New research confirms that management matters – a lot. In fact, it matters as much or more than a number of other factors associated with successful businesses, like technology adoption. Perhaps most surprisingly, management quality varies not just between companies, but within them. And good management depends on free markets, competition, and educated employees.
Ask any sports fan about their favorite team and they will usually spend half the time either cursing or extolling the manager. Apparently, the manager is responsible for every loss, and perhaps even the occasional victory. Enter any pub in England during soccer season and you will find hundreds of angry, red-faced fans shouting insults to the TV, many of them directed at the manager.
On the other hand, many people have an ingrained cynicism about the latest management thinking. In this view, management thinking obsesses over the latest fad, and represents a kind of leadership version of the Pokémon craze. Management consultants know this well: There’s a saying that “management consultants borrow your watch to tell you the time,” implying that good management is so obvious that everyone knows what to do.
The public remains divided over the value of good management. But what does the data tell us? In our research, we’ve confirmed that management matters — a lot. In fact, it matters as much or more than a number of other factors associated with successful businesses, like technology adoption.
Large-scale data on management has been virtually nonexistent, at least until recently. As Chad Syverson at the University of Chicago wryly noted in his 2011 round-up of the evidence on what drives productivity: “…no potential driver of productivity differences has seen a higher ratio of speculation to actual empirical study” than management. Sure, there are thousands of case studies and small sample studies, but it’s hard to generalize from them, since the companies they focus on are seldom representative of the broader economy. How confident are we that the dozens of breathless articles on Apple, Facebook, General Electric, and Google are telling us anything reliable about management in a typical firm?
To address this lack of data on management, we teamed up with colleagues at the U.S. Census to collect data on a large number of companies. The survey contained 16 management questions in three main sections: monitoring, targets, and incentives. We believe these three functions are the core of what business schools and consultancies claim is the essence of good management. Our survey was nationally representative but limited to manufacturing, covering small and large firms across every state in America. With a response rate of almost 80%, it covered plants that account for more than half of all U.S. manufacturing employment, and so is genuinely representative of U.S. management practices. In total, we got data from over 35,000 manufacturing plants in a massive national survey.
What does the first-ever management survey at this scale tell us?
Management Matters, a Lot
We found that only one-fifth of plants use three-quarters or more of the performance-oriented management techniques that we asked about, but that these plants had dramatically better performance than their competitors. The plants that have adopted these monitoring and incentives-based management practices were far more productive, innovative, and profitable. Every 10% increase in a plant’s management index was associated with an impressive 14% increase in labor productivity, meaning the higher value added per worker. And it wasn’t just that already successful firms were more likely to be well-run; plants that switched to performance-oriented practices tended to become significantly more productive, suggesting that better management was driving better performance. Companies with higher management scores were also more likely to expand and less likely to go out of business.
We also compared the impact of management approaches with more traditional explanations of business performance, including research and development (R&D), information technology (IT) expenditures, and workers’ skill levels. We examined differences between plants in the top 10% and the bottom 10% in terms of performance, to see what explained the difference. Management techniques explained 18% of that difference. By contrast, R&D accounts for 17%; employee skills, 11%; and IT spending, 8%. In other words, management matters more than the most common explanations for performance.
Perhaps most surprising, we found that management quality varied not just between companies, but within them. We found that over 40% of the variation in management quality between plants belonging to multiplant firms was because of differences across establishments within the very same firm. That is, in many large firms we found some plants that were managed outstandingly and some with mediocre practices. And this variation was greatest in the very largest firms, possibly because standardizing practices across regions and divisions is particularly hard for the very biggest companies.
Better Management Depends on Competition, Skills, and Learning from the Leading Firms
What could cause these huge differences in management practices across firms? We found several major factors. First, firms in more competitive industries and in those in more pro-business states, e.g., states with Right to Work laws, tended to be better managed. Second, firms with more college graduates and firms located near universities tended to adopt better management practices. Third, being located near a successful large new entrant improved practices, probably because it allows local companies to learn about best practices from leading firms.
All these factors matter, but they explained less than half of the variation in management techniques, which means that many other factors matter too. Our guess is that individual managers and CEOs themselves are another critical driver — great managers make great management practices.
The bottom line of our research is that management matters a lot for company performance, and the huge variation we see across firms suggests there are many opportunities to significantly improve performance. Improving management can be relatively cheap, compared to investments in R&D or IT. And while this study focused on U.S. manufacturing, our other work shows that this huge spread of management practices is just as true in other sectors, like retail, education and health care, and is even more striking in firms in Europe, Asia, South America, and Africa.
It turns out that good management is not necessarily so obvious. It’s relatively rare and incredibly valuable. It shapes the fates of companies, their workers, and entire economies. And we need more of it.