MANAGEMENT PRACTICES AND PRODUCTIVITY
EXECUTIVE SUMMARY

Management practices, defined as LEAN/operations management, performance & target
management and talent management, are an important component of business leadership

Business leadership performance is hard to measure, but recent research has attempted to
measure and ‘quantify’ management practice performance.

Management practices and company performance, including sales growth and productivity,
are positively correlated.

Evidence suggests that UK (and Scottish) companies score less well than those in some other
advanced economies on management practice performance, due to the UK having a ‘longer
tail’ of poorer performers.

Reasons could in part include lower skills levels within UK businesses, lower export orientation
of UK companies and potentially lower competitive pressures.

However, variation of management practice performance within countries is greater than
variation between countries, suggesting that management practices are influenced by internal
company policy (and so can be influenced by companies themselves) as well as the wider
business environment.

If the UK’s management practice performance were to match the average of Japan, Germany,
Sweden and Canada, the productivity gain could be equivalent to a 5% increase in labour
input or a 13% increase in capital stock.

Scottish Enterprise delivers a range of support across each of the aspects of management
practice. There may be a role for Scottish Enterprise to help companies benchmark and
baseline their management practice performance to compare themselves to peers and best
performers.
1. INTRODUCTION
Economic theories and models all highlight the importance of skills to productivity growth. Research
though has tended to focus on skills levels of the working or school age population, with skills
measured by qualification levels. One reason for this is the availability of broadly comparative
international data that allows an assessment of the relative strength of an economy’s ‘skills (or
qualifications) base’1. Most research highlights the positive link between skills levels and economic
growth and productivity2.
1
For example, the OECD produces international data on the % of the population with degree level qualifications, and PISA
produces comparable numeracy, literacy and science skills data for school children.
2
Economic Growth, BIS 2010
1
There has been less research specifically on management skills and practices and links to
productivity, one reason being the difficulties in measuring management practices across countries.
Defining management practices
Management practices here are defined as the approaches and techniques used to improve company
performance, focusing specifically on operations management, performance & target management
(organisational alignment) and human resource (talent) management/workforce development.
Management practices are an important component of business leadership – good leaders are those
that can align their organisations behind common goals and can effectively develop their workforces.
As highlighted in the May Board paper ‘Leadership, Ambition and Business Growth’, leadership,
organisational development, employee engagement and workforce development (skills utilisation) are
all interconnected.
From a Scottish Enterprise perspective, operations management links closely to business efficiency
and LEAN support, organisational alignment to strategy development support and human resource
management/workforce development to organisational development support.
The objectives of this paper are to contribute to the evidence base for this component of business
leadership by:
 highlighting the role of management practices as a driver of company performance and
productivity;
 assessing and quantifying the UK and Scottish performance using recent evidence (leadership, in
its wider sense, can be hard to measure, but there are approaches to measuring a number of its
components)
 outlining the role of SE in supporting the adoption of management practice best practice and
identifying any potential gaps in support.
2
How Leadership and Ambition Can Increase Productivity Through People
(Adapted from the Hay Group 2011)






Clear and promising direction
Confidence in leaders
Quality and customer focus
Respect and recognition
Development opportunities
Pay and benefits
Employee Engagement
 Commitment
 Discretionary effort
Financial
Success
High performance
work practices
Leadership
and
Ambition
Employee
Effectiveness
Customer
Satisfaction
Increased
Productivity
Employee
Performance






Performance management
Authority and empowerment
Resources
Training
Collaboration
Work, structure and process
Skills Use
 Optimised roles
 Supportive environment
Management practices
(McKinsey/LSE definition)
3
The paper outlines recent research on management capabilities and how the UK and
Scotland compares to other economies. The paper also considers current SE support in
areas identified as ‘good practice’ in terms of management practice.
2. MANAGEMENT PRACTICES - COMPARATIVE PERFORMANCE
‘Firms across the globe that apply accepted management practices well perform significantly
better than those that do not’3.
This may appear to be an obvious statement, but up until recently there has been little
quantitative evidence to assess the link between management practices, capabilities and
company performance.
One of the most indepth, cross-country studies of management capabilities and links to
productivity has been completed by McKinsey and the Centre for Economic Policy at the
London School of Economics4. The McKinsey/LSE starting point is that, even controlling for
human and physical capital (including innovation), there are still large ‘unexplained’ variations
in productivity across countries. Their research question is whether these variations can be
explained by differing management practices.
The research is based on surveys of 5,000 medium-sized, manufacturing companies in
Europe, North America, Latin America, Asia and Australasia that have been carried out since
2001, with the latest wave completed in 2008. Management practice is assessed (and
defined) by performance across three broad areas:
 shop floor operations (lean operations)
 performance management
 talent management.
The questionnaire covers issues such as:

whether management has introduced lean techniques

approaches to continuous improvement

target setting (types, interconnectedness and timing)

clarity of goals
3
Management Practice & Productivity: why they matter (CEP and McKinsey, 2007)
See for example Management matters in Northern Ireland and the Republic of Ireland (2009), Enhancing
Management Quality (2010)
4
4

talent management and development

staff performance tracking

use of incentives.
Figure 1: Management Practice Measurement Framework
Source: LSE/McKinsey
See Appendix 1 for more details on the approach and questionnaire.
The survey results indicate that the UK scores in the third tier of countries for management
practices behind the US, by far the best performer, and Japan/Germany/Sweden/Canada.
Within the UK sample of over 1000 firms, only 67 were Scottish, and the score for these is
very similar to the UK average (Figure 2).
The research also highlighted that there is more variation in management practice scores
within countries than between countries, with most companies performing around the
average (Figure 3).
This suggests that the overall performance of a country is not so much determined by the
performance of the best companies, but by the number of poorer performing companies. For
example, what drags down the UK’s overall score compared to countries like the US is the
UK’s ‘longer tail’ of lower performing companies (although compared to the US and Japan,
the UK has a slightly lower proportion of better top scoring companies as well) (Figure 4).
5
Figure 2: Management practice scores (scale of 1-5), 2006-10
Source: LSE/McKinsey
Note: Based on 8261 interviews, 2006 to 2010
Figure 3: Variations in Management Practice Scores within Countries (2006-2010)
6
Figure 4: Management Practice Scores in the UK and US
This variation within countries suggests that management practices are influenced by ‘internal
company policy’ as well as the wider business environment in that country, and so in part
can be influenced by companies themselves.
Considering the headline score in more detail, the UK performed less well for lean operations
management and performance/target management, but performed well for people/talent
management. However, good people/talent management is in part measured by the flexibility
of the labour market in terms of the ease of hiring and firing.
3. MANAGEMENT PRACTICES AND COMPANY PERFORMANCE
The research highlights that there is a strong correlation between management practice
scores and business performance, including productivity and sales growth, and these findings
are similar across countries.
7
Figure 5: Management Practice Scores and Business Performance
Source: LSE/McKinsey
The researchers have attempted to quantify the productivity benefits to companies of better
management practice and have estimated that, for a company, a one point increase in
management practice score results in the same increase in output as a 25% increase in the
labour force or a 65% increase in capital stock. Or, to express it slightly differently, if the UK
was to reach the average of the management practice scores of the second tier of best
performing countries (Japan, Germany, Sweden, Canada), this would be equivalent to a 5%
increase in labour input or a 13% increase in the UK’s capital stock.
4. WHAT FACTORS AFFECT MANAGEMENT CAPABILITIES?
The research has identified a number of factors that can help explain differing management
practice scores across countries:
Businesses ownership
The research found that family owned businesses are the worst managed across all countries
(Figure 6). One of the reasons suggested is that family (or primogeniture 5) firms are less likely
to appoint managers on merit. This suggests that the employment of professional managers
results in better managed and so better performing companies.
5
Companies that are family owned and run by the eldest son or grandson of the founder
8
Figure 6: Management Practice, Productivity and Business Ownership
Source: LSE/McKinsey
The UK, though, has a lower proportion of the business base that are family owned than
many other countries. It was estimated that in 2007, around 65% of businesses in the UK
were family owned compared to around 80% in France and Germany and over 90% in
Finland. Of these, around 80% in the UK were ‘first generation owned’ (a similar proportion to
many other countries)6. In Scotland, it is estimated that almost 70% of businesses are familyowned (compared to a European average of 75%) 7. This therefore suggests that family
ownership is not a significant reason for overall poorer management practice performance
compared to other countries.
Labour market flexibility
Economies with flexible labour markets were found to have, on average, higher management
practice scores. Flexibility here is defined as the ease of hiring and firing workers i.e. the
ability to replace poorer performing managers and workers. The UK is generally considered to
have a more flexible labour market than most EU countries.
Competition levels
The research findings show that the level of competition a business faces is positively related
to management practice performance. The researchers suggest this is because good practice
6
7
Family Business International Monitor (2007)
Scottish Family Business Association
9
spreads within competitive sectors and that competitive pressures ‘eliminate’ poorer
performing companies. Also, the presence of multinational competitors in a sector is found to
positively influence management practices as this allows transfers of management best
practice to local companies.
Competition is hard to measure. Product regulation in the UK is considered to be light touch
compared to other countries, and the UK is a relatively open economy (so exposed to
international competition). Also, the UK has a higher stock of inward investment relative to
GDP than many other countries 8. Therefore the UK could be described as a competitive
economy.
However, another proxy measure of competition is the number of businesses in an economy
relative to population, with more businesses suggesting more competitive pressures. Data
shows that the UK has a below EU average number of businesses relative to population, and
that Scotland has a number than the UK. This could suggest weaker competition levels in the
UK and Scotland.
Skills levels
The LSE/McKinsey research measured the proportion of management and non-management
with degrees in the surveyed companies and found that the higher the skills levels of the
workforce, both the management and non-management team, the higher the management
practice score. The relationship may be relatively weak, though, as India has the highest
proportion of managers with degrees (in the companies surveyed) but it scores the lowest for
overall management practice (Figure 7).
The UK performs relatively poorly in terms of management and employee skills levels. This is
similar to the findings cited in a report by the UK Commission for Employment and Skills that,
comparing management performance across ten OECD nations, the UK had the lowest
proportion (43%) of graduate managers compared to 60% in the USA and 70% in Japan9.
This reflects other data that Scotland is highly skilled compared to other UK regions (on the
measure of % of the population that are graduates), but is mid-table within the OECD.
8
9
BERR 2008 Productivity and Competitiveness Indicators (http://www.bis.gov.uk/files/file49953.pdf)
Towards Ambition 2020: skills, jobs, growth for Scotland
10
Figure 7
Source: LSE/McKinsey
Export orientation
Companies that export tend to have better management scores than non-exporters, and this
is likely to be due to the greater level of competition a company faces when operating in
overseas markets and the greater exposure to management best practice within competitors,
customers and suppliers. Evidence shows that around 20% of UK and Scottish SMEs are
exporters compared to an EU average of 25%, and this could in part explain lower overall
management practice scores.
The UK’s (and so possibly Scotland’s) poorer performance than some other countries on
management practice could be due to a mix of:
 weaker competition within the economy
 lower export orientation
 lower skills levels of management and non-management.
This highlights the potential value added role of Scottish Enterprise which has a direct and
indirect influence on each of these, as well as providing support to companies on the specific
aspects of management practices (outlined in section 5 below)
Given that the attributes of good management are publicly available, this suggests that either
companies that don’t adopt them are not aware of them or of the benefits (i.e. there is an
11
information ‘market failure’), that companies are aware but for some reason can’t apply them
or that its not a priority for them.
The researchers also found that poorly performing managers (in terms of implementing good
management practice) are generally not aware that their practices ‘score low’, suggesting that
some firms may not compare or benchmark their approaches with best practice or other
companies in their sector.
There may be a public policy role in providing intelligence on best management
practices
and
their
benefits
through
information
provision,
mentoring
and
benchmarking (including taking an international perspective).
5. HOW DOES SCOTTISH ENTERPRISE SUPPORT HELP COMPANIES TO ADOPT
MANAGEMENT BEST PRACTICE?
Scottish Enterprise’s Leadership and Organisational Development Policy aims to develop
leaders, support best practice in HR (including management) to overcome barriers to growth.
Current SE support in the three broad areas of management practices are outlined below:
Operations management, LEAN operations and process improvement
Products such as LEAN Management Thinking, SMAS, Business Efficiency Expert Support
and Workshops.
Performance and target management (organisational alignment)
Strategy and leadership development support that aims to align ‘people’ or workforce goals to
business goals. Examples include Strategy Development Workshops (to assist companies to
develop appropriate goals and objectives), Business Mentoring Scotland (working with
business leaders to address specific issues) and Investors in People (to help companies’
workforces adopt appropriate cultures)
Human resource (talent) management/workforce development
Organisational Development Reviews (to help companies’ understanding of the people issues
and development needs associated with business growth), Managing People for Growth (a
programme aimed at all people managers).
The range of support highlights the added value role SE can play through the ability to tailor a
package of assistance addressing each of the areas of management practice. The challenge
for SE is to ensure that connections are made between ‘good’ management practices/
leadership and other forms of support, for example innovation and internationalisation i.e. how
12
the principles of good management practice/leadership can be woven into innovation and
internationalisation support.
Information provision
The research suggests that there is an important role for information provision to raise
awareness of what best practice management practices are and the benefits of adopting
them. Scottish Enterprise support through UK leadership best practice visits, learning
journeys (e.g. to US), leadership master classes and web based content, all aim to provide a
range of information to companies.
A further area of information provision is linked to benchmarking, and allowing Scottish
companies and leaders to compare and measure themselves against peers and top
performers. The LSE/McKinsey survey, the Sunday Times ‘Best Companies to Work For’
survey and ‘Great Places to Work’ are examples of approaches that allow companies to
assess current performance. There could be a role for Scottish Enterprise to promote the use
of a measurement framework to help companies benchmark themselves, to identify areas of
weakness and to tailor support to address any weakness. This would also allow customer
performance to be baselined and progress monitored.
6. Conclusions
This paper has reviewed recent research on management practices, an important component
of business leadership, and its link to productivity. The research suggests that UK and
Scottish companies lag a number of competitor countries in terms of management practice
scores, and this could in part explain our mid-table productivity performance compared to
other OECD economies.
Management and leadership performance is hard to measure, and the LSE/McKinsey
approach provides a potentially useful measurement framework to quantitatively asses some
elements of effective business leadership.
Scottish Enterprise delivers a range of support that can influence management practice
performance, including information provision. There could, however, be a role for SE to help
companies benchmark themselves against peers and best performers.
Scottish Enterprise
June 2011
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Appendix 1
14
Management Practices Questionnaire
1) Introducing Lean (Modern) Techniques
a) Can you describe the production process
for me?
Tests how well lean (modern)manufacturing
management
techniques
have
been
b)
What
kinds
manufacturing
introduced
of
lean
processes
(modern)
have
you
introduced? How long has this practice
been in place? Can you give me specific
examples?
c) How do you manage inventory levels?
What is done to balance the line? What is the
takt time of your manufacturing processes?
2) Rationale for Introducing Lean
a) Can you take me through the rationale to
(Modern )Techniques
introduce these processes?
Tests the motivation and impetus behind
b) What factors led to the adoption of these
lean (modern) management practices?
changes
to operations and what change story was
communicated
3) Process Documentation and Continuous
a) How do problems typically get exposed
Improvement
and fixed?
Tests
processes
for
and
attitudes
to
continuous
improvement
b) Talk me through the process for a recent
problem.
and
whether
learning
is
captured/
c) How can the staff suggest process
improvements?
documented
4) Performance Tracking
a) What kind of KPIs would you use for
Tests whether performance is tracked using
performance tracking?
meaningful metrics and with appropriate
b) How frequently are these measured? Who
regularity
gets to see this KPI data?
c) If I were to walk through your factory could
I tell how you were doing against your KPIs?
5) Performance Review
a) How do you review your KPIs?
Tests whether performance is reviewed with
b) Tell me about a recent meeting.
appropriate frequency and communicated to
c) Who is involved in these meetings? Who
staff
gets to see the results of this review?
d) What is the follow up plan?
6) Performance Dialogue
a) How are these meetings structured? Tell
Tests the quality of review conversations
me about your most recent meeting.
15
b) How would the agenda for the meeting be
determined?
c) What type of feedback occurs in these
meetings?
d) For a given problem, how would you
identify the root cause?
7) Consequence Management
a) Let's say you've agreed to a follow up plan
Tests whether differing levels of performance
at one of your meetings, what would happen
(not
if the plan weren't
personal but plan/ process based) lead to
enacted?
different
b) How long is it between when a problem is
consequences
identified to when it is solved? Can you give
me a recent
example?
c) How do you deal with repeated failures in
a specific business segment?
8) Types and Balance of Targets
a) What types of targets are set for the
Tests whether targets cover a sufficiently
company? What are the goals for your plant?
broad
b) Tell me about the non-financial goals?
set of metrics and whether financial and
nonfinancial
targets are balanced
9) Interconnection of Targets
Tests
whether
targets
a) What is the motivation behind your goals?
are
tied
the
b) How are these goals cascaded down to
organization’s
the individual workers?
objectives and how well they cascade down
c) How are your targets linked to company
the
performance and their goals?
organisation
10) Time Horizon of Targets
a) What kind of time scale are you looking at
Tests whether firm has a ‘3 horizons’
with your targets?
approach to
b) Which goals receive the most emphasis?
planning and targets
c) Are long term and short term goals set
independently?
d) Could you meet all your short-run goals
but miss your long-run goals?
11) Target Stretch
a) How tough are your targets? Do you feel
Tests whether targets are based on a solid
pushed by them?
16
rationale and are appropriately difficult to
b) On average, how often would you say that
achieve
you meet your targets?
c) Do you feel that all groups receive the
same degree of difficulty, in terms of targets?
Do some groups get
easy targets?
d) What is the rationale behind the targets?
12) Clarity and Comparability of Goals
a) If I asked your staff directly about
Tests
individual targets what would they tell me?
how
easily
understandable
performance
b) Does anyone complain that the targets are
measures are and whether performance is
too complex?
openly
c) How do people know about their own
communicated to staff
performance compared to other people’s
performance?
13) Instilling a talent mindset/ Managing
a) How do senior managers show that
Talent
attracting and developing talent is a top
Tests what emphasis is out on overall talent
priority?
management within the organization
b) Do senior managers get any rewards for
bringing in and keeping talented people in the
company?
14) Building a High-Performance Culture
a) How does your appraisal system work?
through Incentives and Appraisals
Tell me about the most recent round?
Tests whether there is a systematic approach
b) How does the bonus system work?
to
c) Are there any non-financial rewards for top
identifying good and bad performers and
performers?
rewarding them proportionately
d) How does your reward system compare to
your competitors?
15) Removing Poor Performers/ Making
a) If you had a worker who could not do his
Room for Talent
job what would you do? Could you give me a
Tests how well the organization is able to
recent example?
deal
b) How long would underperformance be
with underperformers
tolerated?
c) Do you find any workers who lead a sort of
charmed life? Do some individuals always
just manage to avoid
being fixed/fired?
16) Developing Talent and Promoting High-
a) Tell me about your promotion system.
Performers
b) What about poor performers? What
Tests whether promotion is performance
happens with them? Are there any examples
17
based
you can think of?
and whether talent is developed within the
c) How would you identify and develop your
organization
star performers?
d) If two people both joined the company 5
years ago and one was much better than the
other what job
opportunities would he/she have in the
company?
17) Distinctive Employee Value Proposition
a) What makes it distinctive to work at your
Tests the strength of the employee value
company as opposed to your competitors?
proposition
b) If you were trying to sell your firm to me
how would you do this (get them to try to do
this)?
c) What don’t people like about working in
your firm?
18) Retaining Talent
a) If you had a star performer who wanted to
Tests whether the organization will go out of
leave what would the company do?
its
b) Could you give me an example of a star
way to keep its top talent
performers being persuaded to stay after
wanting to leave?
c) Could you give me an example of a star
performer who left the company without
anyone trying to keep
them?
Source: LSE/McKinsey
18