2022

S&Cb/2020634/JAN21/A2
FINAL INDIVIDUAL ASSIGNMENT
WORD COUNT:2597
Introduction

There is a lot of empirical data sourced from cross-country (within the US and Europe) and cross-
industry. The consensus is that each firm differs in their performance and not only micro and macro-
economic factors influence a firm’s position as there is always the human factor to consider in terms of
management. To summarise the articles selected, a brief highlight on some definitions that will frame
the foundation going forward: Firm heterogeneity, Productivity Dispersion and management practice.
This will then be expanded on, in conjunction with the summary of the three selected articles. It is
important to note that no analysis or empirical data has been produced and all information has been
sourced to frame the conversation and position.

Firms are very heterogeneous in terms of economic performance within even narrowly defined sectors.
This has major implications for a country’s competitiveness, understood as its ability to export. Extensive
firm heterogeneity means that aggregate productivity growth can be fostered significantly by a better
allocation of capital and labour across firms, with evidence suggesting that significant productivity gains
can stem from enhanced allocative efficiency within sectors (ECB, 2017). See figure 1 below

Figure 1.
Firm productivity in Belgium for domestic, exporting and
exporting/FDI firms. Source: Mayer and Ottaviano 2007,
21, figure 4)

According to Schiemann (2009) Productivity is the increase in units of measurement for a certain period
with reduced costs. There has been a dramatic rise in the dispersion of firm productivity (Barth et al.
2016, Berlingieri et al. (2017)). Basically, a vast amount of productivity gains is concentrated among a
few firms only. Recent study has documented a robust regularity of significant productivity dispersion
even within narrowly defined industries (Syverson, 2011).

Management practice usually refers to the working methods and innovations that managers use to
improve the effectiveness of work systems. Common management practices include empowering staff,
training staff, introducing schemes for improving quality, and introducing various forms of new
technology is an internal determinant factor that influences how productive a firm can be (Siebers et al.
2008).

The first article by Roberts J, (2018) titled “Needed: More Economic Analyses of Management”
highlights the fundamental importance of management as a factor of production. Interestingly, even
though research surveys such as world management survey by Bloom and Van Reenen were on going
amongst others, the value of economists studying the correlation between management from an
economic perspective and the productivity of the firm was very underplayed. A few of the key insights
and findings are annotated below:
- Crucial management role and expertise was ignored and there were challenges in achieving technical
efficiency due to the point above

- Productivity was widely dispersed across firms, even in the production of simple products

- Evidence showing how the change in management practices as the only variable all other factors
remaining fixed can improve productivity significantly in badly performing firms (Bloom et al, 2013)

- The manager’s role in motivating and coordinating people’s actions in ways to support successful
outcomes

- Management decision on strategy, which market to participate and how to operate etc.

- Management is central to aggregate economic performance and growth

- Bertrand and Scholar’s empirical work in 2003 considered how different individual managers
systematically make different choices, which could stem from personal experiences.

- The results highlighted many managerial effects – like managers make similar choices when they
change firms and each manager makes different choices, the identification of management styles and
the observation that older managers are more conservative in investment choices, while MBAs are
more aggressive.

- The World Management Survey WMS initiated by Bloom and Van Reneen rates establishments on 18
criteria looking at monitoring, targets and incentive practices and grades them on a scale of 1-5. The
findings have been very consistent, and a further study highlighted that management improvements
were long lasting Management variation accounts for a fifth of productivity dispersion.

- Evidence of four drivers of management quality: competition, business environment, learning

spillovers and human capital.

- What goes on in firms is driven by managers and Economists needs to study them to understand how
the economy works.

To summarise these findings above management is vital to a firm’s survival. McMillan (2002) noted that
close to 70% of transactions occur within a firm, rather than through markets and firms are driven by
managers.

Taking a deeper look into firm heterogeneity, according to Melitz (2003), firms are heterogeneous in
their productivity levels and higher productivity is modeled as producing a variety at a lower marginal
cost. These firms can trade in the international market despite the fixed foreign-marker entry costs and
unit trade costs. However, many have argued that the Melitz model is skewed towards a particular
assumption that focuses on steady state equilibrium only i.e. one factor (labour), one industry and a
world of symmetric countries. Syverson (2004a) argued that larger local demand could lead to higher
productivity distribution due to intensified competition as in the case of ready-made concrete. There are
important micro and macro-economic factors on the origination of heterogenous firms as explained by
Bernard et al (2012) that at a micro level, bigger firms perform systematically better including survival,
innovation and participation in international trade. Furthermore, at a macro level the granularity of the
firm size distribution affects aggregate productivity, welfare gains and the impact of systemic shocks
(Gabaix, 2011; Melitz and Redding, 2015). See figure 2 below
Figure 2

reports the total sales of the top 50 and 100 firms as a

fraction of GDP. On average, the sales of the top 50 firms are
24% of GDP, while the sales of the top 100 firms are 29% of
GDP. The top 100 firms hence represent a large part of the
macroeconomic activity, so understanding their actions
offers good insight into the aggregate economy (Gabaix,
2011)

In the first article, its premise was the need for more economic analyses of management in firms. The
second paper begs the question “Does Management really work”. This article was written by Bloom
and Van Reneen (2012), who initiated the World Management Survey. Three fundamental questions
shape the focus of this article which are: Does the organisation support long term goals…? Does the
organisation reward high performers…? Does the organisation rigorously collect and analyse
performance data? In other words do organisations have targets, give incentives and monitor
performance.

Based on the above criteria, many organisations around the world are not well-run. There is also a
correlation between better management with high productivity and return on investment and
management is a differentiator in shaping national performance. An outstanding revelation is the fact
that variation in management accounts for almost a quarter of the 30% productivity gap between the
U.S. and Europe. Based on human capital theory, education and training of individuals is key to the
collective value of human capital in organizations (Becker, 1962; Schultz, 1961) and invariably lead to
strategic advantage for productivity (Lee et al., 2019)

Applying the thesis to more complex world problems like education and healthcare showed that
effective management could improve performance, but it was not a simple formula for success as the
results were not consistent. The crux of it was that in education and health sectors, the implementation
of management practices needed a long time to derive the desired transformational effects.

The study also considered why some organisations are more motivated than others. The outcome was
that the leaders are the initiators for transformation especially during challenging situations.
Highlighting like the previous article the importance and relevance of management in the firm.

The final article also by Bloom and Van Reneen was published in 2017 and titled “Why do we
undervalue competent management?”. The study identifies that core management practices could not
be taken for granted. And again firms with strong managerial practices influence how well companies
perform, by performing better on metrics such as productivity, profitability and growth etc.
Furthermore, the better firms are at management practices, the better the more sophisticated
capabilities they developed. Operational excellence is still a challenge for many organisations even for
the well-structured ones and the data is worldwide and not just within one region. Big differences across
countries were evident but around 60% was within countries more so countries like the US. 11% of firms
had weak monitoring while 6% had strong performance monitoring. Large persistent gaps in basic
managerial practices were associated with large persistent differences in firm performance. In essence
better managed firms are more profitable.

It is critical to note that management practices often rely on a complicated shared understanding among
people within the firm. And if they don’t get it, the benefit of such management is unattainable. There is
a correlation between strategic decision making and basic management. Management community may
have badly underestimated the benefits of core management practices as well as the investment
needed to strengthen them. If core management practices are properly established, they can resolve
the execution gap problem and ensure that strategy gets a fair chance at success.

2.

Company Background

Company: Joe Blogs Education (JBE)- A global education company

Ownership: Majority held by PE.

Structure: Executive Management (Group Chiefs)

Division: CEO and CFO of one of the four divisions within the group reporting to the Group CEO.

Regional team: lead by Regional Managing Director reports to the Divisional CEO and CFO for their
region

Vision: to build and operate a group of quality K-12 schools of scale and well managed financially.

Staff: 4000+ (inclusive circa 300 to management)

Mandate to grow its number of schools for its investors in each investment cycle i.e. every 5 – 7 years.
Driving productivity is synonymous with increasing current and future enrolments and acquiring more
schools into the portfolio.

The corporate regional team is very lean and relies on the direct reports within the schools for
execution. The style of management is a blend between transformational and consultative depending
on which direction i.e. reporting up to division or down to the schools. JBE Middle East implemented
the following management practices after performing an NPS survey and engagement survey.

- Hybrid working policy: With the easing of restrictions, most companies have returned to working
from the office. JBE allowed more flexibility by instituting a standard hybrid model where staff
can choose to work from the office or remotely. Further to this, a work from anywhere policy
was also introduced which allowed staff who wanted to travel to do so and work from any
county they are in. This policy has been transformational especially for the single parents who
get to spend more time with their children and for those who had not seen their family since the
pandemic. The results have been captured in terms of productivity output, for instance,
admission team conversion rates went from 65% to 85% in 2 months. Although not the only
factor, this practice gave a much-needed morale boost.
 - Revised incentive scheme: A robust reward system was introduced to all staff that was SMART, thus
no ambiguity to how bonuses were calculated. The incentive programme allowed staff to set
goals and for management to set rewards based on exceeding the set goal. For example
enrolment target for a school was 250 students, if the team achieved 250 they will expect the
normal associated rewards for delivering the target, if targets are exceeded then further
incentives are provided. Another interesting practice related to the incentive scheme was talent
retention, where some of the big incentives were split between cash reward and equity stake in
the business.

One of the key challenges that management must address is around stakeholder management. As an
education company the main stakeholder are the students, teachers. The practices shared above focus
on driving enrolments i.e., sales up with incentives to keep you motivated but doesn’t quite solve the
problem for the core stakeholders. Teachers have been paid bonuses each year with regular salary
increment and for a few months everything is great. However, for those seeking improvements for both
themselves and for their students nothing really has been provided to incentivize them.

The disconnect is shareholder maximization vs stakeholder value, the incentives provided either reduce
cost to the company or are secured from boosting enrolments (revenue) and there is very little
investment in capital expenditure (capex). The company’s message externally is very different to the
internal workings which is due to the requirement of boosting its EBITDA for the next investment cycle.
It focuses on short term solutions without looking at long term intangible implications that could impact
the company far worse than capex investments.

3.

Improvements that can be proposed to resolve the above are:

- Provide more continuous professional development (CPD) for teachers.

- Create opportunities for knowledge sharing and idea creation by staff. The knowledge, skills, and
abilities transferred within an organization through human capital are crucial to productivity and
profitability (Lee et al., 2019).
- Propose a promotion strategy that is clear, and teachers/staff can follow.
- Quarterly townhall meetings between corporate team and school team. To encourage
communication and transparency
- Invest in making the buildings and infrastructure better. Management showing they care in the
facilities that staff work in can boost morale and lead to higher productivity

Considering the above will not only increase productivity from the core stakeholders but will also build
loyalty which in turn will reduce the churn rate within the company. Another point to note is that in
continuous development of skills and training, the staff become more resilient when changes arise
internally or externally.

4.

Interventions in the management practice may contribute to the firm’s capability to face adverse
economic shocks such as the COVID-18 pandemic. Can be how does a firm remain resilient during
challenging times? Resilience according to Rose (2004) focuses on how firms effectively utilise their
remaining resources to invest in repair and reconstruction to accelerate recovery. There are two
dimensions to resilience., Static and Dynamic Resilience. So while the former deals with management of
resource scarcity, the latter relates to the efficient use of the resources during the time for investment
in the recovery.

Covid-19 pandemic was a shock to the not just firms but the entire global economy, while some
companies collapsed during the time, others survived, and some even thrived. The firms that were
resilient adopted practices to weather the shock. Terms like ‘Pivot’ became synonymous with adopting a
change in strategy, positioning or even in the way things were done. Technology and its use became
vital to carrying on operations and ultimately survive and navigate the ‘VUCA world’ which is short for
volatility, uncertainty, complexity and ambiguity (Erichsen and Hersom, 2016)

Some examples of interventions that could be proposed by management practice in response to COVID-
19 pandemic are: Technological changes, Resource Pooling, Conservation, Relocation, Management
effectiveness etc. (Dormady et al. 2019)

Highlighting ‘Management effectiveness’ considerations to improving efficiencies of the business after

the catastrophic event like flexibility in working hours, operations and reporting requirements (Coutu,
2002; Stecke & Kumar 2009). For example my company worked remotely during the lock down and post
then a hybrid work ethic continues to operate with the flexibility to work from anywhere. This was a
complete change to working full time in an office five days a week.

To summarize there is empirical evidence to show that management practice is key to a firm’s growth,
productivity and profitability, but it is not the only factor. Firms either heterogenous or homogenous are
unique and may adopt similar strategies but in the long run will only thrive with what works for them
and for that having the right management is essential.
Appendix

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