Belarusian Industry: Alliances and Partnerships for Efficiency

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Опубликовано в библиотеке: 2014-04-29
Источник: "БЕЛАРУСЬ В МИРЕ" No.003 10-01-97

Belarus is an industrial and industrious land. It is a paradox that today this country has many problems being recognised as a place where industry has a bright future. Belarus came out of the Soviet era with an awkward mixture of strengths and weaknesses, a new and complex national political and economic situation that the authorities can disentangle only with time and caution.

Their efforts to do so are of three kinds. The first is to try to restore some elements of the past, by reviving institutional and commercial links with production units located in other CIS countries. The second is to privatise enterprises in their present condition, expecting their managers to reorganise and develop their activities. The third is to re-establish state interference through line ministries or holding-type institutions.

Whichever method is chosen, it is true that the success of short- term solutions and visions of the future depend mainly on the education and the level of knowledge of the economic establishment-whether within or outside the enterprises. The issue is not the intellectual qualities of individuals as such, but their knowledge of the world as it is today. The issue is the kind of education and training needed by modern managers-and shareholders-to enable them to understand the world economy and organise the industrial future of their country in that light.

General Structure and Characteristics of Belarusian Industry

By international standards, Belarus has historically been a country of assembly lines, light industry, and research, mainly because of the relatively low cost of labour, compared, for example, to Russia. Heavy industry, involving the installation of long-lasting, expensive equipment, was not usual there, except for some limited cases in the chemical and steel sectors. History being what it is, it may be that at one time, strategically speaking, Belarus was considered as a suitable place for types of industry that are easily moved or easily rebuilt.

The good thing about this situation is that Belarus has developed a genuine capability in terms of schools and individual skills in certain industrial fields such as automobile assembly, electronics, and chemicals. This reality was clearly demonstrated quite recently by the fact that the Ford Motor Company was able to build a greenfield assembly line capable of producing 10,000 units a year and find the skills required to start it up in the course of a few months.

This means that even though Belarusian industry is presently very fragile, and can easily be outdated in terms of finished products, it has shown that it can adjust to new products and organisational patterns, which is a strong point for both management and personnel. It is also increasingly recognised by foreigners that Belarusian manpower is on the whole quite reliable (the proximity of the Baltic states is often mentioned), while an institution such as the Minsk Polytechnic University has been renowned for years in the West, even during Soviet times. More recently, Belarus has come to be seen as an interesting stepping stone to the Russian and other CIS markets.

Weaknesses at the Level of General Management

Modern sophisticated Western economies are based on the principle of supply-driven demand, under which enterprises create or motivate demand for their own products in preference to the products of their competitors. If and when the need for a product exists (virtual demand), actual demand materialises only where the product or service is bought by a consumer or an enterprise in the course of a legal transaction. All activities of the firm, from product definition and design, to payments or credit conditions and distribution and sales organisation, are geared toward this end. It is the skill with which this process is managed-the quality of general management and of corporate governance-that is the key success on both local and global markets.

Demand in the Soviet command economy was created and regulated for the most part by a central system that issued orders for production, deliveries, and exports, including sales prices. Producers did not have to worry about such matters as the cost of raw materials or components, since these were provided at costs matching the sales price. The production units (producers) were responsible only for handling raw materials and components, producing the product, arranging deliveries (sometimes transportation) of a given range or products. They could not decide by themselves on products characteristics, suppliers, etc.

Functions such as buying and subcontracting, financing, studying markets, bench-marking, advertising, selling, organising distribution abroad, etc., and, most of the time, product development, were simply not accessible at the level of the production units. Indeed, there existed in the republics no information system or training system that could make local authorities into managers who would be capable of modifying this situation in the direction of supply-driven demand . In other words, the term "enterprise" was inappropriate because the individual production units actually had no right to be "entrepreneurs."

Turning plants into entrepreneurial units is not easy. A first and major difficulty is the absence of an entrepreneurial tradition at the level of either the plant or the ministry, and although the personal charisma and background of individual managers may permit some functions to emerge and become more or less formalised, this is far from being a widespread phenomenon.

Experience has actually shown that it is particularly difficult to draw a line between the plant as a production unit, and as an enterprise that has to consider strategy and make strategic decisions. In Western economies, only small- and medium-size businesses encounter this kind of organisational problem. Most bigger production units in the West are managed in the framework of multidivisional structures, within each level of management must play a well-defined role in the decision-making process. Such "enterprise headquarters" do not exist in CIS countries, and it will be seen later that line ministries, committees, and holding- type institutions do not and cannot take their place. In their absence, it is not surprising to find that immense problems arise in connection with preparing, making, and implementing strategic decisions.

Size of Belarusian Enterprises in Relation to the Global Market

Geographic dispersion and the relatively small size of production units is another major obstacle to the emergence of efficient management structures in Belarusian enterprises.

It has become somewhat fashionable among foreign experts and international advisory institutions to point to the "huge" size of some CIS enterprises, including Belarusian ones, and then use this to justify chopping up and selling off large enterprises piece by piece. But there are studies,(1) based on comparative statistical approaches, suggesting that there is little evidence of industrial concentration on domestic markets, that very large firms are more commonly found in the United States than in Russia, and that healthier competition can best be promoted by improving distribution systems and by similar means, rather that by recourse to elaborate anti-trust policy schemes. On the other hand, some field analyses(2) demonstrate that in the past vertical integration did sometimes go too far, for a variety of reasons, including the desire to secure supplies of parts and components, to be discussed next. At the same time, concentration towards the market,with its resulting distribution power, has been kept inadequate in fields where international competition is fierce.

For the last 20 years and more, in most branches of industry and services, Western capitalism has concentrated its leadership competence, product development, research capabilities, distribution systems, sales policies, and the like in a continuously shrinking number of global companies capable of competing at the world level. The Soviet system did not lend itself to such a course, because it was on the contrary keeping plants quite apart from each other and dispersed, not only from a geographical point of view, but also from a managerial point of view. It is well known that the numerous production units had no right (and no need) to establish horizontal contacts with their fellow industrialists. Given the extent of the difficulties presently affecting so many production units, they have little choice but to concentrate horizontally, and to form themselves into branches (meaning a certain number of enterprises addressing the same type of markers) structured around the most competent management teams able to organise general management functions . Only a handful of highly specialised companies should remain independent, and then only when their financial situation allows it. This restructuring also calls for the rapid development of new social safety net systems to protect workers from the financial effects of reduced activity and closings of production units when these are unavoidable. Development of such framework of renovated and concentrated structures is the only way to stop the waste of funds for the state as the present shareholder, and to pave the way for new investments on the healthiest possible basis.

Clarifying Complex Enterprises

There are two reasons that some CIS plants may look "huge" by Western standards. The first one is that the plants were designed and built as highly specialised, high volume producers of goods for very large markets. Their markets have shrunk, and the plants now appear to be extravagantly large in comparison. In most cases, the reduction in volume was sudden and dramatic, and there is little chance that former levels of activity will ever return.

The second reason is that most large enterprises carry many more that their basic activities, and have many workers involved in non-core production. Roughly speaking, it is possible to discern three broad types of activity within many large Belarusian enterprises: these are core business, secondary/ancillary activities, and the social sphere. The core business is the raison d'etre of the firm, its main activity, such as designing, assembling, and selling equipment or automobiles, producing fertilisers or tires, etc. This is the centre of the enterprise, what customers give money for; it should be preserved and developed as a priority. Secondary activities consist of producing parts or components for the core business, some of which are strategic for the core business, and some of which are not strategic but could be obtained from other suppliers at less cost. For example, many enterprises have developed forging, casting or moulding activities that could be subcontracted.

It should be pointed out that some ancillary activities, such as maintenance, are being undertaken by the enterprise itself for lack of external providers-unlike in Europe, the United States, or Japan, where ancillary activities are often subcontracted.

Finally, the enterprises retain their direct responsibilities in the social sphere. Some of these involve services needed by the workers during their working hours (cafeterias, some health services, professional education, etc.). Others involve services normally provided in other countries by local or regional public authorities-hospitals, general education, institutions, and so forth. A gradual transfer of the latter class of responsibilities should take place once adequate financing and organisational support can be found.

The desire of enterprises to achieve a "normal" dimension should not lead them to cut out all secondary or social activities immediately in the name of efficiency. However, it is essential for each enterprise to become clearly organised around well-defined product lines with improved accounting systems at the production unit level. This would make decisions on restructuring much easier to make.

Some Difficult Individual Situations

In Belarus, as in any other CIS country, there are few instances where the cost of raw materials has become prohibitive as a result of new market prices or transportation expenses. These situations arise because the former centralised system made decisions without regard to the costs of transportation over long distances or the world prices of raw materials. There is no real industrial solution under these conditions, which normally should lead to the closure of the plant. Addressing the issue in the framework of a branch restructuring could allow some assets to be saved and transferred to other plants, such as personnel, equipment and patents.

Information and Communication

Whatever the issue being addressed, problem number one for every enterprise is to improve its information and communication systems. In former times, the severely limited objectives, assigned to individual production units, made many kinds of information pointless. There was no need for the unit to collect, maintain, and study information on supplies, subcontractors, customer needs and customer satisfaction. The same reason-lack of autonomy-limited the unit's communication with institutions or customers for commercial or advertising purposes. The result is that not only the organisational systems but also the minds that occupy them must now be "re-engineered."

Difficulties are many. The few information sources that did exist in the former Soviet Union have either disappeared or have become profit-seeking. Elementary information is sometimes missing, or prohibitively costly. Managers lack training in how to find and manage independent information. There are few investments being made in methods for processing volatile data and integrating them into strategic decisions. Training of managers and students, preferably abroad, and the development of information systems, should therefore become a priority.

Macroeconomic Conditions for Success

The importance of a stable macroeconomic environment is too well known to require elaboration here. It will suffice to recall that both private and public enterprises require a stable macroeconomic framework to survive and prosper. Many transition countries have yet to improve their economic institutions, taxation patterns, inflation control, the quality of their court decisions, the reliability of their banking systems, the predictability of their administrative actions, the installation of internationally accepted accounting methods, and more. Belarus is no exception.

Corporate Governance and Ownership Issues

Given the kinds of industrial products presently being manufactured in Belarus, few people there see any reason for the state to continue to be sole owner and manager of over 1,000 enterprises, of which around 80 are large or have the potential to compete in international markets. A particular argument against continued state ownership of these enterprises is that they were notoriously directed from Moscow in the past, so that local competence to run them is very scarce at the ministry level in Belarus.

The question whether privatisation is necessary leads to pointless debate. The important issue here is how to accomplish a gradual transfer of the productive system from state ownership to other shareholders in order to enable it to survive and develop. Industry can only develop through projects, which require money, which requires investors and good management. Here we are touching on the core questions of ownership and corporate governance.

The central challenge for Belarus's formerly Soviet industry is that of learning to create demand for its products. This amounts to organising distribution for existing products, developing new products, and modifying old ones to make them competitive with the products of foreign manufacturers in both their traditional market and new markets. This is clearly an entrepreneurial process, which requires risk taking, the search for financing, and managerial responsibility in an international environment. None of these is a matter for a ministry or any state governing body.

Nonetheless, till now the public authorities are formally in charge. Their responsibility now consists of organising conditions-internal and external-that will allow the industrial process to restart and continue. Encouraging the emergence of competent management teams, while developing a style of corporate governance based on international standards, is certainly a principal objective. Steps to this end are incorporation, establishing board membership and function, and appointing a top manager and defining his responsibilities. Both for the sake of efficiency and for financial reasons, some groupings and concentration of competence will probably have to be considered, including mergers of loss-making companies with more efficient ones.

Alliances and Partnerships for Belarusian Industry

Nowadays, alliances and partnerships are indispensable tools to aid any kind of strategic development. Alliances and partnerships may be classified in three broad categories: mergers/acquisitions, in which partnership is total; transactional agreements, for example, regular purchase agreements, common advertising, specific research contracts, and the like, which are of shorter duration and less bidding in terms of strategy; and strategic alliances, which fill the gap between the two. These are generally binding for the participants and have a long-term perspective. Examples are companies that agree to use a common manufacturing subsidiary, to pool their resources for distribution in a given market, or to define a major product in common.

Except for mergers and acquisitions, where the weaker partner usually loses its personality, all other kinds of alliances and partnerships require a well-defined policy and a strong mix of qualities. Good management qualities are needed at each stage of the process of designing, negotiating, signing and executing any kind of deal-but especially strategic deals-with another enterprise. Western companies have entered into many strategic alliances in recent years because addressing global markets is so demanding in terms of financing, personnel, and installations that no individual company, even the biggest, can afford to maintain an effective presence everywhere in the world while relying only on its own resources.

Not all Belarusian enterprises have to participate in world markets-though they may have to compete more and more often at the international level. But due to their persistent lack of resources in terms of management competence, product lines, and finance or distribution systems, a great many Belarusian enterprises will have to develop transactional agreements and/or strategic alliances with others, whether they are from Belarus itself, other CIS countries, or Western countries.

Entering and playing this game is quite demanding. The present article has attempted to point out many of the changes that must occur and improvements that must be made in preparation for entering the game. Only by satisfying these conditions will Belarusian industry be able to take advantage of its privileged geographical location and its extensive past experience.

Notes

(1) The Myth of Monopoly: A New View of Industrial Structures in Russia, Policy Research Paper no. 1331. The World Bank, Policy Research Department, Transition Economics Division, August 1994.

(2) Belarus: Towards Industrial Recovery (2 vols.), UNIDO, Industrial Policies and Private Sector Development Branch, Vienna, March 1996. Prepared for the Belarus Government. Unpublished document. Ukraine: A Policy Framework for Industrial Restructuring, UNIDO, Vienna, 1997.

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© Claude Potelle, independent expert on industry strategic planning, Vienna () Источник: "БЕЛАРУСЬ В МИРЕ" No.003 10-01-97

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