Management matters in retail Management matters in retail Working paper 13, APRIL 2010 The Institute for Competitiveness & Prosperity is an independent not-for-profit organization established in 2001 to serve as the research arm of Ontario’s Task Force on Competitiveness, Productivity and Economic Progress. The mandate of the Task Force, announced in the April 2001 Speech from the Throne, is to measure and monitor Ontario’s competitiveness, productivity, and economic progress compared to other provinces and US states and to report to the public on a regular basis.

In the 2004 Budget, the Government asked the Task Force to incorporate innovation and commercialization issues in its mandate. Working papers published by the Institute are intended to inform the work of the Task Force and to raise public awareness and stimulate debate on a range of issues related to competitiveness and prosperity. The Task Force publishes annual reports to the people of Ontario each November. How to contact us Executive Director To learn more about the Institute and the Task Force please visit us at: www. ompeteprosper. ca James Milway 416 920 1921 x222 j. [email protected] ca Should you have any questions or comments, you may reach us through the web site or at the following address: The Institute for Competitiveness & Prosperity 180 Bloor Street West, Suite 1000 Toronto, Ontario M5S 2V6 Telephone 416. 920. 1921 Fax 416. 920. 1922 It is the aspiration of the Task Force and the Institute to have a significant influence in increasing Ontario’s competitiveness, productivity, and capacity for innovation.

We believe this will help ensure continued success in creating good jobs, increasing prosperity, and building a higher quality of life for all Ontarians. We seek breakthrough findings from our research and propose significant innovations in public policy to stimulate businesses, governments, and educational institutions to take action. Researchers Tamer Azer 416 920 1921 x228 t. [email protected] ca Katherine Chan 416 920 1921 x231 k. [email protected] ca Anam Kidwai 416 920 1921 x238 a. [email protected] ca Lloyd Martin 416 920 1921 x223 l. [email protected] ca

Aaron Meyer 416 920 1921 x224 a. [email protected] ca Comments on this working paper are welcome

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and should be directed to the Institute for Competitiveness & Prosperity. The Institute for Competitiveness & Prosperity is funded by the Government of Ontario through the Ministry of Economic Development and Trade. Adrienne Ross 416 920 1921 x230 a. [email protected] ca Ying (Sunny) Sun 416 920 1921 x227 s. [email protected] ca Copyright © April 2010 The Institute for Competitiveness & Prosperity ISBN 978-0-9809783-6-0 Project Team Design Hambly & Woolley Inc. www. hamblywoolley. om Illustration Blair Kelly Daniela Scur Project Manager Jack Bolland Supervisor Sean Brandreth Supervisor Blaise Bolland Joshua Booth Vadim Dorfman Raswinder Gill Alison McMeekin Nikolina Miljevik Alam Aguilar-Platas Scott Sameroff Management matters in retail Working paper 13, APRIL 2010 Exhibits Exhibit 1Pressure and support drive all three elements of the Innovation System13 Exhibit 2 Managers play an important part in creating Pressure and Support in all elements of the Innovation System14 Exhibit 3 Canadian managers are less well educated than their US counterparts5 Exhibit 4New management techniques are associated with increases in productivity and prosperity16 Exhibit 5 Canada’s retail management matches US performance25 Exhibit 6 Most of Canada’s best managed retail operations are US-owned multinationals26 Exhibit 7 Canada trails the US in adoption and implementation of best practice operations processes26 Exhibit 8 Canada lags world’s best performers in most operations management questions27 Exhibit A Manufacturers are better managed than retailers in the three countries surveyed28

Exhibit B Manufacturers out perform retailers29 Exhibit 9 Canada is among the leaders in best practice for setting and managing goals30 Exhibit 10In performance management, Canada scores very well, but still has improvement opportunity30 Exhibit 11In people management, Canada is not statistically different from the US31 Exhibit 12In people management, Canada performs well32 Exhibit 13 Better managed firms have more educated managers32 Exhibit 14 Multinationals out perform non-multinationals in all countries33 Exhibit 15 Larger firms tend to be better managed4 Exhibit 16Publicly held firms are significantly better managed than privately held or family-owned firms everywhere35 Exhibit 17Ontario retailers trail US peer states, and match Western and Atlantic Canada38 Exhibit 18Ontario under performs counterparts in US peer states, particularly in operations management38 Exhibit 19In operations management, Ontario retailers lag peer state counterparts39 Exhibit 20In most areas of performance management, Ontario retailers are not statistically different from counterparts in peer states40

Exhibit 21In people management, Ontario retailers lead in retaining high performers41 Contents Foreword and acknowledgements4 Executive summary6 Strong management delivers prosperityManagement talent is important in the Innovation SystemCanada lacks sufficient sophisticated management capabilitiesManagement innovation delivers higher productivityManagement practices can be measured11 12 14 15 Lean Retailing is best practice operating strategy17 17 19 Canada’s retailers score well but have opportunities to improveWhere can Canadian retailers improve?

Public policy and business strategies lead to strong management24 26 31 Ontario trails US peers and matches most other Canadian regions37 Opportunities to strengthen managementEnsure businesses aspire to excellence in management42 43 44 44 References46 Previous publications48 International research evaluates management practicesBroaden innovation policy to include management skillsEmbrace international competition in our economy policy4 institute for competitiveness & prosperity Foreword and acknowledgements I am pleased to present Working Paper 13 of the Institute for Competitiveness & Prosperity.

In this Working Paper, we extend our study of the impact of management talent on our economic prosperity. Last year, we presented the results of the first-ever research on the quality of Canada’s and Ontario’s management in the manufacturing sector. This Working Paper focuses on management capabilities in the retail sector. Strong management is a critical element in the innovativeness of our economy, and hence its productivity and prosperity. Strong management drives the demand for innovation through well developed and ably executed business trategies; it affects the ongoing supply of high quality innovation by setting research priorities and orchestrating technical resources; and it is key to the financing of innovation by assembling resources and allocating them wisely to promising investments. Research in the United Kingdom indicates that better management leads to higher sales per employee. “ Strong management is a critical element in the innovativeness of our economy, and hence its productivity and prosperity. ” But government innovation strategies in Canada do not take adequate account of the importance of management.

They still focus on increasing scientific and technical resources that drive new-to-the-world inventions; but they do not adequately consider innovations that create economic value in meeting societal needs by drawing on existing technologies and knowledge. Both are important for our prosperity, and we need public policies that attend to each. Our findings for the retail sector are consistent with the research on manufacturing management. Better educated managers produce better performance. For manufacturers and retailers, in Canada and internationally, the link between managers’ education and business performance is powerful.

We also find that large-scale, multinational retailers are better managed than those focused only on their home market. This holds true in Canada and other countries. Firms that expand globally have dramatically better management, though identifying cause and effect is difficult. More than likely, there is a virtuous circle at work. Firms with global aspirations need effective management to expand, and expanding firms attract better managers.5 The research indicates that Canadian retail managers are as effective as their US counterparts whether they are working for a multinational or a domestic-only company.

Yet, our overall retail productivity, as measured by sales per employee and our retail wages, trails the US retail sector significantly. So we have to acknowledge that the management of store level operations may not be the major challenge we face in improving our retail productivity. However, the quality of corporate management is an important factor; our Canadian retail sector has generated only one global leader – Couche-Tard – while we have twenty-three global leaders in our manufacturing sector. Other factors, such as population size and density as well as competitive intensity, are also likely at play.

In public policy, we continue to recommend that our innovation strategies become more sophisticated and balanced. We need to recognize that supporting science for new inventions is not enough; we need to create an environment where business people draw on new science and many other disciplines to innovate products, services, and processes. We need to ensure that our markets are as open as they can be to foreign competition and foreign investment, because they improve the level of management and innovation in Canada.

And we need to be investing adequately in post secondary education to develop world-class management talent. We gratefully acknowledge the ongoing funding support from the Ontario Ministry of Economic Development and Trade. We look forward to sharing and discussing our work and our findings. We welcome your comments and suggestions. Roger L. Martin, Chairman Institute for Competitiveness & Prosperity Dean, Joseph L. Rotman School of Management, University of Toronto 6 institute for competitiveness & prosperity Executive summary C ompetitive and prosperous countries in the world, as defined by Gross Domestic Product (GDP) per capita. Ontario, in turn, is also one of the most prosperous jurisdictions in the world. Still, we are not realizing our full prosperity potential. For eight years, the Institute has been reporting on a persistent and growing prosperity gap with the United States, which stands at $8,700 for Canada and the United States, and $7,000 for Ontario and our US peer states. anada is one of the most Our major challenge is to raise our productivity and innovation performance.

The two sources of higher prosperity are working more hours and producing more output per hour of work. On the former measure, hours worked per capita, we are near the top of developed economies – through a combination of high rates of participation in the labour force, low unemployment rates, and high hours worked per worker. But on the latter measure – that is, the value we add per hour worked – we trail many developed economies. management matters in retail 7 We have already identified some of the factors behind this poor productivity and innovation performance.

While Ontario has a mix of industries that are by their nature productive and innovative, these industries do not operate as effectively as their counterparts in the US economy. Some of these factors relate to broad economic factors – we tend less to live in metropolitan areas, and we are less well educated than our counterparts in the United States. But some other factors relate to how our businesses compete. For example, compared with their US counterparts across the economy, Canadian managers invest less in productivity enhancing machinery nd equipment, particularly information and communication technology (ICT), and they produce fewer patents. Our past research and the work of others indicate that our senior and middle managers do not have fundamentally different attitudes from their US counterparts toward competition, risk taking, and innovation. But our innovation and productivity performance is inhibited by limited management capabilities – such as lower educational attainment and less diffusion of best management practices – and by context – such as lower competitive intensity in the markets and fewer sophisticated customers.

Effective management leads business innovation. Innovation is the result of the ongoing interaction of three elements – the supply of innovation, the demand for innovation, and the financing of innovation – in an Innovation System. These elements are driven by competitive pressure and broad support that activate the Innovation System. Effective management provides pressure and support across the Innovation System in strengthening demand for innovation, providing supply of innovation, and driving the quantity and quality of financing for innovation.

It is safe to conclude, therefore, that management is an important factor in the prosperity of a jurisdiction. But hard evidence to support this conclusion has been limited. In one research initiative, University of Toronto professor Michelle Alexopoulos has developed a methodology for measuring the diffusion of innovative management techniques, going as far back as Taylor’s scientific management in 1911. Her measures track Library of Congress management book publication records, supplemented with counts of relevant academic journal articles, to determine the adoption of management techniques.

Her research indicates that increased diffusion of new management techniques is correlated with growth in productivity, measured by Total Factor Productivity (TFP), and prosperity, measured through GDP. She concludes that economic growth results not only from increases in “tangible technology” (R&D, machinery & equipment) as most economists agree; but it also is the result of advances in “intangible technologies,” like management techniques and new processes disseminated in part through publications. 8 nstitute for competitiveness & prosperity In another initiative, in 2008, the Institute partnered with Stanford professor Nick Bloom to extend his pioneering global research in measuring management practices to Canada. His research started as a detailed approach to evaluating how well manufacturing operations have implemented advanced management techniques. It encompassed the level of managers’ knowledge of these techniques, the company-wide commitment to setting targets, measuring and monitoring results, and managing people well.

In the manufacturing sector, the research had already been conducted in advanced economies, such as the United States, the United Kingdom, and Japan, and developing economies like China, India, and Brazil. The quality of management, as captured by this study, correlates well with firm and industry productivity. The results of our research were published in the Institute’s Working Paper 12, Management Matters. We found that the Canadian manufacturing sector is among the best managed in the world. Our production management teams are leaders in implementing specific techniques in the area of Lean Manufacturing.

They are solid performers in effecting good performance management, though with room for improvement. But, while they match management teams in other leading economies in people management, Canadian firms trail US practices significantly. Our results also indicated that some of the key variables that drive – or at least are correlated with – better management are education, ownership, and winning global strategies. In Ontario, our results indicated that the quality of manufacturing management is higher here than in the other regions of Canada, and that the province’s results are within statistical range of US results overall.

Nevertheless, against the fourteen US peer states we have identified, Ontario under performs, especially in the area of people management – the willingness of managers to keep and promote high performers and to deal promptly with poor performers. In this Working Paper, we further extend this management research into another important industry in our economy: our retail businesses. In the summer of 2009, a team of analysts at the Institute for Competitiveness & Prosperity interviewed senior managers at 661 retail outlets in total – 409 in Canada, 152 in the United States, and 100 in the United Kingdom.

The research was slightly adapted to fit the retail sector, but still remains largely comparable to that in manufacturing in approaches to measuring and monitoring operations performance, setting and achieving performance targets, and managing people. management matters in retail The results for Canada are encouraging. The overall results indicate that we are among the leaders in retail management, scoring statistically no differently than the United States. Results vary across the three sub-indexes that make up the overall measure.

In operations management, we stand statistically behind the United States, but ahead of the United Kingdom. In performance management, we tie with the United States for the top spot and stay statistically ahead of the United Kingdom. In people management, though our score is lower than the US result, it is not statistically different, and we stand statistically ahead of the UK score here as well. Some of the key variables that are correlated with better management in manufacturing are also important in retail, such as education and global reach. More highly educated management teams out perform other retail managers.

Retailers who have successfully expanded beyond their borders are much better managed than those who are still domestic competitors only. We also found that firm size and scale are important in explaining better management – larger retail firms are better managed. Our results indicate that quality of retail management in Ontario is not statistically different from that in the rest of Canada. Ontario scores statistically worse than our fourteen peer states group; however, unlike our manufacturers, the retailers’ disadvantage is strongest in store operations and not statistically significant in performance and people management.

In summary, this Working Paper reinforces our conclusion that management capabilities are important contributors to provincial and national prosperity. And our Canadian retail management is among the best. Ontario, however, while being no different than the rest of Canada, trails the US peers significantly. Overall, our retail businesses have significant opportunities to improve. 9 10 institute for competitiveness & prosperity The implications for Ontario and Canada are clear: If we want an economy built on innovation, we have to include managerial education in our policy development. Developing our cientific and technical skills is important to our prosperity – but not building the capabilities of our managers is an oversight that holds back our prosperity. ¦ Consistent with the recommendations of the Competition Policy Review Panel, chaired by Red Wilson in 2008, and our own research, we need to encourage an openness to foreign investment in our industries. This Working Paper shows how such investments attract best management practices and performance in our economy. ¦ At the same time, we need to encourage the global aspirations of our successful companies. In turn, global expansion will drive he development of stronger management in Ontario and Canadian firms. ¦ management matters in retail 11 Strong management delivers prosperity C its full prosperity potential. Relative to the United States, the economy most similar to ours and our largest trading partner, we have a growing prosperity gap. Canada’s lag in GDP per capita grew from $2,600 in 1981 to $8,700 in 2008. 1 This growing gap reflects a failure to reach our full economic potential. It means that our generation has not created as much economic value as possible from the human, natural, and physical resources endowed to us. nada is not achieving A key component of closing our prosperity gap is for Canada to broaden its approach to innovation. Strong management practices are a critical contributor to more innovation. So we need stronger commitment to strengthening the capabilities of our business managers to implement best practices. Following on our work in manufacturing, in this Working Paper, we extend our exploration of management capabilities in Canada and Ontario to the retail sector. 1 2007 Canadian dollars; US dollars converted at 2007 Purchasing Power Parity. 12 The retail sector is full of innovation.

One classic example lies in the success of Walmart and its pioneering introduction of “cross-docking” at its distribution centres. This revolutionary system enabled Walmart to achieve excellent productivity and customer responsiveness without the usual inventory and handling costs attached. By enabling its goods to be continuously delivered to its warehouses, then immediately selected, repackaged and transferred to their stores, Walmart has been able to streamline its inventory pipeline by crossing its goods from one loading dock to another without its goods ever spending valuable time and space in the arehouse. 2 Through effective management and innovation, Walmart was able to transform itself from a small niche retailer to the largest and most profitable retailer in the world today. Other examples of innovation in retail include big box retailers with a focused, but very expansive product selection, and Carrefour, which ushered in the concept of combining supermarket and department store into one roof, known today as a “hypermarket. ” It should be noted that these examples and other specific ones in this Working Paper are from business literature and in no way indicate that they were mong the companies we interviewed in our research. Such information is confidential. The benefits of improved management practices also apply in many other sectors. For example, a Washington Post article describes a study conducted in hospitals in the United States, where they implemented a simple management tool, a “surgical checklist” in surgical procedures. The “low-cost, low tech invention” led to a decrease of in-patient deaths by more 2G. institute for competitiveness & prosperity than 40 percent and a fall in the rate of serious complications of 36 percent. The article captures the essence of this ool very well: “The human brain can’t remember everything, so it’s best to focus on the complicated challenges and leave the simple reminders to a cheat sheet. ”3 Management tools such as the surgical checklist, the equivalent of the retail store’s “daily to-do list,” are small changes that can substantially decrease the rate of waste in a business – be it of time, resources, or lost revenue because of product shortages. In this Working Paper, we focus on management capabilities in the retail sector. We define “retail” as those firms engaged in the selling of consumer goods to the public, ranging from utomotive and furniture stores to pharmacies, clothing, and grocery stores. We first briefly review the importance of management talent for innovation and prosperity. 4 We then set out key findings from research we have recently conducted into the current state of management capabilities in Canada’s and Ontario’s retail sector, and how retail fares against the manufacturing sector in Canada, the United States, and the United Kingdom. Management talent is important in the Innovation System As we have discussed in previous reports,5 innovation is a result of the ongoing interaction of three elements supply, demand, and financing of innovation – in an Innovation System. These elements are driven by competitive pressure and broad support (Exhibit 1). Each of the elements is critical for success, but all three need to work together in balance. The supply of innovation includes the factors dedicated to increasing the stock of innovation, including highly qualified personnel, businesses’ facilities, resources, and activities. The demand for innovation is the combination of customer insistence on new products and process breakthroughs and corporate demand for innovation within a firm.

The financing of innovation is an important bridge between demand and supply since, even if these two factors are in balance, significant funding is typically required to commercialize new ideas and scientific breakthroughs. Innovation requires pressure and support in each of these areas. Strong management is important in each element of the Innovation System. The management function includes goal setting, organization building, resource allocation, and monitoring of results. It also includes actions in enterprise finance, sales and promotion, production and delivery, and people evelopment (Exhibit 2). Hence, in building an innovative firm or an innovative economy, management talent matters. Senior managers in successful companies develop strategies where innovation is a critical component. Innovation strategies typically follow one of two paths: • Innovation to reduce costs. Cost reductions can be realized in two ways. – First, improved management and operating processes can reduce the producer’s costs. For example, Harlequin determined that producing romance novels consistently with the number of pages that coincided with one sheet on the printing press would educe its printing costs, standardize shipping requirements, and simplify display for the retailer. Harlequin also determined that mail order distribution would cut costs and build Stalk, P. Evans, and L. Shulman, 1992, “Competing on capabilities: The new rules of corporate strategy,” Harvard Business Review, Mar/Apr, 1992, p. 58, available online: http://my. execpc. com/~jpurtell/HBR-CompetingonCapabilities. pdf Washington Post, January 15, 2009, “Surgery checklist lowers death rate”, available online: http://www. washingtonpost. com/wp-dyn/content/article/2009/01/14/AR2009011402831. tml 4 For a more extensive discussion see Roger Martin and James Milway, Strengthening management for prosperity, Institute for Competitiveness & Prosperity, 2007, available online: http://www. competeprosper. ca/images/uploads/ManagementPaper_May07. pdf 5Institute for Competitiveness & Prosperity, Working Paper 12, Management matters, March 2009. 3 13 management matters in retail repeat purchase behaviour among loyal customers. The lower operating costs could be passed on as lower prices for consumers. But true innovation means that the producer captures some of the value added by not reducing prices at the same rate s costs. –Second, innovation can reduce costs for retailers or other parts of the distribution channel. McCain’s became one of Canada’s global leaders by eliminating the need for restaurants and food service operations to buy whole potatoes and peel them. Instead, they could buy fully prepared frozen fries from McCain’s and simply finish the frying. • Innovation to enhance customer experience. Four Seasons, the world’s leading luxury hotel chain, has succeeded by relentlessly studying what its guests wanted and by improving the customer experience. Cirque de Soleil, the world’s leading ircus company, recognized the customers’ experience of circuses left much to be desired and reinvented the circus world to delight them. Such innovations draw as much on management capabilities – competitive analysis, customer research and segmentations, cost analysis – as they do on technological capabilities. Indeed, our research into high technology firms in Canada shows that, as these firms succeed and mature, the importance of technical skills at the top of the organization is matched by the importance of other skills, including management capability. 6 And below the CEO level, evidence is mounting hat the economy is requiring greater numbers of sophisticated conceptual thinkers and those with the strong analytic and people skills required to lead innovation and upgrading. 7 Exhibit 1 Innovation system has three components Exhibit 1Pressure and Support drive all three elements of the Innovation System The Innovation System PRESSURE PRESSURE Strong Management Source: Institute for Competitiveness & Prosperity. 6 7 Demand for Innovation SUPPORT Financing of Innovation SUPPORT Supply of Innovation The Strategic Counsel, “Assessing the Experience of Successful Innovative Firms in Ontario,” 2004, p. 1, available online: http://www. competeprosper. ca/images/uploads/InnovationInterviewStudyRep. pdf Ibid, p. 41 14 institute for competitiveness & prosperity Canada lacks sufficient sophisticated management capabilities An important opportunity for improving Canada’s innovation and productivity performance is to strengthen management talent in our economy. In our research over the years, we have consistently found that our managers generally have lower educational attainment than their US counterparts, and CEOs of our largest corporations are less likely to have formal business education at the graduate level. Half of US managers have a bachelor’s degree or above compared to just over a third of Canadian managers (Exhibit 3). Further, innovative, hightech firms report disadvantages in access to management talent as a key constraint. 9 A key part of Canada’s prosperity under performance is attributable to its lack of management talent. Management skills are a critical complement to science and engineering skills in creating a high quality supply of innovation, driving sophisticated demand for innovation, and putting in place the required quantity and quality of financing to make the Innovation System work effectively.

Exhibit 2 Managers play an important part in creating Pressure and Support in all elements of the Innovation System The Innovation System PRESSURE PRESSURE Strong Management Source: Institute for Competitiveness & Prosperity. 8Institute 9R. Demand for Innovation SUPPORT Financing of Innovation SUPPORT Supply of Innovation for Competitiveness & Prosperity, Working Paper 6, Reinventing innovation and commercialization policy in Ontario, October 2004, p. 40 Martin and J. Milway, Strengthening management for prosperity, p. 11 15 management matters in retail Management innovation delivers higher productivity Contemporary research often focuses n two measures of productivity: • output per unit of labour input, such as hours worked or employment; and • total factor productivity (TFP), which measures the extent to which actual economic output is higher than capital and labour employment data would suggest. Many researchers and policy makers believe that productivity changes are intimately linked to changes in technology in the traditional sense; that is, productivity growth results from improvements in machinery, equipment, or techniques of production. Thus, the key to higher productivity is technological advances, as evidenced in higher R&D expenditures or more patents.

Professor Michelle Alexopoulos of the University of Toronto presents an alternative, though less intuitive, view. 10 She argues that anything that improves producers’ ability to transform inputs into final goods and services deserves the title “technology. ” For her, productivity is indeed influenced by the traditionally understood types of technology – such as machinery and new products – that she calls “tangible. ” But productivity is also influenced by “intangible” technology – such as management techniques and production processes. She posits that it is important to distinguish between these wo types of technologies, since they affect the types of policies governments may want to put in place. It is generally agreed among management experts that changes in intangibles – such as corporate work rules, team structures, communication channels, morale, or managerial leadership – raise productivity and workforce efficiency. While this is not a controversial statement, quantifying the effect of improvement in management techniques at the aggregate level is extremely difficult because of measurement issues. Professor Alexopoulos’ measure tracks the development and diffusion f management techniques through a count of Library of Congress management book titles, supplemented with counts of relevant academic journal articles. She has demonstrated that changes in management techniques are an important factor in US productivity growth. 11 With the index of management book publications serving as a proxy for diffusion, her regression analyses reveal that available management books are positively associated with growth in an economy’s TFP and GDP. In particular, following the introduction of a new management technique that causes a 10 percent increase in new management books, GDP and TFP

Exhibit 3 Canadian managers are less well educated than their US counterparts Managers’ educational attainment, average 2005–2007 12% 18% Advanced degree 35% Bachelor’s degree 26% Some post secondary 18% High school 23% 39% 19% 7% Canada 3% United States Less than high school Source: Institute for Competitiveness & Prosperity analysis based on Statistics Canada, Labour Force Survey, and U. S. Bureau of Labor Statistics, Current Population Survey 10M. Alexopoulos and T. Tombe, “Management Matters,” forthcoming working paper, University of Toronto. 11Ibid. 16 institute for competitiveness & prosperity row at statistically significantly higher rates than average for approximately six years. In fact, the impulse response estimates suggest that by year five, GDP would be 2. 1 percent higher and TFP would be 1. 4 percent higher in an economy with innovation in management techniques (Exhibit 4). A 2 percent increase in our GDP per capita would increase average disposable income per family by $1,500 in Canada and Ontario. 12 Alexopoulos does not assert that the research definitively leads to this direct impact – but it does suggest that improved management has a significant effect on a region’s or nation’s prosperity.

She concludes that Canadian managers, have access to the same resources as our American neighbours, but many lack the expertise to employ the most productive management innovations. Increasing the number of graduates from economics, business, or management programs and raising funding for research in business management and related fields may help alleviate this deficiency. This kind of “business R&D” is to management what science is to engineering, and deserves more attention from the government. It is intuitively likely that stronger management capabilities lead to more innovation and higher rosperity. But the impact of management capabilities on regional prosperity has not been well studied. Our research and that of others indicate that management matters. The development of improved management techniques, their diffusion, and their implementation by capable managers lead to higher prosperity. Exhibit 4 New management techniques are associated with increases in productivity and prosperity Effect on Gross Domestic Product and Total Factor Productivity Response to a 10% increase in management publications Percentage increase 2. 5 % Gross Domestic Product 2. 0 1. 5 Total Factor Productivity . 0 0. 5 0 1 2 3 4 5 Years following unanticipated increase in management publications Source: M. Alexopoulos and T. Tombe, “Management Matters,” forthcoming working paper, University of Toronto. 12Calculation based on a 2 percent increase in the Canadian 2008 income per capita, personal disposable income as a percentage of GDP, and average household size. 6 management matters in retail 17 Management practices can be measured C learly, good management is an important factor in firm innovation and productivity and, to the extent that a region’s firms are well managed, overall prosperity will be higher.

But economists and management researchers have paid little attention to measuring effective management practices and their impact on firm productivity. A major stumbling block has been the lack of useful, consistent measurements of the quality of management across firms and countries. While researchers recognize the importance of effective management, they typically refer to it as an empirically unobservable variable in their research to account for the differences in productivity across firms within the same country and industry. International research evaluates management practices

To fill this research gap, professors Nick Bloom, John Van Reenen, and Raffaela Sadun developed a methodology to measure management practices first within a manufacturing operation,13 and now have expanded this methodology to include 13 See, for example, N. Bloom and J. Van Reenen, “Measuring and Explaining Management Practices Across Firms and Countries,” NBER Working Paper No. 12216 and N. Bloom, J. Van Reenen, “Why do Management Practices Differ across Firms and Countries? ” Journal of Economic Perspectives, Vol. 24, No. 1, pp. 203–244. 18 institute for competitiveness & prosperity the retail sector as well as forthcoming esearch on management of schools and hospitals. They have applied this methodology since 2004 and have interviewed over 7,000 firms in eighteen countries,14 including developed economies, such as the United States, Germany, and Japan, and developing economies like China, India, and Brazil. The Institute collaborated closely with Professor Bloom to interview Canadian manufacturing firms through the summer of 2008. In 2009, the Institute further collaborated to extend the methodology to the retail sector, for the first time in a large-scale project, including Canada, the United States, and the United Kingdom. Bloom, Van Reenen, and Sadun’s ethod to measure management practices in the firm is based on an interview evaluation tool that scores firms on a scale of 1 to 5, indicating from worst practice to best practice across eighteen management practices, developed originally by McKinsey & Company, a leading international management consulting firm. The management practices cover three distinct, but related areas of management: • Adopting effective operations management approaches. How well have firms implemented retailing management systems that are generally regarded by academics and consultants as best practice? “Lean Retailing” is a fairly recent concept erived from the original “Lean Manufacturing,” which is generally regarded as the most effective management system. Based on the production methods developed by Toyota, but applicable beyond the automotive (and manufacturing) industry, Lean achieves highly efficient operations through a relentless drive to reduce waste of time and resources. It is characterized by an ethos of 14For continuous improvement, backed by close tracking of the operation to identify problems and improvement opportunities. • • Managing targets effectively. Do firms’ management teams set stretch yet realistic targets, monitor performance against these targets, and ake corrective action when necessary? Effective management in this area means that companies are finding the right balance of targets to aspire to for maximum achievable performance. Setting targets too low means under performance; setting them too high will discourage improvements by workers and managers. Effective management also means determining how to measure performance and to follow through with actions when targets are not met. Managing people well. Are companies promoting and rewarding employees based on performance, and systematically trying to hire and keep their best employees? The cliche that people are a firm’s most mportant asset is true. Skilled workers and effective people management together are an important element of productivity in firms and across the economy. Well managed firms are able to attract and retain their top talent through effective reward and incentive programs. They also deal effectively with problem performers. Professor Bloom and his team designed the research process according to rigorous academic research standards. Our analysts, who were business and economics students, were trained to conduct the interviews consistent with analysts in other countries. We randomly selected retail locations for elephone interviews from a comprehensive industry list of firms categorized by Standard Industrial Classification (SIC) retail codes. 15 The analysts conducted telephone interviews that lasted an average of fifty-seven minutes with the most senior store managers available and occasionally district managers. Through a series of structured, but open-ended questions, the analysts scored each company on a scale of 1 to 5, across eighteen factors. These results generated scores on each of the three factors described above, which in turn generated an overall score for the quality of management at the operation.

The structure of the retail interview followed the manufacturing one, in which sixteen out of the eighteen topics were comparable between the two sectors. Analysts also “double scored” fourfifths of the interviews. That is, while one analyst conducted the interview, another, who was not taking part in the interview, listened and independently scored the company. Subsequent comparisons of the scores showed a high degree of consistency between analysts. We conducted interviews from June to August 2009 from a central location in Toronto. To ensure the comparability of the retail scores with the previous year’s anufacturing scores, our analysts were trained using the same methodology, and two analysts from the previous year’s manufacturing project returned to supervise and double-score the interviews. Thus we conclude that, as much as possible, the retail interviews were scored in the same way as those in the manufacturing sector, and therefore are comparable to the rest of the management sample. Further, the distribution of completed interviews across Canada and the United States matches the distribution of actual retail locations. more information on the research methodology, see Professor Nick Bloom’s website: http://www. tanford. edu/~nbloom/index_files/Page371. htm on the Dun & Bradstreet database, using SIC codes 50–57 and 59. For more information, see http://www. dnb. ca/ 15Based 19 management matters in retail Lean Retailing is best practice operating strategy Lean Retailing is an example of a best practice operating strategy that management needs to adopt to maximize the efficiency of the retail operation process. including those in insurance companies, hospitals, airline maintenance organizations, government agencies, retail industries, and many others. 16 In the retail sector, the same Lean approach as now developed to improve operations flows; these principles are known as Lean Retailing. What is Lean Retailing? How does Lean Retailing work? Business success lies in effective management. This is especially critical today, as retailers continue to face the increasing challenge of competing against falling prices alongside rising operating and labour costs. Now, more than ever, retailers are turning toward adopting a more Lean approach in their management operations to improve profitability. At the core of Lean Retailing is a dedication to the elimination of waste. Similar to the manufacturing sector, the ajor types of waste targeted by the Lean approach include excess inventory, product defects, unnecessary motion, under used employees, and wait times. Managers can now apply similar tools and principles to identify these forms of waste to improve their operations efficiency. These Lean techniques include: But what is Lean Retailing? Lean Retailing refers to the operating strategy that seeks to maximize efficiency by identifying and eliminating waste. It focuses on simplifying the work process to eliminate wasted effort, time, materials, and motion. By adopting a Lean approach, managers who employ these tools and principles are able to educe non-value adding activities, detect and prevent problems early, and improve overall operating flow. • • Using “pull” to drive replenishment. Ensuring that the supply of goods is pulled by actual demand of customers as opposed to forecast or estimated demand so that inventory levels are kept low and space is conserved • Removing bottlenecks through the supply chain. Eliminating inefficiencies to shorten delivery times, lower transportation costs and defects, and improve product flow and operational performance • Today, the Lean approach has evolved from the manufacturing industry to apply to operations of all kinds, 16S.

To win in this increasingly competitive environment, retailers need to adopt a relentless focus on delivering value cost effectively. For, despite steadily falling prices, store operating costs are trending upwards because of more expensive operating overheads and labour costs as well as higher investments in shop fittings to match increasing trends to improve the customer experience. 17 Retailers must pursue a Lean perspective in their core operations, including best practices in operations management, performance management, and people management. (See A guide to best practices in Lean Retailing. ) Doing so will produce a more fficient cost structure, more productive workers, less waste, lower effort, and shorter wait times – all of which generate significant improvements in store profitability and customer satisfaction. Today, more and more businesses are focusing on streamlining their key operations to reduce unnecessary processes and waste and to improve customer experience. Lean Retailing is a best practice that, once implemented, can improve productivity and contribute to higher overall economic performance. Our research allows us to measure the quality of retail management through the lens of Lean Retailing – and to provide guidance for retailers in dentifying and implementing Lean Retailing best practices. Eliminating wasted effort, time, materials, and motion. Identifying the core value of operations by eliminating excess motion, time, and materials used in the process flow to reduce and prevent extra work, problems and wait times Where did Lean Retailing originate? Pioneered by Toyota Motor Corporation, the concept of Lean was conceived as a set of tools and methods to eradicate waste and inefficiency in their manufacturing system, famously known now as the Toyota Production System (TPS). This revolutionizing manufacturing strategy fuelled Toyota’s rise from a ash-strapped company to becoming one of the most successful automobile manufacturers in the world. Simplifying work design. Organizing individual work processes to be more feasible and manageable so that these efforts have clear start and finish points Why is Lean Retailing important? Corbett, “Beyond Manufacturing: The evolution of Lean production,” McKinsey Quarterly, 2007, 3, pp. 94-96. Voisin, “The ‘Industrial revolution’ of European retailers in underway,” McKinsey Quarterly, 2004, available online at: http://www. mckinsey. com/practices/retail/knowledge/index_full. asp? startval=20&sort=title 17Jean-Baptiste 0 institute for competitiveness & prosperity A guide to best practices in Lean Retailing For each topic in the study, we define the best practice and provide an example drawn from the 661 retail interviews conducted across North America and Europe Operations management Rationale for Lean retailing techniques Adoption of Lean practices store operations Has the store implemented all the major Lean store operations practices? For example, does the manager have a standard to-do list to follow daily? Is there an automated inventory control system determined by the pull of demand? Is the backroom organized systematically?

Example of best practice: A Canadian bookstore has a point-of-sale system that automatically orders an item as soon as it is sold. The managers and employees check off every item on their set to-do list every morning. The manager has a “store clock,” where she plans for what is happening in the store every hour of the day. Some inventory is kept, and what is on hand in the backroom is organized by aisle with bin codes, keeping the backroom clutter-free. scheduling Has the store implemented all major Lean scheduling practices? Is the scheduling done automatically, based on store traffic and transactions data?

Are there defined roles within the staff? Example of best practice: Scheduling at a US supermarket is based on a computer system that is linked to its sales results system. The computer system bases the schedule on transactions per hour and allocates more labour to peak hours. Roles in the store are clearly defined, and employees rarely have to respond to unexpected traffic increases. What was the reasoning behind the adoption of any or all Lean Retailing techniques? Were managers implementing changes because all their competitors were doing it? Did managers believe it would merely reduce costs and thus ecided to make the switch? Or did Lean fit the businesses’ goals, which often include increasing quality, reducing waste, and reducing injuries while increasing profits? Example of best practice: A UK specialty apparel store introduced techniques to improve customer service, raise product availability, decrease waste, and increase efficiency and productivity. Process problem documentation If an operational/procedural problem in the store occurs, what happens? Do managers wait for problems to happen to address them or do they search for ways of improving processes and avoiding potentially costly product shortages or mistakes?

Is there a specific way that shop floor workers, who are executing most of the tasks, can suggest process improvements? Example of best practice: A UK supermarket uses a checklist system for checking the store every hour. Managers document all issues and have weekly business strategy meetings to discuss them and identify solutions. Action plans encompass targeted completion dates and everything is reported to corporate headquarters. There is a standard system whereby employees can suggest improvements, and managers review them weekly with potential rewards for the employee whose suggestion gets implemented. management matters in retail atters Operations performance tracking What types of Key Performance Indicators (KPIs) are the managers tracking? For example, do managers only track sales per day or does the set of KPIs include a comprehensive list of all productivity factors, such as average transaction value and conversion rates? And are these KPIs available for all to see, or is it only the senior managers who are privy to this information? Example of best practice: A Canadian bookstore manager tracks all major performance indicators daily, weekly, monthly, and yearly. Sales are tracked by shift, and if targets are not being met, the manager follows up mmediately with the sales staff to improve performance. All information is posted for employees to see and updated as new data become available. Operations performance review Does a manager review KPIs with other managers and staff? Is there a meeting to review them? Who is involved in these meetings? Who gets to see the results of this review? What are the typical next steps after a meeting? Example of best practice: A hardware store in Canada has weekly management meetings to review the basic KPIs, and routinely invites floor staff to attend as well. Every meeting, they create a follow up plan with five to six main oints they have to focus on in the coming week with specific timelines and accountability. Results are tracked daily and shared with employees in small team huddles and storewide meetings twice a week. The managers keep a scorecard to help track how they are doing. a 21 Operations performance dialogue Here managers are asked to describe a KPI meeting. Is there a set structure to the meeting; for example, a set agenda used every week? If KPI data are needed to discuss specific issues, are the data always available? Do discussions lead to the root cause of problems? Example of best practice: The manager at an American eneral merchandise store has a set agenda for the meetings (part of it from corporate, part of it open to managers’ discretion), which is distributed ahead of time. All involved are expected to have reviewed it and to come prepared for discussion. Problems are identified and conversations are only finished when the root cause is found. The manager often uses root cause analysis tools such as fishbone diagrams and the 5Ys. a All items are documented and followed up on. Consequence management How do managers deal with a business unit that is under performing? What are the consequences for the under performing unit?

Are there parts of the business that seem to fail repeatedly to carry out agreed actions? Example of best practice: A general merchandise store in Canada has a computerized system where follow-up plans are logged. Outstanding items are flagged (red, yellow, or green). In-store issues have a “sundown rule,” where problems need to be fixed by sundown. External issues require progress reports, and status is frequently reviewed until the item is no longer red-flagged. 5Ys is a management technique used to solve problems by asking “why” five times. By the time the fifth why is asked, the root cause of the problem has already been found. 2 institute for competitiveness & prosperity Performance management Types of goals What types of goals are set for the company? Are there specific goals for the store? Are there any non-financial goals? Example of best practice: A hardware store in Canada has a range of financial and operational goals in place, and also has specific non-financial goals for community involvement (charitable donations/fundraising) and environmental targets. The manager was concerned with “making money” but felt that supporting their community was just as important. Interconnection of goals Is there a clear motivation behind the goals? For instance, oes the company clearly communicate goals, such as “we want to be the leader in the industry” or “we want to grow by 4 percent in the next two years”? How are the goals cascaded down to the individual workers? For example, are workers aware of how their work fits within the larger framework of the company? Example of best practice: The motivation behind a US general merchandise store’s goals is to create shareholder value and deliver customer satisfaction. Corporate headquarters divides goals by region, division, and store. The manager then further divides those goals by department and individual associates, so that all ave personal targets linked to the store’s overall goal. Company goals are communicated through storewide meetings and newsletters. Time horizon What is the time scale of the targets? Do managers focus more on short-term or long-term goals? Do the short-term goals form a “staircase” to the long-term goals? Example of best practice: A Canadian department store has daily, weekly, quarterly, annual, three- and five-year goals and ten-year strategic goals. The goals are all linked in a staircase; if the store meets all the short-term goals, they will inevitably meet the long-term goals. Setting stretch goals How tough are the goals?

Do managers feel pushed by them? Are any goals obviously too easy or too hard? In other words, are there goals that are always met and some that are never met? Do all departments have the same level of difficulty in the targets or do some get off easy? Example of best practice: A UK clothing store has rigorous goals for all departments, based on a specific store growth plan. The manager feels the targets are very tough, but attainable. She meets them between 75 to 80 percent of the time. Clarity of goals Do all employees in the store know what their personal targets are? Does anyone complain that the targets are too omplex – that is, not that they are too stretching, but that they are difficult to understand? Is performance between teams or shifts openly compared to others? Example of best practice: A Canadian bookstore manager sets clear individual targets for her employees and keeps them accountable to them during weekly huddles. She posts performance in the break room and employees are encouraged to compare individual performance, as the manager believes this leads to friendly competition. Instilling a talent mindset Do senior managers discuss attracting and developing talented people? Do managers get any rewards for the talent ool they create? Are managers held accountable for creating a talent pool? Example of best practice: Managers at an American department store participate in university/college job fairs, and actively seek talented people to join the company. The company has a “human capital report,” and the number and quality of the people a manager hired are important in his appraisal and affect (positively or negatively) his bonus at the end of the year. management matters in retail 23 People management Promoting high performers If a worker is exceptionally good, can he or she be promoted on a fast track?

Are top performers routinely identified and developed? Is length of service unduly important in promotions? Rewarding top performers How does the appraisal system work? How does the bonus system work? Are there non-financial rewards? How do these systems compare to the competitors’ systems? Example of best practice: An American hardware store holds appraisal meetings every six months – one full appraisal meeting and one update meeting. There is a bonus for both shop floor employees and managers, based on a review of personal performance. For the shop floor employees, there is a reward system where employees et “stars” in a staircase structure for outstanding performance. For each set number of “stars,” there is a financial reward. When employees reach the highest level, they get a gift. There are also gift cards/movie tickets and other financial rewards for good customer service performance. Addressing poor performance If a worker is continuously under performing, what is the course of action? Is there a set procedure that is followed? How long would under performance be tolerated? Example of best practice: A US department store has a performance improvement plan, whereby managers meet with poor performers, identify their improvement pportunities, develop a plan, and give them tools to make them work more effectively. Once under performance is identified, weekly meetings are set up to update the status. The manager tries to retrain and/ or move the employee to other departments, but under performance is only tolerated for a maximum of three months. Example of best practice: An American grocery store has a formal career path plan for all employees and a succession plan for managers. Promotions are based solely on performance, and tenure does not play a role. The manager uses regular performance appraisals to identify op performers and look for “diamonds in the rough. ” The company has a mentoring program that trains the best to be future managers, and encourages workers to take courses outside the store. Attracting high performers Does the company offer a distinctive work environment that is attractive to top talent? Example of best practice: An American hardware store offers competitive wages, strong performance incentives, and clear career paths. The managers believe it is important to get employees involved in the decision-making process to make them feel like a valued part of the company. Retaining high performers

What special practices are in place to retain top performers who want to leave the company? Example of best practice: A hardware store manager in Canada keeps an eye on the top employees and, if they seem unhappy or are thinking about leaving, senior management will meet with them to discuss their career. For a top performer, the manager would adjust hours, increase pay, and offer more responsibility. The manager mentioned an example where he helped the employee’s mother move to their town so they could live closer together and the employee would stay with the company. 24 institute for competitiveness & prosperity

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