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

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.