Management practices

By The McKinsey Quarterly, February 2006 Wednesday, 26 April 2006

Just how much do good management practices matter to business performance? According to this study of more than 700 manufacturers in France, Germany, the UK and the US, it has more impact on corporate performance than the industry sector in which it competes, the constraints of its regulatory environment, or the country where it operates.

Additionally, companies that consistently apply proven good management practices such as lean production, intelligent goal-setting, tracking performance and nurturing talent generally perform better than competitors that use such techniques sporadically.

The study found a high level of correlation between improved management practices and productivity, market share growth, market capitalisation, sales growth and return on capital employed (Roce). And as well as delivering for investors, employees in companies that employ advanced management techniques are found to be likely to have a more satisfactory work-life balance and enjoy greater autonomy than others.

Of course, it is possible to find companies with good financial performance that have poor practices. But they may also have a hit product, a particular niche or a geographic monopoly that gives them a unique advantage. Generally, it is hard to imagine a company beating its rivals if its managers are second-rate.

Equally, badly managed companies can survive because of a lack of competition - in fact, the more they are protected, the less incentive they will have to adopt better management techniques.

Good management isn't predicated by country, but some countries are found to excel in certain areas. French and German firms tend to be masters at shopfloor operations - squeezing the most out of plant and equipment.

This expertise may in part reflect regulations or working cultures that limit management's options for requiring staff to work more efficiently or for motivating them. US companies are found to be better at setting targets and managing talent - the 'softer side'.

The study also found a link between young companies and good management, perhaps because new entrants to markets have a greater incentive to innovate.

Greater inertia is inevitable in larger, established companies.

Good management practices may not create a sustained business advantage, however. Competitive pressures mean companies pay close attention to rivals' improvements and copy them, so giving best-practice pioneers only a short-term advantage unless techniques are privileged or protected by patents or similar. In turn, though, such imitation should help improve overall productivity in a sector and, presumably, act as a spur for further management improvements.