Ford Motor Company president and CEO Alan Mulally talks with some assembly line workers after … [+]
By Kamalini Ramdas, Professor of Management Science and Operations and Deloitte Chair in Innovation and Entrepreneurship, London Business School
Debate continues around executive pay and whether the large remuneration packages often offered to C-Suite leaders can be justified. Arguments in favour of the generous pay offered to executives typically highlight the firm-wide value their leadership and decision-making can create.
Less focus is given to the role effective senior managers – individuals typically with significant responsibilities and who report to the C-Suite level – play in creating value.
That is a mistake. Understanding the very real influence of these leaders helps to explain why plants in narrow industries, such as auto manufacturing, vary significantly in their productivity – even within the same organization.
New research, co-authored by me, Soledad Giardili (University of Edinburgh) and Jonathan Williams (University of Virginia), shows that an effective manager can improve plant productivity by a staggering 30%.
We examined the US auto industry, tracking the management tenure of 115 plant managers over a period of 1993-2007, to understand how individual managers affected plant productivity. In particular, we observed the effect of “switchers” – plant managers who moved to different plants – to distinguish manager effectiveness from other variables that might affect productivity, like superior technology.
We found that:
We also set out to better understand the drivers of this improved productivity. We found that productivity increased significantly if plant managers had previous experience overseeing production of the same car model at a different plant. This finding matters given the measurable decline in productivity – 22% – associated with the introduction of a new model to a plant.
As one might expect, this variability in productivity has financial repercussions too.
Take, for example, the experience of car manufacturer Ford. In 2003, it changed the vehicle produced at its Avon Lake plant from the Nissan Quest to the Ford Escape SUV. The plant manager had no prior experience producing the new vehicle model and the hour-per-vehicle measure jumped by 70%.
According to our estimates, installing a plant manager with the most experience producing the Escape SUV at Avon Lake during launch would have reduced production time per vehicle by 24 minutes. This would have led to $3.5 million in savings during the first two production years alone.
So, what do we take away from this research?
Firstly, rather than being realized at the top, productivity is an outcome achieved at the plant level. There can be huge variations in productivity even within the same carmaker, and even after accounting for differences in the models produced, technology, new model launches, time trends and the extent of outsourcing.
Secondly, our research shows that installing an experienced and effective manager significantly boosts plant productivity and can lead to millions of dollars in savings.
That our study is one of the few to empirically examine the influence of plant managers on productivity is also notable given the significant responsibility assigned to these individuals. Not only are plant managers often responsible for production, safety and quality control, they also hire and manage personnel. Each of these levers are significant drivers of productivity at the plant level.
Although our investigation focused on the US auto industry, similar results are likely to be observed in other industries where plants or retail shop floors report to a corporate head office. Hiring and retaining good senior managers is critical to firms operating in a wide range of industries.
While the attention directed toward C-Suite leaders and their remuneration relative to their value creation looks unlikely to wane, it is crucial that we don’t ignore the very real and measurable impact a good senior manager can have on a firm’s success.
For while it is readily accepted that firms will pay top dollar to attract top C-Suite leaders, senior managers are often underpaid relative to the value they add. Firms that therefore work hard to retain this top performing talent will be rewarded.
Professor Kamalini Ramdas is an expert in the innovation arena. Her current research examines new ways to create value through innovation, including: service innovation, operational innovation and business model innovation. She has also examined the amount of product variety and component-level variety that firms should offer, and how variety can be managed effectively through design.