The study results, published in the paper, Does Management Matter? Evidence from India, raise two over-arching questions: How much more improvement would occur if the developing-world companies were more extensively exposed to management practices over a longer period of time? And what impact would the productivity improvements in Indian industry have on the global economy? It also addresses a fundamental problem that has long puzzled economists. Why are there such astounding differences in productivity across firms and countries? Companies such as US retailing giant Walmart have revolutionised productivity in its sector. Similarly, some US plants in homogenous industries, such as cement, block-ice, white pan bread and oak flooring, have shown 100% productivity spreads. So, how much difference do management practices really make?
Bloom's research has found that China and India are growing fast in spite of – and not because of – their managers. India's one billion-plus people still have a per capita GDP of only one seventeenth of the US. Labor productivity is only 15% of that in the US. And in common with other developing countries, many Indian firms are comparatively poorly managed.
Management techniques can be taught. More than 20 years ago, US automotive firms were falling behind Japan. The US automotive industry transformed itself in the 1980s by adopting Japanese lean manufacturing technology, reducing inventory levels and moving to just-in-time production. Bloom's study suggests the same transformation can happen in India and other emerging economies.
Room for Improvement
Bloom, a former McKinsey & Co consultant, targeted the textile sector. As India's largest manufacturing industry, it accounts for 22% of manufacturing employment. The research project was carried out on 28 plants operated by 17 firms in the woven cotton fabric industry. These plants weave cotton yarn into fabric for suits, shirts and home furnishings. Their low management "score" was broadly similar to the practices of manufacturing firms in other developing countries, Bloom reports.
Following an open tender process, Bloom engaged management consultancy Accenture to provide free services to help drive changes through the Indian companies using 38 key management practices. Areas broadly targeted included:
Factory operations and planning: Plants were encouraged to undertake regular maintenance of machines, as opposed to only fixing them when broken, and record the reasons for machine downtime so that they could learn from past failures. The production floors at many of the participating plants were blocked by waste, tools and machinery, impeding the flow of workers and materials. Under the "new" management practices, the factory floors were to be kept tidy and organised to reduce accidents and facilitate easy movement.
Quality control: Plants were encouraged to record quality defects by type at every stage of the production process. Records had to be analysed daily and procedures put in place to prevent re-occurrence.
Inventory: Optimal inventory levels were to be defined and stock was to be monitored against these benchmarks. Plants were asked to record yarn stocks on a daily basis. Yarn was to be sorted, labelled and stored with this information logged into a computer so the yarn could be readily located. This was no small feat. Most of the plants had not organised their yarn inventories and yarn stores were a jumble of unlabelled colour and type, the researchers found. Typically, plants carried about four months of inventory on average before the intervention.
Human resource management: The consultants recommended the introduction of performance-based incentive systems for workers and managers, linked to output, quality and attendance at work in order to reduce absenteeism. All managers' and workers' roles were to have job descriptions.
Sales and order management: Plants were encouraged to track production of orders and asked to prioritise customer orders by delivery deadline.
There was cultural resistance to the changes. "These guys are sceptical, they have not heard of the management practices and they think it doesn't matter. And when they compare themselves to their neighbours, they think they are okay," reports Bloom. "Many participants in the study said they didn't need to do it." Another reason for resisting change was that every firm was under family control. Only members of the owning family could make decisions about finances, purchases, operations and employment. Non-family members were given comparatively junior roles with low-level, day-to-day activities. Consequently, a failure to decentralise meant owners had trouble keeping track of materials and finance.
While the textile firms were slow to adopt the new management techniques, when they did, average productivity increased by 11% through improved quality and efficiency and reduced inventory, the study shows. Decision-making became more decentralised and the better flow of information enabled owners to delegate more decisions to plant managers. The changes also increased the use of computers for data collection and analysis.
Why had Indian firms previously ignored modern management practices? Bloom says many were unaware they existed. Anti-competitive conditions, such as a 50% tariff on imported Chinese textiles, guaranteed there was no pressure on inadequately managed firms – and the status quo ensured they would continue to operate and make money.
Widespread improvement of management practices in India depends on building more infrastructure, overhauling the legal system and exposing Indian companies to global competition by changing anti-competitive laws, Bloom believes. "Some of the firms would go bankrupt, others would search around for better practices and then adopt them. But there would be a quantum leap upwards," he predicts.
Indian firms that are exposed to global competition – in IT, telecommunications and the automotive sector – are spectacularly well managed and highly productive, Bloom notes, citing standout examples asoutsourcing giant Infosys Technologies, now headquartered in Bangalore and regarded as India's most admired company. Infosys has clients around the world and operates in 33 countries. Similarly, India's top mobile operator Bharti Airtel, which has more than 140 million subscribers, has completely outsourced all network infrastructure, a management model that "no other telecommunications company in the world has been brave enough to try".
Bloom speculates on the likelihood of even bigger improvements in his research project with the inclusion of more management practices and a longer time frame. "My guess is that if you did an improvement in management practice across the board with a five-year turnaround, which is what most private equity firms do to change management, you would see productivity improve by 300%,' Bloom says. "That would go a long way towards closing the gap between India and the US. If India could increase its productivity by 300%, you have cut the gap by one-third alone".
One catch is that the frontier keeps moving, Bloom points out. India and other developing countries might improve their productivity, but so does the developed world. As a result, companies in developing economies would still remain behind. "You would have to put management development there into warp drive to close the gap a lot faster," Bloom says. "If you want to accelerate it in five years, you have to be more aggressive in things like management training, improving the legal system and opening up to global competition. There is nothing like competition to really force firms to turn themselves around."
Exposure to the operating modes of foreign multinationals would also ramp up management, Bloom suggests. However, the study highlights the opportunities presented by emerging economies for management consultants and business educators.
Adam Dixon, a principal at management consultancy AT Kearney Australia/New Zealand, says disparity in management practices around the world is due to political, legal, cultural and regulatory factors. But emerging economies are now hungry for standard management practices, he notes. "They are very active in importing ideas and it usually starts with expats from the developed world coming in and spending time with them,' Dixon says.
While there's a ready market for management consultants, risks for consulting firms must be balanced with the opportunities, he warns. "There is more risk associated with setting up shop in emerging economies than there is, say, in moving to Europe, but the growth is in developing nations, particularly in Asia and in the future, in Africa as well. AT Kearney and other firms are very focused on growth because that's where the new middle classes are being created and where the future growth of the world economy will come from." Moving into these markets, Dixon says, requires a highly educated workforce, solid communications and, most importantly, strong values that can be passed on to emerging economy managers.
A headline example of the need for management education in developing economies was provided by the difficulties India experienced in preparing for the 2010 Commonwealth Games in Delhi, according to Kevin Fox of the Centre for Applied Economic Research at the Australian School of Business. "More people educated in good management practice could have helped the situation. If they had more people with expertise in project management, they may not have been in that situation," Fox says. "It's a great example of how business education could have benefitted India."
The economies of the developing world would really take off if they adopted modern management techniques, Fox believes – and, ultimately, that would be of enormous benefit for Australia and other Western countries. "It would mean consumers in Australia would enjoy cheaper goods and it would improve our welfare. The vast majority of Australians would benefit from the improved efficiency of production," he says.