Organizational Change in Post-Communist Europe

Management and Transformation in the Czech Republic

Ed Clark, Anna Soulsby

• Publisher: Taylor & Francis
• Year: 2005
• eBook ISBN: 9781134630318
• Edition: 1
• Topic: Business
• Subtopic: Business General
• Index: Business

This book provides a unique and detailed examination of the complex processes of transformation in former state-owned enterprises in the Czech Republic. Drawing on in-depth case studies of organizational transformation, the authors adopt a social-institutionalist approach to the study of organizational change, applying it in order to develop an explanation of organizational restructuring and management redefinition during the early transition period of 1990-1996. In particular, they highlight how these processes have been shaped by continuing historical state-socialist legacies and the powerful role played by senior managers in their efforts to fashion the new privatized organizations in their own interests.

Part I

Backgrounds and Contexts

1

Studying Organization and Management Change in the Czech Republic

The Czech Transition in Perspective

The changes that have spread across Central and Eastern Europe (CEE) since 1989 have been as dramatic as they have been far-reaching. They raise so many practical issues at so many levels and in so many spheres of social life that the degree of interest shown by social scientists in researching the region during the early post-communist period can come as no surprise. In the former communist countries, they see opportunities for examining social change in all its richness. In a situation where the scope for research is so wide, it is our impression that social scientific interest in the socio-economic transition has been overwhelmingly dominated, in both Central and Eastern European and Western social science, by the politics and the economics of the post-communist transformation. Moreover, this concern has been played out especially at the macro level, as researchers have examined the transformation of political systems, structures and processes from the authoritarian, centralized, totalitarianism of state socialism, to the democratic, devolved, pluralism associated with Western-style societies; or considered the changes involved in the move from hierarchical, centralized, state-ownership systems of command planning, to an economy which is essentially decentralized, market-driven and founded on private property relations.

Within this context, the social transition in the Czech Republic has been of particular interest. As part of the Czechoslovak Socialist Republic (ČSSR), it approached the post-communist era from an extreme form of state socialism, having endured many years of strong, autocratic rule by a disliked Communist Party, over which time the command economy had remained fairly obdurate to market-oriented changes. However, it has rapidly developed (or redeveloped) democratic political institutions, and, alone among the former communist nations in Europe, has up to and following the June 1996 elections resisted any temptation to revive the political ambitions of the successor parties of the Communist Party of Czechoslovakia (KSČ). Equally irrefutable has been the nation’s commitment to a transition towards a liberal market economy, having accepted the application of stringent economic policies, and the adoption of radical programmes of mass privatization, at the centre of which has been the much debated voucher system. It is our contention that any explanation of social and economic processes in the ‘post-communist’ period is necessarily predicated upon a sound understanding of historical influences and legacies. The book therefore devotes considerable space and argument to the consideration of Czechoslovak state socialism in the 1980s, and the various processes of socio-economic and institutional development over the forty-one years of communism in the country.

However, history goes back and then back some more, and it is difficult to avoid being caught in an infinite historical regress in the ideal pursuit of comprehensive social scientific explanation. To remedy this tendency we have defined the limits of historical detail as 1948, when, in February, the KSČ assumed control over the political and economic levers of society—which story we pick up in Chapter 3. Czech culture and traditions do have a much longer chronology, and, in contrast to their Central European neighbours, the Czech lands were not newcomers to the practices of democracy and market economics. It is therefore relevant to appreciate the broader historical context in which Czech communism was rooted.¹

The Czech Republic in the 1990s is a small nation of 10.3 million people, and its situation at the very heart of Europe has been defining of its history, as it will be of its future. It comprises two historical parts: Bohemia forms the western half of the country and abuts the new enlarged Germany to the west, Poland to the north and Austria to the south; Moravia, the eastern half, borders Poland to the north Austria to the south and Slovakia to the east. Its immediate history was closely tied up with Slovakia, with which, for most of the previous three-quarters of a century, it had constituted the single state of Czechoslovakia. The latter country was established as recently as 1918, when it was formed from the devastation of the First World War, until which time it had been a significant geographical region under the control of the Habsburg dynasty, rulers of the Austro-Hungarian Empire. Following struggles in the early seventeenth century, the Bohemian ruling class, its national leaders and cultural representatives, were eliminated, expropriated or exiled, and Czech culture and nationhood were subsumed under, and subordinated to, the monarchical authority emanating from Vienna.

During the nineteenth century, Czech industry developed rapidly, especially in the region bordering Germany, and by the end of the century the Czech lands had become one of the most advanced industrial areas of the Austro-Hungarian Empire, with a ready market for its products throughout the rest of the empire (Polišenský, 1947; Teichová, 1988, p. 17).

The industries of the Czech lands were the major supplier of industrial products to a far-flung empire with a population of 60 million. The industries of the region prospered in this large market protected by formidable tariff barriers.

(Klein, 1979, p. 147)

Klein goes on to describe the important growth of the Czech coal, steel, textiles, brewing and sugar-refining industries, and the would-be nation’s comparative advantages in the literacy and general educational standards of the region.

Czechoslovakia inherited these industrial and economic legacies on its legal establishment in November 1918. Tomáš G.Masaryk was elected the first president of the new republic, and he and his provisional government set about planning a constitutional democracy, with a strong parliament as the sovereign power. These arrangements—based on a two-house, elected National Assembly—were consolidated into the 1920 constitution of the First Republic. In addition to the Czechs and Slovaks, the newly defined boundaries included substantial minorities of Germans in the western and northern Bohemian region, Hungarians in southern Slovakia, Ruthenians near the eastern borders and Poles in Silesia (see, for example, Wiskemann, 1967; Anderle, 1979). All minorities, including the Jewish community, were ascribed social and civil rights to an enlightened degree for the time. Twenty years of political democracy and continuing economic development were brought to an abrupt end in 1938, when the growth of intense nationalism in Germany spilt over into territorial claims by Hitler on the German-speaking parts of Sudeten Czechoslovakia. The failure of France and Britain to support the small democracy, symbolized by the so-called Munich Agreement, ultimately paved the way for the military invasion in March 1939, when Bohemia and Moravia were overrun by German troops. Thereafter, the Czech lands were brought into the German Reich as a protectorate, and their natural and industrial resources were used to good effect in supplying the German war machine;² meanwhile, a puppet government loyal to Berlin was established in Slovakia (e.g. Seton-Watson, 1956, pp. 70ff; Taborsky, 1979).

Following liberation, an interim post-war ‘National Front’ government was established under Edvard Beneš, who had succeeded Masaryk on his retirement from the presidency in 1935, but had spent the war years in exile in London. The new government was based on principles resolved at a convention held in April 1945 in the Slovak town of Košice, when Beneš’s London-based political exiles met Czechoslovak communists who had spent periods of the war in Moscow. In fact, dialogue between the two groups had taken place since 1941, though the common ‘Košice Programme’ for the reconstruction of post-war Czechoslovakia was signed on Czechoslovak territory (see Kaser and Zieliński, 1970; Hasager, 1986, p. 19). Beneš included communists and their sympathizers in significant positions in his National Front government, while limiting the scope of political pluralism. The Košice agreement included an extensive plan to nationalize major industries, including banking and finance. Starting in September 1945 and going through a number of phases, by early 1948 over 80 per cent of industrial assets had been confiscated (especially from Germans and Hungarians), come under national administration or passed into public ownership—these accounted for virtually all enterprises with more than fifty employees (Hasager, 1986, p. 25). Democratic institutions were reintroduced, and in the first post-war democratic elections of 1946, the Communist Party attracted 38 per cent of the votes cast, and its leader, Klement Gottwald, became Prime Minister. But, beyond their formal democratic success, the communists had also constructed a very solid grass-roots organization: they were very strong in local government, in the police force, in the trade unions and in workplaces, where they established armed worker militia units (the milice) to ‘protect’ the factories. Facing pressure from Moscow to consolidate the political position of the party, and in the face of doubts about its possible success in the next elections, in February 1948 Gottwald made an effective move to seize power and to eliminate the influence of political opposition (see, for example, Seton-Watson, 1960, pp. 248ff; Taborsky, 1979; Suda, 1980; Teichová, 1988; Kaplan, 1989).

The Czechoslovak economy had undoubtedly suffered during the war, particularly in agriculture, light engineering and consumer goods, which were sacrificed in favour of the contribution of heavy engineering to the German war effort. Many factories were selected as targets for allied bombing in the latter stages of the conflict, but it is probable that Czechoslovak industry suffered far less than that of other European countries, and some parts of it may actually have been enhanced through German war investments (Kieżun, 1991, p. 270). Moreover, after the war, industry recovered far more quickly than most comparable countries. But the biases that had been introduced into the industrial structure—particularly in the development of heavy and mechanical engineering—were compatible with the economic plans of the Communist Party, based as they were on extensive, Stalinist, industrialization. In Chapter 3 we explore the dominant features of the resulting economic and industrial structure during the communist era, in preparation for our more extensive analysis of the management and organization of manufacturing enterprises both during and after that period.

The Four Enterprises

The four former state enterprises that form the location of the research reported in the book were all, in one way or another, born out of political motivation to build a heavy mechanical engineering base to the post-war Czechoslovak economy (see Table 1.1, p. 8). Each has its own unique history, yet all operated under broadly the same institutional conditions that developed under state socialism. Drawing upon both secondary sources, including internal enterprise documents, and the memories of the managers whom we interviewed, we can put together pictures of the enterprises, describing how they were influenced by the flows of history. The economic development of the enterprises has to be understood in the context of the principles and institutions of central planning, which are discussed more expansively in Chapter 3.

Table 1.1 The four Czech enterprises

The decision to build a mechanical engineering and metallurgical plant at Volna was taken soon after the Communist Party assumed power in Czecho-slovakia in February 1948. Although the hills around Volna had been a traditional site for iron-working, which went back to the fourteenth century, these resources had long ago been considered inadequate for modern metallurgical production with its huge raw material requirements. The development of Volnské Strojírny a Slévárny (or Vols, for short) was therefore essentially a political decision, resulting from the need to develop heavy and military engineering quickly and cheaply to respond to the international post-war situation, and its location was based on social reasoning, to bring skilled, industrial employment to a rural region which had high levels of unemployment and a relatively low standard of living.

Starting the construction in 1949, Vols was inaugurated as a state-owned enterprise (národní podnik) and produced its earliest steel in the summer of 1951. The first industrial machines were manufactured in 1953, in the stillunfinished plant. For the near-forty years of its existence under state socialism, Vols produced metallurgical products, including steel castings of various quality and forgings of diverse weights. In its mechanical engineering activities, which use forgings and excess energy from metallurgical operations, Vols manufactured rolling mills—traditionally its most valuable product—and forming machines; the latter are in turn employed in the forging workshops. This production programme was of enormous importance to the ‘iron and steel concept’ (Renner, 1989, p. 21) of industrialization that dominated the Stalinist definition of socialist development (see Chapter 3). Vols’s industrial machinery contributed to the construction plans for Soviet military equipment such as tanks and armoured vehicles, and so enjoyed great exporting success to the socialist world. Likewise, its rolling mills, which enabled the mass production of wire and rails, were sold to developing nations of both the socialist and the non-socialist world, especially where, in the latter case, purchase was aided by politically inspired trade credits.

After 1958, Vols’s domestic markets were organized on its behalf by the lead enterprise in its industry, realizing state plans to expand particular industries or enterprises, and accounted for about 35 per cent of its production programme, while the remainder was exported primarily to socialist countries. Around 40 per cent of all output would be transported to the Soviet Union (its biggest customer); 6 per cent to other Council for Mutual Economic Assistance (CMEA) countries; 16 per cent to developing nations (like Iran, Iraq, India and Syria); and the remainder to the industrialized world. These exporting activities were facilitated by three state exporting organizations, each specializing in a different product line. Its commercial activities were straightforward, because, being based on centralized plans, all but the smallest proportion of its work was contracted for up to five-year periods, with some of the larger projects lasting even longer. These contracts were the main instruments for connecting with partners in the Soviet Union and the European socialist region.

Some 80 kilometres from the nearest city of any consequence, Volna in 1948 was a small, isolated village of 3500 inhabitants, whose lives were almost entirely linked with agricultural work. Since the arrival of Vols, this rural community has grown to 25,000 people, mostly in response to its expansion needs. The factory site of approximately 74 hectares is situated about 500 metres from the old village centre and dominates the south-western fringes of the town. On the cobbled track which leads to the factory gatehouse stands the statue of a socialist foundry worker, which, together with the heavy concrete symbol of Vols, is a strong iconic reminder of the important role of heavy industry in the communist bloc before 1989. The town itself is visibly divided into two architectural halves: the old centre gathers around a large square and a church, while, across a main road and behind the square, the apartment blocks of the great years of expansion point skywards, and the dull grey shopping, hotel and office facilities associated with the urban development extend blandly to the town limits. The size of the community, its relative isolation from cosmopolitan influence and the domination of the community by Vols, with its military connections, combined to give Volna the reputation of being a ‘communist town’, a stronghold in terms of values and ideology.

Vols was physically and socially connected to Volna in many ways (see Soulsby and Clark, 1995; Clark and Soulsby, 1998). Over the forty years of state socialism, the enterprise built many of the major social, cultural, accommodation and recreational facilities of Volna, and it also supplied, at a cost that was never calculated, hot water and energy that was surplus to production requirements. Vols provided kindergartens, crèches and holiday camps for employees’ children virtually free of charge. Recreation and sports facilities, including a first-class winter stadium for ice hockey, were subsidized, as were canteen and factory grocery shops, for which Vols paid staff wages and part of the cost of the food. Reflecting a special concern, foundry workers received priority in obtaining medical assistance, which was free for all employees. Vols built a cinema, and invested in a major cultural complex comprising a huge ballroom, a discotheque and a restaurant. All, in effect, were available to everyone who lived in Volna. Beside this complex stood the enterprise’s own hostel and hotel, which offered subsidized rooms for single workers, as well as comfortable apartments for visiting guests from the Communist Party. Vols owned blocks of apartments, which were rented to employees at subsidized prices and for which services and repairs were free. During the 1980s, Vols employed about 5600 of Volna’s inhabitants, so the enterprise’s tentacles reached into virtually every home in the region. So intertwined are the enterprise and the town that it is commonplace to hear phrases like ‘Volna is Vols’, and ‘the factory is our life and home’.

By virtue of its production activities, its ageing technology and its symbolic role in ‘socialist development’, in many ways the story of Vols is also that of the Czechoslovakia as told by economic historians. Its exports to the communist bloc were successful only at a price, which the central planning procedures and bureaucracy glossed over. Vols was a massive consumer of energy and raw materials which had to be imported, and the lack of central investment in modern technology and the resistance of the planners to real industrial and enterprise restructuring (particularly in the 1960s and 1980s) left Vols in dire straits after the events of 1989.

Unlike the other enterprises, Agstroj is located on the outskirts of a large city, which we have called Stroměsto. Since 1952, the enterprise has manufactured agricultural machinery of repute in the CEE region, which is also fairly well known elsewhere. However, its origins lie in other products, and in another era. It was the occupying German forces that first constructed an industrial plant on the present site in 1942 in order to make aeroplane engines to supply the war effort. In 1944, the site was abandoned following massive Anglo-American bombing raids which left only 10 to 15 per cent of the factory’s walls standing. The liberating Soviet army returned the factory to the post-war Czechoslovak state in 1946, and the Cyrillic messages that the Red Army left on the walls were ritualistically repainted throughout the communist era. In 1947, the renovated plant began production of textile machinery and various kinds of ball-bearing, which were to become its staple product and contribution to the major economic programme of Stalinist industrialization that followed th...

Table of contents

• Cover Page
• Half Title page
• Series Page
• Title Page
• Copyright Page
• Contents
• Figures
• Tables
• Preface and Acknowledgements
• Glossary of Terms
• Part I Backgrounds and Contexts
• 1 Studying Organization and Management Change in the Czech Republic
• 2 Institutions, Organizations and Management
• Part II Enterprise and Management Under State Socialism
• 3 The Czechoslovak State Socialist Economy
• 4 State Enterprises and Their Management in Czechoslovakia
• 5 Czechoslovak Management and Organization The Historical Inheritance
• Part III The Emergence of Post-Communist Management
• 6 The Post-Communist Context of Organizational Transformation
• 7 Management, Enterprises and Institutional Change
• 8 Continuity and Inertia in Enterprise Transition
• 9 The Redefining of Czech Management and Enterprise
• Part IV Conclusions
• 10 Economic Transformation As Institutional Change
• References
• Index