Why Intangibles Matter for the Effectiveness of Structured Management
Englmaier et. al: "Management Practices and Firm Performance During the Great Recession" CRC Discussion Paper No. 548
Much has been written about the importance of flexible management: the ability to pivot on strategy when the context demands it, the capacity to adapt products to evolving consumer habits, the willingness to shrink and expand headcount according to the economic cycle.
Without doubt, flexibility can be an asset in the short term, especially during times of crisis. But taking a more long-term view of a company’s health, structured management may be underrated. Combining a structured approach to management with investments in culture and other intangibles such as consumer relationships may help companies weather the ups and downs of the business cycle.
This is particularly relevant to managers in a scenario which seems to be in a perpetual state of crisis. Reacting to every blip in the news cycle may be not only wickedly complex but also run contrary to the company’s interests in the long run.
But what exactly constitutes structured and unstructured management? We looked at a wide range of human resource policies and practices. Under structured management styles, assessments are regular and formal, and inform decisions such as promotions and firings. In fact, firms under this type of management create structure and specific departments to leverage and synthetize the information that allows them to make better decisions. Companies with unstructured styles focus little on formal employee assessment and development and have few hierarchical layers. Importantly, firms that adopt more structured practices also invest more in intangibles like culture and positive employee relationships.
Among other research, we draw on our study of Spanish companies before, during and after the 2008 financial crisis, which was disastrous for the country. Using unsupervised machine learning, we leverage detailed survey data to cluster companies into structured and non-structured management styles, and then match firm-level financial performance in the pre-2008 growth years, the 2008-12 crisis and the post 2013 recovery.
We find that firms that adopted more structured management outperformed their more flexible counterparts before the crisis, and bounced back more quickly afterwards. This backs up extant evidence from the team around Nick Bloom, Raffaella Sadun, and John van Reenen on a global set of manufacturing firms. However, we document that in the thick of the crisis the firms with structured management did suffer more in terms of productivity. This novel finding can be explained as these firms resisted firing employees and continued to invest. They protected their intangible investments in employee relationships and culture to ride out the crisis and be in pole position for the post-crisis recovery.
What can managers do? Managers can take several implications from our research. First, managers must understand that developing structure and processes within a company is a bet that pays in the long-term and that may come at a short-run cost. Second, long-term investment in structure must be accompanied by investment in intangibles such as culture and relational agreements between workers and managers that helps them to get the most out of the more formal structures and practices adopted in their companies. Culture – and the need to protect it - may create rigidities that are costly in short-term crisis, but pays off in the long term.
Link: Management Practices and Firm Performance During the Great Recession
Authors: Florian Englmaier (LMU Munich, Project B05), Jose E. Galdon-Sanchez (Universidad Publica de Navarra), Ricard Gil (IESE Business School), Michael Kaiser (E.CA Economics), Helene Strandt (LMU Munich)
