Management Practices in Europe,
the US and Emerging Markets
Nick Bloom (Stanford Economics)
John Van Reenen (Stanford GSB/LSE)
Lecture 4
Nick Bloom and John Van Reenen, Management Practices, 2010
1
Management scores across countries
Performance management
Nick Bloom and John Van Reenen, Management Practices, 2010
2
MANAGEMENT PRACTICES ACROSS COUNTRIES?
US
Germany
Sweden
Japan
Canada
France
Italy
Great Britain
Australia
Northern Ireland
Poland
Republic of Ireland
Portugal
Brazil
India
China
Greece
2.6
Distinct groups
2.8
3
3.2
meanManagement
of management Score
Country
Nick Bloom and John Van Reenen, Management Practices, 2010
Average
3.4
“TAILS” DRIVES DIFFERENCES ACROSS COUNTRIES
Brazil
Canada
China
France
Germany
Great Britain
Greece
India
Ireland
Italy
Japan
Poland
Portugal
Sweden
US
0
.5
1
0
.5
1
0
.5
1
0
.5
1
Australia
1
2
3
4
5
1
2
3
4
5
1
Nick Bloom and John Van Reenen, Management Practices, 2010
2
3
4
5
Firm-Levelmanagement
Management Scores
1
2
3
4
5
COUNTRIES ALSO HAVE DIFFERENT RELATIVE
STRENGTHS IN MANAGEMENT PRACTICES
Sweden
France
Australia
Italy
Portugal
Germany
Japan
Greece
Canada
Great Britain
Brazil
Northern Ireland
US
Republic of Ireland
China
Poland
India
Relatively better at
‘operations’
management
(monitoring, continuous
improvement, Lean etc)
Relatively better at
‘talent’
management
(hiring, firing, pay,
promotions etc)
-.4
-.2 firing, pay
0 & promotions)
.2
People
management
(hiring,
– .4
Nick Bloom and John Van Reenen, Management Practices,
2010
mean of peo_ops
operations (monitoring, continuous
improvement and Lean)
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
Nick Bloom and John Van Reenen, Management Practices, 2010
.3
.4
MANAGERS GENERALLY OVER-SCORED THEIR
FIRM’S MANAGEMENT
“Average”
“Best
Practice”
0
.1
.2
“Worst
Practice”
0
2
4
6
8
Their self-score: 1 (worst practice), 5 (average) to 10 (best practice)
Nick Bloom and John Van Reenen, Management Practices, 2010
10
THIS BRAZILIANS OVER-SCORED THE MOST AND
THE AMERICANS THE LEAST
Brazil
Greece
India
Portugal
China
Republic of Ireland
Northern Ireland
Australia
Canada
Italy
Great Britain
Poland
Germany
Japan
Sweden
France
US
0
.5
1
1.5
of gap
Self score (normalized to 1 to 5mean
scale)
– Management score
Nick Bloom and John Van Reenen, Management Practices, 2010
2
0
Correlation
0.032*
-6
-4
-2
Labor Productivity
labp
SELF-SCORES ARE ALSO UNINFORMATIVE ABOUT
FIRM PERFORMANCE
Lowess smoother
0
2
4
6
8
Their self-score: 1 (worst practice), 5 (average) to 10 (best practice)
10
Self scored management
bandwidth
= .8Van Reenen, Management Practices, 2010
Nick Bloom
and John
* In comparison the management score has a 0.295 correlation with labor productivity
Management scores across countries
Performance management
Nick Bloom and John Van Reenen, Management Practices, 2010
10
Performance management
Today we will run through 5 dimensions on performance
management (questions 1, 3, 4, 5 and 6)
The basic concept is around the collection and use of information
within firms.
While the data we have shown is for manufacturing, these
questions have been used in retail, hospitals, schools, drug
treatment clinics, tax collection agencies, charities, PPPs and law
firms
Nick Bloom and John Van Reenen, Management Practices, 2010
11
(3) Process problem documentation
Score (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
Nick Bloom and John Van Reenen, Management Practices, 2010
(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
12
(4) Performance tracking
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.
Nick Bloom and John Van Reenen, Management Practices, 2010
(5): Performance is
continuously
tracked and
communicated,
both formally and
informally, to all
staff using a range
of visual
management tools.
13
(5) Performance review
Score (1): Performance
is reviewed
infrequently or in
an unmeaningful 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.
Nick Bloom and John Van Reenen, Management Practices, 2010
(5): Performance is
continually
reviewed, based on
indicators tracked.
All aspects are
followed up ensure
continuous
improvement.
Results are
communicated to
all staff
14
(6) Performance dialogue
Score (1): The right
data or
information for a
constructive
discussion is
often not
present or
conversations
overly focus on
data that is not
meaningful.
Clear agenda is
not known and
purpose is not
stated explicitly
(3): Review
conversations are
held with the
appropriate data and
information present.
Objectives of
meetings are clear to
all participating and
a clear agenda is
present.
Conversations do
not, as a matter of
course, drive to the
root causes of the
problems.
Nick Bloom and John Van Reenen, Management Practices, 2010
(5): Regular
review/performan
ce conversations
focus on problem
solving and
addressing root
causes. Purpose,
agenda and
follow-up steps
are clear to all.
Meetings are an
opportunity for
constructive
feedback and
coaching.
15
(1) Modern manufacturing, introduction
Score (1): Other than
JIT delivery from
suppliers few
modern
manufacturing
techniques have
been introduced,
(or have been
introduced in an
ad-hoc manner)
(3): Some
aspects of
modern
manufacturing
techniques have
been
introduced,
through
informal/isolated
change
programs
Nick Bloom and John Van Reenen, Management Practices, 2010
(5): All major aspects
of modern
manufacturing have
been introduced
(Just-in-time,
autonomation,
flexible manpower,
support systems,
attitudes and
behaviour) in a
formal way
16
(2) Modern manufacturing, rationale
Score
(1): Modern
manufacturing
techniques were
introduced
because others
were using them.
(3): Modern
manufacturing
techniques
were
introduced to
reduce costs
Nick Bloom and John Van Reenen, Management Practices, 2010
(5): Modern
manufacturing
techniques were
introduced to enable
us to meet our
business objectives
(including costs)
17
But Lean is not always good….
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.
Nick Bloom and John Van Reenen, Management Practices, 2010
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.
MY FAVOURITE QUOTES:
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…]
Nick Bloom and John Van Reenen, Management Practices, 2010
Backup slides
Nick Bloom and John Van Reenen, Management Practices, 2010
20
WE FIND FIVE FACTORS ARE ASSOCIATED WITH
DIFFERENCES IN MANAGEMENT PRACTICES
Competition
Governance - Family firms & Private Equity
Multinationals
Labor market regulations
Education
Nick Bloom and John Van Reenen, Management Practices, 2010
TAILS DRIVES DIFFERENCES ACROSS COUNTRIES
Brazil
Canada
China
France
Germany
Great Britain
Greece
India
Ireland
Italy
Japan
Poland
Portugal
Sweden
US
0
.5
1
0
.5
1
0
.5
1
0
.5
1
Australia
1
2
3
4
5
1
2
3
4
5
1
Nick Bloom and John Van Reenen, Management Practices, 2010
2
3
4
5
Firm-Levelmanagement
Management Scores
1
2
3
4
5
Better Managed firms are larger
Employees in the firm
# firms
3000-5000
308
2000-3000
271
1000-2000
611
750-1000
278
500-750
692
400-500
403
300-400
635
250-300
422
200-250
602
150-200
693
100-150
832
2.6
2.8
3
mean
of management
Average
management
score
from 1 (worst practice) to 5 (best practice)
3.2
Nick
Bloom taken
and John
VanallReenen,
Management
Practices,
Note:
Averages
across
firms within
each country.
5,7472010
observations in total. Mean and median firm size is
701 and 320 employees respectively.
COMPETITION IS ASSOCIATED WITH
BETTER MANAGEMENT PRACTICES
Assessed management practice score
3.5
3.4
3.3
3.2
3.1
3.0
2.9
2.8
2.7
2.6
2.5
0
2
4
6
8
10
Reported number of competitors
Nick Bloom and John Van Reenen, Management Practices, 2010
TOUGH COMPETITION IS STRONGLY LINKED TO
BETTER MANAGEMENT PRACTICES
Dependent variable:
Management
Competition proxies
Import penetration
(SIC-3 industry, 1995-99)
0.066**
(0.033)
“1-Rents” measure1
(SIC-3 except firm itself, 1995-99)
1.964**
(0.721)
# of competitors
(Firm level, 2004)
0.158***
(0.023)
Observations
2499
2980
3589
Full controls2,3
Yes
Yes
Yes
= 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
1 1-Rents
Nick Bloom and John Van Reenen, Management Practices, 2010
A VARIETY OF WAYS COMPETITION CAN HELP TO
IMPROVE MANAGEMENT PRACTICES
“Selection” effect – competition selects out badly managed firms
(they go bankrupt)
“Incentive/Boot up the ass” effect – competition forces badly
managed firms to improve performance
“Learning” effect – competition provides more firms in and
industry, increasing experimentation and learning.
Nick Bloom and John Van Reenen, Management Practices, 2010
CHANGE IN COMPETITION LINKED TO BETTER
MANAGEMENT: SO NOT JUST SELECTION
Competition proxies
Dependent variable: Change in
Management 2006-2004
Change in Import penetration
0.013**
(0.005)
1.006**
Change in “1-Rents” measure1
(0.415)
0.120**
Change in Number of rivals
(0.052)
Observations
421
404
432
= 1- (operating profit – capital costs)/sales
S.E.s in ( ) below, robust to heteroskedasticity, clustered by country-industry
1 1-Rents
UK, US, France and Germany only
Nick Bloom and John Van Reenen, Management Practices, 2010
COMPETITION NOT ONLY DRIVES OUT BADLY
MANAGED FIRMS, BUT MAKES WELL MANAGED
FIRMS LARGER
“Selection” effect – market reallocates jobs to more efficient firms
An additional point on the management score is associated with
an increase of employment (Bloom, Genakos, Sadun & VR):
US 715 more workers
UK 546 more workers
India 263 more workers
Italy 253 more workers
Competitive forces of reallocation weaker in India/Italy compared
to US
Nick Bloom and John Van Reenen, Management Practices, 2010
SUMMARY: COMPETITION KEY FACTOR IN
IMPROVING MANAGEMENT
Selection effect important in accounting for US leading position
Incentive effect also matters (from panel evidence on changes)
Nick Bloom and John Van Reenen, Management Practices, 2010
WE FIND FIVE FACTORS ARE ASSOCIATED WITH
DIFFERENCES IN MANAGEMENT PRACTICES
Competition
Governance
- Family firms
- Private Equity
- Government run
Multinationals
Labor market regulations
Education
Nick Bloom and John Van Reenen, Management Practices, 2010
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
Family, external CEO
Family, family CEO
Founder
Government
Managers
Other
Private Equity
Private Individuals
0
.5
1
0
.5
1
0
.5
1
Dispersed Shareholders
Nick1Bloom2and John
2010
3 Van Reenen,
4
5Management
1
2 Practices,
3
4
5
1
Average Management Score
2
3
4
5
ONWERSHIP PATTERNS OF THESE “POOR
MANAGEMENT” GROUPS VARY SUBSTANTIALLY
Sweden
Japan
US
France
Poland
Canada
Australia
Germany
China
Great Britain
Republic of Ireland
Northern Ireland
Italy
Brazil
Portugal
Greece
India
share family CEO
share founder CEO (1st generation)
share government owned
0
.2
.4
.6
share of ownership (for types associated with low management scores)
.8
Nick Bloom and John Van Reenen, Management Practices, 2010
mean of family
mean of founder
FAMILY FIRMS AND MODELS OF MANAGEMENT
PRACTICES
Likely family impact depends on involvement
• Ownership but not management probably positive
• Concentrated ownership so better monitoring
• Management probably negative
• Smaller pool to select CEO from
• Possible “Carnegie” effect on future CEO’s
• Less career incentive for non-family managers
Nick Bloom and John Van Reenen, Management Practices, 2010
FAMILY MANAGEMENT (PARTICULARLY A PRIMO
GENITURE SELECTED CEO) IS PROBLEMATIC
%
Dependent variable: Management
Family1 largest shareholder
-0.008
(0.043)
-0.137**
(0.023)
Family1 largest shareholder &
family CEO
-0.169**
(0.025)
Family1 largest shareholder,
family CEO & primo geniture2
Observations
-0.073
(0.049)
-0.254** -0.223**
(0.043) (0.046)
4141
4141
4141
4141
1 Family defined as 2nd generation or later
2 Based on question: “How was management of the firm passed down:
was it to the eldest son or by some other way?”.
Note includes SIC-3 digit, country, skills, firm size and public controls
Nick Bloom and John Van Reenen, Management Practices, 2010
Suggestive evidence that Private Equity can
improve management
Management
Number
of firms
134
Management (same
ownership 3+ years)
635
Average score on 18 management practice questions
Government
Founder
Family, family CEO
722
Private Individuals
625
Other
290
Managers
138
Family, external CEO
174
Dispersed Shareholders
1357
Private Equity
137
2
2.25
2.5
2.75
Nick Bloom and John Van Reenen, Management Practices, 2010
3
3.25
3.5
35
Note: Sample of 4,221 medium-sized manufacturing firms. The bottom bar-chart only covers the 3696 firms which have been in the same
ownership for the last 3 years. The “Other” category includes venture capital, joint-ventures, charitable foundations and unknown ownership.
Private Equity firms have greater improvements in
management practice over time
Management Change
Founder
Management Change
(same ownership 3+
years)
Private Individuals
Dispersed Shareholders
PE firms have faster
improvement in
management than other
ownership types
Family, family CEO
Managers
Other
Family, external CEO
Private Equity
-.2
0
.2
.4
Firms with deteriorating management
are more likely to be taken in to PE
Nick Bloom and John Van Reenen, Management Practices, 2010
Note: Sample of 561 firms. Surveyed in 2004 and 2006
36
WHY DO PRIVATE EQUITY FIRMS RAISE
PERFORMANCE?
• Appear to raise operational performance, not just incentives
to top managers
• Davis et al (2009) find when firms taken over by PE
productivity rises
– Low productivity plants closed down
– Net employment broadly the same, but a lot of change
reallocating jobs within the firm
Nick Bloom and John Van Reenen, Management Practices, 2010
37
WE FIND FIVE FACTORS ARE ASSOCIATED WITH
DIFFERENCES IN MANAGEMENT PRACTICES
Competition
Governance - Family firms & Private Equity
Multinationals
Labor market regulations
Education
Nick Bloom and John Van Reenen, Management Practices, 2010
MULTINATIONALS APPEAR ABLE TO TRANSPORT
GOOD MANAGEMENT AROUND THE WORLD
Foreign multinationals
Domestic firms
US
Japan
Sweden
Germany
Canada
Australia
Italy
Great Britain
France
Poland
Northern Ireland
Republic of Ireland
India
China
Portugal
Brazil
Greece
2.4
2.6
2.8
3
Nick Bloom and John Van Reenen, Management Practices, 2010
3.2
Average Management Score
3.4
DOMESTIC MULTINATIONALS ARE IN-BETWEEN
FOREIGN MULTINATIONALS & DOMESTIC FIRMS
Foreign multinationals
Domestic multinationals
Domestic firms
US
Canada
Japan
Poland
Germany
Sweden
Italy
France
India
Australia
Great Britain
Brazil
Greece
Portugal
Northern Ireland
China
Republic of Ireland
Nick Bloom and John
Management
Practices, 2010
2.4Van Reenen,
2.6
2.8
3
3.2
Average Management Score
3.4
MULTINATIONAL OWNERSHIP VARIES
SUBSTANTIALLY ACROSS COUNTRIES
Foreign multinationals
Domestic multinationals
India
Brazil
China
Greece
Japan
Poland
Italy
Northern Ireland
Republic of Ireland
Portugal
Canada
US
Great Britain
Australia
Germany
France
Sweden
0
.2
.4
Share of multinationals
Nick Bloom and John Van Reenen, Management Practices, 2010
.6
.8
WE FIND FIVE FACTORS ARE ASSOCIATED WITH
DIFFERENCES IN MANAGEMENT PRACTICES
Competition
Governance - Family firms & Private Equity
Multinationals
Labor market regulations
Education
Nick Bloom and John Van Reenen, Management Practices, 2010
3.4
3.2
US
3
Canada
Germany
2.8
GreatJapan
Britain
Northern Ireland
Australia
Poland
Sweden
Republic of Ireland
France
Italy
2.6
India
China
Portugal
Brazil
Greece
2.4
Average people management
(hiring, firing, pay and promotions)
peop_mean
LIGHT LABOR MARKET REGULATIONS ALSO
FACILITIATE GOOD PEOPLE MANAGEMENT
0
20
40
World Bank Employment Rigidity Index
Nick Bloom and John Van Reenen, Management WB_RigidityEmployment
Practices, 2010
60
80
EDUCATION IS ALSO STRONGLY LINKED WITH
BETTER MANAGEMENT PRACTICES
60
40
20
0
Percent with a degree
Non-managers
Managers
1
1.5
2
2.5
3
Nick Bloom and John Van Reenen, Management Practices, 2010
3.5
4
4.5
mean of degree_nm
of degree_m
Management
score (rounded mean
to nearest
0.5)
WE FIND FIVE FACTORS ARE ASSOCIATED WITH
DIFFERENCES IN MANAGEMENT PRACTICES
Competition
Governance - Family firms & Private Equity
Multinationals
Labor market regulations
Education
Bottom Line: Account for about 50% of the “lower tail” of badly
managed firms and 50% of cross-country variation with
these factors
Nick Bloom and John Van Reenen, Management Practices, 2010
COMPETITION, FAMILY FIRMS, MULTINATIONALS & LABOR
REGULATIONS ACCOUNT FOR ≈ ½ COUNTRY SPREAD
US
Germany
Sweden
Japan
UK
France
Marginal R-squared on country
fixed-effects reduced by 45%
after controlling for number of
competitors, family
management and primo
geniture, multinational status
and labor market regulations
Italy
Poland
Portugal
Greece
China
India
2.4
2.6
2.8
3
3.2
3.4
management predicted from comp, family, MNE and regulation
raw management data
Nick Bloom and John Van Reenen, Management Practices, 2010
MY FAVOURITE QUOTES:
The difficulties of defining ownership in Europe
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” ?”
Americans on geography
Interviewer: “How many production sites do you have abroad?
Manager in Indiana, US: “Well…we have one in Texas…”
Nick Bloom and John Van Reenen, Management Practices, 2010
BACK UP
Nick Bloom and John Van Reenen, Management Practices, Spring 2009
48
EDUCATIONAL LEVELS VARY STRONGLY ACROSS
COUNTRIES IN OUR SAMPLE
Non-managers
Managers
Overall (share weighted average)
Portugal
Northern Ireland
Brazil
Canada
Greece
Great Britain
China
Australia
Germany
Republic of Ireland
Italy
France
Sweden
US
Poland
India
Japan
Nick Bloom and John Van Reenen, Management Practices, Spring 2009
0
20
40
60
80
.8
“GOOD DOMESTIC” (MANY COMPETITORS, NOT PG
FAMILY) OR MULTINATIONAL
.6
N=2899
0
.2
.4
5.9% firms in tail
1
2
3
4
Our management score - average across 18 questions
5
.6
“BAD DOMESTIC” (FEW COMPETITORS OR PG FAMILY)
N=1244
0
.2
.4
18.1% firms in tail
1
2
3
4
Our management score - average across 18 questions
5
1 Tail
defined as a score ≤ 2. In the whole sample 9.6% of firms
Nick Bloom and John Van Reenen, Management Practices, Spring 2009
are in the tail.