Why American Management Rules the World

Why American Management Rules the World

by Nicholas Bloom, Rebecca Homkes, Raffaella Sadun, and John Van Reenen JUNE 13, 2011

After a decade of painstaking research, we have concluded that American firms are on average the best managed in the world. 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.

Well managed firms thrash their poorly managed competitors. They make more money, grow faster, have far higher stock market values, and survive for longer.

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.

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 worldclass 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, 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.

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