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Management Matters Most for Corporate Performance - Ideas for Leaders
Idea #744

Management Matters Most for Corporate Performance

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KEY CONCEPT

The largest survey ever conducted of management practices in U.S. firms confirms that structured performance-oriented management practices and techniques are vital to corporate performance — and that the extent to which firms integrate these management practices and techniques varies widely.


IDEA SUMMARY

Does management matter in producing results? The intuitive response is yes. Multiple books and articles about famous, successful companies also celebrate the power of good management to drive great results. But until recently, true empirical data on the impact of management on results has been lacking. A team of academics and U.S. Census Bureau researchers used extensive data from more than 30,000 manufacturing plants to fill this research gap. This collected data of unprecedented scope confirms the conclusions of the ubiquitous case studies of famous companies and CEOs: management does matter, and more than any other driver of company performance, including technology, R&D and employee skills.

The data was collected through surveys consisting of 16 management questions, covering three core facets of management: monitoring, targets and incentives. The answers to the questions determined whether the plants were using performance-oriented management techniques and practices related to the three facets. For example: 

  • A question exploring the firm’s use of information to monitor and improve production processes asked how frequently performance indicators were tracked in the firm. Responses ranged from ‘never’ to ‘hourly or more.’ 
  • The set of questions about the design and integration of production targets included a question on the timeframe of production targets. Responses ranged from ‘no production targets’ to ‘a combination of short-term and long-term targets.’ 
  • The set of questions on incentives included a question how managers were promoted in the firm. Answers ranged from ‘mainly on factors other than performance and ability, for example, tenure or family connections’ to ‘solely on performance and ability.’

The survey was limited to manufacturing plants, large and small, but covered the U.S. from coast to coast. With the high response rate, the data represented companies that accounted for more than half of all manufacturing in the U.S. 

According to the results of the survey, about 20% of plants used three-quarters or more of the performance-oriented management techniques and practices for monitoring, targets and incentives; however, almost 30% adopted less than half of these techniques and practices. Whether the plants were part of companies with multiple plants or were the sole plants owned by their companies made no difference; in fact, 40% of the variation in management practices involved differences between plants belonging to the same company. In other words, the variation of management practices among plants within a company was almost as large as the variation among plants of different companies.  

To link management practices to results, the researchers compared companies in the top 10% of results to companies in the bottom 10%. They found that 18% of the difference between the top 10 and bottom 10% could be linked to management practices (compared to 17% to R&D, 11% to employee skills and 8% to technology.

The researchers also examined some of the factors that led to the adoption of more performance-oriented management techniques. These factors included:

  • the competitiveness of the industry
  • location in pro-business states (e.g., with Right-to-Work laws)
  • location close to a major university, and a higher number of college graduate employees
  • location close to a successful large new plant (i.e. a major successful firm had recently built a plant nearby)

It should be noted that although all of these factors were important, they accounted for half of the variation in management practices between the top 10% and bottom 10%. While the other factors are unknown, it can be assumed that the quality of the managers plays a big part in the adoption of performance-oriented management practices.


BUSINESS APPLICATION

The research confirms that the link between performance-oriented management practices and performance results is stronger than for any other traditional driver of corporate performance. The wide variation among plants indicates that opportunities to improve exist. 

Finally, the large variation among plants within the same firm offers an illuminating perspective on the causes of superior management. While there is no doubt corporate governance and top leadership make a difference, the fact that there are differences among plants in the same firm reveals that other factors are important. 

In sum, management practices matter, and the reasons that some firms have superior performance-oriented management practices and others don’t are varied. The study’s survey questions offer a good framework for auditing your firm’s management practices, and exploring the reasons for any deficiencies or challenges that you may uncover.


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FURTHER READING

  Nicholas Bloom’s profile at Stanford University
  Erik Brynjolfsson’s profile at MIT Sloan School of Management
  Megha Patnaik’s profile on LinkedIn
  Itay Saporta-Eksten’s profile at Tel Aviv University
  John Van Reenen’s profile at MIT Sloan School of Management
  MIT Sloan School of Management Executive Education profile at IEDP

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Idea conceived

April 2, 2017

Idea posted

Jul 2019
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