Why do we undervalue competent management?
by Raffaella Sadun, HBR
October 18, 2017 | 2:43 pm| | | Start Conversation
In MBA programs, students are taught that companies can’t compete on the basis of internal managerial competencies because they’re too easy to copy. Operational effectiveness — doing the same thing as other companies but doing it exceptionally well — is not a path to sustainable advantage in the competitive universe. To stay ahead, the thinking goes, a company must stake out a distinctive strategic position.
Nobody has ever argued that operational excellence doesn’t matter. But we contend that it should be treated as a crucial complement to strategy. If a firm can’t get the operational basics right, it doesn’t matter how brilliant its strategy is. On the other hand, if firms have sound fundamental management practices, they can build on them, developing data analytics, evidence-based decision-making and cross-functional communication — all essential to success in uncertain, volatile industries.
Achieving managerial competence requires sizable investments in people and processes throughout good times and bad. These investments, we argue, represent a major barrier to imitation.
In 2002 we began a study of how organizations in 34 countries use (or don’t use) core management practices. We set out to rate companies on their use of 18 practices in four areas: operations management, performance monitoring, target setting and talent management. The ratings ranged from poor to nonexistent at the low end, to very sophisticated at the high end.
Our aim was to gather data that was fully comparable across firms and covered a large, representative sample of enterprises around the world. We realized that to do that, we needed to manage the data collection ourselves, which we did with the help of a large team of people from the Centre for Economic Performance at the London School of Economics. To date the team has interviewed managers from more than 12,000 companies about their practices. On the basis of the information gathered, we rate every organization on each management practice, using a 1 to 5 scale in which higher scores indicate greater adoption. Those ratings are then averaged to produce an overall management score for each company.
That data has led us to two main findings: First, achieving operational excellence is still a massive challenge for many organizations. This is true across countries and industries.
The dispersion of management scores across firms was wide. Big differences across countries were evident, but a major fraction of the variation was actually within countries. The discrepancies were substantial even within rich countries like the United States.
In our entire sample we found that 11% of firms had an average score of 2 or less, which corresponds to very weak monitoring, little effort to identify and fix problems within the organization, almost no targets for employees and promotions and rewards based on tenure or family connections. At the other end of the spectrum, 6% of the firms had an average score of 4 or greater. In other words they had rigorous performance monitoring, systems geared to optimize the flow of information across and within functions, continuous improvement programs that supported short- and long-term targets, and performance systems that rewarded and advanced great employees and helped underperformers turn around or move on.
One of our findings may surprise readers: These large differences in the adoption of core management practices show up within companies too. A project conducted with the U.S. Census revealed that variations in management practices inside firms across their plants accounted for about one-third of total variations across all plant locations.
Our second major finding was that the large, persistent gaps in basic managerial practices we documented were associated with large, persistent differences in firm performance. Our data shows that better-managed firms are more profitable, grow faster and are less likely to die. Better-managed firms also attract more talented employees and foster better worker well-being. These patterns were evident in all countries and industries.
If the benefits of core managerial practices are really so large and extensive, why doesn’t every company focus on strengthening them?
Here are the things that typically hinder the adoption of essential management practices.
Our research indicates that a surprisingly large number of managers are unable to objectively judge how badly their firms are run.
Consider the average response we got to the question “On a scale from 1 to 10, how well managed is your firm?,” which we posed to each manager at the end of the survey interview. Most gave a very optimistic assessment of the quality of their companies’ practices. We found zero correlation between perceived management quality and actual quality, suggesting that self-assessments are a long way from reality.
Perception problems are hard but not impossible to eradicate. The key is to improve the quality of information available to managers so that they have an objective way to evaluate their relative performance. Managers can proactively create opportunities for candid — and blame-free — discussions with their employees.
Our data show that the average management score is significantly higher at firms with better-educated employees. Being located near a leading university or business school is also strongly associated with better management scores. While to some extent the availability of skills is shaped by a firm’s specific context, managers can play a critical role by recognizing the importance of employees’ basic skills and providing internal training programs.
ORGANIZATIONAL POLITICS AND CULTURE:
Even when top managers correctly perceive what needs to be done, are motivated to make changes and have the right skills, the adoption of core management processes can be a challenge. Sometimes the organization at large resists change.
Management practices often rely on a complicated shared understanding among people within the firm. The inability to foster it can easily kill the efforts of the most able and well-intentioned managers. On the other hand, once such an understanding is in place, it’s very difficult for competitors to replicate.
A question that managers face is how to create this common understanding. Changing individual incentives is unlikely to work, since the adoption of new processes usually requires the cooperation of teams of people.
But managers have a different weapon at their disposal: their presence. The successful adoption stories that we’ve encountered in our research often took place in organizations where someone very high up signaled the importance of change through personal involvement, constant communication, message reinforcement and visibility.
Though core management practices may appear to be relatively simple, they are not light switches that can be flipped on and off. They require a profound commitment from the top, an understanding of the types of skills required for adoption and — ultimately — a fundamental shift in mentality at all levels of the organization.
(Raffaella Sadun is the Thomas S. Murphy associate professor of business administration at Harvard Business School. Nicholas Bloom is the William Eberle professor of economics at Stanford University and a co-director of the productivity, innovation and entrepreneurship program at the National Bureau of Economic Research. John Van Reenen is the Gordon Y. Billard professor in the Massachusetts Institute of Technology’s department of economics and its Sloan School of Management.)
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