The MBA AdvantageRebecca Homkes
Viewers of the popular TV show The Office are no doubt familiar with the impact bad management can have on office productivity. Michael Scott (played by Steve Carell), the infamous manager from the U.S. show, is notoriously incompetent and can do almost nothing right. Given that the The Office has been exported to more than 50 countries, bad managers like Michael Scott are presumably a global problem.
Despite the media and business interest in management, it has not been seen as a rigorous science by researchers. Frederick Winslow Taylor invented the concept of scientific management in the early 1900s, but since then most management research has been case-study driven. Case studies are useful for teaching but can be very misleading for research. The example of Enron—a widely popular case-study subject in the early 2000s—highlights this.
My colleagues and I—including researchers from Harvard, the London School of Economics, McKinsey & Co., and Stanford—decided to try to scientifically measure management practices across firms and countries. We developed an interview-based tool to evaluate management practices across four main areas: operations, monitoring, targets, and people management. A team of analysts scored managers’ responses from one (extremely poor) to five (best practice) across 18 dimensions. Over the last decade we used this tool to evaluate more than 10,000 firms across 20 countries.
Not surprisingly we find well-managed firms massively outperform badly managed firms. Companies with good management are more productive, more profitable, grow faster, and are less likely to go bankrupt. For example, going from bad management (the 25th percentile of management practices) to good management (the 75th percentile of management practices) is associated with a 3 percent higher return on capital and 70 percent faster growth.
In terms of management, Americans outperform all others. Developing countries Brazil, China, and India lag at the bottom of the management rankings. Greek firms are typically also badly managed, giving some insight into the depth of problems the country faces. Firms from Japan and Northern Europe tend to be well-managed but not quite up to U.S. levels.
But while cross-country rankings grab headlines, there is even greater variation in management within each country. For example, while the U.S. has many world-class firms, even the best-performing countries have their share of badly run firms. These are typically inherited family-owned firms, or those operating in more sleepy uncompetitive sectors. Indeed, rather alarmingly, about 15 percent of U.S. firms have worse management than the average Chinese and Indian firms.
So if management matters so much for performance, why are so many firms badly managed? One key factor is skills. Better-managed companies employ more educated managers and workers. This makes sense. Implementing best practices requires an educated managerial team and a skilled workforce.
And an advanced business degree—an MBA, in particular—has an even greater effect. If we divide all firms into three buckets by the percentage of MBA-trained managers, we find that firms where the percentage of managers with MBAs is 10 percent or higher are about 0.5 management points better on our five-point scale than those with no MBA managers. To put this in perspective, this skills gap is roughly the same size as the one between Japan and Brazil. This relationship holds even when controlling for firm characteristics, such as country of location and size.
Why is education so strongly linked to better management? One reason could be selection—for example, MBA students are much better at picking well-managed firms to join. But we also think an MBA toolkit emphasizes the very practices that our management measure finds are associated with performance. These include the following:
• Rigorous monitoring. Top firms are ruthless in monitoring their entire production process. While most U.S. firms understand and track their key performance indicators, the very best firms continuously collect, process, and evaluate these data. They have sophisticated systems to ensure employees relentlessly seek out performance improvements to keep ahead of their competitors. MBA students are typically taught statistics and data analysis throughout their coursework, equipping them with the tools for effective monitoring.
• Challenging targets. Best-practice firms set short-term and long-term targets for every stage of their process, spanning financial and nonfinancial measures. These targets are tough but fair, and developing them takes time and effort. MBA courses typically contain finance classes that explore the connections between operational concepts such as output and financial concepts such as gross margin, both in a short-term and long-term time horizon.
• Rewards and incentives. Top firms acknowledge and reward their top performers with a range of bonuses, promotions, and other incentives—they understand human capital is just as critical as physical capital. Underperformers are rapidly identified and provided with training. If efforts to improve their performance are not successful, they are moved out of the firm. MBA courses usually contain sections on human resources management, instilling a sense that merit-based promotion is appropriate. MBA-trained managers know this motivates other employees to outperform.
Comparing the full management practice grid to a typical business school syllabus, it is clear how similar these concepts are.
What are the lessons for firms looking to catch up? Relentless improvement in educational standards will play a major role. Better-managed firms need more highly skilled workers, and they need to make better use of them. This is not to say better-managed firms need MBA-trained managers to excel. Many of the firms that scored highly on our management assessment did so without any MBAs, and let’s not forget Enron, which amassed ranks of MBAs who obviously did little for the firm. But we find across countries and industries that firms with more MBAs tend to be better managed and perform better financially. While we cannot make a cause-and-effect determination, our belief is that part of this strong relationship stems from the core numerical, financial, and people-based skills emphasized in the MBA course.
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