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.
 
 
by Michael Blanding

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.

“Originally it was like a bet—can we quantify management?”

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.

Universal management practices can help increase a company’s
productivity, just as technology can do. Credit: Kadmy

“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.

About the Author

Michael Blanding is a writer based in Brookline, Massachusetts

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