Coping with COVID-19: Does management make firms more resilient?

The COVID-19 pandemic has disrupted the daily operations of firms on a staggering scale. Sharp, short-term impacts of the pandemic on firms have been reported across geographies and sectors in terms of revenue loss, business closures, mass layoffs, and liquidity (Apedo-Amah et al. 2020). While most studies provide an understanding of the magnitude and distribution of the shock, and how firms are adjusting, it does not offer insights on the mechanisms through which firms become more resilient. Our recent working paper explores one such channel, that is, whether structured management practices can help firms cope with the COVID-19 crisis. 

A large literature finds that structured management practices are strongly related to firm performance, explaining one-fifth of the variation in total factor productivity across firms within countries (Bloom et al., 2017). Do these disciplines also help firms adjust in the face of shocks such as the COVID-19 pandemic? On the one hand, highly structured practices could lead to less nimble decision-making, if they require analysis of (not yet available) data or reaching consensus. On the other hand, these practices could lead to more sound decisions during crisis, for example, if employees are attuned to changing circumstances and motivated to act in the best interest of the firm. 

Using the World Bank Enterprise Survey (WBES) panel data on firms before and after the onset of COVID-19 in 16 countries, we present novel evidence on the role of management practices as a potential mediator of firm-specific responses to the current pandemic. In addition, we examine whether these effects are influenced by specific types of practices related to operational efficiency, incentives, targeting, and monitoring. 

Do management practices make manufacturers more resilient?

Structured management practices are associated with more limited downside impacts of crisis on firm performance in manufacturing (Figure 1). Better managed manufacturers, on average, experience a smaller reduction in sales. A one standard deviation increase in management score trims the reduction in sales by 3.6%. They are also less likely to close-down temporarily or permanently. A one-standard-deviation increase in management score reduces both the likelihood of temporary and permanent closure by 2.3%. 

In terms of adjustment, structured management practices are not associated with a firm's ability to fine-tune on employment margins. However, they are correlated with a firm's ability to alter or convert product mix and shift to online work arrangements. Pivoting may ultimately also help limit reductions in sales or lower the probability of firm closure. These responses are likely to be new imperatives specific to COVID-19. Firms capable of making such shifts may also be more resilient to sales, closure, and furlough pressures because these adjustments enable them to sustain or seek new sources of revenue and/or reduce costs. 

Figure 1: Management practices make firms more resilient in manufacturing 

How are services different from manufacturing?

Unlike manufacturing, management in services is not correlated with post-COVID-19 sales changes and temporary closures, although better-managed services firms show some resilience from permanent closures. The patterns in the services sector are similar to that in manufacturing when it comes to adjustments on employment, and the operating model. We see no relationship between management practices and furloughs and layoffs, and a positive and significant relationship with respect to pivoting product mix and switching to remote work arrangements (Figure 2). 

Services usually require greater face-to-face interaction with suppliers and customers, exposing them to lock-down conditions and the resulting demand shocks. Thus, management practices have limited scope in shielding these firms. Regardless of firm size, these strategies may have helped services firms overcome structural disadvantages due to employment size, sales, or face-to-face contact requirements of the core business by enabling product switches and remote work arrangements. These adjustments help offset negative pressures but haven’t resulted in immediate gains on sales. As we cannot narrowly attribute these resilience outcomes to management practices exclusively, our results should be interpreted as indicating fruitful directions for future work. 

Figure 2: Management practices help firms adjust their operation model in services

Which structured management practices correlate with resilience?

The resilience of better-managed firms is related primarily to structured incentive practices (e.g., bonus/promotion to human resource), and is uncorrelated with operations or targeting practices (e.g. setting production goals) (see Bloom et al., 2017 for details). In manufacturing, this result holds for sales reduction, temporary closure, pivoting product mix, and moving to remote work arrangements. Adjustments on the margins of employment (furloughs and layoffs), and permanent closure of firms are the only outcomes that are invariant to incentive practices. As in manufacturing, incentive practices are also the strongest predictor of post-COVID-19 observed adjustments in the operational model (pivoting product-mix and remote work arrangement) in services. 

The finding on the importance of various management practices is consistent with the problem of increased uncertainty due to the pandemic. The crisis may have reduced the importance of routine operating and target-setting practices, relative to the ability to motivate employees to fine-tune the course to reconfigure daily practices or take advantage of emerging opportunities. Incentive practices may reflect employees’ intrinsic motivation to act in the best interest of the firm. Employees may also feel reassured during a crisis that leaders will continue to reward high performance, and that they will not lay off workers. This may encourage them to work harder or more cooperatively in order to respond. 

Monitoring practices, by comparison, show a modest correlation with the firm's ability to switch to remote work arrangements, perhaps because it gives leaders the confidence that employees will not shirk, although this effect may depend on the presence of strong incentives. Monitoring practices are associated with reduced furloughs.  Other management disciplines, such as operations and target setting, may arguably be more important when operating conditions are stable and predictable. Future research could focus on quantifying the value of investing in incentive practices to mitigate downside risks in the face of crisis.

What does this mean for policies to support firms?

Managers tend to often over-estimate their managerial competence in the absence of information on good managerial and organizational practices. Said differently, managers often “don’t know what they don’t know.” This information gap could be addressed by a “light touch” intervention that provides an effective diagnostic of a firm’s actual capabilities and benchmarks it against best practices. The unprecedented changes brought about by the pandemic may have stunned the confidence of firms in their capabilities and accelerated their need to upgrade. Nevertheless, this increased demand may narrowly be focused on skills related to marketing and digitalization, and less so on structured management practices. To this end, a large-scale communication program could provide descriptive evidence on the extent to which improving managerial practices can help firms adapt, especially during the crisis. Once firms appreciate the value of such practices, they may still underinvest in consulting services because of the uncertainty in returns. Policy makers could initially reduce the costs of “trying out” by compensating with subsidized services and vouchers, which will go a long way in enhancing business resilience and strengthening the recovery.