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Management Practices and Productivity: the Case of Saudi Arabia

May, 2012

Dania Kechrid

Department of Economics Stanford University Stanford, CA 94305

dkechrid@stanford.edu

Under the direction of Prof. Nick Bloom

ABSTRACT In my Economics honor’s thesis, I examine management practices in Saudi Arabia and see if and how they correlate with firm productivity. Recent evidence points to strong correlation between “good” management practices - defined as practices that emphasize goal targeting, performance monitoring, and human resource management - and firm performance. That is to say, firms that employ good management practices are more likely to be more productive than their industry counter-parts, performing better in terms of sales, output, and survival. However the evidence is centered around and limited to the industrial sector in developed countries. So, I extend the research to Saudi Arabia, a Middle Eastern developing country. Replicating the survey study outlined in Bloom and Van Reenen (2007), I observe 26 Saudi firms and look at how their management scores correlate with their labor productivity. While I do find a positive correlation between the variables, the results are not statistically significant. Nonetheless, the evidence points to consistency between my results and those in the current literature, thus making an argument for the existence of universally “good” management practices. Keywords: Management Practices, Productivity, Saudi Arabia. Acknowledgements: I would like to thank Professor Nick Bloom for advising me, Professor Geoffrey Rothwell for encouraging me to write this thesis, and Sawsan Nowilaty for helping me throughout the research and writing process.

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1) Introduction

All firms are not equal. Empirical studies show that two firms of the same size, operating

in the same country, and within the same industry, do not produce at equal levels. American

firms in the 90th percentile of the output distribution produce nearly twice the value added of

firms in the 10th percentile (Syverson (2010)). This gap is even larger in developing countries.

Hsieh and Klenow (2009) estimate that Chinese and Indian firms are, on average, five times less

efficient than American firms, even within homogenous industries. Insofar as productivity

impacts firm output, it directly contributes to a country’s production and overall growth. Hence,

a better understanding of productivity would help firms become more efficient and competitive,

yielding higher output and growth at the macroeconomic level.

Several papers hypothesize about the source of firm productivity, postulating that IT use

(Bartle et. al (2007)), manager identity (Bertrand (2003)), and firm ownership (Benfratello and

Sembenelli (2006)) could all play a role in determining efficiency. Most prominently, a team of

researchers, led by Nicholas Bloom and John Van Reenen, examines the link between

management practices and productivity. They survey over 10,000 industrial firms in developed

and emerging nations (China, India, and Brazil) and find strong correlation between “good”

management practices and firm performance1. That is to say, firms that emphasize goal targeting,

performance monitoring, and incentivizing are more likely to have higher output per worker.

However, as extensive as the studies are, the authors still cannot convincingly argue that

certain practices lead to higher production. Nor can they claim that there is a set of practices that

universally improves output, independently of firm industry and country. To do so, the literature

needs to look at a broader firm base from a wider range of countries. Therefore, I am examining

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management practices in Saudi Arabia to see if and how they correlate with firm productivity.

Specifically, I am looking at the correlation between management scores and firm revenue.

My research on management practices and productivity in Saudi Arabia contributes

positively to the existing literature, constituting a new platform on which to evaluate the

hypothesis that certain management practices correlate with higher productivity. The findings

thus provide additional insight into the existence of universally “good” management practices,

insofar as they show whether developed countries’ best practices are also linked to high output in

Saudi Arabia. Thus, it gives additional insight into the sources of productivity. Moreover, the

results of the study will help us better understand the Middle East and its business environment,

which remains sparsely researched.

At present, I observe management practices for 26 mid-sized Saudi firms. However,

given the unreliability of the revenue data, I can only use 14 of those data points to run my

regressions. While I do find a positive correlation between management scores and productivity,

the results are not statistically significant. Nonetheless, the evidence points to consistency

between my results and those in the current literature. I am hopeful that, by expanding the data

set in the future, I can show a statistically significant result.

I have structured the rest of the paper as follows. Section 2 comprises a review of

relevant productivity literature. Section 3 provides some relevant background information about

Saudi Arabia and further motivates mu country choice. Section 4 describes of the data collection

process and presents summary statistics. Section 5 introduces my empirical model. Section 6

discusses the results and the paper’s major limitations. And section 7 concludes.

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2) Literature Review: The Productivity Enigma

The current accepted growth model attributes economic growth and firm output to labor

inputs, capital inputs, and technology (or Total Factor Productivity, TFP). Technology is a

generic term that describes the unexplained residual observed when computing growth.

Technology can be divided into several categories such as human capital, IT use, or research and

development, among others. Much of recent study devotes itself to “chipping away” at this

residual factor and detailing its components. A better understanding of technology would lead to

better comprehension of productivity differences between firms and, ultimately, help firms

become more efficient, yielding economic growth.

There are different possible and plausible explanations for the differences observed in

productivity across firms. Hsieh and Klenow (2009) suggest that the misallocation of inputs and

resources across firms is leading to inefficiencies and large productivity gaps between firms.

They focus their research on two emerging economies, India and China, and begin by pointing

out the inefficiencies in the respective countries. They show disparities in marginal products of

labor and capital across firms, indicating factor misallocation. This implies that, at the margin,

some firms would benefit a lot more from an additional unit of labor, or capital, or both.

According to the authors, the inefficiencies are the product of unfavorable regulation and market

frictions that exist within these, and other, developing countries, such as State ownership. They

estimate that an efficient reallocation of inputs would increase productivity by 30-50% in China

and 40-60% in India. Despite this finding, production factor misallocation is not sufficient to

explain the magnitude of productivity differences observed across firms. There must be one or

several additional components that influence productivity and performance.

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Bartel, Ichinowski, and Shaw (2007) suggest that the use of the latest Information

Technology affects productivity. Concentrating on the valve manufacturing industry, the authors

show that the adoption of new IT is correlated with increased productivity. They use their study

of the valve industry to develop a production function that includes an explicit measure of IT

practices. They are hence able to describe a firm’s investment decision with regard to IT

processes. Their evidence shows that firms that adopt new IT are more productive because new

IT increases production efficiency at all firm levels: it increases demand for skilled workers,

reduces production time, and promotes the adoption of more advanced and efficient management

practices. This paper indicates a clear relationship between the use of new IT processes and

increased productivity. However, it cannot convincingly establish causality due to the myriad of

observed effects caused by new IT practices.

Others, like Bertrand and Schoar (2003) argue that management style influences

productivity levels, suggesting that the identity of the manager affects workers’ performance,

corporate decisions, and thus firm output. The paper seeks to explain variation in firm behavior

that is unattributable to firm fixed effects such as industry and firm-level characteristics. The

authors use panel data on manager fixed effects to test the link between management “style” and

corporate policy. They focus on investment decisions as well as financial and organizational

decisions. They account for possible endogeneity bias by controlling for firm fixed effects.

Bertrand and Schoar find that managers’ identities explain some of the variation: they show an

improvement in the regression’s R-squared. Specifically, they show that managers matter more

to some decisions such as “acquisition or diversification decisions, dividend policy, interest

coverage and cost-cutting policy.” They also find differences in managers’ background and

education affect their “style.” Finally, they show that there is an optimal management style

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considering that certain managerial characteristics and choices are correlated with good firm

performance.

There is also emerging data on the role management practices play in determining a firm’s

productivity. Specifically, in 2007, Bloom and Van Reenen conducted a survey of 723 medium-

sized industrial firms in the United States and Europe, quantifying their management practices.

They focused on monitoring, targeting, and human resource management within firms and found

that well-performing, productive firms consistently received higher management practice

“scores,” suggesting a relationship between management practices and productivity. The authors

later (2010) extended their study to a larger number of firms in a broader spectrum of countries,

including Japan, China, India, and Brazil.

The evidence convincingly shows a causal link between the management practices and

productivity. First, the authors demonstrate how better management practices lead to better

technology. In their 2010 paper, they observe that firms with higher scores typically use more

advanced IT and more modern manufacturing techniques. They hypothesize that better

management implies more efficient practices. The positive correlation between management

practices and technology, coupled with the evidence in Bartel, Ichinowski, and Shaw (2007)

about IT and productivity, strongly suggest a causal relationship between management practices

and productivity. The argument is more convincing considering the breadth of the study, which

included a wide array of industrial firms in terms of industry, national origin, and ownership. The

authors studied several countries at varying stages of development, with different economic

profiles. They found that their hypothesis was consistent across all countries and industries.

Tangentially, they remarked that certain countries “specialized” in certain practices, their firms

scoring higher on average in a certain category. For example, Japanese firms focus a lot more on

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targeting than their counterparts in other countries. This evidence suggests that a certain

management “culture” or “legacy” affects performance, furthering the idea that management

practices play a role in determining productivity.

A final argument in favor of the hypothesis appears in Bloom, Eifert, Mahajan, McKenzie,

and Roberts (2009). For this paper, the authors selected 28 Indian textile plants belonging to 17

firms. They randomly chose 20 “experimental plants.” Of these 20 plants, there was a treatment

group of 14 plants and a control group of 6 plants. The treatment group received 5 months of free

management consulting including a thorough diagnostics test, recommendations in line with

those prescribed by the scoring grid, and implementation aid. Meanwhile, the control group

received 1 month of free diagnostics consulting only. The results were measured and compared

using regressions: the outcome, estimated by performance metrics like sales, was regressed on

management practices. The results were consistent with the theory that an improvement in

management practices leads to higher productivity.

3) Background Information on Saudi Arabia

Located on the Arabian Peninsula, Saudi Arabia is renowned for possessing 20% of the

world’s oil reserves. It is a desert country of 28 million inhabitants. Of those, 8 million are

expatriates: foreigners who work in the country and sustain many of its economic activities. 70%

of the country’s labor force works in the services sector, while the rest work in the agricultural

and industrial sectors. The GDP per capita is $24,000, ranking 55th in the world. 2

Saudi Arabia is currently undergoing an economic transition. Based on the latest Labor

Force Survey figures, 14.9% of the workforce are public employees, compared with 15.54% in

2001. Considering that the government only employs Saudis, and that Saudis make up less than

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half of all employees, the drop is noteworthy. It highlights the country’s ongoing push toward a

market economy with rapid growth in the private sector. This is relevant to management

practices because, in a young economy, clear “best practices” have not emerged yet. There is not

a tried and tested industry standard. So companies are in a trial phase and probably have very

different practices from one another. This desirable variation in the data could potentially

increase the significance of the results.

Saudi Arabia is a young country: 60% of the native population is under the age of 30.

Moreover, the country faces high unemployment. Conservative estimates place the overall

unemployment rate at 10.8%. The rate rises to 40% for youth under 30 years of age. These

statistics are somewhat puzzling. Why would a country with such high unemployment choose to

import so much labor? Simply put, the situation results from the demographic boom of the last 3

decades, when Saudis saw their mortality rates fall precipitously, while birth rates quasi-

stagnated at a high level. In the meantime, the country continued to call for and accept foreign

workers. There are currently policies in place to curb the national unemployment trend. Most

notably, there is a “Saudization” program, which mandates that all private companies employ a

certain percentage of Saudis.

Furthermore, Saudi labor laws make employee dismissal nearly impossible. On one hand,

the Saudization program forces Saudi firms to keep their Saudi employees, however inefficient

they are, out of fear of fines and other legal ramifications. In spite of high youth unemployment,

which usually suggests easy replacement, the system is such that dismissal is costly. On the other

hand, immigration laws make worker visas difficult to procure, such that once an employer

receives a foreign employee, he faces high costs for dismissing him. This unique legal situation

places unusual constraints on firms. Hence, the latter will likely adopt different management

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practices, specifically in the area of human resource management, to survive while meeting their

bottom line.

Finally, Saudi Arabia may suffer from a “resource curse.” Because of the rents accrued

from oil exports, the Saudi economy may be “cushioned,” allowing less competitive companies

to survive, and making companies less efficient overall (K,%01?L!K/,),L!()2!$/+M&F!G#55=HH.

It is interesting to see if and how these factors affect management. If findings in Saudi

Arabia mirror those in other countries, this enhances the likelihood that the good practices

outlined in the study are universal. That is to say, if strong performers in Saudi Arabia use the

same management practices as strong performers elsewhere, there is more reason to believe that

there are certain practices that enhance productivity regardless of other factors. The data doesn’t

allow a robust answer to this question, but might give indications as to the plausibility of

“universality” and convincingly call for further research.

4) Data

In order to determine how management practices in Saudi firms correlate with

productivity, I require firm level data on both variables. To my knowledge, no such data is

collected to date. Thus, I follow the Bloom – Van Reenen (B-VR) survey methodology to

construct a database of firm management practices. The B-VR (Bloom & Van Reenen (2007))

survey allows researchers to systematically quantify or “score” management practices that fall

under three categories: “Performance Monitoring,” “Target Setting,” and “Human Resource

(HR) Management.” Developed in cooperation with consultants at a large international

consulting firm (McKinsey & Co.), the survey covers 18 management topics that fall under one

of the three broader categories.

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Performance Monitoring looks at how firms measure and review their performance,

Target Setting examines how firms set goals in a clear, consistent, and market-oriented way. And

HR management looks at how firms attract, train, and retain talent, as well as how they dismiss

poor performers.

The survey questions are open-ended, such that the interviewee’s answers are not swayed

by the question. This style of question also allows for an unconstrained set of answers that

closely capture the realities of each firm. However, firms’ answers remain comparable because

all answers are normalized following a comprehensive grid that assigns a score between 1 and 5

to every possible practice.3 For example, on the topic of performance tracking, the interviewee is

asked to describe his/her firm’s performance tracking mechanisms. His responses are then coded

by comparing the answer to those provided in the grid and finding the closest fit. The use of this

standard scoring method allows me to compare Saudi firms’ management practices with the over

5,000 firms previously surveyed around the world using this method, creating a broad base for

comparison.

Given Saudi Arabia’s cultural norms, it is challenging to find interview candidates. So I

exploit my network of contacts to disseminate a call for interviews. I then interview people who

express a willingness to participate. I try to approximate a random sampling by approaching as

many relations as possible, and asking interviewees to send the message across their respective

networks. However, this mechanism does not yield a random sample of firms.

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Table 1. Firm Descriptive Statistics

A. Employees

Average 1,668

Median 500

Maximum 8,700

Minimum 16 B. Ownership

Type Number Share (%)

Private 15 57.69

Publicly Traded 3 11.53

Foreign Multinational 6 23.07

Government Owned 2 7.69 Notes: Private means family owned or closed joint-stock company. Publicly traded means traded on the Saudi stock exchange (Tadawul). Foreign multinational means multinational company domiciled outside of Saudi Arabia but operating a plant, a retail outlet, or both, in the Kingdom. Government owned is majority government owned company. C. Industry

Type Number Share (%)

Bank 2 7.69

Construction 5 19.23

Insurance 3 11.53

IT 2 7.69

Manufacturing 3 11.53

Public Services 4 15.38

Retail 7 26.92 Notes: Banks are any banks, retail and investment. Construction is a contracting company. Insurance is a licensed and regulated insurer. IT is any company that produces and sells technological products and services. Manufacturing encompasses all production plants. Public services cover all public hospitals, schools, universities, and other civil service centers. Retail means deals solely in sale and trade (no production).

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I have collected 26 data points, including firm information and relevant interviewee

characteristics. The firms are all medium size, with between 16 and 8,700 employees, an average

of 1,668 employees and a median of 500. I observe firms from various industries, including:

manufacturing, retail, financial services, construction, technology, and public services. There is a

mix of privately owned firms, publicly listed companies, and multinational corporations. This

breakdown closely approximates the breakdown of Saudi labor force by sector, suggesting the

sample is representative4.

Interviewees are approximately evenly broken up between Bachelor’s holders (11) and

Master’s+ holders (14), where Master’s+ is any degree at or a beyond a Master’s. None of the

managers have less than a Bachelor’s degree. The correlation between interviewee education and

industry is 18%, implying that more educated people are not systematically self-selecting into a

certain industry. Assuming educational attainment is an instrument for ability, this statistic

suggests that higher ability people do not prefer any industry to another. However, the

correlation between manager education and overall management score is 38%. Hence, I assume

that manager education could be a lurking variable in explaining firm practices.

Table 2. Score Statistics Metric Average Median Standard Deviation

Performance Monitoring 3.66 4.07 0.9578

Goal Targeting 3.36 3.70 0.9157 Human Resource Management 2.97 2.83 0.7818

Overall, the firms perform as expected given Saudi Arabia’s development stage. The

average score is 3.35/5, and the median falls at 3.67/5, meaning that Saudi firms employ slightly

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better than average practices in the aggregate. I present the score statistics for the 3 management

topics in Table 2. The average scores fall around 3/5. However, there is a long left tail, implying

that some firms are able to employ poor practices and survive. This is consistent with findings in

Brazil and India (Bloom, 2010). Figures 1 through 4 show the distributions of scores.

5) Model: The Regression To Run

I am interested in the relationship between management practices and firm productivity.

Since I do not directly observe total factor productivity, I use the revenue information I have for

14 of the 26 firms to compute a crude estimate of productivity.

Productivity = Revenue/# Employees

While this productivity variable captures labor productivity at the firm level, it does not

allow comparisons between firms given the heterogeneity of the surveyed sample. I hope to

normalize the revenue data by dividing each company’s revenue by its industry average.

Unfortunately, given the lack of reliable information, I must use this rough measure.

Furthermore, as a consequence of the restrictive sample size, I cannot look at the

correlation between productivity and each of the management topics. Hence, I compute an

overall average score for each firm that serves as its unique management score. I do not view this

as a great hindrance to the study because I assume that if a firm has good Management

Information Systems (captured in the Performance Monitoring variables), it also sets target in a

more systematic and data-driven way. Additionally, it couples performance results and targets to

manage and motivate its workforce, and ultimately retains the best performers. On the other had,

if a firm poorly collects and reviews performance data, it cannot set targets in a value adding,

forward looking, and data-driven way, nor can it attract and retain talent to become a competitive

player. Thus, firms with low scores in one category are likely to have a low score in the other

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categories, and vice versa. The wide distribution of scores confirms this assumption. Hence, it is

appropriate to use an overall average score and run the following regression.

Productivity i = ! + !’(Average Score) (1)

While I do observe certain firm and manager characteristics like industry and education, I

do not include these variables in the regression, as this would eliminate any statistical power.

6) Results and Limitations

While the regression shows a positive correlation between management scores and

productivity, the coefficient is not statistically significant. Therefore, I cannot extract any

conclusive results. Table 3 shows the output from the regression analysis.

Table 3. Regression Results Productivity Regressed on Overall Management Score

Coefficient St. Error t-statistic p > |t|

Overall Score 0.969 0.745 1.3 0.218 Observations: 14

Notes: The coefficient is not statistically significant, however it carries the predicted sign.

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Table 4. Score Distribution by Ownership Ownership Overall Score St. Deviation Observations Multinationals and Publicly Traded 3.65 0.499 9

Private 2.94 1.042 15

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Nevertheless, my study suffers from several limitations that prohibit me from making

sweeping conclusions. I highlight the primary limitations in this paragraph, and offer potential

solutions to them. First, since I collect all the primary data, I have a restricted sample. Despite

the variability in the data available, the set is too small to produce significant results, let alone

establish a causal link between management and productivity. Moreover, this pitfall forces me to

view management practices as a single indicator, and obscures the sensitivity of productivity to

certain key practices. Therefore, I cannot pinpoint a certain practice or set of practices that drive

productivity in Saudi Arabia. The small sample size also prevents me from introducing relevant

variables, like manager education or firm industry, to the model. Additionally, the quality of the

data available strongly affects my ability to expand the data set and refine the model. In order to

resolve these hurdles, I need to collect more data.

Another limitation comes from the risk of endogeneity bias. One could argue that any

policy variability I detect comes from manager characteristics, as apposed to management

practices. That is to say, “smart” managers implement efficient practices and generate high

output for the firm, whereas poor quality managers lower output and productivity, regardless of

de jure policy. However, I do not expect manager effects to significantly reduce management

practices’ explanatory power because the survey captures firms’ ability to attract and retain

talent, including managerial talent. Moreover, managers are responsible for creating policies. So

if a firm has a “smart” manager, it is likely a “smart” firm.

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7) Conclusion

The purpose of my study is to measure the effect of management practices on Saudi

productivity by regressing productivity on standard management scores. I find that, although the

variables are positively correlated, my results are not statistically significant. Nonetheless, my

findings are consistent with previous literature, suggesting that a larger data set could robustly

show a positive correlation between management practices and productivity. In the future, I hope

to expand the Saudi management practices database to produce more robust results and

conclusive evidence about the universality of “good” management practices as defined by prior

work in the field.

In addition to these findings, my data shows that Saudi firms tend to score poorly on the

HR Management measure. The scores highlight employers’ inability to hire talent and dismiss

inefficient workers. There is a general lack of talent development and career planning at the

institutional level. In light of Saudi Arabia’s youth unemployment problem, I believe this area

requires more scrutiny and additional study. The government could look into policies that

enhance the labor market by unconstraining employment laws and promoting more competitive

practices.

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References:

Bartel Ann, Casey Ichinowski, and Kathryn Shaw. 2007. “How Does Information Technology

Affect Productivity? Plant-Level Comaprisons of Product Innovation, Process Improvement, and

Worker Skills.” Quarterly Journal of Economics, 122(4), 1721-1758.

Benfratello, L, Sembenelli A. 2006. “Foreign Ownership and Productivity: Is the Direction of Causality so Obvious?” International Journal of Industrial Organization, 24(4): 733-751.

Bertrand, Marianne, and Antoinette Schoar, 2003. “Managing with style: The effect of managers

on firm policies.” Quarterly Journal of Economics 118(1), 1169–1208.

Bjerke, Bjorn and Abdulrahim Al-Meer. 1993. “Culture’s Consequences: Management in Saudi

Arabia.” Leadership and Organization Development Journal. 14(2): 31-35

Bloom, Nicholas and John Van Reenen. 2007. “Measuring and Explaining Management

Practices Across Firms and Countries.” Quarterly Journal of Economics. 122(4): 1351-1408

Bloom, Nicholas and John Van Reenen. 2010. “Why do Management Practices Differ Across

Firms and Countries.” Journal of Economic Perspectives. 24(1): 203-24

Bloom N, Eifert B, Mahajan A, McKenzie D, Roberts J. 2009. Does management matter?

Evidence from India. Unpublished manuscript, Stanford University

Hsieh, Chang-Tai and Peter Klenow. 2009. “Misallocation and Manufacturing TFP in China and

India.” Quarterly Journal of Economics, 124(4): 1403-1448.

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“Saudi Arabia Economy in Figures” 2012. Saudi Arabian Ministry of Labor. (online resource)

Syverson, Chad. 2004. “Product Substitutability and Productivity Dispersion.” Review of

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Economics and Statistics, 86(2): 534-550.

Figure 1. Overall Score Frequency

Figure 2. Performance Score Frequency

Figure 3. Targeting Score Frequency

Figure 4. Human Resource Management Score Frequency

1

MANUFACTURING MANAGEMENT PRACTICE INTERVIEW GUIDE AND EXAMPLE RESPONSES Any score from 1 to 5 can be given, but the scoring guide and examples are only provided for scores of 1, 3 and 5. Multiple questions are used for each dimension to improve scoring accuracy. For details of the survey methodology see Bloom and Van Reenen (2006), “Measuring and explaining management practices across firms and countries”, Centre for Economic Performance Discussion Paper 716.

(1) Modern manufacturing, introduction a) Can you describe the production process for me?

b) What kinds of lean (modern) manufacturing processes have you introduced? 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?

Score 1 Score 3 Score 5 Scoring grid: Other than JIT delivery from suppliers few

modern manufacturing techniques have been introduced, (or have been introduced in an ad-hoc manner)

Some aspects of modern manufacturing techniques have been introduced, through informal/isolated change programs

All major aspects of modern manufacturing have been introduced (Just-in-time, autonomation, flexible manpower, support systems, attitudes and behaviour) in a formal way

Examples: A UK firm orders in bulk and stores the material on average 6 months before use. The business focuses on quality and not reduction of lead-time or costs. Absolutely no modern manufacturing techniques had been introduced.

A supplier to the army is undergoing a full lean transformation. For 20 years, the company was a specialty supplier to the army, but now they have had to identify other competencies forcing them to compete with lean manufacturers. They have begun adopting specific lean techniques and plan to use full lean by the end of next year.

A US firm has formally introduced all major elements of modern production. It reconfigured the factory floor based on value stream mapping and 5-S principles, broke production into cells, eliminated stockrooms, implemented Kanban, and adopted Takt time analyses to organize workflow.

(2) Modern manufacturing, rationale a) Can you take through the rationale to introduce these processes?

b) What factors led to the adoption of these lean (modern) management practices?

Score 1 Score 3 Score 5 Scoring grid: Modern manufacturing techniques were

introduced because others were using them. Modern manufacturing techniques were introduced to reduce costs

Modern manufacturing techniques were introduced to enable us to meet our business objectives (including costs)

Examples: A German firm introduced modern techniques because all its competitors were using these techniques. The business decision had been taken to imitate the competition.

A French firm introduced modern manufacturing methods primarily to reduce costs.

A US firm implemented lean techniques because the COO had worked with them before and knew that they would enable the business to reduce costs, competing with cheaper imports through improved quality, flexible production, greater innovation and JIT delivery.

2

(3) Process problem documentation

a) How would you go about improving the manufacturing process itself? b) How do problems typically get exposed and fixed? c) Talk me through the process for a recent problem. d) Do the staff ever suggest process improvements?

Score 1 Score 3 Score 5 Scoring grid: No, process improvements are made when

problems occur. Improvements are made in one week workshops involving all staff, to improve performance in their area of the plant

Exposing problems in a structured way is integral to individuals’ responsibilities and resolution occurs as a part of normal business processes rather than by extraordinary effort/teams

Examples: A US firm has no formal or informal mechanism in place for either process documentation or improvement. The manager admitted that production takes place in an environment where nothing has been done to encourage or support process innovation.

A US firm takes suggestions via an anonymous box, they then review these each week in their section meeting and decide any that they would like to proceed with.

The employees of a German firm constantly analyse the production process as part of their normal duty. They film critical production steps to analyse areas more thoroughly. Every problem is registered in a special database that monitors critical processes and each issue must be reviewed and signed off by a manager.

(4) Performance tracking a) Tell me how you track production performance?

b) What kind of KPI’s would you use for performance tracking? How frequently are these measured? Who gets to see this KPI data? c) If I were to walk through your factory could I tell how you were doing against your KPI’s?

Score 1 Score 3 Score 5 Scoring grid: Measures tracked do not indicate directly if

overall business objectives are being met. Tracking is an ad-hoc process (certain processes aren’t tracked at all)

Most key performance indicators are tracked formally. Tracking is overseen by senior management.

Performance is continuously tracked and communicated, both formally and informally, to all staff using a range of visual management tools.

Examples: A manager of a US firm tracks a range of measures when he does not think that output is sufficient. He last requested these reports about 8 months ago and had them printed for a week until output increased again.

At a US firm every product is bar-coded and performance indicators are tracked throughout the production process; however, this information is not communicated to workers

A US firm has screens in view of every line. These screens are used to display progress to daily target and other performance indicators. The manager meets with the shop floor every morning to discuss the day past and the one ahead and uses monthly company meetings to present a larger view of the goals to date and strategic direction of the business to employees. He even stamps napkins with key performance achievements to ensure everyone is aware of a target that has been hit.

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(5) Performance review

a) How do you review your KPI’s? b) Tell me about a recent meeting c) Who is involved in these meetings? Who gets to see the results of this review? d) What are the typical next steps after a meeting?

Score 1 Score 3 Score 5 Scoring grid: Performance is reviewed infrequently or in

an un-meaningful way e.g. only success or failure is noted.

Performance is reviewed periodically with successes and failures identified. Results are communicated to senior management. No clear follow-up plan is adopted.

Performance is continually reviewed, based on indicators tracked. All aspects are followed up ensure continuous improvement. Results are communicated to all staff

Examples: A manager of a US firm relies heavily on his gut feel of the business. He will review costs when he thinks there is too much or too little in the stores. He admits he is busy so reviews are infrequent. He also mentioned staffs feel like he is going on a hunt to find a problem, so he has now made a point of highlighting anything good.

A UK firm uses daily production meetings to compare performance to plan. However, clear action plans are infrequently developed based on these production results.

A French firm tracks all performance numbers real time (amount, quality etc). These numbers are continuously matched to the plan on a shift-by-shift basis. Every employee can access these figures on workstations on the shop floor. If scheduled numbers are not met, action for improvement is taken immediately.

(6) Performance dialogue a) How are these meetings structured? Tell me about your most recent meeting.

b) During these meeting do you find that you generally have enough data? c) How useful do you find problem solving meetings? d) What type of feedback occurs in these meetings?

Score 1 Score 3 Score 5 Scoring grid: The right data or information for a

constructive discussion is often not present or conversations overly focus on data that is not meaningful. Clear agenda is not known and purpose is not stated explicitly

Review conversations are held with the appropriate data and information present. Objectives of meetings are clear to all participating and a clear agenda is present. Conversations do not, as a matter of course, drive to the root causes of the problems.

Regular review/performance conversations focus on problem solving and addressing root causes. Purpose, agenda and follow-up steps are clear to all. Meetings are an opportunity for constructive feedback and coaching.

Examples: A US firm does not conduct staff reviews. It was just “not the philosophy of the company” to do that. The company was very successful during the last decade and therefore did not feel the need to review their performance.

A UK firm focuses on key areas to discuss each week. This ensures they receive consistent management attention and everyone comes prepared. However, meetings are more of an opportunity for everyone to stay abreast of current issues rather than problem solve.

A German firm meets weekly to discuss performance with workers and management. Participants come from all departments (shop floor, sales, R&D, procurement etc.) to discuss the previous week performance and to identify areas to improve. They focus on the cause of problems and agree topics to be followed up the next week, allocating all tasks to individual participants.

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(7) Consequence management a) What happens if there is a part of the business (or a manager) who isn’t achieving agreed upon results? Can you give me a recent example?

b) What kind of consequences would follow such an action? c) Are there are any parts of the business (or managers) that seem to repeatedly fail to carry out agreed actions?

Score 1 Score 3 Score 5 Scoring grid: Failure to achieve agreed objectives does

not carry any consequences Failure to achieve agreed results is tolerated for a period before action is taken.

A failure to achieve agreed targets drives retraining in identified areas of weakness or moving individuals to where their skills are appropriate

Examples: At a French firm no action is taken when objectives aren’t achieved. The President personally intervenes to warn employees but no stricter action is taken. Cutting payroll or making people redundant because of a lack of performance is very rarely done.

Management of a US firm reviews performance quarterly. That is the earliest they can react to any underperformance. They increase pressure on the employees if targets are not met.

A German firm takes action as soon as a weakness is identified. They have even employed a psychologist to improve behavior within a difficult group. People receive ongoing training to improve performance. If this doesn’t help they move them in other departments or even fire individuals if they repeatedly fail to meet agreed targets

(8) Target balance a) What types of targets are set for the company? What are the goals for your plant?

b) Tell me about the financial and non-financial goals? c) What do CHQ (or their appropriate manager) emphasize to you?

Score 1 Score 3 Score 5 Scoring grid: Goals are exclusively financial or

operational Goals include non-financial targets, which form part of the performance appraisal of top management only (they are not reinforced throughout the rest of organization)

Goals are a balance of financial and non-financial targets. Senior managers believe the non-financial targets are often more inspiring and challenging than financials alone.

Examples: At a UK firm performance targets are exclusively operational. Specifically volume is the only meaningful objective for managers, with no targeting of quality, flexibility or waste.

For French firm strategic goals are very important. They focus on market share and try to hold their position in technology leadership. However, workers on the shop floor are not aware of those targets.

A US firm gives everyone a mix of operational and financial targets. They communicate financial targets to the shop floor in a way they found effective – for example telling workers they pack boxes to pay the overheads until lunchtime and after lunch it is all profit for the business. If they are having a good day the boards immediately adjust and play the “profit jingle” to let the shop floor know that they are now working for profit. Everyone cheers when the jingle is played.

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(9) Target interconnection a) What is the motivation behind your goals?

b) How are these goals cascaded down to the individual workers? c) What are the goals of the top management team (do they even know what they are!)? d) How are your targets linked to company performance and their goals?

Score 1 Score 3 Score 5 Scoring grid: Goals are based purely on accounting

figures (with no clear connection to shareholder value)

Corporate goals are based on shareholder value but are not clearly communicated down to individuals

Corporate goals focus on shareholder value. They increase in specificity as they cascade through business units ultimately defining individual performance expectations.

Examples: A family owned firm in France is only concerned about the net income for the year. They try to maximize income every year without focusing on any long term consequences.

A US firm bases its strategic corporate goals on enhancing shareholder value, but does not clearly communicate this to workers. Departments and individuals have little understanding of their connection to profitability or value with many areas labeled as “cost-centers” with an objective to cost-cut despite potentially disproportionately large negative impact on the other departments they serve.

For a US firm strategic planning begins with a bottom up approach that is then compared with the top down aims. Multifunctional teams meet every 6 months to track and plan deliverables for each area. This is then presented to the area head that then agrees or refines it and then communicates it down to his lowest level. Everyone has to know exactly how they contribute to the overall goals or else they won’t understand how important the 10 hours they spend at work every day is to the business.

(10) Target time horizon a) What kind of time scale are you looking at with your targets?

b) Which goals receive the most emphasis? c) How are long term goals linked to short term goals? d) Could you meet all your short-run goals but miss your long-run goals?

Score 1 Score 3 Score 5 Scoring grid: Top management's main focus is on short

term targets There are short and long-term goals for all levels of the organization. As they are set independently, they are not necessarily linked to each other

Long term goals are translated into specific short term targets so that short term targets become a "staircase" to reach long term goals

Examples: A UK firm has had several years of ongoing senior management changes – therefore senior managers are only focusing on how the company is doing this month versus the next, believing that long-term targets will take care of themselves.

A US firm has both long and short-term goals. The long-term goals are known by the senior managers and the short-term goals are the remit of the operational managers. Operations managers only occasionally see the longer-term goals so are often unsure how they link with the short term goals.

A UK firm translates all their goals – even their 5-year strategic goals - into short-term goals so they can track their performance to them. They believe that it is only when you make someone accountable for delivery within a sensible timeframe that a long-term objective will be met. They think it is more interesting for employees to have a mix of immediate and longer-term goals.

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(11) Targets are stretching a) How tough are your targets? Do you feel pushed by them?

b) On average, how often would you say that you meet your targets? c) Are there any targets which are obviously too easy (will always be met) or too hard (will never be met)? d) Do you feel that on targets that all groups receive the same degree of difficulty? Do some groups get easy targets?

Score 1 Score 3 Score 5 Scoring grid: Goals are either too easy or impossible to

achieve; managers provide low estimates to ensure easy goals

In most areas, top management pushes for aggressive goals based on solid economic rationale. There are a few "sacred cows" that are not held to the same rigorous standard

Goals are genuinely demanding for all divisions. They are grounded in solid, solid economic rationale

Examples: A French firm uses easy targets to improve staff morale and encourage people. They find it difficult to set harder goals because people just give up and managers refuse to work people harder.

A chemicals firm has 2 divisions, producing special chemicals for very different markets (military, civil). Easier levels of targets are requested from the founding and more prestigious military division.

A manager of a UK firm insisted that he has to set aggressive and demanding goals for everyone – even security. If they hit all their targets he worries he has not stretched them enough. Each KPI is linked to the overall business plan.

(12) Performance clarity a) What are your targets (i.e. do they know them exactly)? Tell me about them in full.

b) Does everyone know their targets? Does anyone complain that the targets are too complex? c) How do people know about their own performance compared to other people’s performance?

Score 1 Score 3 Score 5 Scoring grid: Performance measures are complex and not

clearly understood. Individual performance is not made public

Performance measures are well defined and communicated; performance is public in all levels but comparisons are discouraged

Performance measures are well defined, strongly communicated and reinforced at all reviews; performance and rankings are made public to induce competition

Examples: A German firm measures performance per employee based on differential weighting across 12 factors, each with its own measurement formulas (e.g. Individual versus average of the team, increase on prior performance, thresholds etc.). Employees complain the formula is too complex to understand, and even the plant manager could not remember all the details.

A French firm does not encourage simple individual performance measures as unions pressure them to avoid this. However, charts display the actual overall production process against the plan for teams on regular basis.

At a US firm self-directed teams set and monitor their own goals. These goals and their subsequent outcomes are posted throughout the company, encouraging competition in both target setting and achievement. Individual members know where they are ranked which is communicated personally to them bi-annually. Quarterly company meetings seek to review performance and align targets.

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(13) Managing human capital a) Do senior managers discuss attracting and developing talented people?

b) Do senior managers get any rewards for bringing in and keeping talented people in the company? c) Can you tell me about the talented people you have developed within your team? Did you get any rewards for this?

Score 1 Score 3 Score 5 Scoring grid: Senior management do not communicate

that attracting, retaining and developing talent throughout the organization is a top priority

Senior management believe and communicate that having top talent throughout the organization is a key way to win

Senior managers are evaluated and held accountable on the strength of the talent pool they actively build

Examples: A US firm does not actively train or develop its employees, and does not conduct performance appraisals or employee reviews. People are seen as a secondary input to the production.

A US firm strives to attract and retain talent throughout the organization, but does not hold managers individually accountable for the talent pool they build. The company actively cross-trains employees for development and challenges them through exposure to a variety of technologies.

A UK firm benchmarks human resources practices at leading firms. A cross-functional HR excellence committee develops policies and strategies to achieve company goals. Bi-monthly directors’ meetings seek to identify training and development opportunities for talented performers.

(14) Rewarding high-performance a) How does you appraisal system work? Tell me about the most recent round?

b) How does the bonus system work? c) Are there any non-financial rewards for top-performers? d) How does your reward system compare to your competitors?

Score 1 Score 3 Score 5 Scoring grid: People within our firm are rewarded

equally irrespective of performance level Our company has an evaluation system for the awarding of performance related rewards

We strive to outperform the competitors by providing ambitious stretch targets with clear performance related accountability and rewards

Examples: An East Germany firm pays its people equally and regardless of performance. The management said to us “there are no incentives to perform well in our company”. Even the management is paid an hourly wage, with no bonus pay.

A German firm has an awards system based on three components: the individual’s performance, shift performance, and overall company performance.

A US firm sets ambitious targets, rewarded through a combination of bonuses linked to performance, team lunches cooked by management, family picnics, movie passes and dinner vouchers at nice local restaurants. They also motivate staff to try by giving awards for perfect attendance, best suggestion etc.

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(15) Removing poor performers a) If you had a worker who could not do his job what would you do? Could you give me a recent example?

b) How long would underperformance be 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?

Score 1 Score 3 Score 5 Scoring grid: Poor performers are rarely removed from

their positions Suspected poor performers stay in a position for a few years before action is taken

We move poor performers out of the company or to less critical roles as soon as a weakness is identified

Examples: A French firm had a supervisor who was regularly drinking alcohol at work but no action was taken to help him or move him. In fact no employee had ever been laid off in the factory. According to the plant manager HR “kicked up a real fuss” whenever management wanted to get rid of employees, and told managers their job was production not personnel.

For a German firm it is very hard to remove poor performers. The management has to prove at least three times that an individual underperformed before they can take serious action.

At a US firm, the manager fired four people during last couple of months due to underperformance. They continually investigate why and who are underperforming.

(16) Promoting high performers a) Can you rise up the company rapidly if you are really good? Are there any examples you can think of?

b) What about poor performers – do they get promoted more slowly? Are there any example you can think of? c) How would you identify and develop (i.e. train) your star performers? d) If two people both joined the company 5 years ago and one was much better than the other would he/she be promoted faster?

Score 1 Score 3 Score 5 Scoring grid: People are promoted primarily upon the

basis of tenure People are promoted upon the basis of performance

We actively identify, develop and promote our top performers

Examples: A UK firm promotes based on an individual’s commitment to the company measured by experience. Hence, almost all employees move up the firm in lock step. Management was afraid to change this process because it would create bad feeling among the older employees who were resistant to change.

A US firm has no formal training program. People learn on the job and are promoted based on their performance on the job.

At a UK firm each employee is given a red light (not performing), amber light (doing well and meeting targets) a green light (consistently meeting targets very high performer) and a blue light (high performer capable of promotion of up to two levels). Each manager is assessed every quarter based on his succession plans and development plans for individuals.

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(17) Attracting human capital a) What makes it distinctive to work at your company as opposed to your competitors?

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?

Score 1 Score 3 Score 5 Scoring grid: Our competitors offer stronger reasons for

talented people to join their companies Our value proposition to those joining our company is comparable to those offered by others in the sector

We provide a unique value proposition to encourage talented people join our company above our competitors

Examples: A manager of a firm in Germany could not give an example of a distinctive employee proposition and (when pushed) thinks the offer is worse than most of its competitors. He thought that people working at the firm “have drawn the short straw”.

A US firm seeks to create a value proposition comparable to its competitors and other local companies by offering competitive pay, a family atmosphere, and a positive presence in the community.

A German firm offers a unique value proposition through development and training programs, family culture in the company and very flexible working hours. It also strives to reduce bureaucracy and seeks to push decision making down to the lowest levels possible to make workers feel empowered and valued.

(18) Retaining human capital a) If you had a star performer who wanted to leave what would the company do?

b) Could you give me an example of a star 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?

Score 1 Score 3 Score 5 Scoring grid:

We do little to try and keep our top talent. We usually work hard to keep our top talent. We do whatever it takes to retain our top talent.

Examples: A German firm lets people leave the company if they want. They do nothing to keep those people since they think that it would make no sense to try to keep them. Management does not think they can keep people if they want to work somewhere else. The company also will not start salary negotiations to retain top talent.

If management of a French firm feels that people want to leave the company, they talk to them about the reasons and what the company could change to keep them. This could be more responsibilities or a better outlook for the future. Managers are supposed to “take-the-pulse” of employees to check satisfaction levels.

A US firm knows who its top performers are and if any of them signal an interest to leave it pulls in senior managers and even corporate HQ to talk to them and try and persuade them to stay. Occasionally they will increase salary rates if necessary and if they feel the individual is being underpaid relative to the market. Managers have a responsibility to try to keep all desirable staff.