Management as an intangible

Good management is one of those intangible assets that is often taken for granted. But it shouldn’t be — since good management makes a big difference in the performance of an organization (and conversely bad management hurt performance). But how to prove that? The general answer is that well managed companies thrive and poorly managed companies fail.
Unfortunately, that is no answer at all. Many other circumstances may account for the overall company performance. Badly managed companies in a favorable situation can limp along — succeeding but not living up to their potential. So how can we ascertain the importance of good management?
Here is a new study from Stanford University and the World Bank — Does Management Matter?: Evidence from India — see also the short description on the World Bank’s “All about Finance” blog and a video. The study is really a report of an experiment. The World Bank teamed up with the management consulting firm Accenture to provide 5 months of management training to a group of Indian textile factories. A similar group that was not given the training was identified as a control group. The result was that for the group receiving the training, the product defect rate declined, inventory levels fell, output improved, and productivity increased.
Now, the training was pretty basic stuff. As Ray Fisman notes in his article in Slate on the project:

The study’s authors enumerate 38 practices that define good management. These include routines to record and analyze quality defects, production and inventory tracking systems, and clear assignment of job roles and responsibilities.

One could argue, therefore, that these companies lacked the basic tools of modern management. They were essentially still family owned, owner run companies — straight out of Alfred Chandler’s description of “family capitalism.” In fact, one of the outcomes of the training was that the companies moved away from direct family control to greater involvement by middle management.
Thus, the report is evidence that “management” writ large helps. The shift from family capitalism to managerial capitalism increases performance. What it does not address is the question of incremental improvement — that “better” management increases performance.
So “management” is an important intangible asset. What we need to focus on two fold:
1) how to create that asset in the hundreds of small businesses in the US
2) how to improve that asset once it has been created.
The study is useful on the first point. We need more work on the second.

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