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Research Programmes | Growth:

Management Practices and Organisational Structures

Overview

There are large and persistent differences in organizational performance within detailed sectors that economists find very hard to explain. In a typical four digit industry like ready mix concrete the top 10% of plants have Total Factor Productivity (TFP) that is twice as high as the bottom 10% of plants. Traditionally, these differences have been ascribed to management quality, but most of the evidence here comes from case studies. As useful as this qualitative evidence is, there is still a dearth of quantitative information on firm-level management practices across countries and sectors. The objective of this strand of research is to fill this gap. Working with leading management consultancies we have developed an in-depth survey methodology to benchmark management practices covering many thousands of organizations in over 30 countries in many sectors (for example manufacturing, retail, healthcare and education). Other researchers have extended our methods in other areas such as universities, nursing homes and the civil service.

For an introduction to the work on management see the lead article in the Journal of the European Economic Association in 2014, The New Empirical Economics of Management, by Nick Bloom, Renata Lemos, Raffaella Sadun, Daniela Scur and John Van Reenen, and published in the Journal of the European Economic Association 12: 835-76. The work is also summarised in the Harvard Business Review in 2012, How three essential practices can address even the most complex global problems, with Nick Bloom and Raffaella Sadun, the Journal of Economic Perspectives and in video in John Van Reenen's interview. More detail on the survey methodology employed can be found in an overview published in the American Economic Review Papers and Proceedings.

All data, papers, survey methodology, case studies and an online tool that enables managers to benchmark themselves available on our website http://worldmanagementsurvey.org/. A full list of policy and business reports can also be found there, categorised by country.

We have used our work in lecture courses on management that John Van Reenen has delivered to Business Schools in Stanford and MIT as well as LSE and NBER. Teaching materials are available on our World Management Survey website. These may be helpful for people interested in teaching management practices with a data-driven international approach.

We have also been working with the US Census Bureau to conduct a survey of management practices in over 30,000 plants across the US, the first large-scale survey of management in America. We have constructed a website http://www.managementinamerica.com/ where reports and public use data can be downloaded.

The main areas of CEP work on management practices are summarised below. For further information contact John Van Reenen, Nick Bloom, Renata Lemos, Raffaella Sadun or Daniela Scur.

Further information and material:


  • Management practices and productivity

    How can we quantify the association of management practices with firm performance?

    Nick Bloom and John Van Reenen introduce and analyse the first wave of the management survey in 'Measuring and Explaining Management practices across firms and nations', Quarterly Journal of Economics (2007)122(4), 1351-1408. They find that their surveyed measures of managerial practice are strongly associated with a number of measures of firm performance. US firms were on average better managed than European firms, and in all countries there were significant within-country differences with a long tail of extremely badly managed firms.

    Nick Bloom, John Van Reenen and co-authors (2014) analyse the 'Management in America' data collected by the US Census Bureau in a survey of over 30,000 plants across the US. They show that more structured management practices are linked to higher use of IT and superior firm performance. They also find a substantial dispersion of management practices across establishments, that more structured management practices are more likely in exporting firms, and that the adoption of such practices has risen between 2005 and 2010.

    Further reading:
    IT and Management in America- for the full paper

    Management in America - the Centrepiece article for a summary.

    What is the causal relationship between management practices and firm performance?

    Nick Bloom and co-authors ran a management field experiment on large Indian textile firms, providing free consulting on management practices to randomly chosen treatment plants and compared their performance to a set of control plants. They find that adopting these management practices raised productivity by 17% in the first year through improved quality and efficiency and reduced inventory, and within three years led to the opening of more production plants. They find that informational barriers were the primary factor explaining this lack of adoption prior to the experiment.

    Further reading:
    Does Management Matter? Evidence from India - published in the Quarterly Journal of Economics, 2013.

    Nick Bloom and co-authors conduct an RCT on a Chinese travel company to assess the impact of an innovative management practice: allowing working from home, on performance. Call centre employees who volunteered to work from home were randomly assigned to work from home or in the office for 9 months. Home working led to a 13% performance increase, of which about 9% was from working more minutes per shift (fewer breaks and sick-days) and 4% from more calls per minute (attributed to a quieter working environment).

    Further reading:
    Does Working From Home Work? Evidence from a Chinese Experiment - under revise and resubmit at the Quarterly Journal of Economics.

    What is the relationship between work-life balance practices and firm performance?

    Improved management practices on targets; monitoring, incentives and operations may improve productivity, but what about the workers? Do they come at the expense of anti-social hours and worse family life? In a series of studies we show that worklife balance is actually complementary with better management practices. Family friendly practices are actually more likely when management quality is high. Competition does not seem to result in worse worklife balance. Contrary to much of the literature, however, we find that the positive association between productivity and family friendly practices disappears when we control for the overall quality of management.

    Further reading:
    For a recent survey of the literature on HRM and productivity see:

    Human Resource Management and Productivity

    For answers to the questions on Work-life balance see:

    Are Family-Friendly Workplace Practices a Valuable Firm Resource? - published in Management Journal Strategic Management Journal (2011) 32(4) 343-367, Nick Bloom, Toby Kretschmer and John Van Reenen.

    Management Practices, Work-Life Balance and Productivity: A Review of Some Recent Evidence - Nick Bloom and John Van Reenen.

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  • The drivers of the adoption of managerial best practice

    What are the drivers of the adoption of managerial best practice?

    In their Journal of Economic Perspectives paper, Nick Bloom and John Van Reenen summarise the initial findings on the key drivers of management practice adoption. Firms with higher management scores tend to be exposed to strong product market competition; multinational owned; exporters; have publicly quoted share prices or private equity owners; or more intensively use human capital. Inherited family owned firms who appoint a family member (especially the eldest son), or government owned firms to tend to have lower management scores. At the country level, a relatively light touch in labour market regulation is associated with better use of incentives by management. There are similar findings in the Management in America project: more structured management practices are more likely to be found in establishments that export, who are larger (or are part of bigger firms), and have more educated employees.

    Some papers that explore specific factors are summarised here:

    Competition

    John Van Reenen (2010) examines recent empirical evidence from both large-scale databases and specific industries which suggests that tougher competition does indeed raise productivity and one of the main mechanisms is through improving management practices.

    Further reading:
    Does Competition Raise Productivity Through Improving Management Quality? - This work is summarised in a Big Ideas article, June 2011.

    Private Equity Ownership

    Nick Bloom, Raffaella Sadun and John Van Reenen (2010) find that private equity backed firms appear to have significantly better management practices than family firms and government firms. This does not appear to be simply higher powered incentives - we find improvements in shopfloor operations such as lean manufacturing as well as better people management. This suggests the reforms engendered by private equity firms may be deeper and more long-lasting than is often thought.

    Further reading:
    Do Private Equity Firms Have Better Management Practices?

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  • Theoretical models of management

    Nick Bloom, Raffaella Sadun and John Van Reenen (2013) present a simple model of management as a technology, and empirical analysis that provides strong support for the model's predictions. It is found that about a quarter of the TFP differences across firms and countries are due to management.

    Further reading:
    Management as a Technology?

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  • Management practices in the healthcare sector

    We have adapted our management practices survey to examine the healthcare sector. In 2006-2007 we collected data on English hospitals in the public (NHS) and private sectors.

    We found that competition increases management quality and so helps improve clinical outcomes (such as survival rates from heart attacks). To identify the effect of competition we use the fact that politicians are reluctant to close down hospitals in marginal constituencies generating more hospitals and therefore more competition in particular geographical areas.

    Further reading:
    The Impact of Competition on Management Quality: Evidence from Public Hospitals

    We followed up the UK hospitals surveyed over several years to form a panel and also added another 8 countries to the analysis.

    Further reading and materials:
    Does Management Matter in Healthcare - a draft of the paper

    For non-technical reports see the event materials from Management in Healthcare: Why Good Practice Really Matters

    For an overview of the research see the CentrePiece article, Management practices in the NHS

    For more of CEP's work on healthcare and public sector productivity more generally see our online section on Public Sector Productivity

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  • Management practices in schools

    In 2006 Ifty Hussain, Tim Besley and Steve Machin ran a pilot examining the measurement of management in schools.

    Do Public Sector CEOs Make a Difference? Results From a Pilot Survey of Headteachers is the research report of the promising work.

    From 2009 this work was extended to survey schools in the UK, US, Sweden, Canada , Italy, Germany, Brazil and India. Overall, there is robust evidence that practices vary significantly across countries and are strongly linked to pupil outcomes.

    For an overview of this work see our Centrepiece Article and slides from the 2014 RES conference.

    Further reading:
    Does Management Matter in Schools? - a draft academic paper.

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  • Management in Transition Economies

    We worked with the European Bank of Reconstruction and Development (EBRD) to develop a version of the management survey that used closed questions (like the Management and Organisational Practices) but had more in-depth interviews (like WMS). This was delivered face to face in a number of Eastern European and East Asian countries. This Management, Organisation and Innovation (MOI) survey is described in the paper The land that Lean manufacturing forgot? Management practices in transition countries - with Nicholas Bloom and Helena Schweiger, published in, Economics of Transition (2012), 20(4), 569-785.

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  • Decentralisation and organisational practices

    Building on our empirical work on measuring management, we test the theories against the data we have collected. The programme has made advances in understanding how to examine organisational forms, for example decentralisation, spans of control across industries and countries. In short, work carried out on our programme shows that power is important for productivity. And the degree to which firms decentralise is affected by a mix of technological, economic and, importantly, cultural factors like trust.

    Philippe Aghion, Nicholas Bloom and John Van Reenen survey the theoretical and empirical literature on decentralisation within firms, emphasising how the concept of incomplete contracts shapes our views about the organisation of decision making within firms.

    Further reading:
    Incomplete Contracts and the Internal Organisation of Firms - this was published in the Journal of Law, Economics and Organization (2014) 30(1), 37-64.

    For other CEP overviews of power, see Recent Advances in the Empirics of Organizational Economics - with Nick Bloom and Raffaella Sadun, published in the Annual Review of Economics (2010) 2:105-37.

    Papers that explore the relationships between key drivers of organisation (ICT, social capital and competition) are summarised below:

    Information and Communication Technology

    Nick Bloom, Luis Garicano, Raffaella Sadun and John Van Reenen (2013) test data on the use of ICT against Garicano's theory of the firm as a knowledge hierarchy and find theory and data are consistent. Using World Management Survey data, they find that better information technology is associated with more autonomy and a wider span of control of managers, while better communication technology decreases autonomy for workers and plant managers.

    Further reading:
    The distinct effects of Information Technology and Communication Technology on firm organization - forthcoming, Management Science

    New technology: who wins, who loses?- a Centrepiece article for a summary.

    The theory of the relationship between the diffusion of new technologies and the decentralisation of firms is also supported by data brought to bear on it in an earlier paper by Daron Acemoglu, Philippe Aghion, Claire Lelarge, John Van Reenen and Fabrizio Zilibotti (2007). Using three data sets on French and British firms in the 1990s, they report robust correlations consistent with the predictions that firms closer to the technological frontier, firms in more heterogeneous environments, and younger firms are more likely to choose decentralization.

    Further reading:
    Technology, Information and the Decentralization of the Firm - published subsequently in the Quarterly Journal of Economics, 2007.

    Social Capital

    Many social scientists argue that a key reason for not spreading power down the corporate hierarchy is that there is a lack of trust. In a 2012 Quarterly Journal of Economics publication, Nick Bloom, Raffaella Sadun and John Van Reenen show that trust is a key factor in promoting decentralisation.

    Further reading:
    The Organization of Firms Across Countries:
    They exploit the WMS firm-level data across 12 countries and combine this with regional trust data from the world value survey. When trust is high around the firm's headquarters, decentralizing investment, hiring and sales decisions to local plant managers is much more likely. This even occurs across international boundaries within multinational firms. Subsidiaries located in countries that have a high trust relationship with the country where the firm is headquartered are much more likely to be given greater responsibility. These bilateral trust relationships are measured by Eurobarometer surveys

    Competition

    For work on the impact of competition on decentralisation, see Does Product Market Competition Lead Firms to Decentralize? - Bloom, Sadun & Van Reenen, American Economic Review: Papers & Proceedings Vol. 100, pp 434-438). The authors show that greater product market competition increases decentralisation.

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  • Does CEO's use of time influence firm performance?

    Raffaella Sadun, together with colleagues from HBS and LSE, is involved in a project that seeks to understand how CEOs in Europe and the United States allocate their time between internal and external matters and how their use of time influences corporate performance. Findings from data on 120 top Italian CEOs shows a positive correlation between specific time allocations and firm performance. Data in China, India and the US is currently being collected.

    Oriana Bandiera, Andrea Prat and Raffaella Sadun (2013) study CEOs in the Indian manufacturing sector, where family ownership is widespread and the productivity dispersion across firms is substantial. They find substantial variation in the number of hours CEOs devote to work activities, and longer working hours are associated with higher firm productivity, growth, profitability and CEO pay; family CEOs record 8% fewer working hours relative to professional CEOs; and that the observed difference between family and professional CEOs is consistent with heterogeneous preferences for work versus leisure. Evidence from six other countries reveals similar findings in economies at different stages of development.

    Further reading:
    Managing the Family Firm: Evidence from CEOs at Work