Abstract:
The capitalist and socialist societies of the 20th century assigned firms different roles within their economic systems.
Enterprises transforming themselves from socialist to market economies thus face fundamental organizational restructuring.
Many former state-owned firms in the transitional economies of Central and Eastern Europe failed, so far, at this task.
Firms pursued primarily defensive downsizing, rather than forward-looking strategic restructuring as a result of both internal and external constraints on restructuring strategies.
Building on the organizational learning and resource-based theories, we analyze strategies available to management in privatized, former state-owned enterprises in transitional economies to restructure their organization.
Both internal forces promoting or inhibiting the restructuring process, and external constraints arising in the transition context are taken into account.
A model and testable propositions are developed that explain post-privatization performance.
Implications of our research point to the ways in which firms should manage and develop their resource base to transform themselves to competitive enterprises.
Introduction:
Since political transition in Central and Eastern Europe (henceforth CEE) began, the effectiveness and performance of former state-owned enterprises (SOEs) has been considered one of the chief forces driving the development of these transitional economies (Frydman et al., 1998).
Governments and international institutions, such as the IMF (IMF et al. 1991), predicted that organizational transformation would be completed by the end of the 1990s.
However, this expectation has been largely unrealized (Pucik, 1999; Stiglitz, 1999).
Policy makers focussed on privatization as means to induce restructuring.
Yet the change of ownership and the creation of appropriate governance structures is only a part of the privatization process. Internal changes in the organization are essential.
The needed post-privatization restructuring has proved far more complex than anticipated (Blasi et al., 1997) and has rarely been effective in former SOEs in transitional economies (Carlin and Aghion, 1996; Whitley and Czaban, 1998; Wright et al., 1998).
Privatization may have produced the necessary organizational restructuring in developed nations (Bishop et al., 1994; Megginson et al., 1994), but it often has not occurred as expected in transitional economies.
Recent research suggests several reasons for slow or inadequate transformation of privatized firms.
First, many former SOEs in transitional economies are burdened with mediocre assets and managers who lack the skill, resources, and experience to manage firms in competitive market environments (Filatotchev et al., 1996; Nellis, 1999; Peng and Heath, 1996).
Second, many firms in CEE lost their traditional markets because of new competition, vanished international trade relations, and declined purchasing power (Linz and Krueger, 1998; Meyer, 1998a; Uhlenbruck, 1997, World Investment Report, 1995).
Third, the legal and institutional framework and the factor markets to support organizational transformation is slow to develop (Spicer et al., 2000).
Fourth, the magnitude of the required change may exceed many managers and employees cognitive abilities (Newman 2000).
In light of these adverse conditions, this paper analyses how these firms learn to shape their resources to enable them to grow and develop advantage in increasingly competitive markets.
Surely there is evidence of substantial transformation and entrepreneurial activity in some privatized SOEs, and there are more optimistic evaluations of the economic development in CEE (e.g., Fischer and Sahay, 2000).
Especially, firms acquired by foreign, strategic investors improve efficiency and performance based on the capital, technological resources, and management skills provided (Uhlenbruck and De Castro, 2000; World Investment Report, 1995).
Moreover, a small number of firms privatized domestically have restructured and improved performance without the support of foreign investors (Djankov and Pohl, 1998; Johnson and Loveman 1996; Krueger, 1995; Newmann and Nollen, 1998).
Case studies have identified privatized firms that prospered despite significant competition from global competitors entering now unprotected markets.
These firms recognized the strategic threat of foreign competitors and developed competitive advantages based on knowledge of local markets and lower costs.
Some formerly communist business leaders also have proven to be entrepreneurial and quick to learn from the foreign competition (Djankov and Pohl, 1998; Lyles and Salk, 1996; Peng 2000).
Thus, strategic transformation and adaptation of privatized firms in CEE seems possible, but in the majority of firms it is occurring much slower than expected (Stiglitz, 1999; Wright et al., 1998).
There is considerable research grounded in economic and financial theories reflecting the emphasis of reform in these countries based on intervention on the macro level while insufficiently considering organizational realities (Meyer, forthcoming; Newman, 2000; Zahra et al., 2000).
The past ten years have shown the limits of top-down transformation, as evidenced by the inconclusive results of the governance of privatized firms in CEE (Bevan et al., 1999, Carlin 2000).
More recent research has shown that fundamental organizational change and deep restructuring has to occur before former SOEs in CEE will be able to compete effectively in their home markets and abroad (Antal-Mokos, 1998; Frydman et al., 1998; Newman, 2000).
In view of this state-of the art, we take a bottom-up approach to enterprise transformation.
We propose a theory-based model of the transformation of enterprises that focuses on the firm's resources and markets.
Based on organizational learning theory and the resource-based view of the firm, we develop a model that identifies variables critical to the transformation of firms in their new context.
In our theory development we focus on the processes observed across transition economies, which may be complemented with country-specific variables for resourceendowment or institutional constraints when applied to specific countries.
Organizational learning and the resource-based view are particularly relevant as they account for the history of a firm and address the process of adaptation to a dynamic environment in which competitive advantage has become critical for firm performance (Barney, 1991; Fey and Denison, 1999; Spicer, et al., 2000).
These perspectives allow us to focus not only on product but also on factor markets. Such foci are important because both markets are underdeveloped in CEE.
The acquisition and development of resources becomes more important as competitive markets develop (Hoskisson et al., 2000).
This theoretical discourse provides the basis for future empirical testing and implications for the management of privatized firms in transitional economies.
We begin by examining the current literature on organizational transformation in CEE.
Thereafter, resource-based and organizational learning theories are introduced as the basis for the subsequently developed model.
Following, we suggest a number of propositions regarding the relationship between key variables and firm performance.
Finally, we present implications for research and management.
Conclusion:
The recent recognition that the transformation of privatized firms in CEE to competitive organizations is progressing much slower than expected has served as a catalyst to shift research from issues of governance to managerial issues.
In particular, weak institutional systems,turbulent product markets, and underdeveloped factor markets have been recognized as firmexternal barriers to organizational change.
Internally, many firms are hindered by outdated product lines, inadequate assets, and management with little experience in competitive market environments.
Based on current management theory, the present study provides recommendations how managers of privatized firms may address some of these problems.
In particular, we propose that firms improve their learning ability by actively searching for information in product and factor markets rather then relying on "grapevine" information provided by established networks (May et al., 2000).
Also, there may be a need to adapt organizational structure and processes to allow for more efficient information processing.
This should help firms in identifying market opportunities and needed inputs to improve the resources of the firm.
Nevertheless, these firms have built resource stocks in form of assets, know-how and organizational processes.
Rather than disregarding these, there may be potential for further development of these resources (Spicer et al., 2000).
Managers need to spend significant efforts on integrating resources so that firms achieve the internal consistency and strategic flexibility to be able to take advantage of recognized opportunities.
The proposed model provides the challenge to empirical research to identify the generality of important theories under extraordinary conditions.