Business Productivity: Lean Management is More Effective than Employee Participation

Businesses which have implemented group work, profit centres or flat hierarchies in the last several years have thereby been able to sustainably increase their productivity. Introducing a system in which certain groups of employees hold a share in capital or profits, however, does not seem to have a positive effect on businesses' productivity.

These are the findings of a current survey conducted by the Centre for European Economic Research (ZEW) in Mannheim. The study is based on representative data from the business survey carried out by the Institute for Employment Research (IAB) for the years between 1996 and 2000. Each year, 8000 businesses were surveyed and their answers collated.

More and more businesses in Germany are implementing so-called "Lean Management" systems. That means that they transfer responsibility "down" the hierarchy (flat hierarchy), implement group work, or create work units which are responsible for their own costs and results (profit centres). Lean Management is based on the notion that increasing the participation of employees in internal decision-making processes, will increase their motivation and their sense of responsibility towards the company and its performance. This should in turn increase the efficiency of decision-making and production processes. The ZEW study shows that businesses which introduce Lean Management systems are able to increase productivity over  the course of several years.

Lean Management demands that employees are flexible and willing to accept responsibility, however, whilst it becomes difficult to measure or monitor their performance. It therefore makes sense to financially reward employees involved in internal business decisions on the basis of success or performance. Financial incentives in the form of shares in capital and profits should also be used to increase levels of employee motivation. The results of the ZEW study indicate, however, that the implementation of schemes meaning that employees are financially involved in the company do not result in increases in productivity. A primary reason for this may be that German companies often implement such schemes independent of Lean Management measures, or they implement financial incentives which do not apply to all employee groups which are involved in internal business decisions.

The study also shows that businesses which introduce both Lean Management and financial participation schemes for employees can be clearly differentiated from businesses which stick to classic management styles. It is often larger businesses employing a high proportion of qualified personnel and with modern equipment, which are export-based and make use of tariff agreements, which implement such management schemes. It is corporations based in West Germany which most frequently opt for such schemes. Businesses which offer their employees financial participation generally already have a significant advantage in terms of productivity in comparison to competitors. In comparison, those introducing Lean Management schemes are often motivated by deficits in productivity.

Of those businesses introducing Lean Management systems, 12 per cent have introduced profit centres, around 15 per cent have opted for group work and up to 26 per cent have introduced flat hierarchies. Employee shares in profits, however, have been introduced by only 8 per cent of businesses, whilst shares in capital are offered by one per cent. The proportion of businesses in Germany using a combination of the so-called organisational and financial measures is almost negligible.

Contact

Prof. Dr. Elke Wolf, E-mail: wolf@zew.de

Prof. Dr. Thomas Zwick, Phone:+49(0)621/1235-131, E-mail: zwick@zew.de