Productivity and the quality of management

Long-time readers know that I am obsessed with productivity, how to increase it, and the factors that have stymied productivity growth in recent decades in countries like the UK. The last time I wrote about productivity, a reader kindly pointed out the decades-long research by Nick Bloom and others on the impact of quality management practices on productivity. I am embarrassed to admit, that I wasn’t aware of that entire body of research mostly because I am not very interested in running a business and best practices for managers. But heck did I miss out because this work has a direct impact on macroeconomic developments like a country’s productivity and GDP growth as well as shareholder returns for equity investors. So, to make amends, over the next couple of Wednesdays, I will focus on some of the fascinating findings of the World Management Surveys.

If you read through the World Management Survey 2024, you will find many of these fascinating data points. Let me start with the strengths of management practices in the US, the UK, and Europe as summarized by the report (and always remember, I am talking about averages here; there is a lot of dispersion around them):

USA:

• Good management practices, particularly strong talent management.

• High managerial freedom (corporate HQ allows plant managers a lot of control over hiring and investment).

• Flat hierarchies (few managerial layers).

UK:

• Good at setting interconnected and stretching targets.

• Relatively more likely to have implemented lean manufacturing processes but the rationale for introducing these practices is often unclear to managers.

• Strong processes in place for tracking performance.

Europe:

• Very wide spread of management practices.

• Multinationals are typically well-run across Europe, with characteristics of their HQ (i.e. US firms have managerial freedom, Japanese firms are very ‘lean’).

• Strong managerial freedom in Northern Europe, and more central control in Southern Europe.

As a rule, the more developed an economy the better the management practices as can be seen from the chart below, which shows the average management score of manufacturing companies in a range of countries. These scores are derived by the researchers by conducting a one-hour interview with plant managers in manufacturing businesses, asking them about how ‘lean’ their operations are, how performance is managed how targets are set how talent is managed, and what the organisational structures look like. Each of these areas is then scored on a scale from 1 (worst) to 5 (best).

Average management scores in a range of countries

Source: World Management Survey 2024

US manufacturing companies stand out as having the best management practices on average, followed by high-tech industrial powerhouses like Germany, Sweden, and Japan. Then there is a gap with other industrialised countries like the UK, which is level with France or Italy but well ahead of China or India.

Looking at the chart, one might think that the gap in management scores between the UK and the US or Germany isn’t that large. It’s just about 0.25 points. But that implies a large discrepancy in productivity and return on capital according to the research.

A 0.25-point improvement in average management score in the UK would not only put UK businesses at par with their American and German peers but also:

• Increase productivity by c. 8%,

• Increase Return on Capital Employed (ROCE) by c. 2.5%,

• Leads to a market share gain of c. 1.25%,

• Creates a c. 0.5% boost to sales growth, and

• Boosts value added growth by c. 0.75%.

These are large effects and can boost shareholder returns as well as GDP growth significantly. This is why over the coming weeks, I will write about some specific findings from the research. So, stay tuned, particularly if you are managing a business.