воскресенье, 26 июня 2011 г.

A new SKOLKOVO research about high performance firms in China and Russia

In their recent monthly report SIEMS studies High Performance Firms in China and Russia. In the paper you will find the methofology of the survey, the final top list of high performance firms and the analysis of their success drivers. Here is the short overview of the report:

"All Roads Lead to Rome: High Performance Firms in China and Russia"

One of the primary goals of managers is to achieve and maintain high performance. The popularity of best-sellers such as “Built to Last” and “Good to Great” demonstrates the current enthusiasm for high performance firms. After decades of research, what do we know about high performance firms? What measures should we adopt to evaluate firm performance, especially in emerging markets? And finally, which are the high performance firms in emerging markets, such as China and Russia, and what can we learn from their success stories? The objective of this report is to provide managers with guidance to evaluate firm performance in emerging markets and suggestions on how to achieve and maintain high performance.

Comparison Measures
Chapters I and II of the report are devoted to selecting the comparison measures for evaluating and ranking the companies’ results. The authors carefully consider the factors that are usually applied for similar research and outline several of them being of the highest importance for evaluating the operations efficiency of the companies working on emerging markets. The authors conclude that there are three factors crucial for such alalysis: Sales growth, Market share and Profitability.

Comparison Method
The next question is how we compare firm performance using these measures. We need a method that can compare multiple measures of different scales simultaneously. Frontier analysis was chosen to be applied for the survey. Frontier analysis is a way to understand the efficiency of decision-making units (DMUs) with specific inputs and outputs. A DMU could be any unit with inputs and outputs, such as a production line or a firm. Data envelopment analysis (DEA) is one simple form of frontier analysis. You can find the detailed description of the method in Chapter III of the report.

Companies Selection
In suggesting DEA as the method for evaluating firm performance, the authors assume that efficiency is a firm’s primary goal. This may not always be true because certain firms, such as State-owned enterprises (SOE), may pursue other goals like administrative tasks. Therefore, the report only focuses on private manufacturing firms that are efficiency driven and grow and prosper in emerging markets indigenously. Appendix 1 summarizes how private Chinese and Russian firms are selected.
Frontier analysis was applied to the top 500 Chinese and Russian firms in each year. The table below reports year, the number of observations (less than 500 due to missing values), mean, and standard deviation of efficiency scores.

Table analysis
1) Operations efficiency
Table shows that the average efficiency score of Chinese firms fluctuates between 0.3 and 0.4, meaning that an average firm on the top 500 list is only 30% to 40% as efficient as the most efficient firms that year. For Russian firms, we discover a similar pattern. The average efficiency score remains within the range of 0.3 and 0.4. Whereas similar frontier analysis of high performance firms in the United Kingdom from 1984 to 2003 reveals that the average efficiency score of UK firms across different industries ranges from 0.52 to 0.96 over the 20-year period The difference in efficiency score means that in emerging markets, such as China and Russia, there are many differences between firms in terms of performance, whereas in developed countries, such as the United Kingdom, there are fewer differences. In emerging markets, many inefficient firms are still operating, while in developed countries, firms are relatively more efficient. This also suggests a broad diffusion of high-performing practices and operations in developed countries. Given the weak managerial capabilities, entrepreneurial firms in emerging markets are slow to adopt advanced management and operational practices.

2) Change of efficiency over time
In the growth stage, we expect to see an increase in firm efficiency over time. However, the efficiency scores in Table 3 show no sign of increase over time, for either Chinese or Russian firms. Rather, the table shows a substantial gap across firms in capabilities. Inefficient firms are still able to survive in emerging markets because the demand is so high that economies experiences a capacity shortage.

3) Firm size and efficiency
We do not observe a positive linear relationship between firm size and efficiency. In fact, the relationship between rank in size and rank in efficiency is only 0.125 for Chinese firms and 0.075 for Russian firms. The weak relationship between firm size and efficiency shows that few firms achieve economies of scale. As argued earlier, the fast-growing economy of emerging markets provides great room for firms to pursue growth. Fast growth, however, does not guarantee efficient use of resources. For example, to produce the same amount of output, the Chinese economy is consuming seven times the resources as the Japanese economy.

You can find the final top-list of high performance Chinese and Russian firms (for the last 9 years) in Chapter V of the report. Notably various industries are represented in the list.

The authors also investigate the way how these companies had won leadership on the market. Each of the selected companies is plotted in a chart in terms of its sales growth and profitability, and then the chart is devided into four quadrants. Below you can see the chart for the Russian market.

One overall pattern across different quadrants is that high performance firms have higher market share than the other top 500, no matter which category the firm belongs to. This reflects the fact that maintaining high market share is the key to success for firms in Russia. Since many of these firms are privatized former SOEs, this high market share is the legacy of these firms’ history. With their favorable market positions, their primary challenge is to sustain their high market share.
Firms in Quadrant 3 represent most high performance firms in Russia. They enjoy high profitability and market share, but slightly lower sales growth. These firms are in a stable position where profitability and market share remain at relatively high levels. Sales growth is not very high but is close to the average for the top 500 firms. These firms are enjoying their favorable positions with high profitability and market share and face few challenges from competitors. They may be in industries with high entry barriers or enjoy economies of scale helping them to be cost efficient.

Description for the rest 3 quadrants and the same analysis of the top Chinese companies can be found in Chapter V of the report.

We highly recommend reading the full text of the report available on the link below: http://www.scribd.com/doc/58563780

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