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Factors affecting entrepreneurship in transition economies: An evaluation of the development cycles of Polish MBOs - Page 5

Case Methodology

In 1996, the authors, as a part of a tutor training programme with four Polish technical universities, had the opportunity to be involved in making a set of business audits on-site of a number of Polish firms. Three of these were manufacturing firms that had been privatised in 1991. Information about the progress made by these firms was obtained from interviews with senior management and supplemented by company annual reports. For reasons of market sensitivity the names of the companies reviewed in this paper are withheld.

MBOs Development in Poland

The three Polish MBOs were each firms of long-standing. Each was unlike the other in terms of their products and the industries they served. The period of their operations reviewed covered the years 1991 to 1996. This was a period of transition in Poland when the political and environmental factors active in these years strongly influenced the process of development pursued by these companies.

The Negotiations Phase

The circumstances of the prevailing macro-environment in Poland at the start of the 1990's conditioned all aspects of the negotiations phase founding these MBOs.

Poland's ‘shock therapy' transition to a market system, by way of Balcerowicz's reforms of 1989 - 1991 and culminating in the re-negotiation of Poland's crippling foreign debt in the early 1990's, created a national psychology of optimism that the renewal of links with the West would result in economic growth. The Polish Government encouraged a process of so-called "small privatisation" of shops, small businesses and small factories as a means of giving quick effect to fostering the market mentality.

The enthusiasm for the free market was also founded in a realistic appreciation of the precarious position of Poland 's economy at the end of the 1990's. Servicing the foreign debt of over $40 billion threatened economic collapse. The break-up of the Soviet Union, the dissolution of the CMEA and the re-unification of Germany had broken established foreign trade links. Exports to the former Soviet Union countries suffered a permanent collapse. Unlike the strategic and politically powerful industries, for example, coal and ship-building, which would continue to expect public subsidy, the small firms sector had to become self-reliant.

The Ministry of Privatisation and the State Treasury as the corporate managers of the Polish privatisation process and the managers of the small firms shared this appreciation of the then economic situation and had a common interest in divesting control to company level.

The privatisation process was underway by mid-1990. Polish regulation allowed a number of methods of privatisation: public offering, the selling of a whole company to an individual or group of investors, the liquidation and sale of company assets, the leasing of a state company, and, as of 1995, "Mass Privatisation" by the creation of the National Investment Funds (Karziewicz,1995). The companies investigated by the authors were manufacturing concerns which were acquired as whole companies by their existing managers and employees. To facilitate the transfer of control, lacking sufficient capital, the boards of the new companies had negotiated long-term deferred asset acquisition provisions with the fixed assets being retained by the State Treasury as collateral.

The three privatised firms, on entering the emerging market system of the early 1990's, were unchanged in terms of their managerial and operational capabilities; although they had the safety net of the long term purchase agreements from the State, they were under-capitalised; and with their markets in the former Soviet Union lost, they were reliant on the then uncertain prospects of the Polish domestic markets.

The Setting Up Phase

The profiles of the three companies were as follows:

Case 1 specialised in the manufacture of marine ship control systems. Its main customers were the Polish shipyards. It had a total of 18 internal shareholders. It employed in excess of 120 and, although not the dominant Polish producer, it held around 25% of the Polish market.

Case 2 manufactured marine pumps, overhead industrial cranes and bronze castings. Its customers for the pumps and the cranes were the Polish shipbuilding and the Polish coal and energy industries respectively. It had a total of 320 shareholders, all within the company. It employed in excess of 450 employees. The firm was one of a small number of Polish suppliers of pumps and cranes.

Case 3 manufactured arc welding equipment. Its customers were a diverse range of Polish industries. It had a total of 360 shareholders at the time all internal to the company. It employed in excess of 500 employees.

Operational control in the three companies was managed by senior management teams involving a managing director and key functional directors. They were accountable to small supervisory boards and periodically reported to shareholder assemblies.

In the setting up period in 1991-92, the companies had concentrated on retaining their existing suppliers and customers and on maintaining their employee levels. In effect then the MBO process achieved pursued a "little change”, "business as usual" outcome.

Business Management Phase

In the early years to 1994, in the immediate difficult trading conditions following the "shock therapy" reform process, the three companies defended their trading positions. Existing relationships formed over the years mattered but sales also depended on price.

The re-organisation of the companies was achieved only slowly. All the case companies designated a sales and marketing director and team during 1992. Financial management procedures were revised within each of the companies over the full period in part by the introduction of standard financial accounting IT and also reflecting the requirements of changes in Polish Accounting regulations. The companies also early embarked on the process of achieving ISO9001 quality accreditation.

These adaptations reflected trends common to the industries in which the companies were engaged as suppliers.

During the period each of the companies pursued a cost-reduction objective principally by reducing the employee count through natural wastage. By 1996, the total employee count in cases 1, 2 and 3 was 95, 395 and 330 respectively. As a result of this process by 1996 small percentages of the original shareholders were retired but retained their stake in the companies.

The improving circumstances of the Polish economy were reflected in improved sales in the three companies from 1993. During 1995 each of the companies had restructured, largely along functional lines and the limited introduction of new ‘blood' at middle and senior manager levels had been made.

The pace of change at the three companies differed. One company, case 1, made use of an external consultant during 1995 to advise on systems improvements. This resulted in the introduction of an IT based project management system which greatly increased efficiency and materials management. However, although the company recognised a need to diversify into the markets for on-shore control systems it had made little effective progress in this regard.

Company case 2 had the greatest complexity of production processes and product variety. It was progressing towards a restructuring of the company along a business unit basis serving its distinctive product markets; pumps, cranes, fabrication, castings.

Company case 3 had made greatest strides with regard to embedding a quality culture within the business and, as required for the distribution of its welding product, had established an extensive dealer network.

None of the companies had successfully entered the Western European markets. They saw the Zloty as overvalued and could not afford the cost of establishing agents in these markets. They were apprehensive about the growing impact of Western producers in their own markets but were held back by the high cost of loan capital from making substantial investments in new plant or in product development.

Although each of the companies had substantial "bought in" component purchases they each maintained extended internal production capacities and had concerns for the security of their supply chains.

In short, none had taken a radical route in defining its business strategy. Product-market specialisation remained essentially unchanged. What organisational development was evident lay in the improvement of capabilities as evident in the marketing function, financial management and quality systems. The profit performance of the companies was improving but they remained unattractive to external investors; indeed there was no indication amongst the management teams that they wished to exit from control of their companies.

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