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MEASURING AND EXPLAINING MANAGEMENT PRACTICES ACROSS FIRMS AND COUNTRIES

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Title: PowerPoint Presentation Author: Mark Jones Last modified by: bloom Created Date: 3/16/2004 12:56:58 PM Document presentation format: On-screen Show – PowerPoint PPT presentation

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Title: MEASURING AND EXPLAINING MANAGEMENT PRACTICES ACROSS FIRMS AND COUNTRIES


1
MEASURING AND EXPLAINING MANAGEMENT PRACTICES
ACROSS FIRMS AND COUNTRIES Nick Bloom John Van
Reenen(Centre for Economic Performance,
LSE) Very grateful for support and funding from
the Economic and Social Research
CouncilAdvanced Institute of Management
andAnglo German Foundation Slides paper on
my CEP website http//cep.lse.ac.uk/people/bio.asp
?id1498
2
MOTIVATION
  • Large persistent productivity differences across
    firms and
  • countries which people typically claim is due to
    management
  • But what is the role of management?
  • And why does it vary so much across firms and
    countries?
  • To address these questions in 2001 LSE and
    McKinsey1 started
  • an ambitious joint research project to collect
    the first firm level
  • international management data set.

1 The LSE received no funding from McKinsey
this was made possible by the generous support of
the ESRC, AIM and the AGF!
3
OUTLINE
  • Measuring management practices
  • Evaluating our management measure
  • Describing management across firms countries
  • Explaining management across firms countries
  • Policy implications

4
NEW APPROACH TO MEASURE MANAGEMENT
  • 1) Develop management practice scoring
  • Scorecard for monitoring, targets and incentives
  • 45 minute phone interview of plant managers
  • 2) Obtain unbiased responses
  • Double-blind
  • Managers are not told they are being scored
  • Interviewers do not know company performance
  • 3) Get firms to participate in the interview
  • Introduced as Lean-manufacturing interview, no
    financials
  • Endorsed by Bundesbank ,UK Treasury Banque de
    France
  • Run by 10 MBAs (loud, pushy business experience)

5
MONITORING - i.e. HOW IS PERFORMANCE TRACKED?
Score (1) Measures tracked do not indicate directly if overall business objectives are being met. Certain processes arent 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
Note All 18 dimensions and over 50 examples in
Bloom VanReenen (2006).
6
WE SURVEYED MEDIUM SIZED MANUFACTURING FIRMS
  • US (300), UK, France and Germany (150 each)
  • Medium sized manufacturers, typically about 500
    employees
  • Medium sized because firm practices more
    homogeneous
  • Manufacturing because easier to measure
    productivity
  • Good response rate of 54, with response
    uncorrelated with firm performance

7
OUTLINE
  • Measuring management practices
  • Evaluating our management measure
  • Describing management across firms countries
  • Explaining management across firms countries
  • Policy implications

8
INTERVAL VALIDATION SUGGESTS MANAGEMENT SCORING
PROCESS IS CONSISTENT
Re-interviewed 64 firms with different MBA
interviewers speaking to different plant managers
Firm average scores (over 18 question)
Correlation of 0.75 suggests interviews pretty
reliable
2nd interview
1st interview
9
WE ALSO UNDERTOOK EXTERNAL VALIDATION BY
COMPARING TO COMPANY ACCOUNTS
Labour Productivity1
Sales Growth, ( pa)
Profit Rate2, ()
Bottom 50
Top 50
Bottom 50
Top 50
Bottom 50
Top 50
Management score
Management score
Management score
Survival Rates4, ()
Stock Market Value3
Bottom 50
Top 50
Bottom 50
Top 50
Management score
Management score
1 000 sales per employee at 2000 prices 3
Tobins Q ( value of firm per of assets),
quoted firms only2 Return on capital employed
() 4 (100 - bankrupt or liquidated 12 months
after 2004)
10
OUTLINE
  • Measuring management practices
  • Evaluating our management measure
  • Describing management across firms countries
  • Explaining management across firms countries
  • Policy implications

11
FIRM LEVEL MANAGEMENT SCORES BY COUNTRY
France
Germany
of firms
of firms
Management score
Management score
UK
US
of firms
of firms
Management score
Management score
12
US HIGHEST AND UK LOWEST AVERAGE MANAGEMENT SCORES
All firms
Firms with management scores above 2
US
Germany
France
UK
The long-tail of UK management?
  • Low UK average score mainly due to the long-tail
    of badly managed firms

13
OUTLINE
  • Measuring management practices
  • Evaluating our management measure
  • Describing management across firms countries
  • Explaining management across firms countries
  • Policy implications

14
COMPETITION AND MANAGEMENT
  • Competition is strongly linked with good
    management1
  • Positive effects of competition appears to be due
    to two factors
  • Selection badly managed exit more quickly
  • Effort competition makes managers try harder

1 Used the standard domestic and import
competition measures in Nickell (1996) and found
they were all strongly and positively linked to
better management
15
EDUCATION, SKILLS AND MANAGEMENT
  • Educations, skills and training are strongly
    linked with good
  • management1
  • Positive correlation with education appears be a
    combination of
  • Cause educations skills facilitates better
    management
  • Effect educated skilled people attracted to
    well managed firms

1 Robust link of good management with our five
educations and skills proxies (i) employees
with a degree (ii) of employees with an MBA,
(iii) training days per year for managers (iv)
training days per year for non-managers and (v)
average wages
16
INHERITED FAMILY FIRMS AND MANAGEMENT
  • Inherited family firms defined as 2nd
    generation family owned
  • excludes 1st generation founder firms
    (typically well run)
  • Quality of management practices in inherited
    family owned firms
  • depends on who runs them
  • Firms with professional management typically run
    well
  • Firms with inherited family management typically
    run less well
  • Work from Columbia, Harvard, and NYU shows
    inherited family
  • management also bad for productivity and growth,
    particularly in
  • larger firms and faster growing industries
  • In UK inherited family firms typically family
    managed while in the
  • US and Germany typically professionally managed

17
A FAMOUS UK INHERITED FAMILY MANAGED FIRM, WITH
A BOARD MEETING IN PROGRESS.
Note Albert Steptoe inherited Steptoe Son
from his father, making him the 2nd generation,
and Harold the 3rd generation
18
DO THESE FACTORS EXPLAIN THE UK-US MANAGEMENT GAP?
UK-US MANAGEMENT PRACTICE GAP1
Inherited family managed firms (primogeniture)
Total management Gap
Competition
Education( employees with degree)
Residual management gap
1 Note (a) based on our sample of medium sized
manufacturing firms (b) 1 point on the
management scale associated with about 20 higher
productivity.
19
OUTLINE
  • Measuring management practices
  • Evaluating our management measure
  • Describing management across firms countries
  • Explaining management across firms countries
  • Policy implications

20
BACKGROUND TO THE INHERITANCE TAX POLICY
IMPLICATIONS
  • Standard assets (savings, housing etc)
  • 40 inheritance tax above a 275,000 threshold
  • Private companies (typically family firms)
  • 0 inheritance tax, and no cap on this relief
  • Exemption introduced in Budgets from 1979 to 1992
  • Rationale that inherited family firms help the
    economy

1 A 1m family firm has 16 employees on average.
Taxing firms with gt1m will exclude most family
shops, pubs, small businesses etc.
21
POLICY IMPLICATIONS FOR INHERITANCE TAX
  • We find that inherited family management is
    associated with
  • poorer management and lower productivity among
    medium and
  • larger firms.
  • Given this, there may be benefits from capping
    the inheritance
  • tax exemption for private companies
  • Increase productivity by removing a distortion in
    favour of family inheritance in larger firms1
  • Improve intergenerational equality - which is bad
    in the UK by international standards - by taxing
    large inheritances
  • Raise revenue for example a 1m cap would raise
    250m

1 90 of family firms worth less than 1m. An
average 1m firm has 16 employees.
22
MANAGEMENT RESEARCH NEXT STEPS
  • This summer follow up a second survey wave on
    3000 firms to
  • Extend to more countries
  • Italy, Poland, Portugal, Sweden and Greece
  • Pilot in India
  • Extend to more industries
  • Pilots in Retail, Education (Schools) and Health
    (Hospitals)
  • Extend to look at organisational structure and
    use of IT
  • Quotes to finish..

23
THE WORLD OF MANUFACTURING
  • Spoke to companies making..
  • Plastic balls to stop birds nesting on water near
    airports (reported no competitors)
  • European sex-toys (few exports aimed at
    domestic tastes)
  • .and an amazing array of people
  • I spend most of my time walking around cuddling
    and encouraging people - my staff tell me that I
    give great hugs
  • US male manager to an Australian female
    interviewerYour accent is great and I like
    your talk are you married?
  • ...long silence.sorry I just got
    distracted by a submarine surfacing in front of
    my office window

24
THE SUMMER 2004 SURVEY TEAM
Top Manish Mahajan, Johannes Banner, John Van
Reenen, Tom Rippin Middle Himanshu Pande, Mehdi
Boussebba, Michael Bevan, Simone Martin, Jayesh
Patel Bottom Nick Bloom, Marcus Thielking,
Alberic De Solere
25
SCORECARD COVERS 18 QUESTIONS IN 4 AREAS
Developed by leading international consulting
firm All questions examples in Bloom and
VanReenen (2006) OPERATIONS (3) - problem
fixing, Lean manufacturing etc. MONITORING (5) -
tracking, review evaluation, follow-up
etc. TARGETS (5) - transparent, stretching,
linked, time horizon etc INCENTIVES (5) -
promotions, rewards, fix/fire, retention etc.
26
TARGETS e.g. TARGETS ARE STRETCHING (Q.11)
Score (1) Goals are either too easy or impossible to achieve managers low-ball estimates to ensure easy goals (3) In most areas, top management pushes for aggressive goals based on solid economic rationale. There are a few "sacred cows" not held to the same rigorous standard (5) Goals are genuinely demanding for all divisions. They are grounded in solid, solid economic rational
E.G. A French firm uses easy targets to improve staff morale. They find it difficult to set harder goals because people give up and managers refuse to work people harder A chemicals firm has 2 divisions, producing special chemicals for military and civilian markets. Easier levels of targets are requested from the founding and more prestigious military division. A UK manager insists that he sets aggressive and demanding goals for everyone even security. If they hit all their targets he worries he hasnt stretched them enough.
27
INCENTIVES e.g. PROMOTIONS (Q.16)
Score (1) People are promoted primarily upon the basis of tenure (3) People are promoted upon the basis of performance (5) We actively identify, develop and promote our top performers
E.G. A UK firm promotes based on an individuals commitment to the company, typically measured by experience. Almost all employees move up in lock-step. People learn on the job and are promoted based on their performance on the job. In a UK firm each employee is thoroughly assessed every 6 months and given a red light (not performing), amber light (doing well on track) a green light (high performer - promote) and a blue light (extreme performer - promote twice)
28
MONITORING - i.e. HOW IS PERFORMANCE TRACKED?
Score (1) Measures tracked do not indicate directly if overall business objectives are being met. Certain processes arent 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
E.G. A US manager tracked measures when he thought output was not sufficient. He last requested reports eight months ago, checked them for a week, and then stopped checking once output had increased A US firm bar-codes every product, and performance indicators are tracked throughout the production but this information was not shown to workers A US firm had screens visible to every production line with hourly progress to target. The plant manager met daily with the shop floor to discuss these. He even stamped canteen napkins with key performance achievements
29
MANY COMPETITORS AND NO (PG) FAMILY CEO
N317
2.7 firms in tail1
FEW COMPETITORS AND/OR (PG) FAMILY CEO
N415
9.0 firms in tail1
1 Tail defined as a score 2. In the whole
sample 6.9 of firms are in the tail.
30
OTHER RESEARCH FINDS SIMILAR NEGATIVE IMPACT OF
INHERITED FAMILY MANAGEMENT
  • Three very good recent papers from Harvard,
    Columbia and NYU
  • Villalonga Amit (2005) look at quoted US firms
    and find family firms average productivity if
    professionally managed but low productivity if
    2nd generation family managed
  • Perez-Gonzalez (2006) looks at quoted US firms
    and find when the founder announces his
    retirement the share price jumps if next CEO is
    to be an outsider but drops if it is to be a 2nd
    generation family member (particularly one with
    non-selective college degree)
  • Bennedsden et al. (2006) look at over 5,000
    Danish firms using the gender of the first born
    child to identify a negative causal impact of
    inherited family management on productivity,
    particularly in larger and faster growing firms.

31
INHERITED FAMILY FIRMS AND MANAGEMENT
We define inherited family firms as firms owned
by the 2nd generation or beyond. This excludes
1st generation founder firms, who are typically
well managed.
1 UK Fra Ger US
Inherited family largest shareholder 30 32 30 10
Inherited family largest shareholder and CEO 23 22 12 7
Inherited family largest shareholder family CEO, chosen by primogeniture2 15 14 3 3
1 All shareholdings combined across all family
members. 2 Based on question How was
management of the firm passed down was it to
the eldest son or by some other way?. Non primo
geniture alternatives in frequency order
other sons, son in-laws, daughters, brothers,
wives, nephews and cousins.
32
WHY DOES FAMILY INVOLVEMENT VARY ACROSS COUNTRIES?
  • One reason is history US and Germany more of a
    tradition of professional management versus UK
    and France tradition of hereditary family
    management1.
  • Another reason is inheritance tax2 headline
    rates on a typical large family firm
  • US 50 France 25
  • UK 0 Germany 15

1See Bloom and Van Reenen (2006) for references
and details2 Rate on a private 25m firm. These
taxes are often reduced/avoided by advanced tax
planning, although this involves foresight,
financial costs and some control loss.
33
UK PROBLEM OF INHERITED FAMILY FIRMS IS IN FACT
AN OLD TOPIC
Harvard historians Alfred Chandler and David
Landes1 claimed UK manufacturing decline from the
early 1900s (versus US Germany) due to
inherited family management2 More recent work
from Columbia, Harvard, and NYU also shows
inherited family management bad for productivity,
profitability and growth, particularly in larger
firms and faster growing industries
1 Alfred Chandler (1994), Scale and Scope The
Dynamics of Industrial Capitalism, and David
Landes (1967) The Unbound Prometheus.2 The
phrase Clogs to clogs in three generations
reflects these inherited management problems. The
Chinese have a similar phrase of Paddy field to
paddy field
34
US FIRMS ARE ALSO BETTER IN EUROPE
Average management score by firm type in UK,
France and Germany
in sample
Domestic
379
Non-US multinational subsidiary
44
US multinational subsidiary
20
Controls for any sample selection on size
(direct and group) and listing
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