IEMC Conference, 2005 - National Chi Nan Universitystaffweb.ncnu.edu.tw/clhung/Management/keynote_dorgan.pdf · 35% Management practice Capital * Independent of country, industry,

Working Draft

IEMC Conference, 2005

Stephen Dorgan,John Dowdy,

Tom RippinMcKinsey & Company Inc., London, U.K.

12 September 2005

PRODUCTIVITY IS CENTRAL TO ECONOMIC PERFORMANCE

Compared with the problem of slow productivitygrowth, all our other long-term concerns –foreign competition, the industrial base,lagging technology, deteriorating infrastructureand so on – are minor issues

“

”Paul Krugman, ‘The Age of Diminished Expectations’

AGENDA – MANAGEMENT MATTERS

• Why is productivity important?

• Management practice and corporate performance

• Competition’s role in driving practice and performance

• Management practice and IT

MANUFACTURING IS A MAJOR PART OF MOST ECONOMIES

2220 20

17 17 1617

Japan Germany Italy Canada U.S. France U.K.

Source: Prognos world reports 2004; team analysis

Manufacturing sector as a proportion of GDP, 2002

0

2

4

6

8

10

12

14

0 5 10 15 20

DEVELOPED NATIONS ARE LOSING GLOBAL MANUFACTUREDGOODS TRADE TO DEVELOPING NATIONS

* Current prices

U.S.U.K.Italy

France

Japan

Germany

Manufacturingtrade* CAGR,1992–2002

Share of global manufacturingtrade, 2002

Korea

%

Singa-pore

Ireland

Mexico

Average = 5.5Canada

32

6

62

Manufac-turing

Services Total

100% = £270b

72

11

17

U.K. GVA, 2002 U.K. exports, 2002

Manufac-turing

Services Total

100% = £926b

Other*

THE MANUFACTURING SECTOR PUNCHES ABOVE ITS WEIGHTIN TERMS OF EXPORTS

Other*

* Includes agriculture, mining, utilities and construction

% UK EXAMPLE

IN THE UK ONLY TOBACCO HAS YIELDED SHAREHOLDERRETURNS ABOVE THE MARKET AVERAGE

* CAGR 1990–2003Source: Datastream; McKinsey analysis

Total return to shareholders growth* Basic industrials

General industrials

Others

15.3

8.4 7.9 7.6 7.6 7.05.9 5.6 5.5 5.1 4.6 4.3

2.71.6

-4.5

-9.0IThard-ware

Elec-tronicEquip

Autoparts

Tob-acco

Aero-space

Beve-rages

Food Comm-odity

Eng.machi-nery

Fores-try/paper

Cons.&buildingmaterial

De-fence

Steel

Marketaverage

8.4%

Elec.equip-ment

Speci-ality

Advan-cedmate-rials

Chemicals

70

77

85

100

7881

85

100

CLEAR PRODUCTIVITY DIFFERENCES EXIST BETWEENNATIONS, ESPECIALLY IN MANUFACTURING

Relative TFP*

GermanyFrance U.S.U.K.

Manufacturing sector

Market economy

* Index, U.S. = 100Source: O’Mahony and De Boer, 2002

EUROPE’S PRODUCTIVITY GAP WITH THE U.S. IS GROWING

100 98

117123

101

122

144

111

U.K. France Germany U.S.

Total factor productivity*

* U.K. 1994 = 100Source: NIESR; McKinsey analysis

1994

1999

THIS PRODUCTIVITY GAP IS NOT DUE TO SHORTWORKING HOURS

U.S.

U.K.

France

Germany

1,800

1,680

1,390

1,360

* 2002Source: OECD employment outlook, 2003

Average annual hours per worker*

61%

65%

72%

73%

THE GAP IS ALSO NOT DUE TO A LACK OF WORKFORCEPARTICIPATION

U.K.

U.S.

Germany

France

Employment rate*

* Of the working age population, 2002Source: OECW Employment Outlook, 2003

100

72

114 116

98107

123

75

TOTAL FACTOR PRODUCTIVITY CAN BE THOUGHT OF INTERMS OF ITS 2 COMPONENTS

100 98

117 123

101

122

144

111


Total factor productivity

Labour productivity (GVA/hour)

Capital productivity(GVA/capital services*)

Index*

100115 117

127

102

131

157

134



0.6 X

0.4 X

+


1994

1999

100

72

114 116

98107

123

75

INDUSTRIALS ARE GETTING SIMILAR RETURNS FOR THECAPITAL INVESTED IN THE DIFFERENT COUNTRIES

100 98

117 123

101

122

144

111





Index*

100115 117

127

102

131

157

134



0.6 X

0.4 X

+


1994

1999

100

72

114 116

98107

123

75

LABOUR PRODUCTIVITY APPEARS TO BE DRIVINGBEHIND THE PRODUCTIVITY GAP

100 98

117 123

101

122

144

111





Index*

100115 117

127

102

131

157

134



0.6 X

0.4 X

+


1994

1999

100

160

103 109104122 128

179

SOME HAVE SUGGESTED INCREASING CAPITAL INTENSITYAS A MEANS TO INCREASE LABOUR PRODUCTIVITY



Capital intensity = capital services/hrs worked

Capital productivity(GVA/capital services)

Index*

100115 117

127

102

131

157

134 U.K. France Germany U.S.

100

72

114 116

98107

123

75



X

HOWEVER, INCREASED CAPEX DOES NOT TRANSLATEINTO INCREASED LABOUR PRODUCTIVITY

Manufacturing sub-sectors£’000

-12

-8

-4

0

4

8

-1 0 1 2 3 4

Sub-sector incrementalCapex/employee

Sub-sectorincrementalGVA/employee

* Indexed U.K. = 100Source: NIESR; McKinsey analysis

IN FACT, INCREASING CAPITAL INTENSITY IS INEFFECTIVEAS A MEANS OF INCREASING PRODUCTIVITY

(Capital services/hours worked)Capital intensity*

Labour productivity*

Germany

0

20

40

60

80

100

120

140

160

180

200

0 50 100 150 200

U.K.

U.S.

France

U.S.

U.K. Lines ofconstant total

factorproductivity

U.K. at French.capital intensity

PRODUCTIVITY DIFFERENCES ARE NOT DUE TO SECTOR MIX

0.7

3.2

4.5

0.6

U.K.growth

Due to thedifference insector mix

Due togrowthregardlessof sectormix

U.S.growth

CAGR 1995–99, % EXAMPLE

Source: McKinsey analysis

THE PRODUCTIVITY OF FOREIGN VS. DOMESTIC OWNEDFIRMS SUGGEST THE ROOT CAUSE IS NOT STRUCTURAL

100 101

153

189

U.S.FranceGermanyU.K.

* GVA/Head, all U.K. manufacturers; U.K.-owned companies = 100Source: ONS,Team analysis

Index*

Country of ownership of U.K. manufacturers

THE IMPACT* OF MBOs ON PRODUCTIVITY SUGGESTS THATMANAGEMENT PRACTICE MIGHT DRIVE PERFORMANCE

20

72

90

-2Pre MBO

Medium termMBO impact

Longer termMBO impact

Post MBO

% more/less efficient in TFPthan all plants**

* Corrected for plant age, foreign ownership, government assistance, regional variance** N=35,752 in for entire dataset, N= 4877 for MBOs (979 MBOs)

Source: Harris Siegel, Wright; U.K. Census of Industry






WE EXAMINED COMPANY LEVEL MANAGEMENT PRACTICESIN FOUR COUNTRIES

Codify goodmanagement practices

• Defined 18 scoring dimension focusing on:– Lean shop-floor operations– Meaningful performance and target management– Effective talent management

Select and train team ofinterviewers

• Team of nine MBA and post-graduate management students with nativelanguage skills

• Dedicated, highly skilled and specifically trained interviewers

Select and targetcompanies

• Selected manufacturers in U.S., U.K., France and Germany– 100–10,000 employees– No McKinsey clients

Assess quality ofmanagement practices

• Conducted over 800 ‘double blind’ interviews with, typically, plantmanagers and scored practices across 18 dimensions on 1-5 scale

Correlate managementscore with measures of

success

• Matched management scores with publicly available data such asaccounts and measures of competition

Performanceand targetmanagement

Talentmanagement

Area

Lean shop-flooroperations

Questions

Quality of targets

Clarity of goals and measurement

Interconnection of targets

Degree of stretch in goals

Consequences of measurement

Time horizon of targets


Scoring criteria

Top management focus ison short-term goals only

Short and long-term goalsexist at all levels of theorganisation but are notnecessarily linked

Long-term goals aretranslated into specificshort-term goals andbecome a ‘staircase’ toreaching long-term goals

1

3

5

Time horizon of targets

TO SCORE COMPANIES, WE DESIGNED A MANAGEMENTPRACTICE ASSESSMENT TOOL

1

2

3

4

5

1 2 3 4 5

`

Score based on 1st interview

Score based on 2nd interview

THE ASSESSMENT TOOL PROVIDES A SURPRISINGLY ROBUSTASSESSMENT OF A FIRM’S MANAGEMENT PRACTICES

Management score

WE FIND MANAGEMENT PRACTICE AND CORPORATE LEVELPRODUCTIVITY ARE CORRELATED

3

4

5

6

7

1 2 3 4 5

Labourproductivity

ManagementPractice Score

BETTER MANAGEMENT IMPROVES THE RETURNS FROMEXISTING FACILITIES WITHOUT MAJOR INVESTMENT

1point

35%

Managementpractice

Capital

* Independent of country, industry, size, employees, wage bill, R&D spend, profitability, past productivity growth, outliers, year

Labour

11%

• Improving managementpractice is a highlyleveraged means ofgetting more productivityfrom the firms existing– Labour– Capital

• This is true for allcompanies* irrespectiveof the quality of currentmanagement practices

ROCE%

8.7

11.5

Sales growth%

5.6

7.9

Market share growthIndex

100

171

Productivity*Indexed

100 106

MANAGEMENT PRACTICE IS HIGHLY CORRELATED WITH ARANGE OF MEASURES OF FINANCIAL SUCCESS

* Sales per employee** Tobin’s Q assuming constant book value

Managementscore

Managementscore + 1

Managementscore

Managementscore + 1

Market capitalisation**Index

100126

Managementscore

Managementscore + 1

93.3

102.5102.4

INTERESTINGLY, DIFFERENT COUNTRY PROFILES ARERECOGNISABLE

Lean shop-floor operationsPerformance and targetmanagement Talent management

Germany France U.K.

Indexed management score

Germany France U.K.

94.4

87.189.0

Germany France U.K.

U.S. = 10097.9

89.8

93.1

HOWEVER, MANAGEMENT PRACTICES VARY MORE WIDELYWITHIN THAN ACROSS COUNTRIES

% of companies, by management practice score

1 2 3 4 51 2 3 4 5

Average= 3.37

Average= 3.13

Average= 3.32

Average= 3.08

U.S. Germany

France U.K.

Country

IN FACT, SECTOR IS A MORE POWERFUL DETERMINANT OF ACOMPANY’S MANAGEMENT PRACTICE THAN COUNTRY

Sector

%, share of adjusted R2

Lean shop-flooroperations

Talentmanagement

11

28

35

89

72

65


Managementtotal

21 79

Sector influence

Country influence

MANAGEMENT PRACTICES ARE DETERMINED BYMANAGERS’ CHOICES NOT THE COUNTRY OF OPERATION

% of variance

2

21

42

58

Country Manufacturingsub-sector

Sub-sector/countrycombination

Companymanagers

Managers’ choicesdetermine over halfa company’smanagementpractice score






IN THEORY, COMPETITION SHOULD MODIFY MANAGEMENTPRACTICES OVER TIME

Highlycompetitiveenvironment

• Poorlymanagedcompanies donot survivelong and exitmarket withinseveral years

• In order tosurvive, olderfirms havehonedmanagementpractices overtime

‘Selectio

neffect’

• Companiesare not forcedto keep upwith state-of-the-artmanagementpractices

• Younger firmsoften deploymore recentpractices andare thereforebettermanaged

Lesscompetitiveenvironment

‘Vin

tag

eef

fect

’

Management practice score

Firm age, years

LowCompetition

HighCompetition

CONCEPTUAL

-0.2

-0.15

-0.1

-0.05

0

0.05

0.1

0.15

Firm age, years

Management practice score

5 15-0.2

-0.15

-0.1

-0.05

0

0.05

0.1

0.15

2510 100

Low competition

High competition

EXPERIMENTAL DATA

OUR DATA CONFIRMS THIS THEORY AND INDICATES THATCOMPETITION MAKES MANAGERS WORK ‘SMARTER’

Further test of efforthypothesis• We found no correlation

between level of competitionand– Number of hours worked– Self-reported work-life

balance• This suggests that managers

in more competitive industrieswork ‘smarter’, not harder

BETTER MANAGEMENT INVOLVES WORKING ‘SMARTER’,NOT HARDER

3.13.2

3.5

Muchworse

Thesame

Muchbetter

Average management score

Better managedcompanies report betterwork-life balance

Work-life balance relative to competitors






IN THEORY, GOOD MANAGEMENT PRACTICE AND GOOD ITDEPLOYMENT SHOULD BE COMPLEMENTARITIES*

* Milgrom and Roberts, American Economic Review (1990)Source: Team

IT deployment

Managementpractice

Optimum strategy

OptimumPosition

CurrentPosition

High productivityLow Productivity

IT AND MANAGEMENT ARE COMPLEMENTARY, BUTMANAGEMENT IS THE KEY LEVER

Managementpractice scoreManagementpractice score

TopquartileTopquartile

BottomquartileBottomquartile

Bottom quartileBottom quartile Top quartileTop quartile

Intensity of IT deploymentIntensity of IT deployment

Management matters!Management matters!

• Technology investment hasa low impact if companiesare poorly managed

• Corporations must have theright management practicesto get the most out of ITinvestments

• Technology investment hasa low impact if companiesare poorly managed

• Corporations must have theright management practicesto get the most out of ITinvestments

Increase in total factor productivity, %

Source: Team analysis

+8%+8% +20%+20%

00 +2%+2%

PRELIMINARY

Working Draft

IEMC Conference

Stephen Dorgan,John Dowdy, Tom Rippin

12 September 2005

Documents

IEMC Conference, 2005 - National Chi Nan Universitystaffweb.ncnu.edu.tw/clhung/Management/keynote_dorgan.pdf · 35% Management practice Capital * Independent of country, industry,