Academic journal article The McKinsey Quarterly

An Economic Iron Curtain?

Academic journal article The McKinsey Quarterly

An Economic Iron Curtain?

Article excerpt

Turning around Eastern European companies requires decisive leadership and a time frame measured in decades, not years

Bose: What will it take to bring about a turnaround in individual companies and institutions in Eastern Europe?

Kraljic: Turnarounds, even in the West, always involve a major change program. And, like any major change program, a turnaround needs a set of preconditions before it can really work.

The first precondition is normally a crisis; for companies in the East, this is clearly a given. The second is a strong -- almost ruthless -- and identifiable leader; a leadership team alone will not do. Strong in the sense of doing all the right things, but, at the same time, showing appreciation for people. This is a rare combination.

Third, you need a dedicated leadership team that can put the leader's vision into motion. Fourth, you need the workforce to be involved in an appropriate way. In the West, turnarounds have only been successful when the whole workforce has been involved and knows exactly what it is striving for.

On the second of these, I would say yes, you can find leaders in the East who have what it takes to lead turnarounds. There are fewer of them in the East than in the West, but they do exist. They have a different background from their Western counterparts. Often they rose to the top not as qualified managers, but as loyal party members. The environment in which they managed was also totally different: everything was planned, everything was stable. In that environment they worked as administrators, rarely as leaders. They had absolute authority; very few of their people would revolt, or even dare to disagree.

All the same, some of these former administrators have the potential to lead turnarounds. If the companies are lucky, they still have them on board, though often they are no longer there. Even if they are, employees might refuse to accept their leadership, just because of old sins they might have committed.

Do you have an example of successful leadership?

Yes. Let me give you an example from eastern Germany: a big, broadly diversified machinery and engineering group employing several thousand people, producing all kinds of heavy equipment. An old, established name, it held an important share of the Eastern European market, in particular in Russia. It provided a lot of equipment across the whole Comecon.

The managing director of the company was asked to continue even after unification. His management team included some of his old colleagues from the GDR days, who were all trying to do their best to adapt to the new economic and political situation. Later some new members from the West were added to the team. That really complicated things, because they all had to get used to the company and the way it had operated in the past.

The managing director not only provided an understanding of the industry and the history of his company, but he also enjoyed the trust of the old markets in Eastern Europe, especially in Russia. So for a while, despite the breakdown of the Russian market, he succeeded -- through sheer imaginative genius -- in getting orders.

He understood that with wages rising in eastern Germany, and with a low level of productivity, he had to undertake major restructuring. So in a year and a half he reduced his company to one-fifth of its former size. He was also aware that it needed to speed up its development of marketable products and upgrade its marketing skills to world standards.

What makes leadership successful?

The key element for success is time. Even decisive leaders need enough time to push their programs through. My experience is that the minimum is eighteen months to two years. It is just not physically possible to do it quicker; things would break down. The managing director I mentioned took that long. He was impatient, but he also understood that he needed that time.

An unfortunate thing happened to him after 80 or 90 percent of the restructuring was done. …

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