These Management Practices, Like Certain
Technologies, Boost Company Performance
Management practice acts exactly as a new technology might in
giving companies competitive advantage—and there is a right way and a wrong way
to do things, says a new study by Raffella Sadun and colleagues.
What’s the best way to run a company? The question has bedeviled
economists as long as companies have existed. How, after all, do you measure
something as soft as management style across the range of different types and
sizes of companies in a way that makes it quantifiable?
That challenge has captivated Harvard Business School’s
Raffaella Sadun for more than a decade. “The question is, Are there certain
practices that are beneficial to firm performance regardless of the industry or
the country in which you use them?” says Sadun, the Thomas S. Murphy Associate
Professor of Business Administration in the Strategy unit.
Conventional management strategy would say no, emphasizing that
practices a company puts in place are contingent on any number of factors that
make that company unique, including size, industry, geography, culture, and
structure.
Furthermore, relative to other critical inputs such as capital,
a company’s management practices should in principle be easier to change—if
obvious best practices emerge, they should be easily imitated so that
differences would be leveled over time.
Can management be quantified?
Along with colleagues Nicholas Bloom, Stanford University, and
John Van Reenen, London School of Economics, Sadun challenges this view in a
new National Bureau of Economic Research working paper, Management as a
Technology? They argue that, contrary to conventional wisdom, there are basic
management practices that act exactly as a new technology would, like advanced
machinery might help companies increase output.
“The point for
practitioners is that managerial processes are as important as other inputs in
production and can create significant competitive advantage” over each other
and across a wide variety of countries and sectors, says Sadun.
“Originally it was like a bet—can we quantify management?” she
says. Beginning in 2004, using as a starting point a set of best practices that
had been recognized by consulting firm McKinsey & Co., they began surveying
large and random samples of companies to understand how well best practices
were being used.
In the first 10 years the project encompassed some 11,000 firms
from all over the world (34 countries have been surveyed so far). “In order to
collect this data, we had to create our own operations, mostly at the London
School of Economics,” says Sadun. Over time, the researchers employed more than
100 graduate students, overseeing them with quality and performance measures to
ensure the reliability of the data they collected.
The students were charged with conducting semi-structured phone
interviews with company managers, asking each a series of 18 questions divided
into three categories. The first dealt with the monitoring of their production
processes, looking at how they collected data on what happened on the shop
floor.
The second concerned the ways in which firms used that data in
meetings and how they set targets, from upper management to frontline workers.
The third had to do with human resources, looking at how workers were hired,
trained, and motivated to do their best work. Answers were scored a one if the
company did not seem to adopt the specific practice, and five if the plant
manager’s answers indicated full adoption. In the end, the raw average across
all these questions represented the firm’s management score on the one to five
scale.
To weed out bias, the students asked the questions in a
double-blind fashion; that is, they did not know the performance, industry, or
country of the participating firm, and the managers were not told that their
answers were being scored until after the interview.
Worldwide, management scores corresponded with cross-country
rankings of productivity, with the United States, Germany, and Sweden at the
top; Southern Europe countries in the middle; and emerging economies such as
China, India, Brazil, and Africa at the bottom. What was equally striking to
Sadun, however, was the variation within countries. In the United States, for
example, there was more than a full point between the top quartile (which
averaged 3.72) and the bottom (which averaged 2.88). “Even the United States,
which is at the top of the management ranking, has firms that are badly managed
according to our grid,” she says.
But did these differences matter for firm performance? To see if
the score correlated, the researchers compared the numbers with external
measures of firm performance such as productivity and profitability.
The results were striking. In the United States, the firms
scoring within the top 25 percent were 15 percent more productive than those
firms in the bottom 25 percent. In fact, by comparing the management numbers to
other factors, the researchers determined that worldwide, quality of management
accounted for a whopping 30 percent of the differences in productivity across
the countries included in their sample.
Explaining higher performance
Several factors corresponded with higher management scores.
Those with the best scores faced a high degree of competition within their
industries—possibly due to badly managed firms being weeded out and better
managed firms being pressured to improve their practices. Also, older firms
scored higher than newer companies, perhaps a function of the fact that they
were good enough to survive longer.
Finally, firms with higher management scores also had more
highly skilled workers. “Stronger companies according to our score have people
who make intensive use of data,” says Sadun. “These practices require a certain
level of competency and numeracy in the workforce.”
The need for a skilled workforce to implement these management
practices provides one explanation for why management differences aren’t so
easily smoothed over through market competition, as standard theory predicts.
“These practices are not light switches you can turn on or off,” says Sadun.
“It’s not like you can order your employees to buy into these processes—it’s a
much more complex process of influencing behavior and persuading employees
across all levels that it can be in their own interest to do so.” In addition,
employees may balk at changes. For example, they may resist the introduction of
new processes fearing that increased productivity will lead to fewer jobs,
causing layoffs.
Management changes can be equally threatening to bosses, Sadun
points out, since more reliance on data and transparency may be perceived as a
threat to their power. “If you have a company that is strong, you have people
utilizing data across all levels of the organization, rather than having one
person who makes all the decisions based on gut feeling.” The first step toward
change, says Sadun, is to gain an honest assessment of where the company
currently stands.
“When we ask managers to rate the quality of their practices,
everyone is an 8 out of 10,” she says. In order to give companies a more
realistic view, the researchers have published the data on their their World
Management Survey website, along with a tool that allows companies to score
themselves. For those interested in creating a more in-depth picture of their
strengths and weaknesses, the website includes instructions for firms to run
the complete survey across all levels of their organization.
Since creating the online survey, the researchers have fielded
inquiries from companies all over the world eager to improve their management
practices. “It’s validating when you get calls and emails from people in many
different countries who want to survey their firms,” she says.
Sadun hopes that organizations might use the tool to assess and
improve their management in productive ways. The US Census Bureau has already
adopted a modified version of the methodology, and census offices in other
countries are experimenting with the same approach.
Changing a company’s management practices isn’t easy, stresses
Sadun—quite the contrary, it takes trust and leadership to pull it off
effectively. At the same time, as their research shows, the benefits of
improved productivity and firm performance can make implementing basic
management practices worth it.
by Michael Blanding
http://hbswk.hbs.edu/item/certain-management-practices-like-certain-technologies-boost-company-performance?cid=spmailing-13117905-WK%20Newsletter%2006-29-2016%20(1)-June%2029,%202016
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