Management Practices in Europe, the US and Emerging Markets

1. Management Practices in Europe, the US and Emerging Markets Nick Bloom (Stanford Economics) John Van Reenen (LSE and Stanford GSB) Lecture 1

2. Course Objectives • This course is built on 10 years of research by LSE, McKinsey & Stanford, with recent extensions with Accenture, Harvard Business School, the World Bank and the European Bank for Reconstruction & Development • This course aims to provide to do three things: • Provide a “management 101” overview of basic practices • Explain how management practices vary around the world (and why) • Introduce you to some management research techniques

3. Course Timing We will have 9 classes as follows: Core Management Practices: Jan 7th Research overview; basic concepts in productivity & management; measuring management; Jan 12th & 14th talent management grid; cross-country management; self-scores; performance management grid Jan 19th & 21st Drivers of management (e.g. competition, governance, regulation); target management grid; policy Extensions: Jan 26th Management experiments in India Jan 28th Healthcare, retail and education Feb 2nd Firm Organization: understanding decentralization; Feb 18th Management practices and the US productivity miracle

4. Course Organization • Nick Bloom (Stanford Economics) and John Van Reenen (Stanford GSB/LSE) will co-teach the course. • There will be no take home work or exams • Passing the class for credit simply requires: • Class attendance • Class participation • Individual presentations • Questions, experiences and response • All slides will be put up within 24 hours of class on website http://www.stanford.edu/~nbloom/

5. Class Presentations From Lecture 2 (Jan 12th) onwards there will be a presentation by someone from the class. There will be 8 presentations We will be asking for volunteers half-way through this lecture!

6. Class Presentations Structure (1/2) • Present 6 slides on a firm you know, covering: • What the firm does: e.g. products, size, location, competitors • Your relationship to the firm (an employee, family firm etc) • Talent management practices: score and some examples • Targets management practices: score and some examples • Performance management practices: score and some examples • Your three tips to improve management in the firm • Suggested guides: • All slides in 24 point font or greater • At least one picture per presentation • Be creative – make it interesting and engaging 6

7. Class Presentations Structure (2/2) • The presentations should last about 10 minutes without questions, so about 20 minutes given we expect discussion. • The preparation of the slides should take about an hour, certainly no more than 2 hours. • In advance of presenting in class you are advised to have a practice run through with either of us (e-mail to set up time to do this). We can give you some feedback and suggestions. • This is supposed to be fun, helpful and a way to get excellent class involvement grades. 7

8. Course Timing Classes run from 8:15 to 9:45, Tuesday and Thursday John and Nick will also be around for as long as necessary after class to answer questions, and are happy to meet up at other times as well (again, just e-mail us). INTRODUCTIONS & QUESTIONS

9. Introduction Why care about management and productivity?

10. Productivity • GDP per capita (Income per person) basic indicator of economic wellbeing • GDP per capita increases by growth of inputs (e.g. more capital or labor) or higher Total Factor Productivity (TFP)

11. Some basic Productivity Concepts Output = Inputs + Total Factor Productivity (TFP) e.g. Labor, capital, materials Labor Productivity= Output per employee = Inputs per employee + TFP

12. Productivity “Facts” • Macro: Productivity varies hugely across nations and over time • Robert Solow: TFP growth at least as important as growth of inputs in explaining economic growth • Cross country GDP/capita differences largely due to TFP differences • Productivity slowdown 1973-1995 and “miracle” post 1995 • Micro: Productivity varies hugely across firms

13. In long-run most countries have enjoyed catch up Growth with the GDP/head leader (US) but not all Source: Maddison (2008) Data is smoothed by decade

14. Large Income & TFP Differences between countries Source: Jones and Romer (2009). US=1

15. Why it matters for policy • Increasing TFP means that the economic pie is bigger so more room for • Consumption • Tax cuts • Increases in public goods (e.g. Environmental quality) • Harder to achieve if productivity stagnant • But what can be done to increase productivity?

16. Factors increasing productivity • Proximate factors: • Hard technology (e.g. R&D) • Skills (e.g. Expansion of college education) • Management (a technology & a skill?). • Some deeper factors “driving” the above • Competition • Globalization • Regulations/policies • Culture

17. Productivity Differences across firms within countries is huge • Census data on population of plants • US: plant at the 90th percentile produced 4x higher labor productivity as plant at the 10th percentile (Syverson, 2004) • Controlling for other inputs • TFP difference 1.9 in US • Not just mismeasured prices: in detailed industries (e.g. Boxes, bread, carbon black, block ice, concrete, plywood, etc.) productivity differences get bigger (Foster et al, 2008)! • Not just temporary shocks • Could account for large part of cross country differences

18. Distribution of plant TFP differences: Higher average US productivity due to fewer less productive plants Source: Hsieh and Klenow (2008); US mean=1

19. Big TFP dispersion among US ready mix concrete plants: More Competition means higher productivity (cut off lower tail) Low competition High competition Source: Syverson (2004)

20. How Total Factor Productivity increases • Within Firms (Traditional view) • The same firms become more productive (e.g. new technology spreads quickly to all firms, like Internet) • Between Firms (Schumpeterian view) • Low TFP firms exit and resources are reallocated to high TFP firms • High TFP firms expand (e.g. more jobs), low TFP firms contract (e.g. less jobs) • Exit/entry

21. Example of How Total Factor Productivity increases –Firm A twice as productive as firm B Aggregate (weighted) productivity is 1.5

22. How Total Factor Productivity increases – both firms increase TFP by 0.5 Aggregate productivity increases from 1.5 to 2 (one third)

23. How Total Factor Productivity increases - reallocate all labor to firm A Aggregate productivity increases from 1.5 to 2 (one third)!

24. Some Empirical Evidence on reallocation • Need large-scale database of many firms/plants observed over time (panels) • Reallocation appears to be an important factor: • In aggregate US productivity growth: c.50% of aggregate TFP growth in a 5 year period in typical industry due to reallocation (Bailey et al, 1992) • Following trade liberalizations: about half of productivity gains due to shrinking/exit of less productive plants (e.g. Pavcnik, 2002) • For certain sectors: In retail trade, just about all of labor productivity growth is due to exit/entry of stores (Foster et al, 2006) • Caveats • Reallocation is not immediate (e.g. trade dislocation) • Some shocks can destroy valuable “specific capital”

25. Management • Case studies management in similar industries and positions respond differently • Toyota and General Motors • Goldman Sachs and Lehman Brothers • Obviously management matters but • how to generalize? • how much does it matter? • what causes the differences?

26. Break and pick presenters

27. Examples of management as a technology? Waves of management technologies have arisen over time • American System of Manufacturing (1850s) • Taylor’s Scientific management (1900s) • Mass production (1920s) • Alfred Sloan’s M-form firm (1930s) • Demming’s quality movements (1950s) • Toyota production system (1970s)

28. What we need • A way to quantitatively benchmark management practices • At the firm-level • Across countries and sectors • That can be matched with firm performance data

29. Conclusion Looked at why productivity was important for the wealth of nations Discussed factors that might influence productivity, in particular considered management 29