A TALE OF TWO SHIPYARDS

/CASE ANALYSIS/

Module: Management Processes in Transition Study Program: Management Study Year: 3

PREPARED BY: Mirella Kaloyanova St. : 25725

LECTURER: Prof. Andrzej Kozminski

TABLE OF CONTENTS

TABLE OF CONTENTS................................................................................................................2 INTRODUCTION...........................................................................................................................3 COMPARISON OF RESTRUCTRURING STRATEGIES..........................................................3 THE ROLE OF WORKERS AND TRADE UNIONS...................................................................7 THE ROLE OF PRIVATIZATION..............................................................................................11 THE ROLE OF FINANCIAL ENGINEERING...........................................................................11 APPROACHES TO FUNCTIONAL RESTRUCTURING..........................................................13 POLISH SHIPBUILDING INDUSTRY IN 2009........................................................................14

INTRODUCTION

This report is intended to investigate and compare the various approaches and strategic tools chosen and implemented by the top managers of two important Polish shipyards. The two different strategies will be analyzed on a number of dimensions. This is a necessity if one is willing to grasp the transition process through which a manager had to lead its company in order to turn it from a state-owned enterprise to an attractive opportunity for private investors.

In contrast to some other cases already discussed, this extensive case study provides a large amount of information. In addition to that, most of the questions are focusing on comparing the two different strategies chosen by the shipyards CEOs in the beginning of the 20th century, just after the reforms in Poland. For these two reasons the focal point of the analysis will be comparing the decisions made by the managers at that time; the last section of the paper will observe what happened to the Polish shipbuilding industry at a more current point of time, namely the year 2009.

COMPARISON OF RESTRUCTRURING STRATEGIES

The managers of the Gdansk and Szczecin shipyards, Szyc and Piotrowski respectively were both appointed to the general director position at a time when the two enterprises were facing similar circumstances. To name just a few, both shipyards lost their major clients, which used to be from the Soviet Union;

furthermore, the two of them were facing large debts they were unable to pay; last, but not least, the government was intending to include both companies in the privatization process. Despite the fact the two managers had resembling backgrounds and took over enterprises which were in similar situations, the results achieved by the shipyards 3 years after the reforms differed to a high extent. (Loveman, 1995) The roots of this phenomenon lie in the different restructuring strategies that were introduced into the two Polish shipyards. This case study is a clear illustration of the fact that difficulties cause by the external environment or internal weaknesses can be overcome if an efficient and effective strategy is designed and put into practice.

One of the famous authors discussing the broad topic of strategic management is Charles Hill. In many of the textbooks he wrote or co-edited a simple but powerful model is presented, which in my opinion can be applied to our case to set the foundations of the future analysis. The model shows the basis of strategic management: the company should first establish its major goal and formulate more detailed objectives; on the basis of these a strategy is designed and as a final step

various practical tools are chosen to realize the desired strategy.

GOAL

OBJECTIVE S

STRATEGY

TOOLS

The green bubbles stand for components which Gdansk and Szczecin shipyards and their management had in common. The goal of both yards was actually tightly related to the privatization policy of the Polish government. The government was willing to eventually change the status of the yard from state- to privately-owned but first it wanted the enterprises to get restructured. Main objectives springing from this goal were finding new clients, ways of financing, and becoming competitive in a freemarket business environment characterized by a large number of players and international presence.

Our attention should be focused on the yellow bubble, namely strategy. If the goals and objectives of the two shipyards were to a high extent similar as they were set by another party, the government, each manager opted for his own strategy to implement in the yard under his control. The two strategies resulted in different tool kits used to achieve the desired outcomes. 5

In the case the two strategies are broadly described; however, I would like to mention the essence of both of them as seen from my perspective. For me it seems as Szycs strategy was highly influences by the communist-economy heritage. As the manager believed the yard should be supported by the government, he did not make an effort to design a strategy which would allow the shipyard to become independent and selfsufficient first, and then also profitable. In other words, I think the strategy used at Gdansk was not very sustainable as it did not foresee how the enterprise can start functioning on its own without governmental support in the future. I believe we could actually argue the Gdansks strategy was not a restructuring one, as the manager was willing to keep numerous structure parts as they were in the past, such as a sizeable portfolio, and extensive workforce, etc. (Loveman, 1995) My personal opinion is that this was not a wise managerial decision because the period after the reforms was actually one huge transition for the whole economy and as we observed already in numerous interesting examples in class, a company should react, change and adapt quickly if it wants to come out as a winner.

As far as Piotrowskis strategy is concerned, I think it is an inspiring example of how a state-owned enterprise can be restructured using a broad vision and being persistent in the improvement efforts. The Szczecin yard was not only restructured to the level where it is ready for privatization, it was actually restructured to the extent that it became a world leader in the production of a specific container ship. (Loveman 1995) The key point of Piotrowskis strategy was to restructure radically and subordinate the changes and reforms at the yard to the needs and requirements of the market. Although the case discusses restructuring processes that took place 20

years ago I believe this approach can and will be used by managers nowadays when they need to restructure their companies in order to keep them competitive in the era of technology. What we can learn from Szczecins example and apply in current business life is that sometimes continuing to conduct operations as before is not an option at all, and fundamental change is required instead. No matter how difficult implementing radical changes could be, for some firms this will be the only solution for surviving the crisis or for differentiating themselves in a beneficial way.

THE ROLE OF WORKERS AND TRADE UNIONS

The main functions of managers are to plan, lead, organize and control the work of people to achieve desired results. (Robbins, 2008) A key word here, related to our case study, is people. People, or human resources, are at the heart of every business and their performance, collaboration and co-operation is crucial for the success or failure of a company. A manager should never underestimate the importance of employees and the various impacts a change in HR structure can have on the firm. Workers groups are often represented by trade unions. My analysis of the case study, therefore, will also elaborate on the role which workers and unions played in the restructuring processes of the two yards, and, more important, what implications this has for managers of our time.

First of all, the following table will summarize the main measures undertaken in the two shipyards with relation to the workers and trade unions which are to be found in the text. Aspect/ Measure Labour force size Gdansk Shipyard Maintain an extensive labour force Keep them as a sign of Workers amenities Employee compensation Szczecin Shipyard Shed unnecessary workers Eliminate them in order to

good will cut costs Make efforts not to change Introduce a new system in the wage system used before the reforms Allow them to influence order to increase productivity Receive their support by convincing them the implemented programs will ultimately result in an improved situation for all workers

Trade unions

management decisions in a way which may not be advantageous for the yard

After looking at the table, we can discuss the role played by workers and unions in the restructuring process. In my opinion, although the work force is a strategic factor in any situation, when the company is taking a new direction, the article does not provide sufficient information to elaborate much on the role played by workers in these particular cases. For this reason, I would take a broader perspective: I will look at the role played by workforce in any restructuring process. The role they play is of strategic importance, which is proved by the fact there is a special branch of management focusing exactly on how to deal with the firms human resources when the company is going through an alteration process: change management. In my

opinion a key to implementing a change successfully is finding ways to overcome resistance, gain acceptance and turn it into active support. We may assume this was the case at the Szczecin yard; however, it is just a guess derived from the end result (success of the restructuring process), and not information provided clearly in the text. By being willing or unwilling to cooperate and support the restructuring strategy, workers can strongly influence the end outcome. Despite that fact, it is the important role of managers to lead and organize the workforce and help people contribute as much as possible to the ongoing process.

Another party involved and playing a sizeable role in the process of restructuring described is trade unions. Also nowadays trade unions are among the main stakeholders, with importance varying from country to country. In the past, however, they were a factor with greater strategic weight, especially in post-socialist or postcommunist economies, as large number of workers were represented and protected by unions for many years under this system.

In our case study trade unions play almost contrary roles in the restructuring programs undertaken at Gdansk and Szczecin. The first shipyard has limited options in some aspects because of trade union pressure. A clear example from the text is the fact that the shipyard could purchase some parts for prices lower than production costs at its own premises. Buying from supplier, however, would mean laying off workers who used to manufacture the parts; this, in turn, could be unacceptable from the unions perspective. For this reason this and other restructuring steps at the Gdansk yard were not undertaken, skipped or postponed. Had managements

discretion not been hindered by unions interference, the results might have been different, most probably better.

Piotrowski, on the other hand, gained the support of the trade unions at Szczecin shipyard and they were not impeding his restructuring measures. In my opinion, the explanation for this positive development is twofold. To start with, Szczecins chief executive was an active union leader before his was assigned to the general directors position. This is a phenomenon, which can easily be spotted also today: a managers image and success are defined by multiple factors, which encompass much more that just education and previous experience: crucial are also social involvement, additional activities, etc. In addition to the advantageous background of Piotrowski, there was another reason which led to the union not posing difficulties for the intended strategy. The CEO not only had a clear picture of the role and importance of the workforce in the whole process; he also managed to get his point across and actually convince the trade unions that the planned measures should contribute to the profitability and success of the enterprise, which will in turn benefit every individual worker. Although some changes or new strategies may create temporary turbulences and discomfort for a limited number of employees, this is justifiable if the end result will be increased well-being of the majority of workers.

The role of the workers in any aspect of the companys existence and operations is complicated and has multiple dimensions, but this is what makes the art and science of management so exciting and inspiring.

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THE ROLE OF PRIVATIZATION

Privatization processes, programs and initiatives were not easy or quick, but they definitely market the last decade of the 20th century in the post-communist countries. It will not be wrong to say they also influenced the Western business world, as many investors purchasing shares of ex-state-owned companies came from Western-world countries. The process of privatization is quite complex and definitely worth studying; this is not the aim of my report, however. What I would like to investigate is the role that privatization played for the two shipyards in question.

The Polish government wanted to change the ownership of the shipyards and make them privately owned. However, at the dawn of the new free-market era, the two enterprises were not attractive investment opportunities, as they had lost the majority of their clients, were facing huge debts and were not able to cover them with own resources as they had been strongly subsidized for many years. In that case, privatization was the powerful drive to conduct some restructuring activities. The goal was to restructure the enterprises first and in that way prepare them for privatization, by increasing their potential as an investment option and ensuring their survival in the new free-market reality. We can say metaphorically that privatization was playing the role of the next desired destination and restructuring was the road the enterprises had to walk in order to reach it.

THE ROLE OF FINANCIAL ENGINEERING

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From economic perspective the main aim of every business entity is generating profit, whereas the finance view states that the goal of firms is maximizing shareholders equity. (Brealey, 2010) No matter which approach we favor more, the quality of financial management is crucial for achieving the companys objective.

There are two major ways in which a companys profit can be raised: one option is to increase revenues, the alternatives is to cut down costs. (Horngren 2010) Both shipyards were trying to improve their performance on the first dimension by generating more orders which were supposed to result in larger revenues. In the cost-cutting aspect, however, Mr. Piotrowski definitely achieved remarkably better results than his college, the manager of Gdansk shipyard. While studying the article in detail, I was impressed by the progressivity of some cost-decreasing activities initiated in the Szczecin yard. A couple of the practices, such as eliminating whole cost centers, implementing some aspects of just-in-time inventory management and leasing unused capacity, are in the focal point of modern managerial accountants. I think this also proves that Piotrowski was a manager with visionary skills. In relation to the cost policy followed at the Gdansk shipyard, we can definitely state in hindsight that it was quite wrong: the experience of numerous companies has proved that gross profits do not guarantee the success or survival of a business and that tight cost control should be exercised all the time.

Another important aspect of the financial policy is the way shipyards managers approached and dealt with the huge debts of their respective enterprises. As mentioned already in a previous section, the desire of the Gdansk CEO to keep getting subsidized by the government prevented it from coming up with a constructive

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solution. On the contrary, Szczecin shipyard was on the look for actions in every aspect of the business that will contribute to its self-efficiency and it found an almost brilliant way to cope with the difficult situation. In a nutshell, the enterprise managed to convince the majority of creditors that debt rescheduling is the only alternative that may bring them some advantages in the end. This is how bankruptcy was avoided; moreover, having more time at its disposal to repay its debts, the yard was able to concentrate on another important issue: functional restructuring.

APPROACHES TO FUNCTIONAL RESTRUCTURING

From my point of view the main characteristics that differentiated Piotrowskis approach to functional restructuring from Szycs were innovativeness and progressivity. At Gdansk shipyard strategies and tools on the functional level did not undergo any significant changes; actually, I think that within the time limits of the case study no substantial functional restructuring took place at this particular shipyard. Piotrowski, however, not only initiated solid functional restructuring, but also approached it in a way very innovative for a person who has only been living and working under the planned-market economy system.

What I find fascinating is that Szczecins manager, maybe without even realizing it, touched on some well-established business concepts, which were known in the Western economies since the 1970s, but were something completely new for the post-communist countries. As an example I can distinguish the fact that the 13

marketing division was underlining the container ship expertise and the short production cycle when negotiating with clients. I think this closely resembles the Unique Selling Point concept.

Another interesting point of Piotrowskis approach to functional restructuring is narrowing down the product portfolio. Not only was that beneficial for the business then, but it is also advocated nowadays by some experts as one of the recommended strategic moves of companies willing to survive the crisis. (Schuh, 2009) This proves once again than findings from investigating past managerial challenges can find valuable practical applications today.

POLISH SHIPBUILDING INDUSTRY IN 2009

Despite the fact that shipbuilding enterprises started their restructuring efforts already in 1991, they were still owned by the state when Poland joined the European Union. The government was subsidizing these companies and therefore they were able to conduct projects which were actually not profitable, but exactly the opposite. In fact this resembled the reality before the Polish reforms to some extent. However, this was perceived by the European Commission as a protectionist measure against the interest of the European free market; as a result, an investigation was launched in 2005. (Global Security) The conclusion of the EC was that Polish government subsidizing the state-owned shipyards is not acceptable; for this reason the subsidies were stopped completely, which led to the bankruptcy of the shipbuilding industry in 2009.

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Although it was a stressful moment both for sector and workers, the shipbuilding industry came out of it renewed, refreshed, and maybe improved: private investors purchased the shipyards assets and decided they will continue the manufacturing and production of marine vessels. (Global Security)

The Polish shipbuilding industry went through a massive turbulence, but in the end survived, adapted and acquainted new, improved characteristics; can we hope the same will happen to the world economy after we get out of the recession??....

REFERENCE LIST

Brealey, R. (2010). Principles of corporate finance. Auckland, New Zealand: Pearson Global Security. (2011) Polish shipbuilding privatization. Retrieved from

http://www.globalsecurity.org/military/world/europe/pl-shipbuildingprivatization.htm
Horngren, C. (2010). Introduction to managerial accounting. London, Great Britain: Prentice Hall Loveman, G. (1995) State enterprises restructuring: a tale of two shipyards. Robbins, S. (2008). Management. New York, US: Prentice Hall Schuh, A. (2009). The impact of the current economic crisis on the strategies of multinationals in CEE.

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