The 3 essentials of management

Management’s Little Black Dress: Essential Practices for Leaders - Raffaella Sadun - The Conversation - Harvard Business Review

The essentials of management

We matched our management data on over 10,000 firms to public and private accounting data, which enabled us to identify the management practices, were associated with success. We found three key essentials of good management

1. Rigorous monitoring

Best practice firms are ruthless in monitoring their entire production process. In manufacturing and retail our best firms collected detailed data at every stage of the process on a continuous basis, evaluated the data daily, and used it to generate continuous improvement process. Defects were rapidly spotted and fixed. Opportunities were ruthless sought out and exploited. In healthcare and education, patient and student performance was evaluated on an ongoing basis to highlight problems and opportunities. The basic message: information is king, and firms that collect, process, and exploit information are beating firms that do not.

2. Challenging targets

Best practice firms also set tough short-run and long-run targets for every stage of their process. For example, in manufacturing many great firms had daily, weekly, monthly, quarterly, yearly, and 5-yearly target. This provides employees with a staircase for higher performance. These targets were tough but fair, so that developing them takes time and effort. But we find firms with broad and challenging targets are comprehensively outperforming their competitors.

3. Rewards and incentives

The best firms acknowledge and reward their top performers with a range of bonuses and promotion. Underperformers are rapidly identified and provided with training. If efforts to improve their performance are not successful, they are moved out of the firm. This motivates employees to outperform, driving firms with strong rewards and to overtake their weaker competitors.

Of course these practices work best together. Effective incentives require comprehensive monitoring and broad targets to enable firms to identify star performers. So we find the very best firms are adopting these performances across the board. But the rewards are stunning — going from bad management (the 25th percentile of management practices) to good management (the 75th percentile of management practices) is associated with a 3% higher return on capital, 26% higher market valuation, and 70% faster growth.