What comes first to mind when we hear the words “technology adoption”? Answers tend to range widely, from a new machine, to a resistant seed variety, to an online payment method, but they rarely include organisational practices. However, besides using new inputs or processes for the production of goods and the delivery of services, we can also improve firm productivity by changing its “management technology”.
Governments have recognised the importance of management capabilities, and identified a positive relationship between good business practices and firm productivity. Randomised controlled trials (RCTs) allow us to gather even stronger evidence by testing for a cause-effect link between management practices and business outcomes, and evaluating if and how good practices can be best taught. In particular, RCTs have shown that management practices matter for sales, profit and business growth both in the short and in the long run, and have identified interventions that can improve management, often in remarkably cost-effective ways.
Management matters - and can be taught
To demonstrate the importance of management practices for productivity, Bloom et al. (2013) provided free management consulting services to randomly chosen plants of Indian textile manufacturing firms in 2008, teaching modern management practices such as quality control procedures, inventory management and Human Resource Management (HRM) practices. This intervention increased plant productivity by 17% by the end of the first year, and over a three-year period led to the opening of more production plants in the treated plants as compared to the control plants. In 2017, the authors revisited the firms that participated in their original experiment to see whether the effect of their intervention persisted. They found a large and significant gap both in management practices and in performance between the treatment and the control plants, despite spillovers in practices between plants, and the fact that about half of the management practices adopted in the original experimental plants had been dropped (Bloom et al. 2018). 1
Whereas the Indian trial involved large firms concentrated in the same sector, an RCT with over 400 businesses in Mexico confirmed that access to private, local consulting services can also improve the managerial practices of micro, small and medium-sized enterprises across different industries. The intervention improved firms’ marketing and financial accounting practices, with a positive impact on productivity and a persistent large increase in the number of employees even 5 years after the programme (Bruhn et al. 2018). 2
While these results certainly prove the importance of management practices for firm growth, we caution against treating them as panacea (the provocatively titled Bloomberg opinion piece “Management Consultants Might Be the Best Foreign Aid” comes to mind). A case in point is the trial that randomly assigned micro-enterprise owners in Ghana to work with consultants: despite temporary improvements in their business practices, business owners soon reverted back to their pre-trial behaviour, and experienced no business growth as a result (Karlan et al. 2015).
While the interventions in India and Mexico were successful, they were also quite costly as they involved extensive individual management consulting delivered by private firms. Encouragingly, recent studies have identified more cost-effective solutions to improving firms’ management practices.
First, researchers have demonstrated that the intervention need not happen on a one-on-one basis to be effective: in a trial among Colombian auto parts manufacturers, small-group based management consulting was found to yield similar improvements in management practices as individual consulting, at a significantly lower cost (Iacovone, Maloney, and Mckenzie, 2018). 3
Second, we may not even need to hire consultants at all: there seems to be great promise in facilitating peer-to-peer knowledge sharing for better management. In a trial among owner-managers of young Chinese firms, researchers found that those firms whose managers were randomly assigned to attend regular meetings with their peers achieved significantly higher management scores, and also greater profit than those assigned to a “no-meeting” condition, demonstrating the potential of business networks for information sharing (Cai and Szeidl 2018). 4 An RCT among urban retail shop owners in Indonesia demonstrated that in-person interaction may not even be necessary: a handbook of local best practices coupled with “experiential learning modules” (a documentary video on the experiences of highly successful peers, and/or light in-shop assistance on the implementation of the handbook) led to improved managerial practices compared to the control group and to the group who only received the handbook (Dalton et al. 2019).
Business training or personal initiative?
Despite the success of the above-described programmes, it may be valuable to extend the content of the interventions beyond formal business practices. Depending on the types of businesses that need support, a psychology-based programme may achieve better results than a traditional business training programme.
This was the case in an RCT conducted in Togo, where microenterprise owners were randomised into receiving either no intervention, business training (accounting and financial management, marketing, human resource management, and formalisation), or personal initiative training (teaching a mindset of self-starting behaviour, innovation, identifying and exploiting new opportunities, goal-setting, planning and feedback cycles, and overcoming obstacles). Personal initiative training increased firm profits by 30% compared to the control group, whereas traditional training only led to a statistically insignificant 11% increase in profits (Campos et al. 2017). In addition, personal initiative training may be particularly beneficial for female entrepreneurs, and as such, can help close the gender gap in entrepreneurship (Mensmann et al. 2018).
More evidence through Business Basics
IGL is very pleased to be partnering with the UK Department of Business, Energy and Industrial Strategy (BEIS) and Innovate UK to support the Business Basics Fund (BBF) that sits within the wider Business Basics Programme. The programme embraces an experimental approach to generating much-needed further evidence on management practices by supporting a range of projects that test innovative ways of encouraging small and medium-sized enterprises (SMEs) to take up productivity-boosting ways of working. With the first experiments already in the field, we have already gathered valuable insights that Luke Nightingale (BEIS) shared with participants at the IGL2019 conference. For more details, stay tuned for future blog posts summarising initial results and lessons learned from the first funding round, coming soon!
For those interested in running their own trial a third funding round has now opened. Within this competition up to £2 million is available for trials looking at how SMEs could be encouraged to adopt technology, including those that can limit their exposure to late payments, such as automated payment processes. Management practices cannot be the sole focus of this third round, however projects could explore the alignment with technology adoption - e.g. does realising the benefits from technology adoption also require support to improve wider business practices.
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- 1. A remarkable (non-experimental) study provides another piece of evidence for the long-run impact of management training (Giorcelli 2019). An unexpected budget cut allows the author to compare Italian firms who successfully applied for US study trips for managers provided by the Marshall Plan with similar firms who applied for the programme but were excluded due to the cut. Results show that management training improved survival and performance - and the positive impact persisted for over 15 years!
- 2. It is worth pointing out that trials offering in-class management training rather than consulting have found limited impact of their intervention on actual business performance, despite improvements in the treated firms’ managerial practices.
- 3. Firm data from this trial were rather noisy, but administrative records provided some evidence that the group treatment increased firm size, whereas this was not the case for the individual treatment.
- 4. A trial in India that involved 100 high-growth tech firms highlights an important caveat to peer learning: the advice that peers provide depends on their own management style and thus it is of varying quality (Chatterji et al. 2018).