Management intervention has lasting impact on firm performance
During a 2009 visit to textile factories in Mumbai, Nicholas Bloom encountered alarming conditions on factory floors.
From unsafe machinery to hazardous working environments, he witnessed numerous examples of poor management. Unfortunately, he learned that such practices often led to injuries and lost earnings for the workers.
Bloom, the William Eberle Professor of Economics at Stanford and a faculty affiliate at the Stanford Center on Global Poverty and Development, came away from the experience determined to discover whether improving management practices in these factories would lead to better results.
For two years, he collaborated with other academics, a management consulting group, and 17 textile firms in Tarapur’s woven cotton fabric industry on an experiment that ended up having a much longer reach than initially expected. The plan was to offer management recommendations to plant managers, track the implementation of these practices, and see what effects they would have after two years. Their hopes were that the intervention would lead to improved overall factory operations including better quality control, more efficient human resources, and stronger sales management.
The outcome that the researchers anticipated included positive impact on the lives of those who worked in the factories.
“These improved management practices also help workers by both increasing their pay from the additional performance bonuses, and also improving the safety of their workplace. Given that these management improvements also reduced pollution, this is a triple win for the firms, workers and environment,” Bloom explained.
The choice of which factories to work with was carefully calculated. “We selected Mumbai, the industrial hub of India for our experiment, and then focused on their biggest manufacturing industry, which is textiles. With this in mind we selected the town of Tarapur – a large textiles hub – and randomly picked large firms to offer the management consulting to so they could be included in the research,” Bloom explained.
All of the firms involved in the original intervention were successful operations. They were family-owned and managed and had been in operation for an average of 20 years. Each firm employed nearly 300 people and had annual sales of roughly $7.5 million, placing them in the top 1 percent of Indian manufacturing firms for both employment and sales.
For a month, all treatment and control experimental plants were evaluated on existing management and received recommendations for improvement. The consultants then helped introduce as many practices as the plants could be persuaded to adopt over four months, and they were all observed for the remainder of the two year intervention.
While all plants received the same suggestions from the consulting firm, only some received additional help in actually implementing them.
After the initial two year intervention, the research team found remarkable changes in how the firms were being managed. Product defects were cut by half, inventory was reduced while output increased, and though more workers were hired in new factories, fewer had accidents.
The results were so remarkable that Bloom and his team have continued to receive questions about how these firms have been performing ever since. The response was so great that they realized they had to return for a follow-up with the firms they had worked with years before.
In 2017, they did just that with the help of a grant from the Stanford Institute for Innovation in Developing Economies (Stanford Seed), which along with the Stanford Center on International Development was a precursor to the current Center on Global Poverty and Development.
The team worked with the same consulting group, including the original project manager, on evaluating the long-term effects of their intervention eight years prior.
They found that many of the consultants’ recommendations continued to be implemented with great success. Out of 38 practices adopted in the first intervention, 14 had not been dropped by a single plant nine years later.
Even more striking, however, was that many management practices had spread from the experimental plants to the non-experimental plants, showing a positive domino effect. These results, the researchers realized, showed that management interventions can in fact have long-lasting positive impacts. This is important because the long-term impact that consulting interventions can have on management improvements continues to be an open question. This intervention, however, showed that consulting intervention can in fact have long-term effects.
The most prevalent practices that stuck years later were those which related to the most immediate improvements in product quality and inventory levels as well as systematic preventative maintenance of machinery. These and other improvements were estimated to have increased profits per plant by about $325,000 per year. They also led to fewer accidents on factory floors since looms and other machines were better maintained and accounted for.
As for why certain recommended practices did not stand the test of time, Bloom and his team found that the main reasons given were managerial turnover and lack of director time in the factories. These findings highlight the importance of key employees for good management outcomes.
Perhaps the most surprising finding was that many of the firms had continued using consulting services of their own accord during the last few years, indicating that the managers saw the value of the initial consulting services. Among the most common reasons for additional consulting help were human resources questions and marketing, which were not part of the original intervention.
“There has been a long debate between the “Toyota view” that good management builds on itself to generate continuous improvement and the “Zombie view” that good management collapses in the long-run as chaos returns. In our experiment we found something in between – good management has major long-run impacts, but we don’t see explosive take-off”. This shows it is possible to enact long term effects on management practices, opening the door for continued work in the field.
As Professor Bloom notes, “This is a triple win. Firms make more profits, worker enjoy higher wages and safer working conditions, and the environment gains from lower pollution and waste. Indeed, why wouldn’t we want all our firms to be well managed?”
Please note that prior to May 2019, the Stanford King Center on Global Development was known as the Stanford Center on Global Poverty and Development.