Measuring business practices

How good are management practices across countries and firms?

Those who live in China, Brazil, or India perhaps already know that firms in their countries are poorly managed. For others, Bloom et al 2012, in their paper entitled “Management Practices Across Firms and Countries” validate the same using data. On the other end of the spectrum are American, Japanese, and German firms — the best managed ones.

The authors measure management practices broadly on the following parameters: a) performance monitoring, b) target setting, and c) incentives/people management. Too broad? Many sub-categories within these three criteria define what the “best management practices” are. These criteria are the ones followed in McKinsey — which is convoluted, anyway!

The management metrics used in their analysis are highly correlated with firm productivity and output. In other words, firms adhering to such management practices are the ones that generate higher profits. So the authors are not discussing trivial stuff, for sure.

UK schools, model lesson

Around the globe, there seems to be a pattern for firm management across industries. This pattern seems to corroborate with conventional wisdom. Government, family, and founder-owned firms are poorly managed; while multinational, private-equity, and dispersed shareholders firms are better managed (does one even require data to substantiate this finding?).

America’s retail firms and hospitals seem to be the best managed ones internationally, while US high schools serve to be the counterbalance. No kidding! UK schools are the best managed ones — yes, it is very much official.

Industries with strong product market competition and higher skills have better management practices compared with others. The educational level of the workforce is also strongly associated with better management practices.

The sample in the analysis consisted of medium-sized firms employing between 100 and 5,000 workers. Interviewers were “MBA-type” students from the surveyed countries and were pursuing their studies in top US or European universities!

To top it, the authors (who also happen to be the survey designers) further validate their data using several methods. One among the methods is to run a repeat interview conducted by a second MBA student. The results seem to be consistent. The point above suggests that even the best in the profession are prone to slips. Why would someone require a re-confirmation on whether government firms are poorly managed? Forget the second; even the 100th MBA student is most likely to come back with the same obvious result about government managed firms.

Labour market rigidity

In the manufacturing sector, Indian firms are in the same league as that of American and Chinese firms. Managerial use of incentives in these three countries is much greater than the use of monitoring or target setting. Hold on! Too early to celebrate!

While this system offers the greatest advantage to US firms, it does just the opposite for the Indian counterparts. The authors find that labour market rigidities in India make it harder to reward or punish the high and poor performers, respectively.

An example of labour market rigidity: It is so common (and occasionally a matter of right) for city bus drivers to not stop at red lights, drive on the wrong side of the road, or fail to stop at bus stops. But the labour market conditions or rigidities make it that much harder to punish them.

Overall, the authors are disheartened by the fact that economists ignore management as an important factor that explains productivity differences. They suggest several policy measures that can improve management quality.

These include promoting product market competition, incentivising performances (either ways), reducing taxes, and educating the workforce. Except for the last suggestion, it looks like a real long shot for a country like India. But no worries! Government will take care of the rest!

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