IN SEARCH OF EXCELLENCE - PART 1

The Romanian business model: Poor company, rich owner

Bucharest (2005) – When Peters and Waterman wrote their bestselling management book "In search of Excellence" in the early eighties, the American economy was in a slump and especially Japanese imports were threatening the very existence of the once so mighty American corporations. In their book, Peters and Waterman have examined more than 60 American companies in order to find out what made them (IBM, P&G, Bechtel, Johnson & Johnson, etcetera) so successful over a long period of time. With Romania at the doorstep of EU accession, it seems an interesting idea to me to see in how far Romanian companies are ready for increased competition, using the very attributes of excellence that Peters c.s. has found in his research. In order to create a level playing field I want to start with an outline of the Romanian business model as I have found it over the years that I have been doing business in Romania.

Last year, a friend of mine who has his own business, told me that he won a first price at the yearly contest organized by the Bucharest Chamber of Commerce for the best small and medium sized company in his sector. I asked him, what does this mean to you? His response was rather insightful: "It means I am the only s...paying all his taxes!" This practice is what I call the Romanian business model. Romanian bosses are not motivated by maximizing their profits, as a Western company would be. They are mainly interested in increasing their personal wealth.

One element is the wide-spread use of 'black' sales. Money that never enters the company and for which no taxes (no VAT, no profit tax) are paid. Another issue is the wide-spread practices of not paying taxes (in due time or not at all). This applies to VAT payable to the State, but also payroll taxes or profit taxes. Finally, there is the practice that many companies carry operational costs that are directly linked to the personal life of the owner/manager but have no link with the well-being of the company (luxury cars!).

Does this mean the Romanian entrepreneur/shareholder is not a "homo economicus", like his counterparts in the West? You bet he is. He is only using the present economic and legal situation in Romania to his own advantage.

I am not interested in the moral side of this practice. Of course, it has serious consequences for the competitiveness of these companies, the growth of the business, and ultimately the health of the Romanian economy as such. But that is not the scope of this article. I believe the Romanian entrepreneur/shareholder is just as much a "homo economicus" as his foreign counterparts and as such will adapt to the changes in the Romanian business landscape that are about to happen. Because one thing is clear: The golden days of the Romanian business model are soon over... Why is that? First of all, due the changes in the Fiscal Code, in particular the introduction of the flat tax and the high prison sentences for tax evasion, more and more companies will be forced to pay their taxes. In other words, tax evasion will become more difficult. This in itself will bring hundreds, if not thousands of Romanian companies on the brink of bankruptcy, as they have never learnt to compete in an economy in which fiscal laws were actually applied. Secondly, EU accession in 2007/2008 will further increase competitive pressures, as goods from other EU countries will start to flood into the country. Goods, and to a lesser extent services, that will be both cheaper and of better quality. The result will be equally devastating for most Romanian companies.

By and large, Romanian entrepreneurs/shareholders have two options. They can continue to do business the way they have always done it; skim excess cash flow from the company until the company most probably goes bankrupt. The second option is to fundamentally change the way they conduct their business. This means creating a finance and accounting department based on Romanian and/or international accounting standards, creating a clear and coherent business strategy that will give them a sustainable competitive advantage, investing in upgrading the company, divesting non-core activities, hiring well paid people, etcetera. And even then, not all companies will be able to survive on their own and will need a (foreign) strategic partner to do so.

I think at least some Romanian entrepreneurs will chose the second option. Why? Am I an incurable optimist? I am, but I also think Romanian entrepreneurs are "homo economicus". Choosing the first option means capital destruction and will leave them in the end with less money. The second option will mean first of all that entrepreneurs have to realize they have a problem (awareness). For the majority of them, this will be one bridge too far, as their success till now was based on the very system that has made them rich men. Secondly, they will have to look for professional support, most likely an outside consultant, who can help them sort things out and make the right decisions. Thirdly, they will have to invest into the company in order to make it more competitive and as a consequence accept a lower cash inflow in the short-to-middle term.

In all honesty, most company owners will not be able to make this turn, as it goes against everything that made them into what they are right now. And even if the owner goes through all these steps, that still doesn't guarantee that he will actually survive in the mid-to-long term. It might be, after all, "too little, too late". However, there is still a chance to turn some companies around, but time is running out.....

***

Author: Peter Jansen, Managing Partner of “Bucharest Consulting Group”.

Bucharest Consulting Group offers consultancy services in the field of strategy and general management to local and international medium-sized and large companies in Romania.

For more information contact:

Peter Jansen at