«Comparing The Affects Of Management Practices On Organizational Performance Between For-Profit And Not-For-Profit Corporations In Southeast Wisconsin ...»
Journal of Business & Economics Research – March, 2011 Volume 9, Number 3
Comparing The Affects Of Management
Practices On Organizational Performance
Between For-Profit And Not-For-Profit
Corporations In Southeast Wisconsin
Gary F. Keller, Ph.D., Cardinal Stritch University, USA
The need to demonstrate the effectiveness of any business or organization worthy of attracting resources and transforming them into valued products/services is an entity’s primary mission. A variety of methods have evolved over time to measure a for-profit enterprise’s performance.
Economists have typically studied how well a firm manages the factors of production under its control while accountants and financial analysts scrutinize a variety of analytical tests to determine current and future performance. Not-for-profit organizations have adopted many of the commercial sector’s economic and accounting/financial techniques to gauge their performance.
However, an issue that plagues the analysis of for-profit and not-for-profit businesses is the effect that management has on an enterprise’s performance. While economists and accountants can account for nearly all of the factors of production, the discipline cannot calculate the effect of management on agency performance. Considering the roles and economic impact that both forprofit and increasingly not-for-profit organizations/non-governmental organizations (NPO or NGO) it is vital to assess how these organizations are managed and what if any effect management practices have on their organizational performance. The purpose of this quantitative research investigation was to study the affect of 18 management practices defined as “operations (three practices), monitoring (five practices), targets (five practices), and incentives (five practices)” (Bloom & Van Reenen, 2007, pp. 1393 - 1397) had on the performance of for-profit firms and NPOs in southeast, Wisconsin. The basis of this research project was derived from two studies. One study (Keller, 2009) was conducted on for-profit corporations in late 2008 and the second that Keller conducted on NPOs in 2010. The examination revealed that management practices did not have a statistically significant impact on the economic performance of for-profit firms (with the exception of one ownership type) and a strongly significant influence on not-forprofit organizations.
Keywords: Management Practices; Economic Performance; Economic Measurement of Management; For-Profit Performance Measurements; Not-For-Profit Performance Measurements; Management Theory
INTRODUCTIONS ince the Industrial Revolution in the United States (c., 1860 1890) economists, social scientists and their management science colleagues have attempted to explain why some firms thrive and others fail. Many explanations have been offered over the decades. Economists have opined that factors such as capital, technology and other inputs account for the differences between flourishing and failed firms (Bloom & Van Reenen, 2007). Greenwald (2004) asserted that while economists have typically attributed growth in aggregate economic activity to the introduction of technology, the decision to apply new equipment and other factors of production in a systematic way is a management function. Greenwald stated that “microlevel studies at firms and even plants have consistently shown that most improvements in operating efficiency are attributable to the small, steady benefits of © 2011 The Clute Institute 29 Journal of Business & Economics Research – March, 2011 Volume 9, Number 3 day-to-day management intervention, not to dramatic technological innovations or capital investments” (p. 3).
However, a major barrier to explaining the differences between thriving and unsuccessful companies has been the absence of high-quality data that measures in a consistent way the relationship between management practices and economic performance (Bloom & Van Reenen, 2007).
Around the world, not-for-profit organizations (NPOs) or non-governmental organizations (NGOs) are making an increasingly important contribution to national economies. In the United States in 2007 there were 1,569,572 tax-exempt organizations accounting for 8.11% of all wages and salaries paid with $2.6 trillion in total assets (National Center for Charitable Statistics, 2010). The demand to effectively manage this sizeable portion of America’s GNP has led many NPOs to utilize many of the commercial sector’s economic and accounting/financial techniques to gauge their performance.
However, an issue that plagues the analysis of for-profit and not-for-profit businesses is the effect that management has on enterprise performance. While economists can account for nearly all of the factors of production, the discipline cannot calculate the effect of management on agency performance. Similarly, accountants and financial analysts can compute the outcome of fiscal transactions; however, the professions cannot accurately attribute the effect that managerial decisions have on how the financial numbers were generated.
The type of data collected for this study was quantitative (interval and ratio scale) derived by a survey instrument that was closely patterned after one used and extensively validated by Bloom and Van Reenen (2006, 2007). The authors sought to develop an instrument that reliably calculated the connection between management practices and economic performance (Bloom & Van Reenen, 2007). They developed an 18 question survey that investigated the quality of management practices using a Likert-type 1 to 5 rating scale. The purpose of this quantitative study was to determine whether for-profit corporations or NPO’s management practices, defined by Bloom and Van Reenen (2007) as operations, monitoring, targets and incentives, were related to their economic performance defined as increases/decreases in the number of employees. This economic performance criteria was selected as a proxy for financial gain and a strategic success factor for the following reasons: a) employment data was used as a proxy for firm economic performance because privately held firms are not required to publicly file reports about their financial status in the United States; b) an NPO’s primary goal is to financially break even, therefore year over year financial gain may not be a significant indicator of positive financial success, indeed a profit may be anathema to the organization; c) contributions toward an ongoing capital campaign or special project could distort an organization’s financial position; d) a deficit due to special circumstances could also distort an organization’s financial position; e) the gain/loss of employees provides a quantifiable insight into the entity’s relative effectiveness and if the organization’s products/services were in demand, constant or declining.
To accomplish the goal of studying the impact of management practices on the performance of for-profit corporations and NPOs in southeast, Wisconsin a critical review of the relevant peer-reviewed and scholarly literature was conducted. The type of data collected for both for-profit and not-for profit enterprises were quantitative (interval and ratio scale) derived by a survey instrument that was closely patterned after one used and extensively validated by Bloom and Van Reenen (2006, 2007). The author received permission from Bloom to utilize his methodology and he commented favorably on the modifications made by the author to apply Bloom’s telephonic survey to a mailed survey format.
In October, 2008 a survey instrument was sent to the CEOs of 682 qualified firms in the southeast, Wisconsin. The qualified companies (682) included firms with 49 or more employees derived from the Unemployment Compensation data bases for Racine and Kenosha Counties dated September 2, 2008. The survey instrument was used to sample 100% of the eligible population of 682 firms. In January, 2010 a survey instrument similar to the one used by the author in 2008 was sent to the chief executive officers of 100 qualified NPOs in southeast Wisconsin. The population was limited to organizations listed on the unemployment compensation data base of the State of Wisconsin and excluded governmental, religious, health care and education (school systems and colleges/universities) organizations.
LITERATURE REVIEW – FOR PROFIT PERSPECTIVESince the advent of the industrial economy and its evolution into the information age, corporate leaders have searched for a succinct set of guiding principles that can both guide and measure firm performance. Prior to the Industrial Revolution (1750) the typical farmer or artisan in Europe was not much better off than their ancestors dating back to ancient Rome or Greece; however after the Industrial Revolution that situation changed dramatically (Hubbard, 2006). With the advent of factories and dramatic increases in productivity the scale of coordinating the operations of large enterprises became more difficult. With little historical precedent or academic resources to draw upon, corporate leaders groped for solutions to efficiently manage their enterprises competing in a new competitive environment.
As the American economy continued its massive growth in the later part of the twentieth century a variety of new management theories continued to emerge in popularity to systematize the efficiency and competitiveness of a firm. A variety of management theories emerged during the early period of America’s industrial development Theorists from Frederick W. Taylor, The Principles of Scientific Management (1911) to W. Edwards Deming, Out of the Crisis (1986) to Robert S. Kaplan and David P. Norton, The Balanced Scorecard (1996) have attempted to capture the essence of a singular method to consistently produce corporate success. Furnham (2005) studied the evolution of contemporary management trends (1950 – 2000) and catalogued 24 different management approaches ranging from Empowerment to Theory Z. However; despite the best efforts of many, the search for the managerial equivalent of the Theory of Relativity, a clear definition of corporate performance measures and an explanation of the connection between management choices and corporate results continues.
Hubbard (2006) offered an intriguing insight into the mystery of why some enterprises consistently perform at very high levels and others do not. The key to unraveling the performance/productivity puzzle is assessing corporate competitiveness on a micro economic level. Hubbard cited the work of Alfred Chandler Jr. and David Landes who argued that professional management was the key factor for the United States’ rise to economic prominence compared to its European rivals. “Through the microeconomic perspective, management is, at heart, a choice made by each firm” (p. 30).
A seminal study by Bloom and Van Reenen (2006) of more than 700 manufacturing firms in Great Britain, France, Germany and the United States found that the approach taken by corporate leaders was the foremost management influence on enterprise performance. Those firms with superior management were associated with higher productivity, return on equity and market capitalization. Bloom and Van Reenen (2007) followed up their study of 700 European firms with an expanded research project encompassing more than 4,000 American, European and Asian businesses. Bloom and Van Reenen (2007) research further reinforced their 2006 findings. Bloom and Van Reenen also found that there was no single management practice that provided the key to improved firm performance. Rather, it was the average score of 18 management practices grouped into “four areas: operations (three practices), monitoring (five practices), targets (five practices), and incentives (five practices)” (p. 1361) when compared to a firm’s economic success that provided the most accurate indicator of success.
LITERATURE REVIEW – NOT-FOR-PROFIT PERSPECTIVE
The challenge to manage and measure the effectiveness of any organization is complex and frequently a highly subjective task. The for-profit sector created commonly accepted accounting and financial standards that indicate the economic performance of a firm. However, evaluating the utility of not-for-profit organizations (NPO) has been a historical challenge, given the sector’s purpose of producing social well-being for public stakeholders compared to the for-profit’s objective of producing wealth for private shareholders. As the number of NPOs increased to deal with a myriad of social issues, so did the competition for support and the need to demonstrate how NPOs utilized contributed resources. It was not long before the NPO sector adopted the commercial sector’s accounting and financial gold standards to gauge institutional output.
In addition to utilizing commonly accepted financial standards, NPOs also attempted to appliqué many forprofit managerial theorems onto their institutions. But which management practice was the equivalent of a commonly accepted accounting practice? Furnham (2005) catalogued 24 different management practices ranging
from Empowerment to Theory Z that were introduced in the last half century. Additionally, during the last 40 years many of the best known management theorists translated their principles for use in the charitable sector. Examples include McConkey (1973) Management by Objectives (MBO); Deming, Out of the Crisis (1986) TQM and many of its derivatives such as ISO, Six Sigma and etc.; Drucker (1990) Managing the Non Profit Organization; Buckmaster (1999) Benchmarking; Kaplan (2001) the Balanced Scorecard; Sanger (2008) and Field (2009) Data Drive Performance Measurement and Lewis (2003) a hybrid of all of the evolving management theories.