Industrial Transformation in a Post-Communist Countries: the Case of Ukraine

Tetyana Lepeyko

professor, doctor of economics, Ukraine

lepeykot@indiana.edu

Abstract

The current period of the post-communist countries development characterized by big structural transformations, connected with the requirement of transitive economy and help to build civilized market relationship between all economy subjects. But most dramatic changes happened in industrial sector of economy where large industrial complexes were dominated, which management was inflexible, centralized resources allocated under the command-administrative system. Analysis of industrial development in Ukraine showed the most common problems for all post-communist countries: first, it is legislative indetermination of legal field, in which there are no basic rules, promoting the development of business within the frame of small and medium business; second - concerns the construction of adequate structures and mechanisms of new management system for enterprises; third - creation of economic-organizational bases for functioning of the enterprise’s strategic alliances; fourth - the construction of transparent and effective regional system for support transformation processes, containing both economic and organizational levels of their stimulation. It helped to base concept of industrial transformation which contains the changing in Ukrainian legislation and regional policy as well as system of industrial complexes transformation management and procedure of the measures changing.

Introduction

This paper is examines how modern stage of economy development in post-communist countries reflect on industrial transformation. This process is very complicated and need new point of view on ins mechanism and procedure.

The modern stage of developing of transitive economy in post-communist countries intends the necessity of transformation of present forms and methods of industrial production. The problem is that in Ukraine, as far as in post-communist countries under the command-administrative system, developed large enterprises, oriented to repetition work. The greater part related to big industrial complexes which were constructed in administrative economy. Such enterprises, as world experience shows, turns out to be non-competitive in conditions of market economy, while they don’t have necessary flexibility, adaptation, which allows them to adapt to quickly changeable market environment. Moreover, such type of industrial production organization doesn’t give the possibility for application of innovations, both in technical and economic-organizing field.

The management of large industrial complexes based on centralization is also inflexible, centralized resources allocation under the command-administrative system. In general, such enterprises are non-competitive in the market system. That’s why among the modern conditions within the reforms, implemented in transitive economy, the processes of transformation of such industrial giants through creating the system of small and medium business and also the systems of regional level support acquire great actuality. Such projects have special actuality for Left-bank Ukraine with more than 50% industrial production of the country. The latest American publications note that many mega-corporations, created by means of fusion, have serious problems.1 This confirms the necessity of examination and implantation of industrial transformation methods and forms based on West experience and standards.

There are great quality of publications, dedicated to enterprises transformations, creating and work of small and medium business, functioning of enterprises alliances.

Several recent papers have argued that organizational forms, mechanisms and procedures of enterprise transformation, is open to question and far from clear and complete.1 The interrelations between organization of business and value of development economies and a firms within them is of increasing importance of as emerging markets around the world look to the developed markets to decide how to set up their own economic and business - system (first of all, I think, at a regional level), working in conditions of high uncertain market degree.

1

I based on facts described James B. Broke (1987), that the reasons of difficulties in a mega-corporations, which can’t survive in conditions of modern business policy. The supporters of the bigness industrial complexes try to deny all laws of economy, growing dynamism of modern business in combination with new achievements of information technologies provide with more profitable position to comparatively small enterprises, which become more effective, innovating and competitive. He considers that effective management of such enterprise on curtain stage becomes practically impossible for any, even the most talented manager.

Works of Ana Dutra, Lili de Grandpre (2002), Kirsten D. Sandberg (2002), are reflect using of the principles and methods of modern company activity transformation reengineering concept, correlation between the company government system and its organized structure. This concept become as development of Robert S. Kaplan, David P. Norton (2000) and M. Hammer and J. Champy woks which I propose to use in development transformational procedures (1997).

This paper use the modern management of the changes and transformations at the enterprise’s concept. The integrative changing of this theory is presented in the works by Michael Beer, Nitin Nohria (2002). This theory corresponds to conclusion by John W. Moran, Baird K. Brightman (2002) that management of the changes is the process of constant adjustment of activity direction of the organization, renovation of its structure and the search of new possibilities. I can agree with Rosabeth Moss Kanter(2005) who prove in researches that the basis of the business success is constany’s transformation. The work of J.G.Boyette, J.T. Boyette (2002), William B. Rose (2006) presents the review of experts’ outlooks in the changes management sphere, ideas, approaches and concepts of generally accepted changes. Also was used the results of the business changes identification based on data of the Dutch company Bang and Olufsen for 25-year period.3 3 Davide Ravasi, Majken Schultz (2003) The bias is related to work by David Nadler and Adrian Slywotzk (2004) stated the correlation between strategy, organization and management of the changes of enterprise. I leave out of this paper researchers dedicated to the role of human element and government resistance changes, for instance(Ron A. Carucci, William Pasmore (2003) which examine carrying the logic of adopted decisions to the staff as critical factor of successful changes).

By the most important is creation theoretical approach to management of the groups and alliances of enterprises. These problems are presented in works by Bamford, J., Gomes-Casseres, В., Robinson, M. Mastering (2002); Calabrese, T., Silverman, B. (2000); Baum, J. A. C., Rowley, T., Shipilov, A. V., Rao, H., Greve, H. R. (2004), and also Ashvin Adakar, Asif Aydill, David Ernst, Paresh Weysh (2003).

I assume that nowadays is very important to clarify the approach to transformation of big

2

industrial complexes in post-communist countries. One of the solution for this problem in creation of enterprise alliances which are survive in a strong market competition.

The paper is organized as follows. Section 1 presents evidence on the current level of industry development as well as modern world economy tendencies. Section 2 go trough existed management approach to enterprise transformation to proposed concept of change management for big industrial complexes. Section 3 present methodology of transformation industrial complexes into enterprise alliances. Section 4 concludes.

1. Industrial development analysis.

Although various authors have previously noted that industrial development is a basis of economy level. This section summarized the result of word tendencies and Ukrainian dates’ analysis to evidence the necessity of industrial transformation.

The general tendencies of modern business management development was spared based on Peter F. Drucker (1999) analyses and reflect current tension. Shortly the results of my analyses are coming to next. In 20 century management concentrates on internal questions of enterprise’s development but in 21 century situation are changes. Nowadays the role of time is rise. Business strategy is become as a wage war for time, but not only for money. Modern managers developed only element of strategy and implemented they one by one, transforming only part of enterprise. Diversification’s idea quickly transforms into idea of consolidation. On all markets appear hipercompetition: now it’s better to support many competition advantages in short time period. You might become competitors for yourself before someone become on market. As the main principle of management become complexity. The tendency of business development showed that enterprise becomes a complexity system in meaning of chaos theory, theory of catastrophes and nonlinear dynamic: small changes lead to the global, no of system parameters became to critical level, but system is in crisis. That is why global, fundamental, long-term changes in the way of life, demography and system of values.

The other side of changes is marketing sphere. We had to count on changes in customer values when people interested in irrational things, for example brand or history of product. Beside this we have mass customіzatіon which reflect peoples need to be individuals.

We must also count on rising of productivity. Economic forecast says that in 21 century half of working people will produce more in 3 times and their salary increase in 2 times. It lead

3

to liquidation of some management level – mostly, middle as the result of technology development.

The other tendency which connected with productivity rising is development of outsoursing meaning giving over some internal operation to external mostly special firms.

But the most interesting from the management point of view is appearing of clever organizations which are knowledge based and give big possibilities for self-organization and self-development.

We must count also on lobbing of interests tendencies affecting on all management level. Management heterarchyappeared and every element can become dominant and then will become in next quality, power has no elements but only their connection.

And the most impressive changes in the environment become as result of modern stage of information’s economy distinctions. Now appeared companies with the “zero gravitation” – companies better like to be “less weight”, because in e-economy there are no borders for business.

New type of organization - e-business appeared and gives customers possibility to see all choices and this dramatically change competition environment of enterprise. All stages of buying (receiving of advertisement, information, buying and shipping) collected on Іnternet site. That’s why business became global and functioning 24 hours that’s mean a new principle of global economy “death of time". So business grounded on natural resources now not valid now.

That was a short description of modern mega trends in business environment. The next part of analysis summarizes global tendencies affected post communist countries and especially Ukraine.

As was mentioned before, the formation process of transformation mechanisms of the large industrial enterprises, both on regional and state level in Ukraine is still far from completion: there are no skills and practice of transformation of large industrial complexes, construction of regional economic systems. Besides, in the sphere of top-management of large industrial enterprises there are cases, when enterprises transformation occurs in interests of national oligarchy groups. It is necessary to emphasize the fact, that the influence of the state on legislative registration of mechanisms of transformation in economy, support of small and average business in the process of acceptance of such decisions is considerably reduced because of lobbying interests of some forces.

It is necessary to emphasize the presence of some most general problems in the sphere of

4

transformation mechanisms creation for large industrial enterprises in Ukraine. First, it is legislative indetermination of legal field, in which there are no basic rules, promoting the development of business within the frame of small and medium business. Under the Prime Minister of Ukraine, it is necessary to make changes in more than 4000 acts. Nowadays vertical line of authority functions in such a manner that independence of regions in taking the decisions on economic policy is realized not fully. In the program of increase actions of Ukraine investment appeal for foreign investors in its present variant there is no precise regional component; besides the status of free economic areas and territories of priority investment does not work.

Another problem concerns the construction of adequate structures and mechanisms of new management for system of enterprise. Today many companies in Ukraine decide similar tasks, for example, allocation of not profile capitals, creation of new businesses on the basis of existing capacities, re-structuring. In this case top-management should collide with the task of isolation of some capacities and creation on their basis of the new, independent enterprises. There is a difficult question raised before the management: how to construct mutual relations between newly created enterprises, how to ensure the sufficient control of the given tasks and correct distribution of resources, not restraining thus the idea of independence? The complexity of this question is that there is no universal answer for it, and the optimality of the decision is determined by concrete situation.

In connection with previous there is one more problem - creation of economic-organizational bases for functioning of the enterprise’s strategic alliances. In modern world the competition is not competition between two firms, as Adam Smith noticed, it represents most of all an opposition between groups or alliances of the enterprises. There is a set of the well known reasons for association of the enterprises. In a context of offered research we are interested in those, which make association of experience and technologies. As it is known, that the small business has higher innovational potential, flexibility, that’s why the transformation of the large industrial multi-product giants, which financing large projects and requiring a lot of time for reorientation of manufacture will allow increasing efficiency of Ukrainian economy functioning.

And at last, the construction of transparent and effective regional system for support transformation processes, containing both economic and organizational levers of their stimulation, which is absent now, will allow to increase efficiency of functioning both each separate business - unit, and economy of Ukraine as a whole.

The last aspect of analyses reflected industry development tendencies based on data of Annual Report Ukrainian National Bank (2005).

5

As you can see on figure 1, during January-November 2005 the Ukrainian government managed to withhold surplus Consolidated Budget of Ukraine. Basic were the expenditures observed during the last month of 2005(exceeded 2.5 times in December an average monthly income for ever previous month). As a result, the deficit of Consolidated Budget of Ukraine came in the beginning of 2006 up to UAH 11.0 billion ($ 2.2 billion) or 17.9% to GDP, and made almost two thirds of the monthly income (73.3%) which seriously affected on industry development.

In 2005, financial status of enterprises and institutions improved financial results of ordinary business before taxation totaled UAH 57.6 billion (total profit reached UAH 72.4 billion, losses UAH 14.8 billion) – figure 2.

As compared with 2004, it increased by 29.3%. Industrial enterprises and institutions in all spheres of their activities, except of constructions, improved their financial results, showing the best profit before tax (UAH 26.8 billion) which was by 41.3% more than in the previous year. However, the financial status of light-industry enterprises worsened: 43.0% of them incurred losses because of being strongly dependant on supply of raw materials and because of introduction avalized promissory notes for their customs clearance.

As you can see on figure 2 in 2005 66.7% of enterprises gained profits, it the industrial sector 61.2% of enterprises were profitable (in 2004 – 62,5%), including in chemical and petrochemical industry (72.2% of total enterprises), in pulp and paper industry and publishing (70.5%), metal manufacture and processing (68.2%), manufacture of non-metal mineral product (67,8%).

A share of barter operations declined: in 2005 0.6% of the industrial products worth UAH 2.1. billion were bartered (in 2004 – 0.9% (UAH 2.8 billion). Positive dynamics of barter reduction were observed in all industries, except for light industry. The smallest share of barter in products sold was registered in Dnipropetrovsk and Lviv regions (o,2%), the largest in Sumy region (2.3%). This results evidence the positive tendencies in industrial development toward civilized market post industry economy.

In the beginning of 2006, the growth of industrial output continued to show a downward trend of the end of 2004 (figure 3), as a result of slumping investment activities (figure 4), unfavorable external conditions (reduction of prices for traditional Ukrainian exports), high prices for energy recourses, and fuel market crisis. The industrial output increment made up 3/1% that was 4 times less than 2004. Consequently, industrial component in GDP growth decreased from 28.3%, in 2004 to 21.3%, in 2005.

6

During the year, positive dynamics of industrial output were provided chiefly by industries targeted towards meeting needs of domestic market, where demand stably drew as a result of a real increase in households’ income. For instance, growth of output in food industry and processing of agricultural products reached 13.7% that provided 77.0% of the total industrial growth. Production of wood and wooden goods increased by 19.5%, its share in the total industrial output growth being 4.8%. (figure 5)

Let’s analyze outputs of main structural branches of industry in Ukraine.

An increase in machine-building output (figure 5,6) by 7.1%stimulated positive dynamics of industrial output. Starting from the second quarter output rates in machine-building industry slowed down because of slumping export. However, in the fourth quarter demand for products of mechanical engineering improved so that at the end of the year machine-building industry had 35.6% in the total industrial output increment.

Output in chemical and petrochemical industry grew by 9.8% as compared with 2004 due to both an increase in chemical products export by 10.4%, and growth of domestic demand for some types of products, including fertilizers (an increase in production of potash fertilizers totaled 42.3%, nitrogen fertilizers 9.4%). As a result, in the beginning of 2006, a share of chemical industry in total industrial output increment made 21.2%.

At the end of 2005, industrial output in the sphere of metal manufacture and processing showed an upward trend. In December, the growth rate reached 5.3%, however, it was not enough to compensate negative cumulative dynamics of output during the first half of the year, as a result of substantial drop of external demand. Totally for the year, a decrease in output accounted for 1.5%. Output in the share of petroleum derivatives production also significantly dropped (by 13.4%). Shares of these industries in the total output were negative and accounted for minus 11.7 and minus 30.6% respectively.

Some acceleration of output growth rate was observed in the mining industry (4.4 versus 4.1% in 2004), that was provoked by an increase in growth rate of extraction of power-generating materials from 1.9%, in 200, to 3.1%, in 2005, which compensated deceleration of growth rate in production of non-power-generating materials (from 7.6%, in 2004, to 5.7%, in 2005).

In the sphere of power generation and supply the output grew by 2.9% as a result of raising power generation rates by thermoelectric power station and heat-and-power plants (by 1.7%), nuclear power plants (by 2.0%) and by hydroelectric power stations (by 5.1%). Totally, these plants generated 185.0 billion kWh, including 88.8 and 83.8 billion kWh produced by

7

nuclear and thermoelectric power plants respectively, which was by 2.1% higher than in 2004.

2. Modern approach to common activity management

Integration into economic is possible by creation as joint ventures, and formation of various types of alliances. Associations of the enterprises available now are created in the majority for lobbying joint projects or political support of someone's interests. For this reason the available economic unions appeared poorly functional and short-lived. Expansion of activity and an output to the new markets forces the Ukrainian enterprises to pay more attention to economic aspects of the enterprises’ strategic groups’ formation.

At the same time one of the tendencies of strategic groups’ formation most widespread for modern economy is the aspiration of association of the national enterprises with the conducting foreign companies. Such association can be shown in the form of integration, merges or absorption, formations of alliances or joint ventures.

It is necessary to note, that in Ukraine group associations of the enterprises are created mostly not for manufacturing processes improvement, as for functioning financial streams and creation of the organizational forms based on principles of horizontal management. Such tendencies are supported with transition to high diversify forms of conducting economic activities. In this connection, the research-consulting firm "Alto", provided by Gysakov, V.(2005) had been explored the certain set of the international and Russian enterprises’ associations and large integrated structures. The purpose of such research was comparison of efficiency of their functioning and a degree of diversification their activity. For this purpose on a degree of diversification 75 American, European and Central Asian companies with an annual turnover not less than 2 billion dollars working in different areas of the industry – telecommunications, an autostructure, pharmaceutics, instrument making, etc have been allocated. Also some Russian integrated groups have been included in sample (Sibneft and Yukos – oil refining, Severstal – metallurgy, OMZ – large machine-building holding).

All designated companies have been distributed on a degree of their activity diversification. So, the high degree diversification is inherent to the strategic groups, practically not connected with each other or carrying out association within uniform logic of the business organization. Synergetic and vertically integrated groups are characterized by an average degree of diversification. With high degree – concentrated companies with single business instead of

8

group (see table 1).

As sources of information IKF "Alto" used the public reporting of the selected groups of the enterprises. Calculation of effectiveness ratio was carried out with the help of definition of the profit up to the taxation and amortization (EBITDA) which size is not influenced by the accepted national rates of the taxation and feature of amortization charge, that makes comparison of the data received from any companies more correct and which can be calculated on the basis of the data practically from any system of book keeping – Russian, American, GAAP, etc. In table 1 according to a degree of diversification the generalized information about condition and dynamics of efficiency parameters of the enterprises from the considered sample is given.

Results of the analysis submitted in table 1 testify the significant advantages of the integrated companies towards the diversificated first of all on account of the most effective utilization of the company’s personnel potential and efficiency of using actives. Nevertheless, wide diversificated companies also have a number of the advantages, not reflected with the help of parameters of profitability. In our opinion, these advantages are connected to the various fields of activity that allows to compensate failures of one direction by the advantages of another.

During creation of strategic group of the enterprises it is necessary to take into account, that wide multi-branches diversification, inherent in national economy, doesn’t allow to equivalent develop of all activity directions. This position is confirmed also with the international practice. So, by results of . Gazin, G. and Minakov, D. (2006) research from 165 conglomerates which existed in the USA from 1979 to 1994 33% have sold out not profile directions of business (as a rule, rather small) and have concentrated on one basic kind of business. More than 35% from them have been absorbed or liquidated. Recent process of re-structuring of conglomerates and in post-communist countries was appreciably intensified, that in many respects is connected to strengthening of a global competition. Thus, at formation of group it is necessary to reduce a level of activity diversification and to unite business processes in common logic of the organization and functioning. Nevertheless, depending on objects in view of group association, expansion of processes diversification is possible.

The most full research of conglomerate forms of the strategic groups enterprises organization was carried out by N.B.Rudyk (2005). He had been revealed the empirical and theoretical preconditions of confirming and denying expediency of such association form. Thus not looking on a significant amount of arguments against conglomerates, the author pays attention that the volume of financing which can involve a conglomerate, always more or equal to the volume of financing with which its participants could involve, when being separate business units that result in increasing of a financial synergy level.

9

The enterprises, which diversify the business through absorption or creation of new business units, aspire to provide synergy effect through combining different directions of business. The majority of economists concerned, that the basic way of expansion volumes of industrial-economic activities and maintenance of the enterprises development is the combination basic competences with the help of merges and absorption. I use the results of detailed studying of parameters for 15 years of 276 companies from the list of magazine Fortune 500 which published inline in 2005. It have passed process of merges are resulted. In 70 % of cases such reorganization has led to increase of efficiency of the companies, and the general economy on all to 276 companies which was achieved as a result of more effective utilization of an available infrastructure, made 28 billion dollars. Hundred of the most successful companies from the analyzed list increased the efficiency as a result of merge on 5 % and have saved on 250 million dollars for one year everyone.

Experts on PriceWaterhouse research of 300 merges for 1987-1997 and determined, that almost 61 % of merges does not pay back the enclosed means; 57 % of the incorporated enterprises lag behind in the development other subjects of the market and are again shared on independent corporate units.

As a conclusion, alliances are more flexible form, than merge and absorption. For them the smaller role is played with time for completion of integration processes and the greater value has influence of everyone’s contribution from in the future development of position inside an alliance. The major factors are the connected communications with partners, presence of original know-how, a variety of services offered to consumers and, in last turn, the capital of the company.

Such form of formation of strategic group when some financial establishments in common get the big enterprise or industrial holding that allows to reduce significally financial risks is inherent in post-communist country economy also and is more effective to carry out improvement and modernization of their internal structure. One of the main advantages of group of the enterprises creation inform of the alliance or holding is the factor of demand. The enterprises which are included in groups, have considerably best parameters of security orders in comparison with other enterprises.

Undoubtedly, creation strategic or even a time alliance together with benefits contains also threats for the economic activities, connected with asymmetric of an alliance in the condition to reduce efficiency of an alliance and to lead to absorption of its weaker participant. Besides there is also a lot of other risks: risk of a source of strategically important information, risk of outflow of clientele and the staff to the partner in case of disorder of an alliance, etc. In a

10

similar situation, according to the consulting companies, published in Ukrainian Invest-Newspaper (2003), about 60-70 % of strategic alliances break up, or not having reached the purpose, or solved only the most simple problems.

Thus, despite of a significant amount of failures as at carrying out of agreements on merges and absorption, and at formation of time structures constant growth of strategic groups of the enterprises amount is inherent in economic. The enterprises in most cases formed as a result of merges continue separate functioning as set separate and sometimes even competing divisions which have a different industrial infrastructure, research and marketing services that coincides with work of a strategic alliance more. It is connected with problem of integrate the absorbed enterprise into working structure which usually extremely difficultly. Even the economy due to centralization of separate functions of management can appear inaccessible. The complex structure of corporation, first of all conglomeratic type, on the contrary, is capable to lead to increase in number of the administrative and managerial personnel. The final analysis of efficiency of the specified formations are submitted in table 2.

At the same time it is necessary to take into account and criticism the some authors institutional theories, in particular that the emphasis on transactions costs turns around ignoring of production costs. Thus, association institutionalism with available theories of management allows to develop the concept of group enterprise creation.

Proposition 1. Basis of the suggested concept is the idea about formation between separate market agents (and і) uniform economic space and makes an establishment according to it common rules of interaction and development of own institutes. Thus the set of the enterprises {A} (аi is formed A), for which it is created common economic and institutional space, and set {In} which elements (bi B) are in a common condition. Thus in managerial process by development is possible trough transformation of separate members from set {A} in set {B} and on the contrary. At the same time it is necessary to allocate set of the goals{C} formations of such space.

Proposal 2. Also during the organization of a management system of enterprise group it is necessary to take into account and determined institutional restrictions. So, it is necessary to generate set of institutes {І} which in the aggregated kind can be shared on internal {Іi} and external {Ie}. Thus it is offered to allocate for simplification of a statement of a material only three groups of institutes (number of group is submitted in brackets): actually economic (1), нормативно-legal (2) and social (3) which will determine rules of interaction inside strategic group of the enterprises construction. Clearly, that external institutional restrictions will be identical to all members of association though here too it is necessary to allocate: restrictions for

11

the integrated association as a whole {Ie11k} – external economic institutes, quantity(amount) k; {Ie12l} – external legal institutes, amount l; {Ie13m} – external social institutes, the general amount m; and internal rules of cooperation which act as external institutes concerning participants of the integrated structure. Sets {Ii21k}={Іi11k}, {Ie22l} = {Іi12l} и {Ie23m}={Іi23m}. are accordingly formed. Except for that for everyone і participant of new institutional structures (the integrated association) will be formed accordingly sets {Іi21kі}, {Іe22lі} и {Іe23mі}.

3. Management conception of big industrial complex transformation into enterprises’ alliances

Strategic groups of the enterprises can be classified to different attributes. Distribution to structures of vertical both horizontal types and division is most distributed on the basis of irregular structure described in the works Andronov, V.V. (2003), Gorbynov, A.R. (2002) , Ivanova, T.U. and Prihodko, V.I. (2004), Ymantsev, G.V. (2002). Vertical integration – process of association of the enterprises which are at different stages of production and whose economic mutual relations are determined by communication "supplier - buyer". Thus it is desirable, that integration processes completely covered industrial process which will bring in the certain stability to functioning an industrial circuit as a whole, will allow to accumulate great volume of the marketing information, will raise a level of standardization and the control of charges and industrial operations. Vertical integration also can be classified on a number of attributes, depending on: integration of a technological chain stages ("back" or "downwards" and "forward" or "upwards"), volume of integration (full and narrow), the initiator of integration (progressive and regressive).

Horizontal integration – process of the enterprises association which are at one stage of production and consequently initially compete. It conducts to increase in a degree monopolization of the market as the greater territorial scope provides the greater success to group. Integration on the basis of irregular structure includes horizontal and vertical communications, i.e. the enterprises and the organizations which are taking place both on one, and at different stages of technological process are united.

Along with vertical and horizontal integration T.Tarelkina (2006) considers conglomerative diversification, providing distribution of integration processes on the adjacent enterprises. Such form of integration arises in case the adjacent product which is necessary for the basic product, does not meet the requirements of the enterprise under the price or quality.

12

Process of association of the enterprises efforts also can take the form of cooperation (association of resources, acceptance of the common decisions without formation of the common controls) or concentration (improvement of any function realization on the basis of centralization of management, association of capitals and introduction of new kinds of technologies).

Integration processes, both vertical, and horizontal, have the lacks, the main thing from which is reduction of competitive pressure by the separate enterprises of group owing to what quality of their production can become the worse, than at competitors. At the same time, than the greater size has the enterprise and the more productions it supervises, the more difficultly to coordinate separate directions of the activity.

All organizational forms of integration of companies I.G. Vladimirova (1999), in turn, suggests to on "firm" and "soft". To firm it is possible to relate on concern and trust, and to soft, first of all, – association, consortium, strategic alliance. "Soft" forms allow to conduct joint activity at preservation by founders of legal and economic independence. Within the framework of strategic alliances, there is an opportunity of mobilization of powerful corporate structure advantages together with preservation of its members isolation.

At the same time, A.B.Feldman (1999) suggests to allocate separately economic mechanisms of integration and organizational - legal forms in which action of these mechanisms ({Т}) is carried out.

The point is that in each of the considered cases the primary goal of a control system will be not only creation of group of the enterprises, but its reduction in a condition of stabile and effective association –which not only takes a worthy position in the market, but also in a condition to keep it on strategic prospect.

Thus structures of the market form the common configuration of economic relations, fixing structure of participants of the market and their positioning to each other. Nevertheless, at the set configuration of communications between participants of the market the contents of these communications can considerably differ. For this reason institutes, as against structural contours, determine not so much who to whom is connected, and more likely as it is connected, that is transferred on a structural contour and in whose interests streams of material, financial and information resources are organized.

Classification of kinds of the enterprises group association represents a special problem. So, for the purposes of the organization of the integrated management the most important is distribution of groups on holding (based on a joint-stock way of the control and relations of the property) and not holding (mutual relations inside which are adjusted by special agreements). At

13

the same time, it is necessary to note, that the considered classification in many respects is conditional, as a rule, the holding control is supplemented with system of contracts and on the contrary, not joint-stock associations develop into holding. In most cases group association provides use of the holding form of the control. Financial and industrial groups also are made quite often out as holdings though use also other mechanisms of the control.

Not holding variants of association can be divided into two groups. First, it is the associations based on concentration of the control over resources and services. Second, it is groups within the framework of which voluntary centralization of imperious powers is carried out. At the same time, in E.L.Dracheva and A.M.Libman (2000 and 2001) opinion, except for holding structures, it is possible to allocate groups of the manufacturers connected by systems of impecunious calculations, non-payments, barter. Thus as group forms of business cooperation and the common planning of activity to which number carry long-term contract relations, granting of financial and commercial services on a long-term basis, rent and franchising, participation in the capital, the enterprise unions and time associations are considered.

А.Р. Horbunov (2002) also marks, that in modern post-communist countries economy present type of the enterprises integration in the form of the agreement on joint. Such form is convenient for attraction of investors and association of the enterprises resources. It provides management of the partners project. The separate balance of joint activity where the resources enclosed in it which remain at the order of their owner are displayed is conducted. At the same time, the establishment of partner mutual relations at the vertical form of integration requires again to determine a role and powers of each group and a responsible post at the enterprise if they are somehow connected to established relations. Besides control systems of partners should be corresponded one another and allow an establishment of the formalized channels of information interchange and coordination of group activity.

V.V.Radaev (2003) suggests to allocate two basic forms of organizational structures of the enterprises: the enterprise and business. In the author’s opinion, in the last case the question is group of the enterprises which have formally independent position, but thus have the uniform control centre consolidating financial streams and determining a uniform strategic orientation of activity.

Along with creation of integration structures which provide the conclusion of a part of economic processes in limits of hierarchically constructed enterprise, in the market there are rather steady relations between the different enterprises independent in financial and legal attitudes. Such relations can be limited only to information interchange, and can be embodied in realization of agreements.

14

Partner relations arise between the enterprises which are not competitors. More often they are considered as means of new kinds’ development of industrial activity – as a rule, in what other partner is engaged. Partner relations can develop various ways. It can be internationalization (development of industrial activity of the enterprise at which it sets the new geographical markets), vertical integration (the enterprise sets areas of economic activities of suppliers and consumers) and diversification (development of the new areas which haven’t been connected directly with the basic manufacture).

Partner mutual relations and aspiration to support at the greatest possible level independence of each enterprise of the partner has led to occurrence of strategic alliances as new form of integration of the enterprises. So, alliances, in B.Garret’s and P.Djussozh's (1995) opinion, include the enterprises which in spite of the fact that they have been incorporated for achievement of overall aims, do not lose the strategic autonomy and stand up to their own interests. At the same time, the alliance, as against simple partner relations, should meet the certain conditions. So, the motivation of activity of an alliance should correspond to strategy of companies - partners, and inside an alliance it is necessary to accumulate knowledge and to exchange experience. Besides as against traditional kinds of integration structures and groups of the enterprises alliances cannot have special the legal form.

I considered that using such a form as enterprise alliances help to minimize risk of rider operation which now appeared in all post-communist countries economies.

As if within the frame of alliance a number of the independent enterprises combine in result frequently there is a presence of the several supervising centers which should make common decision concerning directions of realization of the project or joint development. Presence of many supervising centers also makes management of the alliance more complexity in comparison with the organization with usual hierarchical structure as even the fast decision of a problem question needs the consent of all partners.

One of features this alliance which needs to be taken into account during the management of changes is that interests and the purposes of the each enterprise contradict one to another more often. Other feature of alliances consists that one partner can strengthen the competitive advantages due to another. Also, as against merges and absorption, the important characteristic of alliances is turnover of the accepted strategic decisions therefore there is an instability and loss of efficiency.

I considered that alliance in not only form of enterprises combine. As you see on figure 7, strategic alliances only effective cooperation of enterprises which provide long-term interaction and achievement common setting strategic goals.

15

Each alliance in conditions of the competitive market environment should try to increase number of competitive advantages in the market, nevertheless strategy of alliances cause radical restructuring administrative practice. Now all strategic decisions should be accepted together with partners, and heads – to operate those processes which till now were not subject to the full control. Synergic effect from association of the enterprises requires carrying out of the special analysis as strong and weaknesses, and "distinctive opportunities " groups.

Asymmetry between partners of the alliance requires detailed consideration during realization of the integrated management as the problem of a competition between the enterprises in the given situation accepts the new form. Now it acts as rivalry within the framework of the alliance when competitive relations arise any more in the market of production. The question is a competition within the framework of the market of assets, which enterprises aspire to supervise, and the market of the profit which they would wish to redirect from an alliance to themselves. Nevertheless, such functioning of group will complicate managerial process. The centralized decision-making on distribution of group resources in most cases is necessary. This position coincides with the theory of economic authority.

So, the home market of the integrated group of the enterprises can be determined as system of deliveries which are carried out by separate branches and affiliated companies within the limits of a uniform macrostructure under the specific transfer prices. It can be generated in any macrostructure which unites set of branches and legal persons. A lot of operations which formally are market actually represent moving services within the limits of a uniform macrostructure. Thus the home market as assists maximization of incomes of group and achievement of the greater efficiency of its functioning, and represents one of mechanisms of integration of the separate enterprises.

During last times many researchers mark, that traditional hierarchical and bureaucratic forms of the organization and management in most cases do not meet the increased requirements to the modern enterprises concerning their ability to fast changes, training and modernization. At the same time, in the countries with the advanced market economy the organizational structure of the enterprises significally changes. It is connected first of all to radical and radical reorganization of business processes which occurs in conditions of introduction of the newest information and communication technologies.

Generalizing and predicting tendencies of organizational development, I can allocated with such features of the organizations of the future: integration; automation and development of the personnel instead of rationalization of work and structure of the organization; network creation; demanagement; destructurization; information; virtualization and socialization. The

16

designated tendencies, in turn, occurred in a forms of associations of the enterprises and new forms of the organization which provide distribution of manufacturing to suppliers and end users.

Simultaneously with it there is a transformation of the corporate organization by washing out of organizational borders, creations of the joint enterprises to competitors and activization of work with subcontractors and transition to new scientific model of management on which basis integration processes in the companies, their association with the help of global information systems lay, strategic alliances and other unions of different types.

So, the modern enterprises not simply become more flexible, they turn to virtual systems of networks, in the sum of contracts between suppliers, experts, consumers and a society as a whole. The organizations become more "invisible" and "imperceptible" then all other structures, and relations become sources of authority. Competitive struggle is conducted more between the separate enterprises, and between circuits of deliveries, networks and different type combinations of logistical information resources.

Nevertheless, it is necessary to agree with P.F.Druker's (1999) idea which denies effectiveness of concepts of organizational structure absence and the end of hierarchies as in each organization there should be an indisputable authority which will make the final decision and to which other employees will submit. As in a situation of increase of risk with which in any case each enterprise faces, from clearness of a management decision depends all its future.

Ways of overcoming of the specified contradiction have been offered by G.Mintsberg (1989), which has considered features of narrow horizontal specialization and selective decentralization in limits adhocratic structures of management (is high organic structures with insignificant formalization of behavior). The adhocratic enterprises organizational structure of management is represented as several circles which display consistently from the center of the top management, headquarters of the company, managers, experts and workers. That is in the organization of such type there is as though a reference point from which the structure misses around on radial directions. The circle in this case is a symbol of that all efforts of workers are directed on achievement of the strategic purposes of the enterprise. With the help of adhocraty association of matrix structures with simultaneous application of functional and market principles of the enterprises association and their divisions in group is possible.

If at use of matrix structures of management the enterprise can be presented as two-dimensional model, at addition to these two measurements (as a rule, to resources and results) still additional variables, such as territory, the market and the consumer, it can be characterized as multivariate model. More often they refer to as "the enterprise in the enterprise", etc. The basis of the multivariate company is the independent working group which receives in most cases the

17

status of the center of the profit, and on occasion acts as the independent company. The main advantage of the multivariate approach is the maximal rapprochement of the manufacturer and the consumer that allows to satisfy most effectively inquiries of the last.

Association of the enterprises in a network allows to connect the resources, capacities, to expand a share of the market. The network differs from the market that the economic exchange inside a network will be carried out on other base, compared with economic transactions in the market. We can point main reasons to develop network structures: requirement for fast training as in areas where the knowledge is absent-minded, innovations depend on association of efforts of different types of the organizations; presence of interorganizational systems of the information and the communications; low efficiency of the standard of cooperation forms at the decision of challenges of economic activities in a combination to aspiration independent forms of work; financial benefits – the coalition of one enterprise with another opens before both opportunities of a choice which in the other case are inaccessible to each of them; distribution of risks and restriction of irrevocable charges; constant changes of an environment and necessity of adaptation of the companies for these changes; constant complication of industrial and commercial activity; increase of value of the factor of time; expansion of the company space.

Inspite of the fact that the network contain features of different organizational forms, they can unite elements of different management structures. The network organization can include elements of the functional form specialization, autonomy of divisional structure and an opportunity of redistribution of resources of the matrix organization.

It is necessary to mean, that the network organization differs not only the person, heterarchic organizational structure of coordination character, but also adequate organizational culture as a whole, including a principle of decentralized responsibility, high loyalty to partners and self-discipline, interactive competence with displacement of organizational attention from aspect of substantial sense for the benefit of social relations, from strategic - functional to communicative rationality of management and the organization. Rigid subject - objective communications in sphere of management break inevitably up and replaced with the communications having character of subject - subject relations. Actually network structure represents the compromise between growing charges on construction of the organization and aspiration to their minimization due to refusal of organizational structures as such. In fact at the formation of a network are formed around of one main enterprise or made out on the basis of alliances and cooperation between groups of the enterprises that satirizes necessity of systems’ improvement of the enterprises groups integrated management.

18

4. Conclusion

I close with a few remarks about industry transformation in a post communist country. Modern conditions of market competition strengthening in all markets, presence of the world economics clasterization, characterized by increasing in quantity and versions of the enterprises associations, growth of business partnership’s volumes and logistical networks integration, have caused necessity of industry transformation. For the post-communist countries one of the main problems is transformation of the big industrial complexes (partly oriented on military purposes). This can be provided by creation and introduction in activity practice appropriate effective forms of the enterprises group association.

There is a need of adequate approaches formation concerning transition to the new scientific model of management in which basis integration processes in the enterprises strategic groups lay.

To find solution of the specified problem, on the basis of studying tendencies of h world economic development and industrial development in Ukraine the variety of the enterprises association forms is established, the typology of the enterprises groups is developed, conditions and restrictions of conducting the interconnected activity for each of types of groups are determined, existing approaches to the management organization by process of transformations are generalized.

Appendix A: Industry development analyses.

Figure1. Inflation influence in Ukraine economy.

19

Source NBU Annual Report

Figure2. Industrial corporate finance.

Source NBU Annual Report

Figure 3. Industrial output

20

Source NBU Annual Report

Figure 4. Industrial investment

Source NBU Annual Report

Figure 5. Basic industrial indices

21

Source NBU Annual Report

Figure 6. The share of industries in TGO

Source NBU Annual Report

Appendix B. Analyses of approaches to enterprise common activity

22

Table 1 Indexes of the group enterprise effectiveness distributed by level of diversification. (generalized by Gysakov, V. (2005))

Index and its content Dynamic of indexProfitability of assets

Shows profitability of group consolidated assets and level of consolidated profit on each asset valueAverage level on concentrated companies was higher in analyzed period (22% against 9% in wide diversified). But the companies with middle level of diversification are close to strategic groups which use concentrated models of business (17%). Beside this middle diversified companies in 2002 had better result than concentrated companies. *

Labor productivitySows profit company on each employee а

Results show big differences in this point: for concentrated companies profit per employee is $86 000 and for diversify companies in only $ 29 000.). And middle diversify companies have $ 49 000..

Sales profitabilityThe most informative index of efficiency, include factors of efficiency of personnel and assets.

The most efficiency is integrate companies (19%), than goes middle diversified (16%) and high diversified become the last (10%) Анализ показывает наиболее высокую эффективность

Market value of the companyCharacterize extent of trust to company on market

Was discovered small preferences of concentrated companies (157% market value on sales), middle diversified (134%) and wide diversified become the last (130%)

* distribution on column: concentrated, middle diversification, wide diversification

Table 2.`The analysis of efficiency of formation(education) of the integrated structures

23

SourceYear of the publication

The country of the initiator

Frameworks of researchResult

Success

Neutrally

Failure

Estimation of result on a sales volume

Jansen/Koerner 2000 Germany

103 intercountry and national groups 1994 – 1999

44 %

Estimation of result on a degree of achievement of the declared purposesBooz-Allen/Hamilton

1998 The world 150 integration structures 34 %

Estimation of result on increase of cost of the integrated structureJansen/Koerner 2000 Germany /

the world103 integrated in 1994 – 1999 of structures 24 %

McKinsey 2000 The world 507 merges and absorption and 1996-1998. 50 %

KPMG 2000 The world 107 from 700 integration structures of 1996-1998. 16 % 30 % 54 %

Kearney A.T. 1999

America, Europe, Asia

115 merges and absorption in 1993-1996. 58 %

Appendix C

24

Figure 7. The content and classification of the allianses

25

References

[1] Andronov, V.V., 2003 “Corporate management in modern economic relations.” Moscow, Publishing “Economy”.

[2] Bamford J., Gomes-Casseres B and. Robinson M., 2003. “Mastering Alliance Strategy - Comprehensive Guide to Design” Management and Organization Wiley

[3] Beer Michael and Nohria Nitin, 2002. “Breaking the Code of Change” HBS Working Knowledge http://www.management.org.ua

[4] Boyette G. and Boyette J.T., 2002. “ The best ideas of change management masters’” http://www.management.org.ua

[5] Carucci Ron A. and Pasmore William, 2003. “Driving Change Through Advocacy” Mercer Management Journal, Issue 14

[6] Dratseva, E.L. and Libman A.M, 2000. “Problems of globalization and integration of international business and its influence on Russian economy.” Management in Russia and abroad, 6, p34-42.

[7] Dratseva, E.L. and Libman A.M, 2001. “Problems of determination and classification of integrated corporate structure.” Management in Russia and abroad, 6, p12-21.

[8] Drucker, Peter F., 1999 “Management Challenges for the 21st Century”, Harper Business,1999

[9] Dutra Ana and de Grandpre Lili, 2002, “Organizational Transformation: Bringing the Great Growth Strategy to Life”, Mercer Management Journal, Issue 13

[10] Ivanova, T.U. and Prihodko, V.I., 2004 “The theory of organization.” St. Petersburg

[11] Feldman, A.B., 1999. “Management of corporate capital.” Moscow, Financial Academy by Government of Russia Federation.

[12] Hammer, M., and J. Champy. 1994.”Reengineering the Corporation: A Manifesto for Business Revolution”. HarperBusiness, New York

[13] Gazin, G. and Minakov, D., 2006 “The science of absorbation”. http://www.mckinsey.com/locations/moscow/russianquarterly/authcontent/ma.asp.

[14] Garrette, Bernard şi Pierre Dussauge, 1995 „Les Strategies d’Alliance”, Les Editionsd’Organisation

[15] Gorbynov, A.R., 2002 “Satellite companies, branches and holdings. Methodical recommendations. Organizational structures. Consulting.” Moscow, Globe.

[16] Gysakov, V., 2005 “Concentrated elixir of effectiveness” http://www.altrc.ru/cgi-

26

bin/dforum/forum.pl?msg=86

[17] Kanter, Rosabeth M. "When Giants Discover the Disadvantaged." In Business Solutions for the Global Poor: Creating Social and Economic Value, edited by V. Kasturi Rangan, John A. Quelch, Gustavo Herrero and Brooke Barton. John Wiley & Sons, Inc., 2007.

[18] Kanter, R. M. "Small Business and Economic Growth." In The Rising Tide, edited by J. J. Jasinowski. New York: Wiley, 1998.

[19] Kanter, Rosabeth M. "When Giants Discover the Disadvantaged: Managerial Challenges and Success Factors in Building Capacity to Serve Under-served Markets." HBS Global Poverty Conference, December, 2005.

[20] Robert S. Kaplan and David P. Norton, 2000. “The Strategy-Focused Organization” Harvard Business School Press

[21] Merger: “Practical, but not “fashionable”?” http://www.zn.kiev.ua/ /nn/show/420/36857/

[22] Nadler David and Slywotzky Adrian, 2004. “Management as Parallel Processing [23] When strategy, organization, and change management converge” Mercer

Management Journal 16[24] Radaev, V.V., 2003 “Sociology of markets: formation of new direction”. Moscow,

High School of Economics.

[25] Ravasi Davide and Schultz Majken, 2004. “Practicing Identity: A Process Model of Identity Change Management in Organizations” Working Paper, University of Bocconi

[26] Rydik, N.B., 2005. “Conglomerative merger and absorbation”. Moscow, Delo.

[27] Sandberg, Kirsten D., 2002 “The Return of Reengineering for Recessionary Times (HBS Working Knowledge” http:///www.management.com.ua

[28] Silverman, B.S., 1999. “Technological Resources and the Direction of Corporate Diversification: Toward an Integration of the Resource-Based View and Transaction Cost Economics,” Management Science, 45(8), pp. 1109-1124

[29] Tarelkina, T. “Management of holding.” // http:\www.bkg.ru

[30] Ymantsev, G.V., 2002. “Holding companies and industrial-financial groups in modern economy.” Kyiv, Vira-R.

[31] Vladimirova, I.G, 1999 “Organizational forms of company integration.” Management in Russia and abroad, 6, p18-25.

[32] “When and why to create alliances”, 2003. Invest-Newspaper, 48, p26–34

27