68 THE 1987 INTERNATIONAL CONFERENCE OF THE SYSTEM DYNAMICS SOCITY. CHINA
MUST GOVERNMENT OWNED ENTERPRISES BE LESS EFFICIENT THAN PRIVATE ONES ?
Andres E. Breiter
A.B.C.- Tecniche Avanzate di Gestione
Milano
ABSTRACT
This paper is based on direct observation of privately and government
owned enterprises in Argentina, Italy, Poland, U.S.A. and Yugoslavia.
A causal model is presented which is found in all enterprises operating
successfully and efficiently over time. The frequently observed
inefficiencies in government owned companies are explored with its help.
The same method suggests why certain privately owned enterprises exhibit
inefficient behaviour while on occasions government owned enterprises are
an example of dynamic. foresighted and efficient management.
The external pressure groups and their methods for exercising influence
through government bureaucracy and other channels on company management
are found to be of great importance and so is the legal structure and
competitive environment in which management operates. The availability of
adequately trained managers is another key element.
Several general recommendations are formulated for policies that will
ensure efficiency in both government and privately owned corporations.
INTRODUCTION.
Efficient operation of enterprises over time in production and services is
essential if society's resources are to be used to the best advantage.
Observation of enterprises under very different circumstances suggests
that usually there are important opportunities for improvement in their
efficiency.
This author has never found yet an enterprise which after a more or less
profound scrutiny would not show important opportunities for improvement
in its overall efficiency. This is true for enterprises dedicated to
textile prodtction, heavy machinery, automobiles electric appliances,
commodities or specialities in the chemical industry, transportation,
teaching or R&D activities. The observations refer to large private
THE 1987 INTERNATIONAL CONFERENCE OF THE SYSTEM DYNAMICS SOCITY. CHINA 69
publicly owned corporations, family owned businesses, cooperatives and
government owned companies; located in Argentina, several West European
countries, Poland and U.S.A.
Careful observation of enterprises differing greatly in size, located in
various parts of the World, operating in similar and unlike businesses,
under heterogeneous social systems and under private, government, mixed
and cooperative ownership suggests that their relative efficiency is
determined primarily by a general pattern of cause effect relationships.
The long term success or its lack in the operations of an enterprise can
usually be traced to a limited number of key factors. Once the system
causing the observed behaviour is understood and the requirements for the
desired behaviour are determined it appears mich easier to proceed with
modifications of the situation on-hand.
This paper describes the general system of causes and effects that has
been observed under all circumstances.
The system here presented is proposed as a guide in the analysis of the
effects on efficiency of general macro and micro economic policies. of
social policies bearing on development of professional managerial and
technical skills, of legal measures regulating enterprises' activities.
particularly of those bearing on access to markets, sources of management
and technical personnel, capital “technology, energy and raw materials
It is also hoped that the systematic knowledge about existing interactions
will be helpful to board members and top management in evolving the kind
of company culture, structure and behaviour best suited to each situation.
This paper is organized in three parts. Elements that interact determining
efficiency of enterprises are discussed in the first part. Here attention
is focused on the nature of each element and on some key interactions
among these elements. Suggestions for public policies bearing on
efficiency of government enterprises are presented in the second part. To
a considerable extent these suggestions are also applicable to privately
owned enterprises, the more so if they are highly dependent on government
support for success. Examples of management strategies for altering
existing situations are described in the third part.
KEY ELEMENTS OF THE SYSTEM THAT DETERMINE COMPANY EFFICIENCY.
The various elements that determine company efficiency tend to be present
in all situations though their importance and contents may vary.
70 THE 1987 INTERNATIONAL CONFERENCE OF THE SYSTEM DYNAMICS SOCITY. CHINA
The elements included in the system, schematically illustrated in Fig. 1,
are: external pressure groups, relative company dependence on government
as compared with its dependence on competitive success in the markets,
legal system and structure of the enterprise, susceptibility to external
pressures, sources of management and of other professional skills,
selection process for management and other technical positions, company
mission and culture and the consequent motivation systems, business area
dynamics, external pressure groups and their value systems, competitive
advantage or lack of it resulting from operating in a given environment
or from technological position, communications strategy, successful
adaptation to market needs. and overall efficiency.
Interactions among these elements are discussed and attention is focused
on how each affects the overall efficiency of the enterprise.
The specific contents of some of the above elements tend to differ
* systematically between government owned and privately owned enterprises.
” For example the influence of external politically oriented pressure groups
is more’ frequent in governmenc-. owned enterprises and usually-has negative
effects:on their overall efficiency.
On. close analysis, however, it. will be shown that government owned
enterprises can be efficient. over. time provided they are shielded from
interference by external pressure groups which tend to push them towards
goals other than overall efficiency.
“Efficient . government owned enterprises are rare indeed, but they are
sufficient to support the point made here that if we understand the system
‘that causes them to operate efficiently and if we are willing to act on
our understanding they could become the rule rather than the exception.
s
Although a detailed analysis of most of the elements explicitly shown in
Fig. 1 would ‘probably require at least as much space as this entire paper
allows;: an attempt is made to describe them briefly below.
_Pressuré ‘Groups and their Value Systems.
- External pressure groups are present in all societies. Their shapes, goals
value’ systems’ and methods of exercising influence vary greatly from one
society: to-.another and even in the same society they undergo profound
‘transformations over time.
THE 1987 INTERNATIONAL CONFERENCE OF THE SYSTEM DYNAMICS SOCITY. CHINA 71
Figure 1. Schematic representation of key interactions bearing on
overall company efficiency.
EXTERNAL RELATIVE
PRESSURE GROUPS ENTERPRISES" POOL OF
AND THEIR VALUE DEPENDENCE ON CANDIDATES
SYSTEMS GOVERNMENT LEGAL SYSTEMS FOR TOP LEVEL.
AS COMPARED TO AND ENTERPRISE POSITIONS
DEPENDENCE ON STRUCTURE
MARKETS
SUSCEPTIBILITY TO
EXTERNAL PRESSURES
\ ssc PROCESS
FOR TOP LEVEL
POSITIONS
MISSION AND CULTURE
SOURCES OF MEN MOTIVATIONAL SOURCES. OF MEN
WITH MANAGERIAL
SYSTEM WITH TECHNICAL
SKTLLS oy SKILLS
BASINESS | es PROFESSIONAL
DYNAMICS” SSS CAPABILITIES oo ,
COMPETITIVE
POSITION ASSOCIATED
COMMUNICATIONS SUCCESS IN WITH: OPERATING IN A
STRATEGY ADAPTING TO GIVEN ENVIRONMENT
MARKET NEEDS
AND OVERALL
EFFICIENCY
72 THE 1987 INTERNATIONAL CONFERENCE OF THE SYSTEM DYNAMICS SOCITY. CHINA
For example in large ‘government. owned enterprises in Argentina during the
period of rule-‘by.the. military government the following. pressure groups
i dentified as bearing on company operations:
- The military establishment motivated to achieve objectives of
patriotic grandeur on national scale while. the local military
governors pushed for provincial equivalents. This implied pressures
for visible investments and expansion of the infrastructure which in
fact in many cases was achieved while only limited pressure was
exercised to improve efficiency in..the utilization of existing
investments.
~ the ministry of economics established its .own goals determining
limits and conditions on credit that could be contracted abroad.
- The church pressed in some areas for employment opportunities and
for hiring of selected personnel and on occasions supported its ow
candidates for specific jobs.
The internal professional and management groups pressed for
satisfaction of personal and professional interests frequently
employing their contacts in the external pressure groups.
Roughly at the same time in Italy equivalent companies ‘were subject to
similar pressures The pressure groups in this case were political parties
and unions pushing for politically sensitive investments and labour
contract settlements, central bank defended the currency's stability,
economic ministries and internal management groups pushed for a variety
of goals not necessarily related to company efficiency.
In Yugoslavia the main external pressure group was the communist party
which acted also on behalf of the economic authorities, of the local
interests and-of the internal pressure group in the companies.
The examples of external pressure groups in the three countries chosen
illustrate a general situation. The specific names of these groups change
perhaps from country to country and to a certain extent so do their goals .
and methods for exercising influence on enterprises but they exist
everywhere.
This influence tends to be very important for many enterprises. It is
particularly strong for those acting in areas of energy, large scale
transportation, communications, arms production, education and health
related products and services.
THE 1987 INTERNATIONAL CONFERENCE OF THE SYSTEM DYNAMICS SOCITY. CHINA 73
Relative Dependence of the Enterprise on Government as Compared to its
Dependence on Markets.
According to the country they operate in, their legal status, financial
structure and to the nature of their business some enterprises are more
dependent on government for survival then others.
Let us look at the airlines to illustrate this point. Airlines operating
in most countries depend on governments both for their reverues. and for
most of their costs when they do not depend on government also for their
equity capital. It is government that assigns the routes. they fly,
determines tariffs they charge and approves the aircraft models they
operate thus determining their revenues. Government also determines most
of their costs such as fuel, largely dependent on taxes or exemptions
thereof, pay scales and working conditions established in negotiations
with unions according to government guidelines or imposed by government
mediators. Only where deregulation has progressed as in the U.S-A. are
airlines less dependent on the government and more so on the market.
Airlines are not alone in their dependence on governments. Large
industrial companies are heavily influenced by governments too in the
following areas: legislation and its application regarding employment
regulations, pollution control, support for R&D, support for exports
either directly or through policies regarding value of their currency,
product specifications like safety features and consumption standards in
automobiles, government contracts and frequently government supplied risk
capital, low cost credit or credit guarantees. Many other areas of
government regulation could be listed that are crucial to enterprises’
operations.
Naturally smaller companies tend to establish themselves in businesses
more free from government controls because many efforts are needed to deal
with them and small companies simply cannot afford this expense.
Legal System and Structure of the Enterprise.
The legal system and structure of the enterprise may facilitate the
interference by external pressure groups or it may act as’ an effective
barrier against such pressures.
Two extreme examples illustrate the point. If an enterprise is directly
run by a ministry: which appoints top management and consolidates the
enterprises budget with its own while administering its cash flow, then
opportunities for interference in day-to-day operations are probably
greatest’ since ministries are generally prone to political influences of
the pressure groups. Mm the other extreme a government owned corporation
is run as an autonomous organization with its top level management
74 THE 1987 INTERNATIONAL CONFERENCE OF THE SYSTEM DYNAMICS SOCITY. CHINA
appointed for a relatively long period of time with iron clad guarantees
that it will not be removed if the company operates efficiently... In this
case there are fewer opportunities for interference by external pressure
groups. If in addition the rules under which the second company operates
in the market place, regarding for example its access to technology, to
financial resources and to human resources are clear and similar to those
under which the rest of the enterprises operate the opportunities for
external interference could be very limited indeed in spite of its
ownership by government.
In many countries the governing parties and/or the unions have their
representatives on. the board or on the various management committees.
Under these circumstances the influence of the external pressure groups
thus represented is to be expected. If this causes interference in
efficient operations there is a need for rules that will allow influence
to be exercised within clear limits that do not unduly affect efficiency.
Potential for External Pressures.
The potential for external pressures increases as the enterprise's
survival and growth depend more on government’s good will than on success
in the market place. When prices are regulated by decree, when competition
is similarly regulated, when survival of enterprises depends on the whims
of government bureaucracy then conditions exist that tend to limit the
efforts of management for increased efficiency while more efforts go into
courting of bureaucracy and of the pressure groups that may influence it.
This behaviour is to be expected if. management sees as its primary goal
that of ensuring survival for the enterprises it heads. Incidentally this
survival is essential to preserving management's own position. Therefore,
under conditions of strong dependence on government, it is only logical
that successful managers are endowed with political skills which enable
them to obtain the decrees crucial for success of their enterprises. In
exchange for such "favours" they are frequently forced to promote men
strongly supported by members of external pressure groups, establish or
intensify operations in areas politically important to their benefactors
or contribute to the political fund of their parties.
As stated in the previous point the dependence on government and on
external pressure groups is determined to a considerable extent by
existing legislation and by each enterprise's legal status.
THE 1987 INTERNATIONAL CONFERENCE OF THE SYSTEM DYNAMICS SOCITY. CHINA 75
Pool of candidates for Top Level Positions.
The pool of candidates for top level positions is crucial for the
enterprise, True, day-to-day operations are entrusted to an army of middle
managers and technicians whose decisions determine the aggregate
efficiency, but the general criteria they follow, their professional
skills, their coordination and the general orientation. of the enterprise
are in the long run determined by top management.
If members of the pool of candidates have the necessary skills, vision and
value systems to ensure efficient operations of the companies with which
they are entrusted we have a situation favourable’ to efficient operations
cover long term, if on the other hand. the pool of potential candidates is
limited t6 men who are eligible for family connections, for their
political or religious reliability or for other reasons unrelated to their
ability to provide effective leadership we have a different situation.
In the first case at least this necessary, but by no means sufficient
condition for efficient operations of enterprises exists. th the. second
case the situation is problematic from the outset.
Selection Process for Top Level Positions.
If the process of selection for top level positions gives priority to
political or religious convictions or to family position we have a
situation where candidates may be selected for the top jobs for . the wrong
reason This is bad only if the selection process deprives the enterprises
of people with the right skills to ensure efficient operations. If the
selected candidates do have such skills the harm -may be limited if good
but not the best ones are chosen. i
Mission and Culture.
In our experience the importance of this crucial element in the causal
loop is seldom understood, frequently underestimated and therefore it
rarely receives the necessary attention. This is striking because all the
enterprises successful in the long run in the competitive struggle that we
have seen had solved this. point adequately. In fact it tended to be one of
the key elements distinguishing the enterprises successful in the long run
from the others.
The mission of an enterprise clearly though perhaps generically states
what and how it shall deliver,. what resources it will use and in what
ways.
76 THE 1987 INTERNATIONAL CONFERENCE OF THE SYSTEM DYNAMICS SOCITY. CHINA
To direct all human efforts towards the mission's goals an organization
needs an adequate culture. It ‘is assumed here that an organization's
culture means "a set of beliefs shared by a group of people that they
apply to solution of problems" thus modifying Edgar H. Schein's definition
(Schein 1984) to fit situations observed under new management teams or in
new organizations. Clearly the "problems" referred to in the definition
are those encountered in fulfilling the organization's mission.
In our experience the beliefs regarding an enterprise's relationships to
its environment are extremely important for the overall efficiency with
which it operates. Particularly the beliefs regarding relationship to
pressure groups on the one side and to employees, clients, consumers, ©
competitors and suppliers on the other frequently determine the crucial
dimensions to which everything else is made to fit. Thus the nature of
desired interpersonal relationships and the features sought in the younger
managers and technicians with potential for promotion are determined to
considerable extent by the way the company is seen to relate to its
environment.
The lack of perception that culture and the associated value systems are
essential to efficient operations in pursuit of the enterprise's mission
in our experience is the most frequent cause of enterprise failures or of
their unsuccessful operations. This situation frequently arises when men
are promoted to the top jobs for the wrong set of reasons or.if' the pool
of candidates does not contain men with the right set of skills.
Sources of Men (and Women) with Managerial Skills.
The availability of men with basic managerial skills is crucial to an
efficient enterprise. Frequently it is necessary to decide whether to hire
candidates with basic training or already trained.
In the first case, that of hiring candidates with only basic skills and
nurturing internal growth - perhaps with external help -, the process of
developing a team may take several years. This approach offers the
opportunity for having a management team with a strongly shared set of
values and trained for the specific needs the company faces. The second
case, that of hiring already trained managers, provides an opportunity
for “instant" coverage of management positions in the organization
structure. However, the welding of individual managers into a team with
shared values requires strong leadership, considerable time - although
perhaps less than in the previous case - and fortunate circumstances. A
mixed approach may sometimes be followed provided it is thoroughly
understood by top management enacting it.
THE 1987 INTERNATIONAL CONFERENCE OF THE SYSTEM DYNAMICS SOCITY. CHINA 77
Sources of Men (and Women) with Technical Skills.
The problems here are conceptually similar to those in the case of
managerial personnel except that it is essential to understand how complex
and how proprietary is the technology employed. In other words one is
forced to examine how much time will pass before technicians hired from
various sources will be able to operate successfully within the company.
Motivational System.
The motivational system should be designed bearing in mind the
enterprise's culture and in particular the way how the enterprise needs to
relate to its environment in order to achieve its goals.
The motivational system also. needs to consider requirements for a balanced
renewal or conservation of management and technical personnel.
Fuzzy or misguided motivational systems frequently accompany lack of
perception about enterprise's mission or about its need for organizational
culture. They also exist when external pressure groups use their influence
to secure promotions within the company, or exercise other kinds of
interference disturbing to the efficient operations.
Business Dynamics.
Every business has its own characteristic dynamics which may change over
time. These dynamics are imposed for example by the technological
evolution, changes in the market place caused by competitors, new
products, different social habits or consumption patterns, legal
requirements, modifications in the patterns of supply and changing
economic conditions generally.
In most cases adapting to new situations has a cost for an enterprise.
Usually the quicker the adaptation must take place and the more profound
it is the greater are the inefficiencies. One crucial element that slows
down the process of adapting to new circumstances is the inadequacy of
professional capabilities to the new situation. Frequently this inadequacy
is such that the new situation is not even understood for a time much less
acted on.
Professional Capabilities.
The professional capabii:ties of an enterprise's management and technical
teams are key to success in day-to-day operations and in adapting to new
circumst ar ces,
78 THE 1987 INTERNATIONAL CONFERENCE OF THE SYSTEM DYNAMICS SOCITY. CHINA
It is probably safe to say that these professional capabilities are never
quite sufficient in the view of a demanding top management, it is this
awareness combined with actions to close the gap that generally ensure
success.
Here again if top management selection is inadequate not only will the
motivation system be inadequate to ensure the availability of needed
professional managérs and technicians but the actions to close the gap
will be poorly planned and executed and the enterprise will not realise
its. potential.
The most frequent deficiency encountered in our experience is the lack of
adequate management and technical teams. Not that the number of people in
managerial or technical positions is always too short. this on occasions
is also the case, but even though numerically the companies appear
adequately staffed, on closer examination the critical skills for
successful operations are seldom adequate.
Competitive Position Associated with Operating in a Given Environment.
Frequently many of the shortcomings mentioned above were not apparent when
looking at profitability and costs of output because the enterprises
operated in an environment which offered them substantial competitive
advantage. This was the case in many Italian industries until the late
1960's when the labour cost advantage within the European common market
compensated for many management shortcomings and this is still the case
to-day in many industries in .South-Eastern Asia, this is also the
situation for enterprises operating under tightly controlled economic
systems in Eastern Europe where exports are frequently subsidized. this is
again the case for some Agricultural products in Argentina where land is
so cheap as to allow low capital intensive technology to be economical.
Companies entering first and successfully new business areas enjoy this
position of competitive advantage for a while if they are able to erect
barriers protecting them for the time being from competitors.
If enterprises succeed only because of 4 position of competitive advantage
due to operating in a given environment or to exclusive access to a
technology there is a risk that should circumstances change as they did
for the Italian industry in the 1970's and for some Argentine agricultural |
products in the last few years they may be caught unprepared and unable to
adapt on short notice to the new situation.
THE 1987 INTERNATIONAL CONFERENCE OF THE SYSTEM DYNAMICS SOCITY. CHINA 79
Success in Adapting to Market Needs and Overall Efficiency.
Success in adapting to the evolving markets can be achieved by foresight
and planning for its evolution and/or by quickly modifying products, costs
and operations to meet unanticipated conditions.
Successful adaptation to changing market needs requires first of all
flexibility within the organization. Such flexibility exists if management
and technical personnel have some. slack so that they are not already
stretched running current operations. In addition the company culture
needs to be such as to help in overcoming any organizational rigidity
and facilitate introduction of needed innovation.
Overall efficiency takes into account the ability to take advantage of a
broad mix of opportunities the enterprise faces.
In addition to efficient industrial and commercial operations it implies
for example: ability to access cheap sources of capital, obtain at
convenient costs access to adequate technology, offer products within
successfully formulated product-market strategy, apply correctly the
internationalization. strategy to technology, markets, financial resources,
production facilities and management.
Some of the above actions can also be effective stop-gap measures taken
occasionally by individual managers but overall efficiency over the period
of several years implies the availability of adequate professional
capabilities within the enterprise to take systematically advantage of the
various opportunities as they appear.
Communications Strategy.
The communications strategy represents a key element at the disposal of
management for:
- influencing external pressure groups and government,
- maintaining the right relationship with clients, consumers, competitors,
suppliers and investors,
- adapting the culture. to the evolving needs.
80 “HE 1987 INTERNATIONAL CONFERENCE OF THE SYSTEM DYNAMICS SOCITY. CHINA
SOME RECOMMENDATIONS FOR PUBLIC POLICIES REGARDING GOVERNMENT AND
PRIVATELY OWNED CORPORATIONS.
Three guidelines, if followed, would go a long way towards increasing
efficiency in all enterprises and particularly so in the government owmed
ones. They can be summed up as follows:
- Use enterprises for efficient transformation of resources into products
and services.
- Insulate enterprises from interference by external pressure groups.
~ Control enterprises for profitability and for other key variables.
These guidelines are discussed below in some detail.
Use Enterprise for Efficient Transformation of Resources into Products and
Services.
The enterprise exists for the purpose of. transforming resources into
products and services. The more efficiently this is achieved the better
the enterprise performs its basic role.
Satisfactory pursuit of only one goal - efficient operations over time -
is difficult enough to achieve. Simultaneous pursuit of other goals will
usually result in a lower level of achievement of the first one.
On occasions, however, other objectives are also assigned to enterprises,
especially to those owned or controlled to a vast extent by governments.
Among them two deserve special mention for their frequency. One is
creating jobs and the other is providing strategically important products
or services.
Creation of jobs is a sub-product of enterprises' main activity that of
transforming efficiently resources into products and services desired by
the markets. If creation of jobs becomes the main objective naturally the
use of resources becomes inefficient. What follows is inefficient overall
allocation of resources by the entire society. Governments choosing this
road must know that although social problems will. transitorily appear
solved the problem of industrial inefficiency will loom in the future and
this is much harder and more costly to correct.
The production of strategically important goods or services may be
inefficient in absolute terms if comparisons are made with their
production cost in other economies but they can be produced aiming for the
THE 1987 INTERNATIONAL CONFERENCE OF THE SYSTEM DYNAMICS SOCITY. CHINA 81
highest possible level of relative efficiency considering the environment
in which the enterprise operates. This requires that all.the conditions
necessary for efficient operation of enterprises be met.
Insulate Enterprises from Interference by External Pressure Groups.
In order to operate efficiently over time any enterprise, government. or
privately owned, it is. essential to insulate it from the interference by
external pressure groups. This presents two requirements:
“an environment that will reduce the opportunities for external
interference, i
- selection of candidates for top management positions for, their skills
rather then for their political allegiance, religion or family ties.
Insulating an enterprise from external interference: es; not mean
insulating it from outside realities. It implies her ity..that. external
pressure groups may not influence decisions bearing...on -efficient
operations of the enterprise nor on its internal. promotions system in
pursuit of their own goals.
The creation of an environment that reduces opportunities -for.
external pressure groups requires an examination of. the way:
enterprise may be subject to their influence. This occurs usually through
its dependence on government officialse Thus it is essential to reduce the
number of detailed government rules that govern operations requiring
specific resolutions based on more or less arbitrary interpretations and
decisions by government officials. Z
For example if everybody may import certain goods eventually. paying a
fixed tariff the opportunities for external interference are considerably
less then if import quotas are more or less arbitrarily assigned to each
enterprise or if the import duties are applied subject to officials’
interpretation of a fuzzy tariff system.
Similar considerations regard access to credits. If there is one
financial market for loans and everybody has access to it on approximately
equal terms the situation is different from that of a two markets
situation, one at soft terms that apply to companies that obtain. some sort
of deliberate approval by government officials, the other on much<harder.
terms for all the others. Obviously in the two markets situation the
government officials issuing the official approval for soft loans may.
exercise pressures on the company on their own behalf or on that of
external pressure groups.
82:THE 1987 INTERNATIONAL CONFERENCE OF THE SYSTEM DYNAMICS SOCITY. CHINA
The same considerations apply again to enterprises ‘using other resources
supplied or assigned by the government, particularly if the original
decision comes up periodically for review by public authorities and if the
decision criteria are not so explicit as to be automatic. This is
frequently the case with most public utilities, and in transportation,
communications, TV and Radio broadcasting as well as with companies
exploiting public land for whatever reason.
Only crystal clear rules and procedures open to public review will help in
reducing undue interference by external pressure groups in enterprises’
operations.
A frequent case that is’ particularly wasteful to the economy occurs when
government owned enterprises competing with private ones incur continuous
losses covered by the treasury. This situation not only makes them open to
external interference but also brings undue and sometimes fatal pressures
on other companies, frequently efficient ones. This situation may be dealt
with just.as if the government owned companies were private. The people
responsible for continuous losses must suffer the consequences and loose
their jobs, the companies must redirect their focus, restructure their
operations or go into liquidation.
With regard to the second requirement that of appointing the most adequate
candidates for top management jobs in government owned corporations the
following remark by a high official of the Yugoslav communist party comes
to mind. When talking about the evolution of enterprises in his country he
said: "first we appointed company managers based on their party history.
this resulted in inefficient management so now we select the best
candidate for the job and if he is not a party member already we offer him
the opportunity to join the party later."
What is important is to have clear decision criteria regarding what makes
the candidate ‘the best for the job.
These must include the ability to understand the business ard to instill a
corporate culture and motivation system that will lead to development of
professional and technical capabilities in the team that runs the
enterprise. They must also include the ability to run an organization and
to prepare it for the future.
The legal framework that will give top management an opportunity to work
independéntly of the whims of bureaucracy is an essential element for
achieving an environment free from external interference and can be
helpful=in ‘getting the best candidates appointed to the top management
jobs in government owned enterprises.
THE 1987 INTERNATIONAL CONFERENCE OF THE SYSTEM DYNAMICS: SOCITY. CHINA 83
Control Enterprises for Profitability and for Other Key Variables.
We have already seen that top. management must clearly . formulate the
mission the enterprise is to accomplish and must act to establish the
culture and motivation systems suitable. for the mission and for the
environment in which the enterprise is to operate. Top management mst
naturally also provide profitability as a means to ensuring survival.
Whoever owns the equity must carefully examine the success as measured by
profitability. Profitability, however, is only the end result of a lengthy
process therefore it is necessary to watch also other variables.
First among them is definition of enterprise's mission and progress in the
development of its culture in a sense coherent with. the mission it is to
accomplish.
The availability of professional capabilities in . accordance with
enterprises objectives must also be closely monitored.
Other variables to watch include market.position, technology position
regarding suppliers and availability of capital resources.
Pregress on all these variables and perhaps on some others precedes in..
time eventual profits which usually come later and as a consequence. If
profits exist before progress along the key dimensions is significant.
they frequently are the result of operating under particular conditions
that provide competitive advantages. Such conditions usually are not
permanent and profitability should not. be -a. screen covering up for
insufficient progress on the other fronts.
EXAMPLES OF MANAGEMENT ‘STRATEGIES TO IMPROVE EFFICIENCY IN GOVERNMENT
OWNED ENTERPRISES.
Two cases illustrate dramatically different situations, approaches and
results. Although many more could be presented they suffice to suggest
that the schematic diagram presented in Figure 1 is valid under vastly
differing circumstances,
The following situation sums up. and slightly disguises the essential -
aspects of a real. case which we have observed at. close vange and which
evolved successfully.
A large government owned and operated utility, within the structure of a
ministry, for years operated power generation and distribution. As
external pressure groups changed internal pressure groups . based on high
middle management learned to establish contacts with them, these they used
84 THE 1987 INTERNATIONAL CONFERENCE OF THE SYSTEM DYNAMICS SOCITY. CHINA
for personal benefit rather than for getting the company to operate
efficiently. Several top management groups unsuccessfully tried to
establish a more professional approach to managing the enterprise only to
be interrupted either by changes in the external political pressure groups
due to changes in general political situation of the country or by actions
of some segments of these external pressure groups that responded to
requests from higher middle management.
At a certain point a capable new top management was selected, possibly for
the wrong reason, as ‘the selection criteria “were based essentially on
public image and on political affiliation of the candidates” and not on
management skills needed for this situation. Once nominated this group
found itself subject to the same kind of external interference combined
with internal resistance that prevailed previously.
A quick appraisal of the problem led to the design of a causal loop very
similar to -the one illustrated in Figure 1. An analysis of available
options led to the following five step plan that proved rather successful:
1.- The enterprise was to be transformed ‘into an independent company and
top management's term was to be 5 years during which period it should
not be ‘removed except under grave circumstances. Naturally this term
was to-be renewable.
2 - The mission for the enterprise was formulated.
3.- A communications strategy was carefully laid out aiming at. the
external pressure groups and government officials in order to show
them how the top management’s program met their objectives.
A value system and a motivational system were designed in such a way
as to ensure support for the enterprise's mission.
5 - Actions were planned over time so as to avoid simultaneous
confrontations with the entire internal higher middle management and
to ensure that when such confrontations would arise there would be a
Solid support for top management by external pressure groups.
_ Attention was paid to promoting men with the right value systems to
key positions’ without initially upsetting any members of the internal
"establishment". Only when key positions were to be solidly secured
‘the: old lords of high middle management were to be dislodged.
Another case which we have also observed relates to heavy industry. It
enjoyed an initial success only to turn into a major failure tater.
THE. 1987 INTERNATIONAL CONFERENCE OF THE SYSTEM DYNAMICS SOCITY. CHINA 85
Poor management selected for reasons of political loyalty and imposed by
external political pressure groups led to strong labour unrest which in
the end caused a drastic change in the pressure groups themselves. A new
minister took over and appointed a new man to straighten out the industry
and to remove the inefficiencies from the system.
In this case: the new management looked to new. technology for relief. This
“allowed a complete. restructuring of the industry introducing the concept
of materiais flow. where previously workers moved around the objects being
built, working. conditions were improved as most operations were
transferred from outdoors into sheltered areas. if
Initially the new technology allowed a-substantial increase in efficiency
and a reduction in delivery time.. This led-to saturation of the works and
to a more bearable situation in general as workers’ compensation improved.
No attempt was made to introduce values and motivations acceptable to
the employees who worked under a system they definitely considered as
imposed upon them. Middle management up to a rather high level felt very.
much the same.
The situation remained in an.unstable equilibrium with production. quotas.
gradually being increased through external pressures without involvement
of the employees. At a given point when orders began to. slacken violence
erupted again.
In retrospect it may be concluded that the initial success due to
improvement in working conditions, output. and -cémpensation met ~ the
requirements. of external pressure. groups. Political and: government
officials. were satisfied because peace and production has been
re-established and. an increase..in output -was achieved. Labour was
satisfied because of \the better working conditions and compensation.
These improvements, however. were not. permanent because of’ absence of
shared value. and motivational. systems. This was compounded by lack of
adequately. trained and motivated ‘professional management ‘able to. provide
leadership under changing circumstances. Conditions were. ripe for a crisis
as soon as external difficulties. appeared.
Unfortunately the approach illustrated in the second case: tends to be only
too frequently applied by saviours of both goverfiment owned and privately
owned enterprises.
86 THE 1987 INTERNATIONAL CONFERENCE OF THE SYSTEM DYNAMICS SOCITY. CHINA
CONCLUSIONS
Improvements to enterprises'’ performance are sought from incorporating
new technology into products and processes, new products are offered to
existing markets or access is gained to new markets, cheaper and more
convenient capital sources are located and used. Through all these means
and perhaps with ‘the help of some manipulation of the legislation a
transitory position of competitive advantage is established. The
enterprise appears tore profitable and perhaps through: an ‘improving
compensation level even a measure of good will is generated among its
personnel. All this by conventional standards implies that the top
management is doing a great job. ,
On deeper analysis.“ however, there may room for farther substantial
improvement in efficiency and the very success based on the above
described actions could be short-lived. .
Unless the mission is clearly formulated for an enterprise, and a culture
suitable for support of this mission is established, coordinated
motivational systems are enacted and management and professional
capabilities are developed to deal with the changes in the environment,
crises due to inefficiency are very likely to lie ahead.
Two conclusions may be drawn:
1 - Government owned enterprises need not be inefficient provided some
basic rules are followed in setting them ‘up and in running them.
2- There is ample room for improvement of efficiency in all enterprises
independently of their ownership structure. Examination of thé chain
of causes and effects presented in Fig. 1 is helpful in locating the
specific opportunities for improvement.
REFERENCES. “
Schein, Edgar H.(1984), "Coming to a New Awareness of Organizational:
Culture",, Sloan Management’ Review, Vol 25, No. 2, pp. 3-16.
