Here is an excerpt from an article co-authored by Nicholas Bloom, Raffaella Sadun, and John Van Reenen and featured by Harvard Business Review. To read the complete article, check out others, and sign up for email alerts, please click here.
Artwork: Man Ray, Rayography 2 Cones, 1927, rayograph
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HBR’s 90th anniversary seems like a good time to back up and ask a basic question: Are organizations more likely to succeed if they adopt good management practices? For a decade we’ve been conducting research to find out. That may seem like a foolish endeavor—isn’t the obvious answer yes? But as classically trained economists, we believe in reexamining long-held assumptions to see whether they stand the test of time.
At least since Frederick Winslow Taylor published The Principles of Scientific Management in 1911, businesses have been trying to follow formalized sets of best practices. Academic disciplines such as complexity and contingency theory have sprung up, as have numerous practical innovations, from decentralized budgets to performance reviews to lean manufacturing. To formulate a testable hypothesis for our research effort, we asked whether or not the thousands of organizations we studied adhere to three practices that are generally considered to be the essential elements of good management:
• Targets: Does the organization support long-term goals with tough but achievable short-term performance benchmarks?
• Incentives: Does the organization reward high performers with promotions and bonuses while retraining or moving underperformers?
• Monitoring: Does the organization rigorously collect and analyze performance data to identify opportunities for improvement?
Our teams of researchers asked managers a targeted list of open-ended questions, designed to ferret out details about how their companies were—or were not—implementing these practices. Overall, we learned three things. First, according to our criteria, many organizations throughout the world are very badly managed. Well-run companies set stretch targets on productivity and other parameters, base the compensation and promotions they offer on meeting those targets, and constantly measure results—but many firms do none of those things. Second, our indicators of better management and superior performance are strongly correlated with measures such as productivity, return on capital employed, and firm survival. Indeed, a one-point increment in a five-point management score that we created—the equivalent of going from the bottom third to the top third of the group—was associated with 23% greater productivity. (See the exhibit “The Return on Good Management.”) Third, management makes a difference in shaping national performance. Our analysis shows, for example, that variation in management accounts for nearly a quarter of the roughly 30% productivity gap between the U.S. and Europe.
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Nicholas Bloom is a professor of economics at Stanford University. Raffaella Sadun is an assistant professor at Harvard Business School. John Van Reenen is the director of the Centre for Economic Performance at the London School of Economics and Political Science.