Management Matters in Australia Report
Management Matters in Australia Report
Management Matters in Australia Report
NOVEMBER 2009
Report commissioned by
This unique research project for the Department of Innovation, Industry, Science and Research benchmarks management practices in Australian manufacturing firms against the global best. The project was undertaken by a research team from the University of Technology Sydney, Macquarie Graduate School of Management and the Society of Knowledge Economics, and is part of a world-wide study led by the London School of Economics, Stanford University and McKinsey & Co. The findings suggest that while some of our firms are as good as any in the world, we still have a substantial tail of firms that are mediocre, especially in their approach to people management. This is a key differentiating factor between Australia and better performing, more innovative countries. The research also finds that there is a clear link between the quality of management scored across 18 dimensions of people, performance and operations and enterprise productivity. Since the late 1990s, Australias productivity performance has slipped from being one of the OECD leaders to a laggard. This structural deterioration in our economy was masked in recent years by windfall gains from the commodities boom, which reversed the longstanding decline in our terms of trade and reduced the policy focus on management and productivity. It is generally acknowledged that Australia has handled the world economic downturn well, overcoming our vulnerability as a small open economy with an effective fiscal stimulus package. However, this study suggests that it may now be appropriate to link these short-term measures to the need to build longer-term competitive advantage through targeted, supportive public policy initiatives. The study demonstrates that a cost-effective way of improving the productivity performance of Australian firms is to promote a transformation in the calibre of the management and leadership of our organisations. This is the key to a more innovative, dynamic and sustainable economy into the future. 3
CONTENTS
Executive summary Inside the productivity black box Economic impact of management practices Australian managers perform around the global average Drilling down into Australian management Issues for Australian manufacturing enterprises Why do Australian management practices vary? Key implications for Australia Australian Management Practices Research Team 5 10 13 14 21 30 32 38 42
Executive Summary
This report reviews management practices in Australian manufacturing firms and the link between these practices and the productivity performance of firms. The Australian Governments recent innovation white paper, Powering Ideas An Innovation Agenda for the 21st Century, recognises that the improvement of Australias productivity performance will depend ultimately on the innovation capacity and performance of firms and organisations. The white paper contends that Australias innovation system will need to work better if we want to maintain the way of life we value so much, and notes the implication that: One future focus of the Australian Governments industry and innovation policies will be on building innovation capacity and performance at the enterprise level. However, policies to build innovation capacity and performance require an evidence base, and it has become apparent that there is little reliable data in Australia on management practices and their relationship to firm performance. A major international study undertaken recently by the London School of Economics (LSE) and McKinsey & Co examined management skills and capabilities across 15 countries and found clear linkages between the quality of management and the performance of firms and organisations, but this study did not include Australia. There has not been any such analysis on a comparable scale in Australia since the comprehensive 1995 Karpin Report on leadership and management skills, Enterprising Nation, and an earlier series of Australian workplace employment relations surveys, which is why the current study was commissioned to replicate the LSE methodology in Australia. The key objective of the research is to identify determinants of high performance and to benchmark Australian firms against the global best. It is designed to provide an information base for policy development and services to improve innovation skills and workplace capabilities, including management and leadership skills building on Enterprise Connect and the Education Revolution.
LSE defines medium firms 100 to 5000 employees, Australian Bureau of Statistics (ABS) define small firms as firm size less than 20 employees, medium size firms from 20 to 199 employees, and large size firms with employees 200 and greater. The small size firms in Australia are not in scope.
quality of management practices has a measurable impact on labour productivity, as well as sales and the number of employees in firms. As a result, a single point increase in the management score a measurement derived from the 18 management characteristics in our scoring grid is associated with an increase in output equivalent to a 56% increase in the labour force or a 44% increase in invested capital. The study also found that there is considerable variance in management practices within Australian firms. The following are the key findings with regard to the determinants of management practices: Size is an important factor in management performance, with larger firms scoring better than smaller firms Ownership is also a factor and multinationals clearly outperform domestic firms in management performance Australian publicly listed companies are also more likely to adopt modern management practices than other types of company ownerships Family run businesses tend to exhibit inferior management performance International exposure is important as there is a significant positive correlation between the management score and share of exports The level of education and skills among both management and non-management personnel impacts management performance There is a highly significant positive relationship between the management score and the overall degree of plant manager autonomy Organizational hierarchy is also positively correlated to the management scores, a finding possibly indicating limitations in flatter structures Flexible people management is shown to be a key element of successful management, and well-managed firms tend also to exhibit superior innovation capabilities While the international study found increased labour market flexibility correlated with the people management score, the Australian findings do not support this High management scores are positively correlated with various measures of success including: sales, productivity, employee numbers and market valuation Just as in other countries, Australian management tends to overrate its own performance against the benchmarks Unlike the global survey, the Australian research did not find a link between the level of competition and management performance, which may be an anomalous result
While the findings relate to manufacturing firms, there are implications also for services-based firms and organisations, which reflect their growing significance in the economy.
behaviour but it also maintained that Doing so may be the single most cost-effective way of improving the performance of their economies 2. While there are limits to the role of public policy in encouraging and facilitating organisational improvement, according to the World Economic Forum, Australia is among those countries that have reached the innovation-driven stage of development. Seeding and improving the productivity of its economy through initiatives and investments in management skills and capabilities would be worthy of greater attention. In this light, a start has been made to explicitly incorporate management and leadership development into Australias innovation system, but there is scope for greater emphasis on the innovative and management capability of firms and organisations in fast moving local and international markets. This is particularly the case for smaller firms, who face information asymmetries and resource constraints in acquiring and implementing world class management practices. Considering the important role that multinational corporations (MNCs) can play in lifting overall performance and productivity in Australia, there would be considerable merit in looking at more strategies to augment the role of these companies in supply chains and networks and to more fully gain from their presence in Australia. This might be achieved through more targeted foreign investment attraction in key activities, and also through local industry development policies which encourage collaboration and industry clustering between domestic firms and foreign MNCs. This industry policy will complement rather than substitute for the market, and can play a major role in strengthening the overall competitive advantage of Australian businesses. Supportive public policy can also encourage Australianbased firms to grow their domestic operations internationally and become more globally competitive 3. Clearly, investing in education and skills is a key requirement for those performing managerial roles now and into the future. Governments world-wide have a role not only in funding and guiding education systems, but also in the development of specific programs to develop management capability. Such programs must be accompanied by a fair, flexible and balanced system of labour market regulation. The relationship between regulation and management structures and behaviour is highly complex. While the study has indicated a relationship between the labour market rigidity index as measured by the World Bank and people management, research also suggests that the dimensions and determinants of people management are primarily under management control and will only be improved if organisations change their practices with a view to creating more innovative and collaborative workplaces.
Nick Bloom, Stephen Dorgan, John Dowdy, John Van Reenen, Management Practice & Productivity: Why they matter?, Management Matters, Nov 2007, p. 10. 3 It should be noted that as the focus of this research has been on medium and large firms, it has limitations with respect to the application of policy to small firms; caution is required in extrapolating any policy implications to the cohort of small firms with less than 50 employees.
dynamic capabilities and sustainable competencies and to accommodate the impact of these external factors. This study shows that there is considerable room for improvement in the quality of management practices in Australian manufacturing firms. Further, the study translates these findings into the services sector and recommends that the fostering of capabilities in managing services innovatively, smartly and swiftly will also translate into higher productivity, in turn with additional benefit for Australias long-term economic prosperity. Overall, the research findings indicate that national debate about the productivity performance of our economy should include thinking about how effectively Australian firms and organisations are managed. The openness of domestic and international markets, the role of infrastructure and the quality of our training and education systems are all vital, but so too are the management practices of organisations in adapting to and shaping future opportunities.
ABS Australian System of National Accounts, 200708 (cat. no. 5204.0), Table 13. Venturous Australia: Building Strength in Innovation (Melbourne: Cutler & Company, 2008), p. ix. 6 World Economic Forums Global Competitiveness Report 2008-09, http://www.gcr.weforum.org/. 7 Enterprise Connect is a division of Department of Innovation, Industry, Science and Research, Canberra, established by the government to boost the innovation capacity, productivity and performance of smaller and medium Australian firms, including by encouraging collaboration with larger firms and public research institutions. 8 Powering Ideas An Agenda for the 21st Century, (Canberra: Commonwealth of Australia, 2009) p.49.
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innovation capability and performance at the enterprise level. This was the thrust of a number of reviews, including the review of Australias Automotive Industry which argued that given the competitive pressures the industry is experiencing, a greater emphasis on improving productivity, reforming work and management practices, and promoting a productive workplace culture will be required if the Australian industry is to remain competitive in the longer term. While volume, economies of scale and innovation (broadly defined) remain the key determinants of productivity in the industry, more needs to be done to encourage high-performance workplaces and cost-competitive supply chains 9. Likewise, the Review of the Australian Textiles, Clothing and Footwear Industries noted that all industries in high-wage, globalised economies like Australias depend for their success on the development of innovative capability at the level of the enterprise and workplace. This is driven not only by research and technology development but also by the increasing emphasis on business model transformation, market-led organisational change and the integration of firms into external collaborative networks and supply chains 10.
Review of Australias Automotive Industry (Canberra: Department of Innovation, Industry, Science and Research, 2008). Review of Australian Textiles, Clothing and Footwear Industries (Canberra: Department of Innovation, Industry, Science and Research, 2008), p. 84. 11 Bloom, Nicholas and John Van Reenen, Measuring and Explaining Management Practices Across Firms and Countries, The Quarterly Journal of Economics 122 (4): (2007), p.1351-1408. 12 Northern Ireland is seen as a separate jurisdiction. 13 LSE defines medium firms 100 to 5000 employees, ABS define small firms as firm size less than 20 employees, medium size firms from 20 to 199 employees, and large size firms with employees 200 and greater. The small size firms in Australia are not in scope.
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11
Operations
People
Performance
These eighteen dimensions collate into three distinct, but related areas of management operations management, performance management, and people management: Are we good at managing the operations of our businesses? Operations Management incorporates the firms implementation of modern manufacturing techniques and management systems designed to not only increase efficiency and reduce waste, but also to create and deliver value to the overall business objectives. Best practice warrants a commitment to monitoring operations, continuous improvement initiatives and deep embedding of these practices in the culture of the company making it a natural way of life. Monitoring key performance indicators and methodologically tracking and reviewing the operational performance are core to any business success. Do we manage business targets proactively? Performance Management encompasses the firms processes around setting goals and targets, where good management requires these goals and targets to not merely be operationally or financially oriented but be more holistic and interlinked, leading to sustainable value creation. They also need to strike a balance between addressing both long-term and short-term corporate performance. Effective management is about setting realistic goals and targets which are challenging yet attainable; this will keep the team motivated and focused towards achieving these goals and targets, thereby driving performance. Are we good at managing the talent of our people? People management and its role in enhancing firm performance and productivity cannot be over emphasised. In todays intensely competitive environment, organisations need to leverage their most valuable intangible asset human capital for a sustained competitive advantage. Underpinning this, effective people management is paramount, and is achieved when companies follow a structured and focused approach to the attraction, retention and development of talent. In particular, this is characterised by encouraging, motivating and nurturing people through a systematic approach. 12
Note: Panel data for firms over the period 2004-2008, firms are grouped in 0.5 increments of assessed management score and performance measure variables are logged. Econometric Analysis (not reported here) reveals that this positive association is robust to the inclusion of controls such as region, industry and other factors which have been shown to explain productivity.
In the context of this research, a single point in the management score refers to a point as per our scoring grid, wherein improvements in any or all of the eighteen identified management dimensions can help achieve a one point increase in the overall management score. Our results show that a single unit increase in the management score is associated with an increase in sales per employee ranging from 8.4% to 16%, an increase in sales of 13%, and an increase in the number of employees of 19.5%. Importantly, the association between management practices and firm productivity performance is economically significant, which is consistent with the findings from other international research 14. Further, the relative level of firm output associated with an increase of a single point in the management score is equivalent to a 56% increase in the labour force or a 44% increase in invested capital (Exhibit 3). Although the relationship is not necessarily causal, this finding does suggest that management practices have an economically significant association with sales output for manufacturing firms. One plausible argument this finding suggests is that
14 Nick Bloom, Stephen Dorgan, John Dowdy, John Van Reenen, Management Practice & Productivity: Why they matter?, Management Matters, Nov 2007, p. 5.
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investing in management practices may be a cost effective way for firms to boost productivity, relative to hiring additional employees or direct investment in fixed capital.
Exhibit 3 - - Management Practice Labour and Capital Equivalency Association
Note: Controls for country, sector, employees, skill and hours worked. Another method used to calculate this association generates larger labour and capital increases associated with 1 point improvement in management practices.
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14
* At the 10% significance level. Source: Management Matters dataset. For further survey work, see Nick Bloom and John Van Reenen, "Measuring and Explaining Management Practices Across Firms and Countries, Quarterly Journal of Economics, November 2007; Australian management practices research; Management Matters, Working paper 12, March 2009 Institute of Competitiveness and Prosperity, Canada.
The LSE study has illustrated a strong relationship between management practices and organisational productivity, as well as national productivity 16. Examining this correlation in the context of manufacturing industries in Australia, Exhibit 5 illustrates a positive association, if not direct causality, showing that as management practices score increases across industry sectors productivity per employee also increases.
150 140
22: Textile, Clothing, Footwear and Leather Manufacturing 28: Machinery and Equipment Manufacturing
Source: Australian Bureau of Statistics 8221.0 and Australian management practices research. Note: The size of the bubbles in the graph above signifies the industry-wise sample size of interviews conducted.
16 Nick Bloom, Stephen Dorgan, John Dowdy, John Van Reenen, Management Practice & Productivity: Why they matter?, Management Matters, Nov 2007, p. 4.
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* At the 10% significance level. Source: Management Matters dataset. For further survey work, see Nick Bloom and John Van Reenen, "Measuring and Explaining Management Practices Across Firms and Countries, Quarterly Journal of Economics, November 2007; Australian management practices research; Management Matters, Working paper 12, March 2009 Institute of Competitiveness and prosperity, Canada.
At a more granular level of the individual dimensions within the area of operations management, Australia is moderately placed in terms of its global ranking (Exhibit 9). Australian firms operations management practices are statistically no different from the top leaders in only two out of the seven dimensions. Australia trails and performs statistically worse than the respective best performers in the remaining dimensions; more focussed attention to these will enable Australia to emerge even stronger in the sphere of operations management (Exhibit 10). Australia does relatively well in the area of performance management, ranking sixth among the sixteen countries. Australia is currently at the same level as a group of countries including Italy, France, Canada and Poland, but performs statistically significantly worse than the top tier countries. While Japan is the global best performer in this area, countries such as Germany, Sweden, US and Italy also outperform Australia (Exhibit 7).
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* At the 10% significance level. Source: Management Matters dataset. For further survey work, see Nick Bloom and John Van Reenen, "Measuring and Explaining Management Practices Across Firms and Countries, Quarterly Journal of Economics, November 2007; Australian management practices research; Management Matters, Working paper 12, March 2009 Institute of Competitiveness and prosperity, Canada.
While Australia ranks well overall in the area of performance management, its standing in the individual dimensions within this area varies considerably (Exhibit 9). In fact, the country is statistically on par with the global best performer in only one of the six dimensions. This suggests potential scope for improvement in the other five dimensions, wherein Australias performance is statistically worse than the top nations (Exhibit 10). US manufacturing firms lead in people management, but for Australian manufacturers this emerges as a relatively weak area with Australia ranking eighth in the world. The US, Canada and Germany deliver exceptional performance in this area of management and emerge ahead of Australia. Australian performance is statistically no different from Sweden, France, Ireland and Italy (Exhibit 8).
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* At the 10% significance level. Source: Management Matters dataset. For further survey work, see Nick Bloom and John Van Reenen, "Measuring and Explaining Management Practices Across Firms and Countries, Quarterly Journal of Economics, November 2007; Australian management practices research; Management Matters, Working paper 12, March 2009 Institute of Competitiveness and prosperity, Canada.
While Australia ranks low in almost all the people management dimensions, Australian manufacturers seem to be comparatively better at linking employee performance with clearly defined accountability and rewards (Exhibit 9). Relative to the best performing nation, the Australian scores in the area of people management are statistically worse across all of the six dimensions (Exhibit 10). Moving forward, Australian businesses must improve their human resource-related practices with a target of attracting, retaining and promoting best talent and more importantly addressing poor performance.
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7 2
Sweden US
Consequence management
Best practice : Failure to achieve agreed targets drives retraining or moving individuals around. Worst practice : Failure to achieve agreed targets does not carry any consequences 7 US
Performance Management
Overall score
Types of goals Best practice : Goals are a balance of financial and non-financial goals Worst practice : Goals are exclusively financial or operational Interconnection of goals Best practice: Corporate goals increase in specificity as they cascade through the business units Worst practice: Individual workers are not aware of how their contribution is linked to corporate goals Time horizon Best practice : Short-term goals are set so that they become a staircase to reach the long-term goals Worst practice: Top managements main focus is on short term goals 6 9 Japan Japan
US
Sweden
Setting stretch goals Best practice: Goals are demanding for all divisions, and are grounded in solid economic rationale Worst practice: Goals are either too easy or impossible to achieve Clarity of goals Best practice: Performance measures are well defined and well communicated; worker performance is made public to induce competition Worst practice: Performance measures are complex and not clearly understood; worker performance is not made public
Sweden
Japan
People Management
Overall score
Instilling a talent mindset Best practice : Senior managers are evaluated and held accountable on the strength of the talent pool they actively build Worst practice : Senior management do not communicate that attracting, retaining, and developing talent is a top priority Rewarding top performance Best practice: The firm provides ambitious stretch targets with clear performance related accountability and rewards Worst practice: People within the firm are rewarded equally irrespective of performance level Addressing poor performance Best practice : Poor performers are moved to less critical roles or out of the company as soon as weaknesses are identified Worst practice: Poor performers are rarely removed from their positions Promoting high performers Best practice: Top performers are actively identified, developed, and promoted Worst practice: People are promoted primarily upon the basis of tenure Attracting high performers Best practice: The firm provides a unique value proposition to encourage talented people to join the company instead of the competitors Worst practice: Competitors offer stronger reasons for talented people to join their companies Retaining high performers Best practice : Managers do whatever it takes to retain top talent Worst practice : Managers do little to try and keep the top talent 8 US
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US
US
US
US
Japan
US
Note: Canada is excluded from the statistical analysis of individual questions as the firm-level data of Canada was not available Source: Management Matters dataset. For further survey work, see Nick Bloom and John Van Reenen, "Measuring and Explaining Management Practices Across Firms and Countries, Quarterly Journal of Economics, November 2007; Australian management practices research.
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In summary, specific dimensions within the broad management areas of operations, performance and people management have been identified where Australias score statistically significantly trails behind the global best performing nation, with the gaps as shown by vertical arrows in Exhibit 10. Immediate and prioritised attention in improving the indicated management practices will help Australia bridge the gaps to match up with the global best, thus eventually lifting the overall performance of Australian management practices in manufacturing firms.
Exhibit 10 - - Gaps in the Australian management performance by each dimension
* Australian score statistically significantly different from the global best performing countrys score.- based on statistical analysis at the 10% significance level. Note: Canada is excluded from the statistical analysis of individual questions as the firm-level data of Canada are not available. Source: Management Matters dataset. For further survey work, see Nick Bloom and John Van Reenen, "Measuring and Explaining Management Practices Across Firms and Countries, Quarterly Journal of Economics, November 2007; Australian management practices research.
Looking at the relative positioning of countries in operations management and people management, Australia emerges as being more operations-oriented while people management is a potential area for improvement (Exhibit 11). The results also reinforce that Australias standing in operations management is in parity with its performance management. Australia is relatively better in the area of performance management vis--vis people management although not as emphatically as countries like Sweden and Japan. Again, this demonstrates that improving talent management is where Australia needs to give priority.
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Note: the relative management operation vs. people is measured as the difference between the average score of the area of operation and of people, normalised. Source: Management Matters dataset. For further survey work, see Nick Bloom and John Van Reenen, "Measuring and Explaining Management Practices Across Firms and Countries, Quarterly Journal of Economics, November 2007; Australian management practices research; Management Matters, Working paper 12, March 2009 Institute of Competitiveness and prosperity, Canada.
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Performance
Average score 2.96
People
Average score 2.71
3.22
Better performance
Operation Performance dialogue Rationale for the adoption Process documentation Adoption of Lean Manufacturing Interconnection of goals Setting stretched goals Consequent management Promoting high performers Attracting high performers Addressing poor performance Time Horizon Clarity of goals Types of goals Rewarding top performance
Worse performance
Types of Management
Research by Bloom et al 17 concluded that it is the tail of poor performers, and not as much the outstanding performers, that largely determine a countrys overall management performance. While the size of Australias tail of poor performance is shorter than in some other countries, the spread of the overall management scores indicates that a greater number of firms are assessed as poorly managed as compared to those firms with exceptionally superior management practices. Thus, focussing on the critical mass of poorly managed firms within the country is the most effective way of enhancing Australias overall management capability and performance. We next examine management practices across three dimensions by state, by industry and by firm size. Within that, we will initially examine several other possible combinations of firm size originating from different perspectives, namely, a comparative study of medium vs. large firms as per ABS classification, firms interviewed and seeking advisory services from Enterprise Connect vs. rest of the cohort, and the manufacturing firms interviewed belonging to the Top Business Review Weekly (BRW) 2008 firms vs. the rest of the sample.
Nick Bloom, Stephen Dorgan, John Dowdy, John Van Reenen, Management Practice & Productivity: Why they matter?, Management Matters, Nov 2007, p. 6.
17
22
Large
* 3.12
Medium
2.74
2.6
3.2
*: statistically significantly different from the rest of the sample. Source: Australian management practices research.
Large sized firms significantly outperform medium sized firms in operations, performance and people management practices. Zoning into the level of key management dimensions within each of these three areas, the results emphatically suggest that the large-sized firms exhibit better management practices across all the eighteen dimensions as compared to the performance of smaller firms vs. rest of the cohort.
18 LSE defines medium firms 100 to 5000 employees, ABS define small firms as firm size less than 20 employees, medium size firms from 20 to 199 employees, and large size firms with employees 200 and greater. The small size firms in Australia are not in scope.
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Exhibit 14 - - Management Scores for smaller firms (size 50-99) vs. rest of the cohort
Australia firms size 100 and beyond 3.02 3.26 3.01 2.74
There are inherent attributes that substantiate differences in management practices across smaller firms and BRW-listed firms when compared to the rest of the cohort, which are summarised in Exhibit 16. Overall, the presence of family-owned and domestic firms, coupled with the lower levels of education and skills in the workforce seem to be pulling down the scores of the smaller firms (size ranging between 50 and 99). In contrast, superior management deployed in publicly listed firms and multinationals complemented by a better-educated workforce are driving the performance of the BRW-listed firms. The same relative findings emerge when comparing medium sized firms with large sized ones.
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Scenario
Level of Education/Skill
family firms
MNC firms
family firms
domestic firms
25
South Australia
(56 firms)
3.09
Victoria
(121 firms)
3.06
Queensland
(70 firms)
2.95
2.95
Western Australia
(32 firms)
2.68
2.6
3.2
*: statistically significantly different from the rest of the sample. Note: Tasmania not included due to negligible sample size and findings for Western Australia should be taken with caution due to a small sample size. Source: Australian management practices research; Tasmania and Northern territory not included sample size too small.
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A snapshot of the relative performance of the States across the three management areas of operations, performance and people management shows that there are variances across States in these areas (Exhibit 18). Victoria outshines the rest of the States in operations and performance management and Western Australia trails in all three dimensions. All the States besides Western Australia are statistically on par as far as their people management practices are concerned.
Exhibit 18 - - Relative state performance across the three management areas
statistically better
Victoria
Victoria
Victoria South Australia South Australia Queensland South Australia New South Wales New South Wales
statistically worse
Western Australia
Western Australia
Western Australia
Western Australia
Operation
Performance
People
Overall
Note: Tasmania not included due to negligible sample size. Source: Australian management practices research; Tasmania and Northern territory not included sample size too small.
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Next, examining the relative ranking of the overall management score across ANZSIC manufacturing industry sectors, our findings reveal that only Machinery and Equipment Manufacturing (ANZSIC Code 28) performs statistically significantly better than the rest of the industry sectors (Exhibit 19).
Exhibit 19 - - Overall management scores by industry
Printing, Publishing and Recorded Media Machinery and Equipment Manufacturing Petroleum, Coal, Chemical and Associated Product Manufacturing Food, Beverage and Tobacco Manufacturing Non-Metallic Mineral Product Manufacturing Metal Product Manufacturing Wood and Paper Product Manufacturing Textile, Clothing, Footwear and Leather Manufacturing Other Manufacturing
24 28 25 21 26 27 23 22 29 2.7
2.77 2.85 2.84 2.93 2.93 2.97 3.01 3.07 *
3.11
3.1
*: statistically significantly different from the rest of the sample. Note: While the absolute value of the average management score of Printing, Publishing and Recorded Media (ANZSIC code 24) sector is highest, rigorous statistical tests show that the difference in scores is not of statistical significance with the rest of the sample. Source: Australian management practices research.
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The performance by industry sector across the three management areas is summarized here (Exhibit 20). In terms of operations management, Machinery and Equipment Manufacturing (ANZSIC Code 28) tops the ranking and is significantly better than the rest. In performance and targets, most of the industry sectors are not statistically different except for Other Manufacturing (ANZSIC Code 29) and Textile, Clothing, Footwear and Leather Manufacturing (ANZSIC Code 22); both these sectors are indeed statistically significantly worse than the rest. In the area of people management, most sectors are equivalently placed, however, Wood and Paper Product Manufacturing (ANZSIC Code 23) is worst and the difference is indeed statistically significant.
Exhibit 20 - - Relative industry performance across the three management areas
statistically better
ANZSIC 28
ANZSIC 28
ANZSIC 21
ANZSIC 24 ANZSIC 25
ANZSIC 23 ANZSIC 28
ANZSIC 26 ANZSIC 27
statistically worse
Operation
Performance
People
Overall
Source: Australian management practices research. Note: 21: Food, Beverage and Tobacco Manufacturing; 22: Textile, Clothing, Footwear and Leather Manufacturing; 23: Wood and Paper Product Manufacturing; 24: Printing, Publishing and Recorded Media; 25: Petroleum, Coal, Chemical and Associated Product Manufacturing; 26: Non-Metallic Mineral Product Manufacturing; 27: Metal Product Manufacturing; 28: Machinery and Equipment Manufacturing; 29: Other Manufacturing.
In conclusion, firm size is found to have a strong correlation with management scores in the Australian context, indicating that large companies are more likely to adopt good management practices than small companies. 19 These findings are also valid at the individual state level and the industry sector level. The firm size alone explains 9 percent of the variability of management score.
19
29
0
1
.2
.4
Density .6
3 management
Australian firms
.8
.2
.4
Density .6
3 management
Source: Management Matters dataset. For further survey work, see Nick Bloom and John Van Reenen, "Measuring and Explaining Management Practices Across Firms and Countries, Quarterly Journal of Economics, November 2007; Australian management practices research.
20 21
Klaus Schwab and Xavier Sala-i-Martin, The Global Competitiveness Report 2009-2010, (World Economic Forum, 2009) Powering Ideas An Agenda for the 21st Century, (Canberra: Commonwealth of Australia, 2009), p.21.
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22 Nick Bloom, Stephen Dorgan, John Dowdy, John Van Reenen, Management Practice & Productivity: Why they matter?, Management Matters, Nov 2007, p. 8.
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3.25 1.25 26 2.75 30.57 3.05 37.06 5.84 48.36 9.60 63 13.78 64.32 20
20
40
60
proportion of managers with university degree proportion of non-managers with university degree
In particular, our findings support the hypothesis that firms in a high-skill environment will have better human-capital management practices than those in a low-skill environment 24. These findings affirm the Australian Governments commitment to: Improve innovation
Nick Bloom, Stephen Dorgan, John Dowdy, John Van Reenen, Management Practice & Productivity: Why they matter?, Management Matters, Nov 2007, p. 8. 24 Bloom, Nicholas and John Van Reenen Measuring and Explaining Management Practices Across Firms and Countries. The Quarterly Journal of Economics 122 (4): (2007), p.1351-1408.
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skills and workplace capabilities, including management and leadership skills building on Enterprise Connect and the Education Revolution 25. However, the skill level within Australian manufacturing is among the lowest in the world. With an average of only 44% of managers and a mere 8% of non-managers in the firm sample having a university degree, this is an area where Australia is clearly a laggard (Exhibit 23).
Exhibit 23 - - Level of education A global comparison
India Japan Poland Germany Greece US France Portugal Ireland Italy Northern Ireland Sweden Australia* China Great Britain 0
13.9 24.1 15.5 11.4 6 13.7 13.9 3.5 10.4 13.9 6.3 15.6 8.28 8.6 8.5 51.9 51.6 50.9 49.2 46.6 43.91 42.5 41.7 59.6 59.5 70.5 69.5 66.3 65.1
82.8
20
40
60
80
%_of_managers_with_degree %_of_nonmanagers_with_degree
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enabling Australias global reach by opening up distribution channels, overseas employment opportunities and export avenues; and finally by augmenting the flow of knowledge and skills to domestic firms, customers and staff alike 28. Earlier research indicates that the primary means by which MNCs create and diffuse innovation is through the use of the knowledge base contained in their network of subsidiaries, leading us to believe that the more sophisticated the use of management techniques by Australian MNCs, the more their involvement in this innovation network 29.
Exhibit 24 - - Management scores multinationals vs. domestic firms
Foreign multinational
3.18
Australian multinational
3.01
Domestic company
2.80
2.7
3.3
34
Dispersed Shareholders
3.13
2.91
2.86
Private Individuals
2.86
Other
2.85
Government
2.61
2.5
2.7
3.1
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Rigidity of employment index is part of the World Bank ranking of countries and testifies the labour market conditions in countries. It is a simple average of the below three indices (The World Bank, Doing Business 2008): - Difficulty of hiring index: Applicability and maximum duration of fixed-term contracts and minimum wage for trainee or first-time employee. - Rigidity of hours index: Scheduling of non-standard work hours and annual paid leave. - Difficulty of firing index: Notification and approval requirements for termination of a redundant worker or a group of redundant workers, obligation to reassign or retrain and priority rules for redundancy and reemployment. 33 Nick Bloom, Stephen Dorgan, John Dowdy, John Van Reenen, Management Practice & Productivity: Why they matter?, Management Matters, Nov 2007, p.8. 34 Management Matters, Working Paper 12 (Institute for competitiveness and Prosperity, Canada March 2009).
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clarified in order to provide robust policy advice 35. It would seen that in Australia, the dimensions and determinants of people management are primarily under management control and performance will only be improved if organisations change their current practices and structures. Research by the UK Work Foundation also found that the best managed 30% of UK companies achieved higher growth, sales per employee, profitability and exports, where best practice was not characterised by any particular structure, but by informal and continued dialogue supported by simple processes, an open work culture of sharing information between peers and networks of managers, visible and accessible leadership and management, strong interpersonal and employee relations. 36
Exhibit 26 - - People management scores by Rigidity of employment index A global comparison
4
3.5 US 3 Canada Australia 2.5 Japan UK Ireland China India Italy Poland Germany Sweden Brazil Portugal Greece France
2 0 10 20 30 40 50 60
Other research has also highlighted that defining issues in terms of rigidity and flexibility is not always helpful. Labour standards can in fact work as a productivity whip and this explains to some extent why productivity performance in Europe has improved over recent decades37. A possible limiting factor for Australia in terms of the deployment of people management practices is not the high proportion of union membership as such but the difficulties experienced by management in structuring their relationship with workforces in a positive and collaborative way. Australian firms can emulate the worlds best by pursuing high performance work practices, lifting management skills and embracing healthy workplace cultures in organisations. Other important findings show that organisational hierarchy seems to impact management performance in firms. Interestingly, the results show that organisational hierarchy is positively correlated to management scores, a finding which qualifies the trend to flatter structures in firms, possibly indicating that, in the context of Australian manufacturing firms, a certain optimal degree of hierarchy is still necessary for organisation and management of
35 36 37
Wage setting Institutions and Outcomes, Employment Outlook, (Paris: OECD, 2004), pp 127 181. Cracking the Performance Code: How the Top Firms Succeed, (UK Work Foundation 2003, 2005). L Mishel et. al., State of working America, (Ithaca: Cornell University Press, 2008), Chapter 8.
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operations. In addition, the degree of manager autonomy38 is significantly linked to better management, and can explain approximately 4 percent of variability of the management scores. Put simply, the more plant manager autonomy, the better the management performance of firms. What this means is that within manufacturing firms, while a structured hierarchy certainly aids in systematic implementation of management practices, at the same time introducing flexibility in the management style and empowering the workforce for decision-making is also beneficial in driving performance; striking the right balance between organisational structure and levels of autonomy is the key.
Total IP granted 20 30
40
50
49.8
25.2
10
8.3 6.8
7.2
1.5
2.5
3.5
The attention of enterprises needs to increasingly shift towards innovation, entrepreneurial and management talent, which play a critical role in driving competitiveness and growth in the modern economy. As such innovation and management performance go hand in hand. In urging enterprise level innovation, growth and prosperity, the white paper Powering Ideas emphasises the importance of management skills and talent where the policy paper
38
Degree of manager autonomy is measured through an overall index calculated by normalizing the average score of four dimensions of autonomy i.e. hiring and firing autonomy, involvement in introduction of new products, maximum capital expenditures investment allowed, and involvement in sales and marketing decisions. 39 Number of innovation patents for the manufacturing firms obtained from IP Australia.
37
acknowledges: Making innovation work requires a workforce with sophisticated skills of all kinds including leadership and management skills. It also requires cooperative workplaces in which creativity is encouraged. Few organisations command all the skills needed to innovate successfully on their own. They must network and collaborate locally and globally 40.
Powering Ideas An Agenda for the 21st Century, (Canberra: Commonwealth of Australia, 2009) p.49.
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management. It follows that engaging better educated personnel both as managers and shopfloor workers, and constantly upgrading their skills through training and development initiatives, will almost certainly contribute to enhanced management performance within firms. Autonomous management drives better management performance. Firms can benefit by introducing more flexibility in their management style, decentralising the decision-making processes and developing an empowered workforce, as this unleashes the creative potential and induces a greater sense of accountability amongst the employees, thereby leading to enhanced productivity performance of enterprises.
41 Agarwal, R. & Selen, W., Dynamic Capability Buildng in Service Value Networks for Achieving Service Innovation, Decision Sciences, August 2009, Volume 40, Issue 3, p. 431-475.
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capabilities are a genuine option for managers 42 as they further management capabilities. Moreover, government policies should also target the development of intangible processes and management techniques in order to significantly improve productivity43. As such, Enterprise Connect can demonstrate the wealth embedded within organisational business processes and the process of dynamic capability building through road-shows, case studies, showing clients the building blocks and pathways to higher performance levels. Enterprise Connect can use the findings of this research to strategically prioritise its support to firms operating behind the curve in specific industries and across industries. There is a gap in approaches to developing leadership and management practices, instilling a talent culture in organisations processes and helping companies to measure their progress and outcomes. Further, organisations need help in developing policies for reward, recognition, pay and promotion so that they are able to invest in the personal growth and human capital development of their employees. To facilitate innovation within firms, Enterprise Connect may wish to facilitate partnerships with enterprises, research and educational institutions and other public sector agencies when formulating new initiatives. This will not only develop the skills and capabilities of client firms but also of Business Advisers who can contribute further layers of expertise to the process of workplace development. It is this co-evolutionary adaptive process of doingby-learning and learning-by-doing with a focus on lifelong learning, whilst collaboratively working with their stakeholders, which will keep Australian public policy and enterprises themselves ahead of the curve. At this juncture, it is important to note that this project looked at medium and large firms, so has its limitations with respect to direct application of these policy changes to the small firms. Considering that such small-sized firms make up a relatively significant proportion of the Australian economy, due caution and consideration is required while extrapolating these policy implications to the cohort of small firms with less than 50 employees.
42
Cepeda, G. & Vera, D. Dynamic Capabilities and Operational Capabilities: a Knowledge Management perspective, Journal of Business Research, 2007, 60, p. 426-437. 43 M. Alexopoulos and T. Tombe, Management Matters, Manuscript, University of Toronto, 2009 cited in Management Matters, Working paper 12, March 2009, http://www.competeprosper.ca/.
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The 2008 Review of Australias National Innovation System, Venturous Australia, noted that, Many government workplace and innovation programs in Australia are directed at technological or scientific innovation while only a few are directed at strengthening innovation management inside organisations, including leadership and culture The challenge is how best to promote successful adoption and diffusion of high performance work systems in both the public and private sectors 44. The challenge has not gone away addressing it is the key to linking short-term recovery to longer-term competitive advantage through better management of Australian firms and organisations.
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