Thursday, September 27, 2018

The out-sized importance of basic management practices

There is perhaps no branch of development economics research which has a richer systematic body of rigorous evidence than the new empirical economics of management.

Rafaella Sadun, Nicholas Bloom, and John Van Reenan examined the management practices of over 12000 firms across 34 countries and found that firms with superior core management practices are "more profitable, grow faster, and are less likely to die", these practices accounts for "a large fraction of performance differences across firms and countries", and they are "incredibly hard to copy". They rated companies on their use of 18 practices in four areas - operations management (flow of information across and within functions), performance monitoring, target setting, and talent management. They write,
In MBA programs, students are taught that companies can’t expect to compete on the basis of internal managerial competencies because they’re just 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—doing something different than its rivals. This is what the C-suite should focus on, leaving middle and lower-level managers to handle the nuts and bolts of managing the organization and executing plans... but our research shows that simple managerial competence is more important—and less imitable... There are vast differences in how well companies execute basic tasks like setting targets and grooming talent, and those differences matter: Firms with strong managerial processes perform significantly better on high-level metrics such as productivity, profitability, growth, and longevity. In addition, the differences in the quality of those processes—and in performance—persist over time, suggesting that competent management is not easy to replicate... 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 more-sophisticated capabilities—such as data analytics, evidence-based decision making, and cross-functional communication—that are essential to success in uncertain, volatile industries. Achieving managerial competence takes effort, though: It requires sizable investments in people and processes throughout good times and bad. These investments, we argue, represent a major barrier to imitation... According to our estimates, the costs involved in improving management practices are as high as those associated with capital investments such as buildings and equipment...
Data has led us to two main findings: First, achieving operational excellence is still a massive challenge for many organizations. Even well-informed and well-structured companies often struggle with it. This is true across countries and industries—and in spite of the fact that many of the managerial processes we studied are well known. The dispersion of management scores across firms was wide. Big differences across countries were evident, but a major fraction of the variation (approximately 60%) was actually within countries. The discrepancies were substantial even within rich countries like the United States... These differences show up within companies, too... variations in management practices inside firms across their plants accounted for about one-third of total variations across all plant locations... Even the biggest and most successful firms typically fail to implement best practices throughout the whole organization. Some parts of it are effectively managed, but other parts struggle.

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. Indeed, moving a firm from the worst 10% to the best 10% of management practices is associated with a $15 million increase in profits, 25% faster annual growth, and 75% higher productivity. Better-managed firms also spend 10 times as much on R&D and increase their patenting by a factor of 10 as well—which suggests that they’re not sacrificing innovation to efficiency. They also attract more talented employees and foster better worker well-being. These patterns were evident in all countries and industries.
They attribute the failure to adopt these simple management practices to false (or excessively optimistic) perceptions about their own operational efficiency, insufficiently democratic/collaborative governance structure, poor employee skill levels, and organisational politics and culture.

Going forward, as developing countries seek to increase their productivity, I am inclined to believe that improvements in management practices may be at least as important as technological advances.

This applies as much to management of businesses as to administration in government. The weak capacity of public systems is well acknowledged. Its contributors include chronic resource scarcity, politicisation and corruption, and apathy and complacency. But a less noticed fact is deficient management or administrative capacity at the leadership levels. 

Like with private businesses, certain basic management practices can be high value in weak state capacity and resource constrained public systems. Foremost are prioritisation, identifying and nurturing competent and committed sub-ordinates, work delegation, fixing accountability, and systems for the diligent follow-up on the prioritised issues. One could add a few other practices like time management. These are, on the face of it, simple administrative practices, but they are very scarce. 

While there is no empirical evidence to validate, there are several anecdotal examples that attests to its importance and scarcity. For example, it is common place that offices which had been floundering for long occasionally become abruptly functional and energised when certain new officers take charge. In most such cases, the change can be traced back to some of the aforementioned practices and culture introduced by the particular new official. 

This carries relevance for those designing training programs for government managers. It may generate more bang for the buck and strengthen state capacity if these trainings focus on basic administrative practices that have the potential to significantly impact efficiency than on say, substantive content. 

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