Management Practices in Europe,
the US and Emerging Markets
Nick Bloom (Stanford Economics and GSB)
John Van Reenen (LSE and Stanford GSB)
Lecture 7: Management experiments
Nick Bloom and John Van Reenen, 591, 2011
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Experiments in India
Experiments in China
Nick Bloom and John Van Reenen, 591, 2011
Does management matter:
evidence from India
Nick Bloom (Stanford)
Benn Eifert (Berkeley)
Aprajit Mahajan (Stanford)
David McKenzie (World Bank)
John Roberts (Stanford)
Nick Bloom and John Van Reenen, 591, 2011
Management appears to be better in rich countries
US
Japan
Germany
Sweden
Canada
Italy
France
Great Britain
Australia
New Zealand
Poland
Ireland
Portugal
Chile
Mexico
Greece
Brazil
China
Argentina
India
2.6
2.8
3
mean of management
3.2
3.4
Average country management score, manufacturing firms 100 to 5000 employees
(monitoring,
targets and incentives management scored on a 1 to 5 scale. See Bloom and Van
Nick Bloom and John Van Reenen, 591, 2011
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Reenen (2007, QJE) and Bloom, Sadun and Van Reenen (2010, JEP)) & ICP (2010)
US, manufacturing, mean=3.33 (N=695)
0
.2
Density
.4
.6
.8
Developing countries have more badly managed firms
2
3
management
4
5
India, manufacturing, mean=2.69 (N=620)
0
.2
Density
.4
.6
.8
1
1
2
Nick
Bloom
and John
Van Reenen, 591,
2011
Firm
level
management
score,
3
management
4
5
5
manufacturing firms 100 to 5000 employees
But do we care - does management matter?
• Long debate between business practitioners versus academics
• Evidence to date primarily case-studies and surveys
• Syverson’s (2010) productivity survey stated on management
“Perhaps no potential driver of productivity differences has
seen a higher ratio of speculation to actual empirical study
than management”
Nick Bloom and John Van Reenen, 591, 2011
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We investigate these questions in large Indian firms
Took large firms (≈ 300 employees) outside Mumbai making
cotton fabric. Randomized treatment plants get 5 months
management consulting, controls plants get 1 month consulting.
Collect weekly data on all plants from 2008 to 2010
• Profits up by about 25% ($250,000 a year)
• Productivity up by about 10%
Nick Bloom and John Van Reenen, 591, 2011
Exhibit 1: Plants are large compounds, often containing several buildings.
Nick Bloom and John Van Reenen, 591, 2011
Exhibit 2a: Plants operate continuously making cotton fabric from yarn
Fabric warping
Nick Bloom and John Van Reenen, 591, 2011
Exhibit 2b: Plants operate continuously making cotton fabric from yarn
Fabric weaving
Nick Bloom and John Van Reenen, 591, 2011
The production technology has not changed much over time
Krill
Warp
beam
Nick warping
Bloom and John
Van Reenen,
591, 2011
The
looms
at Lowell
Mills in 1854, Massachusetts
Exhibit 2c: Plants operate continuously making cotton fabric from yarn
Nick Bloom and John Van Reenen, 591, 2011
Quality checking
Exhibit 3: Many parts of these Indian plants were dirty and unsafe
Garbage outside the plant
Garbage inside a plant
Nick Bloom and John Van Reenen, 591, 2011
Flammable garbage in a plant
Chemicals without any covering
Exhibit 4: The plant floors were often disorganized and aisles blocked
Nick Bloom and John Van Reenen, 591, 2011
Exhibit 5: There was almost no routine maintenance – instead machines
were only repaired when they broke down
Nick Bloom and John Van Reenen, 591, 2011
Exhibit 6a: Inventory was not well controlled – firms had months of
excess yarn, typically stored in an ad hoc way all over the factory
Nick Bloom and John Van Reenen, 591, 2011
Exhibit 6b: Inventory was not well controlled – firms had months of
excess yarn, typically stored in an ad hoc way all over the factory
Nick Bloom and John Van Reenen, 591, 2011
Exhibit 7: The path for materials flow was often heavily obstructed
Unfinished rough path along which several 0.6 ton
warp beams were taken on wheeled trolleys every day
to the elevator, which led down to the looms.
This steep slope, rough surface and sharp angle
meant workers often lost control of the trolleys. They
crashed into the iron beam or wall, breaking the
trolleys. So now each beam is carried by 6 men.
A broken trolley (the wheel snapped off)
At another plant both warp beam elevators had
broken down due to poor maintenance. As a
result teams of 7 men carried several warps
beams down the stairs every day. At 0.6 tons
each this was slow and dangerous
Nick Bloom and John Van Reenen, 591, 2011
1.5
These firms appear typical of large manufacturers
in Brazil, China and India
01
.5
1
Experimental Firms, mean=2.60
1
3
management
5
.8 .2
0
.4
.6
.8
Indian Textiles, mean=2.60
1
2
3
management
4
5
0
.2
.4
.6
Indian Manufacturing, mean=2.69
.8
1
2
3
management
4
5
.2
.4
.6
Brazil and China Manufacturing, mean=2.67
0
Nick Bloom and John Van Reenen, 591, 2011
1
2
3
management
4
19
Management scores (using Bloom and Van Reenen (2007) methodology)
5
Management practices before and after treatment
Performance of the plants before and after treatment
Why were these practices not introduced before?
Nick Bloom and John Van Reenen, 591, 2011
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Intervention aimed to improve 38 core textile
management practices in 6 areas
Nick Bloom and John Van Reenen, 591, 2011
Intervention aimed to improve 38 core textile
management practices in 6 areas
Nick Bloom and John Van Reenen, 591, 2011
.6
Treated
.5
Treatment plants
.4
Control plants
.3
Control
Excluded plants
(not treatment or control)
.2
Share of key textile management practices adopted
Adoption of these 38 management practices did rise, and
particularly in the treatment plants
-10
-8
-6
-4
-2
0
2
4
Months after the diagnostic phase
Nick Bloom and John Van Reenen, 591, 2011
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8
10
12
Management practices before and after treatment
Performance of the plants before and after treatment
• Quality
• Inventory
• Output
Why were these practices not introduced before?
Nick Bloom and John Van Reenen, 591, 2011
Poor quality meant 19% of manpower went on repairs
Large room full of repair workers (the day shift)
Workers spread cloth over lighted plates to spot defects
Nick Bloom and John Van Reenen, 591, 2011
Defects are repaired by hand or cut out from cloth
Defects lead to about 5% of cloth being scrapped
Previously mending was recorded only to crosscheck against customers’ claims for rebates
Defects log with
defects not
recorded in an
standardized
format. These
defects were
recorded solely
as a record in
case of
customer
complaints. The
data was not
aggregated or
analyzed
Nick Bloom and John Van Reenen, 591, 2011
Now mending is recorded daily in a standard format,
so it can analyzed by loom, shift, design & weaver
Nick Bloom and John Van Reenen, 591, 2011
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The quality data is now collated and analyzed as
part of the new daily production meetings
Plant managers now meet
regularly with heads of
quality, inventory, weaving,
maintenance, warping etc.
to analyze data
Nick Bloom and John Van Reenen, 591, 2011
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Figure 3: Quality defects index for the treatment and control plants
Start of
Implementation
End of
Implementation
97.5th percentile
Control plants
Average (♦ symbol)
80
100 120
140
quality)
Quality defects index (higher score=lower
Start of
Diagnostic
60
2.5th percentile
97.5th percentile
Average (+ symbol)
20
40
Treatment plants
0
2.5th percentile
-20
-10
0
10
20
weeks
since
Weeks
afterdiagnostic
the start ofphase
the diagnostic
Nick Bloom and John Van Reenen, 591, 2011
30
40
Management practices before and after treatment
Performance of the plants before and after treatment
• Quality
• Inventory
• Output
Why were these practices not introduced before?
Nick Bloom and John Van Reenen, 591, 2011
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Organizing and racking inventory enables firms to
slowly reduce their capital stock
Nick Bloom and John Van Reenen, 591, 2011
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Sales are also informed about excess yarn stock so
they can incorporate this in new designs.
Shade cards now
produced for all
surplus yarn. These
are sent to the
design team in
Mumbai to use in
future products
Nick Bloom and John Van Reenen, 591, 2011
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Figure 4: Yarn inventory for the treatment and control plants
Start of
Diagnostic
Start of
Implementation
End of
Implementation
prior to diagnostic)120
Yarn inventory (normalized to 100
100
97.5th percentile
Average (♦ symbol)
Control plants
97.5th percentile
2.5th percentile
80
Average (+ symbol)
Treatment plants
60
2.5th percentile
-20
-10
0
10
20
30
Weeksweeks
after the
startdiagnostic
of the intervention
since
phase
Nick Bloom and John Van Reenen, 591, 2011
40
50
Management practices before and after treatment
Performance of the plants before and after treatment
• Quality
• Inventory
• Output
Why were these practices not introduced before?
Nick Bloom and John Van Reenen, 591, 2011
34
Many treated firms have also introduced basic
initiatives (called “5S”) to organize the plant floor
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.
Nick Bloom and John Van Reenen, 591, 2011
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Spare parts were also organized, reducing downtime
(parts can be found quickly) and waste
Nuts & bolts
sorted as per
specifications
Parts like
gears,
bushes,
sorted as per
specifications
Tool
storage
organized
Nick Bloom and John Van Reenen, 591, 2011
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Production data is now collected in a standardized
format, for discussion in the daily meetings
Before
Nick Bloom and John Van
Reenen, 591, 2011
(not standardized, on loose pieces of paper)
After
(standardized, so easy to enter
daily into a computer)
37
Daily performance boards have also been put up,
with incentive pay for employees based on this
Nick Bloom and John Van Reenen, 591, 2011
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Figure 5: Output for the treatment and control plants
Start of
Implementation
End of
Implementation
130
Start of
Diagnostic
Treatment plants
Average (+ symbol)
110
Output (normalized to 100 prior to diagnostic)
120
97.5th percentile
100
2.5th percentile
97.5th percentile
90
Average (♦ symbol)
80
Control plants
70
2.5th percentile
-20
-10
0
10
20
30
weeks since diagnostic phase
Weeks after the start of the intervention
Nick Bloom and John Van Reenen, 591, 2011
40
50
Management practices before and after treatment
Performance of the plants before and after treatment
Why were these practices not introduced before?
Nick Bloom and John Van Reenen, 591, 2011
40
Why does competition not fix badly managed firms?
Bankruptcy is not (currently) a threat: at weaver wage rates of $5
a day these firms are profitable
Reallocation appears limited: Owners take all decisions as they
worry about managers stealing. But owners time is constrained –
they already work 72.4 hours average a week – limiting growth.
Entry is limited: Capital intensive ($13m assets average per firm),
and no guarantee new entrants are any better
Nick Bloom and John Van Reenen, 591, 2011
So why did these firms not improve themselves?
Collected panel data on reasons for non implementation, and
main (initial) reason was a lack of information
• Firms either never heard of these practices (no information)
• Or, did not believe they were relevant (wrong information)
Later constraints after informational barriers overcome
primarily around limited CEO time and CEO ability
Nick Bloom and John Van Reenen, 591, 2011
42
Finally, not to pick on the Indians, one country
has such bad managers it even makes TV
shows about them.......
David Brent
(The Office)
Basil Fawlty
(Fawlty Towers)
Nick Bloom and John Van Reenen, 591, 2011
Jim Hacker
(Yes Minister)
Experiments in India
Experiments in China
Nick Bloom and John Van Reenen, 591, 2011
Working from home or
shirking from home?
A Chinese field experiment
Nick Bloom (Stanford)
James Liang (Ctrip)
John Roberts (Stanford)
Nick Bloom and John Van Reenen, 591, 2011
Policymakers are increasingly thinking about
regulating issues around work-life balance
The EU regulates working hours to average 48 hours per week, with
some countries (France) restricting this to 35 hours
Many European countries are also increasing maternity and
paternity – i.e. Sweden offers 16 months paid joint leave
In the US working hours are currently not regulated, and statutory
maternity and paternity leave is limited to 12 weeks unpaid.
Nick Bloom and John Van Reenen, 591, 2011
But US policy could change - for example the
Obamas launched a CEA report on work life balance
Nick Bloom and John Van Reenen, 591, 2011
The report highlights that changes in families and
the labor market are increasing work-life pressures
Nick Bloom and John Van Reenen, 591, 2011
Working hours particularly long in the US
Nick Bloom and John Van Reenen, 591, 2011
US employers offer limited workplace flexibility
50 Bloom and John Van Reenen, 591, 2011
Nick
So is this bad – should the US regulate on
work life balance?
• Amazingly, it appears nobody really knows
• Having been consulted on the CEA report it was clear
the evidence base on this is extremely poor
Source: Executive summary, CEA report (2010)
Nick Bloom and John Van Reenen, 591, 2011
So we are running field experiments on two potential
solutions - home working and part-time working
• Working with CTrip, China’s largest travel-agent with 10,000
employees, whose co-founder and chairmen is James Liang
Nick Bloom and John Van Reenen, 591, 2011
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Ctrip operates two large call centers, where
employees are allocated to 15 person groups
Nick Bloom and John Van Reenen, 591, 2011
Individuals will be randomly allowed to work from
home for up to 4 days a week
Nick Bloom and John Van Reenen, 591, 2011
CTrip has incredible internal data collection systems
so we can monitor a wide range of metrics
Nick Bloom and John Van Reenen, 591, 2011
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80
90
100
110
120
No impact on productivity so far from
working at home - phonecalls
2010w1
2010w21
2010w41
Week
Phonecalls - control
Nick Bloom and John Van Reenen, 591, 2011
Phonecalls - treatment
56
2011w9
60
80
100
120
140
No impact on productivity so far from
working at home - orders
2010w1
2010w21
2010w41
Week
Orders - control
Nick Bloom and John Van Reenen, 591, 2011
Orders - treatment
2011w9
But home workers report much higher job
satisfaction levels and 50% fewer quits
• So preliminary evidence suggests benefits for home-working
– Happier employees
– Lower quit rates
– Reduced office costs (only in 1 day per week)
• Question is will this persist in the long-run, and how much
can this be extended to other firms and countries?
• The JetBlue question
Nick Bloom and John Van Reenen, 591, 2011