Improving the way firms are managed could have a big impact on the UK's national productivity, says Rebecca Homkes

Rebecca Homkes

English

Research Papers in Economics

CentrePiece Winter 2010/11
2
I
n the wake of the global crisis,
governments are attempting to
rebalance their economies, enhance
competitiveness and position their
countries along sustainable growth paths.
Globally we are witnessing ever-
heightened attention to both the potential
sources of growth and what governments
can do to stimulate them.
While growth is often spoken of in
terms of GDP, from an economic
standpoint the main focus should be more
on productivity growth. It is productivity,
the measure of output per input, 
which drives the growth of real wages 
and consumption.
Productivity levels vary dramatically
across countries, with the UK falling
distinctly mid-table. Comparing GDP per
hour in 2009, the UK is 12% less
productive than the United States but 
also lags behind France and Germany.
These productivity gaps are persistent over
time, not only across countries but also
between firms even within narrowly
defined industries (see, for example, 
Foster et al, 2008).
What factors are driving these
differences? One possible explanation is
that the disparities are due to ‘hard’
technological innovations, such as research
and development, information technology
and patents. While these factors certainly
play a role, even when controlling for
them, productivity gaps still persist.
Another approach to explaining
productivity differences, long espoused by
business school academics and consultants
but less supported by economists, has
focused on the role of management
practices. Confirming this explanation is a
challenge, in part because of the difficulty
of measuring management.
Over the past decade, CEP has
undertaken a research programme to fill
this void by systematically measuring
management practices. Surveying almost
10,000 medium-sized manufacturing firms
across 20 countries (as well as
organisations in the retail, healthcare and
education sectors), we have shown that
better management practices are
associated with higher productivity and
other indicators of organisational
performance, such as profitability, return
on capital employed, sales growth and
firm survival rates (see, for example, 
Improving the quality of management in UK
firms could lead to significant gains in national
productivity. Rebecca Homkes outlines the
latest findings of CEP’s research programme on
the impact of management practices on 
the economic performance of firms and
countries – and their implications for policies 
to restore growth.
Enhancing 
management quality:
the potential for productivity
growth after the recession
Better management
practices are
associated with
higher productivity
and other indicators
of organisational
performanceCentrePiece Winter 2010/11
3
Bloom and Van Reenen, 2010). In fact, we
estimate that management practices 
can account for up to a third of the
differences in productivity between firms
and countries.
While the significance of management
practices seems clear given the strong
correlations between management and
performance, we cannot as yet say for sure
that the relationship is causal. One way to
overcome this is to run randomised trials,
where both improvements in management
and changes in performance can be
tracked over time. The next article in this
CentrePiece describes how we are
undertaking this in the context of large
manufacturing firms in India.
We have also recently expanded the
research programme to focus on the role
of innovations in managerial practice. In
2009, we re-surveyed approximately 
1,500 firms (including 256 UK firms) across
13 countries that we had interviewed in
2006, which has allowed us to build a
longitudinal panel. Given the challenges 
of the current climate, we also asked
managers a new set of questions – first,
about the constraints that they perceive
are impeding improvements in their
management practices; and second, how
their firms responded to the recession. 
Management across firms
and countries
Our work shows that significant differences
in management performance persist across
countries (see Figure 1). While the United
States outperforms all other countries,
developing countries such as China and
India lag behind. Noticeably mid-table, the
UK falls well below the United States and
Germany in terms of management
performance, though it scores similarly to
the rest of Northern Europe and Australia. 
Cross-country differences account 
for less than 10% of the diverging
management scores: the biggest
management differences occur across firms
within the same country. The distribution
of scores highlights the fact that much of
what drags certain countries down is a
persistent ‘tail’ of underperforming firms,
those that score less than a two on our five
point scale. While this tail is largely absent
in the United States, it is evident in the UK
and especially pronounced in developing
countries such as Brazil and India.
Changes in management
practices
A central finding of our research is that
management quality is fairly stable: firms
that were well managed in 2006 tend to
exhibit high quality management practices
in 2009. We also find that firms that 
were poorly managed in 2006 were more
likely to have closed, confirming that
management is significantly associated
with one key performance measure –
firms’ survival rates.
2.4 2.6 2.8 3.0 3.2 3.4
India
Brazil
China
Greece
Argentina
Portugal
Ireland
Poland
Mexico
New Zealand
France
Australia
Italy
UK
Canada
Sweden
Germany
Japan
US
Notes: Each bar represents the average management score (over 18 questions)
across all firms in each country.The results are based on 8,261 management
interviews between 2006 and 2010.
Figure 1:
UK management is mid-table by international standards
2.5 2.7 2.9 3.1 3.3 3.5
China
India
France
UK
Germany
US
■ 2006 
■ 2009
Notes: Data from a total of 1,718 firms interviewed in 2006 and 2009/10 (263 US,
118 German, 253 UK, 157 French, 197 Chinese, 107 Indian firms).
Figure 2:
While relatively stable, across countries there is
improvement in management scores from 2006 to 2009
Better managed
firms are
significantly
more likely 
to engage in
cost-cutting
during a
recessionCentrePiece Winter 2010/11
4
On average firms have improved their
management scores over time, suggesting
that there is some learning behaviour and
diffusion of best practices across firms
(see Figure 2). A degree of cross-country
convergence in management over time is
also occurring with developing countries,
notably China, making the most
substantial gains. There have also been
notable improvements in the UK, allowing
it to catch up to some degree with the
top-performing United States.
The biggest changes have come in
operations management or the
implementation of lean technology and
practices. We also find that firms are
more likely to improve their management
scores when there is a new plant manager
on site, suggesting that managerial
turnover may be another potential driver
of management improvements.
Two other factors seem to matter in
determining management improvements:
increased product market competition
and skill levels. More competitive
environments are associated with better
management practices, and this positive
relationship holds up against other
measures, such as industry price-cost
margins or indicators of trade openness
(Bloom et al, 2007). Across countries,
another significant finding is that firms
that employ a greater number of
managers with university degrees are
much better managed than those with
less educated managers. 
Notes: Data from 265 UK, 266 US, 123 German, 211 Indian and 221 Chinese
companies interviewed in 2009/10.
Figure 3:
Constraints on improving management internationally
0 1 02 03 04 05 06 07 08 09 0 1 0 0
Trade unions
Employment laws and
regulations
Obtaining cost-effective
consultancy
Knowing what new management
practices to introduce
Hiring non-managers with
the right skills
Hiring managers with
the right skills
■ Major obstacle 
■ Minor obstacle 
■ No obstacle
0 1 02 03 04 05 06 07 08 09 0 1 0 0 0 1 02 03 04 05 06 07 08 09 0 1 0 0
0 1 02 03 04 05 06 07 08 09 0 1 0 0
Trade unions
Employment laws and 
regulations
Obtaining cost-effective 
consultancy
Knowing what new management 
practices to introduce
Hiring non-managers with 
the right skills
Hiring managers with 
the right skills
0 1 02 03 04 05 06 07 08 09 0 1 0 0 0 1 02 03 04 05 06 07 08 09 0 1 0 0
UK US China
France Germany India
Better managed
firms are not
only more
productive and
profitable, but
they are also
more pro-active
during times of
adversityCentrePiece Winter 2010/11
5
Constraints on management
improvements
Across countries, an inadequate supply of
managerial human capital (‘hiring
managers with the right skills’) is the most
cited constraint on improving
management, while the second most cited
constraint is insufficient worker skills (see
Figure 3). UK managers face similar
constraints to their US, French and
German counterparts, which suggests that
while a scarcity of managerial talent may
be a major constraint, it is no more severe
than that facing their major competitors.
For developing countries this is much more
of an impediment, especially in India
where 56% of managers cite scarcity of
talent as a major constraint compared
with only 25% of US managers. 
Another major contrast between
developing and developed economies is in
the third most commonly cited constraint:
informational barriers or not knowing
what changes to make. Over 20% of
Indian firms and a quarter of Chinese
firms cite this as a major constraint
compared with around 10% in the UK
and the United States. Despite frequent
media attention, very few UK or US 
firms consider employment laws and
regulations to be a major obstacle, yet
they appear to be constraining 15% of
French firms and around a quarter of
German and Indian firms.
The impact of the recession
We asked managers the degree to which
various aspects of their operations – such
as costs, product mix and jobs – were
affected by the recent economic downturn
(see Figure 4). Overall, fewer changes
were seen in China and India than in the
developed countries, which is not
unexpected given the recession’s lesser
effect on growth in developing countries.
In the developed countries, investment
was the most severely affected variable,
but the UK actually made fewer cuts here
than the others.
In all countries, prices were relatively
unaffected by the recession – changes in
firms’ product mix were more common.
With employment, UK firms came second
only to the United States in terms of jobs
cuts: these fell less heavily in France and
Germany (which is consistent with the
known higher firing costs in continental
European countries). UK and French firms
were less aggressive in seeking to cut costs
than German and US firms (with the latter
being particularly severe).
A strong finding also emerges that
better managed firms were significantly
more likely to engage in cost-cutting
during the recession. This relationship
between management quality and active
changes also holds across other
dimensions of firms’ operations. This
suggests that better managed firms are
not only more productive and profitable,
but they may also be more pro-active
during times of adversity.
Implications for policy 
and practice
Our research shows that large and
persistent gaps in management quality
remain across countries, mainly driven by
the tail of underperforming firms. The UK
clearly has a deficit in management quality,
and this deficit is likely to be a key factor
explaining the persistent productivity gap
with other countries such as the United
States and Germany.
This lagging position would be
substantially improved by boosting the
management quality of the lower
performing tail of UK firms. As a large
proportion of these firms are family-
owned, attempts to spread key lessons to
these firms and encourage them to recruit
professional managers or expertise should
be examined. One policy response is to
remove the zero inheritance tax rating on
business assets passed within families.
Product market competition is one of
the most significant ways to boost
management quality. While the UK has
relatively strong competition policy, there
0 5% 10% 15% 20% 25%
Cut prices
Reduced 
investments
Reduced
employment
levels
Changed
product mix
Cost
cutting
Notes: Data from 265 companies interviewed in 2009/10. Each bar shows the
average percentage change across all firms.
Figure 4:
UK firms’ reactions to the credit crunch
The UK’s deficit in
management quality
helps to explain 
the persistent
productivity gap with
the United States,
France and GermanyCentrePiece Winter 2010/11
6
are a few areas to consider. Besides
continuing to ensure reduced regulatory
barriers to setting up and expanding
businesses, greater effort should be made
to advancing further trade liberalisation
and strengthening the European Union’s
services directive, which aims to boost
competition by making it easier for service
businesses to set up or sell their services
anywhere in Europe.
While the importance of skills
resonates throughout our research, this is
an area where the UK has a relatively poor
record: in the UK manufacturing firms we
surveyed, fewer managers had degrees
than in comparable countries. One way to
improve management is to increase the
supply of human capital, for example, by
allowing university expansion or by
increasing the availability of travel/work
visas for experienced managers.
Unfortunately, current education and
immigration policies seem to be moving in
the opposite direction.
Small firms seem to have particular
difficulties in gaining access to skills, which
highlights a role for management
education and other facilities to increase
the supply of capable managers. Smaller
firms also face the greatest constraints on
access to information. While propping up
firms on ‘artificial life support’ is not the
answer, this does imply that targeting
existing policies to smaller firms (for
example, business advice and skills
support) could generate substantial
benefits.
An overriding finding from managers’
responses to the recession is that it is
difficult to predict the actions firms will
take, which cautions against policy
responses targeted at particular firms or
industries. But better managed firms are
more pro-active, which suggests that
enhanced managerial capability also
produces more resilient firms, making them
more likely to survive periods of adversity.
Thus, better quality management could
decrease the output volatility of UK firms
over the business cycle.
Overall, our work suggests that
focusing on management quality is a key
way to enhance productivity, and we
highlight a few policies that could foster
these needed management improvements.
Given the still fragile nature of the current
business and economic climate – and
strained public coffers – there is an acute
need to get policy right.
Measuring management
To measure management practices, CEP
researchers interviewed plant managers in
medium-sized (approximately 250
employees) manufacturing firms. Plant
managers were selected because they are
senior enough to have a well-founded
perspective on what happens in a
company, but not so senior that they
might have lost touch with the shop floor.
We used an interview-based survey
evaluation tool that defines from worst
practice (‘1’) to best practice (‘5’) across
18 dimensions of management practices.
These practices fall into four broad areas:
operations, monitoring, targets and
people management. Each of these
dimensions is scored on a one to 
five basis, and the average of the 
18 separate scores made up the overall
management score.
To ensure accurate and unbiased
responses, we used a double-blind
technique: interviewed managers were
unaware of the scoring methodology and
interviewers have no information in
advance about the firm’s performance or
other differentiating characteristics.
Across countries, we obtained an
approximately 45% response rate. There
did not appear to be any bias in responses
received: responses were uncorrelated
with performance measures; and the non-
responder firms had roughly similar
management scores to the responder firms
in the original 2006 survey.
Rebecca Homkes is a CEP research officer
and project director of the Centre’s research
programme on management.
More details on the programme, including
past reports and full methodology, are
available here: http://cep.lse.ac.uk/_new/
research/productivity/management.asp
A free online tool, which firms and managers
can use to benchmark their own management
performance, is available here:
http://worldmanagementsurvey.org
Further reading
Nicholas Bloom, Stephen Dorgan, John
Dowdy, Christos Genakos, Raffaella Sadun
and John Van Reenen (2007) ‘Management
Practices and Productivity’, CEP/McKinsey 
& Company (http://cep.lse.ac.uk
/management/Management_Practice_and_
Productivity.pdf)
Nicholas Bloom and John Van Reenen (2010)
‘Why do Management Practices Differ across
Firms and Countries?’, Journal of Economic
Perspectives 24(1): 203-24
Lucia Foster, John Haltiwanger and Chad
Syverson (2008) ‘Reallocation, Firm Turnover,
and Efficiency: Selection on Productivity or
Profitability?’, American Economic Review,
98(1): 394-425
Product market
competition is
one of the most
significant ways
to boost
management
quality

Enhancing management quality: the potential for productivity growth after the recession

http://cep.lse.ac.uk/pubs/download/cp328.pdf

Enhancing management quality: the potential for productivity growth after the recession

Abstract

Similar works

Full text

Available Versions

Research Papers in Economics