How managerial learning can assist economic transformation in Russia

Organization Studies, Spring, 1996 by Charalambos A. Vlachoutsicos, Paul R. Lawrence

It is no secret that the transformation of the Russian economy is still not effective. Nor is it a secret that the success of the reforms is a matter of global importance. The chief reason for the slow progress is, in our view, that reforms at the institutional and individual levels have been neglected. It is at these levels that managerial learning is a key to success. To be effective at the institutional level, educational programmes must provide the know-how so that state enterprises can restructure themselves into smaller market-oriented firms. To be effective at the individual level, managerial educational programmes must help Russian managers transform themselves from shortage-focused managers operating in a planned economy, to profit-focused managers operating in a competitive market economy. Developing such programmes will be especially difficult since Western teachers of management and Russian enterprise managers have a limited base of shared management knowledge and organizational culture. To understand the managerial education challenge in Russia, the status of the economic reform effort must be briefly reviewed.

Russia's sweeping drive towards a market economy was launched by Boris Yeltsin in January, 1992. There were four key elements to his reform programme: the removal of price controls on most commodities; the phasing out of central planning for the supply, production and distribution systems; a drive towards a balanced national budget; and the start towards the privatization of state enterprises. These efforts were all addressed to macro-economic issues essential for the transformation to a market economy.

Notwithstanding recent positive indications that a stabilization of the Russian economy is in sight, the overall results of the reform effort so far have been disappointing, even for those who anticipated the magnitude and difficulty of the changes that were required. According to government figures, production fell in each of the intervening years: 19 percent in 1992, 12 percent in 1993, 15 percent in 1994 (Goskomstat 1995). These declines are staggering, even if one allows for the fact that they do not take into account the growth of shadow markets. Inflation has been rampant: From 1354 percent in 1992 to 140 percent in 1995 (Times 1996). The large federal budget deficit during this period (averaging 15 percent of GNP) has clearly been a significant contributor to inflation. A major new concern has been an increase in business-related crime and corruption - the 'Mafia' problem. The most positive achievement in the three years has been the rapid pace of privatization, a process now largely completed (70 percent in late 1994, Andreef 1994).

With hindsight, it is possible to see not just how the macro-economic policies might have been handled better in regard to their timing and scale (Goldman 1994), but also that these policies, in themselves, are not sufficient to effect the sort of massive change that is needed.

The reforms undertaken by the Russian government failed to address three issues: (1) The need for radical restructuring of the large state enterprises. Under communism, these massive, often monopolistic, organizations conducted almost all of Russia's economic activity. These organizations have stubbornly stuck to their traditional ways of operating and have changed very little in the past three years. They have failed to respond as Yeltsin's economic advisors expected. (2) The almost total absence in the old Russian economy of any distribution or marketing institutions and of private financial institutions. This lack of a distribution and credit infrastructure for moving products to market, in combination with monopolistic production units, meant that removing price controls simply increased prices without significantly increasing the domestic supply of goods and services. (3) The lack of training and experience of Russian managers in management skills and techniques key to a market economy. These included sales promotion, marketing, cost and capital accounting, cash flow and financial management and, more importantly, management systems such as lateral integration.

We believe that the research we began doing in Russia in 1988 on state enterprises (Lawrence and Vlachoutsicos 1990a, 1990b; Vlachoutsicos and Lawrence 1990) and later on Western-Russian joint ventures (Lawrence and Vlachoutsicos 1993) can throw light not only on the nature of these three oversights in the reform programme but more particularly on the managerial learning agenda needed to help address these gaps. Our belief in this regard flows largely from the methods we employed in studying Russian state enterprises. We would not have been able to secure an intimate look at Russian management decision making without the particular research methods we employed.

The main features of our methodology were:

1. The project was staffed and led by a team which had a balanced representation of both Westerners and Russians, and both practitioners and academics.