How important is management to the success of organisations?

This is the question that was asked in a ground-breaking article published in the Harvard Business Review.

Why Do We Undervalue Competent Management?” by Raffaella Sadun, Nicholas Bloom and John Van Reenen challenges the current orthodoxy that a firm’s internal managerial competencies are not the basis for competitiveness and that it must, instead, stake out a distinctive strategic position i.e. doing something different than its rivals.

In fact, through interviewing over 12,000 managers, the paper demonstrates that simple managerial competence which many organisations take for granted is more important than previously thought.

So what are the main results from this study and what are their relevance to businesses?

First of all, it is clear that achieving operational excellence is still a major challenge for many businesses across all countries and industries.

Of course, there were variations across the spectrum of businesses interviewed. At one end, six per cent of firms were ‘superstar’ businesses with 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.

On the other end, 11 per cent of firms had 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.

Why is there such a difference? One of the explanations suggested by the authors is the expenditure required to make the difference with estimates that the costs involved in improving management practices are as high as those associated with capital investments such as buildings and equipment. And whilst many firms are prepared to invest in the latter as part of their ongoing strategy, the former tends to be seen as less important.

The second major finding was that better managed firms are more profitable, grow faster and are less likely to fail. They also spend ten times as much on research and development, attract more talented employees and foster better worker well-being.

So if the benefits of investing in core managerial practices are really so large and extensive, why doesn’t every company focus on strengthening them?
Believe it or not, one of the key explanations for this is that a large number of managers simply cannot judge how badly or well their companies are actually run.

Most managers have a very optimistic assessment of the quality of their companies’ practices and there is zero correlation between their perception and the reality of the situation as measured by the actual management scores of their business and its performance. This is an enormous issue because it suggests that even managers who really need to improve their practices often don’t take the initiative as they are under the false belief that they’re doing all right.

One way to change this situation is to improve the quality of information available to managers especially from those employees on the coalface of the organisation so that they have an objective way to evaluate their relative performance. As employees may be reluctant to criticise the performance of their organisation, managers can address this issue by proactively creating opportunities for open discussions with their employees that can significantly change attitudes toward core management processes.

Identifying the skill deficits within the business is also important as good management practices require capabilities such as numeracy and analytical skills that may be lacking in a firm’s workforce i.e. better managed firms have better-educated employees.

More relevantly, not only does the availability of executive education for managers lead to superior performance but managers themselves can play a critical role by recognising the importance of employees’ basic skills and providing internal training programmes.

Finally, and perhaps most importantly of all is how to overcome the existing organisational culture so as to improve the management of the business. The study shows that 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 because the organisation is geared to resist change.

And creating that shared understanding of management practices can often make or break the firm. If it is in place, it can be very difficult for competitors to replicate but if not, then it can demoralise and defeat even the best managers in the business. Whilst some may think that individual incentives and new processes would be the best way to foster this, the research shows that it is something far simpler that can have the biggest difference i.e. “walking the talk”.

When senior managers signal the importance of changing management practice through personal involvement, constant communication, message reinforcement, and visibility, it can drastically affect the odds of success for change initiatives. Indeed, management quality was significantly higher in those firms where the leaders dedicated a larger portion of their time to employees than to outside stakeholders.

Therefore, the simple conclusion from this study is that management matters and those businesses that invest in improving management practices will ultimately benefit in terms of improved performance. 

Given that improving management practices is one of the key solutions to low productivity, the challenge for policymakers is how they promote, support and incentivise businesses to focus on improving their management capacity and, as a result, benefit the economy as a whole.

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