Pibrex Russia Essay

Then plant lacks a strong organisational culture; communications within and between departments are poor; there is inequity between in wages, working conditions and training and problems with motivation and employees is prevalent. Pibrex International is losing interest in the Russian operation and two sub-cultures exist within the Pibrex Russian organisation. The new General Manager, Elena Michasilova must develop an action plan that can turn the operations around to breakeven point by the year 2000 at minimal cost to the company. This reportoutlines to Elena Michailova considers both the external environmental (Political, economicsocialand organisation factors affecting Pibrex Russia and analyses why the plants are underperforming in a difficult economic environment and outlines four different unique strategies retrenchment, price leadership, quality leadership and export orientation) makes recommendations that Elena Michailova can implement to overcome the numerous organizational and financial challenges that the company faces. It establishes a viable export orientate strategy and industry leading restructuring programme, called Challenge 2000 that Elena can quickly implement to overcome these challenges she faces managing Pibrex Russia at minimal cost to the company. Implementation of both will lead Pibrex back to profitability by the year 2000 This report illustrates what the management team has done to begin a turnaround of the firm and the problems that remain. In particular, the company must reassess its management strategies and take steps to masintain its competitive position Introduction: This report considers both the external environmental and organisation factors affecting Pibrex Russia and analyses why the plants are underperforming in a difficult economic environment and makes recommendations that Elena Michailova can implement to overcome the numerous organizational and financial challenges that the company faces. It establishes a viable strategy and industry leading restructuring programme, called Challenge 2000 that Elena can quickly implement to overcome these challenges at minimal cost to the company. Background. Pibrex is one of the world’s largest producers of petrochemical based polymers for the plastics market. The company has purchased a plant in Russia and after three years of serious operating losses and has appointed a new general manager of the plant. The plant lacks a strong organisational culture; communications within and between departments are poor; inequity in wages, working conditions, and training exist but motivation and retention problems are prevalent. Pibrex headquarters is losing interest in the Russian operation and two sub-cultures exist with Pibrex Russian organisation. Two subcultures exist within the company because there is two separate manufacturing plants. The first plant is Pibrex KAZ, which is one the site of the original plant in Kalingrad. The other plant is the recently purchased (1993) Pibrex KZ plant which is just outside Moscow. In addition Pibrex opened a sales and marketing office in St Petersburg (called Pibrex AO) and a head office in the capital city of Moscow (called PibrexRussia). In contrast to the two manufacturing facilities Pibrex AO and Pibrex Russia were staffed with people from Pibrex’s other overseas operations and enthusiastic young graduates such as Elena. In 1994 Pibrex KAZ, Pibrex KZ, Pibrex A) and Pibrex Russia were grouped together into Pixbrex Region Europe North. However, within Pibrex’s decentralized governance structure, the regional subsidiaries were able to decisions autonomously In 1997 the management of PREN Europe North took steps to stem the losses at Pibrex KZ. Pibrex Russia was shut down and the sales and marketing department merged with Pibrex KZ. At Pibrex KZ over half the production workers were laid off and prices were raised to increased margins, but this only had the effect of eroding sales even further. A macroeconomic shock came in the form of the Russian Financial Crisis (RFC). This preceded the Global Financial Crisis. As a result of the RFC, Pibrex’s sales slipped even further and management was now fully involved in crisis management with the ultimate goal being survival. Whereas in the past Pibrex had relied on a decentralized governance structure, on this occasion, Pibrex formed a â€Å"steering committee† to direct strategy in its Russian operations. The steering committee reassigned Elena as the new Financial Controller and asked her to perform a financial audit on all of Pibrex’s Russian operations. They also decided to concentrate on reducing costs and increasing profits wherever possible. Sales activity was limited to only the largest and most profitable of customers. Also, the steering committee took various steps to control all finances as well as reduce all expenditures. The steering committee as Elena to serve as Managing Director and Financial Controller of all Pibrex’s Russian operations pending a submission of a full set of key issues facing Pibrex and a clear set of recommendation on Pibrex with the view to reaching breakeven point by 2000. This is that set of recommendations. Identification of Key Issues and Challenges. Pibrex Russia is faced with a multitude of problems and challenges that it needs to deal with as it progresses through 1988 and 1999, if it is to break even by the year 2000. ?The following is a synopsis of the most critical issues a)The Financial Situation in Russia Pibrex Russia faces very challenging external factorsthat make for a very difficult external environment as a result of the Russian financial crisis The unstable financial situation bought about by the RFC means that Pibrex Russia is strugging to increase its revenues and reduce its costsdue to rampant inflation; a dramatically devalued Russian currency, the ruble; the evodus of foreign investment funds; the financial collapse of many Russian small to medium enterprises, multiple bank faces and an increasing unskilled, unmotivated and cynical workforce. This unstable financial situation means that Pibrex’s costs (particularly of raw materials) is going up and increasing company failures will mean it will be more difficult to make sales. It will have difficulty finding plant finance and to attract and retain employees with the right skills. (b)Difficulties in the Internal Operating / Accounting Environment. The internal operating environment of the company also seemed very chaotic, like the external environment. There was a lack of internal accounting controls, which I assume would eventually impede the dire to drive down costs and increase revenues c)Difficulties in the Legal / Regulatory Environment. Since reentering Russian in 1992, the Russian government has imposed a number of operating conditions on PR that undoubtedly prevent PR from operating at optimal efficiency. Russian law required each of Pibrex’s subsidiaries to maintain separate bank account and pay local taxes (p125). There were also many other bureaucra tic hassles (d)Difficulties with Organisational Issues. Organisational obstacles included PR never being legally registered as the Russian mother company. The Russian subsidiaries were opened at different times and were therefore registered as different entities. Also the distance between the subsidiaries were substantial leading to taxation constraints. (e)Difficulties with Old and Poorly Maintained Plant and Buildings. The old plant and poorly maintained and buildings reduces the effectiveness of production, potentially creates health and safety concerns for the workers but more than that, it severely affects the morale of the workers who see it as ineptitude on the part of management and indicative of how they value the production workers. f)Poor Management and Employee Relations There are old and deeply held resentments between factory workers and middle management whom the factory workers believe â€Å"stole† the workers share of the company when privatization. This resentment has never gone away. The workers were also deeply resentful of the dual wage structure whereby sales and management staff who were transferred Pibrex AO (the Moscow sales and marketing office were given shiny new facilities while the production workers had to work in cold and outdated factories. (g)Cultural Conflict within Pibrex Russia In my opinion the main problem facing Pibrex is the cultural conflict between the factory workers and the company’s management. There are many subcultures at play within Pibrex Russia. This arises because Pibrex Russia itself is a merger between the old Pibrex Russia, Pibrex AO, Pibrex KZ and Pibrex KAZ. As a result of being part of the old Soviet Russia there is a rigid, bureaucratic and authoritarian culture which affects the production workers, and management. Characteristics of this culture included strong power distance, adherence to authority, belief in hierarchy, clear lines of communication, and strong uncertainty avoidance. Under this environment top managers did not delegate, middle managers did not make the decisions that they need to, whereas production workers looked for clear direction. This authoritarian culture was a complete contrast to, and did not fit well with Pibrex’s usual practice of decentralization and delegation. The highly complex and decentralized structure of PREN (Pibrex Region North Europe) which involved two business areas and four functions did not fit with this traditional, authoritarian culture at Pibrex KZ which favoured a more straightforward bureaucratic structure. After the Merger between Pibrex AO and Pibrex KZ there was a definite cultural conflict betweenthe younger, more urban, more entrepreneurial sales and marketing staff from Moscow and the older established production staff and established management staff from Pibrex KZ. (h)International Management losing Interest in Pibrex Russia As a result of all of the above problems listed above, it seems that Pibrex in Gothenburg seems to have lost patience with Pibrex Russia. Accordingly, Pibrex Gothenburg has a firm directive that it wants its Russian operations to return to profitability by 2000. General External Environmental Analysis Pibrex Russa is in the Russian plasticsand chemicals industry. Polymers and resins produced by Pibrex Russia are found in a large number of different Russian industries including packaging, construction equipment, furniture and consumer goods. It was expected that demand for Pibrex’s resins and polymers would remain strong as a result of the need to rebuild Russia’s infrastructure (after the fall of Communism) and to supply the Russian military. Although there were numerous overseas competitors, none of them had established themselves in Russia. Also, there was a strong research and development base In Russia for the development of resins and polymers In late 1990s the external environment in Russia is influenced by the downfall of communism and the RFC. The environment, particularly financial, was characterized by instability and unpredictability. This instability can be traced back to the soviet reforms ofâ€Å"Glasnost† and â€Å"Perestroika. † Russia embraced a programme of rapid economic reform and liberalization which involved removal of financial regulations and freeing up the Russian financial system. Largely, this prgramme of financial and economic reform was not successful and this, in my opinion was one of the main factors leading to the RFC. There was also contagion from the Asian Financial Crisis. The RFC resulted in a currency devaluation , bank and company failures the collapse of the Russian stockmarket, the exit of foreign investment and this lead to a â€Å"black market† economy. Chaos in Russia was not limited to the economy. There was extensive political and social instability as well. The post soviet government was still establishing itself. On a social level this economic and political upheaval led to many social ills and discontent e. g. increased alcoholism. S. W. O. T Analysis AS. W. O. T analysis Strengths A key strength that Pribex has is it’s relationship with its parent company. This relationship is important because Pribex can leverage of the parent company’s international reputation, tacit knowledge, its existing supplier relationships, their research and development facilities and manufacturing processes as well as its customer service and safety standards. Additionally I believe the parent company may be able to provide Pibrex Russia with financial backing, which is particularly important given the financial and economic environment described above. Pribex AO is a strength to Pribex Russia. Their culture is not as divided and its staff and highly trained and motivated. Additionally it is where Elena has come from so it has a history of effective management. Elena herself is a critical strength to the company. She is one of the key managers and is materially contributing to the fdinacial well being of the company. Weaknesses As mentioned before the company, the company has a number of operational weaknesses. The major one is the conflicts that arise in the various subcultures of the company but there are other weaknsses as well such as ineffective financial controls over revenues and costs, poor relations between management and employees generally, a divisive dual wage system and a absence of top management support. The two factories Pibrex KZ and Pibrex KAZ old, use outdated technologies and are not very pleasant to work in. The factories have also been poorly maintained so for these reasons production output is poor. In addition to production weaknesses there are also some financial weaknesses. The company is having difficulty increasing revenues in the current economic environment and reducing costs. The company has been losing money for many years and there is little prospect of returning to profitability Opportunities: Pribex Russia has an opportunity to establish itself as a market leader in the building polymer and resins industry and as the rebuild of Russia infrastructure gets into full swing, it should be able increase revenues and decrease certainly its fixed costs and this may lead to profitability. Additionally Pribex Russia, with its existing research and development facilities has an opportunity to pioneer new polymer applications and establish itself as an innovator in the market. As the Russian economy is reformed Pibrex Russia has the opportunity to improve its financial situation and develop a reputation as an innovator in the industry. Threats: The macroeconomic analysis above indicated that the RFC and the instability and uncertainty that it brings to the financial sector as the major threat to Pibrex. It is a threat because it makes it more difficult for Pibrex to increase revenues and reduce costs. The RFC also threatens the company’s ability to raise capital and to reward its works appropriately leading to resentment amongst workers. The other major macroeconomic threat is the political instability that exists within Russia and makes it difficult for Pibrex management to forward plan and affects confidence. If Pibrex pursues a â€Å"price leadership strategy† then it faces threats from competitors, both domestic and foreign, who can produce products cheaper and therefore charge lower prices than pribex thus undermining their price leadship strategy If Pibrex pursues a â€Å"product leadership† strategy based on quality it faces competitive threats from both domestic and foreign competitors who can beat Pribex’s current quality standards (which are affected by their aging, inefficient plants). Four Strategies that Can Be Implemented at Pibrex Elena should recommend the following four quite different strategies to the management of Pibrex. 1. Retrenchment Strategy. Under this strategy Pibrex Russia should retrench its operations and closing the aging loss making Pibrex KZ plant and focus on modernizing its Pibrex KAZ plant. This would eliminate all of the problems associated with the older Pibrex KZ plant mentioned above and this would help restore confidence in Pribex Russia with the parent company. The downside is that it would minimize opportunities for further growth and expansion 2. Price Leadership Strategy. To minimize the macroeconomic risks mentioned above and return the company to profitability the company could pursue a competitive strategy based on price leadership. Under this strategy Elena would aggressive pursue domestic production from both manufacturing plants through a low price strategy, which would provide more work for the current production workers. To implement a successful price leadership strategy Pibrex may need to draw up on the financial resources of the parent company. Pibrex would aggressive pursue and develop new customers though aggressive advertising (with support from the parent company). In order to adapt a successful price leadership strategy PR would need to aggressively control costs, establish strict financial controls and eliminate the vtwo tier wage structure 3. Quality Leadership Strategy. To minimize the macroeconomic risks to the company it could pursue a strategy based on quality. Under this strategy it would draw on the parent company’s tacit knowledge and research and development facilities to become a quality leader in the area of building polymers and resins. Elena would lead an aggressive sales strategy based on world leading research and innovation and become a centre of excellence based on quality. This sales strategy would be to mainly domestic customers and the strategies relies on a considerable upswing in sales, as a result of infrastructure building to correct the company’s financial situation and return to profitability by the year 2000. To assist in selling to the rejuvenated domestic market, Elena would draw upon the sales `skills and sales teams already existing in the parent company. Pibrex Russia would become a domestic leader based on this Quality Leadership strategy. 4. Export Focused Strategy. Under this strategy Pibrex would split its manufacturing plants so that the older plant, Pibrex KZ would supply solely the domestic market, and the more modern plant Pibrex KAZ would supply the export market. The more modern plant would be chosen to serve the export market because more quality and innovation is required. Success in export markets would require additional attention to the company’s quality management processes. This dual strategy should ensure there is enough work for all the factory workers. Additionally an export led strategy would benefit from any currency devaluation. This dual strategy and the increased attention to quality control may, in the short term require additional capitl funding that the parent company would need to provide. Overall Implentation Plan for Elena. It is recommended that Elena implements an export focused strategy. This strategy would take advantage of the company’s strengths (being the parent company’s knowledge, reputation, resources and sales strategies) as well as minimizing its weaknesses (under-capacity, bitterness between workers and culture conflicts). It would reduce the tensions between workers, increase production and reduce the overcapacity problem. This export focused strategy does not initially minimize all of Pibrex’s weaknesses (such as poor financial controls and lack of head office commitment) but these weaknesses maybe corrected over time. To successfully implement this export focused strategy I recommend implementing a change programme called â€Å"Challenge 2000† which will draw on Pibrex’s strengths and minimize the company’s weaknesses. Challenge 2000 will be led by Elena as well as supported by the Steering Committee and PREN management. Challenge 2000 will have eight distinctive steps that will ensure success: 1. Demand sufficient capital investment from the parent company to allow for the repair and upgrade of the Pibrex KZ plant, implementation of a new sales incentive sub-programme and a quality sub-programme based on research and innovation. . Complement the increased efficiency at the Pibrex KAZ and the upgraded Pibrex plant by removing excess layers of management 3. To this reduction in management layers by creating an efficiency sub-programme bthat implements inventory, cost and revenue controls throughout Pibrex russia 4. Alleviate employee resentment and bitterness by eliminating the dual wage programme, and implementing an aggressive bonus incentive programme that rewards both local export sales. 5. Implement the export focusedmarketing strategy but aggressive pursue all domestic leads as well 6. Develop a marketing plan as part of this marketing strategy for both the domestic and export markets. 7. Have Pibrex aggressively pursue all sales leads in domestic and export markets. 8. Co-ordinate production schedules to the marketing plan using just in time inventories Conclusion. This paper outlines four different implementation strategies that Elena Michailova can chose and recommends an export focused strategy for Pribesx Russia. The successful implementation of this export focused strategy complemented with the eight step Challenge 2000 program will ensure that Pibrex will be restored to profitability by the year 2000. Challenge 2000 is a viable low cost change program that will certainly impress PREN management. The successful implantation of both will be replicated in Priex’s plants throughout the world which will see Elena Michailova, the once young bright inexperienced manager, rise over time to be the world wide Chief Operating Officer for Pirbex