Nick Bloom, 149, 2015 The Modern Firm in Theory and Practice Nick Bloom and Paul Milgrom Lecture 4: Management and firm Performance 1

Nick Bloom, 149, Monitoring management practices Targets management practices Danaher

Nick Bloom, 149, 2015 (3) Process problem documentation (1): No, process improvements are made when problems occur. (3): Improvements are made in one week workshops involving all staff, to improve performance in their area of the plant (5): Exposing problems in a structured way is integral to individuals’ responsibilities and resolution occurs as a part of normal business processes rather than by extraordinary effort/teams

Nick Bloom, 149, 2015 The survey scores to question (3), process problem documentation – all countries, manufacturing 4 All countries, manufacturing firms (100 to 5000 employees), 9840 observations Average 3.13

Nick Bloom, 149, US, manufacturing firms (100 to 5000 employees), 1298 observations Average 3.42 The survey scores to question (3), process problem documentation – US, manufacturing

Nick Bloom, 149, India, manufacturing firms (100 to 5000 employees), 1137 observations Average 2.64 The survey scores to question (3), process problem documentation – India, manufacturing

Nick Bloom, 149, 2015 The survey scores to question (3), process problem documentation – US, Canada and UK, retail 7 All countries, retail firms (100 to 5000 employees) 661 observations Average 3.07

Nick Bloom, 149, 2015 The survey scores to question (3), process problem documentation – developed countries, hospitals 8 Hospitals, Canada, France, Germany, Italy, Sweden, UK, US, 1183 observations Average 3.04

Nick Bloom, 149, Score(1): Measures tracked do not indicate directly if overall business objectives are being met. Tracking is an ad-hoc process (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. (4) Performance tracking

Nick Bloom, 149, 2015 Examples of performance metrics – Toyota 10

Nick Bloom, 149, 2015 Example of performance metrics – apparel and textiles 11 Shirt factory, BurmaFabric factory, India

Nick Bloom, 149, 2015 Examples of performance metrics – Call Centre 12

Nick Bloom, 149, 2015 Examples of performance metrics - Heathrow 13

Nick Bloom, 149, 2015 Examples of metrics – Retail Bank (1/2)

Nick Bloom, 149, 2015 Examples of metrics – Retail Bank (2/2)

Nick Bloom, 149, 2015 Performance tracking (4): all countries, manufacturing 16 All countries, manufacturing firms (100 to 5000 employees), 9838 observations Average 3.36

Nick Bloom, 149, Score(1): Performance is reviewed infrequently or in an un- meaningful way e.g. only success or failure is noted. (3): Performance is reviewed periodically with successes and failures identified. Results are communicated to senior management. No clear follow-up plan is adopted. (5): Performance is continually reviewed, based on indicators tracked. All aspects are followed up ensure continuous improvement. Results are communicated to all staff (5) Performance review

Nick Bloom, 149, 2015 Performance review (5): all countries, manufacturing 18 All countries, manufacturing firms (100 to 5000 employees), 9827 observations Average 3.33

Nick Bloom, 149, 2015 Interviewer: “Would you mind if I asked how much your bonus is as a manager?” Manager: “I don't even tell my wife how much my bonus is!” Interviewer: “Frankly, that’s probably the right decision...” SOME FIRMS SEEMED TO BE TOO TRUTHFUL 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 Who rules the home in Ireland French secretary: “You want to talk to the plant manager? There are legal proceedings against him, so hurry up!!” The trusted Secretary

Nick Bloom, 149, Monitoring management practices Targets management practices Danaher

Nick Bloom, 149, 2015 Score(1): Goals are based purely on accounting figures (with no clear connection to shareholder value). (3): Corporate goals are based on shareholder value but are not clearly communicated down to individuals (5): Corporate goals focus on shareholder value. They increase in specificity as they cascade through business units ultimately defining individual performance expectations. (9) Target interconnection

Nick Bloom, 149, 2015 Target interconnection (9): all countries, manufacturing 22 All countries, manufacturing firms (100 to 5000 employees), 9813 observations Average 3.01

Nick Bloom, 149, 2015 Score(1): Top management's main focus is on short term targets. (3): There are short and long-term goals for all levels of the organization. As they are set independently, they are not necessarily linked to each other (5): Long term goals are translated into specific short term targets so that short term targets become a "staircase" to reach long term goals (10) Target time horizon

Nick Bloom, 149, 2015 Target time horizon (10): all countries, manufacturing 24 All countries, manufacturing firms (100 to 5000 employees), 9814 observations Average 2.99

Nick Bloom, 149, 2015 Score(1): Goals are either too easy or impossible to achieve; managers provide low 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" that are not held to the same rigorous standard (5): Goals are genuinely demanding for all divisions. They are grounded in solid, solid economic rationale (11) Targets are stretching

Nick Bloom, 149, 2015 Targets are stretching (11): all countries, manufacturing 26 All countries, manufacturing firms (100 to 5000 employees), 9819 observations Average 3.00

Nick Bloom, 149, 2015 Score(1): Performance measures are complex and not clearly understood. Individual performance is not made public (3): Performance measures are well defined and communicated; performance is public in all levels but comparisons are discouraged (5): Performance measures are well defined, strongly communicated and reinforced at all reviews; performance and rankings are made public to induce competition (12) Performance clarity

Nick Bloom, 149, 2015 Performance clarity (12): all countries, manufacturing 28 All countries, manufacturing firms (100 to 5000 employees), 9821 observations Average 2.67

Nick Bloom, 149, Monitoring management practices Targets management practices Danaher

Nick Bloom, 149, 2015 Danaher has continued to do well 30 Nick starts teaching Danaher case

Nick Bloom, 149, 2015 And the market has really noticed 31

Nick Bloom, 149, From internet searching I believe they are introducing a new product range

Nick Bloom, 149, 2015 Q1 Why has Danaher been successful as a multi-business conglomerate over the past two decades? What do you see as the core attributes that have allowed it to sustain superior performance during this period? Operations Corporate strategy 33

Nick Bloom, 149, 2015 Q2) How easy or difficult is it for other companies to mimic or emulate what Danaher does? Why? 34

Nick Bloom, 149, 2015 Q3) What do you consider to be the biggest challenges that Danaher is likely to confront during the next years? What can Larry Culp do to prepare the organization for these challenges? 35

Nick Bloom, 149, Basic Lean – floor markings

Nick Bloom, 149, 2015 Excessive Lean – desk markings The £7 million guide to a tidy desk, London Times, January 5, 2007 Red tape has given way to black marker tape for thousands of bemused civil servants as part of a £7 million paperclip revolution aimed at ensuring that they keep the tools of their trade in the right place. Office workers have been given the tape to mark out where they should put their pens and pencils, their computer keyboards and to indicate where to place their phones. National Insurance staff have been chosen as guinea-pigs for the latest phase of the “Lean” programme brought in by the logistics consultants Unipart. The programme prohibits workers from keeping personal items on their desks.

Nick Bloom, 149, Wrap up 1)Large variation in monitoring and targets – best organizations monitor extensively and continuously improve set challenging targets that flow from short to long run 2) Variation common across all industries we have looked at 3) Potential for improvement is extensive, especially in family firms, uncompetitive areas & in developing countries 4) On Monday we will focus on Scientific Management & Ctrip