Can US management stay ahead of China, India?

There are a few things that US firms can do to stay competitive: monitor management, set targets, and develop strong incentives for employees to perform well

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    John Maltabes, research engineer at Hewlett-Packard, picks a roll of thin flexible electronic display that will be placed into a etch machine at Hewlett- Packard Laboratories in Palo Alto, Calif., March 15, 2011. Even though the US has world-class firms, like Hewlett-Packard and General Electric, overall management in the US is worse than in India and China, write guest bloggers Nicholas Bloom and Rebecca Homkes.
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Two decades ago, Japan was the world economy's new kid on the block. America's growth was stagnating while Japan's was accelerating. Many American politicians and citizens feared that US global dominance was fading – a fear Hollywood echoed with the 1993 film "Rising Sun," in which Sean Connery and Wesley Snipes battled corrupt Japanese corporations.

That economic miracle was built on strong management. Japan developed and perfected the lean management system, powering its corporations toward global supremacy. The US eventually copied and further innovated these management practices, and the Japanese advantage melted away.

Today's new kids on the block, China and India, are powered by something quite different: a vast supply of cheap labor that has supercharged growth in low-wage manufacturing and services. But this cheap labor is running out as eventually all underemployed farmers move to the city. In China's Pearl Delta manufacturing heartland, wages now are reportedly rising at 20 percent per year. So what will happen next: Will China and India's growth slow, or will they copy Japan to get a second wind? The quality of their management practices will play a key role.

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Currently, the management of US corporations reigns supreme, closely followed by Japan, Germany, and Sweden, according to a new interview-based measurement tool that we at the London School of Economics and Stanford University have developed with colleagues at Harvard University and McKinsey and Co. to evaluate management practices. Developing countries like Brazil, China, and India lag at the bottom, but they are catching up. What should US companies do?

Country rankings grab the headlines, but this disguises tremendous internal country differences in management. Almost 90 percent of the variation in practices is within countries. For example, while the US has many world-class firms such as General Electric and Hewlett-Packard, about 15 percent of US firms are actually worse managed than the average Chinese and Indian firm!

So how can US firms stay ahead? Our methodology, which has now evaluated more than 10,000 firms in 20 countries, identifies three key areas of management that really affect performance:

•Monitoring management: The world's best firms measure key metrics constantly. Visit a Toyota factory, and you will see performance boards above every employee showing a range of performance metrics. In the back rooms of world-class firms such as Tesco or Wal-Mart, impressive boards display key performance indicators

•Targets: The best-run companies set challenging, balanced, and well-defined targets for their employees across a range of metrics.

•Incentives: The best firms set strong incentives based on stretching targets and regularly monitor staff against these. Great employees who meet or exceed these targets are rewarded. Poor employees are retrained, moved, or pushed out.

Our research suggests these basic management practices can generate huge improvements in performance immediately as well as in the long run. So if American firms are to escape the rising dragons, they must continue to excel in these management practices. History has shown modern techniques can quickly be copied and innovated; new competition is never far away.

Nicholas Bloom, economics professor at Stanford University, and Rebecca Homkes, director of the Management Project at the London School of Economics, are coauthors of the World Management Survey. This column will appear online at CSMonitor.com/business/new-economy.

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