New research finds that certain types of management policies are associated with higher levels of productivity, profitability, innovation, and growth.
Management styles and practices vary dramatically among industries, companies, and even business units. Hierarchical or flat, agile or traditional, Silicon Valley-style or Wall Street-based, management practices are often what distinguish one corporation’s culture from another’s.
What researchers have been unable to determine — until now — is what those differences mean for business productivity and profits.
Recent U.S. Census survey data offered us a window to view more than 30,000 manufacturing plants across more than 10,000 companies, revealing striking variations of management practices even within the same corporation. For example, an automobile plant in one state may have very different requirements for hiring, promotions or even criteria in job descriptions than a plant doing the same work for the same parent company, but located in another state.
Our analysis of the Census data, conducted with Lucia Foster and Ron Jarmin of the U.S. Census Bureau and published recently in a National Bureau of Economic Research working paper, has led us to conclude that a particular set of practices that we call “structured management” is tightly linked to performance and success. For instance, consistent hiring, performance review, and incentive practices are as important to productivity as research and development investments, and more than twice as important as IT implementation.
In fact, the research shows that plants using more structured management practices have greater productivity, profitability, and innovation — as measured by R&D and patent activity — as well as higher growth.
The Census survey we analyzed contained 16 management questions in three main sections: monitoring, targets, and incentives. The survey also included a section on organizational practices as well as questions seeking information describing the establishment and the respondent.
When we examined the variation in management practices across plants, we found three key results. First, a lack of consistent management practices across plants is widespread. While 18% of plants had adopted three-quarters or more of basic structured management practices for things like performance monitoring, targets, and incentives, 27% had adopted less than half of such practices.
Second, almost half of this variation in management practices occurs across plants within the same company. That means that in companies with multiple plants, there is considerable variation in practices across units.
Third, bigger companies don’t have it easier. In fact, management differences increased along with the size of the company, and larger businesses have substantially more discrepancies in management practices because they find it harder to fully align practices across their plants.
To help us understand why structured management is so important and why there are wide differences among plants, we identified four causal “drivers” that seem to influence corporate style and substance: product and market competition, state business environments, learning spillovers, and education.
Product and market competition We found that tougher competition is significantly correlated with more structured management practices: Policies intensify when competition increases, probably as a condition for survival. In particular, competition prompts more diligent management practices among poorly managed companies, which will be forced to exit the market if they don’t adapt.
State business environments To identify the impact of geographic business environments on management practices, we considered the location of plants near the border between a state that has a “right-to-work” labor environment and a state that does not, as well as the location of a company’s founding plants.
“Right-to-work” rules often serve as a proxy for a state’s business environment, including reduced influence of labor unions and more flexible environmental and safety regulations. In our study, the presence of right-to-work rules seemed to increase structured management practices around firing and promotions but seemed to have little impact on other practices. One explanation for this result is that right-to-work regulations make it easier for companies to link hiring, firing, pay, and promotion to employees’ ability and performance.
Learning spillovers Our study provides strong evidence that the arrival of large — and typically multinational — plants will impact the management, employment, and productivity of preexisting manufacturing plants in an area. This highlights the importance of localized, within-industry learning spillovers.
Human capital and educational resources We also found significant effects on management practices and human capital as a result of educational opportunities and proximity to a land-grant college. This was true despite a range of controls for other local variations in population density, income, and other county- and company-level factors.
An increased supply of college graduates seems to lead to more structured management practices, even after controlling for local economic development. This suggests a more direct link between better-educated employees and structured management practices than you might think.
Despite our findings about the benefits of structured management practices, we don’t believe that businesses need to lose their unique cultures and characters in order to succeed. However, based on the data, we do see a clear takeaway for executives: Implementing the right set of management practice yields productivity rewards — and that is something leaders can’t afford to ignore.