownership Family, CEO External Other Managers Private individuals Founder, External CEO Family CEO Family CEO, Primo Geniture* *Firms which appoint their eldest child as CEO Source:Data collected from interviews as of October 2008; team analysis

34 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 Average Management Score

35 ONWERSHIP PATTERNS OF THESE “POOR MANAGEMENT” GROUPS VARY SUBSTANTIALLY ACROSS COUNTRIES share family CEO share founder CEO (1 st generation) share government owned Share of ownership (for types associated with low management scores)

36 BETTER MANAGEMENT IS ALSO LINKED WITH HIGHER SKILL LEVELS OF BOTH MANAGERS AND NON-MANAGERS Degree educated non-managers, % Degree educated managers, % Management practice score

37 Average share of managers with degree – by country 70.5 Japan Poland Germany Greece US France Portugal ROI Italy NI Sweden China GB Ø 57.7 Average share of non-managers with degree – by country Ø Japan 15.6 Poland Sweden Italy 13.9 France 13.7 US 11.4 Germany 10.4 ROI 8.6 China 8.5 GB NI Greece Portugal ONE KEY DRIVER OF THE UK AVERAGE MANAGEMENT SCORE IS ITS RELATIVELY LOW SKILL LEVELS

38 China France Germany ROI Greece Employment flexibility* GB People Management Practice score US 0 Sweden NI** Portugal Poland Japan Italy India 2.8 *100 minus the World Bank ‘Employee rigidity index’ **Assumed NI labour productivity same as Great Britain Source: Data collected from interviews as of September 2008, World Bank; team analysis Labour market rigidity index* vs people Management Practice score – By country COUNTRIES WITH MORE FLEXIBLE LABOUR MARKETS HAVE BETTER PEOPLE MANAGEMENT SCORES

39 Average operations management score* …BUT, LABOUR MARKET REGULATION IS NOT LINKED WITH POOR OPERATIONS MANAGEMENT World Bank labour market regulation index *Note: Based on giving an approximate overall score to each firms interview response. (0 = Most flexible labour market) 100 = Most rigid labour market) Note: Includes updated data as of 3 October 2007 Correlation of

40 Average Management Practice score, controlled for size and SIC code Source:Data collected from interviews as of October 2008; team analysis 2.65 ROI 2.77 NI 2.69 GB 2.85 ROI 2.97 NI 2.89 GB 2.55 ROI 2.67 NI 2.60 GB Exporter Non-exporter DomesticMNE Exporting firms exhibit better Management Practice than firms serving only the local market MNEs have better Management Practice than domestic firms 2.94 ROI 3.06 NI 2.98 GB ~0.40 increase in score COMPETITION AND INTERNATIONAL PRESENCE INCREASE THE LEVEL OF MANAGEMENT PRACTICES

41 WE CONTINUE TO SEE THAT GOOD MANAGEMENT IS CORRELATED WITH RAPID CHANGES IN A MANAGERS’ ROLE, BUT NOT TENURE IN COMPANY *Only companies with 50 to 4999 employees, bucketed by overall scores in 0.5 increments Source: ROI and NI data collected from interviews as of September 15, 2008 Tenure in company 2 Tenure in position Assessed score Assessed score Firms whose managers have shorter tenure in current role received higher average scores However, there is no strong correlation between a manager’s tenure in a firm and their average scores Assessed score, tenure in years

42 AGENDA Measuring management practices Evaluating the management measure Describing management across firms and countries Explaining management across firms and countries Future research and key takeaways

43 GLOBALLY, THE EFFECT OF IMPROVING MANAGEMENT IS LARGE COMPARED TO INVESTING IN LABOUR OR CAPITAL 1 point 65% Management practice Capital * Independent of sector, ownership type, profitability, past productivity growth, size Source:Data collected from interviews as of October 2008; team analysis Labour 25% Improving management practice is a highly leveraged means of getting more output from the firms existing –Labour –Capital This is true for all companies* irrespective of the quality of current management practices Output Effect* of increased factor inputs on output

44 Dependency of management score (% of variance) CountryManufacturing sub-sector Sub-sector/ country combination Company managers Managers’ choices determine over half a company’s management practice score EXAMPLE ONLY THESE DIFFERENCES IN MANAGEMENT PRACTICE ARE DUE TO THE CHOICES INDIVIDUAL MANAGERS MAKE

45 WHILE THE AVERAGE MANAGER THINKS THAT HIS OR HER FIRM’S MANAGEMENT IS WELL-ABOVE AVERAGE Management self-score “Average” “Worst Practice” “Best Practice” Share of firms Response to the Question “Excluding yourself, how would you rate your company’s management from 1 to 10, one being the worst and ten being the best?”

46 Average score on 18 management practice questions and self-assessed management score, by country Self-Assessed Management Our Management Score Note: Scores are divided by 2 to put them on the same scale as our management scores Average self- assessed management in China and India THE REALITY IS THAT MANAGEMENT PRACTICES VARY SUBSTANTIALLY ACROSS COUNTRIES

47 THIS BRAZILIANS OVER-SCORED THE MOST AND THE AMERICANS THE LEAST Self score (normalized to 1 to 5 scale) – Management score

48 Management score ILLUSTRATIVE Lean shop-floor operations Performance and target management Talent management Targeted interventions Focus on key areas to improve Consistency of management practice Average management score Associated performance –ROCE –Productivity –Growth –Market capitalisation Management practice score FOR FIRMS, OUR ASSESSMENT AND TOOLS CAN HIGHLIGHT THE AREAS FOR TARGETED IMPROVEMENTS TO INCREASE PERFORMANCE

49 Substantial intra-country variation in management practice Our assessment of management practice is clearly correlated with corporate performance, both when measured in productivity and financial returns Firm ownership is a key driver of management practice variation Relative to domestic firms, foreign multinationals are better managed and more likely to be amongst a country’s best-managed firms Higher levels of competition correlates with better management practice Managers’ perceptions of their own management practice does not correlate with either their assessed management practice nor with their firms’ performance Created a robust assessment tool to score management across 5,000 companies in 15 countries KEY INSIGHTS: MANAGEMENT PROJECT ALLOWS US TO EXPLORE AND ANALYSE DIFFERENCES ACROSS FIRMS AND COUNTRIES

50 CONCLUSIONS Some can thrive even in tough conditions Self- assessment may be poor Meritocratic CEO selection important For Businesses Competition vital Ownership Skills International competitors catching up fast For Policy makers

51 THESE MANAGERS SHARED SEVERAL MEMORABLE QUOTES French secretary: “You want to talk to the plant manager? There are legal proceedings against him, so hurry up !!” Production manager: “Workers individual goals? They just want to go home!” Swedish manufacturing goals… Americans on Geography… Interviewer: “How many production sites do you have abroad? Manager in Indiana, US: “Well…we have one in Texas…”

52 … AND DURING OUR IRISH INTERVEWS, WE’VE ALREADY HEARD SOME GREAT QUOTES …. Money’s 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 won’t 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? I’d be out of prison at this stage.

53 … AND FINALLY, SOME MORE INTERESTING QUOTES Production Manager: “I spend most of my time walking around cuddling and encouraging people - my staff tell me that I give great hugs” Staff retention the American way 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 PM: We have no competitors, just parasites [Swedish female PM for medical instruments company with 70% of world market] Competitive market in Sweden?

54 REBECCA HOMKES Permanent London contact: Project Director/ Engagement Consultant Centre for Economic Performance London School of Economics & Political Science Houghton Street, London WC2A 2AE TEL: 44 (0) ( , FAX) MANAGEMENT MATTERS DIRECTOR / INT’L COORDINATOR

55 KEY INSIGHTS EMERGING FROM CURRENT AND FUTURE RESEARCH EXPLORING MANAGEMENT AND PRODUCTIVITY Beginning to analyze role of national characteristics on organizational structures Initial data shows strong organizational similarities between firms originating from the same country, irrespective of firms’ location, sector or size Also related to Manager Contact project Initial progress and emerging insights Returns to IT are extremely variable and the key difference is the management and organisation of the firm Possible relationship between impact of IT and firm organisational structure Impact of firm and plant organisational structure Beyond a manufacturing focus….. Role of IT Impact of environmental Public sector focus –Retail sector –Management matters currently being implemented in retail sector across Canada and US –Transnational public private partnerships –Social care sector: Fostering agencies and care homes –Management matters currently being implemented in retail sector across Canada and US