Management Practices in Europe, the US and Emerging Markets

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Management Practices in Europe, the US and
Emerging Markets

• Nick Bloom (Stanford Economics)
• John Van Reenen (Stanford GSB)
• Lecture 5 May 21st 2009

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Management research in India
Management practices in healthcare
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Management is worse in developing countries
Average Country Management Score, firms 100 to
5000 employees(score using Bloom and Van Reenen
(2007) methodology)
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The tails drive much of the lower developing
average
Firm-Level Management Scores
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This raises three linked questions

• What is the impact if any of bad management
  on firm (and ultimately national) productivity?
• If management does matter, why are some firms
  badly managed?
• If management does matter and some firms are
  badly managed, what policies could improve
  management?

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To address these questions we ran management
experiments in India

• Prior research provides evidence that management
  is important for productivity
• But hard to confirm causality without field
  experiments
• Because of the cost of doing field experiments no
  prior work with medium or large firms. Only with
  micro entrepreneurs.
• Our approach has been to work with a small sample
  of large firms and collect detailed data across
  metrics and time

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The experiment randomizes a management shock

• Select 16 plants in Indian fabric firms with ave
  250 employees
• Textiles is the largest Indian manufacturing
  industry
• These firms are big enough to need formalized
  management
• Within this group we randomly select eight
  matched pairs
• 8 treatment plants, given extensive free
  consulting
• 8 control plants, given very light consulting
• Firms selected according to
• Size (100 to 1000 employees)
• Location (near Mumbai and within 1 hour of each
  other)
• Data (have sufficient pre-intervention data)
• Agreement (CEOs PMs agree to free consulting)

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Textile firms in India have similar management
scores to the rest of manufacturing in India
All manufacturing except textilesN424,
mean2.67, sd0.664 (within SIC2)
Management scores
Textiles (SIC22), N96, mean2.69, sd0.548
Management scores
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Two stage project timing

• Started with a pilot wave on 6 firms in August
  2008
• Started main wave on 16 firms in April 2009
• Today I am going to present data from the pilot
  wave

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This slide deck outlines some preliminary findings

• How can better management raise productivity?
• Operational efficiency and safety
• Inventory management
• Quality control
• Monitoring and planning
• People management
• Why were these practices not introduced before?

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Many parts of the factories are dirty and unsafe
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The factories are also disorganized
Instrument not removed after use, blocking
hallway.
Oil leaking from the machine
Cotton lying on the floor
Instrument blocking the hallway
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And machinery and tools are not maintained (which
leads to frequent production downtime)
Tools lying on the floor.
Extremely dirty machine parts
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The treated firms have started to introduce basic
initiatives (called 5S) to organize the factory
Worker involved in 5S initiative on the shop
floor, marking out the area around the model
machine
Snag tagging to identify the abnormalities on
around the machines, such as redundant materials,
broken equipment, or accident areas. The operator
and the maintenance team is responsible for
removing these abnormalities.
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Large volumes of waste was removed from the
factories and productivity is slowly rising
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Daily labor productivity one example firm
Example data from firm A
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This slide deck outlines some of the key areas of
management that we are improving in these firms

• How can better management raise productivity?
• Operational efficiency and safety
• Inventory management
• Quality control
• Monitoring and planning
• People management
• Why were these practices not introduced before?

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Inventories were very disorganized, so that firms
typically had more than a year of yarn inventory
Different types/colors of weft Yarn lying mixed
Yarn without labeling or in any sort of order
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Organizing inventories enables firms to reduce
capital stock and reduce waste (yarn rots)
Stock is organized, labeled, and entered into an
Electronic Resource Planning (ERP) system which
has details of the type, age and
location. Inventory is now calculated on a daily
basis as part of the set of metrics shown to the
factory manager
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New stock is ordered by demand forecast. Sales is
also informed about excess stock so they can
incorporate this in new designs.
Shade cards now produced for all surplus yarn.
These are sent to the design team - which are
typically based in central Mumbai several hours
drive from the factory - so they can utilize in
future designs
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Inventory levels are slowly falling
Example data from firm A
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There was a similar story for spares these
could often not be found or were damaged
No protection to prevent damage and rust
Spares without any labeling or order
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Organizing spares reduces downtime (since parts
can be located quickly), capital stock and waste
Nuts bolts sorted as per specifications
Parts like gears, bushes, etc. sorted as per
specifications
A stand made in-house for storing reeds
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This slide deck outlines some of the key areas of
management that we are improving in these firms

• How can better management raise productivity?
• Operational efficiency and safety
• Inventory management
• Monitoring and planning
• Quality control
• People management
• Why were these practices not introduced before?

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Production information is collected but is rarely
stored electronically or analyzed
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Part of the problem is much of the documentation
is also ad hoc
Before treatment the preventive maintenance
record is not properly maintained.
After treatment the appropriate recording format
is designed and used
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Data formats were simplified converted to
electronic modes to facilitate analysis and
tracking
Before
After
The quality defects were captured in a format
with poor readability which did not allow any
data analysis
Quality defects are now stored in electronic
format and a daily quality score is calculated
and tracked
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This data is now used in the new daily production
and the weekly sales operations meetings
Meetings aimed at continuous improvement based on
high frequency performance analysis
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Better organization helps in many areas for
example on time deliveries

• Tracking production allows firms to change
  scheduling if orders are forecasted to be missed
• Sales now has visibility of the production
  schedule so can commit to dates that are feasible
  when taking orders
• Late production requires expensive air freight

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This slide deck outlines some of the key areas of
management that we are improving in these firms

• How can better management raise productivity?
• Operational efficiency and safety
• Inventory management
• Monitoring and planning
• Quality control
• People management
• Why were these practices not introduced before?

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About 1/4 of employees are involved in quality
checking and repair
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Previously quality checking was only used for
customer rebates
No standard fabric grading norms
No standardized way to capture defects, so daily
quality score was not available.
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Now quality is measured in a systematic way, on a
daily basis, and used for continuous improvement
The quality format is changed to accommodate all
the frequent defects. This is used to calculate a
daily Quality Defects Index (QDI). This is
analyzed daily.
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Quality is gradually improving, and as this
happens less labor is used for checking and repair

• Every fabric is given a grade (A, AB, B or C) at
  the gray checking stage
• A fabric is graded as A if it has one or lesser
  number of defects which can be cut from the
  fabric at the stage of packing
• Grade A fabrics command the highest prices. Grade
  B or below are often unusable.

Example data from firm A
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This slide deck outlines some of the key areas of
management that we are improving in these firms

• How can better management raise productivity?
• Operational efficiency and safety
• Inventory management
• Monitoring and planning
• Quality control
• People management
• Why were these practices not introduced before?

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Longer run improvements also require reforming HR
practices to improve employee morale and
incentives. Some limited changes have been done.
Director presenting a reward to the Top Weaver at
the factory in the month of November
The names of the Top performers displayed on the
notice board at the factory
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This slide deck outlines some of the key areas of
management that we are improving in these firms

• How can better management raise productivity?
• Operational efficiency and safety
• Inventory management
• Monitoring and planning
• Quality control
• People management
• Why were these practices not introduced before?

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information and human capital were the main
reasons these practices were not introduced before
Across 128 individual management improvements
Accenture undertook a root-cause analysis to
evaluate why these management improvements had
not previously been undertaken
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This informational gap is not surprising
Management practices are gradually evolving over
timeBut these firms do not have links with well
managed domestic firms (e.g. Tata or Reliance) or
foreign multinationalsThey also have no
employees with good engineering degrees, or any
sophisticated customersAnd no firm has ever
hired consultants they seem to have no idea
they are particularly badly managedSo there is
no easy route for better management practices to
filter through into this population of firms
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This suggests policies to increase managerial
awareness could have major impacts
Good management like any technology will
generate direct productivity improvement and
positive cross firm spilloversPolicies to help
improve management include- Improved basic
business and engineering education on finance,
operations and HR basics- Greater foreign
exposure via competition, ownership exports-
Government and industry association provided
training- Encouraging a cheap domestic
consulting industry
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Generality of the Management Practice Tool

• The management scoring was originally designed
  for manufacturing and many examples are from this
  sector
• But almost of the questions are designed to be
  generic, so applicable across all industries
• Healthcare, retail, schools, tax collecting
  agencies......

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Management research in India
Management practices in healthcare
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THE HOSPITAL MANAGEMENT SCORECARD
PATIENT PATHWAY (2 questions) lay-out of
hospital, inventories, how changes in this
occurred MONITORING (6) - tracking, review
evaluation, follow-up etc. TARGETS (5) -
transparent, stretching, inter-connected, time
horizon, PEOPLE (5) - promotions, rewards,
fix/fire, retention etc.
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HOSPITAL MANAGEMENT SURVEY SAMPLE

• 161 respondents covering 100 English acute NHS
  hospital trusts (population sampling frame of
  164)
• Response rates uncorrelated with performance
  (and other
• observables )
• Also a smaller sample of 21 private hospitals

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EXTERNAL VALIDATION OF THE SCORING
casemix, size, noise controls

• Performance measures all taken from external
  sources (NHS public databases)
• Note not a causal estimation, only an
  association

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Improving management scores associated with
significant improvements in hospital performance
Notes This shows implied improvement in outcome
(in standard deviations) following a one standard
deviation increase in the hospital management
score
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Improving management scores associated with
significant improvements in hospital performance
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FIG 3 MANAGEMENT SCORES LOWER FOR NHS HOSPITALS
THAN PRIVATE MANUFACTURING FIRMS
Panel A Public hospitals (161)
Panel B UK Private manufacturing Firms (651)
50-5000 workers, No multinationals
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Gap in Management Scores Manufacturing vs. NHS
Notes 161 public hospitals interviews, 651
manufacturing plants., common questions only (16)
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Gap in Management Scores Private vs. Public
hospitals
Notes 161 public hospitals interviews, 21
private hospitals interviews.
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BETTER MANAGED HOSPITALS HAVE ALSO HAVE MORE
AUTONOMY CLINICALLY QUALIFIED MANAGERS
Dependent variable Management Dependent variable Management Dependent variable Management Dependent variable Management Dependent variable Management

Foundation hospital (more autonomy) Foundation hospital (more autonomy) Foundation hospital (more autonomy) 0.633
(0.180)
managers with clinical qualification managers with clinical qualification managers with clinical qualification 0.926
(0.343)
Helps reduce the information communication gap
between senior consultants and management (cf US
system universities)
Notes 161 public hospital interviews
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Competition also seems to help improve hospital
performance and management practices
About 20 of this effect effect is due to
improvements in management
The effect of competition in the private sector
is about twice as big as this
Notes Competition is measured by the number of
other hospital trusts in a 30km area Around the
trust examined
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Why could competition have an effect?

• Quasi-market due to healthcare reforms?
• Managerial career concerns
• Learning
• Something else? Universities?

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Conclusions

• Useful tool for management in healthcare
  contains information (performance results)
• Lower scores in public sector than private
  (especially for people management)
• Competition matters for performance management,
  especially for private sector

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MY FAVOURITE QUOTES
Customer involvement
Interviewer Do staff sometimes end up doing
the wrong sort of work for their skills?
Manager You mean like physicians doing nurses
jobs, and nurses doing porter jobs? Yeah, all the
time. Last week, we had to get the healthier
patients to push around the beds for the sicker
patients!
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BACKUP
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Treatment on the treated how we selected our
sample of firms

• Started with a sample of 142 fabric firms around
  Mumbai with forecasted 50 to 5000 employees
  (based on assets)
• Kept the 64 firms within the Tarapor and Urmagaon
  districts, which are two central fabric firm hubs
• Of those 29 (47) expressed an interest in free
  consulting on the initial telephone contact
• Of those 16 (55) were willing to provide
  resources and data within 4 weeks to enable them
  to be part of the project
• Average management score of 2.69 (same as all
  textiles)

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Q3 MONITORING - Continuous improvement
How do problems typically get exposed and fixed?
Talk me through the Process for a recent problem
that you faced. Can you give examples?
Score (1) No, process improvements are made only when problems occur (3) Improvements are made in irregular meetings involving to improve performance in their area of work (e.g., ward or theatre) (5) Exposing problems in a structured way is integral to individuals responsibilities. Resolution involves all staff groups. Part of regular processes rather than by extraordinary effort
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Q15 PEOPLE - Removing poor performers
If you had a clinician or a nurse who could not
do his job, what would you do? Could you give me
a recent example? How long would
underperformance be tolerated? Do some
individuals always just manage to avoid being
fixed/fired?
Score (1) Poor performers are rarely removed from their positions (3) Suspected poor performers stay in a position for a few years before action is taken (5) We move poor performers out of the hospital/department or to less critical roles as soon as a weakness is identified
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INTERNAL VALIDATION CORRELATION BETWEEN FIRST
AND SECOND INTERVIEWEE IN SAME HOSPITAL
Correlation 0.53
Notes standardized management score (16
questions) for hospitals where there Where 2
interviews. 45 hospital trusts. Weight is inverse
of number of sites(unweighted correlation is
0.4). Only trusts where all answers by managers
(clinicians)