What REALLY Works?

Management is the big thing of the last century. It has come all the way from Fredrick Taylor to Peter Drucker and finally, to today´s pop psychology. But what really works in management? Or is this ”art of getting things done” just a bubble when everything just depends on the context where management actually happens?

Management has its sceptics – with good reasons. For example, Matthew Stewart has written a book ”The Management Myth” where he writes that it´s better to study history and philosophy than to study business for a degree. Some business professors wouldn´t recommend his book for their students because of the fear of losing some promising students elsewhere. Some critics also say that it´s impossible to say what is good management when it all depends on so many environmental factors.

Some critics also say that it´s impossible to say what is good management when it all depends on so many environmental factors.

In the past, economists have avoided researching differences in management results because management literature is so often based on case studies. Managerial studies have been the playground for “softer science”. On the contrary, economists would like to base everything on systematic empirical data. Now, however, economists are on management as well because they have found ways to use econometric methods in their research.

Nicholas Bloom of Stanford University and John Van Reenen of the London School of Economics have been studying over a decade what difference does good management make. For this study, they employed about 150 researchers, they used highly scientific methods and their study concerned over 10,000 organisations in 20 countries.

The results of the study are clear: companies with better management practices are larger, more productive, more profitable, grow faster and have higher survival rates. What are the management techniques researchers focused on? They focused on 1) setting targets, 2) rewarding performance, 3) measuring results. Fairly universal and accepted management techniques to say the least. After the study, it could be pretty clearly stated that these practices simply work.

Causal change on firm performance based on management practices was proved in India where the economists provided free management advice to a randomly chosen group. After one year of implementing the advice their productivity improved by 17%. According to Bloom and Van Reenen, the strong evidence of field experiments suggests that, for example, incentive-based pay increases productivity.

The study also explains how the differences in management practices between countries and companies affect the productivity rates. Even though the impact of these practices are hard to measure, Bloom and Van Reenen offer some hard figures: they estimate that about a quarter of the 30 % productivity gap between US and Europe results from the management differences. American companies are best managed overall, especially when it comes to incentives management, Swedish companies are doing good job with monitoring management and German companies are best at targets management. Bad management exists in places like Brazil, Greece, India and Portugal. In that light, it seems to be clear that management has wide implications even for countries´ economies. Maybe management is the area where others could learn from America and in doing so improve the whole world´s economy.

Surely, there are many questions to ask. There are all kinds of new and different management practices and it would be important to know how much the different techniques matter. However, the study by Bloom and Van Reenen is a breakthrough in two ways: firstly, we know that some management practices really work regardless of time and place. Secondly, they developed a methodology for other researchers to go forward in management: more high quality quantitative research on what really works and less literature based on case studies. ”The End Times” for bad business practices are here.

Sources:

Wikipedia, article by Nicholas Bloom and John Van Reenen at http://www.stanford.edu/~nbloom/JEP.pdf, article by The Economist at http://www.economist.com/news/business/21594223-it-no-longer-just-plausible-theory-good-management-boosts-productivity-measuring