Management practices as capabilities leading to superior performance.
| Autor | Brito, Luiz Artur Ledur |
| Cargo | Report |
Introduction
Does the use of updated management practices lead to superior firm performance? The current debate about this question happens in both empirical and theoretical grounds. On the empirical side, although the majority of evidences point to a yes answer (Bloom, Genakos, Sadun, & Reenen, 2012), there are some doubts since a few studies found a negative relationship between practices and performance (Chavez, Fynes, Gimenez, & Wiengarten, 2012; Siren & Kohtamaki, 2016) and others ones found no direct relationship (Flynn, Huo, & Zao, 2010; Stank, Keller, & Daugherty, 2001). The reasons for these mixed results probably reside in different operationalization of practices, performance and a non-controlled context influence, so more focused empirical research is necessary. The theoretical debate is getting fiercer, challenging the usefulness of the Resource-based Theory (RBT) in explaining the heterogeneity of performance at firm level. Practices are thought to be easily copied and available to all firms so they would not have basic characteristics of the resources responsible for sustained performance differences. Bromiley and Rau (2014, 2016) argue that there is need for a new perspective --the Practice-based View (PBV)--to explain these differences. Hitt, Xu and Carnes (2016) reply to this argument contesting several criticisms related to the RBT, but acknowledge value of some points raised by the PBV proposal.
This paper contributes to the presented debate in the empirical and theoretical fronts. On the empirical side, we investigated the relationship between practices and performance in a focused context: the packaging industry in an emerging country--Brazil. Additionally to being focused, this context is likely to have a large variance at the level of practices due to its composition, based on results from previous studies (Bloom & Reenan, 2007, 2010a). Factors that contribute to this variance are emerging country contexts and presence of family owned, medium-sized firms and multinationals. Our results confirm that higher levels of management practices are associated with superior performance. On the theoretical side, we propose a novel interpretation of practices as capabilities, grounding this interpretation on the capabilities literature. In our conceptualization, heterogeneity is caused by different levels of these practices/capabilities instead of simply presence of a capability that has been focus of most of the RBT literature. We also propose that there are barriers for developing these practices/capabilities that promote the sustainability of this heterogeneity. This conceptualization suggests that effect of practices on performance can be supported by the RBT and there is no need for a new theory, just extension of the RBT. Our section on Management Practices as Capabilities develops this argument in detail.
Another contribution of the paper is identification of managerial hubris, overestimation of its own potential, abilities or chances of success, as a relevant inhibitor to development of higher levels of management practices. This finding builds on recent literature on the effects of senior management hubris on organizational outcomes (Ou, Waldman, & Peterson, 2015; Picone, Dagnino, & Mina, 2014; Tang, Li, & Yang, 2015).
The findings have strong implications for competitiveness of firms in emerging markets like Brazil. Previous studies (Bloom & Reenen, 2007, 2010a) have shown that medium-sized companies, particularly in emerging markets, have lower levels of management practices. Multinationals, however, have high levels of management practices in all regions they operate (emerging and developed). Since higher levels of management practices are related to higher performance as confirmed by our results, this indicates that these medium-sized local firms can have a disadvantage in competing with multinationals and imported goods and services. This can be seen as an internal component of the so- called Custo Brasil (the Brazilian Cost). Most of the discussion on this topic is related to external factors as inefficient logistics and infrastructure, high taxes, bureaucracy, and bottlenecks (Federacao das Industrias do Estado de Sao Paulo [FIESP], 2013). Management can be another, less studied and internal component of the Custo Brasil.
Management Practices as Capabilities
The term capability is used in many management texts as a concept that is taken for granted, sometimes with a loose and all-encompassing meaning. Jacobides and Winter (2012), for example, refer to it as "the firm-specific and time- and space-contingent ability to perform a particular productive activity" (p. 1365). The notion of organizational capabilities dates back to the influential paper of Richardson (1972) who, recognizing its vagueness, uses the term to identify the effect of knowledge, experience and skills on specialization of firms in particular activities. During the development of the Resource-based Theory, primarily in the 1990s, there was considerable debate about its definition and its differences from the general notion of resources (Amit & Schoemaker, 1993; Grant, 1991). Dosi, Nelson and Winter (2000) refer to the terminology problem by comparing the term capability to an iceberg in a foggy Artic sea that is quite difficult to differentiate from several other icebergs floating nearby.
The definition given by Winter (2000) is quite detailed and has influenced most of the more recent work on the topic: "An organizational capability is a high-level routine (or a collection of routines) that, together with its implementing input flows, confers upon an organization's management a set of decision options for producing significant outputs of a particular type" (p. 983).
This definition has several aspects that deserve further consideration. First, a capability must be relevant to the firm. The terms high-level routine and significant outputs embody this aspect. Second, a capability needs some level of visibility and intention. They exist for an intended purpose. The term decision options accounts for that aspect. Third, routines are not isolated. Often, they need specific resources to produce their effects. For example, a marketing capability may need a specific customer database to be effective (Dosi, Nelson, & Winter, 2000). This aspect is covered by the expression together with its implementing input flows.
Another aspect that is not clear from the definition is that there can be different levels or degrees in a capability. Capabilities evolve and develop over time (Helfat & Peteraf, 2003) and can follow different trajectories and reach different levels (Rockart & Dutt, 2015). Winter (2000) recognizes this variability in level: "whether an organization has a certain capability is often a matter of degree" (p. 981). Thus, heterogeneity can result not only from different capabilities or combinations of capabilities but also from different levels of the same capabilities (Hoopes & Madsen, 2008).
Winter's (2000) definition does not contain any reference to rareness of barriers to imitation or replication. According to the RBT, these characteristics of valuable resources have the potential to contribute to a firm's sustained competitive advantage (Barney, 1991). However, the management literature often conflates these characteristics with the definition of capability. A capability does not need to be rare or costly to imitate to be a capability. The same holds for the more general term resources. What the RBT adds is that valuable resources and capabilities that exhibit these characteristics have the potential to be a source of sustained competitive advantage.
Management practices is another ubiquitous term in the management literature. It relates to sets of general practices used by firms to achieve better results. Examples are quality management (Cole, 1998), market orientation (Kohli, Jaworski, & Kumar, 1993), and strategic management (Grant, 2003), which are general bodies of knowledge that consolidate and document companies' experience and research in the field. When a specific firm attempts to apply these practices, the process is not a straightforward re-enactment of existing knowledge; rather, it involves adaptation, new learning and novelty (Jacobides & Winter, 2012). The implementation of a management practice is not a simple process and is influenced by context. A classic example is American firms' efforts to implement Japanese production techniques in the 1980s (Adam et al., 1997; Cole, 1998; Hayes & Wheelwright, 1984). The term practices would be properly used when these techniques are still outside the firm, in the external body of knowledge. When a firm applies them, it is more appropriate to consider them capabilities at initial level of development with varying levels of specificity. These capabilities can develop over time, reaching different levels of effectiveness and specificity. An applied management practice has all of the characteristics of a capability. It is relevant and usually a high-level routine or a collection of routines and also has a clear intended purpose. Management practices are usually top- management driven in search for better results, and they usually interact with other resources or input flows.
Figure 1 helps to integrate this understanding of management practices as capabilities in the general capabilities literature. The horizontal axis of Figure 1 depicts the frequency of a capability in a population of competing firms. We would position a capability owned by only one firm in this population on the extreme right. As we move to the left, more firms would have the same capability. The midpoint would represent a capability that is not rare--it is present in half of the population. At the extreme left, we would have a capability that is present in all firms. The vertical axis represents the level of development of the capability in question. The extreme top of...
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