1
The effect of the operations management process on
firm performance.
A study among Dutch SMEs
Name:
Esmée Jans
Student number:
S3543447
Date:
14 September 2020
Supervisor:
Dr. M.J. Brand
2
Abstract
3
Table of content
Abstract ... 2
1. Introduction ... 5
2. Literature review ... 8
2.1. Small and medium-sized enterprises ... 8
2.2. Management practices ... 9
2.2.1. Management ... 9
2.2.2. Practice ... 10
2.2.3. Definition of management practices ... 11
2.3. Formal management practices in SMEs ... 13
2.4. Operations management ... 16
2.4.1. What is operations management? ... 16
2.4.2. The importance of operations management ... 16
2.5. Operations management practices ... 17
2.5.1. Lean Manufacturing ... 17
2.5.2. Link between the lean principles and operations management ... 18
2.5.3. Monitoring, target setting and incentives ... 18
2.6. Firm performance ... 19
3. Research framework ... 20
3.1. Operations management practices in this study ... 20
3.1.1. Operations management tasks ... 21
3.1.2. Management practices ... 22
3.1.3. Operations management process ... 23
3.2. Research model ... 24 3.3. Predictions ... 25 3.3.1. Data collection ... 25 3.3.2. Target setting... 25 3.3.3. Incentives... 25 4. Methodology ... 26 4.1. Firm selection ... 26 4.2. Data collection ... 26 4.2.1. Interview structure ... 27 4.2.2. Firm performance ... 27 4.3. Data analysis ... 27 5. Results – descriptive ... 28
4
5.2. Operations management tasks ... 29
5.2.1. Data collection ... 29
5.2.2. Target setting... 31
5.2.3. Incentives... 32
5.3. Influence of operations management process on firm performance ... 33
6. Results – analytical ... 35
6.1. Operations management tasks ... 35
6.1.1. Data collection ... 35
6.1.2. Target setting... 36
6.1.3. Incentives... 36
6.2. Influence of operations management process on firm performance ... 37
6.3. Influence of firm size on the operations management process... 40
6.3.1. Availability of resources ... 40
6.3.2. Organizational structure ... 41
6.3.3. The degree of formality ... 42
7. Discussion and conclusion ... 44
8. Managerial implications ... 48
9. Limitations and future research ... 48
References ... 50
Appendixes ... 53
Appendix 1. Operations management practices defined by Bloom ... 53
Appendix 2. Definitions developed in this thesis ... 54
Appendix 3. Interview questions linked to theory ... 55
Appendix 4. Interview scheme ... 59
5
1. Introduction
It is safe to say that the aim of every entrepreneur is to have a successful and profitable business. Unfortunately, there is no guide to follow on how to ensure the survival, profitability or even growth of your business. Academics and researchers have long stressed the importance of management and management practices in firm performance (Bloom and Van Reenen, 2006; Taylor, 1911). According to Corman and Lussier (1996), management is the ability to accomplish objectives through the efficient use of people, capital and equipment. It can be divided in various management areas such as strategy, finance and marketing. Within these management areas, the managers have certain management practices. The definition of a management practice however could not be found.
Bloom and Van Reenen (2006) were the first to present a survey instrument in order to codify management practices into a measure of “good” or “bad” management that is applicable to different firms in different countries. According to Bloom et al (2010), management practices can be divided under three broad headings: monitoring, targets and incentives. Interestingly, they do not give a further definition of a “management practice” within their research. Therefore, before their work is used in light of this study, a discussion is provided about what exactly a management practices is and how it can be defined.
After careful examination of several kinds of literature on management practices, I defined a management practice as the actual application of the gathered knowledge, insights and experience of a manager for the fulfilment of their managerial tasks. This definition implies that the
management practices determine how the manager’s task is fulfilled. The managerial tasks in this definition more or less matches the three headings defined by Bloom et al (2010). Based on the concept of complementary practices, continuous improvement and focus on processes, it is determined that the management tasks together with the management practices described in this thesis are seen as a coherent management process. Although this process can be applied in every area of management within a firm, it is found that particularly within operations management it has a direct impact on firm performance (Bloom et al, 2012; Bloom et al, 2017).
Operations management is concerned with managing the company’s processes that creates their goods or services (Manikas et al, 2019; Kumar, 2009; Greasly, 2008). Therefore within this
6 2012; Bloom et al, 2017). Although not all companies have a department called “operations”, they all undertake operations activities since every organization produces goods and/or delivers services (Greasly, 2008). Therefore, in this study the focus lies at management tasks and practices in the area of operations management i.e. the operations management process.
The Dutch economy exists for 99,2% of small and medium-sized enterprises (Nederlands comite voor ondernemerschap, 2019). SMEs in the Netherlands are the driving force for economic growth and are responsible for an employment share of 71%, which highlights their importance (Nederlands comite voor ondernemerschap, 2019). Although both small and medium-sized firms belong to the SME concept, they have distinctive characteristics due to their size. Consequently, these characteristics might cause differences in the operations management process and ultimately firm performance. Therefore it is studied how SMEs’ characteristics influence the operations management process. The following sub-question is formulated:
How does SMEs’ distinctive characteristics influence the operations management process?
The existing literature about the influence of management practices on firm performance mainly focusses on large firms which makes their results not applicable for SMEs in the Netherlands. Additionally, this literature discusses management practices separately whereas we present the operations management process (consisting of coherent operations management tasks and
management practices). Therefore, in this study it will be examined how the operations management process influences firm performance in Dutch SMEs. The following research question is formulated:
How does the operations management process influence firm performance in Dutch SMEs?
In order to answer this question, the extent to which SMEs carry out the operations management process is studied. Then, the effect of the operations management process on firm performance is determined.
7 The thesis proceeds as follows. Chapter 2 presents and reviews the relevant existing literature in light of this study. In chapter 3, the research framework used in this study is developed and explained. Chapter 4 presents the methodology used in our qualitative analysis. Chapter 5 and 6 present the results of our analysis about the influence of the operations management process on firm
8
2. Literature review
In the literature review the most important and relevant literature in light of the research question is described. First, it is discussed what Dutch SMEs and its characteristics are. Then, different strands of literature are discussed about “management” and a “practice” in order to come to a definition of a management practice. When this definition is established, the next section puts management practices in the perspective of operations management. Finally, the literature review is concluded with information about firm performance.
2.1. Small and medium-sized enterprises
In this paragraph it is explained what Dutch SMEs are and which definition is used in this research. In addition, the distinctive characteristics of SMEs are presented.
In this thesis, the focus is at the operations management process in Dutch SMEs. First it is important to have a clear definition of what these so called “small and medium-sized enterprises” (SMEs) are. According to Nooteboom (1994), a small business consists up to 10 persons and a medium-sized enterprise exists of 10 up to and including 100 persons. This definition however is not widely
accepted. The Dutch Committee for Entrepreneurship (2019), defines small businesses as enterprises that exist from 10 up to and including 49 persons. Additionally, they define medium-sized businesses as firms that contain 50 – 250 persons. These definitions are also recognised by the European Commission (2003) and are therefore adopted within this research.
9
2.2. Management practices
The word “management practice” is used extensively throughout the micro-economic literature, but researchers fail to define the concept. Since a management practice is one of the key concepts in this research, it is important to develop a clear definition. First, the concepts “management” and a “practice” are examined separately by carefully reviewing literature that contains these topics. Important questions that are answered in this paragraph are: What exactly is management? and What do we mean when we talk about a practice? Next, micro-economic literature that discusses management practices is examined in order to get an indication about the meaning that other researchers are aiming for. Finally, a definition for a management practice is developed that will be used throughout this research.
2.2.1. Management
The term “management” is a word that everybody has heard of and generally everybody knows in the back of their head what it means. However, to give a clear definition is somewhat more difficult. There exist many different views of “management” within the literature. Henri Fayol is often
described as one of the founders of the classical management theory. He describes management as planning, organizing, commanding, coordinating and controlling (Fayol, 1949). This view however is criticized by different academics among which Henry Mintzberg. According to Mintzberg (1990), these words do not capture management but indicate some vague objectives managers have when they work. In his book “Managers not MBAs” he states that “management is a practice that has to blend a good deal of craft with a certain amount of art and some science” (Mintzberg, 2004 p. 1). Mintzberg (2004) explains that science is the development of explicit knowledge through analysis. Although managers apply science, management is more an art based on insight, vision and intuition (Mintzberg, 2004). In addition, he states that it also is a craft, meaning that it relies on experience. “There is no one best way to manage; it all depends on the situation. Management therefore is an action where art, craft and science meet” (Mintzberg, 2004 p. 10). Another important and influential researcher on management is Peter Drucker. He explains management through its tasks and
responsibilities. According to Drucker (2007), management is the organ of a business charged with making resources productive with the responsibility for organized economic growth. In addition, he defines three tasks that the management has to perform (Drucker, 1994):
- Economic performance: fulfilling the specific purpose and mission of the institution, whether business enterprise, hospital or university;
10 Drucker (1974) states that these three tasks have to be done at the same time and within the same managerial action. Furthermore, Corman and Lussier (1996) define management as the ability to accomplish objectives through the efficient use of people, capital and equipment.
Although it is hard to find a uniform definition of management, some definitions can be seen as complementarities. First, Drucker (1974) describes the tasks that a manager has to perform. Then, Fayol (1949) describes the activities of a manager in order to fulfil these tasks and finally Mintzberg (2004) explains how these activities are executed by a manager. These three together fully grasp what management entails and therefore the following definition is made in the context of this study:
“Management is combining experience with a certain amount of insight and some science for the execution of managerial activities with the goal of fulfilling manager’ tasks.”
2.2.2. Practice
In this section the main question that we seek to answer is: What exactly is a “practice”? Since the meaning of the word could not be found in the literature, I asked fellow students, business associates and family members how they would define the word “practice”. The most common words
mentioned were: “exercise”, “practise”, “method or procedure” and “how one handles the facts they obtained”. But overall the question “how would you define a practice?” raised even more questions among the respondents, which points out the importance of developing a definition.
11
Source Definition
Oxford learner’s dictionary (2017)
- Action rather than ideas
- A way of doing something that is the usual or expected way in a particular organisation or situation
- A thing that is done regularly; a habit or a custom. Dictionary of Business (2004) A way of doing things, a custom or habit
Oxford Dictionary of English - The actual application or use of an idea, belief, or method, as opposed to theories relating to it.
- The customary, habitual, or expected procedure or way of doing of something
Oxford Thesaurus of English - the principles and practice of radiotherapy: application, exercise, use, operation, implementation, execution, enactment, action, doing.
- it has become common practice to employ women lawyers for the defence in rape trials: custom, procedure, policy,
convention, tradition, fashion, habit, method, system, routine, institution, way, rule.
Table 1. Definitions of a practice
All definitions found in the different dictionaries have clear similarities. In Economics as well as in everyday use they all describe a practice as an action or actual application instead of an idea or theory. A practice can also refer to a custom or habit. In order to find out which one it is, we turn to the work of Drucker (1974). He states: “management is a practice – its essence is not knowing but doing.” (Drucker, 1974 p. 1). This statement matches the definitions found in the dictionaries as “an action or application” and puts the word “practice” in a management context. Therefore in light of this study, I find the definition of the word practice as an actual action and application, rather than a custom or habit, the most suitable. A “practice” is defined as follows:
“an action or actual application”
2.2.3. Definition of management practices
12 It was therefore decided to review additional literature about the topic from different
authors/researchers. Although this work still did not provide a clear definition, I did find several citations which give an indication about the meaning of a management practice. These citations are presented in table 2.
The first three citations in the table are specifically about management practices and stem from articles about this topic (Bloom and Van Reenen, 2007; Bloom et al, 2013; Gibbons and Henderson, 2012). The fourth citation only refers to management practices. It is found in an article is not specifically about management practices, but only uses the concept.
Citation Article and author
Citations about management practices "We see management practices as more than
the attributes of top managers: they are part of the organizational structure and behaviour of the firm, typically evolving slowly over time even as CEO and CFOs come and go."
Measuring and explaining management
practices across firms and countries (Bloom and Van Reenen, 2007 p. 7)
"We focus on practices rather than aspirations, what is happening on the ground rather than what the firm claims are its formal policies."
The new empirics of management (Bloom et al, 2013 p. 852)
“Management practices – that is things that any manager (or at least most managers) might do rather than an managerial ability per se.”
What do managers do? Exploring persistent performance differences among seemingly similar enterprises (Gibbons and Henderson, 2012 p.689)
Citation referring to management practices "Managers are often perceived as having their
own "styles" when making investment,
financing, and other strategic decisions, thereby imprinting their personal marks on the
companies they manage.”
Managing with style: the effect of managers on firm policies (Betrand and Schoar, 2003 p. 1170)
Table 2.Citations about the meaning of “ management practices”
13 As can be seen these researchers pinpoint some characteristics of a management practice rather than providing a definition. So the question remains: What exactly is a management practice? When our two definitions of “management” and “practice” are combined, the following definition is made:
“The action of combining experience with a certain amount of insight and some science for the execution of managerial activities with the goal of fulfilling manager’s tasks.”
However, we are looking for a more concrete definition which is easier to understand and more suitable for this study. Derived from the definition above a management practice is something personal. It requires experience, insight and some science which is different for every manager. However, the meaning of the word “science” is not directly clear when placed in the definition of a management practice. It refers to the development of explicit knowledge through analysis (section 2.2.1.). Therefore science is changed into “gathered knowledge”. In addition a management practice is seen as something tacit, it is an action that combines several personal variables to be able to execute managerial activities. Furthermore, it entails the actual application of these two for the fulfilment of the managerial tasks. For this reason I define a management practice as follows:
“The actual application of the gathered knowledge, insights and experience of a manager for the fulfilment of their managerial tasks.”
2.3. Formal management practices in SMEs
There is substantial variation the adoption of management practices across SMEs (Broszeit et al, 2019). Within this research a distinction is made between formal and informal management
practices. Small firms tend to use less formal management practises compared to larger firms (Forth et al, 2019; Wu et al, 2015). Formal refers to the presence of written procedures, rules and policies to design, measure and regulate the operational processes (Storey & Greene, 2010). In light of this study however, formal also means that practices are specific, frequent and explicit (Bloom et al, 2013). There are two lines of reasoning which can be distinguished for whether or not firms adopt formal management practices. At one hand there is the universalistic perspective, and at the other the contingent perspective.
14 often find it difficult to objectively judge how good or bad their firm is run (Bloom et al, 2017). Most managers have a very optimistic self-assessment. Therefore, they might fail to see the improvements that can be made because of their (false) believe they are doing a good job (Bloom et al, 2017; Dieteren et al, 2018). Firms in competitive environments are associated with better management practices (Bloom et al, 2011; Bloom et al, 2007). SMEs generally operate in smaller, local markets than large firms and this could limit the effect of competition (Forth et al, 2019).
The second perspective argues that SMEs have distinctive characteristics because of the firms’ size which makes the use of formal management practices inappropriate. Small firms typically have fewer resources than medium-sized firms (Van der Vrande et al, 2009; Taylor and Taylor, 2014). According to Taylor and Taylor (2014), small firms’ financial resource constraints causes them firms to invest less in IT systems than medium-sized firms. Information technology (IT) helps firms to store, present and analyse their data and provides inputs for managerial decision making (Brynjolfsson and
15 Another difference between small and medium-sized firms is their organizational structure. The decision making processes in small firms is concentrated in the owner/manager (Taloy and Taylor, 2014). Therefore, the success of small firms is often dependent on the owner/manager’s personal background, managerial skills and education (Cagliano et al, 2001). Because of the number of employees within medium-sized firms it will not be possible for the business owner to make all the decisions and exercise control through personal interactions (Wu et al, 2015). Therefore, medium-sized firms generally are more bureaucratic with more hierarchical layers than small firms (Wu et al, 2015). They have more of a mechanistic structure where small firm often have an organic structure (Taylor and Taylor, 2014). The use of formal management practices may become necessary to ensure employees are appropriately developed and motivated, and to overcome coordination and control problems (Wu et al, 2015). Within mechanistic structed companies, coordination and problem solving typically occurs at the higher levels in the hierarchy (Taylor and Taylor, 2014). More specialized labour makes it unlikely for employees to recognize problems because of their limited understanding of the overall process (Tata et al, 1999). Additionally, when they do recognize the problem they do not have the authority to fix it without management approval (Tata et al, 1999). In organic structures however, problems are resolved when they occur. Employees in these firms often have to perform a variety of tasks and know the production process. They identify and diagnose problems, and take action without having to go through the management hierarchy (Tata et al, 1999).
The third difference between SMEs is that small firms are characterized by informality. Small business owners typically exercise control through personal interactions with employees. They have a more hands-on approach and are in touch with the workplace (Taylor and Taylor, 2014). The implementation of formal management practices may then be considered overly bureaucratic and unnecessary (Wu et al, 2015). Because of the informal and small nature of small firms, close networks between managers and employees might exist which allows such firms to share
16
2.4. Operations management
This study focusses on the operations management process in Dutch SMEs. Therefore, it is important to understand exactly what operations management entails and why this area of management is studied.
2.4.1. What is operations management?
Operations management is defined as “the process whereby resources, flowing within a defined system, are combined and transformed in a controlled manner to add value in accordance with policies communicated by management” (Kumar et al, 2009 p9). It is concerned with the conversion of inputs into outputs using physical resources. The aim of operations management is to provide the desired utility to the customers while meeting other organizational goals such as effectiveness, efficiency and adoptability (Kumar et al, 2009). According to Kumar (2009), the objectives of operations management can be categorized into customer service and resource utilization. The customer service objective entails providing the adequate level of customer service (and customer satisfaction) by providing goods or services with the right specification, at the right cost, at the right time. The resource utilization objective entails obtaining the maximum effect from resources or minimizing their loss e.g. achieving the agreed levels of utilization of materials, machines and labour. Operations management must be able to achieve a satisfactory performance on both objectives. However, the improvement of one objective will often deter the other, thus finding the right balance is important. For example, maximizing the utilization of a machine at one hand could delay the delivery time of a product on the other hand. Activities related to operations management are: location of facilities, plant layouts and material handling, product and process design, production and planning control, quality control, materials management and maintenance management (Greasly, 2008). The most important activities in this research are product and process design, production and planning control, quality control and maintenance management. A change in these activities have the most influence on the output of the conversion system and are therefore chosen.
2.4.2. The importance of operations management
17 revenue. Therefore the way operations is managed in the long-term, is likely to be a vital element of an organization’s success (Greasley, 2008).
2.5. Operations management practices
Most research found on operations management practices (Bloom et al, 2012, 2013, 2014, 2019; Forth et al, 2019; Brozeit et al, 2019) draws on the theory and methodology first described in Bloom and Van Reenen (2007). They developed a survey instrument for the measurement of management practices in cooperation with a global management consultancy firm. Within this instrument 16 operations management practices are defined under three broad headings i.e.: performance
monitoring (information collection and analysis), target setting, and incentives (people management) (appendix 1). According to Bloom (2013), those organizations that continuously monitor their
processes, set targets and pay close attention to their workforce will perform better than those which do not. Bloom et al (2007, 2012, 2013, 2019) developed these three topics from the principles of continuous monitoring, evaluation and improvement from Lean Manufacturing. Although these studies refer to Lean Manufacturing, they do not give a further explanation what Lean Manufacturing is, how it links to operations management and how they exactly derived target setting, monitoring and incentives. In the following section, I look for an explanation about the choice of these topics first defined in the work of Bloom and Van Reenen (2007). In addition, their use is validated.
2.5.1. Lean Manufacturing
18 Now that the main principles of Lean Manufacturing are clear, the link with operations management will be established in the following section.
2.5.2. Link between the lean principles and operations management
According to the lean principles, improvements can be made by changes in the input or output of processes. It entails making something better while trying to minimize costs and negative
consequences. Since operations management is concerned with the conversion of inputs into the desired output, an important link between the Lean Manufacturing principles and operations management is established. Another similarity is the value added concept. Operations management is concerned with the process that combines and transforms resources into value added services in a controlled manner (Kumar, 2009). According to the lean principles, value added elements have to be identified in order to see where the waste can be reduced. Overall, the lean principles drive
operational decisions and actions about products and processes which highlights their connection. In the following section we will discuss how Bloom and Van Reenen (2007) derived the dimensions target setting, monitoring and incentives from the lean principles.
2.5.3. Monitoring, target setting and incentives
Bloom et al (2012) define the operations management practices under three broad headings: monitoring, target setting and incentives. They explain monitoring as the extent to which organizations monitor what goes on inside the firm and use this information for continuous improvement. With target setting they examine an organizations’ type of targets, the realism of targets, and the range and interconnection of targets. According to the Lean Manufacturing principles, no organization can improve unless it routinely meets customer demand and achieves operational targets on a daily basis (Nicholas, 2018). In order for operations managers to check whether this is the case or not, they have to gather data and monitor results and processes. Based on this information it seems logic why Bloom and Van Reenen (2007) chose target setting and
monitoring and how it originated from the lean principles.
19 based on their performance, prioritizing hiring, and trying to keep their best employees. A clear link can be made between Lean Manufacturing and incentives from Bloom and Van Reenen (2007).
The real motivation of Bloom and Van Reenen (2007) for choosing monitoring, target setting and incentives remains unclear. However, we were able to establish a logical link between their topics, Lean Manufacturing. Therefore, their choice seems valid. We therefore chose to build on the work of Bloom et al (2012) including the three headings and corresponding operations management
practices, in the remainder of this thesis.
2.6. Firm performance
The performance of a firm is a very important construct in management research, because it indicates how well a firm is doing. According to Venkatraman & Ramanujam (1986), firm
performance is a subset of the broader construct of organizational effectiveness. They state that the domain of organizational effectiveness exists of two primary dimensions: financial performance and operational performance. The financial performance domain is assumed to reflect the fulfilment of the economic goals of the firm (Venkatraman & Ramanujam, 1986). Typical indicators of this domain are for example sales growth, profitability (return on investment, return on sale, and return on equity), earning per share, etc. Indicators of operational performance are nonfinancial such as market share, new product introduction, product quality and manufacturing added value (Selvam et al, 2016).
20
3. Research framework
This chapter discusses how the operations management process is developed and how it is derived from the work of Bloom et al (2012). Section 3.2. presents the research model used in this study. Finally, my predictions about this model are described in section 3.3.
3.1. Operations management practices in this study
According to Bloom et al (2012), the defined operations management practices (appendix 1) are basic management practices for which best practices most likely exist. These best practices aim to raise the efficiency of firms’ production of goods and services. Firms adopting these practices are more profitable, grow faster and survive longer (Bloom and Van Reenen, 2007). Following the work of Bloom et al (2012), a well-managed organization is one that:
- Continuously monitors and tries to improve its processes; - Sets comprehensive and stretching targets;
- Promotes high-performing employees and fixes underperforming employees (by training or firing).
Blooms’ management practices do not match the definition of a management practice developed earlier (see section 2.2.3.). Therefore, we will not fully adopt the research model of Bloom et al (2012). I consider most of the management practices developed by Bloom et al (2012) as
management tasks rather than practices. We define a management task as a piece of work that has to be carried out by a manager (Oxford learner’s dictionary, 2017). Whereas a management practice is defined as “the actual application of the gathered knowledge, insights and experience of a
manager for the fulfilment of their managerial tasks” (section 2.2.3.). This implies that the
management practice determines how a management task is fulfilled. It requires knowledge, insight and experience which is different for every manager. How the task is fulfilled is therefore different for every manager while the task itself stays the same. To make the difference more clear, read the following example: An operations manager has the task of setting production targets for his firm to ensure on time delivery. Based on their information, the manager might decide to plan the
production of product A first and then product B. However, another manager with more experience decides that it is more efficient to produce product B first and then product A. The interpretation of the data is different for every manager, because it requires the application of the manager’s
21 In the remaining part of this paragraph the development of the research framework is discussed.. The operations management tasks and management practices defined in this study are presented in table 4 and 5. The definitions developed and used in this study are presented in appendix 2.
3.1.1. Operations management tasks
In order for operations managers to monitor their processes, make decisions and judge the work of their workforce, they have to have certain data about these topics. According to the concept of data-driven decision making, the act of collecting data and the way it is documented makes it more explicit and less tacit (Brynjolfsson and McElheran, 2016). The data can be used by the operations manager to guide decision-making and therefore I define the first operations management task as data collection (see table 4). The data that is collected are KPIs and feedback from employees. Key Performance Indicators (KPIs) are variables used to measure performance (in this research the performance of the production process and products) (Brynjolfsson and McElheran, 2016). In addition to the KPIs, the feedback from employees is also considered an important source of information. Managers often see and discuss the data in meetings that are removed from the data sources (e.g. workplace) and do not involve the people most involved with those sources.
Consequently, they could overlook, do not understand or misdiagnose problems (Nickolas, 2018)
The second operations management task will be called target setting. It is an operations
management task that has to be carried out by a manager and therefore a verb is more fitting than a noun. Other than the difference in name it will remain the same as described by Bloom et al (2012). Targets help to inform managers about whether the production system is performing as desired, identifying possible problems and formulate possible actions (Brynjolfsson and McElheran, 2016). Within target setting, the type of target, target interconnection, target time horizon and target adjustment are important elements (table 4).
The third operations management task is incentives, also called people management (Bloom et al, 2012). Incentives have an influence on an employee’s motivation and performance, and thus
ultimately also on their results and outputs in the conversion system. So although it is a topic related to the field of Human Resource Management, it will be considered to be an operations management task. A firm should always try to keep their best employees and align their efforts with the goals of the organisation (Forth et al, 2019). The elements pay and bonusses, promotion criteria and
22 Operations management task Element Explanation Data collection
The act of collecting data serves to codify information which makes it more explicit and less tacit.
Key Performance Indicators (KPI)
KPIs give an indication about the type of data that is collected as well as the actual intensity of data collection.
Feedback from employees Employees are close to data source so their feedback could help managers diagnose problems and improvement points Target
setting
Interlinked short- and long term targets help to identify help to inform whether the organization is performing as desired by the management/directors.
Type of targets The type of targets indicate if they are: financial, non-financial or is there a balance
Target time horizon Short term or long term targets
Target interconnection It identifies whether or not the targets are connected to each other and to individual performance expectations
Target adjustment It identifies whether targets are adjusted within their time frame.
Incentives Employees are assessed based on the achievement of targets, are motivated and rewarded based on their performance.
Pay and bonusses Rewards related to performance and effort or are employees rewarded equally irrespective of their performance level
Promotion criteria Consequences of poor performance Promotion/rewards high performers Assessment criteria Assessment criteria for the employees
Table 4. Operations management tasks as defined in this study
3.1.2. Management practices
The first management practice is defined as monitoring/reviewing based on Bloom et al (2012). It entails the conversion of the gathered data into usable information. The use of IT systems makes monitoring/reviewing formal because it becomes more systematic and explicit in comparison with no use of IT (table 5).
23 The third management practices is defined as communication. Communication is important in the transfer of knowledge, creating understandings between a manager and the employees, and in motivating the workforce. Although communication does not really fit the definition of a management practice, it has significant influence on how the operations management tasks are executed. The presence of written communication and scheduled meetings make communication formal.
Management practice Explanation Formal management practices Monitoring/reviewing The collected data is monitored
and reviewed in order to turn it into usable information.
The use of IT makes
monitoring/reviewing more formal
Decision making Decisions can be made based upon objective data.
Data-driven decision making Communication The communication of managers
to their employees.
Written communication, scheduled meetings
Table 5. Management practices as defined in this study
3.1.3. Operations management process
The management practices monitoring, decision making and communication are considered to be entwined with the operations management tasks. According to Brynjolfsson and Milgrom (2012), the success of management practices and tasks almost always depend on the system of complementarity practices in which it is embedded. The concept of complementary practices is widely researched in the field of HRM. Gibbons and Henderson (2012 p. 694) state: “HRM practices in bundles and not individual practices have an economically and statistically significant effect on productivity”. Support for this statement is also found in the work of Ichniowski et al (1997). Although some of these findings stem from HRM literature, I believe the same could hold in the field of operations
management. Nicholas (2018) states that in Lean Manufacturing the operations managers’ key focus is on processes and continuous improvement. Following the concept of complementary practices and Lean Manufacturing, the operations management tasks (data collection, monitoring and incentives) together with the management practices are considered to be complements and therefore reinforce their positive influence when applied in a continuous coherent process. For example, with
monitoring certain data is collected and reviewed, based on this data targets can be made and these targets have to be achieved by the workforce. The workers can be rewarded or get sanctions
whether they hit these targets or not. After this the process starts again.
24 corresponding management practices are seen as a continuous process, firms are able to identify and eliminate problems in an early stage in the production process
3.2. Research model
In this study a clear distinction is made between an operations management task and a management practice. Based on the concept of complementary practices, focus on processes and continuous improvement (the lean principles) (Brynjolfsson and Milgrom, 2012; Nicholas, 2018), it is determined that the operations management tasks with its management practices is a continuous process i.e. the operations management process. This process consists of three operations management tasks that are executed by managers applying three management practices. These findings are used as the base for my research model presented in figure 1.
The following section will present our expectations on how the operations management process should be.
25
3.3. Predictions
This thesis is a qualitative study and therefore does not contain any hypothesis. Instead, based on the theory found it is described how I think the operations management process should be in order to achieve the most optimal results on firm performance. This prediction will be tested empirically in the following chapters.
3.3.1. Data collection
Firms collect key performance indicators about their product and production processes on a daily basis. This data is collected and formally monitored/reviewed by managers together with their employees. By monitoring/reviewing the data, managers turn it into usable information that serves as an objective base for decision-making. The data is expected to be collected and formally
monitored/reviewed daily to be able to diagnose possible problems and continuously track performance.
3.3.2. Target setting
The firms use the information from the previous operations management task data collection to guide decision making in setting targets (DDDM). These targets are used by the managers to be informed about how the firm is performing and alerting them to potential problems. The firms have interlinked short- and long term targets. With the help of short term targets the performance of the firms can be measured throughout the year against the long term target to help identify possible problems at an early stage. If short-term targets are not met, they are adjusted in order for the firm to be able to achieve their long-term target.
3.3.3. Incentives
The employees of a firm are assessed and held accountable based on the achievement of targets. In order to motivate employees and to retain high performers they are rewarded based on their performance. In case of underperforming employees, the firms offers them training and courses to get them at the required skill level.
26 Now the research model with its predictions is clear, the methodology will be discussed in the
following chapter.
4. Methodology
The effect of the operations management process on firm performance in Dutch SMEs is not widely researched. Through theory development, this research contributes to the literature on operations management practices and firm performance of SMEs. According to Yin (1994), a case study is an empirical inquiry by addressing the “how” and “why” questions concerning the phenomenon of interest. This research is a qualitative study with data gathered through semi-structured interviews.
4.1. Firm selection
The chosen firms are Dutch SMEs which produce their own product or service. Following the definitions of the European Commission (2003) medium-sized firms consists of 50-250 employees and small firms of 10-49. There might be a large difference between the operations management process in a small company with 20 employees compared to a medium-sized company with 150. Therefore a distinction is made between small and medium-sized firms. Due to the outbreak of the COVID-19 virus it was hard to find companies who were able to cooperate. Therefore is was decided to add no further criteria based on the kind of production process or output.
Initially the firms were selected from the network of myself and Previen Markandu who writes his thesis on a similar subject as mine. In order to acquire more respondents, a letter was send out to 30 different SMEs in the Netherlands with the question if they were interested in giving an interview. After some companies indicated they were willing to cooperate, we send out an e-mail with more detailed information about the research and the requirements for the interview. By agreement, an appointment for the interview was made and an additional e-mail was send to thank them for their cooperation. A total number of eight managers were willing to give an interview.
4.2. Data collection
To be able to answer the research question, primary data (e.g. data collected directly from
27
4.2.1. Interview structure
The interview questions and theory are systematically linked in order to make them comparable to each other and to connect the primary data to the theory in the analysis later on. The table
presented in appendix 3 links the theoretical topics to the interview topics and corresponding interview questions. This way the construct validity is improved by making sure interview questions truly discuss a certain theoretical topic. Construct validity is defined as “the extent to which an operationalisation measures the theoretical concept which it is intended to measure” (Bagozzi, 1984 p. 14). The interviews start with a brief introduction of the researcher, followed by the researched topic, the rights of the interviewee and the structure of the interview. The interview is divided into several topic groups with corresponding questions which is introduced by the interviewer every time a new topic is addressed. Each of these topics represents a management task defined in the research model. The questions are asked by the interviewer in a non-directive way to prevent the suggestion of certain answers to the respondents. First the main question is asked, followed-up by asking for explanations for the specific answer and the question if they could provide an example. When no further new information arises, the next question is asked. Finally, the interview concludes with a brief thank you to the respondent. All interview questions related to the operations management process are shown in appendix 4.
4.2.2. Firm performance
The indicators of firm performance as described in section 2.6. are difficult to obtain. When we look at the articles of Bloom et all (2007, 2012, 2013, 2019) performance indicators are firm growth, survival, productivity and profits. Companies however are often reluctant to give financial data and do not have direct information about their growth, survival and productivity.
In order to really know the influence of the operations management process on firm performance, longitudinal research would be best. However, for this thesis this approach is not suitable because of time restrictions. Therefore, we ask the respondents if they made changes in their management and how these changes affected the performance of their firm.
4.3. Data analysis
28 concepts in the interview answers. These concepts are coded in order to help analyse and interpret the respondents’ answers. Appendix 4 presents the codes that are used in short example schemes. Finally at the last stage, the data from these concepts are compared with the theory in this study and the ideas of the researcher. Following these three steps results emerge that are used to answer the research question and test the expectations.
The descriptive results are first presented chapter 5 and analysed in chapter 6.
5. Results – descriptive
In this chapter the interviews are described. General information about the participating firms is presented. Then, the findings are described for each operations management task separately. The results for the management practices are discussed within the operations management task because they are entwined. Finally, it is discussed how the respondents thought the operations management tasks influenced the firm performance.
5.1. General information about the firm
The eight firms that participated in the research are located in the north of the Netherlands. 50% of these firms are small-sized and the other 50% are medium-sized firms. They all, except one (Business F), operate within the technical branch. All the small firms have a flat (organic) organizational
29
Firm Information about the firm Firm size Firm
structure
Level of competion
Product /service
Business A Specialist in job placement in the technical sector
10 Flat High Service Business B Family business who produces
folding rulers for 70 years
9 Flat High Product
Business C Makes machines for the wood working industry
10 Flat Low Product
Business D Arranging and organizing the project management within yards
10 Flat Low Service Business E Family firm who produces concrete 75 tall Medium Product Business F Consumer electronica store with an
own web shop
77 tall High Service
Business G A crane builder in the offshore and wind sector
140 tall High Product
Business H Develops, sells, and maintains high pressure systems
125 tall Low Product
Table 6. General information about the firms
5.2. Operations management tasks
In this paragraph the descriptive results for the operations management tasks are presented. Each sub-paragraph concerns one operations management task and is discussed with the management practices.
5.2.1. Data collection
The respondents were asked about the data they collect concerning the performance of their product and production process, how this data is collected and the frequency. Concerning the management practices, we asked the respondents how and how often they monitor/review the data, if the data is used for decision making and if the KPIs are formally communicated.
Firm KPI Frequency data
collection Data documentation Feedback from employees Small firms
Business A Financial Daily ICT system No Business B Non-financial Daily - Yes Business C Financial Daily ICT system No Business D Financial Daily ICT system Yes
Medium-sized firms
Business E Financial Daily ICT system Yes Business F Financial Daily ICT system Yes Business G Financial Daily ICT system No Business H Non-financial Daily ICT system Yes
30 Table 7 shows that 75% of the firms use financial data such as revenue and sales as a key
performance indicators (KPIs). These are rather broad indicators and in case of negative performance they do not directly pinpoint where problems are. The other 25% of the firms use more specific KPIs like quality, lead times and reliability of their supplied products. These companies state they measure these KPIs several times during the process up and until delivery of the product/service to the
customer. All eight firms stated their employees are aware of the KPIs although they are not formally communicated. Every company but one (Business B) has an ICT system to be able to document and store the gathered data. One of the directors of Business B states: “We are a small company and timewise it is not efficient for us to document all the information about the KPIs. Instead I walk around and check the KPIs continuously and solve problems directly when they arise”. All eight companies say they collect their data every day. The companies were also asked if they gathered feedback from their employees. Five out of nine firms confirmed they do.
Table 8. Most important results management practices at data collection
Table 8 shows that the answer to question about how the collected data is monitored/reviewed differs among the respondents. Half of the respondents answered that the management
monitors/reviews the collected data and turns it in usable information. The remaining half state they monitor/review their gathered data together with their employees. An interesting finding is that only one of these companies is a medium-sized company and the others are small-sized. Although every company stated they gather their data on a daily basis, only four of them monitor/review them at them same rate. Since one small company (Business B) does not have a system to document their data they are also not able monitor their data other than directly. Two small firms review them every week and one medium-sized firm every month. 75% of the firms claim they use the collected data to make decisions within their companies.
Firm Monitored/ reviewed by: Frequency of monitoring/ reviewing
Data used for decision making
Small firms
Business A Manager + employees Weakly Yes Business B Manager + employees Continue No Business C Manager Weakly No Business D Manager + employees Daily Yes
Medium-sized firms
31
5.2.2. Target setting
The respondents were asked about what kind of targets they set and what their time frame is. We also asked whether the respondents have interlinked short- and long term targets and if they adjusted within their time frame. Concerning the management practices, we asked the respondents which information they use to set their targets and how the targets are communicated to their employees.
Short term targets Long term targets Target adjustment
Small firms
Business A Revenue Revenue No Business B Quality, production Total yearly production No
Business C Quality No
Business D On time delivery In budget Yes
Medium-sized firms
Business E Revenue No
Business F Sales Profit No
Business G Improvement of working
method Product development No Business H Several specific measurement
points
Several specific measurement points, revenue Yes
Table 9. Most important results operations management tasks at target setting
Table 9 shows that six out of the eight firms have short term targets as well as long term targets. One company (Business C) has only short term targets and the other one (Business E) only long term targets. The short term targets that were mostly named are quality and production goals/sales. The long term targets are the targets on an organizational level. Five firms stated that they have formal written financial long term targets. The other firm named product development as their long term goal.
Firm Based on gathered data Communication Knowledge of targets
Small firms
Business A Yes Formal Management + employees Business B No Informal Management + employees Business C No Formal Management + employees Business D Yes Formal Management + employees
Medium-sized firms
Business E Yes Formal Company directors Business F Yes Formal Management + employees Business G No Formal Management + employees Business H Yes Formal Management + employees
Table 10. Most important results management practices at target setting
32 means only two firms do. The respondent of one of these two firms (Business H) said: “Every
department has its own performance inductors, based on the results from these indictors we set future targets and measure continuously if they are met. We also make a business model at the beginning of every year which serves as a guide throughout the year. So every time we measure if the goals are met, it gives us information about how well we are doing based on this plan”. Seven out of eight firms formally communicates their targets to their employees. One of these firms
communicates its targets to the company directors and leaves it up to him if he communicates them to the other employees.
5.2.3. Incentives
Respondents were asked on what criteria they assess the performance of their employees, how they are rewarded and motivated. In addition they were asked how they try to retain their high
performers and how they deal with underperforming employees. In light of the management practices, the respondents were asked whether they formally asses their employees or not.
Firm Assessment criteria Pay Monetary Bonusses Under
performance
Small firms
Business A Achievement of targets Fixed wages No Training, courses Business B Effort, thinking along Fixed wages No Conversations Business C Effort, thinking along Fixed wages No Conversations Business D Effort, communication Fixed wages No Conversations
Medium-sized firms
Business E Communication Fixed wages No Training, courses Business F Achievement of targets Fixed wages Yes Training, courses Business G Effort, behaviour Fixed wages Yes Conversations Business H Achievement of targets,
personal development Fixed wages Yes Training, courses
Table 11. Most important results operations management tasks incentives
An interesting finding is that three companies (two medium: Business F and Business H, one small Business A) explicitly mention that the assessment criteria for employees are based on whether they are meeting their targets or not. For these companies this gives a clear link to target setting. The assessment criteria for the remaining five companies are effort, communication and thinking along. Personal development is an assessment criteria that was only mentioned by one firm (Business H). This respondent states: “Lifelong personal development is the most important thing in our
medium-33 sized firms state they give monetary bonusses based on their performance and the achievement of their targets. In case of underperformance of their employees, four firms (one small and three medium) offer training and courses to get them on the required skill level. The other firms hold conversations in order to motivate the underperforming employee and get them at the desired level.
Firm Communication Frequency performance appraisal
Small firms
Business A Formal Monthly
Business B Informal Regularly
Business C Formal Yearly
Business D Formal Monthly + Yearly
Medium-sized firms
Business E Formal + informal Yearly
Business F Formal + informal Weakly + yearly Business G Formal Yearly
Business H Formal + informal Regular + yearly
Table 12. Most important results management practices at incentives
Seven managers/directors mentioned that they have an annual formal performance appraisal where they document and archive the results of the conversation. Thus the assessment of their employees runs through formal communication channels. It is important to mention that the companies which have the achievement of targets as an assessment criteria, also review the performance on a more regular informal basis. One of them does this on a monthly basis (Business A) and the other two do not have fixed moments but state that it is done regularly (Business H, Business F). Finally, all respondents found it important to communicate the performance appraisals in a positive formal way.
5.3. Influence of operations management process on firm performance
In this section we look at how the separate operations management tasks influence firmperformance. Then, it is discussed if the respondents perceive the operations management tasks and management practices as an coherent process or as independent tasks. In the last part of this
paragraph, we look whether the companies made changes in their management process and what effect these changes had on their firm performance.
34 them and take appropriate action if needed. A respondent states (Business H): “Collecting data gives an increased focus, if something has an increased focus it will lead to better results”.
When it comes to target setting, seven respondents state that targets gives direction to their company and employees. The respondent from Business E said: “Setting targets helps to clarify the way we can achieve our milestones”. Another respondent (Business H) states: “The targets give direction to our employees so they know what is expected from them. Without direction they start to wander”. One respondent could not give a clear answer about its influence.
Incentives in this section entails how the respondents think this part of the operations management process influences their firm performance. Overall every respondent said that motivating and giving their employees attention has a positive influence on their results. One respondent (Business G) claims they only see short term effects of their people management practices. He states: “We have annual performance appraisals and initially we can see that employees try to improve themselves when necessary. However, most of the time the effect of the appraisal fades as time passes”.
Furthermore, the respondents said that incentives are important for the culture within the company. It can create a positive working atmosphere which in turn also leads to less absenteeism.
All the respondents were asked how they perceived the operations management tasks data collection, target setting and incentives with the management practices. All firms stated they see it as a coherent process instead of independent tasks and practices. The respondent of Business H said: “Separate tasks that do not fit within your processes are tasks that you shouldn’t do”. All
managers/directors were also asked how they would grade their own management. The respondents of the medium-sized firms gave themselves an average score of 8.5, where the lowest grade is an 8. The respondent of the small firms scored themselves an average of 7.9, where the lowest grade is an 7.
35 in cooperation with their employees. Ultimately these things lead to an improvement in
performance.
Another respondent (Business C) told they went from no use of IT to the introduction of a customer relationship management system. They started to document and gather data about their customers, projects, sales, etc. The data became ready and available at any second which lead to transparency and oversight which in turn lead to an easier production process and higher productivity. Finally, Business F pointed out they improved their communication within their firm. Their goal was to inform every employee in every layer of the company about what exactly is expected from them, they gave their employees more of a voice which allowed them to solve structural problems. As a consequence, the productivity of their employees increased which lead to higher results.
6. Results – analytical
In this chapter an analysis will be made in order to critically asses the predicted optimal operations management process (figure 1) against the data derived from the interviews. In each paragraph the operations management tasks will be analysed together with the management practices.
6.1. Operations management tasks
In this paragraph the analytical results for the operations management tasks are presented. Each sub-paragraph concerns one operations management task and is discussed with the management practices. In addition, we try to see if the respondents carry out the management tasks
independently from one another or in coherence.
6.1.1. Data collection
According to our research framework, firms should collect, document and formally monitor/review data in order to make information explicit and to make decisions founded by objective numbers. The data should be collected and formally monitored/reviewed daily in order to be able to diagnose possible problems and continuously track performance.
The descriptive results show that both small and medium-sized companies engage in data-driven decision making. They mainly collect financial, less specific data which do not indicate the source of possible problems in case of disappointing results. Also the intensity of data-driven decision making differs, but these differences cannot be explained by firm size.
36 on a daily basis, mostly the medium- sized firms monitor/review them at the same frequency. This shows that only within medium- sized firms there is a continuous process between data collection and monitoring/reviewing.
According to the research framework, managers should discuss the data with the people close to the sources. Otherwise they overlook, do not understand or misdiagnose problems (Nickolas, 2018). Most small firms monitor/review the gathered data together with their employees, where medium-sized firms mainly don’t. The small firms all have flat organizational structures (section 5.1.) which indicates that they are less bureaucratic than medium-sized firms. One of the small companies stated (Business B): “We are a small company and therefore have to work time efficient.
Monitoring/reviewing the data directly together with our employees helps us save time, but also ensures the identification of problems early on in the production process. ”
6.1.2. Target setting
According to research framework, managers should use the monitored/reviewed information to guide decision making in setting their targets (DDDM). Furthermore, it is proposed that firms set interlinked short- and long term targets in order to track how well they are doing.
Although all firms claim they use their monitored/reviewed data for decision making, only five of them (mainly medium-sized firms) use them for target setting. It implies that data-driven decision making in target setting is more present in medium-sized firms. It is interesting to see that most firms state they have short- and long term targets, but only three firms have interlinked short- and long-term targets to be able to measure if they are performing as desired (two medium-sized Business F, Business H, one small firm Business A). In addition, most of the companies use data from previous years to set the long term targets and do not adjust their targets based on gathered real time-data throughout the year. These findings indicate that generally firms do not use short-term targets as an “staircase” towards the long-term targets. So although firms measure short-term performance, they do not know if they are going to achieve their long-term goals and thus do not have an strong indication about their long-term performance, which is not in line with the expectations. Medium-sized firm Business H, explained that in order for them to realize growth they continuously have to measure their performance and eliminate weaknesses.
6.1.3. Incentives
37 The companies which assess their employees based on achieving their targets are mostly medium- sized firms. Although no company has incentive pay, the medium-sized firms give monetary bonuses based on performance. All respondents put a high emphasis on generating intrinsic motivation, while only medium-sized firms also extrinsically motivate their employees. The respondents from small firms explained that because of their smallness they cannot ensure monetary bonusses for their employees and therefore generating intrinsic motivation is more valuable. The employees from medium-sized firms are held accountable for the achievement of targets and are rewarded based on this. Within small firms, the managers/directors are responsible for whether or not the targets are achieved.
Within the firms that link their targets to their KPIs, store data about the achievement of targets, monitor/review this data with the help of IT systems and then assess their employees based on the achievement of targets, monitoring is formal. The latter is present in only three firms (Business F, Business H and Business A). Thus, within both small and medium-sized firms managers mostly informally monitor/review their employees. Both small and medium-sized firms have formal annual performance appraisals. These appraisals are documented and stored which enables the manager to make (future) decisions based on objective data, i.e. data-driven decision making. In addition, the medium-sized firms which have the achievement of targets as an assessment criterion, review the performance of their employees also on a more regular informal basis. It is interesting to see that these companies are also the ones which have interlinked short- and long-term targets and set their targets based on the data from data collection. It indicates that these firms link data collection to their targets and incentives and formally monitor/review continuously which confirms the predictions in this study. It implies that these firms see the operations management tasks and management practices as a coherent process.
In case of underperformance of employees, small firms only hold personal conversations and give attention to try to “fix” their employees. The medium-sized firms are able to offer training and courses in order get their employees at the desired level. Overall, medium-sized firms make use of more formal management practices when it comes to incentives where small firms’ approach is characterized by its informality.
