Last updated on January 19, 2012
Thompson Strickland, one of the respected writers on strategic management, once wrote that for a company to qualify as excellently managed, it must exhibit excellent execution of an excellent strategy. It is against this canvas that I wish to paint an abstract on the realisation of the need for strategic thinking and planning in relation to SoEs (State owned Enterprises) vis-à-vis privatisation.
The establishment of most SoEs was not as a result of deliberate desire to conduct business. The driving force behind their establishment was a movement towards self-reliance. This was increasingly important during Ian Smith’s Unilateral Declaration of Independence (UDI). One very obvious development from this era is the Tanzania-Zambia Pipeline (TAZAMA) and Tanzania-Zambia Railways (TAZARA).
Self-reliance therefore required that there be a broad based array of companies to make the country almost self contained. There was Mansa Batteries in Northern Province, Luangwa Industries in Eastern Province, Mwinilunga Canneries in North-Western, Kapiri Glass in Central Province, Nitrogen Chemicals and Kafue Textiles in Lusaka Province and Livingstone Motor Assemblers in Southern Province. The structure of some of these firms was such that they were integrated. NCZ uses coal gasification of coal to yield ammonia gas a key base for its products. This coal came from Maamba Collieries. Fertiliser so manufactured was used in agriculture for crops such as maize for the milling companies and cotton for the textile industry. Products such as ammonium nitrate for explosives was used in the mines as well as sulphuric acid, all produced at NCZ.
The creation of employment was also a motivating factor for the setup of industry. At the time it was not important to consider the optimal levels of employment. In the event of a company making a loss, Government would subsidise through ZIMCO Limited, the holding company. The economy then was monopolistic hence there was no threat from new players in the market. Strategic management was not a key issue therefore. Down the corporate road, management became relaxed and the quality of the product/service reduced. The customer had no alternative and so did not complain. The black market developed and thrived providing smuggled goods creating a parallel unofficial alternative to the customer.
The loss making parastatals did not contribute to the Treasury, they instead helped deplete it through subsidies. For those companies which made a profit, proceeds were used to finance the loss making ones. However, this could not go on forever. Lack of funds meant that recapitalisation was a problem. Companies could not get the necessary upgrades of equipment, send staff for training, usually abroad as plants were country specific. Production which ultimately drives the economy was affected. However, the over employment was maintained and companies remained inefficient.
The change of government in 1991 brought in a liberalised economy. Anyone who wanted to conduct business could do so provided they adhered to the set conditions. Institutions such as the Zambia Privatisation Agency were created to divest Government interest in SoEs. Government made a decision that they should remove themselves from the business of business.
Most people have understood privatisation to mean outright sale when in reality there are about sixteen methods of privatisation, to mention a few; lease or management contract, dilution of shares held by government by offer of additional shares, concession and public offering of shares. It is common to hear people talk of how company x was sold for a song, etc. A starting point to understanding the process is an appreciation of the situation as discussed already, that is the origins and state of these parastatals or SoEs.
Most investors have vast experience in the sectors they have acquired SoEs. They operate businesses strategically. Management in the current world economy can not afford to lag behind and involves a continuous process of change. Privatised SoEs therefore require strategic management, which is the management of change. The process of strategic management consists of five core managerial tasks which are not isolated from each other:-
- Decisions on what business a company will be in and hence the vision where the company wants to be results in the creation of purpose which gives the long-term path of the company.
- The strategic mission/vision has to be assessed to determine the most critical issues the business must address to achieve the vision/mission.
- A strategy then has to be crafted to achieve the desired result. How exactly will the resources be allocated in the right places.
- The strategy has to be effectively and efficiently implemented by involving from the beginning of the process, parties that will help carry out the strategy.
- The results are therefore evaluated making adjustments on a continuous basis.
It follows, therefore, that when an investor conducts his due-diligence of a company to be privatised he first looks at how the company will fit into his plans as the first step of strategic management. Orientation of the business may be altered in his plan. He may choose to do away with certain sections of the business, improve on some or add new areas of business. Most investors shy away from taking over social assets. The rationale is that they are masters of a particular field and cannot concern themselves with management of what they do not know. Key to strategic management is to identify a competitive strength, that which you do well, and use it to attain competitive advantage over your competitors. The social asset can, however, also be leased out to an experienced operator. For example a guest lodge can be given to an experienced firm in the hospitality business to run on behalf of the investor. This allows the investor to concentrate on the core business.
Most investors have praised Zambian staff in parastatals earmarked for privatisation. They have expressed surprise at how the staff are able to operate in usually very difficult circumstances. One major noticeable handicap has been the failure by management to make decisions that will chart the course for these companies. This has been attributed to the already discussed backdrop of a socialist and monopolistic economy where there was no motivation to excel in business.
The investor with his different and usually seasoned background will definitely have different expectations from the existing SoEs. A private investor could be seen as a redeemer who is going to pay a premium for the company and transform it for the better. Whilst agreeing to transform the business, the investor is tasked with grooming a viable business. This involves curving the company into a very efficient unit that will be strategically sound, that is with the right staffing levels, acceptable remuneration and quality of work life, quality product/service, good corporate citizen status and a leader in the industry of operation. To achieve this, usually, the company has to be recapitalised, reequipped and systems replaced or improved upon. This costs money and most investors would rather invest into businesses than advance a huge payment for the company. Employment is likely to be created in support or spill-over businesses.
The value of the transaction therefore ought to be a balancing act of what is advanced in form of payment (the purchase consideration) and what is to be invested by way of equipment, staff training, quality of the product, liabilities assumed and recapitalisation. The business has to survive in a competitive environment, competing for funding, creating value for the owners and giving back to the community in which it operates to gain the elusive goodwill. Later, payoffs will manifest in form of a company which will pay taxes, remunerate the scaled down workers well, etc. The business is just that, a business and not a charity.
As Michael E. Porter sums it all up, The essence of formulating competitive strategy is relating a company to its environment …the best strategy for a given firm is ultimately a unique construction reflecting its particular circumstances.