The importance of good management

The importance of good management

The word “management” often receives a somewhat negative connotation in discussions. Management gets associated with controlling and directing, with “doing things right” within some predefined boundaries. Managers are said to keep the status quo, while leaders on the other hand innovate and change. Who would still like to be called a manager within this context?

Of course, I don’t want to argue against the importance of leadership (see one of my recent blog entries on the importance of leadership during transitions), but I would like to remind ourselves that good management is equally important for a successful enterprise. An organization needs to innovate and set visionary direction, but at the same time it needs to execute. Linda Hill & Kent Lineback argue in their 2011 HBR Blog Entry that a great “boss” needs to be capable of playing both roles, leader and manager, just as the situation requires.

But how can we measure the effect of management?

The research of Stanford’s Nicholas Bloom provides an answer. To measure management practices, he and a team of researchers at the London School of Economics, Harvard Business School, and McKinsey & Company developed a double-blind survey tool that was systematically executed on around 10,000 organizations over the past decades.

Using this survey, the researchers evaluated management practices in firms based on 18 categories along the following three broad dimensions –

  1. lean operations: how well do companies monitor what goes on inside their firms and implement modern processes and continuous improvements;
  2. performance and target management: how well do companies set the right targets, track the right outcomes, and take appropriate action if the two are inconsistent?
  3. talent management: how are companies promoting and rewarding staff based on performance, and trying to hire and keep the best employees?

Bloom and his team not only assembled one of the first large internationally comparable management datasets, but also provided various striking insights on the crucial role of management in companies.

The key finding is that good management clearly matters. There is a strong association between quality of management and total factor productivity of a firm. A one point higher score on the 5-point scale of management quality can be associated with a 2.8 percentage point increase in return on capital employed (ROCE).

This might sound negligible – but to put it in other words: improving the quality of your management processes by one point has the same effect on output as adding 25% more staff to your workforce. Impressive?

There seem to be large geographical differences in management quality. On average, American, Japanese, and German firms seem to be the best managed, while firms in developing countries, such as Brazil, China, and India, still can substantially improve their managerial processes.

Management scores across countries. Source: worldmanagementsurvey.org

Management scores across countries. Source: worldmanagementsurvey.org

What else can we learn from the research –

  • Publicly (i.e., government) owned organizations have worse management practices across all sectors we studied. They are particularly weak at incentives.
  • Among private-sector firms, those owned and run by the founders or their descendants, especially firstborn sons, tend to be badly managed. On the other hand firms with professional external CEOs tend to be well managed.
  • Multinationals appear able to adopt good management practices in almost every country in which they operate.
  • Tough product market competition is associated with better management practices, within both the private and public sectors.
  • And less regulated labor markets are associated with improvements in incentive management practices such as performance based promotion.
Management scores across ownership. Source: worldmanagementsurvey.org

Management scores across ownership. Source: worldmanagementsurvey.org

Can firms improve the quality of their management systems?

The question remains, how to change this? Or in other words: Does training of management or the introduction of management tools lead to better performance within the same firm?

Nicholas Bloom’s research also provides insights on this issue. For the paper „Does Management Matter?“, published in the Quarterly Journal Of Economics (2013) the researchers ran a management field experiment on large Indian textile firms. They provided several months of professional consulting services on management practices to randomly chosen treatment plants and afterwards compared their performance to a set of control plants.

The results were impressive. The effect of a few months of consulting advice was that profits rose by almost a fifth, to the tune of several hundred thousand dollars a year. Output was up, inventory was tighter and defect rates were halved. The better managed firms also achieved higher growth rates over the following three years as they opened new production plants.

So, yes, management does matter. The quality of it, the techniques of it, can make significant differences to the firms’ results. And one can also learn how to be a good manager.

Sources:

About the Author

Stefan Pap

Stefan founded Stefan Pap & Partners in 2008 after a successful career as project manager at two well-known global consulting firms. He is a passionate and dedicated consultant with a unique combination of strategy, business technology, and people management experiences.

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