what do managers know

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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 Miamis School of Business Administration in Coral Gables, Florida. William H. Starbuck is the ITT Professor of Creative Management at New York Universitys 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 theyre 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 worlds best-known companies.

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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 industrys 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 didnt.

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 companys 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 youd 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 doesnt depend on managers having a precise understanding of their environments. (For more on this idea, see Kathleen M. Sutcliffe and Klaus Webers 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 Gatess 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



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

Copyright 2003 Harvard Business School Publishing.This content may not be reproduced or transmitted in any form or by any means, electronic or mechanical, including photocopy, recording, or any information storage or retrieval system, without written permission. Requests for permission should be directed to [email protected], 1-888-500-1020, or mailed to Permissions, Harvard Business School Publishing, 60 Harvard Way, Boston, MA 02163.


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