Of Horses and Riders

Do you bet on the horse or on the rider?

When you evaluate a company, which matters more, the business model and competitive landscape, or the managers that run the company? It’s a question that has plagued analysts for years. For one thing, measuring management effectiveness is difficult. “Hard” skills like use of performance evaluations and budget goal are tough enough, let alone “soft” skills like effective communication and integrity. It’s enough to make many researchers give up on the question.

But that doesn’t mean that the question is meaningless. Intuitively, we know the answer: good management helps companies do better. Just because a skill can’t be quantified doesn’t mean it’s unimportant. A recent study of 20 large textile firms in India introduced key operational practices common in European and American firms. Quality defects fell 50%, inventories fell 40%, and productivity rose 10% in a six month period!

There are lots of reasons that best management practices don’t always get implemented. Protected local industries with captive markets don’t need to improve; an overwhelmed court system means that fraud often goes unprosecuted, so owners limit the management pool to family members where they can exercise control. But the key takeaway is that management matters, and that investing in better management helps everyone.

As global competition and an improving legal infrastructure expand in the developing world, better management and improved profitability should result. This phenomenon is a key reason why global growth is being fueled by better performance in China, India, and Brazil.

Douglas R. Tengdin, CFA
Chief Investment Officer
Hit reply if you have any questions—I read them all!

Follow me on Twitter @GlobalMarketUpd

direct: 603-252-6509
reception: 603-224-1350

www.chartertrust.com • www.moneybasicsradio.com • www.globalmarketupdate.net
By | 2014-09-11T12:27:43+00:00 April 18th, 2011|Global Market Update|0 Comments

About the Author:

Leave A Comment