Effect of best management practices on the performance and productivity of small firms

Abstract

Recent research on productivity finds that best management practices are a crucial but neglected element in explaining firm productivity. This stream of research also focuses on why a large number of firms may not implement best management practices despite their apparent benefits. In this paper, we examine the adoption of best management practices in small leveraged buyout (LBO) firms. Our choice of small LBO is motivated by the fact that these firms undergo extensive restructuring and, therefore, there is an opportunity to study the adoption process of best management practices. The findings show that buyout companies introduce best management practices (operations, monitoring, targets and incentive-related practices) at different stages of their development, and more importantly, these practices evolve in response to changes in various firm-level characteristics. For example, companies emphasizing cost leadership tend to follow targets and monitoring related practices while firms following a differentiation strategy are more likely to implement incentives and operations related management practices. Buyout sponsors’ board representatives and new CEO also play a critical role in the adoption of these best management practices which are linked to superior firm performance, measured as growth in revenues, productivity and return on assets.

Keywords:

• Best management practices
• small firms
• buyouts
• firm performance

Disclosure statement

No potential conflict of interest was reported by the authors.

Notes

Notes

1 Leveraged buyouts are normally undertaken by private equity firms who raise specialist funds for the purpose. However, since private equity firms also raise funds for dealing with operations such as distressed debt, the common industry practice to distinguish between these activities is to call buyout funds as buyout sponsors.

2 PE sponsors make their investments via LBO funds that have a limited life span of 10–12 years.

3 In the 1980s and 1990s, apart from a few private equity firms, buyout activity was mostly undertaken by European venture capital firms. It was, therefore, likely that the amount of leverage used in buyout activity was less than the one used in U.S-based firms. However, post-2000, a large number of European-based firms have raised private equity funds that solely target leveraged-buyout activity. US-based private equity firms have also established their offices in several European countries to directly participate in the local buyout market. These trends have helped converge buyout practices in both sets of markets.

4 Private equity is also associated with ‘flipping’ their buyout companies in a short space of time. In our empirical research, we took care to include only those companies where the investor hold period is more than the industry average (Kaplan 1991).

5 We have earlier noted the limitations of adopting this approach as empirical research suggests that such generic strategies may be linked in a variety of ways (Hill 1988; Jones and Butler 1988; Murray 1988), and, therefore, they may not be mutually exclusive. Similar to Sandino (2007) and others, we have adopted this approach in order to simplify our analysis.

Additional information

Notes on contributors

Tahir M. Nisar

Dr. Tahir M. Nisar is an Associate Professor of Management at the University of Southampton. Professor Nisar did his studies at Cambridge University and the London School of Economics. He is a member of the editorial board of Management Decision and has published in many peer reviewed journals.

Niraj Kumar

Dr. Niraj Kumar is a Senior Lecturer in Operations and Supply Chain Management at the University of Liverpool Management School. In the past, he held academic positions at Sheffield University Management School, Hull University Business School, University of Bath School of Management and the University of Hong Kong. He has more than 50 research publications in high quality international journals and conferences such as IJOPM, Omega, IJPE, JCP, PPC, IJPR and ESWA. Some of his research papers are highly cited in reputed journals. He has also undertaken a number of operations and supply chain consultancy projects in various organizations.

Guru Prabhakar

Dr. Guru Prabhakar is a Senior Lecturer in project management at the Bristol Business School, UWE. He earned the BBA (Hons.) and MBA degrees from the Dayalbagh Educational Institute (Deemed University), Agra and the PhD degree from the École Supérieure de Commerce (ESC), Grande École (France). His main research areas are project and operations management. Previously, he has conducted research, in conjunction with the Wharton School, USA. Guru has work experience in the field of finance, banking and e-commerce. As an academician, he has taught, presented, and published research papers widely.