Shifting Roles of Management in Society

Management Impacts Performance

Overview

Better management practices are associated with higher performance of firms.

Do better management practices really matter? A team of researchers led by Nicholas Bloom and John Van Reenen developed a measure of management practices and examined its correlation with firm performance in terms of productivity, profitability, growth rates, survival rates, and market value. They found that “higher management scores are robustly associated with better performance” in their initial sample of manufacturing firms and continue to find similar results across sectors, such as health and education.

One might be tempted to associate better firm performance with worse outcomes for workers and the environment. However, related research suggests that well-managed firms tend to have better childcare accommodations, job flexibility, and self-assessed employee satisfaction. And Bloom, Genakos, Martin, and Sadun found that better managed firms tended to be more energy efficient.

Interestingly, Bloom, et al. concluded that “founder firms—where the current chief executive officer founded the firm—are also badly managed.” While they are trying to work out explanations, one potential explanation is that “the entrepreneurial skills required of a start-up, like creativity and risk taking, are not primary skills required when a firm grows” beyond their initial small size. These results are consistent with others that point to increasing importance of professional management across sectors.

Finally, human capital is important to firm performance, suggesting an important role for business schools. Here is an excerpt from Bloom and Van Reenen:

    Education is strongly correlated with high management scores, whether one looks at the education level of managers or of workers. We cannot infer a causal relationship from this association, of course, but it is plausible that managers with an MBA or college education are more likely to be aware of the benefits of modern management practices like lean manufacturing. More surprisingly perhaps, is that worker-level education is also positively associated with management scores, suggesting that implementing many of these practices may be easier when the workforce is more knowledgeable. Many of the best practices ... depend on significant initiative from workers, such as the Japanese-inspired lean manufacturing techniques and higher-powered incentives.

    Our belief is that more basic business education—for example, around capital budgeting, data analysis, and standard human resources practices—could help improve management in many nations, especially in developing nations.

It is interesting to ask whether these differences are likely to persist. Are advances in information communication and automation likely to diminish differences in management scores?

Related Resources

Shaping the Quality of Organizations

Shaping the Quality of Organizations
Thomas Froehlicher, dean of Kedge Business School, believes students are searching for "friendly" companies that can offer both career opportunities and a favorable work-like balance.

Management Matters, McKinsey & Company
A report based on interviews with more than 700 medium-sized manufacturing companies that shows how important management practice is to company performance.

The Triple Bottom Line: Student Activists Demand More from B-Schools, Knowledge @ Wharton
Highlights examples of business students wanting to make positive societal impact over just making profits.

Managing with Style, Quarterly Journal of Economics
Among the results in this journal article is a “positive relationship between MBA graduation and corporate performance” as measured by rates of return on assets and operating returns on assets.

Management Matters, Ontario Institute for Competitiveness & Prosperity
A straightforward and comprehensive view on the role of management in innovation. The report describes the role management plays in the demand, supply, and financing of innovation.

Reimagining Business Education: A World of Ideas, Business Education Jam
Spearheaded by scholars, executives, researchers, and participants around the world, the Business Education Jam harnessed the brainpower of a global audience to envision an innovative future for business education.

Why Do Management Practices Differ across Firms and Countries?
An article within the Journal of Economic Perspectives in which the authors present evidence on a possible explanation for persistent differences in productivity at the firm and the national level—namely, that such differences largely reflect variations in management practices.

Work-Life Balance, Management Practices, and Productivity
An article which sheds lights on contrasting views related to work-life balance, using a data set on over 700 firms in Europe and the United States that contains firm performance, management, and work-life balance variables.

Modern Management; Good for the Environment or Just Hot Air?
A 2008 discussion paper which matches firm-level information on management practices to production and energy usage data from the UK business census for the establishments owned by these firms. The data shows an apparently positive correlation, suggesting that well managed firms may pollute more.


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