5.5 Long-term responses and enterprise restructuring


5.5 Long- term responses and enterprise restructuring

The case studies in Brada and Singh (1998) and Wosinska (1995), because they were undertaken later, provide better evidence of strategic changes by firms and how these related to privatization and the introduction of new owners . Before turning to the evaluation of the long-term behaviour of the firms in our sample, two short-term responses that appeared to be vital to the success of long-term restructuring efforts must be mentioned. The first was maintaining the profitability of the firm during the early period of transition. Firms that managed to remain even marginally profitable in the first years of the transition made greater progress in their long-term transformation. Indeed these firms were not only more successful in adjusting their business strategies to the new environment, but they also had higher rates of output growth, greater profitability and greater managerial autonomy. The second response was the establishment of clear control rights. In firms where these were established early on, managerial responses were more active, more comprehensive and more successful. Indeed it could be argued that in every case where the survival of the firm was in doubt, ambiguity about ownership was a significant contributory factor. This was particularly evident in the Polish firms in the sample. In many of these, real transformation began only when the firm s corporate structure was changed to eliminate the workers council. While this often resulted in the workers becoming shareholders, this was usually a minority shareholding and managers tended to hold the controlling, or at least a decisive , share.

Although each firm s experience was unique, a reading of the case studies quickly reveals a number of common practices among firms that can be judged as making a successful transformation to the new market environment.

5.5.1 Marketing

Every firm that can be judged as having achieved long-term viability made significant changes to its marketing activities. Common measures were to expand the sales staff and increase the marketing budget. Firms operating in command economies had little need for marketing: products for business customers went to the state-run wholesale network, consumer goods went to the state retail network and exports were usually handled by specialist export houses , thus leaving almost no marketing for firms to undertake. At the start of transition the domestic distribution systems collapsed and firms had to deal directly with customer firms and private retail networks consisting of many small sellers, all of whom required their suppliers both to produce goods and to serve as a wholesaler. The collapse of the state-run distribution channels forced firms not only to devote more resources to marketing and distribution, but also to change how they distributed their products. Some firms sought, with varying degrees of success, to develop their own retail outlets, others to form links with newly emerging wholesalers and retailers.

Most firms abandoned the export trading houses that had handled their exports in the past. This was partly due to the fact that the expertise of the trading houses was much more oriented towards the former socialist countries than it was towards the West, where producers wished to explore sales opportunities. However not all successful firms sought out foreign markets, and many relied on the domestic market for their main source of income. Foreign-owned firms enjoyed some advantages in penetrating foreign markets, but there were significant exceptions. For example the Hungarian firm Tungsram, wholly owned by General Electric, found it surprisingly difficult to break into Western markets, while the access of the Czech firm Glavunion to some Western markets was restricted by its Belgian parent (Brada and Singh, 1998). In some cases foreign owners focused the strategies of their East European acquisitions towards the domestic market.

5.5.2 Workforce reduction

While some firms reduced their labour force by as much as 50 per cent, others made relatively small cuts. Some firms failure to eliminate redundant workers was due to outside pressure, and in other cases it was due to managerial reluctance to do so. Furthermore there was a decline in wages relative to other input costs and in labour costs as a share of total costs, which reduced the need for aggressive labour shedding. Foreign-owned firms seemed as differentiated in their approach to workforce reductions as domestic ones. In general, large cuts in employment did not seem to be the central or key element of restructuring that many observers had expected.

5.5.3 Restructuring output

There was no clear pattern in the strategies firms adopted for revamping their product mix. A small proportion of firms expanded their output assortment, but most narrowed it, eliminating lines in which they were not competitive. Given the relatively large size , broad product range and high degree of vertical integration of the typical socialist enterprise, this was not surprising.

In addition to narrowing their product lines, firms also tended to undergo a certain amount of vertical disintegration. In part this was due to the process of privatization, as enterprise units that had formed an integrated supply chain were separated into independent firms and were therefore forced to rebuild their dealings on a market rather than an intrafirm basis. There was also a tendency to spin off auxiliary service activities. Services such as the provision of company holiday facilities and medical care were common examples of this, but some firms contracted out cleaning, repair and transportation services as well.

5.5.4 Quality and quality control

One of the major areas of emphasis in virtually every successfully transforming firm was quality and quality control. This stress on quality was independent of whether the firm s product strategy was geared towards higher-quality , export-oriented production or whether its products were aimed at price-conscious domestic consumers. Also noteworthy was a relatively high reliance on outside consultants and Western quality-control technologies. This reflected both the importance attributed by managers to quality improvements and the dearth of expertise and resources for improving quality in the region. In terms of emphasis on quality improvements, domestic and foreign-owned firms did not differ in their approach.

5.5.5 Human resources

Many of the successful firms revamped their human resource practices. The introduction of changes to the remuneration system was almost universal among successful firms. This often involved widening the pay scales in favour of those with the most needed skills. This usually meant that, in relative terms, white- collar and managerial employees with skills in critical areas such as marketing gained at the expense of production workers, especially unskilled workers. Also almost universal was a shift in managerial remuneration and prestige away from managers in charge of day-to-day production towards those who made strategic decisions or were involved in finance, control, marketing and accounting. Such changes reflected the fact that under the old system strategic planning and the need to consider how to finance the firm s activities simply had not existed. Also noteworthy was the number of firms that, despite difficult circumstances, undertook programmes to develop their human capital through in-house training and education programmes.

5.5.6 Decision making

Most of the firms in our sample changed their management structures. Many separated strategic decision making from the management of day-to-day operations. Under the old regime an enterprise manager s key responsibility had been to maintain production, and thus the prestige and authority accorded to production managers had been very high. Under the new circumstances the firm s top managers had to devote most of their attention to strategic issues connected with the firm s long-term survival, and therefore lower-level managers on the shop floor were expected to make decisions about production, something to which they were not accustomed. At the same time the socialist corporate culture, which had given primacy to production, had to be changed so that the firm s business activities were not conducted to serve the needs of managers responsible for output. Instead a new culture where production reflected the needs of the marketing department and the constraints imposed by the firm s financial resources had to be created. Numerous case studies have revealed the cultural tensions these changes brought about.

There were two organizational changes that many firms implemented to bring about the new culture. One was to move towards a divisional structure, with a headquarters staff responsible for strategic and control activities and divisional managers responsible for day-to-day operations. This served to elevate the status of strategic management and to give divisional managers greater responsibility and autonomy. The other response, which in some cases was complementary to and in other cases a substitute for the divisional structure, was to organize the firm into profit centres . To some extent this too was an effort to increase the responsibility and autonomy of lower-level managers, but a reading of the case studies suggests that it was also seen as a way for top management to ascertain how viable the various units of the firm were so that they could effectively allocate investment resources.

The greater need for information about the firm s activities brought about by the market transition was also reflected in the number of firms that introduced new management information systems or extensively revamped and upgraded their old ones. The use of outside consultants in the implementation of these changes to the organizational and information systems reflected both managers uncertainty about what their firms required and their lack of experience in implementing organizational change.

5.5.7 Investment

Lack of capital was often seen as a serious barrier to enterprise restructuring. Hence it is quite surprising that the case studies showed very different investment behaviour on the part of firms that were judged to be restructuring successfully. Lack of capital was a key problem for firms such as Glasunion and Radiotechnikai (Brada and Singh, 1998), which had been prevented from restructuring and were in danger of collapse precisely because they were unable to undertake vitally needed investments.

The amount of investment varied among successful firms but in most it was quite small. The largest investment among the case-study firms was that by General Electric in the Hungarian firm Tungsram. This served not only to modernize Tungsram s products, technology and operations but also to cover several years of operating losses, and was a classical example of the largesse expected of foreign strategic owners who acquired East European firms. However there are other examples, including Glavunion and Matra Cukor (ibid.) of foreign owners choosing not to make large investments in the capacity or technology of their East European acquisitions. Thus while foreign owners clearly had better access to capital markets than did domestic firms in Eastern Europe, this did not always result in greater investment.

In many cases domestic firms admitted to the difficulty or impossibility of obtaining credit from banks or other sources. Therefore their investments had to be financed internally. This fact underlines the finding mentioned at the start of this section that firms that were able to maintain their profitability had a much better record of restructuring than did those which suffered losses early on. While the volume of investment that self-financing allowed was not large, it represented the difference between stagnation and movement towards survival and growth. However some firms were able to obtain outside financing, mainly from banks, and firms owned by single entrepreneurs or small groups of owners were the most successful in obtaining such funds.

The investments that firms undertook served a number of objectives. The most common was to change the product mix so that the firm s output would better reflect market demand. In some cases this involved increasing productive capacity for one or several products while the total capacity of the firm was reduced. Also common were investments to replace productive activities that had been carried out within the framework of a large, integrated enterprise in the socialist era but now belonged to smaller firm spun off from this enterprise by privatization or administrative edict, and investments to renovate and modernize production, lower production costs and, somewhat surprisingly, ameliorate environmental damage from the firm s activities. Investments designed to increase production over a broad range of products were very rare among former state-owned firms, where overcapacity tended to be the norm, but firms that had been started up by private entrepreneurs had a more appropriate scale of production and thus were willing to invest to expand as market conditions dictated.

Overall it is rather striking that investment activity was not the key element of successful restructuring, contrary to early concerns about the amount of money that would be required to restructure East European industry. Indeed relatively ˜soft measures such as human resource policies and reorganization were much better agents of restructuring than investment.

5.5.8 External organs of control

Also vital to the success of the case-study firms was effective owner control. In part this emerged as the result of actual or incipient privatization. The exception was Poland, where workers councils tended to block restructuring and limit managerial autonomy. Many Polish cases show that legislation that exempted firms no longer owned by the state (and therefore not subject to the rule of workers councils) from the popiwek (the tax on large wage increases ) was critical in strengthening the autonomy of managers and thus enabling them to undertake extensive restructuring. The case studies show that workers were often willing to disband their workers council in exchange for exemption from the popiwek in the expectation that, under the new ownership structure, they would enjoy higher wages. However in many cases the workers expectations were not met because the harder budget constraints and greater managerial autonomy that resulted from this change in corporate structure and governance made large wage increases impossible .

Also evident in the case studies was a division of labour between managers and the various boards that formed the organs of corporate governance. In exceptional situations, for example when managers were replaced or prospective outside owners were being courted, corporate boards played an active and almost day-to-day part in the affairs of the firm. However under normal circumstances it was the managers who devised strategies, made the difficult decisions and set the future course of the firm. This is not so say that managers were always up to this task. There were instances of serious business mistakes being made, and the frequent reliance on outside management consultants or foreign owners for strategies and managerial inputs was perhaps indicative of the doubts that assailed managers in the region. Nevertheless the setting of strategies and the day-to-day operations of these firms was not the task of their supervisory boards .




Change Management in Transition Economies. Integrating Corporate Strategy, Structure and Culture
Change Management in Transition Economies: Integrating Corporate Strategy, Structure and Culture
ISBN: 1403901635
EAN: 2147483647
Year: 2003
Pages: 121

flylib.com © 2008-2017.
If you may any questions please contact us: flylib@qtcs.net