MASTER THESIS
The influence of management
practices on firm performance
A study among Dutch SMEs
Authors Previen Markandu (S3857476) University University of Groningen
Faculty Faculty of Economics and Business Programme MSc Small Business and Entrepreneurship College year 2019 - 2020
First supervisor Dr. M.J. Brand Second supervisor Dr. S. White
Date and place of publication Groningen, 17-08-2020 Word count
Version:
Abstract
This thesis aims to give more understanding on how management practices influences firm performance. Management practices refer to the tasks and methods that managers use to improve the effectiveness of organizational processes. The objective was to bring a discussion on how management practices are used within Dutch SMEs. In this study, I was interested in how management practices influence firm performance. Furthermore, this study aims to develop an understanding of how the culture of Dutch SMEs influence the use of management practice dimensions. The practices are applied by managers in a firm. Therefore, managers have a large influence on how management practices are applied. The skills and competencies of the manager are a factor that influences the use of management practices. To do this qualitative study a theoretical framework on the continuous process of management practice dimensions was developed. This framework is applied in eight Dutch SMEs, split into four small and medium-sized firms.
The results show that the level of formalization of management practices differs within the firms. Small firms tend to use more informal practices. Whereas medium-sized firms use more formal practices. The difference in management practices applied within firms is partially explained by firm size, dynamics of the market, ownership of the firm, the skills and competencies of the manager. This study found out that management practice dimensions have a positive effect on firm performance. Whereas monitoring has a positive effect on growth and helps to manage the firm. Target setting shows to have a direct effect on firm performance by setting common goals for the employees. Furthermore, incentives show a positive effect by using intrinsic and formal incentives to help to improve the work atmosphere and help to motive employees to perform.
Lastly, the findings show that management practice dimensions implemented by managers within Dutch firms are shaped partially by the cultural dimensions scores of Hofstede. Especially, the
masculinity and uncertainty avoidance scores of the Netherlands are having an impact on how management practice dimensions are used within Dutch SMEs. The uncertainty avoidance score can partially be explained by the use of relatively high formalization with management practice dimensions. Therefore, more rules and regulations are applied when using management practice dimensions by the Dutch SMEs. Finally, the low score on masculinity is seen in the way how managers have a more
Table of Content
1. Introduction ... 5
2. Literature review ... 6
2.1 SMEs, Management and Culture ... 7
2.1.1 SMEs ... 7
2.1.2 Distinction between small and medium-sized firms ... 7
2.1.3 Management ... 9
2.2 Culture in management ... 9
2.2.1 Cultural dimensions of Hofstede ... 10
2.3 Practices ... 12
2.3.1 The use of practices ... 12
2.4 The studies on management practices of Bloom et al ... 14
2.4.1 Criticism on the studies of Bloom et al ... 16
2.4.2 Managers influence the use of management practices ... 17
2.4.3 Formalization in management practices ... 17
2.5 Relation between (management) practices & performance ... 18
2.6 Research framework ... 19
2.6.1 The relevance of management practices by Bloom et al ... 19
2.6.2 Changes based on criticism ... 19
2.6.3 Refined management practices ... 20
2.6.4 The role of culture on the use of management practices ... 22
2.6.5 Theoretical framework ... 23
3. Methods ... 25
3.1 Firm selection criteria ... 25
3.2 Data collection ... 26
3.4 Data analysis ... 27
4. Results – Description of data ... 29
4.1 General information about the firms ... 29
4.2 Skills and competences of managers ... 30
4.3 Management practice dimension – monitoring ... 30
4.4 Management practice dimension – target setting ... 32
4.5 Management practice dimension – incentives ... 33
4.6 Perspective of managers on management practices ... 35
5. Results – Analyses ... 36
5.1. A) Relationship between monitoring and target setting ... 37
5.2. B) Relationship between target setting and incentives ... 37
5.3. C) Relationship between incentives and monitoring ... 38
5.4. How management practice dimensions influence firm performance ... 39
5.5 Managers skills ... 41
5.6 Differences in the use of management practice dimensions ... 41
6. The impact of culture on management practices ... 42
6.1 Expectations ... 42
6.2 Findings within Dutch SMEs ... 42
6.3 Analyses based on the findings and the results of Hofstede ... 42
7. Conclusion, discussion, and future research ... 45
7.1 Conclusion ... 45
7.2 Discussion ... 46
7.3 Managerial implications ... 47
7.4 Limitations and future research ... 48
References ... 49
Appendix ... 54
1. Introduction
Since February 2020, the world is fighting a global pandemic named COVID-19. Besides the tragic loss in life, this virus also has a great impact on the economies of nations. In a survey done by the central bureau of statistics in the Netherlands the following results were alarming, 22% of the small firms think that they will not survive the lockdown (CBS, 2020). Times are uncertain for firms all over the world. However, uncertainty and firms not surviving was also common before and will be common after this pandemic. A reason for firms not surviving is explained be the fast-changing environment
(Englehardt & Simmons, 2002). Another reason for the liquidations of SMEs seems to be the lack of management practices in firms (Bryson 2016, Gaskill et al 1993). Management practices are tasks or methods that a firm can apply to increase effectiveness within an organization.
Management practices are the use of data collection analysis, target setting and performance-focused human resource practices to enhance the firm performance (Bloom et al, 2014). Bloom’s research found that management practices vary substantially across organizations in each country and every sector (Bloom et al, 2012). The study of Bloom et al focused on how management practices were applied by firms in the manufacturing industry across the world. The work of Bloom is prominent in the field of management practices (Bloom et al, 2007, 2012, 2014, 2015).
The concept management practices of Bloom are applied by researchers in their study to elaborate on the study of Bloom (Forth, 2019, Nemlioglu, 2017 and Brozeit et al, 2018). These existing studies are quantitative. This research method could show if a relationship between variables was positive or negative. However, this research method can not show how management practices influence within the organisation. This could help to understand one of the oldest questions in economics and business a little bit more. Why is there such a large heterogeneity in management practices (Bloom et al, 2017)?
The statistics show that the survival rate of SMEs between countries varies in Europe. This by itself is not striking. However, the difference between business survival in the UK and the Netherland is more than 10 per cent, which is notable for two western economies that are near each other (Statista, 2017). However, there is a concern about the UK persistently weak productivity growth. This is focused on the small and medium-sized firms (Aradanaz-Badia et al, 2017).
Recent studies show that Dutch SMEs have different characteristics than other SMEs. Based on the study of Chong et al 2018, which discusses the positive characteristics of Dutch SMEs. Chong argues that Dutch SMEs are more likely to benefit from export, due to their higher quality output and
The different characteristics of Dutch SMEs can partially be explained by culture. A study of Hofstede (1984) found out that countries have four dimensions of common structure in their cultural systems. They are based on four fundamental issues in human societies to which every society must find its answer (individualism, power distance, uncertainty avoidance, and masculinity). There is solid evidence that these four dimensions are universal. Together they account only for a small part of the difference in cultural systems around the world. However, this small part is important if it comes to understanding the functioning of firms and people within them.
Therefore, in this study, I want to find out if Dutch SMEs use the management practice of Bloom. This study can help to understand how management practices help a firm in acquiring better performance. Lastly, I want to find out how the culture of Dutch SMEs influence management practices. This research contributes to the existing literature of Bloom et al. The aims of this study are as follows:
1. To find out how the use of management practice dimensions influence firm performance in Dutch SMEs
2. To develop an understanding of how the culture of Dutch SMEs influence the use of management practice dimensions
The ‘how’ questions are stated to understand how management practices are used in Dutch SMEs and how these management practices influence firm performance. This study will likely result in new managerial implications based on the qualitative nature of this study.
2. Literature review
This literature review discusses the important concepts that are relevant for this study. First, SMEs, management, and cultural dimensions are described extensively. Second, practices and
management practices of Bloom are discussed with relevant literature. Third, the relationship between (management) practices and performance is described. Lastly, the research framework is discussed. In this paragraph the focus of this study is explained and the choices that are made to come up with the
2.1 SMEs, Management and Culture
2.1.1 SMEs
Many definitions are given to the term ‘Small & medium-sized enterprises’ (SMEs). Nooteboom (1994) argues that Dutch small enterprises consist of up to 10 employees and medium enterprises consist of 10 up to and including 100 employees. The European Commission’s (2017) stated that the criteria for SMEs are a minimum of 10 employees and a maximum of 250 employees. This is the most recent defined term of a ‘SME’. Therefore, it will be used in this study.
2.1.2 Distinction between small and medium-sized firms
SMEs are usually categorised in two sizes. Small and medium-sized firms with each size having their specific characterises. Table 1 shows the distinction between the sizes with specific weaknesses and advantages for each firm size. The information to make table 1 is found by an extensive literature review. The following articles and literature are used to make this table: Fiegenbaum et al, (1991), Nooteboom, (1994), Greiner, (1998), Carter & Jones-Evans, (2009), Croonen, (2018).
There are two interesting developments firms likely go through when they tend to grow in size. First, small firms mostly start informal. A reason for this is having fewer employees and more resource constraints. When these small firms grow towards medium-sized firms. The firm must choose if more formality is needed. This choice is based on their market, competitors and product that is sold. Medium-sized firms tend to have a higher level of formalization. A reason for this is the large number of
employees that must be managed and controlled compared to small firms.
Formalization refers to the presence of written procedures, rules, and policies to design, measure and regulate the operational processes (Storey & Greene, 2010). According to Kessler (2013), formally refers to the extent to which the activity in the organization is governed by rules and standard procedures often existing in writing. Based on the previous two definitions I define formalization as the extent to which an organisation is characterised by: written procedures, rules and policies that apply to every member of an organization, to regulate processes within the firm.
Although there are similarities between managing a small or medium-sized firm, significant differences also exist. First, some difficulties for small firms are discussed. By nature, most small firms are owner-managed. The owner is required to manage all functions of the business, including operations, finance, staff and marketing. However, a narrow expertise of the owner can result in a lack of a number of these functional areas. Moreover, most small firms do not have the resources to hire outside skills to strengthen the functional areas of the business (Croonen, 2018). Nootboom (1994) mentions some weaknesses as well for small firms. Two important ones are the vulnerability of small firms and short-term perspective in the management.
On the other hand, there are also some advantages for small firms. First, managers within small firms have smaller teams to manage. Existing literature shows that smaller groups of employees are better managed (Jones, 2012). A reason for this is the closer relationship between manager and employee, which results in a more productive workspace. Nooteboom (1994) argues that employees and managers tend to be more motivated in small firms. A reason for this is more personal and close relationship between employee and managers in smaller sized firms.
Table 1 Pros and cons of small and medium-sized firms based on the articles
Firm size: Small firms Medium-sized firms
Weakness Informality Working towards more formality is costly and
time consuming
Poor information systems By growing it becomes harder to be flexible Poor decision making Management layers mostly occur
Resource constraints
Advantages Management is motivated and
committed
More mature and efficient then smaller firms Personal and close relationship with
customers
More resources available then smaller firms
Flexible Attract better quality of staff
2.1.3 Management
Management is a widely researched subject in literature. Minzberg is one of the pioneers in the field of management. Mintzberg explains that management can be broken down into roles, responsibilities and organizing the workplace to simplify complex concepts (Mintzberg, 1968). With roles, he implies managers that are responsible for a certain part of the firm. The certain part of the firm is the workplace that is simplified in, for example, a marketing department or the production floor. This perspective of Mintzberg helps to organize firms into a more efficient organism, and its members (staff) to develop their skills.
Hatten (2006) defines management as ‘the process of planning, organizing, leading and
controlling resources to achieve the goals of an organization’. These processes are to some extent done by a manager.
Based on the definitions of Mintzberg and Hatten, I conclude that management is based on a process which includes planning, organizing, leading and controlling resources of an organization, Therefore, implementing functions (e.g. managers) and responsibilities (e.g. managing finance or marketing) to achieve the goals of an organization. In the end, a manager is responsible for the processes within the department or firm.
2.2 Culture in management
Management consists of the coordination of the efforts of people and the use of economic and technical resources to reach the desired goals (Hofstede, 1984). According to his studies, management is a socio-technical activity in the sense that it implies dealing with a human side (‘socio’) and with the non-human side (technical side), as well as the integration between the two. Some management focuses more on the human side (e.g. nursing, school), others more on the technical side (e.g. banks, accountancies). However, there is always a combination of the two sides active within management. The technical side is less culture-dependent than the human side but because the two interact, no management is culture-free.
2.2.1 Cultural dimensions of Hofstede
Hofstede (1984) detected some elements of structure in cultural systems in more in than 50 countries. The four dimensions represent elements of common structure in the cultural systems of the countries. The position of the country on each of the four dimensions could be indicated by score. The range of scores represented the range of different answers to the four dimensions found. The four dimensions are as follows:
Individualism versus collectivism
Individualism stands for a preference for a loosely social framework in a society wherein
individuals are supposed to take care of themselves and their immediate family only. Collectivism stands for a preference to tightly social framework in which an individual can expect their relatives to look after them in exchange for loyalty. This dimension shows the degree of interdependence a society maintains among its people.
Large versus small power distance
Power distance is the extent to which people of a society accept that power in institutions and organizations is distributed unequally. This affects the behaviour of the less powerful as well as the more powerful people of society. People in large power distance society accept a hierarchal order in which everybody has a place, which needs no further justification. People in small power distance societies strive for power equalization and demand justification for power inequalities. This dimension addresses how society handles inequalities among people when they occur. This has consequences for the way people build their institutions and organizations.
Strong versus weak uncertainty avoidance
Uncertainty avoidance is the degree to which the members of a society feel uncomfortable with uncertainty and ambiguity. This feeling leads them to beliefs promising certainty and to maintaining institutions protecting conformity. Strong uncertainty avoidance societies maintain rigid codes of belief and behaviour and are intolerant towards deviant persons and ideas. Weak uncertainty avoidance societies maintain a more relaxed atmosphere in which practices counts more than principle and change is more easily tolerated. This dimension addresses how society reacts to the fact that time only runs one way and the future is unknown. So, whether it tries to control the future or to let it happen.
Masculinity versus femininity
Masculinity stands for a combination of two factors. First, masculinity stands for a preference in society for achievement, heroism, assertiveness, and material success. Its opposite, femininity, stand for a preference for relationships, modesty, caring for the weak, and the quality of life. Second, this dimension shows how society allocates social (as opposed to biological) roles to the sexes. Some societies strive for maximum social differentiation between sexes. The norm is then that men are given the more outgoing assertive roles and women the caring, nurturing roles. Other societies strive for minimal social
differentiation between sexes. This means that some women take assertive roles if they want to but especially that some men can take relationship-oriented, modest, and caring roles if they want to. A combination of these two factors is considered in the cultural dimensions scores of Hofstede.
Comparison with US, UK, Netherlands, China, and Japan
The data was originally derived from multinational corporation employees. However, subsequent research shows that the same or closely dimensions could be found in other research data, collected by different researchers with different methods. (e.g. random samples of entire national populations and statistics from the World Health Organization). Therefore, there is solid evidence that the four dimensions are universal. Together they account only for a small part of the differences in cultural systems around the world. However, this small part is important if it comes to understanding the functioning of work
organizations and the people within them. Fifty countries are given index scores on each of the four dimensions based on their local employees. The scores are always relative scores in which the lowest country is situated around zero and the highest around 100. Table 2 shows the scores of the US, UK, Netherlands, China, and Japan.
Table 2 Overview of cultural dimension scores
Country Individualism Power
distance Uncertainty avoidance Masculinity United States 91 40 46 62 United Kingdom 89 35 35 66 Netherlands 80 38 53 14 China 20 80 30 66 Japan 46 54 92 95
2.3 Practices
An organization needs to find tasks or methods that can help them organize and structure firms in an efficient way. Taking my take on management into account, in the end, a manager is responsible for the planning, organizing, leading, and controlling. But there are ways that an organization can help managers in doing their job. One solution is the implementation of practices.
Existing literature does not give a clear definition of the term ‘practice’. The Cambridge
dictionary describes the practice as “the actual application or use of an idea, belief, or method as opposed to theories relating to it’’. Therefore, I propose the following provisional definition:
“The actual application of a method or task that is done regularly”.
A method is a procedure for accomplishing or approaching something in a systematic way. A task is a assigned piece of work often to be finished within a certain time.
2.3.1 The use of practices
After an extensive literature search, I found some studies about the use of practices within firms. In this paragraph, the literature is discussed. Appendix 1 shows a matrix with all the studies and the most important information and findings.
The second study of Huselid (1995) was about high-performance work practices, which is defined as follows: High-performance work practices are extensive recruitment, selection, and training
procedures, labour management and incentive systems that help increase productivity within firms. This paper gave more insight into the impact of high-performance work practices on firm performance. An interesting finding in this study was that the external and internal environment of a firm can change the need for employees.
The third study of Li (2006) was about supply chain management practices (SCM), which is defined as follows: SCM practices are defined as the set of activities undertaken by an organization to promote effective management of its supply chain. This quantitative paper gave insight on the impact of SCM practices on competitive advantage and organizational performance. In this paper, an important finding was that higher levels of SCM practice can lead to improved organizational performance.
The fourth study of Jong & Vermeulen (2006) is about innovative practices, which is defined as follows: Innovative practices are tasks done within an organization to innovate successfully. This
quantitative study is about the determinants of product innovation in small firms. An interesting finding in this study was that manufacturing firms score high on successfully using innovative practices.
The last study found was that of Artz (2020) about human resource practices, which is defined as follows: HRM practices are defined as the tasks of managers to encourage, help, respect, and praise their employees. This quantitative study is about the role the managers plays within the firm. It focuses on what the effect of managers is on the employees. An interesting finding in this study was that certain
combinations of HRM practices are positively related to organizational performance.
2.4 The studies on management practices of Bloom et al
Nicholas Bloom is currently a professor of Economics at Standford University, He previously worked at the UK Treasury and Mckinsey & Company. His research area focuses on management practices and uncertainty (Stanford, 2020). Management practices usually refer to the working methods and innovations managers use to improve the effectiveness of the organization (IGI Global, 2020). Note that this definition is not of Bloom, in his studies he does not use a clear definition of the term
management practices. My provisional definition of management practices is discussed in the next paragraph. However, in 2007 he released a joint paper, which explains and measures management practices across firms and countries. They found that it is difficult to classify management practices as ‘good’ or ‘bad’ because often it depends on the environment of the firm. A firm in product making industry uses other management practices in comparison to a firm offering a service (e.g. insurances).
Therefore, only the potential management practices that can be defined for most of the firms are used (Bloom et al, 2007). In a collaboration with a leading international consultancy firm, a list of 18 key management practices was configured. There is no scientific proof for these 18 practices in the paper of 2007. The management practices were classified into four dimensions. Table 3 shows an overview including the four dimensions, 18 practices and an explanation. Three dimensions are called monitoring (information collection and analysis), target setting, and incentives (people management). These management practice dimensions apply to most of the commercial sectors. Furthermore, the dimension ‘operations’ was made to make management practices more applicable to the manufacturing industry.
A few years later another study was conducted about management practices across firms and countries (Bloom et al, 2012). In this quantitative study, he used the 18 management practices from the study of 2007. Questions were constructed to derive on what level a firm used management practices. A scale of 1 to 5 was used. Where 1 is not applied in a firm and 5 is formally applied in a firm. The answers to the questions gave a management score between 1 and 5. Firms that scored closer to 5 were ‘best managed’ based on Bloom. He was convinced that if a firm used the management practices in a systematic, continuous, and formal way. A firm would benefit the most in terms of performance-enhancing. The impact of formalization on management practices is discussed further in this chapter.
Table 3 Management practices of Bloom et al (2012)
Dimensions Management
practices
Explanation Operations
Operations are activities done within the
organizations.
This dimension focusses on the introduction of lean (manufacturing) techniques and the documentation of process improvements
Introduction of modern manufacturing techniques
What aspects of manufacturing have been formally introduced? Automation, flexible manpower, support systems and JIT delivery by suppliers are examples Rational
introduction of modern manufacturing techniques
Were techniques adopted just because others were using them, or they implemented for reducing costs or improving quality
Process problem documentation
Are process improvements made only when problem arise or actively sought out for continuous
improvement
Monitoring
The monitoring section focusses on the tracking of performance of individuals, reviewing performance (e.g., through regular appraisals and job plans, and
consequence management (making sure that plans are kept, and appropriate sanctions and rewards are in place
Performance tracking
Is performance tracked ad hoc or continually and communicated to all staff
Performance review
Frequency and two- or one-way feedback is used
Performance dialogue
How to proceed after a performance review, so coaching for example clear for all parties
Consequent management
What happens by failure to achieve objectives
Targets
This dimension examines the type of targets(financial or operational), the realism of the targets(stretching, unrealistic, or nonbinding), the transparency of targets (simple or complex), and the range and interconnection of targets (whether targets are given consistently
throughout the organization).
Target balance Are goals exclusively financial or is there a balance of financial and non-financial targets
Target
interconnection
Are goals based on accounting value and ultimately connected to individual performance
Target horizon Does the top management focus on short- or long-term goals
Target stretching Are goals easy to achieve or challenging Performance
clarity
Are performance measures clearly defined and communicated to the staff
Managing human capital
What extent are managers evaluated and held accountable for the human capital
Incentives
The incentives section includes promotion criteria (e.g., purely tenure-based or including an element linked to individual performance), pay and bonuses and fixing or firing bad performers
Rewarding high performance
Are high performers rewarded Removing poor
performers
Does poor performance have consequences Promoting high
performers
Are high performers promoted Attracting human
capital
How to encourage talented people to join Retaining human
capital
2.4.1 Criticism on the studies of Bloom et al
There are no perfect empirical studies, which means that a critical view can help to find ways to improve research done in the past. First, Bloom does not give a clear definition of the term ‘management practices. Therefore, I propose the following provisional definition after reading Bloom et al, 2007, 2012 and 2014. The definition of management practices is as follows: Management practices refers to the tasks and methods that managers use to improve the effectiveness of organizational processes.
A task is an activity that needs to be accomplished within a defined period to work towards work-related goals. A method is a particular procedure for accomplishing or approaching something. The last part of the definition states: to improve the effectiveness of organizational processes. Which means that tasks of a manager should help with improving the processes within a firm. Ultimately, resulting in a better performing organization.
Second, there is no valid explanation of how these 18 key management practices are found. The paper of Bloom and van Reenen (2007) states that with the help of a leading international management consultancy firm the 18 key practices were developed. There is no further explanation in the paper about how this firm came up with these management practices.
Third, after analysing the different management practices described in table 3, some inconsistencies are found. First, not all the management practices described are tasks based on my definition of management practices. The dimension ‘operations’ has three management practices, but the first two practices are not about a task. “introduction of modern manufacturing techniques’ is about how much of production is supported by systems or automation. “rationale introduction of modern
manufacturing techniques” is about how changes in the production were implemented, was it the firm’s decision or a copied from a competitor. Therefore, the dimension ‘operations’ is not considered in this study. The dimensions monitoring, target setting, and incentives also have management practice within them that are no tasks or methods. These will be removed from the study or constructed towards a task or method.
Fourth, Bloom’s study only looks if a firm has certain management practices implemented. He does not look at how these management practices are applied within the firm by a manager. This issue is further discussed in the next paragraph.
2.4.2 Managers influence the use of management practices
Bloom et al studies were on firm-level. Therefore, a rather important factor is not considered; who applies these management practices within the firm? Management practices must be carried out by a manager, which makes the individual level relevant to the outcome of the management practice. The skills and competencies of a manager are important in how he/she performs a management practice. In the literature about management, some key skills and competencies are found (Newton, 1995 and Gasse, 1997). First, a manager must be able to communicate with the management team and employees. Second, decision making defines a manager in a firm. A manager should have the experience and confidence to make decisions for his employees or the firm. Third, problem-solving is a key skill for managers within a firm. The manager must be able to solve a problem to make sure that the processes within a firm run properly.
Lastly, educated managers have greater cognitive diversity and are better able to absorb new information than a less educated manager (Wally & Baum, 1994; Barker & Mueller, 2002). This can result in that higher educated managers are more likely to understand the complexity of management practices. Therefore, they are more capable of applying management practices. The use of management practices can differ within each firm. Based on the managers who apply the practices.
2.4.3 Formalization in management practices
Forth stated that small firms make less use of formal management practices in comparison with large firms (Forth, et, 2006). Studies about formalization in SMEs found different perspectives on the use of formalization within SMEs. One perspective sees the use of lesser formal management practices among small firms as the result of the lack of knowledge and information (Bloom, 2011). An alternative perspective states that small firms have distinctive characteristics, which can make the extensive use of formalized management practices inappropriate (Kitching and Marlow, 2013). Therefore, it can be that smaller firms tend to use less formal management practices.
In both perspectives, formal management practices are less common in small firms. However, more factors influence the decision in making use of formal management practices. A small firm
2.5 Relation between (management) practices & performance
Scholars argue that definitions given to firm performance may be abstract, or general, less, or clearly defined (Taouab, 2019). I use a definition that is in line with my perception of the term firm performance for this study. According to Lupton (1977) in an effective organization, the productivity rate and levels of motivation and satisfaction of its members are high, while rates of turnover, costs, labour unrest are low or absent.
In our discussion in section 2.3.1 about the use of different practices, I found that most of the practices applied are influencing performance. For example, one practice focuses on getting higher productivity rates within the firm (Huselid, 1995). In the study of Artz (2020) bad managers have a negative influence on performance. Bad managers are described as those who cannot motivate their employees and are worst on their ability to get the job done. Both studies show that there is a relationship between practices and performance. The studies of Flynn, Huselid and Lie show that practices in their respective fields have a positive influence on performance. In their studies, they cover HRM practices and supply chain management practices. These practices are used by firms to help managers in their work.
2.6 Research framework
In the introduction of this paper, the main aim of this study is to understand how does the use of management practice dimensions influence firm performance in Dutch SMEs? Furthermore, in this study I want to understand the influence of the culture of Dutch SMEs on the use of management practice dimensions. In the literature review chapter, I discussed the relevant literature that could help to answer these questions. This paragraph describes the choices I have made to come up with my theoretical framework and expectations.
2.6.1 The relevance of management practices by Bloom et al
The study of Bloom et al in 2007 tried to make management measurable by developing management practices. Bloom does not give a clear definition of the term management practices.
Therefore, I propose the following provisional definition after reading Bloom et al, 2007, 2012 and 2014. The definition of management practices is as follows: Management practices refer to the tasks and methods that managers use to improve the effectiveness of organizational processes. The studies of Bloom et al focused on how management practices were applied by firms across the world. The work of Bloom is prominent in the field of management practices (Bloom et al, 2007, 2012, 2013, 2014,
2015,2016, 2017). The concept management practices were further investigated by researchers to elaborate on the study of Bloom (Forth, 2019, Nemlioglu, 2017). This shows that there is interest in the research of management practices. However, there are a lot of questions unanswered. In this study, I am interested in one question. That is how different management practices influence firm performance.
2.6.2 Changes based on criticism
In section 2.4.1, I discussed the following limitations of the operationalization of the term
considered. Therefore, in this study, I add the skills and competences of a manager to see how it influences the use of management practices within a firm.
2.6.3 Refined management practices
This paragraph helps to explain my choice to go forward with 12 management practices within three management practice dimensions. In this research, the management practice dimensions are key to understanding what management practices are. The dimensions are the actual tasks or methods that a manager can use in their workflow. Therefore, research is done on these three dimensions, with each dimension having relevant management practices that help fulfil the task/method of the dimension. A list of the dimensions and management practices is shown in table 4.
Monitoring
Monitoring is explained as to how well a firm oversees what goes on inside the firm. Monitoring can be applied to the production process, or objectives set by the firm, and used on employees. This dimension consists of a management practice named data collection, which means that a firm should collect data within the firm to have a snapshot of where the firm stands. This can be on an organization level, finding out the revenue or on a production level, making sure the right number of products are made. The process of gathering information is called data collection. Furthermore, performance monitoring is a management practice within the dimension monitoring. This practice can show how a manager monitors the performance of the firm, department, and staff. This can be done by effectively analysing the gathered data. The last practice within monitoring is consequence management. This gives an insight in if the data collection and performance monitoring is occasionally or a continuous process.
Target setting
Incentives
The third and last management dimension is incentives, which consists of five management practices. The first one is managing human capital. This is about how the managers stimulate and motivate their employees to perform. The second one is rewarding high performers. Firms can offer incentives to perform better by given rewards to high performers. The third one is promoting high performers, which shows if there is a possibility within the firm to promote high performers. The fourth practice is attracting human capital, which shows how a manager makes its workplace attractive to potential employees. The last practice is retaining human capital. This shows the ability of a manager to keep (good) employees within the firm.
Table 4 Refined management practices
Dimensions of effectiveness Management practices Description
Monitoring Data collection What data is collected by
managers within the firm Performance monitoring (how) is performance of the
firm/employees monitored Consequent management Is the management consequent
in data collection and performance monitoring
Target setting Target balance Are targets only related to
finance or non-financial goals Target interconnection Are targets connected with the
data collected and performance monitored?
Target time horizon Are targets short or long term based?
Target stretching Are targets flexible or set
Incentives Managing human capital (How) are employees
stimulated to perform? Rewarding high performance (How) are high performance
rewarded?
Promoting high performance Is promoting possible? Attracting human capital What can the firm offer to
attract human capital? Retaining human capital How are (good) employees
2.6.4 The role of culture on the use of management practices
2.6.5 Theoretical framework
In the ideal situation, the monitoring dimension helps to set the basis for making targets, which explains the arrow from monitoring to target setting. However, as the framework shows there is also an arrow from target setting to monitoring, which shows that targets should be monitored to ensure that the determined targets are achieved. Furthermore, monitoring could help a manager to act on time to make a decision that can enhance the process in achieving the targets or change the targets based on the situation.
Targets should be challenging but not unreachable. The reason for this is that employees within the firm should be able to achieve the targets set by the firm. Otherwise, it could affect the work atmosphere and the morale of the employees. Incentives can help firms to achieve their targets. For example, bonuses and promotion possibilities for employees given by the manager/firm. Furthermore, incentives could result in employees performing better. Therefore, firms could achieve targets faster or set targets higher.
Managers should use incentives in a way that they get the best performance out of their employees. Bonuses or promotion are incentives mostly implemented in a formal policy. Next to these more formal incentives, some incentives can help motivate and stimulate employees without costing the manager anything. These incentives are more intrinsic. Examples are compliments, appreciation, and involvement of employees within the organisation. Resulting in a better work atmosphere. In the end, monitoring could help to see if the use incentives influence the performance of the firm.
In this study, I expect that the management dimensions are a continuous process for managers within a firm. However, a difference will be found between small firms and medium-sized firms. This difference will likely be in how formal these management practices are applied by the
Managers skills 1. Communication 2. Decision making 3. Problem solving Monitoring 1. Data collection 2. Performance monitoring 3. Consequence management Target setting 1. Target balance 2. Target interconnection 3. Target time horizon 4. Target stretching
Incentives
1. Managing human capital 2. Rewarding high performers 3. Promoting high performers 4. Attracting human capital 5. Retaining human capital
Firm performance
3. Methods
As the effect of management practices on firm performance is not yet explained in the qualitative literature, theory development is the right process to generate knowledge for this research. The study of Aken et al state that “theory development is needed when the business phenomenon has not yet been addressed in the academic literature” (Aken, Berends, van der Bij, 2012). In this study, the goal was to find out how management practices influence firm performance within Dutch SMEs. Previous studies about management practices showed only the effect and could not answer the how or why questions. A reason for this was the quantitative method used in previous studies. Therefore, in this study, I chose the qualitative approach.
In this study, the management of a firm is a key element in describing the use of management practices. Therefore, I choose to interview senior managers/directors within Dutch SMEs. The reason for this is that these functions have a better understanding of the concept, due to their experience. The interviews were held via online web calling. The COVID-19 situation in the Netherlands made it hard to interview managers face-to-face.
3.1 Firm selection criteria
For this research, 8 firms were approached. The focus of this study is on Dutch SMEs. The chosen firms are assembling their product or service. In this study, a distinction is made between small firms andmedium-sized firms to find out if the size of an SME matter for the use of management practices.
3.2 Data collection
The data for this study was obtained through semi-structured interviews. The semi-structured interview took place with a manager/director of selected firms. In this paragraph, the process of firm selection is described.
Firms were selected from the network of myself and Esmée Jans. To acquire more firms a letter was send out to SMEs in our network. After some of the reached firms showed interest, an e-mail with more information was sent. In this email, an explanation of the research topic and requirements for the firms were described. When firms agreed to cooperate, an additional mail was sent to firms to thank them for their cooperation and with information about when and how the interview would be conducted. In the week before conducting the interview, an appointment was made with all the firms that were willing to cooperate. An overview of the firm acquiring process is shown in figure 2.
Figure 2 Firms approach process
3.3 Questionnaire development
The interview questions and theory are systematically linked to structure these interviews and make the interviews comparable to each other. First, the transformation of theoretical topics to interview topics is shown in an overview matrix in appendix 2. This overview shows the link between the
theoretical topics and interview questions. Furthermore, the matrix shows the relevant articles used for making the interview questions.
When no new information emerged after each question, the next question was asked. The interviews lasted approximately 60 minutes. The complete interview scheme is shown in appendix 3.
By making sure the interview questions truly discuss a certain theoretical topic, the construct validity is improved. Construct validity represents the extent to which a method truly measures what it implies to measure (Bagozzi, 1991). The systematic approach is used for this study.
3.4 Data analysis
The interviews were recorded and transcribed and put in a qualitative data matrix. To analyse the data the article of Lee (1991) is used. Lee developed a three-level model approach to help researchers transform qualitative data into theoretical understandings. The first step in this model is about
understanding and comparing the data of each respondent by using the transcriptions. The transcriptions from the respondents have been put in a data matrix, which makes a distinction between small and
In the next chapter, the descriptive results of this study are shown. This information helps to get a better understanding of how firms apply management practices. In chapter five the results related to the theoretical framework are analysed. The use of analytical questions helps to find reasons for how management practices influence performance. In chapter six the cultural dimensions are being compared with the use of management practice dimensions by managers within Dutch SMEs.
4. Results – Description of data
In this chapter, the descriptive results are discussed. First, some general information about the firms in this study is shown. Second, more information is given about the managers in those firms. Third, the first management practice dimension – monitoring is discussed. Fourth, the second management practice dimension – target setting is described. Fifth, the last management practice dimension – incentives are discussed in a paragraph. Lastly, the influence of each management practice dimension is described in the last paragraph. The perspective of the managers is shown.
4.1 General information about the firms
For this research, interviews were conducted with eight firms. The firms can be divided into four small firms and four medium-sized firms. Two of the firms in this study are family businesses**. The firms are all located in the north of the Netherlands. All interviews were conducted with a manager within the firm. The managers have experience in their field and know the company. Table 5 provides an
overview of the general information about each firm. The firm structure of the firm is described as flat or flat/tall, which means that it is between flat/tall. The competitiveness shows if a firm is in a highly competitive market or a niche market. Lastly, the product/service column shows if what a firm makes. Product/services mean that the firm makes a product and offers a service to its customers.
Small firms Information about the firm Firm size Firm structure Competi tiveness Product /service
1.Technicum Specialist in job placement in the technical sector
10 Flat High Service
2. BV Schuif** Family business who produces folding rulers for 70 years
9 Flat Niche Product
3. Marinus Makes machines for the wood working industry
10 Flat Niche Product
4. Maritime projects
Arranging and organizing project management within yards
5 Flat Niche Service
Medium sized firms
5. Kijlstra Beton**
Family firm who produces concrete ca. 75 Flat/tall Medium Product/ service
6. MM Assen Consumer electronica store with an own web shop
77 Flat/tall High Product/ service
7. SMST An offshore crane builder ca. 140 Flat/tall High Product/ service
8. Resato Assen Develops, sells, and maintain high pressure systems
125 Flat/tall Niche Product/ service
4.2 Skills and competences of managers
When looking at the education level of the managers who were interviewed the following results were acquired. Only two out of the eight managers had a high degree in education (MM Assen, Resato Assen). The other six managers worked themselves up in the firm or were successors of their family firm.
When asked what skills and competences the managers needed to do their job the following results were found. Seven out of the eight firms explicitly mentioned that communicative skills were essential for doing their jobs. Five out of eight firms mention that problem solving is a key element in their job. Three out of the eight firms mentioned that leading and quality control is important in their job. A respondent stated: “Communication skills and problem-solving are extremely important in our job. However, showing empathy and confidence in your employees is equally as important” (MM Assen).
The findings show that managers are aware of the need of communication and problem-solving skills. However, the need for decision making is not directly confirmed by the managers. This relationship was found in the analyses of the management practice dimensions in the next chapter.
4.3 Management practice dimension – monitoring
This paragraph focuses on the management practice dimension: monitoring. Each manager was asked the same question about how monitoring works in their firm. Table 6 shows what is monitored in the firms, if data is collected, formalization, the frequency of monitoring, if the results are shared with the employees, and if monitoring is delegated.
From the four small firms, three were doing practices based on monitoring. Only the manager working in a small family firm (BV Schuil) did not clearly apply the practices within monitoring. The respondent stated: “It is too much work for me, instead I do check-ups on the work floor” (BV Schuil**). All other managers who were doing monitoring practices and had a formal system for it. For example, a shared map with documents or excel sheets that were archived.
Lastly, two of the four managers in medium-sized firms, monitor daily (MM Assen and Resato Assen). These two firms focus on growth in turnover (MM Assen) and growth in firm size (Resato Assen). A respondent said: “Daily monitoring helps the management to control their departments and employees” (Resato Assen).
The results show that monitoring is used differently in small and medium-sized firms. Also, family firms tend to use management practices differently compared to our other respondents.
Table 6 Overview of the results about monitoring
Small firms Monitored Data
collection
Formal Frequency Shared Delegated
1.Technicum Turnover, margin, gross margin, labour costs
absenteeism, purchasing costs and EBITA
Yes Yes Daily Yes No
2. BV Schuif** Production number Daily quality check on the work floor
No No Daily Yes No
3. Marinus Sales Yes Yes Daily Yes No
4. Maritime projects
Turnover, sales, labour costs, and absenteeism
Yes Yes Daily Yes Yes
Medium sized firms
5. Kijlstra Beton**
Purchasing costs, sales, turnover and absenteeism
Yes Yes Daily No Yes
6. MM Assen Turnover, margin, labour costs, and profit
Yes Yes Daily Yes No
7. SMST Sales, customer experience, balance sheet
Yes Yes Daily No Yes
8. Resato Assen Quality, reliability, purchasing costs and financial numbers (classified
4.4 Management practice dimension – target setting
Table 7 shows the findings of target setting. The results show that three out of the four small firm managers use target setting within their firm. One small firm manager had written formal targets for their firm (Technicum). One of the three that use target setting has a long-term goal of expanding their market (Maritime Projects). This firm just started with the use of target setting for their sales team. Before, the sales team was too busy with processing orders. One small firm had no target setting within their firm, this firm also did not have monitoring practices (BV Schuil**). Again, the smallness of this firm made it hard to set targets for the organization based on the results.
All medium-sized firms used target setting. Furthermore, all medium-sized firms had formal targets written for their organization. Three firms had targets on a short and long-term period. Except for one firm who had short-term targets based on each order coming in (SMST). The medium-sized firm managers tend to communicate their targets to the employees. A respondent stated: “These targets are based on results of previous years with a growth percentage calculated in it” (MM Assen).
Table 7 Overview of the results about target setting
Small firms Using target setting
Sort of targets Time horizon Target interconnection Target stretch ing Emp involveme nt
1.Technicum Yes Turn-over targets labour costs targets Regional targets Short-term Based on results in the past Yes Yes 2. BV Schuif** No - - - - -
3. Marinus Yes Delivery on time Production number Short-term Based on order coming in No Yes 4. Maritime Projects
Yes Expanding to a new market Long-term Based on resources available No No Medium sized firms 5. Kijlstra Beton**
Yes Business plan for three years Short and long-term Connected to purchasing costs No Yes
6. MM Assen Yes Turn-over targets labour costs targets Positive EBITA Short and long-term Based on results in the past Yes Yes
7. SMST Yes Production targets Short-term
No Yes Yes
4.5 Management practice dimension – incentives
All small firm managers responded that the primary wages for the employees were their main incentive. Furthermore, compliments and a positive approach towards employees was an incentive within small firms. In three small firms, employees could work themselves up within the firm. However,
working up within a small firm is getting more responsibilities, not necessary another function. One firm could not offer promotions to their staff, the respondent stated: “We are very pleasant and flexible to our employees and they appreciate that too” (BV Schuil**). Small firm managers had no clear approach on how to deal with underperformers. Two out of four managers stated that multiple assessments reviews without improvement from the employee can result in an exit. Small firms tend to have little possibilities in retaining high performers within their firm compared to medium-sized firms. Small firm managers state that flexibility and a personal approach are the two main incentives they can offer (Technicum and Maritime Projects). Furthermore, small firm managers have performance appraisal with their employees. Three out of four small firm managers do these conversations in an informal way. The frequency of having this performance appraisal differed from yearly, monthly and no fixed moments.
Medium-sized firm managers answered that involving employees in their work process was their way to simulate their employees. Furthermore, three out of the four medium-sized firms offered bonuses to their employees if they performed well. Only the family firm did not use bonuses (Kijlstra Beton). Medium-sized firm managers conducted two performance appraisals formally in a year. Whereas small firm managers had no fixed moments mostly. A respondent stated that performance appraisals are done as follows: “This is always communicated in a positive way, in a two-way conversation” (MM Assen). Which covers how the rest of the managers in this study did their performance appraisals within their organization. An overview of all the results about incentives is shown in table 8.
Table 8 Overview of the result about incentives
Small firms Using incentives
Sort of incentives Promote high performers Under performers Retain human capital Performance appraisal
1.Technicum Yes Primary wages Individual targets Bonusses Work up possibilities Conversations ending with exit if necessary Little possible Yes Formal
2. BV Schuif** No Primary wages Compliments Positive approach towards employees No No formal way Little possible Yes No formal Way
3. Marinus No Primary wages Compliments Work up possibilities No formal way Little possible Yes No formal way 4. Maritime projects No Primary wages Small positive gestures Work up possibilities Conversations ending with exit if necessary Little possible Yes No formal way Medium sized firms 5. Kijlstra Beton** No Primary wages Compliments Positive communication with employees Work up possibilities No formal way Little possibilit ies Yes Formal
6. MM Assen Yes Involving employees with the organization Bonusses 1 on 1 conversation Work up possibilities Offer trainings Exit by assessment reviews More possible Yes Formal
4.6 Perspective of managers on management practices
To find out the effect of management practices within a firm, the perspective of the managers is used. For this study, the manager is key to finding out how management practices contribute to an organization. Table 9 gives a quick overview of how each management practice dimension contributes to a firm based on the perspective of the managers.
The first dimension, monitoring, provides an overview of how a firm is performing at that moment. A respondent stated: “If you analyse your gathered data daily, you increase your focus on performance” (Resato Assen). Besides analysing the data, managers used the data to make decisions within the firm. Furthermore, it helped with managing the staff and controlling the quality of the output.
The second dimension, target setting, is about how targets are set within a firm and how managers derive these targets and cope with them. There was a large consent by the managers that target setting helps to give direction to themselves but also their employees. A respondent stated: “If you don’t give a direction with targets, employees will wander off. That is irrevocable. So, targets provide direction” (Resato Assen).
The third and last dimension, incentives, is based on how managers stimulate and motivate their staff. Most of the managers agreed that incentives are important for the working atmosphere within the firm. It thereby influences the culture within a firm. A respondent said: “Compliments are important in achieving a better working atmosphere, but also constructive feedback is important to improve
employees.” (MM Assen). Furthermore, managers stated that incentives help with motivating employees and getting a better work atmosphere. A respondent stated: “If the atmosphere is good, then you always see that the performance is better than when the atmosphere is not good” (Kijlstra Beton**).
Table 9 The effect of management practice dimensions
Management practice dimensions
Contribution according to interviewees
Monitoring - Gives a clear snapshot - The basis of decision making Target setting - Gives direction
- Clarity in expectations for managers and employees
Incentives - Working atmosphere
5. Results – Analyses
To analyse the data in a structured way, three analytical questions are formulated for this chapter. The questions represent the arrows in our model for this study (Figure 4). The three analytical questions that structure this chapter are A) What is the relationship between monitoring and target setting and how do managers experience this? B) What is the relationship between target setting and incentives, and how do managers describe this relationship? C) What is the relationship between incentives and monitoring, how do managers experience this? Furthermore, the arrows directed towards firm performance are discussed in a separate paragraph. The influence of managers skills on the management practice dimensions is discussed in a paragraph. Lastly, the difference in the use of management practice dimensions is discussed in the last paragraph.
5.1. A) Relationship between monitoring and target setting
Expectation
In the ideal situation monitoring practices help to set the basis for making targets, which explains the arrow from monitoring to target setting. However, as the framework shows there is also an arrow from target setting to monitoring, which shows that targets should be monitored to ensure that the determined targets are achieved. Furthermore, monitoring could help a manager to act on time to make a decision that can enhance the process in achieving the targets or change the targets based on the situation.
Results
In the real world, the benefits of these two management practice dimensions are not fully used by all firms. There are several reasons for this according to the managers. First, firm size plays a major role. The small firm managers find it time-consuming to gather data in a formal way. Small firms are more likely to manage monitoring in a more personal way with their employees, which is possible by their smaller size. Furthermore, target setting for small firms is seen as difficult. A reason is the lack of proper information systems. Also, small firms tend to survive more day by day, which results in a focus on short-term results (e.g. deliver an order on time). A respondent stated: “To deliver orders on time is a challenge with our small group of employees” (BV Schuil**).
The medium-sized firm managers have access to modern SAP/ERP systems that make the monitoring process easier and less time-consuming. Therefore, targets can be set based on the documented data and performance of previous years archived within the systems.
The expectation of monitoring was more complex. However, the findings of our study show that the use of this dimension is simpler within small firms. Medium-size firms are more moving towards our expectations.
5.2. B) Relationship between target setting and incentives
Expectation
Results
Based on the results of our data, this bilateral relationship between the two management practice dimensions turns out to be more complex. The small firm managers that were interviewed stated that it was not always possible to set targets for their firm. Again, their smallness within the market was a problem. Some small firms are not able to forecast how many orders they will have. So, the manager is more short term focused on getting each incoming order done. Which means that their targets are more focused on delivering the order on time and with the right quality. A respondent stated: “We are focused on delivering on time, the quality of the output is important for our clients” (BV Schuil**).
Medium-sized firm managers described a relationship more in line with the expectations of this study. First, the targets that are set within these firms are on an organizational level and individual level. This means that the managers set targets for the whole firm(long-term), but also a department and their staff (short-term). This can be done due to the modern SAP/ERP systems that are in place in these firms. Furthermore, managers have access to real-time data that can help them to monitor the performance of the organisation and their employees. Therefore, it is easier for managers in medium-sized firms to involve the employees on the current performance of the firm and their performance. The use of formal
performance appraisal is possible, due to the availability of information about the performance of individuals. Also, managers in medium-sized firms can give out bonuses to high performers. The possibility of promoting high performers is more likely in medium-sized firms based on our results. Therefore, medium-sized firms have more incentives to offer to employees. A respondent stated: “Based on turnover, margin, and up selling the performance of measured of each sales employee. This can be done via our automated systems” (MM Assen).
5.3. C) Relationship between incentives and monitoring
Expectation
Managers should use incentives in a way that they get the best performance out of their employees. Bonuses or promotion are incentives mostly implemented in a formal policy. Next to these more formal incentives, some incentives help motivate and stimulate employees without costing the manager anything. These incentives are more intrinsic. Examples are compliments, appreciation, and involvement of employees within the organisation. This can result in motivated staff and a better work atmosphere. In the end, monitoring could help to see if the use incentives influence the performance of the firm.
Results
The small firm managers use more intrinsic incentives. They tend to use compliments and appreciation to motivate their employees. Another way to stimulate employees to perform is to give guidance to employees directly. This is mostly done when employees are not performing at their potential level. In this way, small firm managers can monitor employees closely and help the employees to reach their targets or develop themselves within the firm. A respondent stated: “By using a positive approach and compliments you create a comfortable working atmosphere” (Marinus).
As discussed in the previous paragraph, medium-sized firms have more incentives to offer to their employees. One sort of incentives is the formal incentives (Bonuses and promotion option). Besides formal incentives, managers of medium-sized firms also use intrinsic motivation (compliments and positive feedback). Medium-sized managers pointed out that the positive work atmosphere helps to stimulate and motivate employees to perform. In the case of medium-sized managers, they can monitor the effect of the use of incentives on employees by their SAP/ERP systems. For example, if the use of bonuses makes the staff perform better. A respondent stated: “We focus on personal development with our employees, but also reward high performers with bonuses”. (MM Assen).
5.4. How management practice dimensions influence firm
performance
In figure 4 each management practice dimension shows an arrow towards firm performance. This potential relationship is a key element in this study. When conducting the interviews, I asked each manager about the influence of each management practice dimension on their firm. This helped to find out if each management practice dimension has a direct influence on firm performance.
Furthermore, I asked the manager if they found that the use of management practice dimensions is a continuous process. Seven out of the eight managers agreed that the management practice dimensions were a continuous process. One manager argued that it should be a continuous process. However, in reality, he found it difficult to realize it within the firm, because of the many other
