Diagnosing a small Hong Kong company with manufacturing facilities in China
Imagine a large, vertically integrated company with no marketing or sales department and no distribution channels. Suppose that for decades this company was so insulated from competition that it was able to survive with products of poor quality and outdated, inefficient production systems. Imagine that it grew bloated with excess employees and was heavily weighted down with debt. Such a company, confronting competition from around the globe, is a company with tremendous challenges. Add to its list of infirmities limited access to new capital, ambiguous enterprise governance, and unfamiliarity with competitive markets, and you have summed up the circumstances facing most large state enterprises in post communist countries. Although large Western companies have faced difficult conditions when deregulation or new competition has forced dramatic change, many have had the protection of considerable market power and few have been afflicted with such a daunting list of serious problems.
Radical macroeconomic measures, known as shock therapy, have been instituted in some companies with great success, while other companies struggle to find a coherent reform strategy. However, all post-communist countries face a common, fundamental problem: what to do with the thousands of large state enterprises inherited from the communist period. These sprawling enterprises, with their vertical integration and large numbers of employees, have been heavily concentrated in industrial sectors such as manufacturing, mining, and transportation. Historically, they have employed the vast majority of nonagricultural workers and have, accordingly, been the focus of much attention from politicians, researchers, and businesspeople. .
Thousands of new businesses have generated millions of new jobs, attracted considerable capital to the private sector, and provided a multitude of new products and services to businesses and consumers. Yet while the private sector has been spurring economic renewal, the essential task of restructuring state enterprises has remained uncompleted. For Western investors and managers, the future of restructuring and privatization in large-scale state enterprises is a subject of considerable interest. The opportunities and difficulties associated with enterprise restructuring have received a great deal of attention in the popular press and among academics. But most commentators rely on incomplete anecdotes or on large-sample studies that they use to make general inferences across a wide range of industries and circumstances.
In contrast, we examine managerial activities at the enterprise level to develop a grounded understanding of the central tasks associated with state-enterprise reform and the managerial strategies for accomplishing those tasks. We selected a shipyard to study because of the high visibility of shipbuilding and because the government considered it among the most promising candidates for reform.
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Shipbuilding has a long and distinguished history in Hong Kong and China. Even during the years of communist rule, when exports to other communist states drove production, the shipyards maintained a level of quality and sophistication that compared more favorably with international standards than did the output of most other industries. With large facilities on the Baltic Sea well positioned for trade with European shippers such as Germany and Scandinavia, the government hoped to revitalize its shipyards and make them more competitive. These hopes were bolstered by Western consultants' reports, prepared in the early months of economic reform, which identified the shipyards as among the enterprises most likely to be competitive once they were restructured and privatized.
The experience of the shipyard and its progress thus far underscore some of the major challenges inherent in restructuring a state enterprise. To begin with, they illustrate the need to confront fundamental issues throughout the organization — in marketing, operations, human resources, finance, and control — in ways that are internally consistent and aligned with an overall business strategy. However, the case also highlights the pivotal role that leadership and vision can play in successful organizational transformations. Indeed, we have found that, because the task is so difficult, successful state-enterprise restructuring depends more heavily than we originally suspected on insightful and inspiring leaders. An effective individual is able to create a compelling vision of how the enterprise can compete and is then able to implement that vision.
The shipyards sold primarily to Eastern bloc countries, particularly the Soviet Union, which bought more than 60% of the shipbuilding industry's total output. However, the yards themselves never interacted directly with fleet owners. Rather, a large state-operated trade company handled all inquiries from customers and negotiated contracts on behalf of the shipyards, taking a commission of 2% of a ship's selling price. The shipyards relied on the government not only for marketing assistance but also for financial backing. The government was accustomed to propping up the shipbuilding industry with generous subsidies and interest-free loans. It tolerated staggering losses at the shipyards because they employed thousands of workers and because shipbuilding had become a point of industrial pride. Rather than find ways to earn profits, managers clung to a strategy geared toward extracting government concessions.
Management systems and practices in the shipyards were typical of state-enterprise management. Well suited to a context of central planning, shipyard management required radical change to respond to the economic liberalization that accompanied democratic political reform. Indeed, the transition from a planned economy to a market economy always necessitates a reorientation of enterprise management on a scale that dwarfs the organizational-change tasks common to large Western companies.
At a minimum, enterprises embarking on restructuring must be able to price, market, and sell their output; develop a sensible strategy based on analysis of competitive positioning; establish profit-based incentives and measurement systems; improve operational efficiency; and manage their finances in a professional way. But although these are necessary preconditions for restructuring, they in no way ensure that an enterprise will be successful. What's more, they do not take into account the importance of leadership vision for integrating and directing organizational reform.