Management practices really matter: Study
new york — Management consultants face perennial questions about what value they add to companies. But management practices go a long way towards explaining why some businesses perform better than others, an important new analysis shows. Perhaps management consultants are onto something after all.
Surprisingly large and growing differences across businesses in wages, productivity, capital returns and worker mobility may influence income inequality and even macroeconomic growth, many recent studies show. Now it seems management practices play a big role in explaining the variations across businesses, at least in manufacturing.
The new study, by a group of well-respected researchers, is based on a Census Bureau survey of about 32,000 US manufacturing plants. The survey asked such things as how frequently managers track performance indicators, how quickly underperforming employees are reassigned or dismissed, and whether managers are promoted based solely on performance and ability.
The researchers used the companies’ answers to construct a management practices index, with higher ratings for plants that do such things as monitor performance, detail targets and tie management incentives to performance. Because the survey included multiple plants within individual firms, the economists were able to examine how practices vary both within companies and between them.
They found, first, that management techniques vary widely from plant to plant. Less than 20 per cent use three-quarters or more of the performance-oriented management techniques, for example, while more than a quarter use less than half of them. Perhaps most surprisingly, the authors found that a little more than 40 per cent of the variation in overall management practices occurs within the same firms.
They also found that the management techniques matter — a lot. The plants practicing more structured performance-oriented management are more productive, innovative and profitable. Every 10 per cent increase in a plant’s management index is associated with a 14 per cent increase in labor productivity, for example. And the relationships hold over time: The more performance-oriented a plant becomes, the more productive it is. Companies with higher management scores are also more likely to expand and to survive. — Bloomberg