Competent Management: a Surprising Source of Competitive Advantage
A cornerstone to enduring competitive edge resides in the transmutation of an asset that is hard for competitors to acquire into a perceived product value. This advantage may sprout from many sources: renowned brands, patents, economies of scale, personal networks, legislative regulations, or data. The quintessence of this notion is a positive feedback loop: the further one develops their competitive edge, the stronger it becomes, subsequently augmenting the difficulty in imitation.
In today's post, let's examine these positive feedback loops and their opposites, the negative feedback loops or vicious cycles, with an unanticipated origin of competitive advantage: competent management.
Transient or Enduring?
In his seminal 1996 paper, "What is Strategy?", Michael E. Porter contended that operational efficiency could not be considered a sustainable competitive advantage, given the ease with which management practices can be replicated.
Porter's conclusions sprouted from the Japanese automobile manufacturers of the 1980s. The operational effectiveness movement is traced back to the Japanese advancements of the 1970s and 1980s. During this period, Japanese enterprises outpaced Western rivals in operational efficiencies to such an extent that they could concurrently provide superior quality and reduced costs, rendering them seemingly invincible to competition. Present-day prime operational practices, such as total quality management and lean manufacturing, originated in Japanese corporations, notably Toyota Motor Corporation, with the foundational influence drawn from Frederick Winslow Taylor's Scientific Management concepts.
Nevertheless, as Michael Porter, Hirotaka Takeuchi, and Mikio Sakakibara expounded in their 2000 publication, "Can Japan Compete?", Japanese firms seldom had strategies. Those that did, such as Sony, Canon, and Sega, were more outliers than the norm. Most Japanese corporations replicated one another's product ranges, features, services, and operational practices. As international competitors mastered these operational techniques, it surfaced that Japanese firms had little to fall back on.
A firm can outpace rivals only if it can establish a durable difference. Evidently, operational best practices and tools were all too easy to replicate.
Harvard Business Review Research
Since 2002, Harvard Business Review has thoroughly explored how organisations in 34 countries utilised (or neglected to utilise) fundamental management practices. Based on a survey tool initially conceived by John Dowdy and Stephen Dorgan at McKinsey, the HBR sought to rank companies employing 18 practices across four domains: operations management, performance monitoring, target setting, and talent management.
Use of lean techniques
Reasons for adopting lean processes
Use of key performance indicators
Discussion of results
Consequences for missing targets
Choice of targets
Connection to strategy, the extent to which targets cascade down to individual workers
Level of challenge
Clarity of goals and measurement
Talent mindset at the highest levels
Management of low performance
Employee value proposition
Scores ranged from low to non-existent at the lower end (say, for performance tracking using measures that did not explicitly reflect if overall business aims were achieved) to highly developed at the upper end (for performance tracking that constantly monitored and communicated metrics to all staff using a variety of visual tools, both formally and informally). In conjunction with the Centre for Economic Performance at the London School of Economics, the HBR team has interviewed managers from over 12,000 firms regarding their practices. Based on the collected data, they graded each organisation on each management practice, using a scale from 1 to 5, where higher scores imply broader adoption.
Two key findings stem from this research.
Firstly, attaining operational excellence remains a tremendous hurdle for many organisations. Even firms with ample information and good structure often grapple with it. This is a consistent challenge across countries and industries — even though many of the managerial processes they studied are widely recognised.
Secondly, substantial, ongoing gaps in fundamental managerial practices correlated with significant, continuous differences in the performance of companies. The data indicate that better-managed firms are more profitable, grow quicker, and are less likely to fail. Moving a firm from the worst 10% to the best 10% in management practices correlates with a $15 million increase in profits, a 25% faster annual growth, and a 75% increase in productivity.
Yet these empirical results pose a significant question: If the benefits of core managerial practices are so vast and compelling, why does every firm not concentrate on copying them?
Why the companies still do not replicate the best managerial practices?
HBR research shows that a shockingly large number of managers cannot objectively gauge how poorly (or well) their firms are run.
Comparable biases are observed in other contexts. For instance, 70% of students, 80% of drivers, and 90% of university teachers consider themselves 'above average.'
Reflect on the average response to the question, "On a scale from 1 to 10, how well managed is your firm?". Most managers have an overly positive view of the quality of their companies' practices. Indeed, the median response was a 7. Moreover, the research found no correlation between perceived management quality and actual quality (as demonstrated by their firms' management scores and performance), suggesting that self-assessments are often detached from reality.
This sizeable gap is troublesome because it implies that even managers who genuinely need to improve their practices often don't take the initiative, mistakenly believing they're doing fine.
While HBR research attributes skill deficits as a catalyst for the current predicament, I wish to spotlight an alternative angle contributing to this perpetual downward spiral of sub-par management methods.
Imitating a management method is hardly an arduous task in and of itself, but you must choose carefully what to imitate. In this era of abundant information and global connectivity, one may be fooled into thinking that knowledge and facts are readily available 'out there', just waiting to be discovered. However, what truly lies 'out there' is often a reflection of our own confirmation bias or what others would find advantageous for us to believe. Facts are present too, but as Timothy Snyder has observed, they require labour.
This is even more true for managerial practices. The internet readily overwhelms you with articles extolling the virtues of rather esoteric management styles that someone is trying to sell you. And the business sections of bookshops are chock-full of autobiographies and testimonials penned by individuals enjoying their moment in the limelight (or their ghostwriters) for various reasons. Deciphering a potentially beneficial management practice from the sea of esoteric jargon and self-promotion requires qualification.
Now, let's consider an enterprise suffering from poor managerial methods. These methods didn't materialise from thin air; people introduced them – often the current management team or proprietors. They surely did not set out to foster poor managerial habits within their organisation, yet, here we are. A plausible explanation could be their inability to distinguish effective management from ineffective, and in their attempt to emulate successful practices, they inadvertently instilled poor management methods within their firm.
This state of affairs traps the company in a stasis. Managers lacking the necessary qualifications struggle to distinguish effective management practices from ineffective ones, thus hindering their ability to select the appropriate ones to replicate. Furthermore, they struggle to differentiate between competent managers and those lacking the necessary qualifications, thereby stymieing the evolution of the company's management culture and skillset.
The startup bane
Unsurprisingly, HBR research reveals that the companies with the worst management practices are founder-owned companies with founder CEOs.
This scenario aligns with a substantial number of startups. It's all too easy to succumb to the enchanting allure of startup pop-culture, which lauds 'vision', 'motivation', 'charisma', and 'positive thinking', concepts amplified by the roar of social media. Nevertheless, such attributes are hardly substitutes for proper qualifications and competence.
And the lack of managerial ones can doom your company to failure. As one startup founder and CEO told me, 'There is no place for managers in my company, and there never will be'. It is no surprise his company struggled throughout its entire existence.
Conversely, at the other end of the spectrum, the presence of competent managers can provide a significant advantage over competitors. As Michael Porter stated, once you've identified a successful management practice, emulating it is not a challenging feat. Recruiting more qualified managers paves the way for further fortifying your company's competitive advantage.
Some years ago, I had the opportunity to work as a business analyst for SoftServe, a software development firm. During one of my projects, I applied the change management principles described by Laurie J. Mullins in his insightful book, "Management and Organisational Behaviour". This resource, once a core textbook during my days at the London School of Economics and Political Science, has since become an essential reference for me. My colleague, Andrew Kosar, instantly recognised the influence of 'Mullins', as he noted with a knowing smile.
SoftServe consistently demonstrated exceptional management culture and practices - a fact that evidently contributed to its significant growth. Over the past decade, SoftServe expanded 4x, increasing its team from 3,000 to 13,000, whilst achieving a remarkable $750M+ annual turnover, all without any external investment. The firm's internal culture facilitated the establishment of the SoftServe Data Science Group, one of the first AI service lines among European software companies, and I was privileged to become SoftServe’s first Director of Data Science in 2013. Numerous SoftServe alumni have gone on to found many tech startups and service companies. Some were even sought after to join boards and C-suite positions in other software companies, eager to glean from SoftServe's success.
There is no shame in underdeveloped management practices for a startup company, especially at the early stages – the whole point of the emerging enterprise is to develop the value proposition and product while staying afloat among the tremendous uncertainties. However, a continuous disregard for managerial practices and culture could spell disaster for a firm, especially once competition rears its head.
In building a sustainable competitive advantage, paying attention to nurturing virtuous cycles is crucial. Yet, it is equally essential to be aware and avoid the vicious cycles that, if left unchecked, may threaten your entire business.
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