!DOCTYPE html PUBLIC "-//W3C//DTD XHTML 1.0 Strict//EN" "http://www.w3.org/TR/xhtml1/DTD/xhtml1-strict.dtd"> Streamline Training & Documentation: Management Practice Dimensions

Monday, February 01, 2010

Management Practice Dimensions

The Winter 2010 issue of the Journal of Economic Perspectives contains an article posing the question, "Why Do Management Practices Differ across Firms and Countries?."

I'll go into how the authors, Nicholas Bloom (Stanford) and John Van Reenen (London School of Economics), answer this question tomorrow. Today I want to highlight the way they went about measuring the quality of management practices since, among other things, the dimensions they used can be a starting point for an organization wanting to design a self-assessment.

Bloom and Van Reenen's approach was to define eighteen management practice dimensions and then to interview plant managers at 5,850 manufacturing concerns in seventeen countries to get the managers' take on where on a scale of 1 to 5 (high) their particular enterprise fell on each dimension. It is important to note that these management practices are process-oriented. They do not not relate to senior management's strategic activities, such as evaluating merger and acquisition opportunities.1

The eighteen dimensions (slightly edited) are:

1. Introduction of modern manufacturing techniques
What aspects of lean (modern) manufacturing have been formally introduced, including just-in-time delivery from suppliers, automation, flexible manpower, support systems, attitudes, and behavior?

2. Rationale for introduction of modern manufacturing techniques
Were modern manufacturing techniques adopted just because others were using them, or are they linked to meeting business objectives like reducing costs and improving quality?

3. Process problem documentation
Are process improvements made only when problems arise, or are they actively sought out for continuous improvement as part of a normal business process?

4. Performance tracking
Is tracking ad hoc and incomplete, or is performance continually tracked and communicated to all staff?

5. Performance review
Is performance reviewed infrequently and only on a success/failure scale, or is performance reviewed continually with an expectation of continuous improvement?

6. Performance dialogue
In review/performance conversations, to what extent are the purpose, data, agenda, and follow-up steps (like coaching) clear to all parties?

7. Consequence management
To what extent does failure to achieve agreed objectives carry consequences, which can include retraining or reassignment to other jobs?

8. Target balance
Are the goals exclusively financial, or is there a balance of financial and nonfinancial targets?

9. Target interconnection
Are goals based on accounting value, or are they based on shareholder value in a way that works through business units and ultimately is connected to individual performance expectations?

10. Target time horizon
Does top management focus mainly on the short term, or does it visualize short-term targets as a “staircase” toward the main focus on long-term goals?

11. Targets are stretching
Are goals too easy to achieve, especially for some “sacred cow” areas of the firm, or are goals demanding but attainable for all parts of the firm?

12. Performance clarity
Are performance measures ill-defined, poorly understood, and private, or are they well-defined, clearly communicated, and made public?

13. Managing human capital
To what extent are senior managers evaluated and held accountable for attracting, retaining, and developing talent throughout the organization?

14. Rewarding high performance
To what extent are people in the firm rewarded equally irrespective of performance level vs. having rewards relate to performance and effort?

15. Removing poor performers
Are poor performers rarely removed, or are they retrained and/or moved into different roles or out of the company as soon as the weakness is identified?

16. Promoting high performers
Are people promoted mainly on the basis of tenure, or does the firm actively identify, develop, and promote its top performers?

17. Attracting human capital
Do competitors offer stronger reasons for talented people to join their companies, or does a firm provide a wide range of reasons to encourage talented people to join?

18. Retaining human capital
Does the firm do relatively little to retain top talent, or does it do whatever it takes to retain top talent when they look likely to leave?

To arrive at an overall measure of a firm's management practices, Bloom and Van Reenen averaged the firm's individual scores on the eighteen dimensions.

For purposes of analysis, Bloom and Van Reenen divided the dimensions into four broad areas:2
  • Operations — whether firms use modern manufacturing processes in a way that helps improve firm performance on a continuous basis (items 1-3).

  • Monitoring — how well firms monitor what goes on inside their operations and use this for continuous improvement (items 4-7, 12).

  • Targets — whether firms set the right targets, track the right outcomes, and take appropriate action if the two are inconsistent (items 8-11, 13).

  • Incentives — whether firms promote and reward employees based on performance and try to hire and keep the best employees (items 14-18).
1Bloom and Van Reenen chose to interview plant managers because they "are senior enough to have an overview of management practices but not so senior as to be detached from day-to-day operations."

The firms where interviews took place "were randomly sampled from the population of all public and private manufacturing firms with 100 to 5,000 employees."

It might be more accurate to say firms in sixteen countries were assessed. Great Britain and Northern Ireland were measured separately, yielding the count of seventeen. The other countries were Australia, Brazil, Canada, China, France, Germany, Greece, India, Italy, Japan, Poland, Sweden, and the United States.

Bloom and Van Reenen restricted themselves to process-oriented management practices because "many aspects of strategic management, such as pricing or takeover decisions, will be very contingent on specific circumstances with no typical 'good' or 'bad' practice..."

2 For details of Bloom and Van Reenen's scoring rubric and their assignment of the eighteen dimensions to the four broader groups, see "Measuring and Explaining Management Practices Across Firms and Countries" (pdf), Centre for Economic Performance Discussion Paper 716.