Harvard Business Review Online | What Do Managers Know, Anyway?
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What Do Managers Know, Anyway?
A lot less than they think. Now, the good news.
by John M. Mezias and William H. Starbuck
John M. Mezias is an assistant professor of management at the University of Miami’s School of Business
Administration in Coral Gables, Florida. William H. Starbuck is the ITT Professor of Creative Management at New
York University’s Stern School of Business. For more information on this topic, see their article in the March 2003
issue of the British Journal of Management.
Most corporate decision making assumes that managers know what they’re talking about. But
three decades of research, capped by our own recent studies, support what many people have
long suspected: Managers often have badly distorted pictures of their businesses and their
environments.
Though they receive endless data about their organizations and the markets they operate in,
managers tend to focus on what is happening right now, in their specific jobs, in their specific
business units, operating in very specific competitive situations. Busy among the trees, they lose
sight of the forest. They base their analyses on formal corporate documents (which they often
misunderstand), personal experiences, rumors they hear at the watercooler, conversations
during committee meetings, articles in periodicals, speeches by their CEOs, and other sources of
varied reliability.
As early as the 1970s, studies began to hint at the chasm between managers’ perceptions and
the objective reality of their businesses. Research by University of Florida management
professor Henry Tosi and colleagues in 1973, and by business consultant H. Kirk Downey and
colleagues in 1975, asked middle and top managers to describe how stable their companies’
markets were. Both research groups then compared the managers’ responses with volatility
indices calculated from the companies’ financial reports and industry statistics. In both studies,
the correlations between the managers’ perceptions and the objective measures were near zero
and negative more often than positive.
Later studies of companies in crisis showed that senior managers had great confidence in their
own, often distorted perceptions of the shape their companies were in – despite the accuracy of
their subordinates’ diagnoses. Research also confirmed the common wisdom that many senior
managers surround themselves with yea-sayers who filter out warnings from middle
management.
To Err Is Human
It was hard for us to imagine that managers could be as out of touch with their environments as
those studies suggested. But because none of the research was designed specifically to assess
perceptual accuracy, it seemed possible that the results were misleading. So we conducted two
studies to try to quantify managers’ perceptions, tapping executives from some of the world’s
best-known companies.
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Harvard Business Review Online | What Do Managers Know, Anyway?
In our first study, we surveyed 70 managers in executive MBA courses at Columbia University
and New York University. These managers worked in various industries; they were presidents of
small companies, department heads in large organizations, and technical specialists. We asked
them about their businesses and environments, querying them about sales growth and
fluctuation as well as industry growth, concentration, and homogeneity. We then compared their
answers with published market reports and statistics.
On average, these managers misreported percentage changes in their industry’s previous-year
sales by 300%. Some managers were off by 1,000% or more. And more than half of the
executives made inaccurate statements about sales by their business units. About one-third of
them underestimated sales, with errors ranging from 75% to almost 100%, and about a quarter
of them grossly overestimated sales, with errors of 200% or more. We saw similar inaccuracies
in the managers’ perceptions of other sales measures, and much to our surprise, managers who
had sales experience fared as poorly as managers who didn’t.
To see if our findings applied consistently to top management, we surveyed 47 senior leaders in
an organization whose divisions were large companies themselves. We looked at the managers’
perceptions of their company’s quality-improvement program, a major headquarters-driven
initiative. Each division had its own quality-improvement department. Managers attended
training courses and received quarterly quality-performance reports, and they earned bonuses
for quality improvements made in their divisions. This is a group you’d expect to have a firm
grasp of corporate quality metrics.
But many of the senior managers’ responses to questions about quality performance were way
off. In reporting quality performance as defect-rate percentages, or defects per million, about
one-third of the nonquality specialists and one-quarter of the quality specialists we interviewed
were off by 50% or more. When defect rates were reported using the nonlinear sigma scale – a
common measurement tool in quality-improvement programs – three-quarters of the nonquality
specialists made errors of 50% or more, and half of the quality specialists made similarly large
errors. Some managers could not read the quality-performance reports correctly even after the
program had been operating for two years. In one case, a quality specialist and a finance
manager both gave the same extremely precise but incorrect number – having pulled it from the
wrong section of the quality report.
Our studies confirmed the astonishingly high prevalence of large errors in perception among
executives.
To Forgive Is Judicious
Clearly, effective strategic thinking doesn’t depend on managers having a precise understanding
of their environments. (For more on this idea, see Kathleen M. Sutcliffe and Klaus Weber’s “The
High Cost of Accurate Knowledge” in this issue.) Because managers usually get prompt feedback
on the impact of their decisions, their misperceptions cause only small errors if they respond
appropriately. For example, managers’ ability to improve product quality depends hardly at all
on their knowledge of current quality measures. It does depend on their readiness to adjust
their thinking in response to feedback – which requires a willingness to admit mistakes.
In 1981, Bill Gates observed, “640K ought to be enough for anybody.” Gates famously
misjudged the potential demand for computer memory; but then, almost all managers
underestimate or overestimate many dimensions of their environments. What distinguishes
Gates’s mistake is not that he made it but that he quickly realized his error and went on to build
a software empire predicated on PCs’ ever-expanding storage capabilities.
Owning up to that gaffe posed no threat to Gates. But most managers today fear sanctions for
being wrong. This trepidation poses a great danger for companies. Distorted perceptions are a
fact of management. Simply providing managers with more training and data is unlikely to
change that. Instead, companies must design decision processes that work despite inaccurate
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Harvard Business Review Online | What Do Managers Know, Anyway?
perceptions, just as aircraft engineers try to anticipate pilot error. That means encouraging
managers to admit their errors and to modify their approach accordingly. The greatest asset
that managers can bring to strategic decision making is not their immediate knowledge but their
ability to seek and make wise use of feedback.
Reprint Number F0305A
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