Factors affecting entrepreneurship in transition economies: An evaluation of the development cycles of Polish MBOs - Page 4

MBO Performance

The literature regarding the prediction of MBO performance suggests that both financial and non-financial variables are important (Keasey and Watson 1991). Non-financial variables will include management competence and pro-action, the timely implementation of restructuring and organisational change, downsizing, process and systems re-engineering, product-market development and the extent of monitoring duly undertaken. Houlden (1990), Singh (1990) and Wright et al (1995) found that buyout companies performed better than industrial averages over the medium term of about 3 years but after this performance varied widely between MBOs. Singh takes the view that motivation is a significant contributory factor in improved performance but re-sizing and restructuring may also be important. Otek (1994) also argues that MBOs have the potential to improve performance related to organisational change and improved operating performance.

Many factors affect the success or otherwise of the new MBO. Wright et al (1996) suggest that early restructuring of the organisation is an important aspect of subsequent success. Others argue that appropriate performance measures are an essential initial step. Ronstadt (1986) suggests that entrepreneurial perspectives have an important bearing on the future of the MBO.

However, not all factors are within the control of the management team. Wright et al (1996) argue that changes in the economy and the market can put pressure on new MBOs and affect the MBO life-cycle. Although they suggest that there is little systematic research into MBO failure, the changing of economic and allied market conditions may seriously affect the financial stability of the organisation and bring about a loss of confidence on the part of financial backers.

MBOs which did not increase operational performance within a short term after formation were more likely to be unsuccessful (Kaplan 1989). Wright et al (1994) find that early exits from MBOs are associated with financial institutions being in a relatively stronger position in management and with rapidly changing market conditions. Weir (1996) discussed entrepreneurial issues relating to MBOs and argues that, if MBOs are based on entrepreneurial drivers, MBO performance will be superior to pre-MBO performance. He concludes that MBO activities generally contain a high content of entrepreneurial behaviour.

Wright et al (1995; 1996) suggest that MBOs, as a means of corporate reconstruction and new organisational form, has a longer-term future than predicted in the 1980s although it is true that some MBOs change dramatically in the short term. Wright et al (1995) further support Kaplan's heterogenity view derived from his study of US MBOs (Kaplan 1989). Wright et al suggest that the survival of MBOs is related to factors such as the scale of the buyout, institutional control and the number of buy-out team members. On the other hand, Oftek (1994) argues that MBOs have the potential to improve performance related to organisational change and improved operating performance and argues that performance is an essential aspect of successful MBOs.

A particular challenge for the new company will be in the retention of suppliers and customers. The buy-out may give rise to uncertainty on the part of these stakeholders, suppliers in terms of the commercial risk of supply and customers in the ability of the new company to maintain product features such as quality and product attractiveness.

Finally, Wright et al suggest that mechanisms for exiting the MBO should be considered, either as a way of minimising losses or in terms of selling the operation as a profitable concern. The eventual form of exit is important because of taxation, legal, financial and performance issues. Exiting the current MBO format is not necessarily a signal of failure or internal change such as the breakup of the management team, it can be a positive move, for example to float the company or to provide staff with a greater shareholding.

Fig 1. Illustrates the important activities and factors associated with the setting up and operation of a management buy-out, based on UK practice.

setting up and operation of a management buy-out

Fig. 1: Important factors in setting up and operating a MBO in the UK

The preceding review of the emergence of MBOs in the UK suggests that success or failure in MBO performance is contingent upon the conditions affecting and the business decisions made at three successive phases of development of the MBO:

Phase 1: the Negotiations Phase; when the basis of ownership, start-up resourcing and control is established in the wider context of the political/economic conditions and forecast opportunities for the business.

Phase 2: the Setting Up Phase; when external market relationships are consolidated and decisions are made regarding the organisation and direction of the business.

Phase 3: the Business Management Phase; when strategies to improve the efficiency and effectiveness of the business are implemented and financial performance is closely monitored.

This model of MBO development is used to review the experience of three Polish companies which were privatised in 1991.

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