Management as Capital

Learning and applying good management practices can help improve productivity

Shyam Ponappa / August 4, 2011

At a time of concern about sustained momentum in India’s economic growth, some recent findings including a case study in India offer fresh pointers on the implications for management and organisation in emerging economies.

Competition ≠ Efficiency

A widely held assumption is that competition results in efficiency. The reasoning is that market forces and competition compel enterprises to evolve into efficient producers. So, does management affect productivity?

An article in The American Economic Review posits that developing economies appear to suffer a shortage of what the authors term ‘managerial capital’1, that is, management and organisation. The authors also note that this aspect has been ignored in studies of development and growth. This is not surprising, given the completely different domain expertise compared with economics, such as, the skills required to understand financial statements and linkages to operations, or organisational structure and effectiveness, and the difficulties in defining and measuring managerial inputs. However, this does not diminish the importance of managerial inputs for growth and development, just as factors not well understood by weather forecasters nevertheless do influence the weather.

The authors cite evidence that managerial know-how can improve the productivity of other inputs including human resources and equipment, and help to better deal with resource constraints, by planning, acquiring and configuring assets to optimise outcomes.

Management and organisation are accepted as critical inputs for effective performance in developed economies. This is true for enterprises at the firm level, for sectoral policy and regulations, and for the economy as a whole. Anecdotal evidence suggests this is less so in developing economies, both in terms of prevalence and acceptance. Also, the wide variability in productivity in developing countries’ plants has been attributed to differing management practices, but so far with little validation based on data.

Differences in management practices can vary by nearly 30 per cent between the “best” and “worst” countries. The accompanying chart shows overall management scores for a number of countries. The studies consider differences in managerial practices between emerging and developed economies, as well as interventions to improve practices in the former, comprising training and advisory inputs. The results imply that good practices can be learnt and applied in developing economies.

(Number of firms surveyed shown on or next to each bar)

Source: http://www.nber.org/papers/w17231²

An experiment in textile companies in India over a two-year period supports these findings.3 The report covers 20 plants in 17 companies. Of these, 14 plants in the treatment set were given active interventions, while six were treated as control units. The active set went through a diagnostic phase over a month, followed by an implementation phase of intensive support over four months, and a measurement phase thereafter for several months. The control units were only exposed to the diagnostic phase. The management inputs covered a range, such as lean manufacturing practices including sales and inventory management, quality control and human resource management.

The interventions by transnational consultants were estimated at $250,000 (Rs 1.125 crore) in each firm if provided at commercial rates. The report estimated the productivity in the treated plants to improve by 18 per cent, with net gain in profits in the first year itself estimated at 40 per cent above costs, at $350,000 (Rs 1.575 crore).

Implications

(i) A need to improve enterprise management and organisation: the reports show evidence of the inadequacy of management and organisation prior to interventions, and of the benefits of upgrading management practices with measures that are considered standard operating procedures in advanced economies. There is explicit evidence from textile companies in India that the induction of such practices results in significant productivity gains.

(ii) Delivery methods: the report found that common practices, such as preventive maintenance, were known but not adopted, because managements thought they would not be profitable. Such items account for 45 per cent of practices in the interventions. For uncommon practices, the problem was lack of awareness.

The question is whether the approach – of a transnational consulting firm providing advisory services for several months – is the preferred way of upgrading practices at enterprises, or if there may be other practicable ways that are equally effective and efficient. For instance, whether distance education is a plausible method for learning or participating in substantive diagnostics and best-practice dissemination for enterprises. The issues are whether management institutes or local consultants can develop effective programmes for delivery as modules; whether such methods can be effectively developed and delivered through the Internet; whether the National Skill Development Corporation, the National Productivity Council and the like can co-ordinate such initiatives; and whether systems integrators can grow to deliver such services.

(iii) Sectoral management and organisation: beyond the enterprise level, developing economies sorely need management and organisation at the sectoral level. Here, it is not so much about best practices as it is about designing the right framework of goal-oriented policies and procedures appropriate for the given socio-economic context. Sectoral frameworks are essential to create productive sectors and to prevent the flight of capital — major Indian groups invest abroad rather than in India, even when there is much room for growth here. While the crisis precipitated by the 2G scam has forced the government to undertake drastic reforms in communications and spectrum management, the power sector is an equally critical area, which desperately needs radical reform.

(iv) Local play: Stanford, Massachusetts Institute of Technology, Harvard, World Bank and the European Bank for Reconstruction and Development have conducted path-breaking studies on management inputs and upgradation. Considerable work needs to be done by Indian institutions — there seem to be no such studies at present. As for local funding, the significant Indian donations are either to self-run institutions or to iconic foreign institutions, a notable recent exception being the Nilekanis.

shyamponappa at gmail dot com

1 “What Capital is Missing in Developing Countries?”, Miriam Bruhn, Dean Karlan and Antoinette SchoarThe American Economic Review, May 2010:

http://karlan.yale.edu/p/BruhnKarlanSchoar_AER_P&P.pdf

2 “The Land that Lean Manufacturing Forgot? Management Practices in Transition Countries”, Nicholas Bloom, Helena Schweiger and John van Reenen, July 2011:

http://www.nber.org/papers/w17231.pdf

3 “Does Management Matter? Evidence from India”, Nicholas Bloom, Benn Eifert, Aprajit Mahajan, David McKenzie and John Roberts, Jan 2011:

http://www.nber.org/papers/w16658.pdf