1 MANUFACTURING MANAGEMENT PRACTICES Nick Bloom Denver, November 2 nd 2009

1.“Measuring” management practices 2.Evaluating the reliability of this measure 3.Describing management across firms & countries 4.Accounting for management across firms & countries OUTLINE 2

1) Developing management questions Scorecard for 18 monitoring, targets and incentives practices ≈45 minute phone interview of manufacturing plant managers 2) Obtaining unbiased comparable responses (“Double-blind”) Interviewers do not know the company’s performance Managers are not informed (in advance) they are scored 3) Getting firms to participate in the interview Introduced as “Lean-manufacturing” interview, no financials Official Endorsement: Bundesbank, PBC, CII & RBI, etc. Run by 75 MBAs types (loud, assertive & business experience) THE SURVEY METHODOLOGY 3

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 MONITORING - i.e. “HOW IS PERFORMANCE TRACKED?” 4

MANAGEMENT SURVEY SAMPLE Interviewed 6188 firms across Asia, Europe and the Americas Obtained 45% coverage rate from sampling frame (with response rates uncorrelated with performance measures) Medium sized manufacturing firms: Medium sized ( ,000 employees, median ≈ 250) because firm practices more homogeneous Focus on manufacturing as easier to measure productivity (but currently extending to Schools, Hospitals and Retail) 5

1.“Measuring” management practices 2.Evaluating the reliability of this measure a) Internal/External validation b) Measurement error/bias 3.Describing management across firms & countries 4.Accounting for management across firms & countries OUTLINE 6

INTERVAL VALIDATION: RE-SURVEY ANALYSIS 1 st interview 2 nd interview Re-interviewed 222 firms with different interviewers & managers Firm average scores (over 18 question) Firm-level correlation of

EXTERNAL VALIDATION OF THE SCORING Performance measure ln(capital) ln(materials) management (average z-scores) ln(labor) other controls Use most recent cross-section of data (typically 2006) country c Note – not a causal estimation, only an association 8

Dependent variable Productivity (% increase) Profits (ROCE) 5yr Sales growth Share Price (Tobin Q) Exit EstimationOLS Probit Firm sampleAll QuotedAll Management28.7*** 2.018*** 0.047*** 0.250***-0.262** Firms EXTERNAL VALIDATION: BETTER PERFORMANCE IS CORRELATED WITH BETTER MANAGEMENT Includes controls for country, with results robust to controls for industry, year, firm-size, firm-age, skills etc. Significance levels: *** 1%, ** 5%, * 10%. Sample of all firms where accounting data is available 9

EXTERNAL VALIDATION – ROBUSTNESS Performance results robust in all main regions: Anglo-Saxon (US, UK, Ireland and Canada) Northern Europe (France, Germany, Sweden & Poland) Southern Europe (Portugal, Greece and Italy) East Asia (China and Japan) South America (Brazil) 10

EXTERNAL VALIDATION: WELL MANAGED FIRMS ALSO APPEAR MORE INNOVATIVE Total patents Management score (rounded to nearest 0.5) Note: European firms only as uses the European Patent Office database 11

EXTERNAL VALIDATION: WELL MANAGED FIRMS ARE ALSO MORE LIKELY TO EXPORT Share of firms exporting Management score (rounded to nearest 0.5) 12

EXTERNAL VALIDATION: WELL MANAGED FIRMS ALSO APPEAR TO BE MORE ENERGY EFFICIENT Energy use, log( KWH/$ sales) Management 1 point higher management score associated with about 20% less energy use 13 Source: Bloom, Genakos, martin and Sadun, NBER WP Analysis uses Census of production data for UK firms

14 1.“Measuring” management practices 2.Evaluating the reliability of this measure 3.Describing management across firms & countries 4.Accounting for management across firms & countries OUTLINE 14

MANAGEMENT PRACTICES ACROSS COUNTRIES Notes: 1)Uses firms with 100 to 5000 employees 2)Australian data from MGSM/UTS survey Average Country Management Score Not statistically different from Canada 15

16 DISTRIBUTIONS BY FIRM ACROSS COUNTRIES Firm-Level Management Scores 16

1.“Measuring” management practices 2.Evaluating the reliability of this measure 3.Describing management across firms & countries 4.Accounting for management across firms & countries Competition Family firms Multinationals Labor market regulations Education OUTLINE 17

TOUGH COMPETITION IS STRONGLY LINKED TO BETTER MANAGEMENT PRACTICES Competition proxies Dependent variable: Management Import penetration (SIC-3 industry, ) 0.066** (0.033) “1-Rents” measure 1 (SIC-3 except firm itself, ) 1.964** (0.721) # of competitors (Firm level, 2004) 0.158*** (0.023) Observations Full controls 2,3 Yes 1 1-Rents = 1- (operating profit – capital costs)/sales 2 Includes 108 SIC-3 industry, country, firm-size, public and interview noise (analyst, time, date, and manager characteristic) controls 3 S.E.s in ( ) below, robust to heteroskedasticity, clustered by country-industry 18

FIRMS WITH PROFESSIONAL CEOS ARE TYPICALLY WELL RUN. GOVERNMENT, FOUNDER FAMILY CEO 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 19

MULTINATIONALS APPEAR ABLE TO TRANSPORT GOOD MANAGEMENT AROUND THE WORLD Average Management Score Foreign multinationals Domestic firms 20

LIGHT LABOR MARKET REGULATIONS ALSO FACILITIATES GOOD CANADIAN MANAGEMENT World Bank Employment Rigidity Index Average people management (hiring, firing, pay and promotions) 21

EDUCATION IS ALSO STRONGLY LINKED WITH BETTER MANAGEMENT PRACTICES Management score (rounded to nearest 0.5) Percent with a degree Non-managers Managers 22

WE USE LARGE SAMPLES BECAUSE THE WIDE VARIATION IN MANAGEMENT MEANS SMALL SAMPLES CAN BE POTENTIALLY MISLEADING Case studies provide rich firm- level details, but the variation in management practices means these can easily be misleading (e.g. Enron, was a case-study favorite with many HBS Enron cases) Management score Log of Sales/employee ($’000) 23

WE ALSO GOT MANAGERS TO SELFSCORE THEMSELVES AT THE END OF THE INTERVIEW We asked: “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” We also asked them to give themselves scores on operations and people management separately 24

MANAGERS GENERALLY OVER-SCORED THEIR FIRM’S MANAGEMENT “Average”“Worst Practice” “Best Practice” 25

SELF-SCORES ARE ALSO UNINFORMATIVE ABOUT FIRM PERFORMANCE Labor Productivity Self scored management * In comparison the management score has a correlation with labor productivity Correlation 0.032* 26

MY FAVOURITE QUOTES: [Male manager speaking to an Australian female interviewer] Production Manager: “Your accent is really cute and I love the way you talk. Do you fancy meeting up near the factory?” Interviewer “Sorry, but I’m washing my hair every night for the next month….” The traditional British Chat-Up 27

Production Manager: “Are you a Brahmin?’ Interviewer “Yes, why do you ask?” Production manager “And are you married?” Interviewer “No?” Production manager “Excellent, excellent, my son is looking for a bride and I think you could be perfect. I must contact your parents to discuss this” The traditional Indian Chat-Up MY FAVOURITE QUOTES: 28

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 I guess I could put you down as an “Italian multinational” ?” The difficulties of defining ownership in Europe MY FAVOURITE QUOTES: 29

The bizarre Interviewer: “[long silence]……hello, hello….are you still there….hello” Production Manager: “…….I’m sorry, I just got distracted by a submarine surfacing in front of my window” The unbelievable [Male manager speaking to a female interviewer] Production Manager: “I would like you to call me “Daddy” when we talk” [End of interview…] MY FAVOURITE QUOTES: 30