Democrats or Republicans, Sales or Operations: How Business and Government are Similar

by Dr. Donald N. Sweet

Have you ever seen a business that reminds you of our Federal Government? I was at a management meeting of a business facing some difficult financial issues, not unlike our country in broad strokes? In these businesses, like in our country, the management meeting features two factions arguing with each other, protecting turf and constituents while seeming to forget about the health of the business.

When this happens in a business, we usually find that the organization has a very weak set of core values, if any at all. People on both sides of the table, or aisle, are only interested in what is good for their side. Long forgotten are the ideals that first brought them together. Gone are the memories of shared success during the growth periods. Personal and parochial agendas drive each side now.

When this happens in companies and red ink flows—like deficit spending in government–lending sources begin to dry up. It starts with borrowing becoming more expensive which causes higher deficits and the start of a downward spiral (aka: a death spiral). Often times lenders start to put demands on the organization and may go as far as requiring turnaround consultants being brought in to save the company.

Sometimes we may wish that would happen in Washington. From my doctoral dissertation research, turnaround consultants have three main levers to pull. First is changing the CEO, the leader who guided the ship into this mess. Second is selling any non-productive assets, property, buildings, equipment, stocks, etc. The final lever is expense reduction. Cash is king and it must be found and preserved.

This is where Washington can take a lesson from business. Minting money is not a solution to a financial crisis. Neither is gouging customers–tax payers. True, these “customers” may not have anyplace else to go in the near-term, but it is not a healthy long-term strategy.

How do organizations get in these difficult situations? We believe they lose sight of their core values. They forget how to work together, how to play well in the sandbox. Whatever the organization we are part of, we are only one part of a whole. When we start to identify with subgroups, operations, Republicans, sales, Democrats, we begin to lose sight of the purpose of the whole.

We find that when that happens the core values of, “continuous improvement”, “be terrific”, “always do the right thing”, “focus on the customer”, “our word is our bond”, etc. fall by the wayside. Core values are replaced by what’s best for my special interest group, not what is best for the entire organization. We need to continually guard against this happening and acknowledge that this tendency is as old as recorded history!

Continuous emphasis on the core values of the organization can help us overcome these issues. Good hiring practices tell us to hire people who have shown that they have our core values. Good management practices tell us to fire someone for violating one of our core values.

Verne Harnish of the Gazelles would caution us to have only a handful of these values. He further instructs us to repeat them over and again to ensure people continue to hear them. Of course, as leaders we must live those values, to model the way for others as Kouzes and Posner suggest.

Have a few core values. Communicate them continuously and effectively. Walk the talk. Hire people who share those values. Fire people who violate them. If we do that within our organizations our chances of success are greatly improved.

Can we do the same in our Government? What are our top five or six core values? They are the guiding light for our businesses. Why should that differ for our government? Should we enter into a national debate about the five or six things that are most important to us?

To be really core, values must be relatively few in number. When difficult decisions are to be made we should be looking to our core values to inform our deliberations. The Gazelles suggest that you only have five or six fundamental values. Too many and they lose their effectiveness. At the end of the day effectiveness is key for the team, the company, the party, the nation.

When operations and sales agree, the infighting falls away. The emphasis is put on the right issues, not what is best for my part of the team. At the end of the day we are all in this together. We believe Core Values are the glue that keep us together and and help us concentrate on the real problems and opportunities facing our organizations.

 

Workshops Focusing on Growth and Capturing the Rewards of Growth

On September 22nd we will hold a workshop in Portsmouth on how best to capture the rewards of growing your company. We will host Mr. John Murphy, President of Atlantic Management Company, to speak about The Four Most Common and Effective Exit Transitions for Business Owners. See here for more information.

On October 13th we will co-host a workshop in Woburn, MA on how to grow a company by Mastering the Rockefeller Habits. This is an exceptional opportunity to get introduced to the Gazelles approach to growth (by Mastering the Rockefeller Habits) and take a giant step forward in planning and executing to achieve growth. See here for more information.

Making Dollars and Sense with Core Values

by Dr. Donald N. Sweet

Core values can put dollars on your bottom line!  However, many of us have only paid lip service to core values in our businesses.  Of course they’re important but there are so many more immediate things that need to be addressed.  Sound familiar?  I know I’ve had those thoughts in my businesses.

During those times, I was where what Stephen Covey calls the first quadrant of time management: the important and urgent quadrant, or quadrant 1.  This is also known as fire-fighting.  Core values work are in what Covey calls quadrant 2, important but not urgent.

You’ll recall Covey instructs us that the best way to stop all the fire-fighting is by spending some time on things that are important before they become urgent.  Why would core values ever become urgent?  They inform most all our decisions, even if we don’t know it.  Our firm’s culture is shaped by them, even when they aren’t written down.

How can that happen, you ask?  Every firm that doesn’t have written and communicated core values has implied values.  Furthermore those values are interpreted differently by employees, customers, vendors and partners.  Sounds like chaos, doesn’t it?  That’s what quadrant 1, fire-fighting, often looks like.

Core values are quadrant 2 material.  They are a small set of timeless guiding principles.  Core values require no external justification; they have intrinsic value and importance to those inside the organization.  They are the bedrock of company culture.  If you don’t have core values written down and communicated there is a decision vacuum in the firm.

Core values inform who to hire: people who share the firm’s values.  Who to fire: employees, vendors or customers, when your core values are violated.  They also tell you when you need to take a financial hit for adhering to your values.  Some of you will remember Johnson & Johnson’s decision to remove Tylenol from all retail shelves in the ‘80s.  That cost them millions but it was the right decision and prompted by their core values.

Ralph Larsen, former CEO of Johnson & Johnson stated that, “The core values embodied in our credo might be a competitive advantage, but that is not why we have them. We have them because they define for us what we stand for, and we would hold them even if they became a competitive disadvantage in certain situations.”

In a recent HBR.org post by Rosanna M. Fiske titled “The Business of Communicating Values”, Ms. Fiske commented that the recent high profile scandals have made it clear that many businesses do not properly or openly communicate their values. That has both direct and indirect effects on their firm. This could be avoided, but not without some heavy lifting.

Having core values requires that they be communicated and lived by the leadership team on a daily basis.  This is truly a quadrant 2 activity.  When line people need to make a difficult decision on the spot, the core values they have learned and lived with will often point the way.  Everyone in the firm has a clear basis for making difficult decisions.

When used as an integral part of the hiring practice they improve our probabilities of making the right hires.  Everyone knows the enormous cost of mis-hires , starting with time and money spent hiring to training time and costs, to the agony of finally letting the mis-hire go, only to begin the process again.  How much time and money is lost?  Dr. Brad Smart estimates the cost of a mis-hire is between six and twenty-seven times their salary depending on their level in the organization.

Most of us have been down this path.  Not only is it costly, it’s painful.  Painful for us and our organizations.  Using our core values as one of our filters can eliminate those candidates that just won’t fit in to our culture and our way of looking at the business world.  Of course that doesn’t mean we just want to hire “yes” people, we don’t.  But we do want people who share our values.  There’s a big difference.

Teams that have the same values work better together.  One of my mentors used to say that he would take a team that worked well together over a team of superstars any day.  Employees feel better about coming to work when there is a shared culture.  When we work well together we are more effective and take care of the customer better.  At the end of the day, core values provide the foundation upon which to build a strong, profitable and vibrant company.

Mid-Market Business Dilemma: Limited Resources

by: Dr. Donald N. Sweet

This past week I had a conversation with a former client and friend of ten+ years. We’ll call this friend, Tom, for purposes of this post. Tom runs a business with four locations in four states with over 100 employees. Recently he has run into cash problems because of a classic dilemma Mid-Market companies face – too few resources.

In Tom’s case, the problem was not initially too little cash, it was too few management resources. Tom and his management team embarked on two large capital projects at the same time. To compound the resource issue, both of these projects were over 100 miles from headquarters and in different states.

Individually, both projects made sense for the company to undertake. However together, they became too complex for the team to manage when coupled with the inherent business challenges that present themselves from time to time. This is a common error many Mid-Market companies make.

As the onion was peeled back a bit further, it was discovered that the company had suffered a weak Controller. The ripple effects of this held up calendar year end financial statements which are still not done and it is now late July! Probably even more damaging was the lack of any meaningful cash forecasting.

Tom’s company was careening down the hill without being able to see out the windshield, or even the rear view mirror. Meanwhile the management team was consumed with two major projects, their resulting issues, and running the business. They were hoping against hope there would not be a fender bender.

The first major accident happened last week when they ran out of raw materials when they were put on credit hold by a critical vendor. This shut down their production which in turn also shut down an important customer. As any CEO knows, this is one of the most deadly of business sins.

So now, on top of all of the other issues Tom’s management team faces, they have a credit crunch. As everyone knows who has weathered that situation, all issues now seem to become amplified. The Financial Statements from the outside accountant are at best a couple of weeks away. The bank loan extension is good for another five weeks and little cash relief is in sight.

Tom and his team will have to do their best to manage their way out of this serious issue, there are no silver bullets. That said, what are the major lessons the rest of us can take away from this dilemma? Mid-Market companies with limited resources need to be sure they don’t reach too far beyond their capabilities.

This does not mean that our organizations shouldn’t stretch themselves. That can be just as problematic as overreaching. That said, what are the three most important resources a Mid-Market company has? In this writers opinion, they are its people, cash and customers.

People rank first because without good people the other two don’t last long. People make all the decisions in a business. They then execute those decisions. Of course those two are joined at the hip. I once worked for a CEO who used to say give me a fair plan, well executed over an exceptional plan poorly executed any day. This CEO had similar things to say about management teams and their working well together.

At Vital Growth Consulting Group, we find that it is the people and, in particular, the management team that adds the most value to the business. Some of the questions that we ask, and suggest you do too, are as follows: Does the management team take good care of their employees? Do they consistently communicate the company direction clearly and concisely to all stakeholders? Do they work well together? Are they able to intensely debate major issues, get outside points of view, reach timely decisions and get everyone behind those decisions? Are they realistic about risks without being risk adverse? Do their skills, outlook and experiences complement each other?

When the answers to those questions are in the affirmative, the chances for success are much higher than when they aren’t. Just as in Tom’s situation, there are no silver bullets in any business venture. There are no absolute right and wrong answers. But Mid-Market companies can improve their probabilities of success, with limited resources, by making sure they have a strong, balanced and well-functioning management team.

Company Culture is Central to Organizational Effectiveness (and Profit)

We at Vital Growth know that company culture is central to organizational effectiveness. Organizations can succeed with a poor culture but more often they fail or “fail to thrive.” The article below makes the case for attending to your company’s culture for the benefit of employees and the bottom line…

Does Corporate Culture Pay?

The Beryl Cos.’ CEO Paul Spiegelman argues that having a strong corporate culture makes smart business sense. See here for the full article.

Culture: It’s a word that often makes CFOs cringe because of the perception that it’s expensive. From my experience, it’s far more costly to do business without it. As CEO of The Beryl Cos., which specializes in managing patient interactions for hospitals, I’ve found that employee engagement through our unique corporate culture is what allowed us to move from a commodity to a business that doesn’t need to compete based upon price. Read More…

Nimble Companies Plan for the Quarter in Today’s Economy

The days of the 100 plus page annual business plans have ended. Business dinosaurs might continue to produce them, but they won’t for long as they follow the original dinosaurs into oblivion. Let’s face it; in the old business planning process, which began by gathering data over the summer for next calendar year’s plan, was hopelessly out of date even while it was still in use.

How can we possibly know what will happen in detail some 15 months from now? We can’t. More importantly, how can we expect ALL our employees to know what the critical business elements are in all that paper? Again, we can’t.

The time has come to radically change your business planning model. A number of our clients are moving to a quarterly planning model using the Gazelles One Page Strategic Planning tool. This keeps their plan fresh and vibrant. It also allows them to take advantage of near term opportunities in the market place and, sometimes more importantly, respond real time to threats.

How does a company make the shift from the old sluggish business plan to a new more nimble process? At Vital Growth Consulting Group we have a migration path available for you and your company. As you can imagine, having a solid foundation in place is critical for the process to be effective. We believe that foundation, at a minimum, consists of Core Values, Brand Promise and BHAG (long term goal).  Our thanks to Jim Collins for his work in this arena.

With those items in place and as your business base, you can then determine what next quarter’s priorities are. We find the best way to accomplish this is in a facilitated meeting with your management team. Having a handful of good minds batting around the business issues consistently provides the most robust solutions. Using an experienced facilitator/coach involved in the process provides both guidance and an outside business perspective. We suggest that you pick no more than five quarterly priorities and designate one as the top priority for that quarter.

We have all seen what happens when there are too many items on our “to do” list. Usually we try to knock the majority of items off them. Often times the completed ones are not the most important. The main items are usually big and/or difficult and require more time and effort than we have at any one point in time. So we consistently spend time getting the less valuable ones done. That’s human nature and it applies to the folks that work for us too.

Once the top five priorities and top one of five are agreed upon we must develop a plan to inform all employees. We want everyone in the company to understand the quarterly priorities so it is important to have, and execute, a robust communication plan. Some clients will try the process internally with the management team for a quarter or two to work out bugs before bringing in the entire team. Others jump in with both feet.

Of course for priorities to have teeth they must be specific, have one person responsible for getting them done (that person often has others to assist them) and have a target due date with regular progress reviews. Sometimes priorities require additional resources and occasionally they run into major obstacles. Regular top management review helps to overcome those issues.

We think of the Quarter as a thirteen week race. Arriving at the handful of important priorities every three months keeps your company focused on the most important matters. The BHAG provides you and your team with the compass reading so you can ensure that your quarterly priorities are always moving you north.

Take an important step toward making your company more nimble in this difficult economy. Get a leg up on your competition. Contact us at Vital Growth Consulting Group (www.vitalgrowthllc.com) to see how we can help you more effectively accomplish your goals.

Innovate Your Management System or Die

One of the keys to health and growth of any organization is innovation, often times known as R & D.  Innovation comes in many forms and is often thought to refer to products or service offerings.  But those aren’t the only important forms of R & D.   Innovation can also take place in the management systems of an organization.

Gazelles International provides coaching and technology services to help mid-market companies around the world build and execute a strategic plan. The Gazelles are probably best known for the One-Page Strategic Plan and other one-page tools.  Certified Gazelle coaches focus on helping executive teams make the right decisions when it comes to four key decisions areas: people, strategy, execution and cash.

This program helps teams get company alignment around key points like, strategy, priorities, brand promise, goals and core values.  It is a straight forward way of communicating the important aspects of the business to all stakeholders.  How much more effective would your organization be if EVERY EMPLOYEE UNDERSTOOD the company’s strategy and their role in its execution?  For a number of our clients, that “secret weapon” has been particularly innovative.

How can that happen, you ask?  Simple, get some professional help from a certified Gazelles coach to focus on the four key decisions in your business: people, strategy, execution and cash.  If you don’t, you risk leaving significant revenues, profits and time on the table.  Furthermore, you leave the door open for your competition or the market to pass you by.  Now please allow me, with help from Verne Harnish, founder of the Gazelles, to provide some guidance on the four decisions.

People Decisions
In general, you know you have People challenges when you’re not enjoying running your company. You either have a partner issue, a customer with too large a piece of your business, a supplier delaying your success, a key employee or two who’s disrupting the rest of the organization’s effectiveness, or challenges at home. Or you might simply lack enough employees to serve your customers, though I caution executives to avoid tossing employees at problems.

Until you settle these relationship issues, they’ll continue to consume a tremendous amount of emotional energy, making it difficult to focus on the other three main decisions. Focus first on getting the right people, doing the right things, with clear accountabilities and metrics.

Strategy Decisions
Strategy challenges are indicated by a slowing in top line revenue growth. If revenue is not growing as quickly as you like, then it’s time to re-examine your strategy i.e. what you’re selling, at what price, and to whom. It’s important to have a concise articulation of that strategy so you can get everyone aligned and on the same page without wasting sales or operational energies on activities not useful to the business.   You will know you’ve gotten the strategy right if revenues are growing as rapidly as you want.

Execution Decisions
Execution challenges surface when your increasing revenues are not generating increasing profits. We’ve seen firms double and triple their revenue, because they have capitalized on a differential advantage, only to see their profitability drop because of the sloppiness of their execution.

The other indication of poor execution is pure hours spent delivering your products or services. When execution is haphazard, the organization has to rely on the “heroics” of their people putting in incredible hours to just keep the wheels from falling off the organization. By simply tightening up your execution habits, you can dramatically improve gross margins and profitability while reducing the time it takes for everyone to complete their work.

Cash Decisions
The last, but not the least, challenge is Cash.  Cash provides both oxygen and options for an organization.  Without cash, a business is in trouble.  Furthermore, the first law of entrepreneurial gravity is “Growth Sucks Cash.”  We take client companies through a process to help calculate their Cash Conversion Cycle (CCC).  This measures how long it takes from the time you spend a dollar (on sales, marketing, proposals, rent, inventory, wages, etc.) until you get that dollar back.

In the early days of Dell, the CCC was running 63 days and caused Michael Dell to almost run out of cash. By focusing on decreasing this cycle, they got it down to close to minus 35 days. That meant they generated more cash the faster they grew. We believe all growth firms can accomplish this or at least dramatically improve their CCC giving them sufficient internal cash to fuel their growth.

We suggest executives read Neil Churchill’s famous Harvard Business Review article entitled “How Fast Can Your Company Afford to Grow” which provides the formulas for calculating your cash conversion cycle.

Secret Weapon
The secret weapon is the way Certified Gazelle Coaches help organizations get all employees aligned with the company’s major goals and objectives.  Everyone on the team knows where they are going and what their individual duties are to help complete the big picture.  Through some simple techniques and procedures, your management team will be shown what they need to do to innovate your management system and get your organization firing on all cylinders.  The power this alignment brings is incredible, as any Gazelle coached company will tell you.

Innovation of your management system can rejuvenate your team and your business.  You, as leader, must take the first step to make that happen.  May your business be healthy, happy, and help you reach all your goals.

“In business you cannot discover new heights unless you have the courage to leave the ground.” ~ Seth Godin

Five Tough Questions Every Entrepreneur Must Ask about Growth

We at Vital Growth Consulting Group endeavor to share some of the best thinking on management that we encounter in our travels. Below is a HBR blog post by Rosabeth Moss Kanter titled, “Five Tough Questions Every Entrepreneur Must Ask about Growth.” The five include the areas of People, Finances, Partners & Allies, Organizational Culture and Outcomes & Impact.

Changes in organizations are constant. They add an additional level of complexity for the entrepreneur to deal with. We at Vital Growth CG recommend business owners consider joining organizations like HBR (link below the article for your convenience) for timely thoughts on business issues and trends.

Five Tough Questions Every Entrepreneur Must Ask about Growth

by Rosabeth Moss Kanter

Getting a venture underway is often easier than keeping it going and growing. At each major stage from start-up to sustainable success, entrepreneurs face tough questions about shifting gears, making major changes, and letting go of people, partners, and products. For new businesses, inability or unwillingness to change can land them in the statistics about high failure rates at the five-year mark. For non-profits, clinging to the past can lead to marginality and stagnation.

To keep an enterprise on track while facing the often-pleasant challenge of growth requires making sometimes-painful adjustments in these five areas.

The People. One of the hardest questions is when to change the people — not just individually, but the whole mix. Founders often start with friends and true believers who work hard because of zeal for the cause or hope for future returns. They occupy multiple overlapping roles. But do the people with single-digit badge numbers or members of the founding generation have the skills the organization needs as it creates routines and requires depth in every specialty? Who can make the cut? A winery I knew from its beginning kept the original group longer than the business could afford, and loyalty got in the way of bringing in experienced people “above” the people who felt they were founders and thus privileged to call the shots. Raise a glass to courageous leaders willing to tell people they must either grow or go.

Finances. Whether the original source of funds is venture capital or venture philanthropy, an investor base or a donor base, each growth phase challenges organizations to shift assumptions and thus change practices. Perhaps investors expect customers to take over as funders of growth by paying more (or paying at all), a challenge dot-com companies faced in the first Internet wave and social media companies face now. Non-profits also outgrow friends-and-family angels or local sources and must find sustainable revenue and capital sources. How do you move from being discretionary nice-to-have in a portfolio to essential-to-fund? Where are the new sources appropriate to a new, larger size? A multi-site non-profit went from local businesses close to the founding city to national funders in government and foundations to a revenue model replicable in every site through ongoing school budgets on a fee-for-service basis.

Partners and Allies. The best organizations are attuned to the need for key external relationships that provide resources and support. At the same time, entrepreneurs do not want to be captive to the needs and desires of their first distribution partners, component suppliers, source of talent, or marketing allies. It is tricky to know how to nurture and draw benefits from key partners without being subsumed by them — or subject to damage if they stumble — and, at the same time, add to a partner set without creating conflicts. Which partners should be downplayed or replaced as the organization grows? How can key relationships be managed to lessen dependence while seeking new, more relevant, allies? And with growth comes the need for entirely new types of relationships — which is why Facebook now has an enlarged Washington office.

Organizational Culture. Are you making explicit what the organization stands for in tangible ways that can be transmitted and endure? Are you on guard against drifting away from the culture? Numerous studies, including my own, show that an emphasis on organizational culture is associated with continuing excellence. Values, stories, artifacts, and rituals provide a source of identity that makes the organization feel the same, in pursuit of the same mission even while everything else changes. Culture provides internal glue. As an organization grows, what was once informal must be documented, codified, memorialized, and passed on to new people. Savvy entrepreneurs ensure that their organizations are built to last by stressing culture. At every stage, they invest in preserving fundamental values and principles while adding new iconic stories that reflect them.

Outcomes and Impact. What results are being produced, for whom, and are these sufficient? In the beginning it’s enough to show that it can be done at all — to address a good cause or to prove that something works in a handful of markets. In the next phase, you might look at growth indicators — we did more this year than last year. Recall the signs that McDonald’s posted outside its stores during its rapid growth phase, heralding how many millions of hamburgers had been served. Sooner or later a new question arises: Are you making a difference that makes the venture more essential?

Ventures that go from proof of concept to “permanent” player have become icons, household names, or must-have players because they can show differentiated user, recipient, or national benefits — that they have impact not just on their immediate customers but on the entire industry. We all know that success provokes imitation. As the organization grows, its distinctiveness gets harder to maintain. But often many in and around the organization come to believe that existence is a sufficient sign of importance — a trap particularly for non-profits. Asking the “so what if we weren’t here?” question about making a difference can provoke soul-searching and strategy change.

The bottom line: In addition to the challenges of innovation to ensure new offerings and new capabilities, entrepreneurs and organization founders must also be alert to the ways that the organization itself changes as a result of growth. It is important to anticipate those developments and ask the five big questions at every stage in order to get ahead of change and master it.

Why American Management Rules the World

We at Vital Growth Consulting Group endeavor to share some of the best thinking on management that we encounter in our travels. Below is a HBR blog post by Nicholas Bloom, et. al. entitled, “Why American Management Rules the World.” The article is something to cheer about if you’re an American and provides the “secret sauce” for achieving managerial success.

We at Vital Growth CG recommend business owners consider joining organizations like HBR (link below the article for your convenience) for timely thoughts on business issues and trends.

Why American Management Rules the World

by Nicholas Bloom, Rebecca Homkes, Raffaella Sadun, and John Van Reenen

After a decade of painstaking research, we have concluded that American firms are on average the best managed in the world. This is not what we — a group of European researchers — expected to find. But while Americans are bad at football (or soccer, as it’s known as locally), they are the Brazilians of Management.

Over the past decade, a team from Harvard Business School, London School of Economics, McKinsey & Company, and Stanford has systematically surveyed global management. We have developed a tool to measure management practices across operational management, monitoring, targets, and people management. We scored each dimension on a range of practices to generate an overall management score, surveying over 10,000 firms in 20 countries. This has allowed us to create the first global database of management practices.

Here are some of our findings.

Well managed firms thrash their poorly managed competitors

First, not surprisingly, we find that organizations with better management massively outperform their disorganized competitors. They make more money, grow faster, have far higher stock market values, and survive for longer. (For details see our previous HBR blog post.)

The American Management Century

Second, when it comes to overall management, American firms outperform all others. This U.S. dominance occurs in the manufacturing, retail, and healthcare sectors (but interestingly, not in high schools). Japanese, German, and Swedish firms follow closely behind. In contrast, developing countries like Brazil, China, and India lag at the bottom of the management charts. Southern European countries like Portugal and Greece appear to have management practices barely better than those of most developing countries. In the middle stand countries like the UK, France, Italy, and Australia, which have reasonable but not brilliant management practices.

Bottom dwellers drive the rankings down

While the ranking of countries is certainly eye-catching, the real story lies within the countries. Almost 90% of the cross-country differences are driven by the size of the “tail” of really badly managed firms within each country. Countries like the U.S. that excel have hardly any badly managed firms, while those like India that have low average scores have a mass of very badly managed firms pulling down their averages.

Every country has some world-class firms

But while there are many of these extremely badly managed, every country also hosts some excellent firms. Even bottom-ranking India has dozens of firms that use world-class management practices. A key takeaway is that individual companies are not trapped by the national environments in which they operate — there are top performers in all countries surveyed. Conversely, being in a world-class environment like the U.S. does not guarantee success. Even in America, more than 15% of firms are so badly managed that they are worse than the average Chinese or Indian firm.

What is the secret sauce of management success?

One of the biggest drivers of these differences is variation in people management. American firms are ruthless at rapidly rewarding and promoting good employees and retraining or firing bad employees. The reasons are threefold.

  1. The U.S. has tougher levels of competition. Large and open U.S. markets generate the type of rapid management evolution that allows only the best-managed firms to survive.
  2. Human capital is important. America traditionally gets far more of its population into college than other nations.
  3. The U.S. has more flexible labor markets. It is much easier to hire and fire employees.

Many developing-country firms, even while trying to implement new techniques like Lean Management, ignore the fact that labor is different from other “inputs.” Many of the Chinese firms surveyed did not even employ managers who spoke the same language as the workers, relying on interpreters or basic sign-language for communication. As you can imagine, this does not lead to a feeling of mutual support between management and workers.

But the U.S. should not be complacent. Other countries equal or better the U.S. in some of the other areas of management we examined, such as careful monitoring, lean production, and sensible targets. The manufacturing prowess of Germany, which has helped it weather the recent downturn so well, is built upon such advantages. Furthermore, although Chinese management practices are well below U.S. standards, they showed the fastest improvement since 2006 of any country we have looked at.

Changing the ranks and reaping the rewards

What lessons emerge for others wanting to reach the top of the ranking?

The answer is not for all firms to be more American but rather to consider some of the practices U.S. firms — and especially U.S. multinationals — continually exhibit and implement. Across all countries, organizations that properly incentivize talented workers, whether through promotion, pay, or other rewards, outperform others. As best practices spread and firms continue to implement these techniques they will narrow the existing gaps, reaping huge growth and profitability gains.

Do you want to know where your firm would fall in the rankings? For more on our research agenda and related work, go to the World Management Survey, where you can also benchmark your own organization and determine where you fall within the ranks of your industry or nation.

Nicholas Bloom is a Professor of Economics at Stanford University. Rebecca Homkes is the Director of the Management Project and a Research Officer at the Centre for Economic Performance at the London School of Economics. Raffaella Sadun is Professor of Strategy at Harvard Business School. John Van Reenen is the Director of the Centre for Economic Performance and a Professor of Economics at the London School of Economics.