Saturday, May 20, 2017

Economists link sound management to firm success

Economists have done very little research linking how different management practices correlate with indicators of firm performance such as productivity and growth.  The reason is quite simple: economic research relies all too often on data collected by the government and the government does not collect data on management.

Two professors at MIT Sloan and a colleague at Stanford decided to collect data on management practices and, with the help of the Census Bureau, linked it to data on individual manufacturing plants.  The focus was on 16 measures of monitoring, targets and incentives which were combined into a management index.

The results, summarized in this HBR piece, were quite striking: every 10% increase in the management index was associated with a 14% increase in productivity.  Well-managed firms also were most likely to grow and less likely to close.  Management practices have a bigger effect on  productivity than IT investments, R&D intensity, and worker skills.

Interesting question raised by the study: we know that investments in IT, R&D and worker skills are quite expensive compared to the cost of changing management practices.  So why don't the poorly managed firms make adjustments?  Maybe it has something to do with who the managers of those firms are!

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