KEY CONCEPT

A new study shows that companies that are seen as continuously using new and improved management practices are valued more highly by analysts and other observers.

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IDEA SUMMARY

The best companies are expected to model, if not to develop themselves, innovative new management practices. This expectation is known as the ‘institutional norm of progress’, and companies that use new and improvement management practices are said to be displaying ‘progressiveness’. A study by a team of researchers from the Rotterdam School of Management, Queensland University of Technology and the Cranfield School of Management reveals the impact that progressiveness has on the valuation of companies.

Previous studies have shown how companies that adopt certain specific practices, when they are popular, increase their reputation. In the 1990s, companies that built strategies around ‘core competencies’ were more highly valued than companies that did not adopt the popular approach, to give just one example.

The new study, however, shifts the focus from specific approaches or practices to an organizational display of what it terms progressiveness. Thus, one company might be rewarded for its focus on e-commerce, another for its focus on CRM. Neither company will be penalized for not using the other’s approach. Both companies benefit from showing that they are open to new and popular techniques.

According to the researchers, any management practice contributes to a company’s progressiveness as long as it fits two requirements: it is fashionable and it is well-publicized. Fashionable management techniques and practices are popular, but that popularity is not consistent over time. These practices have a certain lifecycle during which they first garner a growing amount of attention, before seeing that attention start to decline. (For that reason, corporate social responsibility, which is ongoing, is not considered a fashionable practice.) The second component of progressiveness is visibility: outside audiences are aware of the company’s adoption of the practices in question.

In the study, the researchers developed through the analysis of business literature a list of fashionable management practices. They then measured a company’s ‘progressiveness’ based on the number of times a company’s name and a fashionable practice co-occurred in the pages of the Wall Street Journal during the course of a year.

Based on data from 360 companies continuously listed in the S&P 1500 between 1992 and 2008, the study revealed the following:

• Security analysts overestimated the future earnings of companies that displayed ‘progressiveness’. Focusing on three-year forecasts, the study showed that analysts developed a positive bias toward companies with well-publicized adoptions of fashionable management practices.
• The lifecycle stage of the fashionable practices influenced the positive bias. As noted above, fashionable practices move through a lifecycle of growing then declining attention. The study showed that adoption of management practices that displayed recent and rapid growth led to a greater positive bias for the company than adoption of management practices that displayed slow attention growth or even decline. (Management practices have different lifecycles; the study used the average lifecycle status of each company’s set of fashionable practices.)
• The number of fashionable practices did not increase this positive bias. As inferred above, companies do not adopt a single management practice at a time, but rather are more likely to be using a variety of practices. The study showed that the number of fashionable practices did not increase the analysts’ positive bias — in fact, it seemed to have a negative impact. This indicated that analysts preferred organizations that focused on a limited number of new management practices in a given year.

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BUSINESS APPLICATION

This study offers three lessons for companies and their leaders. The first is to pay attention to the norms of progress. Outside audiences are impressed by companies making an effort to find the best methodologies, techniques and practices to ensure success.

The second is the importance of publicity. It’s not enough to adopt new practices; you must somehow display this use. Zappos is a successful online shoe company whose reputation has been greatly expanded by its CEO’s successful marketing of its customer service approach.

Finally, the third lesson is that symbolism counts. Companies do not have to prove that the management practices they’ve adopted have led to significant bottom line results. The value of an organization is not solely based on market efficiency, despite what some might argue.

Despite the study’s reflection of the power of symbolism, care must be taken in choosing which new practices to pursue. An obvious revolving door of flavour-of-the-month management methodologies and initiatives will inevitably lead to internal disengagement — and, the institutional norm of progress notwithstanding, external disapproval. 

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REFERENCES

Following Fashion: Visible Progressiveness and the Social Construction of Firm Value. Jurriaan J. Nijholt, Pieter-Jan Bezemer & Patrick Reinmoeller. Strategic Organization (December 2015). 

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