Business Forecasting and Data Analysis - Assignment Example

The chart below shows the distribution of the overall mean management scores, for Italy when all 18 aspects (questions) are treated equally. Figure 1: Firm management score from 1(worst practice) to 5 (best practice) Majority of the companies in Italy are dismally performing shown from the rapid variation in the density of the management score. The chart below illustrates the variations in the overall mean management score regarding multinational or domestic firms in Italy. Figure 2: The chart showing the variations in the overall mean management score regarding type of ownership of firms in Italy. Multinational firms in Italy show higher reputation and degree of performance compared to domestic firms. This implies that multinationals have the capacity and machinery to adopt quality management and technological principles to improve sales and sustain revenue. Domestic firms are run and influenced by local politics and differences. Figure 3: Management score by firm ownership It is obvious from the figure above that dispersed shareholding has higher performance compared to founder chief executive managed firms. Dispersed shareholders delegate roles and decision to professional managers who in turn report to a management board (Woodward, 2008). They easily identify challenges and apply the right machinery to subdue these problems. Size of firm Figure 4: Management score by nature of business Hospitals seem to be better managed as compared to schools. Retail and manufacturing are satisfactorily managed implying that professionalism and desire to increase revenue is practical. Retail and manufacturing firms are facing stiff competition from countries with manufacturing and technological advantage (Hustled & Becker, 1996). They are also protected by the government through copyrights, patents and trademarks. Schools reflect a universal provision with minimal competitors but private schools tend to perform more than public schools. Difference in management score between public and private firms in Italy Figure 5: Comparison of monitoring, targets and incentives in selected disciplines The opportunity to monitor, set targets and improve performance is the desire of many corporations. Hospitals lead in the sectors that have better monitoring and target strategies. Retail follows in this while schools lead in proving incentives to teachers and subordinate staff. Monitoring management can be increased in firms, through closely adhering to set targets and motivating workers to give the expected results. Table 1: Management and organizational performance (descriptive statistical tests) Sector Retail (1) Retail (2) Retail (3) Retail (4) Retail (5) Retail(6) Hospitals (7) Schools (8) Dependent variable Log (sales) Log (sales) Log (sales) ROCE (Profitability) 5-year growth sales (%) Exit (%) AMI mortality rate(z-scored) Test scores (z-scored) Firm size 0.487**(0.037) 0.287**(0.030) 0.089*(0.045) 2.034***(0.412) 7.213**(1.453) -1.456**(0.357) -0.562**(0.234) 0.214**(0.051) Ln (Ownership) 0.502*(0.028) 0.845**(0.192) 0.672** 0.456 Ln (Multinationals) 0.878**(0.007) 0.789**(0.034) 0.564**(0.031) Industry controls No Yes N/a Yes Yes Yes Yes Yes General controls No Yes N/a Yes Yes Yes Yes Yes Firm fixed effects No No Yes No No No No No Organizations 57 57 30 57 57 57 56 44 Observations 194 194 167 194 194 97 56 44 Note: *** denotes 1% significant, ** denotes 5% significance, and * denotes 10% significance. Sample All estimated columns for Ordinary Least Squares (OLS) with standard errors are in parentheses. The coefficient estimates are clustered by institution (firm, hospital, or school). The columns 1 to 6 comprise all firm-years by five-year sales growth data, employment, and capital, sales, return on capital employed (ROCE). Firms taking more than two surveys dropped the noise controls as having limited time series variation. Column 6 used the latest year to evaluate exit. All hospitals had AMI data, while all schools had pupil test scores. Management is determined by the organization-level management score. Profitability refers to return on capital employed (ROCE) while exit means the time the firm was liquidated. AMI Mortality Rate implies acute myocardial infarction adjusted as the risk mortality rate. Industry controls constitute 159 SIC three-digit dummies. General controls are firm-level controls for average weekly labor hours worked and the proportion of company’s fixed assets. Hospital-level controls comprised a natural log of average hours worked, and hospital age. Others were the company’s total assets in dollars. Increasing the employee weekly labor hours is a result of improved recruitment and labor retention practices. Controlling for firm size and industry, the firms with (500-2000) employees are able to realize greater targets and results. Retail performance goes alongside ownership and motivation of employees. Equity owned companies showed more concern to employees and processes. The multinational companies seem to have succeeded in this by isolating ownership to management (Davila, Foster & Jia, 2010). Agency conflicts are minimized by close monitoring and inspection of quarterly and annual financial results. Multinational in Italy like McDonalds have demonstrated a higher propensity of management by objectives as compared to family owned clothing companies with rigid decision making avenues. Table 2: Firm sales performance controlled for employees and weekly work hours Dependent variable Sector ln (Sales, employee) (1) ln (Sales, employee) (2) ln (Sales, employee) (3) Profitability (ROCE) (4) Ln (Tobin’s Q) (5) Sales growth (6) Sustainability (7) Management 0.577**(0.027) 0.307**(0.020) 0.089*(0.035) 1.434***(0.712) 0.713**(0.673) 0.496**(0.017) 0.562**(0.534) Ln(Total labor hours, all employees) 0.892*(0.048) 0.505**(0.032) Ln(Founder owned) 0.469**(0.034) 0.094**(0.037) Industry dummies No Yes Yes Yes Yes Yes Yes General controls No No N/a Yes Yes Yes Yes Firm fixed effects No No Yes No No No No Firms 57 57 30 57 57 57 56 Observations 2340 2340 2340 2135 2250 1875 1875 ***, **, and * shows a significance level of 1, 5, and 10 percent respectively. The sample was obtained from firms with sufficient accounts data at some point between 2003 and 2008. The management score has a mean of 2.99 and a standard deviation of 0.674. The industry dummies constituted a full set of 162 SIC 3-digit dummies. General controls consisted of firm-level controls for natural log on average hours worked and natural log of founder owned companies. All regressions consisted of a full set of time dummies. Management is determined by the organization-level management score. Profitability refers to return on capital employed (ROCE) while exit means the time the firm was liquidated. Sustainability equaled zero if the firm exited owing to bankruptcy/liquidation by early 2009. This is the standard error and marginal effect multiplied by 100. The sample mean of non-survival is 2.44% thus the marginal effect of 0.56 implies one management point is associated with 22.95% (0.56/2.44) lower exit rate. When the mean management score increases from 2.5 to 4.0, there is an expectation of increased monitoring of products, processes and employees (Greene, 2002). The target will be easily attained giving rise to new level of targets. Employees will be motivated as a result of new companies reward scheme. Table 3: Results of Multiple Regression of management performance attributes in Italian firms Predictors Model 1 std. β Performance ATTRIBUTES Management 0.52*** Weekly Labour hours 0.53*** Fixed assets 0.53*** Founder owned 0.54*** R2 0.78 Adj. R2 0.77 R2 change 0.78 F-change 62.267*** Italian firms are evenly spread and follow a normal distribution. They are mature with many spanning more than 50 years in existence and variation in relation to vintages of management practices. A regression of Italian GDP per capita on management practices across the sample of 57 firms yields an R-squared of 0.78. When compared to eleven OECD nations with good manufacturing productivity data, it gives an R-squared of 0.66. Predictors Model 1 std. β MODEL VARIABLES Management 0.0499 R2 0.79 Adj. R2 0.71 R2 change 0.70 F-change 0.599 Management Practices Differ across Firms in Italy Management practices are quantitatively significant. Italy can improve average management practices and thus aggregate productivity by promoting factors that raise average management quality of individual firms, and by improving productivity on the average firm. The F-change value obtained was 0.599. Firm size as key measure of performance is better managed when the companies are larger. This is because the market will apportion these firms a bigger share of sales, resources, and incentives to apply better management. When average management score is plotted against the number of employees in a firm obtained that firms with 10,000 weekly labor hours had average management scores of about 3.00. When the management score improves with firm size, firms with 15,000 weekly labor hours had average management scores of about 3.5. The amount of sales will be predicted sales $21,500 and total assets $30,000. Multinational firms have wider market acceptance and coverage. They have overtime established a unique brand and customer segments. They can help predict sales through trend projection and weighted averages extending to six months. The sales figures also exhaust the number of remaining customers by enabling a market saturation of between 90 and 100%. The model of sales is not expected to increase until the firms undergo technological and design changes. Management score and sales Firms have undergone through a series of reforms in recent years to advance management For instance, in retail, there is a broad adoption of management practices (Bertelsmann Haltiwanger & Stefano, 2008). The distributions of management scores for retail firms, hospitals, schools demonstrate wide dispersions in Italy. These management practices spreads appear to imitate the wide dispersions in sector performance (Grouse, 2011). The management scoring method is universal and has been applied by many research teams to investigate sectors outside manufacturing, retail, schools, and hospitals disciplines. Ownership and sales performance Ownership is a strong factor influencing management. When controlled for size and type, private organizations are better performing than public institutions. The gap is huge with an average figure of 0.16 in Italy. Publicly run institutions have lower scores because they have weak incentive management practices (Bloom & Reenen, 2011). Specifically, many public-sector portfolios are based on time served, and consistent underperformers who remain in their positions despite the dismal work. Unions prefer their strengths on equity, fairness, and political criteria. Family and Founder Ownership and Management The privately owned firms the retail and manufacturing sample consisted of dispersed family ownership, shareholders, with an external chief executive officer. Others were based on family ownership run by a family chief executive officer or owned by the managers or founder the of the company (Bloom & Reenen, 2006). There are instances of private equity or individual private ownership. When controlled for firm size and industry dummies in the study, family firms are currently owned by the children, grandchildren or great grandchildren of the founder (Homkes, 2011). They showed a large tail of poor management as compared to family owned by managed by external company executives. Firms run by dispersed shareholders showed better sales and leadership performance. The conflicts arising from the kin succession, affects the overall management of the firm (Cumming, Siegel & Wright, 2007). In Italy, many firms are owned and run by families when compared to those in the US. This has the likelihood of being tax exempted in Italy. Family firms have less debt and minimal product market competition; hence do not feel the pressure of increasing the market share through innovation and diversification. Sales performance substantially meets operating costs such as salaries and wages, but not capital costs like rent on equipment or property acquired many years ago (Delery & Doty, 1996). This shows the continued inability of family firms to generate positive cash flows; by projecting economic losses since family owners have cheap capital advantages. Private equity firms are well managed as compared to family or government owned firms. The findings in Italy are consistent with empirical investigations showing that private equity transactions in the US and the UK results increase productivity (Dohrmann & Pinshaw, 2009). In recent years, the pattern of private equity firms buying firms in Asia and Europe, previously family owned or publicly managed has greater economic sense. Founder-owned or founder-CEO firms are on average worst managed. This phenomenon is still under investigation, though a possible explanation is the entrepreneurial skills needed in starting-up the business. Creativity and risk taking are attributes needed for a firm to be large enough that can be included in the sample more than 100 employees. A mature firm with ambitions to better their sales needs to transcend informal rules, and implement effective professional management. Multinational Firms Multinational companies have production facilities abroad. They are well managed when compared to domestic firms. They also transfer their management practices to the new foreign locations in-spite of local hardships (Atkinson & Patrick, 2005). The firms have higher degree of decentralization and are distinguished by their export status, showing a clear pecking order. Mean management scores for non-exporters were the lowest (2.72), non-multinational exporters (2.93), and greatest for multinationals (3.35). Product Market and sales The manufacturing and retail managers are keen on maximizing sales performance by identifying a number of competitors present in the marketplace. It was established that the mean management score was higher for firms facing serious competition. When other measures of competitive manufacturing firms are not reported by managers, import penetration rates determined by imports increases its share on domestic production. Besides, Lerner competition indices give similar result that management quality increases with competitive intensity. Data collected from schools and hospitals yielded similar correlations. Organizations facing stiff competition adopt better management practices (Abramowitz, 2006). The desire to drive sales figures upwards is the concern of the associations of management with “driving factors” such as design, technology and customer service. Value addition to products is a spurious and not causal correlation (Foster, Haltiwanger & Syverson, 2008). In the case of management, product propositioning may underestimate the positive effects of value addition. Specifically, well-managed organization is likely to drive sales figures upwards as well as badly managed rivals out of business. To increase the market share and reduce the number of rivals, market research and segmentation is inevitable. Reference List Abramowitz, M 2006, Resource and Output Trends in the United States since 1870. American Economic Review, 46(2): 5–23. Atkinson, A & Patrick K 2005, Modeling and Measuring Organization Capital, Journal of Political Economy, 113(5): 1026–53. Bertelsmann E, Haltiwanger J, & Stefano S 2008, Cross Country Differences in Productivity: The Role of Allocative Efficiency, Unpublished paper. Bloom, N & Reenen J V 2006, Measuring and Explaining Management Practices across Firms and Countries Centre for Economic Performance Discussion Paper 716. Bloom, N & Reenen, J V 2011, Human Resource Management and Productivity, Handbook of Labor Economics Volume 4B in Orley Ashenfelter and David Card (eds), Chapter 19 1697-1769. Cumming, D, Siegel, D. S, & Wright, M 2007, Private equity, leveraged buyouts and Governance, Journal of Corporate Finance, 13(4), 439–460. Davila, A Foster G & Jia N 2010, Building sustainable high-growth startup companies: Management systems as an accelerator. California Management Review, 52(3), 79–105. Delery, J E & Doty D H1996, Modes of theorizing in strategic human resource management: Tests of universalistic, contingency, and configurations. Performance predictions. Academy of Management Journal, 39(4), 802–835. Dohrmann, T & Pinshaw G 2009, The road to improved compliance: A McKinsey benchmarking study of tax administrations 2008-2009. New York: McKinsey & Company. Foster, L Haltiwanger J & Syverson, C 2008, Reallocation, firm turnover, and efficiency: Selection on productivity or profitability? American Economic Review, 98 (1), 394–425. Grouse, A 2011, Management Practices in the UK Aerospace Sector, LSE mimeo Greene, W 2002, Econometric Analysis (5th edition). Prentice Hall Homkes, R 2011, The missing management link: Why Management Matters in global public-private partnerships, LSE mimeo. Hustled, M A & Becker, B E 1996, Methodological issues in cross-sectional and panel estimates of the human resource-firm performance. Industrial Relations, 35(3), 400–422. Woodward J 2008, Management and Technology, Cambridge: Cambridge University Press. Read More