The Radical Beauty of Three Simple Management Practices
by Nicholas Bloom, Raffaella Sadun, and John Van Reenen | 12:07 PM October 29, 2012
Are you among the 79%?
In our research into more than 8,000 companies in 20 countries, 79% of organizations reported that their management practices were above average.
That should have been very good news. But we also conducted our own analysis and found that only 15% of U.S. companies, and fewer than 5% elsewhere, scored above a 4 on a five-point management-practices scale we created. There was no correlation at all between our scores and the self-assessments we had gathered.
The vast majority of organizations, it turns out, have a highly inflated view of their management practices. The reality is that many of them are unable to take such basic steps as setting achievable benchmarks, removing underperformers, collecting useful data, or offering coherent bonus schemes to motivate employees. These deficiencies are as common in health care and education as they are in manufacturing and retail.
The good news is that much of the opportunity for improvement lies in the hands of people exactly like you — managers of teams, departments, units, and divisions. And even small improvements in practices can have a huge impact: Among manufacturers, for example, we found that a one-point gain on our five-point scale correlates with 23% higher productivity, 14% higher market capitalization, and a 1.4-percentage-point-higher annual sales-growth rate.
But can a company really move the needle if it adopts good-management practices? As part of our research, we partnered with the World Bank to offer manufacturers in Tarapur, India, the opportunity to participate in an experiment. Fourteen plants got free, high-quality advice from consultants, who taught them about three management fundamentals: setting targets, establishing incentives, and monitoring performance. The consultants showed the companies how to support long-term goals with tough but achievable short-term performance benchmarks, how to reward high performers with promotions and bonuses while retraining or moving underperformers, and how to collect and analyze performance data to identify opportunities for improvement.
The interventions transformed the plants. On average, the manufacturers cut defects by more than 50%, reduced inventory by 20%, and raised output by 10%. They also became far easier for their CEOs to manage, which allowed for the addition of new facilities and the expansion of product lines.
Chances are, no one is going to knock on your door and offer free consulting. But managers can have a huge impact by rigorously evaluating their own practices and comparing themselves with others.
At our web site, you can quickly benchmark your organization by country and industry on a management-scoring grid. Our analysis tool is based on 18 practices that fall into the three broad categories of targets, incentives, and monitoring.
If your company scores well, more power to you. You really are above average! A high score strongly correlates with measures such as productivity, return on capital employed, and firm survival.
If your organization doesn’t score well, you can start taking steps to push it toward progress in each of those broad areas. We’ve seen organizations make a good start by identifying which processes they need to change (for example, is product development too slow?) and then devising metrics for monitoring progress over the short and long terms. Ideally, goals should be visible to everyone and should be translated into companywide, group, and individual targets that are tracked frequently. That approach helps companies replace finger-pointing with timely, effective action plans across all organizational functions.
Small changes can be effective in driving larger changes later on. In the Indian factories we studied, we typically overcame resistance to improving management practices by piloting changes on a few machines in one corner of the factory. The positive results then opened the way for overhauling the whole plant.
Don’t expect immediate success. GE, McDonald’s, Nike, and Toyota are among the world’s top performers today, but they didn’t get to be that way overnight. Over the course of many years, they established focused targets and powerful incentives, and they continuously monitored performance, always seeking to improve. On a day-to-day basis, such steps may seem mundane. But their effect over long periods shows how profound — even radical — those simple management practices are.