Strategy and Competition B, Assessment Example

Introduction

Firm heterogeneity refers to the differences that exist between firms; Some are small while others are large. Some pursue a cost-leadership competitive strategy, while others focus on differentiation to build a competitive edge. Productivity dispersion is the indifference between firms in productivity. A growing productivity literature posits that similar firms differ widely in their productivity, and these differences persist with time. Firms strive to use efficient production methods to keep production costs low and appeal to low-cost consumers to remain competitive and relevant. While productivity dispersion distinguishes firms from their competitors and creates a competitive advantage, management practices drive productivity and contribute to the firm’s success. Putting in place an incentive system that rewards employees based on their performance helps attract and retain a highly skilled and talented workforce committed to realizing the organization’s goals. This paper advances the management practices literature by presenting summaries of past studies, lessons learned and expounds on the link between productivity and the firm’s resilience.

Theoretical background

Organizations have stressed firm heterogeneity that is concerned with a firm’s distinctiveness for a long period. Organization leaders consider heterogeneity the best approach to building a long-lasting competitive advantage. However, firm heterogeneity definition is changing to include aspects of management practices. To build a competitive advantage, one must incorporate both aspects of organization distinctiveness and effective management practices. Productivity which is concerned with organization output affects the cost structure of the firm and influences performance. When the production level is high,  fixed costs are spread over many units, thus decreasing the cost per unit and increasing profits.

From the above graph, it can be seen that fixed costs remain constant at any given production level or output. Firms will have to pay fixed costs even at zero production level, which translates to losses because, at this point, it does not sell anything. However, as the level of output increases, the firm recovers fixed costs and eventually becomes profitable. Therefore, productivity plays a key role in cost reduction and profit generation. Productivity heterogeneity refers to dissimilar activity levels in firms (Aiello& Ricotta, 2016). It leads to firm heterogeneity by creating distinctiveness in production. However, production is driven by a pay and reward structure, work flexibility, and a strong management team. All these factors relate to management practices. For example, reward and promotional schemes are crafted by the organization’s management. If the pay and reward system is skewed, the organization will not appeal to hardworking employees who would help drive productivity. However, until recently, data on management practices was when World Management Survey (WMS) was unveiled (Scur et al., 2021).

Article summaries

Why do we undervalue competent management? By Sadun, R., Bloom, N. and Van Reenen, J. (2017)

Sadun and colleagues sought to know why managerial competencies are undervalued based on their imitability and lack of strategic distinctiveness despite the existence of research that links operational excellence to competent management. They studied how organizations use or fail to apply core management competencies. The scholars evaluated companies on their use of eighteen management competencies on operational management, performance monitoring, target setting, and talent management. They found that the attainment of operational excellence is a big challenge to many firms, including well-structured ones. The researchers found a negative correlation between firms’ performance and managerial practices; firms with persistent gaps in managerial practices showed large persistent differences in performance. Better managed firms were more profitable, grew faster, and were less likely to die in the early stages of their operations. They also attracted highly skilled and talented employees. On the other hand, poorly managed firms recorded enormous losses and showed no sign of growth. On the question of what deters firms from implementing effective management policies, they found that many managers had false perceptions about how their firms were being run. Overconfidence was another problem; managers believed that their firms were on the right trajectory and there was no need to take the initiative to turn around things. The governance structure was found to be a major hindrance to adopting effective management practices, especially in family-owned businesses. Other stumbling blocks included organizational culture, politics, skills, and education deficits. Better educated managers performed better than their lower educated counterparts. While many organizations value strategic distinctiveness over managerial competencies, as illustrated by Sadun et al. (2007), there is a need to strengthen internal structures to remain relevant in the industry. Organizations with effective reward and compensation policies attract a highly skilled workforce who contribute to its success. For managers to successfully implement a strategy, they must have the right people with the right attitude. However, an organization can only appeal t competent workers if its management policies and practices allow employees to thrive in the workplace.

Building a Productive Workforce: The Role of Structured Management Practices by Cornwell, C., Schmutte, I.M. and Scur, D. (2021)

Cornwell et al. studied the role of management practices in building a productive workforce by investigating the relationships between firms’ management practices, the quality of their managers, and the process by which firms recruit, retain, and dismiss employees. They noted that firms with structured management practices hire effective and efficient workers, especially in leadership positions. Such firms record low employee turnover. Managers in organizations that adopt structured management practices influence other workers within the organization positively.

Additionally, firms with structured management practices have higher employee retention rates, indicating that they pay their workers well and contribute to their personal development. However, if they have to dismiss workers, they selectively do it by paying keen attention to quality. Generally, the adoption of structured management practices was linked to workers’ productivity and job satisfaction. The researchers proved that firms with structured management practices-formal recruitment and selection procedures- consistently hire and retain a large percentage of skilled managers and production workers. These firms pay keen attention to quality when dismissing employees. Organizations that adopt structured management practices offer salaries and wages that are commensurate to effort expended and peg promotion on performance. According to learning curve theory, employees take time to develop skills. However, after mastering the concepts, they spend less time to produce a unit of the product leading to increased output. An organization with structured management practices strive to develop their employees’ skills.

World Management Survey at 18: lessons and the way forward by Scur, D., Sadun, R., Van Reenen, J., Lemos, R., and Bloom, N. (2021)

Scur and colleagues presented major lessons they learned in measuring and understanding management practices twenty years later. The World Management Survey idea was convinced to develop a universal approach of evaluating organization management practices. They presented global data sets they developed since the introduction of the survey. On the measurement of management practices, Scur and colleagues noted that a structured interviewing system eliminated ambiguity and personal bias from interviewees. They observed that the question of what constitutes good management leaves out critical aspects such as innovation, finance, marketing, among others. Scur and colleagues noted that the question of whether good management is universal or not is culturally biased and the practices measured are simple and less culturally sensitive. On firms’ productivity, the researchers learned there was a strong positive correlation between productivity, operating profit output growth, and management of firms across nations. However, they pointed out that management practices do not affect productivity alone. Other aspects affected include work-life balance and family-friendly policies. They also observed that positive relationships between management and performance are similarly reflected in public institutions. Better managed health facilities have positive patient outcomes. Another key lesson learned is the impact of general education on managers’ and workers’ performance. They argued that education has a positive impact on workers’ productivity and the company’s success. Better educated workers were more productive than workers with no formal training. Overall, the researchers agree that effective management practices contribute to the success of an organization.

Management Practices at Amazon

Amazon, an American multinational company, adopts some of the most ineffective and inefficient management practices. The company uses unorthodox ways of evaluating and rewarding employees. Workers are classified into three groups; the first groups constitute a small number of high-performing workers who are generously rewarded for their efforts. The second group consists of a large group of average performers who hold on to their jobs, while the third group consists of underperformers who are on their way out. Though workers should be evaluated on the basis of their performance, the method used by amazon is subject to personal bias. It also creates an atmosphere of fear that discourages employees from improving their skills.

Additionally, the process hinders teamwork and collaboration. Employees at Amazon work for an average of 80 hours against the recommended 40 hours; this implies that the organization does not pay attention to work-life balance. Sadun et al. (2017) study found out that organizations that valued managerial competencies and used effective reward and compensation systems attracted skilled and talented employees who contributed to the organization’s overall success. Work-life balance is another factor that attracts employees. Bloom,  Sadum, and Van Reenen (2012) believed in three basic elements of good management practice; target, incentives, and monitoring. Targets should be challenging but achievable (Bender et al., 2018). Although many companies use rank and yank management methods, research suggests that it does not succeed in enhancing productivity (Adsit, 2018).

Management practices

Develop workforce

Amazon should develop its employees through training, mentoring, and motivation to make them more productive in the workplace. Herzberg’s motivation theory argues that incentives, recognition, and praise influence job satisfaction because they encourage personal growth and development as well as the desire to achieve and prosper in the workplace. Training improves workers’ productivity and organizational success. The management should encourage those who perform poorly rather than threaten them with job redundancies. A carrot and stick motivational approach that rewards high performance and punishes low performance is not the best method of motivating employees in a large organization like Amazon (Frangieh & Rusu (2021).

Structured management practices

Structured management practices help build a productive workforce and reduce cases of dismissal and high staff turnover. Firms that adopt structured management practices attract quality managers who have a positive impact on employees. They are also successful in keeping high-quality hires (Scur, Schumtte, and Cornwell, 2019; Kotey, 2005). Quality workers are highly productive, focused, and result-oriented. Structured management practices will lead to low staff turnover because the organization will have an effective reward and motivation policy that supports growth and personal development. McKenzie and Woodruff (2015) opined that better management practices contribute to high performance while bad business practices such as skewed hiring, reward, and compensation policies and process hold back firms in developing countries.

Matching employees’ skills abilities with jobs

One of the most effective management practices is matching employees, skills, qualifications with jobs. Recruiting the right people for the right jobs eliminates complaints, reduces high staff turnover, and leads to firm competitiveness in the industry. Employees are more productive if given tasks that match their skills and qualifications. Placing candidates in the right positions based on their skills and qualifications reduces the chances of making mistakes that would attract punishment and lower employee morale and job satisfaction.

 Impact of Interventions and advanced economic shocks

Adoption of remote working

During economic shocks and pandemics such as Covid 19, workers’ movements are restricted to control the spread of the virus. These measures affect organizations’ performance and productivity (Lamorgese et al., 2021). However, firms with structured management practices can easily change from office-based to remote working. (Schirvadi et al. (2021) found out that better-managed firms posted positive results during the covid 19 pandemic. They recorded a significant increase in sales revenues. They were also able to keep their operational costs low by developing effective cost control measures. These results are similar to Lamorgese et al. (2021), who studied practices and their impacts on a firm’s productivity during the pandemic.

Increase incentives that boost employees’ morale

Although firms with structured management practices can find it easy to adopt remote working, the process comes with additional costs such as the internet and costs related to employee monitoring. However, motivated employees are highly productive (Mwanza & Chingarande, 2013). They go the extra mile and surpass their targets during the pandemic. Schirvadi et al. (2021) posit that monitoring employees to a similar level before the occurrence of the pandemic may be important during unprecedented situations because it allows a smooth transition to remote work without the need for the organization to implement additional changes. Although not all workplace activities can be done remotely, the practice may help reduce drastic fall in production and closure of the business. Internet-based sales can help keep organizations afloat by offsetting fixed costs that accrue daily regardless of the production level.

Training and productivity

Organizations that have implemented effective management practices regularly train their workers and prepare them for economic shocks such as financial crises, while those with weak management practices rarely update their workers’ skills. During an unprecedented period where workers need to shift to new practices, they record low sales revenues. An organization with structured management practices attracts quality workers who are innovative, resilient, and adaptive. Such employees find new ways to improve their performance even during pandemics (Lee, 2000). Aghazadeh (2007) reviewed past, and current research on productivity problems and how to alleviate them through proper training found that businesses that train their workers showed high productivity levels. He concluded that businesses should train their workers to make them more productive and resilient. Training, adoption to remote working, and incentives that boost employees’ morale are related to structure management practices. Incentives and performance-based bonuses are common in organizations with a structured management system. Firms that pay their employees well also attract competent managers who contribute to the organization’s productivity, as observed by Sadun et al. (2017).

Corporate resilience

Resilience is the ability of a firm to remain versatile or bounce back after an economic shock. Firms try to remain resilient by establishing alternative growth paths through diversification and the acquisition of both related and unrelated businesses. Resiliency also depends on a firm’s ability to start afresh in case of destruction. Productivity is related to a firm’s resilience in the sense that highly productive firms generate more profits and can diversify into other product lines (Nyaupane et al., 2020). In the event of an economic shock, resilient firms can still continue with their operations. Highly productive firms also have revenue reserves that can be utilized in running business operations after the occurrence of a calamity. Improving management productivity and better management practices helps build a more resilient firm. Increased productivity will help a company generate more profits and build strong reserves that can be utilized during a catastrophe. While better management practices will help firms respond to calamities such as fire (Nyaupane et al., 2020). The creation of awareness and training can help respond to calamities and economic shocks and reduce the organization’s vulnerability to external shocks.

Critical analysis

Management practices are critical in enhancing productivity, improving performance, and building a resilient organization. Evidence-based studies have demonstrated that with the right management practice, such as structure management, organizations can be more competitive and achieve their long-term goals. Paying employees salaries commensurate to the effort expended helps motivate them and steer their efforts towards organizational goals. A flexible working environment leads to innovation and creativity since employees have more time to reflect. Competent managers inspire employees to achieve and surpass set targets.

References

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Aghazadeh, S. M. (2007). Re?examining the training side of productivity improvement: evidence from service sector. International Journal of Productivity and Performance Management.

Aiello, F., & Ricotta, F. (2016). Firm heterogeneity in productivity across Europe: evidence from multilevel models. Economics of Innovation and New Technology, 25(1), 57-89.

Bender, S., Bloom, N., Card, D., Van Reenen, J., & Wolter, S. (2018). Management practices, workforce selection, and productivity. Journal of Labor Economics, 36(S1), S371-S409.

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Frangieh, M., & Rusu, D. (2021). The effect of the carrot and stick transactional leadership style in motivating employees in SMEs. Revista de Management Comparat International, 22(2), 242-252.

Kotey, B. (2005). Goals, management practices, and performance of family SMEs. International Journal of Entrepreneurial Behavior & Research.

Lamorgese, A., Linarello, A., Patnaik, M., & Schivardi, F. (2021). Management practices and resilience to shocks: Evidence from COVID-19.

Lee, S. H. (2000). Understanding productivity improvement in a turbulent environment: A symposium introduction. Public Productivity & Management Review, 423-427.

McKenzie, D., & Woodruff, C. (2015) Are bad business practices holding back small firms in developing countries?. Bad practices hold back small firms in developing countries | VOX, CEPR Policy Portal (voxeu.org)

Mwanza, C., & Chingarande, G. R. (2013). The efficacy of a bonus scheme on staff morale and quality of service: A case study of a private hospital in Botswana. International Journal of Management, IT and Engineering, 3(9), 106.

Nyaupane, G. P., Prayag, G., Godwyll, J., & White, D. (2020). Toward a resilient organization: analysis of employee skills and organization adaptive traits. Journal of Sustainable Tourism, 29(4), 658-677.

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Schirvadi et al, (2021).Management practices boosted firm performance in COVID-19 by facilitating remote work: Evidence from Italy

Scur, D., Sadun, R., Van Reenen, J., Lemos, R. and Bloom, N.(2021). The World Management Survey at 18: lessons and the way forward (No. w28524).