Alexander Shenkman System reforming of industrial enterprises

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					   UNIVERSITY OF LATVIA




    ALEXANDER I. SHENKMAN



System reforming of industrial
enterprises under the transitional
      economy conditions

      Summary of the Promotion Paper for
 promotion to the degree of Doctor of Economic


                   in economics branch -
        Latvian national economy




                   Riga - 2004
                                                       52

                                      Table of Contents
Introduction ................................................................................................. 53
1. Study of industry reforming experience in the conditions
   of the transition economy exemplified by Russia .................................                         60
   1.1. Analysis of the problems of development and reforming
        of industrial production in the conditions of the transition economy.......                          60
   1.2. Analysis of distinctive features of reforming
        structuring industries of economy .....................................................              61
   1.3. Problems of reforming the enterprises of structuring industries ........                             65
   1.4. Analysis of the development of enterprise reforming methods .........                                66
2. Strategic directions of reforming the industrial enterprise .................                             68
   2.1. Strategic analysis of system reforming directions .............................                      68
   2.2. Method of identifying structuring industries .....................................                   70
   2.3. Conceptual provisions of the system reforming methodology .........                                  71
   2.4. Study of the systems of complex diagnostics of the enterprise
        under the transition economy conditions ..........................................                   72
   2.5. Factor model of the influence of key parameters of the external and
        internal environment of the enterprise on the efficiency of its reforming.....                       74
   2.6. Characteristic features of anticrisis reforming of enterprises ............                          75
   2.7. Distinctive features of methodical techniques for the realization
        of the personnel and social components of reforms ...........................                        77
3. Methodology and experience of system reforming
   (as applied to a metallurgical enterprise) ..............................................                 78
   3.1. Model of effective reforming of the enterprise .................................                     78
   3.2. Adaptive methodology of organization planning ...............................                        81
   3.3. Optimization of the organizational and structural forms ...................                          82
   3.4. Reforming the system of financial management of the enterprise ......                                83
   3.5. Specific features of reforming the enterprises
        of the metallurgical industry of Latvia ..............................................               85
   3.6. Economic efficiency of system reforming ........................................                     87
Conclusions and suggestions ............................ , ......................................... 88
                                        53


Introduction
      Topicality of the study
      Transition to market relations, formation of commodity and financial
markets and competition have raised new rigid demands for the enterprises.
Such demands include restructuring, which in turn requires deep changes of the
structure and technology of production, business management and produce sale
control, and, in the long run, improves the financial and economic parameters
of the enterprises involved.
      Today restructuring of the industrial enterprise becomes an objective
necessity ensuring Us competitiveness and survival In the last decade
practically no leading corporation in the world has managed to avoid the risky
and painful procedure of complete restructuring. Delays or attempts to do
without serious changes have resulted in the disappearance of each fourth
company from the list of 500 leading corporations of the world.
      For Russian and Latvian enterprises the problems of restructuring are of
ever greater interest, which is caused not only by the need to adapt to the
quickly changing environment characteristic of foreign enterprises, but also by
general adaptation to market economy. The heads of industrial enterprises face
the problem of complete transformation of the organizational and business
system of their enterprises. It is still too early to speak of extensive and clearly
successful application of such restructuring projects, because even for the
professionally well-prepared managers the difficulty of this complex task
considerably exceeds all previous tasks familiar to them, which hinders
successful implementation of the said projects.
      The concept of "restructuring" as a process of complex change of the
enterprise operational methods and conditions in accordance with external
market conditions and the worked-out strategy for the market development
came into business usage of the countries with economies in transition
relatively recently.
      Restructuring presupposes system optimization of the enterprise functioning
to include a set of multidimensional and interconnected measures, processes,
methods, from complex diagnostics to reorganization of both the organizational
structure and the business processes on the basis of modern approaches to
management, including the methodology of quality management, re-engineering
of business processes, information technologies and systems, etc.
      The main feature of restructuring, different from separate current changes
in the production, capital or property structure, market outlets, etc. is that
restructuring is not a part of the daily business cycle of the enterprise.
      The problem of restructuring is especially pressing for the so-called
structuring industries making decisive contributions to the output of industrial
produce and forming the basis for the development of other industries.
                                           54

     For Latvian structuring industries the reform objective is still more
complicated by the problems of raw material resources - for example, by its
having no source of raw materials for metallurgy.
     Restructuring is an efficient market tool for successful business development
and a pledge of the economy modernization. Failures experienced by some
enterprises in the process of restructuring testify rather to its insufficiently balanced
and worked-out organization, than to its failure as a method.
     Proceeding from the above, the topicality of the study is proved by the
following facts:
      • The structuring industries form the basis of economy;
      • The structuring industries in the countries with their economy in
           transition at present face a number of specific problems, which, on
           the one hand, stem from the difficulties of the transitive period, and,
           on the other hand, are a consequence of non-optimum development of
           the transition economy;
      • The structuring industries account for only 14.9% of Latvian
           economy (the sphere of services, including transit services, making
           more than 70%); metallurgy, being an important structural industry,
           has practically no raw materials base; whereas it is these industries
           that define the directions and rate of Latvian economy development
           towards its market variant;
      • Adaptive system reforming is one of the main effective mechanisms
           for economy modernization.
      The object of the present research was the methodology of system
reforming of the leading enterprises in the structuring industries of transition
economy countries, and, first of all, the methods of corporate strategic reforms.
      The subject of research was the formation and realization of the programs
for reforming the leading enterprises, including such important aspects as anti-
crisis monitoring; complex diagnostics of the enterprise (not only during its
reforming, but also as a continuous precautionary measure under complex
conditions of transitive economy development); adaptive organizational
structures, optimized industrial and administrative business processes, etc.

     Aim of research
     The aim of the research is to develop methodologies and models for
reforming enterprises taking into account the following aspects:
     • Importance of the development of enterprises belonging to structuring
         industries under the transition economy conditions;
     • Specific features of Latvian industry development, including the
         presence / absence of sources of raw materials, competitive environment
         (for Latvian metallurgy - absence of internal competition), etc.
     • Necessity to take into account social factors in the course of reform
         procedures;
     • System approach when forming and realizing the programs of reforms.
                                        55


     The principal tasks of the research include:
     •    Study of the basic problems of industrial enterprises development;
     •    Analysis and classification of the structuring industries forming
          economies in transition and the factors influencing their development;
     •    Study of specific features of the functioning of Latvian structuring
          industries;
     •    Study, systematizing and ranking of typical problems encountered in
          the course of development and activity of structuring industries and
          their constituent enterprises;
     •    Formulation and substantiation of principal directions for further
          development of structuring industries, particularly stressing the
          importance of system reforms of their enterprises;
     •    Study of theory and practice of system reforming in structuring
          industries;
     •    Identification and analysis of major factors of the transition economy
          affecting the enterprise reform strategy;
     •    Development of methods and models for system reforming of
          enterprises structured by tasks, stages and directions;
     •    Identification and analysis of specific restrictions and requirements to
          reforming the enterprises forming the structuring industries of Latvia;
     •    Realization of the basic methodologies applied to the leading
          metallurgical enterprises of Russia and Latvia and analysis of the
          efficiency of this realization.

     The basic methods of research include:
     •    statistical methods of data processing;
     •    expert analysis of the importance of the relevant factors;
     •    factor analysis;
     •    mathematical modeling;
     •    simulation modeling of different development scenarios.

     Grounds for research
     Theoretical and methodological basis of the research is formed by the works
of foreign and domestic scientists and practicians in the field of reforms of
enterprises and companies and transition economy problems. One should also
mention the works of such foreign experts in the field of reforming/restructuring as
D. Hay, D. Morris, A. Ufuah, N. Allan, A. Utterback, M. James, F. M. Scherer, J.Y.
Lin, J.B. Nugent, M. Dewatripont, G. Roland, Michael J. Crames, Andrew A.
Kress, Herbert S. Edelman and others, and also such Russian experts as V. D. Shapiro,
V. N. Trenev, A. B. Idrisov and many others. Of considerable interest is the
experience of such leading consulting companies as "BIG", "Pro-invest consult",
"Noncommercial foundation for enterprise restructuring", "ROEL Consulting",
                                        56

"ARCO" (Agency for the restructuring of credit organizations) and others. We have
also analyzed the experience gained in restructuring basic structuring industries,
such as power industry (RAO UES), oil and gas industry (Gazprom, LUKoil, RAO
Rosneftegasstroi, etc.), transport, metallurgy, mechanical engineering, etc. There
has been studied the experience of reforming the leading enterprises of the above
industries.
      The study of theoretical and practical methods of reforms has allowed the
author to suggest a scientific hypothesis stated as follows: reforming of
enterprises and industries at the level of microeconomic approaches, with no
system-level interrelation with the development problems and tendencies of the
mezo- and macro-levels does not lead to sustainable development in a quickly
changing transition economy environment. Only a system-level approach
integrating the micro-, mezo and macro-levels of economy allows the industrial
enterprise to survive and develop to triumph over its competitors. Working at the
above hypothesis, the author has studied the features of the system-level approach
in Russia (priority of vertical integration in the structure of the enterprise) and
Latvia (priority of horizontal network integration of enterprises).

     Structure of the work
      The work consists of three chapters.
      In the first chapter the author studies the problems and tendencies of the
development of the leading industries of Russian transition economy and
suggests a hypothesis stating that system reforming is objectively necessary to
promote the development of market economy. The concept of a structural
industry is introduced and it is proved that orientation at the
development/reforming of leading enterprises of the structuring industries will
ensure economic growth of the economy as a whole. The problems of industrial
development and features of the structuring industries of Latvia are identified.
The scientific and practical works and methodologies in the field of reforms
analyzed by the author have allowed to draw the conclusion on the necessity of
creating adaptive methods and models with reference to structuring industries.
      Developing his hypothesis, in the second chapter the author investigates
strategic directions of reforms on the macro-, mezo- and microlevels on the
basis of the system-level approach and creates a number of methods and
models targeted at the leading enterprises of the structuring industries. The
enterprise diagnostics system is studied and a system of complex diagnostics
focused on the strategic aspects of the activity of the leading enterprises
forming the structuring industries is suggested. A factor model of the influence
of the key parameters of the enterprise external and internal environment on the
efficiency of its reform is constructed. An extended concept of anticrisis
management within the framework of reforms is formulated and methodical
procedures are suggested to minimize conflicts, stresses, social and personnel
difficulties in the course of reforms.
      In the third chapter the author interprets the hypothesis suggested giving a
case study of the Russian largest metallurgical enterprise - the Novolipetsk Iron &
                                        57

Steel Corporation and the sole metallurgical enterprise of Latvia - the joint-stock
company "Liepajas Metalurgs". The author has taken part in working out an
adaptive set of schemes for organizational designing, models of reform processes,
reform realization methods, typical stages of realizing the programs of reforms,
enterprise diagnostics schemes. The chapter shows the application of these methods
in the course of reforms carried out by the managers of the Novolipetsk Iron &
Steel Corporation which has allowed to radically change its strategy, aims of deve-
lopment, organizational structure, administrative and industrial business processes.
     The efficiency of the methods and models created with the participation of
the author is proved by actual data received by the Open Joint-stock company
"Novolipetsk Iron & Steel Corporation" {hereinafter referred to as OJSC
"NI&SCo") - the economic and industrial parameters grew from 5 up to
12 times, with the growth of the number of the employees and production
volume 1.2 and 1.34 times, correspondingly. OJSC "NI&SCo" is Russia's
largest manufacturer of sheet products producing about 8 million tons of high-
quality steel per year. The enterprise employs more than 46 thousand persons.
The company ranks 21 among the world leading steelmaking companies.
     The Latvian metallurgical enterprise forming the Joint-stock company
"Liepajas Metalurgs", being the only one of the type not only in Latvia, but also
in all the Baltic countries, has special restrictions and requirements to its
restructuring, as all other industries depend on its efficient functioning. The
situation is further complicated by the absence of sources of raw materials in
the republic. Therefore the technologies of reforms suggested by the author for
the metallurgical enterprises of Russia and envisaging their integration with the
complete technological cycle, in their original form may not be employed for
the Latvian enterprise. The author of the present research suggested methods to
create a horizontal network organizational structure including a steady system
of providers of raw materials and supplies, the enterprise itself manufacturing a
wide range of products, transport enterprises ensuring the product delivery to
the end users, and end users of the enterprise products.

     Academic novelty
     The academic novelty of the research consists in the following:
     • The author has put forward and substantiated a hypothesis asserting the
         expediency of the system-level approach to reforming the leading
         enterprises of structuring industries in view of the state and tendencies
         of the development of the mezo- and macrolevel of economy;
     • There are proposed adaptive methodologies and models targeted at
         the development of structuring industries of the transition economy in
         view of social orientation;
     • There is suggested a system of integrated methods for enterprise
         diagnostics allowing system-level realization of the programs of reforms;
     • A set of models to effectively reform the enterprise is created;
     • The author has put forward, substantiated and tested in actual practice
         a specific methodology for reforming the leading enterprises of the
                                        58

          structuring industries of Latvia (taking a metallurgical enterprise as
          an example), based on the principles of forming horizontal network
          organizational structures.
      The practical importance of the research consists in that the suggested
methods are invariant for the enterprises of any structuring industries and
countries with their economy in transition. The models and methodologies
imbued with actual and statistical data of a particular industry and country with
its economy in transition allow to generate strategies and programs of reforms
appropriate for particular conditions. For Latvian enterprises there is suggested
a form of organizational structures on the basis of strategic alliances with
foreign suppliers and consumers, specific for export-oriented branches of
economy in case of absence / insufficiency of own sources of raw materials.

      Conclusions drawn as a result of the research:
      1. An integrated study of the methodology of system reforms of
structuring industries under transition economy conditions has been conducted.
Macroeconomic strategies for the development (reform) of economy in the
transition period presuppose:
      • Targeting at the structuring industries of the national economy;
      • Targeting at the development of strong corporate structures - loco
           motives of economic growth.
      The macroeconomic strategies for Latvian economy also include specific
forms of a wide range of alliances with foreign partners built on horizontal
network structures.
      The research has been carried out and validated at the largest metallurgical
enterprise of Russia and the only Latvian metallurgical enterprise, it has the
necessary attributes of topicality, academic novelty and practical importance.
      2. The analysis has shown that system reforming of the transition
economy is a necessary measure conditioned by a number of macroeconomic
factors and should be based on strategic aspects of functioning which set the
aims of the reform processes: ensuring competitiveness and stability of the
functioning economic systems at the mega-, mezo- and microlevels.
      3. The research has shown that the scientific and methodological level of
the existing works in the field of restructuring does not quite meet the
requirements set for applied research works providing the intellectual basis for
reforming structural industry enterprises.
      4. An important conclusion concerning the invariance of the methodology
of reforms as applied to the specific features of a structural industry was
obtained in practice. The said conclusion was obtained on the basis of applied
studies of basic attributes of the relevant structuring industries.
      5. The developed factor model for the influence of the key external and
internal environment parameters of the leading enterprises constituting the
structuring industries has shown that the administrative and organizational
factors are of greater importance as compared to the industrial and
                                       59

technological ones. This has allowed to rank the principal directions of the
enterprises development by their importance for ensuring the growth of the
value of the enterprises and business.
      6. The proposed methodical techniques for the realization of the personnel
and social components of reforms show specific ways to avoid and/or minimize
conflicts, stresses and social tensions in the course of reforms.
      7. An extended concept of anticrisis management for a structural industry
enterprise has been formulated by adding to the traditional approach the so-
called preventive management to forecast the probability of the said tensions
and stresses and to take anticipatory decisions on reforming the enterprise.
      8. The research has proved that effective system reforming of structural
industry enterprises should be based on strategic directions of the enterprise
development and principles of creating an adaptive business system of the
enterprise, including an effective system of administrative and industrial
business processes, organizational structure and management system
corresponding to the said business processes.
      9. The methods and models suggested by the author have allowed the
management of the Open joint-stock company "Novolipetsk Iron & Steel
Corporation" to efficiently restructure the leading metallurgical enterprise.
Expedient formulation of the mission, strategy and purposes of the enterprise
development has allowed to carry out principal reforms of the organizational
structure; to modernize the production structure of the enterprise; to improve
the industrial business processes; to create a system of financial administration
based on new principles of financial responsibility centers.
      10. As a result of system reforms the enterprise has materially improved
its economic and industrial parameters; at that the growth of the basic
parameters from 5 to 12 times was achieved with the growth of the number of
the employed and the production volume 1.2 and 1.34 times, correspondingly,
which proves a high level of efficiency of the restructuring performed.
      11. The methods suggested by the author for reforming the Latvian
metallurgical enterprise - the joint-stock company "Liepajas Metalurgs" have
allowed the enterprise management to form an effective horizontal network
organizational structure including foreign suppliers of raw materials and
semifinished metallurgical articles, and also a wide network of foreign
consumers of its products. Thus has allowed to improve the enterprise
functioning stability and to ensure the joint-stock company "Liepajas
Metalurgs" transformation into the largest processing enterprise of Latvia, the
eighth by turnover in the country. The reforms resulted in the production
profitability growth from 2.7% in 1998 up to 7% (estimated) in 2003.

     Validation
     The basic theoretical postulates of the present dissertation study were
discussed at scientific and practical conferences and seminars and are stated in
a number of the works published by the author or prepared for publication.
                                        60

      Some statements of the study were validated within the framework of the
author's participation in the projects of reforming a Russian enterprise - the
Open joint-stock company «Novolipetsk Iron & Steel Corporation and a
Latvian enterprise - the Joint-stock company "Liepajas Metalurgs".
      The positive responses of the management of the Open joint-stock company
«Novolipetsk Iron & Steel Corporation* and Latvian metallurgical enterprise -
the joint-stock company "Liepajas Metalurgs" are given in the Appendix.
       The introduction by the Open joint-stock company «Novolipetsk Iron & Steel
Corporation of the methods and technologies of reforms developed by the author has
allowed to achieve a significant production efficiency growth, with the production
volume increase materially exceeding the relevant industry parameters. In 2002 the
commercial product profitability grew by 46% in comparison with 2001.
      The methods and models suggested by the author for reforming the joint-stock
company "Liepajas Metalurgs" have allowed the enterprise management to form an
efficient horizontal network organizational structure on the basis of strategic
alliances with foreign suppliers of raw materials and metallurgical semifinished
items, as well as with foreign consumers of the enterprise products. This has
allowed to improve the enterprise functioning stability and to give it a better
competitive position on the foreign market for metal products. The enterprise
management has approved the long-term strategy for further development of the
joint-stock company "Liepajas Metalurgs" suggested by the author.

1. Study of industry reforming experience in the
   conditions of the transition economy
   exemplified by Russia
1.1. Analysis of the problems of development and reforming of
     industrial production in the conditions of the transition
     economy
      In the past ten to fifteen years of the XX century the global economy
entered the epoch of cardinal changes, commensurable with the transformations
of the first half of the century, when the socialist economy system was created.
      This was the first time in history when a so-called "transition" economy
appeared - a modern economic system in which the centralized planned
economy is being transformed into the market one.
      Among the principal features and problems of the transition economy one
may mention the following.
      • Costs of initial accumulation of private capital - mostly by non
           productive, non-business ways;
      • Deformed structure of economy explained by the division of labor
           existing in the former socialist countries;
      • Adverse investment climate and corresponding investment activity problems;
                                         61

     • Unstable legal environment;
     • Certain degradation of the research and production potential;
     • Absence of a clear investment and structural policy of the state;
     • Weakened state control over the structuring industries of economy.
     Global experience and the research carried out by the author show that
overcoming the above problems requires system reforming of the national
economy targeted at social aspects. The system level of the reforms means that
the process should embrace all levels (economy as a whole, separate industries
and tfcieir enterprises) and aspects (political, economic, legal, social, etc.), which
makes it goal-oriented.
     Social orientation of economy reforming means that an ever increasing
part of the society resources mobilized by the state should be allocated for
various kinds of social insurance, health services, education.
     The analysis of the transition economy problems shows that:
     • Development is the principal way of existence of both global and national
           economies. Besides natural "spontaneous" development, at a certain stage
           of the society development the mechanism of conscious reforming is
           invoked. Thus, reforming is a key action in the transition economy;
     • Transformation of economy is impossible without a system -level
           approach to its reforming. The system-level approach to reforming
           the economy is based on its multilevel system structure: the global
           economy is a system of a higher order in relation to a particular the
           national economy, which is, in turn, a system of a higher level in
           relation to its separate industries;
     • The nucleus of reforming is the reforming of principal structuring
           industries and their leading enterprises.
      The conducted study of the problems of the transition economy and the
basis for its development - industrial production show the necessity of their
system reforming so as to optimize their structures. An optimum economic
structure-is that meeting public requirements, able to quickly and adequately
react to their changes, based on rational use of national resources and extensive
division of labor with other countries, and ensuring the end product output with
minimal expenses.


1.2. Analysis of distinctive features of
     reforming structuring industries of
     economy
      The system-level approach to the development of the transition economy
is based on hierarchical reforms of the economic system based on industrial
production.
      Macroeconomic strategies of the economy development (reform) in the
transition period assume its targeting at the structuring industries and corporate
structures of the national economy. Such structures are able to form a
                                          62

competitive domestic market environment, i.e. national leaders - locomotives
of economic growth.
      The industries we call structuring are those characterized by the material
contribution of their functioning and products to the production processes of
other branches and making a considerable aggregate contribution (more than
80%) into the commercial commodity output of the country as a whole. Such
industries, as a rule, include the fuel and energy complex, transport, metallurgy,
mechanical engineering and some others.
      The concept of Structural Industry is examined in the publications of
foreign scientists who name as the prevailing attribute of a structural industry
the share of the industry output in the production processes of other industries.
      The results of the production structure analysis by the principal industries of
Russia are shown in table 1. The data testify to the growth of importance of the
structuring industries in the national economy of the country, as well as to positive
dynamics in the development of the structuring industries of Russia's economy.
                                                                              Table 1
      Dynamics of the commercial output structure in Russian industry




       The author has studied the data on the industrial production structure of
 another country with its economy in transition, namely, Latvia (table 2), which has
 a different production structure. Analysis shows that although traditionally the
 contribution of the structuring industries in the structure of economy is not as great
 as in Russia, these industries form the basis for the industrial production of Latvia.
                                                                              Table 1
Commercial output structure of the Latvian industry,
2002
                                        63 .

      A special place among the problems most acute and painful for the
economy of Russia is occupied by the low competitiveness of the products of
its structuring industries. The economy development rates to a considerable
extent depend on the state of affairs in these industries, on the speed of their
transition to new market conditions so as to manufacture new generation
products which will be employed in equipping various branches of the national
economy and entering the global market.
      Under modern conditions of international division of labor one of the
production specialization industries of Russia is the national the metallurgical
industry. The output of Russian metallurgy makes a significant share in the
global manufacture and trade in metals. In 2002 Russia produced 7% of the
global output of metals (4th place in the world). At that 55% of its ferrous rolled
metal output was exported, which made about 9% of global trade (1 st place in
the world). The share of Russia in the global output of the six principal kinds of
non-ferrous metals (aluminum, nickel, copper, zinc, lead, tin) makes about
8.5%. About 80% of the total output of the principal non-ferrous metals and
70% of rare metals are exported.
      The metallurgical industry plays an important role in the formation of
macroeconomic parameters of the economy of Russia. In 2002 the share of
metallurgy in the total industrial output of Russia made 17.0%, in the number
of industrial employees - 11.8%. The industry enterprises brought 14.3% of the
country's total volume of currency proceeds, about 6.1 % of the tax revenues
received by the consolidated budget from various industries.
      Metallurgy is characterized by considerable consumption of capital,
materials and power. The metallurgical industry to a considerable extent
defines the level of production capacities utilization in a number of basic
industries of economy. The metallurgical complex accounts for 14% of the fuel
and 33% of the electric power consumption in industry, 40% of the raw
materials and mineral resources consumed in the country. The metallurgical
enterprises provide about 30% of railway freight turnover.
      System reforming is of special importance for metallurgy, as well as for
other structuring industries; it is possible to single out three aspects of such
reforms: social, technological and institutional.
      Social aspect. At present metallurgical enterprises have high social
responsibilities. Increase of metallurgy products competitiveness under the
conditions of limited production scale growth necessitates the growth of labor
productivity and redundant labor release. As most metallurgical enterprises
form the nucleus of company towns, the problem of finding employment for the
released workers becomes extremely acute and far from easily soluble.
      Technological aspect. Beginning with the early 90-ies, a lot of outdated
metallurgical facilities have been decommissioned. However, this process is far
from complete. Many enterprises employing out-of-date, environmentally
burdensome and resource-intensive technologies continue their operation. This
first of all concerns ferrous metallurgy, in which the share of open-hearth
process for the output of steel makes about 28%.
                                         64

      The institutional aspect of the metallurgical industry restructuring is
connected first of all to the change of the organizational structure of the
industry and reforming of horizontal and vertical contacts of the enterprises.
      The principal direction is the creation of powerful vertically integrated and
diversified structures able to successfully compete in the internal and external
markets of metal products. It would be expedient to set a limited number of
integrated industrial and financial companies managing the activity of their own
and affiliated enterprises and organizations on the basis of holding considerable
blocks of shares, commercial partnership contracts and credit agreements.
      The analysis of the problems of structuring industries shows their
generality and similarity in the conditions of the transition economy, as well as
a certain invariance to specific conditions of a particular country.
      The metallurgical industry occupies an important place in the industrial
complex of Latvia (4th place by the added value contribution to the GDP structure,
2nd place by the share of export). An important feature of the metallurgical industry
of Latvia is the absence of the raw resources within the territory of the republic,
which makes the industry to a certain extent import-dependent.
      The analysis of the structure of the industrial production of Latvia has
shown that the economy of the country is characterized by a relatively low
share of the processing industry -only 14.9%, while the sphere of services,
including transit services, makes more than 70% of the said structure. This
imposes specific conditions on the development of the country as a whole and
the development / reforming of the metallurgical complex.
      The analysis of the metallurgical industry of Latvia has shown that:
      • Metallurgy and mechanical engineering jointly account for about lA of
           the added value of industrial production. They export 70-80% of their
           total output.
      • The metallurgical industry occupies an important place in the industrial
           complex of Latvia (4th place by the added value contribution to the GDP
           structure, 2nd place by the share of export of the republic).
      • An important feature of the metallurgical industry of Latvia is the
           absence of own raw resources within the territory of the republic,
           which makes it to a certain extent import-dependent.
      • Metallurgical products make 53% of the total output of the
           cumulative metallurgy and mechanical engineering industry.
      • The gain in the output of metal and metal products in 2002 was rather
           insignificant - 2%. The year was more successful for mechanical
           engineering (10%). However, the contribution to added value was
           practically the same, which shows greater success of the metallurgical
           industry in comparison with mechanical engineering.
    The problems of reforming the metallurgical industry of Latvia are
connected with the following:
    • The industry is represented by the "Liepajas Metalurgs" plant which
         is the only metallurgical enterprise of the republic. Besides it, an
                                     65

        insignificant quantity of steel (in accordance with the data for 2002 -
        not more than 10% of the overall output of the republic) is produced
        by the Riga electric machine-building plant and RUSOBALT
        company.
   •    "Liepajas Metalurgs" is of considerable importance for Latvia: the
        enterprise is one of the largest taxpayers of the republic.
   •    The social aspect of reforming the Joint-stock company "Liepajas
        Metalurgs" is connected with that being a company town-forming
        enterprise it ensures the employment and social guarantees for 36% of
        the people engaged in industrial production in the town.
   •    The technological aspect of reforming is connected with the change
        of the production structure towards the expansion of the rolling
        branch and reduction of the open-hearth process, which, together with
        the technical and technological modernization, should promote the
        output of high-tech deep conversion products.
   •    The institutional aspect of reforming is connected with the fact that
        under the conditions of a sole metallurgical enterprise in Latvia the
        principles of creating vertically integrated structures recommended in
        case of Russian metallurgy are inapplicable, and it is more expedient
        to use flexible horizontal network organizational structures including
        foreign partners.

1.3. Problems of reforming the enterprises
    of structuring industries
    Strategic prospects of the Russian industrial enterprises of such
jructuring industries as metallurgy, mechanical engineering, instrument -
faking, electro technical, etc. depend on whether they manage to be integrated
i the global market and produce articles which by a set of their parameters
lould suit the consumers both in the internal and external markets. The
jincipal aim is principal increase of competitiveness, both in the home market,
(id on a global scale.
    The analysis of the problems facing the enterprises of the structuring
jdustries shows that the economic recession in Russia is a consequence of the
tw competitiveness of Russian industry. The reasons of low competitiveness
f the industrial enterprises of Russia are, in their turn, not so much their
tchnological problems or absence of sources of financing, but rather the low
fficiency of the enterprise management, as well as the negative influence of
le existing tax laws and customs regulation on the domestic commodity
reducers and the low efficiency of measures of the measures of state support
>r the domestic commodity producers.
     The existing scientific and practical works in the field of development /
 :form are devoted, as a rule, to specific, rather narrow branch problems of
 structuring and do not contain, as a rule, adequate quantitative methods of
                                        66

research. As a result there arise at least two groups of problems requiring
further study:
     • How well-grounded are the methods and means of restructuring
           suggested by the authors in the actual conditions of other subjects and
           objects of restructuring;
     • To what extent may their recommendations be applied to the
           structuring industries and enterprises characterized by the above
           features.
     The author has established the following features in the course of
industrial enterprise restructuring:
     • In most cases restructuring does not have a complex character;
     • There is no synchronization in carrying out the measures on
           restructuring, which materially reduces their efficiency.
      The reform of the industrial enterprises is aimed, first of all, at the
increase of competitiveness of the economy, industries and enterprise products.
The principal components ensuring the competitiveness of the enterprises are:
      • balanced degree of integration and technological completeness;
      • quality of products and services;
      • strategy of marketing and sale;
      • personnel qualification;
      • technological level of production;
      • tax environment in which the enterprise operates;
      • availability of sources of financing.
      The main principles of integrated enterprises are: orientation of industrial
divisions at the consumers, delegation of powers and responsibility to a lower
level, modernization of administrative structures towards reduction of central
offices, business processes reengineering on the basis of wide application of
information technologies, presence of perfectly definite criteria of the
efficiency estimation.


1.4. Analysis of the development of enterprise reforming methods
     At present restructuring of enterprises and companies - a field of
knowledge and practical applications new for Russia - is increasingly
developing. The methodology of restructuring widely employed in the business
practice of the advanced Western countries begins to win over the Russian
market. Realization of the restructuring programs can materially increase the
competitiveness of the enterprises and result in overcoming negative situations
in economic development.
     Reforming of industrial production as an attempt to make the process of
the Russian enterprises adaptation to the market more orderly, actually started
in 1997, though separate industries joined this process much earlier: in 1992,
simultaneously with privatization.
                                       67

      In the recent Russian business practice the concept of "reforming the
enterprises", "restructuring the enterprises" is widely used, although many
researchers and practicians tend to interpret the terms "reforming" and
"restructuring" in their own way. This frequently results in a confusion of
various concepts and a slightly one-sided treatment of the terms.
      The studies of the author have shown that in modern theory and practice
the concept "reforming of the enterprises" is universal, covering numerous
directions of economic activity (components, variants) and its transformations,
namely: restructuring, reorganization (allocation, division, joining), change of
the ownership pattern and production technology, etc. In this connection today
it is necessary to clarify these concepts and to structure them within a uniform
system, as they characterize the whole process of reforms for the Russian
enterprises transition to a new level of development.
      Restructuring presupposes system-level optimization of the functioning of
the enterprise / company including a multidimensional and interconnected set
of measures, processes, methods - from complex diagnostics of the company to
the reorganization of both its organizational structure and business processes on
the basis of modern approaches to management, including the methodology of
quality management, business process reengineering, information technologies
and systems, etc.
      The author singles out two principal directions of restructuring, including:
      • corporate strategic restructuring of the company aimed at the
      increase of its functioning efficiency and connected to the
      development of the going concern, including the increase of the equity
      value, increase of competitiveness, gain of new markets or expansion of
      the available ones, optimization of the organizational structure,
      diversification of activity, etc.;
             restructuring of the company in crisis conditions. The crisis
        situations for the company have several kinds (stages): from the decrease
        of the production efficiency and sale, deterioration of the financial and
        business standing not affecting settlements with the creditors, up to a
        situation described by delayed or incomplete satisfaction of the
        claims of its creditors. An extreme manifestation of the crisis
        situation is the insolvency (bankruptcy) of the company.
     Under modern conditions the process of restructuring of the industrial
enterprise becomes an objective necessity ensuring its competitiveness and
survival.
                                         68


2. Strategic directions of reforming the
   industrial enterprise
2.1. Strategic analysis of system reforming directions
      The studies of the author show that the topicality of reforms for the
Russian enterprises is defined by the necessity of overcoming the economy
crisis and entering the trajectory of economic growth. The author puts forward
a number of principles of reforms with reference to the leading enterprises of
structuring industries.
      Principle of selective development of industries
      The studies of the author prove the topicality of the approach to reforming
the economy on the basis of priority restructuring of the leading enterprises of
the structuring industries, which realizes the selective development principle in
the conditions of investment shortage typical of the transition economy,
meeting the requirements of increasing the produce competitiveness first of all
of the structuring industries forming the basis for the development of the
economy as a whole.
     Principle of a system-level approach to reforms
     The system-level approach in reforming the enterprises means that the
reforms should embrace all levels (economy as a whole, its industries and
separate enterprises) and aspects (political, economic, legal, social, etc.) and be
duly targeted. In turn, system reforming of the enterprise requires the
accounting of all external (industry, economy as a whole, competing
enterprises, etc.) and internal (enterprise activity factors - its structure,
production, management, supply and sale, financial policy, personnel, etc.)
conditions in their interrelation and interaction.
      Principle of a system-level strategic definition of objectives
      The strategies of economy modernization define the strategies of the
development of its separate industries which, in turn, define the principal
strategic directions of reforming their leading enterprises.
      In the opinion of the author, effective economic development of Russia
requires system reforming of economic systems at the macro-, mezo- and
microlevels, which presupposes the presence of a hierarchical system definition
of objectives based on the strategies for the development of the system as a
whole and its subsystems. Provided that the objectives of a higher level are the
projection (goals) for the objectives of a lower level. It is also essential that the
system feedback should be provided - the definition of objectives of the lower
levels adjusts the definition of objectives for the higher ones (fig. 1).
                    Fig. 1. System goal-setting of reforming
      In the opinion of the author, in the conditions of a transition period when the
economic situation is unstable the choice of profit maximization as the leading
objective for the enterprise is not the most inefficient way of development. Under
the conditions of insufficient investments in the production capacities and their
wear this will result in an even greater wear of the production capacities, and the
resulting necessity of saving in current expenses will provoke decrease of the
quality characteristics of the enterprise activity.
      The studies show that under the conditions of the transition economy the
most acceptable strategic objective of the enterprise may be the achievement of
its sustainable development. This becomes possible when its aspiration to
increase the profits is combined with the search for the best adaptation of its
activity to the external environment conditions, and when internal coordination
of the activity of its structural divisions is ensured.
      As the generalized ideology of reforming efficiency at all levels of
economy (macro- mezo- and macro-), in the opinion of the author, one should
apply the Pareto optimization principle: the state of the economic system at the
macro- mezo- and microlevels will be efficient if none of the key parameters of
reforming may be improved without worsening the value of other parameters.
      The principal objective of reforming is to ensure the competitiveness of
economic systems at the macro-, mezo- and microlevels.
In the opinion of the author, such objective as the increase (maximization) of
the enterprise (business) value is in principle a certain criterial parameter of the
efficiency of its development / reforming.
                                          70


2.2. Method of identifying structuring industries
       To identify the structuring character of the industry the author suggest a
mathematical model being a special case of inter-industry balance models in terms of the
output and consumption of commercial products and intended not for interbranch
calculations, but for a comparative analysis of the industries from the point of view of
their structuring character. Let us introduce the following symbols:
       Xij - volume of the products of the i-th industry required by the j-th industry;
       Yi - consumption volume of the products of the i-th industry outside the
sphere of material production - end produce for public and personal needs;
       Mi - volume of imported products of the i-th industry to cover the requirements;
       Ei - volume of exported products of the i-th industry;
       Xi - total output of the commercial output of the i-th industry;
       Zi - total demand for the products of the i-th industry for all material
production industries defined in accordance with the formula:



     X - total output volume of material products by industries, defined in
accordance with the formula:
     N - total number of industries of the national economy.
     In case all commodity products produced, in view of import and export, is
consumed, the following formula for each i-th industry will be true:




                                                                               Table 3
Mathematical industry model
(in terms of commercial output)
                                         71

      Having arrayed table 3 by column 11 and the values of Xi in the
decreasing order, we shall receive the structure of the commercial output of the
national economy. Value Di means the percentage share of the i-th industry in the
structure of the national economy and is defined using the formula:
      Di =100x(Xi/X)
      Arraying table 3 by column 7 - Zi in the decreasing order allows to define
the industries belonging to the structuring industries of the national economy. Let
us introduce value Wi as a quantitative attribute of the structuring character of the
industry calculated as the ratio of the total requirement of the industries in the
products of the i-th industry Zi to the total commercial output of the i-th industry
Xi, in accordance with the formula:
     Wi = 100 x (Zi/Xi)
      At the factor Wi value of more than 50% the industry may be considered
structuring provided that the value of factor Di is not less than 10%. A smaller
value of the factor means that the product of the industry is consumed outside of
other industries of the economy, i.e. it does not affect their development. A larger
value of this factor means that the product of the industry is vitally important
for other industries, i.e. it is some kind of basis for their functioning. This is the
meaning of the structuring character of the industry.
      It is important to note that the industry has a structuring character
irrespective of whether the requirement of other industries is met with own
products or import of the products and/or raw materials. In case the import
component if the structural industry products prevails in meeting the
requirements of the majority of industries such industry is import-dependent,
which impacts the safety and stability of the development of the economy as a
whole.
      As a rule, the fuel and energy complex, mechanical engineering and the
metallurgical industry are always present in the top lines of such table;
however, in some countries not having the required raw materials and
production operations, the requirements of the structuring industries should all the
same be met by import.

2.3. Conceptual provisions of the system reforming methodology
     Restructuring of the enterprise is a lengthy process carried out with the
help of various experts and aimed at a more efficient use of the own internal
potential of the organization and its adaptation to new market conditions.
     The author has developed a conceptual model of system reforming of the
enterprise, a principal scheme of the industrial enterprise restructuring, a
structure of tasks and hierarchy of restructuring.
                                       72
                                                                         Table 4
                Hierarchy of restructuring tasks




      The study has shown that the centre of system-level restructuring is
complex diagnostics of the enterprise, which is to form the foundation for the
project / program of restructuring, on the basis of which the business plan of
restructuring is developed. The author has worked out the principal stages of
forming the business plan for the industrial enterprise restructuring project and
a prototype of the plan with timing estimates.

2.4. Study of the systems of complex diagnostics of the
     enterprise under the transition economy conditions
      Complex business diagnostics of the enterprise is intended to identify and
understand its problems, weaknesses and strengths, place in the market and
among its competitors, to give a quantitative and qualitative estimation of the
state of the enterprise as a complex organism vis-a-vis the external environ-
ment, and at the same time as a complex system including interrelated
organizational, industrial, financial, administrative structures.
                                       73

     Generally speaking, complex diagnostics includes the following kinds of
analysis and estimations:
     • strategic or situational analysis, including industry and competitive
          analysis, which is usually employed for the analysis of the external
          situation (macroenvironment) of the enterprise, as well as the nearest
          environment of the enterprise (microenvironment);
     • organizational and management analysis, which is aimed at the study
          Of the enterprise management in its current state;
     • financial and economic analysis, which is targeted at the estimation
          of the financial standing, financial results, and efficiency of activity
          and forms the basis for preparing the financial policy of the
          enterprise;
     • production and business analysis, which aims to estimate the level of
          efficiency of the enterprise employing industrial resources for the
          manufacture and sale of its products and, in fact, to establish the
          efficiency of the principal production activity at which the enterprise
          is focused;
     • analysis of the personnel potential, which is focused on finding out
          the reserves of the workers, the structure of individual psychological
          and social qualities of the personnel, management factors;
     • analysis of the value of the enterprise (business), which, on the one
          hand, gives critertial estimation of the initial state of the enterprise,
          and, on the other hand, allows to evaluate the efficiency of the
          restructuring performed.
     As the object of reforming in the given work is represented by the leading
enterprises of structuring industries, the first and most important stage of
diagnostics should be the industry strategic and competitive analysis, which
answers the principal purpose of reforming - increase of the product
competitiveness.
     The industry analysis carried out by the author in metallurgy - a structural
industry of the Russian economy - has allowed to establish positive and
negative factors of competitiveness of the industry enterprises.
     Positive factors:
     • low cost of metallurgical raw materials and supplies;
     • continuing rather low cost of energy resources in comparison with the
        principal competitor countries;
     • low cost of the sufficiently skilled labor (8 times less than in EU);
     • competitiveness of the industry products with regard to its prices and
        quality;
     • presence of a certain work-in-process inventory of the industry R&D
        (not yet completely claimed).
                                         74

     Negative factors:
     • high costs of transport and logistics per ton of products (3 times
          higher than in EU);
     • arrears in introducing energy-saving technologies and, in particular,
          continuous steel casting (almost 100% - as compared to industrially
          developed countries and about 50% - in the Russian Federation);
     • excessive specific spending of almost all kinds of resources - raw
          materials, supplies, fuel, energy (not less than 10% above the average);
     • low labor productivity and output per 1 worker (2-3 times lower than
          in EU), which is partly caused by the inclusion of the non-production
          personnel in the structure of the employed;
     • adverse tax environment interfering with the realization of the
          enterprise modernization programs.
     For the Latvian metallurgy the positive factor is the absence of quotes for
the delivery of metallurgical products to the EU countries, which makes
partnership with the joint-stock company "Liepajas Metalurgs" attractive for
the Russian enterprises. The negative factor is, first of all, the absence of
sources of raw materials for metallurgy and own energy resources.
     Besides general industry competitiveness it is important to evaluate the internal
industry competitive environment of the enterprises. The analysis carried out by the
author on the basis of the metallurgical enterprises of Russia shows that more than 50
percent of the metallurgical market is taken by two-three enterprises. The Latvian
home market of metallurgical products is characterized by the absence of competition
because the metallurgical enterprise is the only one of its kind therein.


2.5. Factor model of the influence of key parameters of the
     external and internal environment of the enterprise on
     the efficiency of Us reforming
      The study has allowed to establish the principal key factors of success
(KFS) - main determinants of the financial and competitive success in the
structural industry. The efficiency of the enterprise reforming is determined by
the formation of the key factors of success.
      In building the factor model of the influence of the key parameters on the
efficiency of enterprise reforming (EER) in the metallurgical industry there
were employed the methods of expert analysis on the basis of ranking methods.
The study used expert estimations of a group of the leading experts of the
metallurgical industry for the principal leading enterprises of the metallurgical
industry: Open joint-stock company «Novolipetsk Iron & Steel Corporation*,
Open joint-stock company "Severstal", Open joint-stock company "Magnito-
gorsk integrated iron-and-steel works".
                                      75

     The expert analysis allowed to determine:
     • the importance (weight) of the influence of the principal groups of
         factors on the resulting efficiency of reforming the metallurgical
         industry enterprises;
     • the factor model of the dependence of the resulting efficiency
         parameter on the particular factors of reforming.
     The key factors of success were divided into 7 groups, and their
importance was estimated from the point of view of the metallurgical industry
and enterprises.
     The result of ranking by the degree of importance is shown in Table 5.
                                                                      Table 5
Results of ranking the factors of efficiency of the enterprises
restructuring




     The factor analysis has allowed to identify the most important factors of
the enterprise restructuring efficiency. Among the major factors (in the
decreasing order of influence) the following may be listed:
     • competent management and presence of the relevant "know-how";
     • openness to innovations in production processes;
     • ability to quickly react to varying market conditions;
     • openness to innovations in production;
     • corporate information system;
     • competent scientific research;
     • "know-how" in quality control.
     Obviously, the greater the presence of the competitive factors of success
within the framework of reforms, the more stable will be the subsequent
functioning of the enterprise.


2.6. Characteristic features ofanticrisis reforming of enterprises
     The author has investigated the system of anticrisis management which is
frequently understood as a system of bankruptcy for the enterprise. In the
author's opinion, it is necessary to treat this concept somewhat more widely -
                                           76

the concept of anticrisis management should also include preventive measures
for relatively stable enterprises so as to give advance warning of their possible
bankruptcy.
      For the prevention of crises it is of much importance to timely detect
indicators of the forthcoming crisis situation. Broadly speaking, a crisis
situation is characterized not only by the insolvency of the enterprise, but also
by the infringement of the interests of its proprietors and creditors. In defining
the efficiency of investments in equity it is necessary to take into account the
opportunities for alternative use of the invested resources. The choice of the
concepts of restructuring should be made in view of their risks and financial
practicability.
      In the author's opinion, the concept of the crisis situation should be
extended to differentiate between the concepts of crisis and insolvency
(bankruptcy). It is necessary to earlier identify the presence of a crisis situation
to adequately react to the negative tendencies in the conditions when the
enterprise is still completely under the control of its owners and is
administrated by the managers they employ; and, consequently, it has a larger
freedom in and wider choice of anticrisis procedures as compared to the set of
measures carried out in the course of legislative anticrisis regulation.
      The crisis situation may be characterized as an insufficiently effective
management of the assets and credit indebtedness of the enterprise leading to
the outflow of money from the owners and, finally, resulting in incomplete
satisfaction of the claims of its creditors. On the basis of the study the author
suggests the following classification of stages of the crisis situation:
      1) The crisis for the enterprise owners is seen in the deterioration of the
         financial and economic standing of the enterprise, which has not yet
         affected its settlements with the creditors. A consequence thereof is an
         infringement of the interests of the owners, i.e. actual losses of
         resources invested in the equity;
      2) The crisis for the creditors is characterized by delayed or partial satisfaction
         of the creditors' claims. However, the enterprise is still an independent
         running concern controlled by the owner through hired managers;
      3) The crisis presupposing legislative regulation in the interests of the
         creditors, i.e., in fact, the beginning of the enterprise bankruptcy procedure.
      Thus, the principal objective of restructuring is to help the enterprise out
of the crisis. In so doing it is necessary to reach such subordinated purposes as
increase of the production efficiency, change of the assets management pattern
and use of the extra (loan) financing opportunities.
      The major parameter of the enterprise operation efficiency is the equity
value growth, and, consequently, the author believes that the restructuring
should be carried out in this particular direction.
      The choice of the company value parameter as a restructuring criterion
was not accidental, as for the owner the criterion of efficiency of his
investments in a particular company is a steady growth of the value of
                                       77

contributions ensuring both an increase of the level of personal well-being of
the owners and sustainable development of the enterprise.


2.7. Distinctive features of methodical techniques for the
     realization of the personnel and social components of
     reforms
      The study conducted by the author has shown that the present-day state of
restructuring the structural industry enterprises is complicated by a number of
social and personnel aspects:
      • many enterprises are owned directly by their workers, and it is on
          them that the continuing operation of the enterprise now depends;
      • most large enterprises form the nucleus of company towns and may not
          be liquidated or significantly reorganized by virtue of social reasons;
      • for many regions the possibility of attracting other personnel is rather
          low (due to the unattractiveness of the enterprise, region, financial
          conditions);
      • a considerable part of the personnel have no chances of finding
          another place of work due to their professional characteristics, and,
          consequently, their staying at the enterprise is the only employment
          opportunity.
      It is for this reason that for most Russian enterprises the question of
reorganization is especially acute in the structuring industries.
      The analysis of the personnel management methods has allowed to
identify a number of the most effective methods which may be applied in
reforming the enterprises.
      Compulsory method. It presupposes the use of authority to overcome the
personnel resistance.
      Method of adaptive changes. Within the framework of this approach strategic
changes take place by gradual imperceptible steps during a long period of time.
      Crisis situation management. The method may be employed in a
situation when the enterprise experiences a crisis, for example, when the
changes in external environment threaten its existence and it has found itself in
a serious time trouble.
      Resistance management ("accordion" method). While the compulsory
and adaptive methods are extreme measures of reforming, the present method is
intermediate and may be realized within the time limits depending on the
occurrences in the external environment. The duration of the process of
changes should take into account the time available. With a decrease of the said
time the method comes nearer to the compulsory one, with an increase of the
time available it approaches the adaptive method of changes.
      The studies of the author allow to put forward a number of principles for
socially oriented restructuring of the enterprise.
                                       78

      Principle of the enterprise personnel potential optimization. It means
that instead of mechanical reduction of the personnel the nucleus of the
personnel potential should be preserved, developed and supported.
      Principle of forming a unique personnel potential of the enterprise.
Formation and preservation of competitive advantages in the field of
intellectual, industrial and information potential.
      Principle of targeting at the professional nucleus of the enterprise
personnel potential. Development of the personnel nucleus professionalism.
      Principle of the management roles conformity in the enterprise reform
situation. The methods of personnel management should correspond to the
enterprise management strategy.
      The methodical techniques proposed by the author for realizing the
personnel and social components of reforming suggest specific ways to avoid
and/or minimize social conflicts and stresses in the course of reforms.



3. Methodology and experience of system reforming
   (as applied to a metallurgical enterprise)
3.1. Model of effective reforming of the enterprise
     The study of the problems of industrial production development under the
conditions of the transition economy carried out by the author has shown that
the reforming should be aimed at ensuring the competitiveness / stability of
functioning and development on the basis of the system-level approach.
     The principal problems of reforming of the enterprises, in the author's
opinion, include:
     • investment deficiency, which requires the use of the principle of
          selective development of industries backed by the leading enterprises
          of the structuring industries forming the basis of the country's
          economic development;
     • state of the production and technological base of the enterprises,
          which demands that' the modernization of the production and
          technological potential of the enterprises be included as the material
          basis of the reforming efficiency;
     • inadequacy of the enterprise organizational structures to the
          conditions of the market due to their failure to ensure the management
          system flexibility and efficiency under the dynamically varying
          market environment conditions.
     The metallurgical industry is a prime example of the structuring industries
of Russia's economy. The analysis has shown that, in spite of the fact that there
are more than 3.5 thousand enterprises, including 800 relatively large ones,
functioning in the industry, more than 50% of the market is taken by relatively
few major enterprises, the leading ones among them being the Open joint-stock
                                       79

company «Novolipetsk Iron & Steel Corporation^ OJSC "Severstal", OJSC
"Magnitogorsk integrated iron-and-steel works", which account for 95% of the
profit of the metallurgical industry.
      The undeniable leader of the metallurgical enterprises is the Novolipetsk
Iron & Steel Corporation, which was restructured with the use of the
methodologies and models developed by the author.
      In the author's opinion, the achievement of the system reforming purposes
should be based on the solution of many tasks, the principal being:
      1. Reforming of the enterprise as a coordinated and consistent system.
      2. Creation of the organizational structure and control system directed
           at the achievement of a hierarchy of purposes, solution of tactical
           problems, performance of the plans developed.
      3. Increase of the efficiency of business processes in all key directions
           (functions):
      4. Provision of information support for the performance of business
           processes and enterprise operation management, i.e. creation of a
           corporate information system.
      The system reforming of the OJSC "NI&SCo" began with complex
diagnostics of the activity of the enterprise, which allowed to define the key
directions of its restructuring:
      • reorganization and reengineering of the industrial business processes, as
          well as modernization of manufacture, which was to form the material
          basis for the OJSC "NI&SCo" industrial potential modernization;
      • restructuring of the organizational structure and management system
          of the integrated works on the basis of reorganization and
          reengineering of the management processes, including such new
          methods of management as budgeting, marketing, expenses and
          quality management, corporate information systems, etc.;
      • reforming of the financial system of the integrated works, its key
          function being to ensure economic validity of not only operative, but
          also strategic solutions.
     On the basis of the author's research and the results of complex
diagnostics there were formulated the mission, strategy and purposes of the
development of the OJSC "NI&SCo" described below.
     The mission of the OJSC "NI&SCo" was formulated as follows: output
of high-quality metal products fully meeting the customers' requirements and
ensuring stable profit.
     The strategy of the OJSC "NI&SCo" development is aimed at the
increase of the quality of the products, expansion of its assortment and building
up the manufacture of capital-intensive deep-conversion products in accordance
with the high requirements of the modern market. The basis for the OJSC
"NI&SCo" development strategy is formed by:
     • improvement of the quality parameters of the products and expansion
          of the product mix assortment;
                                       80

•    production improvement by means of the capital facilities modernization;
•    increase of the financial and business activity efficiency aimed at
     achieving the maximum financial result with the least expenses;
•    strengthening of the position of the high-quality rolled steel supplier
     in the markets of metal products;
•    increase of the output of the share of high added value products.
Purposes of the OJSC "NI&SCo".
 Production purposes of the OJSC "NI&SCo":
1. Maintenance of a high quality level allowing to be the leader in the
    Russian market of metal products and to successfully compete in the
    global market.
2. Development of own manufacture of metal products, improvement of
    the quality and expansion of the assortment of the output, reduction of
    industrial expenses.
3. Better ecological cleanness of the metal products manufacture.

Market purposes of the OJSC "NI&SCo":
1. Strengthening of positions in the strategically important markets and
   mastering of new sales markets by improving the quality of the products
   and expanding their nomenclature. For this purpose the analyzed requests
   of the consumers are taken into account when planning the output.
2. Maintenance of an optimum price-quality ratio, efficient management
   and wide geography of deliveries in the external markets. This allows
   to timely react to the changes which may occur and to overcome
   cyclic declines in the steel markets.
3. Expansion of the dealer network embracing the economically advanced
   regions of Russia with the purpose of strengthening positions in the
   home market. This will allow to promptly react to the changing prices
   for the products and to increase sales in large industrial centers.

Financial purposes of the OJSC "NI&SCo":
1. Maximization of stable profits.
2. Optimization of the correlation of profitability, liquidity and financial stability.
3. Organization of the control over the balanced development in the
    spheres of income, investment of finances in development and
    management of financial flows.

Social and personnel purposes of the OJSC "NI&SCo":
1. Integral system of continuous development of the workers.
2. Flexible system of the personnel vocational guidance.
3. New order of distributing the powers and assigning the spheres of
    responsibility in developing and taking management decisions.
4. Social orientation of the enterprise policy.
                                          81

      According to the above purposes the OJSC "NI&SCo" reforming was
carried out along the following principal directions:
      • perfection of the development strategy;
      • perfection of the management structure and functions;
      • modernization of production;
      • perfection of the financial and economic policy;
      • perfection of the management business processes;
      • perfection of the marketing policy and pricing system;
      • perfection of the personnel management system in view of its social orientation.

3.2. Adaptive methodology of organization planning
     The organization planning of the enterprise is generally intended for its
formation as a structured business system subordinated to the interests of
achieving the established purposes. In this instance the structured business
system shall mean an interconnected and interacting set of:
     • industrial and management business processes carried out within the
         framework of the enterprise functioning;
     • organizational structure of allocating responsibilities and powers, being
         in fact the personnel organization structure of assigning the production
         and management personnel to the business processes and business
         operations (to the works and functions, in the traditional terminology).
      The studies of the author have allowed to develop an adaptive scheme of
forming an organizational plan for the enterprise development / reforming.
      The adaptive structure of the organizational plan of the enterprise
restructuring worked out by the author of the present study and allowing to
adapt it to particular conditions of the enterprise by introduction of specific
parameters includes the following sections:
      1. Adopted methodology, initial specifications.
      2. Analysis of the company standing, including:
          2.1. Organizational and management factors;
          2.2. Financial and economic factors.
      3. Concept of restructuring.
      4. Plan of changing the structure of business processes and organizational
          structure.
      5. Plan of changing the capacity / number of the production / management
          units.
      6. Plan of changing the management functions.
      7. Plan(s) of the development of the enterprise elements subject to reorganizatioa
      8. Calculation of expenses for the project realization.
      9. Graphic schedule of the project realization.
      10. Calculation of the project efficiency.
      11. Estimation of the risks (of the project customer).
      12. Designer's field supervision forms.
                                          82

    A set of the documents listed above together with an explanatory note
makes a plan for the organizational structure of management.

3.3. Optimization of the organizational and structural forms
      Effective management is possible only for a well structured system
including business processes and an organizational structure.
      The studies of the author have shown that the processes of formation and
perfection of the structural elements of the enterprise, i.e. business processes, orga-
nizational structure and personnel allocatioa are closely coordinated, and the perfec-
tion of each of them separately may result in inefficient management of the enterprise.
      The author has developed principles to be met by the organizational structure
and functions of the leading enterprises of the structuring industries of economy:
      • conformity of the organizational structure to the general purpose of
            the enterprise development;
      • adaptability of the structure and Junctions, i.e. ability of effective
            adaptation to new tasks and conditions of their solution;
      • possibility to effectively affect the final technical and economic
            parameters of the enterprise /project at all phases of the life cycle;
      • provision of an optimum level of the enterprise management centrali
            zation - as a rule, with the decrease of the number of contacts closed
            on the first manager and precise segregation of the functions of the
            second managers;
      • creation of a system of personal responsibility for the performance of
            each function;
      • the structure should ensure a standard level of management;
      • provision of vertical and horizontal coordination of the positions at
            all structural levels;
      • to ensure the flexibility and profitability of the organizational
            structure it is possible to partially remove a number of tasks requiring
            considerable expenses and highly skilled staff from the enterprise
            limits, including:
           • marketing studies;
           • trust management of temporarily free resources;
           • tax planning measures;
           • property management;
           • development of business plans for the investment projects.
      The author has developed typical stages of forming a new organizational
structure of a going concern.
      The organizational and production structures of the OJSC "NI&SCo" were
reformed by the integrated works management using the methodologies and
technologies suggested by the author of the present study, resulting in a more
                                        83

orderly system of the allocation of powers and assignment of the spheres of
responsibility in working out and taking management decisions.
      As a result the so-called corporate centre was formed with the main task
to define the OJSC "NI&SCo" policy with respect to the labor remuneration,
financing, capital structure, investment strategy.
      Accordingly, there were established centers of responsibility answering
for the achievement of a certain result of their activity. The centers of
responsibility were formed on the basis of production units with a complete
cycle, centers of financial responsibility establishing the spheres of the material
and financial resources flows, etc.
      The analysis has shown that the initial structure of the integrated works
had significant drawbacks, the most important of which was the excessive
"functional" targeting and, accordingly, the difficulty of the realization of the
so-called project management system. This drawback, in turn, made it
problematic to realize the strategic purposes of the enterprise, which may be
generically defined as competitiveness and investment appeal.
      Realization of these ideas in the new organizational structure has allowed,
inter alia, to organize a "R&D - experimental development - manufacture"
cycle with an effective feedback, as well as to ensure a materially higher level
of vertical integration of the enterprise due to the occurrence of new
technological conversion processes.
      On the whole the new structure may be characterized as a functional
design one with product divisional elements. The author has developed
classification of the types of structures of the industrial companies (segregating
classification groupings inherent to the OJSC "NI&SCo").
      In the course of restructuring it was possible to deny the existing opinion
that reforming should in all cases result in the reduction of the number of the
managerial personnel. It has been shown that the purpose of structural
reforming consists in ordering the functions, which does not exclude the
necessity of a certain increase in the number of the employed. Thus, the
organizational project of the OJSC "NI&SCo" has shown the necessity to
increase the number of the enterprise management employees by 5 to 7%.
      This resulted in a formerly absent opportunity to realize a whole set of
necessary management functions. A deeper consequence of organizational
restructuring was the improvement of the production and economic results of
the enterprise activity.

3.4. Reforming the system of financial management of the
enterprise
     Reforming of the system of the financial management of the OJSC
"NI&SCo" began with the system of internal financial control, the principal
task of which was the provision of the most effective organization of
bookkeeping, observance of the current legislation, safety of property and other
assets. The financial activity of the OJSC "NI&SCo" was conducted in the
conditions of risks and uncertainty, therefore first of all it was necessary to
                                        84

form a control system for the principal financial risks, the analysis of which,
carried out by the author, has allowed to identify the following principal kinds
and principles of their management.
      The analysis of the initial state of the system of financial management has
allowed to establish its following characteristics:
      • use of outdated methods of work, tools and personnel of the economic
           and financial services formed under the planned economy conditions
           and not corresponding to new tasks;
      • targeting not at the provision of economic validity of the decisions taken,
           but at the preparation of out-of-date reporting remaining practically
           unclaimed because of its cumbersomeness and insufficient efficiency;
      • weakness of the information processing and economic parameters
           forecasting means, limiting the opportunities for the enterprise
           management and frequently reducing the economic services activity
           to inefficient measures taken when a certain event occurred;
      • non-transparency of the flows of materials and finances.
      The paramount task was the introduction of a financial assets monitoring
system - a money flow budget. The budget was based on the following principles:
      • strict correspondence between the incomes and expenses of the enterprise;
      • maximum accuracy of the budget and its reapproval in case of
           changes in its major items;
      • personal responsibility of the officials for the planning and
           performance of the budget items, financial parameters of the
           enterprise (system of financial responsibility centers);
      • detailed elaboration of the budget expense items before exact
           payments.
      The integrity of the financial planning system was achieved through the
coordination of the marketing and production programs, plans of capital
expenses and social spending of the enterprise when developing the budgets.
      Simultaneously with the executive budget there was introduced a new
system of management reporting which has allowed to solve inconsistent tasks:
to ensure the maximum detailed elaboration of the operating parameters of the
divisions and services and to preserve general manageability of the enterprise.
The new reporting should contain the data on the flows of materials and
financial resources by the centers of financial responsibility, which are then to
be deciphered up to specific business operations.
      The resource allocation monitoring system integrated with the executive
budget has allowed the integrated works to manage not only the incomes and
expenses of the budget, but also all material and financial resources, having
considerably increased the responsibility of the managers for their reasonable use.
      As the budget management covers all divisions and directions of the
integrated works activity, the formation of long-term and short-term budgets
and their timely updating in case of necessity will allow to make the whole
                                         85

system of business activity duly manageable and to increase its adaptability to
constantly varying external conditions.

3.5. Specific features of reforming the enterprises
      of the metallurgical industry of Latvia
      A peculiar feature of the metallurgical complex of Latvia is the fact of its
having only one (unique) enterprise - that of the joint-stock company "Liepajas
Metalurgs", it being unique in all Baltic countries. This defines, on the one hand,
the absence of competition in the market economy of Latvia and other Baltic
countries as a whole, and, on the other hand, makes all the other industries
dependent on its functioning. The situation is further complicated by the absence
of sources of raw materials in the republic. Therefore the technologies of
reforming applicable for the metallurgical enterprises of Russia and allowing
their integration with the complete technological cycle may not be employed for
the Latvian enterprise without certain alterations. The author has suggested
methods for creating a horizontal network organizational structure including a
stable system of the suppliers of raw material and supplies, the enterprise itself
with a wide range of products, transport enterprises ensuring the delivery of the
products to the end users and the end users of the enterprise products.
      The studies of the author have shown significant advantages of the
horizontal network organizational structure with reference to the joint-stock
company "Liepajas Metalurgs", including:
      • adaptability of the enterprise to varied conditions, ability to promptly
           react to the changes in the materials and sales market conditions;
      • concentration of the enterprise activity at the priority specialization
           areas and unique processes;
      • material reduction of costs, their rational structure and increase of incomes;
      • possibility to attract the best partners to joint activity within the framework
           of the network, exclusion of the use of second-grade contractors.
      The horizontal network organizational structure of the j oint-stock
company "Liepajas Metalurgs" is characterized by a significant synergetic
effect achieved.
      The conceptual approach to reforming the joint-stock company "Liepajas
Metalurgs" suggested by the author envisages a strategy focused on the
enterprise searching for the prospects of creating high-tech products and
solving the supply and sale problems, using partnership relations with other
companies, foreign ones included.
      Inclusion of the raw materials suppliers in the network organizational
structure allows to improve the production stability by minimizing the risks of short
delivery / nondelivery of resources. Accordingly, inclusion of the product
consumers in the network organizational structure minimizes the risks of sales. The
transport enterprise provides efficient delivery of the products to the consumers.
                                       86

      As a result of reforms the joint-stock company "Liepajas Metalurgs"
became the largest processing enterprise in Latvia and eighth in the country by
its turnover. The strategy of further development of the joint-stock company
"Liepajas Metalurgs" worked out with the participation of the author is directed
at forming stable and advanced production ensuring a high level of
competitiveness and formation of the intellectual potential in order to ensure
stable supply of the home market and expansion of the external one.
      Further reforming of the joint-stock company "Liepajas Metalurgs", as seen
by the author, should provide an increase of the share of high-tech products. To
enable the output of products of a deeper conversion with a higher added value it
was suggested that the enterprise should reconsider the production structure to
expand the scope of rolling products and reduce that of the open-hearth process,
which is characterized by an increased spending of material and energy resources
(by 20-30%), lower labor productivity (2.5-3 times) and, consequently, low
competitiveness of the products in the global market.
      The rolling output capacity escalation, in the author's opinion, may be
ensured by including in the horizontal network structure of Russian and/or
Ukrainian enterprises supplying the initial raw materials of the rolling
production - blanks and slabs.
      In the author's opinion, there may be the following variants of cooperation
with the Russian and Ukrainian suppliers of semifinished steel items within the
framework of the horizontal network organizational structure of the joint-stock
company "Liepajas Metalurgs":
     1. Trade interaction
     1.1. Informal partnership created without any binding agreements or risk
          restrictions on the part of the partners aspiring only to increase their
          income.
     1.2. Contracts with independent parties providing long-term steady
          mutually advantageous contacts.
     2. Strategic alliances, including;
     2.1. Non-joint-stock alliances based on functional agreements and
          envisaging first of all activity coordination (noncommercial
          partnerships, etc).
     2.2. Joint-stock alliances with the partner participating in the capital,
          envisaging long-term relations and allowing to establish firm
          contacts at the policy formation level.
     2.3. Joint ventures envisaging partial or complete consolidation of the
          assets of their members.
      The creation of such strategic alliances will allow:
      • to save expenses conditioned by the scale of activity;
      • to combine complementary resources;
      • to increase the market strength through decrease of competition in
          the field of joint activity.
                                         87


3.6. Economic efficiency of system reforming
      The efficiency of reforming the enterprise may be generally defined as the
difference between the benefits and expenses caused by the measures taken, i.e.:
E restr =B-C
     where B - enterprise benefit from the reforming;
           C - costs connected with the reforming processes.
      If the value of Erestr > 0, reforming is effective.
      There are two ways of defining the expenses and benefits. The first one is
traditional, based on the forecast of the future flows of money resources due to
the growth of the income and/or decrease of the cost price of the products.
From the discounted results there are subtracted the expenses, including those
connected to reforming, and in case of a positive result the reforms may be
considered expedient.
      The second way is based on estimating the market value of the enterprise.
In this case there are compared the initial and forecast values of the enterprise.
If this difference is positive, it determines the preconditions for the reforming
advantageousness.
      Both ways have their information complexities connected in the first case to
the reliability of the forecast of the future money flows of the reformed enterprise,
and, in second one, to the reliability of the forecast of the enterprise market value.
      Generally, it should be noted that the efficiency of reforming includes at
least two parties:
      • efficiency of the principal activity (industrial activity) of the enterprise,
           i.e. business efficiency by the expenses and results of the productive,
           business, financial, marketing and other directions of its activity; i.e.
           evaluation of WHAT the enterprise does. Traditional parameters of
           efficiency measuring the results against the expenses are applicable here;
      • enterprise management system efficiency, i.e., in fact, management
           efficiency, i.e. evaluation of HOW the enterprise achieves the relevant
           results. The parameters here are mainly of a qualitative character.
      Thus, the efficiency of reforming the OJSC "NI&SCo" is proved by the
economic and production characteristics achieved through it.
      As a res'ult of systematic activity to restructure the OJSC "NI&SCo" the
growth of the production volumes achieved materially exceeded the industry
parameters: profit from the product realization during the past five years grew
17-fold with a 1.34 times increase of steel output and 1.19 times growth of the
number of the workers. The commercial output profitability in 2002 grew by
46% as compared to that of 2001. Being an enterprise forming the nucleus of a
company town (Lipetsk) and the budget of the Lipetsk region, the OJSC
"NI&SCo" provides the jobs for 11% of the total number of the employed in
the regional economy and accounts for more than 87% of the consolidated
budget of the region (profit tax). The social spending of the OJSC "NI&SCo"
during the period beginning with 1998 grew more than 4-fold.
     In the long term the OJSC "NI&SCo" will be one of the leaders of the
global ferrous metallurgy, delivering a wide range of high-quality products with
a high share of added value to the internal and external markets. The basis of
the OJSC "NI&SCo" financial stability should be its highly efficient high-tech
production with a full metallurgical cycle.



Conclusions and suggestions
Conclusions
1.   The study of the tendencies in development of the industry for the period from
     1999 to 2002 has shown that in the group of industries headed by the ferrous
     metallurgy (in which there are also the chemical, mechanical engineering,
     construction materials and light industry), the high growth rates in 1999-2002
     were a consequence of the import-replacement process development, favorable
     situation in the home markets, growth of the solvent demand of the population.
     By 2002 the said factors had been practically exhausted, which had a negative
     effect on the development dynamics.
2.   The analysis has shown that one of the main problems of the industrial
     production development in the countries with their economy in transition is
     the insufficient competitiveness of the products - both in the internal and
     in the external markets. Thus, for the Russian enterprises:
     • in the home market the competitiveness of the products of 38% of the
          enterprises is considered to be high, 57% -average and 4% - low,
     • the relevant figures in the markets of the CIS member states are 16%,
          46% and 7%, correspondingly
     • those for the external markets are 5%, 41% and 20%.
3.   The study of the state of the production assets of the Russian enterprises
     testifies that the average age of most machines is 15.7 years, in some
     industries exceeding 23 years.
4.   The analysis of the global economy development has shown that the
     system reforming of industrial production is an objectively necessary
     measure caused by a group of macroeconomic factors.
5.   The studies have shown that the system-level approach to the development
     of the transition economy is based on hierarchical reforming of the
     economic system founded on industrial production. The priority subjects of
     reforms there are the so-called structuring industries forming the basis for
     all branches of economy and making a significant cumulative contribution
     (not less than 80%) in the commercial output.
6.   The study of the commercial output structure in Russia's industry testifies
     to the growth of the importance and positive dynamics of the development
                                   89

of the structuring industries in the national economy (from 73.1% in 1998
up to 76.7% in 2002).
The analysis of the structure of industrial production of Latvia has shown
that its economy as a whole is characterized by the relatively low share of
the manufacturing industry - only 14.9%, whereas the sphere of services,
including transit services, makes more than 70%.
The analysis has shown interpenetration and interconnection of industries.
Thus, the share of expenses on fuel, electric power, transport, as well as the
ferrous and non-ferrous metallurgy products makes from 17-20% in the
cost of the,light and food-processing industry articles to 30-35% in the
manufacture of fabrics, clothes and footwear.
The study of the dynamics of the Russian metallurgical industry
development has shown:
• A significant share in the global manufacture and trade in metals (7%
    of the global output and 9% of the global trade).
• An important role in the formation of macroeconomic parameters of the
    economy of Russia - 16% of the total industrial production output.
• A high level of capital, materials and power consumption of the
    production enterprises: 14% of fuel, 33% of electric power, 40% of raw
    materials and minerals consumed in the country.
The analysis of the metallurgical industry of Latvia has shown, that:
• Metallurgy and mechanical engineering jointly make about lA of the
     added value of industrial production. The export of these items makes
     70-80% of the total amount of their output.
• The metallurgical industry occupies an important position in the
     industrial complex of Latvia (4th place by the added value contribution
     to the GDP structure, 2nd place by the share of export of the republic).
• An important feature of the metallurgical industry of Latvia is the
     absence of the sources of raw materials on the territory of the republic,
     which to a certain extent makes the industry import-dependent.
• Metallurgical products make 53% of the total output of metallurgy and
     mechanical engineering taken together.
• The gain of the manufacture of metal and metal products in 2002 was
     rather insignificant - 2%. The year was more successful for mechanical
     engineering (10%). However, the contribution to the added value was
     practically the same, which testifies to a greater success of the
     metallurgical industry in comparison with mechanical engineering.
The study of the problems connected to reforming the Russian metallurgy
has allowed to identify their principal aspects:
• Social - restructuring of the metallurgical industry assumes the release
    of redundant industrial personnel in ferrous metallurgy up to 203
    thousand persons and up to 142 thousand persons in non-ferrous
    metallurgy by the year 2010.
                                          90

    •   Technological - it is planned to decommission up to 28% of out-of-date
        production facilities with ecologically harmful, resource-consuming
        technologies.
    •   Institutional - powerful vertically integrated and diversified structures
        will be created able to successfully compete in the internal and external
        markets of metal products.
    The problems of reforming the metallurgical industry of Latvia are
    connected with the following;
    • The industry is represented by the "Liepajas Metalurgs" plant, which is
       the only metallurgical enterprise of the republic. Besides it, an
       insignificant quantity of steel (in accordance with the data for 2002 -
       not more than 10% of the overall output of the republic) is produced by
       the Riga electric machine-building plant and RUSOBALT company.
    • "Liepajas Metalurgs" is of considerable importance for Latvia as the
       enterprise is one of the largest taxpayers of the republic.
    • The social aspect of reforming the Joint-stock company "Liepajas
       Metalurgs" is connected with that being a company town-forming
       enterprise it ensures the employment and social guarantees for 36% of
       the people engaged in industrial production in the town.
    • The technological aspect of reforming is connected with the change of
       the production structure towards the expansion of the rolling branch
       and reduction of the open-hearth process, which, together with the
       technical and technological modernization, should promote the output
       of high-tech deep conversion products.
    • The institutional aspect of reforming is connected with the fact that
       under the conditions of a sole metallurgical enterprise in Latvia the
       principles of creating vertically integrated structures recommended in
       case of Russian metallurgy are inapplicable, and it is more expedient to
       use flexible horizontal network organizational structures including
       foreign partners.
10. The analysis has allowed to formulate the problems of reforming the
    enterprises of the structuring industries. To these there should be attributed: 10.1.
    Outdating and irrational use of the technological basis of the
    enterprises. The majority of the Russian enterprises use not more than
    35% of their available production facilities. In Latvia the problem is
    further aggravated by the absence of domestic heavy mechanical
    engineering.
    10-2. Taxation problems: with the level of taxation comparable to the
          industrially developed countries and, at the same time, depressive state
          of the enterprises the burden of the taxes is unreasonable, which results
          in the growth of debt liabilities. For the Latvian metallurgy represented
          by the only enterprise, the problems are even more acute. From 1998
          till 2002 the enterprise had the standing of a Liepaja special
          economic zone (SEZ). However, on 01.01.2003 the joint-
                                         91

           stock company "Liepajas Metalurgs" left the SEZ structure. This was
           accompanied by the decision of the Cabinet of ministers of the
           Latvian republic, effective since January 1, 2003, to deprive the
           enterprise of a part of its tax privileges granted to it as a legal entity
           operating on the territory of the Liepaja special economic zone.
           These steps of the government were prompted by the EU directive
           limiting the volume of state assistance to the enterprises of
           metallurgy, chemical and some other industries. This decision
           created certain difficulties for the enterprise, as the annual amount of tax
           deductions was increased by about € 130.000.
    10.3. Investment problems: the majority of the enterprises are unable to
          provide liquid security for the credits granted by the banks, and state
          financing is practically unavailable. For the Latvian enterprise the
          problems are aggravated by the removal of the standing of a special
          economic zone and, as a consequence, state financial support.
    10.4. Structural problems: excessively centralized management of the
          large enterprises and large nomenclature of the provisionally final
          products of the enterprises. The complexity of structural problems
          the Latvian metallurgy faces is connected to the absence of the
          sources of raw materials and low conversion enterprises on the
          territory of the republic and, as a consequence, enterprises supplying
          raw materials and semifinished metallurgical items.
    10.5. Problems of manageability and management: irrational partitioning
          of enterprises (not by kinds of business, but by divisions), allowance
          of the necessary integrity in the management of the principal
          technological process, etc.
    10.6. Scientific and methodical problems: the majority of studies are
          devoted to relatively narrow industry problems and do not contain
          modern quantitative methods of research.
11. The analysis has shown that not more than 30% of the enterprises have
    developed the strategy of their development for a term of 3 -5 years;
    executive plans (for 1-2 years) have been prepared by not more than 25%
    of the industrial enterprises. The ferrous metallurgy enterprises lag behind
    other industries by the system level characteristic of their development
    plans: if in non-ferrous metallurgy, chemical, petrochemical industry the
    competitiveness increase programs embrace 65% of the enterprises, in
    ferrous metallurgy such enterprises make no more than 21%.
12. The study of the problem of the so -called strategic feature of the
    companies has allowed to establish a system of the relevant internal and
    external factors.
    To the internal factors describing the company strategy there belong:
    • presence of know-how, licenses, unique developments and high-quality
        products;
    • presence of effective technologies;
    • quality of transport networks;
                                           92

      • presence of skilled personnel;
      • presence of an effective automatic-control system;
      • presence of a system of personnel retraining;
      • personnel motivation systems.
      To the external factors there refer:
      • image, popularity of the trade mark;
      • share of the company product in the market;
      • presence of a developed distribution network;
      • contacts with the suppliers of goods and services.
13.   The analysis has shown an ever growing development of a sphere of
      knowledge and practical applications new for Russia - the so-called
      restructuring of enterprises and companies widely employed in the
      business practice of the advanced Western countries. At the same time
      restructuring has not yet become a part of the daily cycle for the Russian
      companies. A similar problem is typical of Latvia, as well.
14.   The study of the basic attributes of the structuring industries has shown
      that the methodology of reforming is invariant to the specific features of
      any structural industry.
15.   The study of strategic directions and basic parameters of reforming the industrial
      enterprises has allowed to suggest a number of system-forming principles:
      • Principle of selective development of industries envisaging selective
          influence of the state on certain elements of the economic system;
      • Principle of the system-level approach to reforming envisaging the study of
          all processes and phenomena as certain integrated systems, having new
          qualities and functions not inherent for their constituent elements;
      • Principle of system-level strategic target-setting envisaging mutually
          unequivocal conformity of the principal essence of reforming at each
          structural level to the relevant strategic purpose.
16.   The research of the author has allowed to build a mathematical model
      being a special case of the interindustry balance models allowing to carry
      out a comparative analysis of the industries from the point of view of their
      structuring character. As a quantitative attribute of the structuring character
      of an industry there is considered the value calculated as the ratio of the
      total demand of the industries in the products of the i-th industry Zi to the
      total volume of the commercial output of the i-th industry XL With the
      values of the ratio (Wi factor) exceeding 50% the industry may be
      considered structuring provided the value of Di (share of the i-th industry
      in the structure of the national economy) is not less than 10%.
17.   The study of the problems of reforming has shown that the centre of
      system restructuring is complex diagnostics of the enterprise including
      such constituent elements as situational analysis, organizational and
      management analysis, financial and economic analysis, production and
      business analysis, personnel potential analysis. Within the framework of
      the research performed there has been developed a conceptual model of
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    system reforming of the enterprise, as well as the order of the development
    and realization of the relevant project at the enterprise.
18. The research has shown a correlation of the factors determining relative
    competitiveness of Russian steel and rolled products.
    18.1. The positive factors include:
    • low cost of metallurgical raw materials and supplies;
    • relatively low cost of energy resources as compared to the principal
        competitor countries;
    • low cost of sufficiently skilled labor (8 times less than in EU);
    • competitiveness of products by their prices and quality;
    • presence of a certain work-in-process inventory of the industry R&D.
    18.2. The negative factors include the following:
    • high costs of transport and logistics per ton of products (3 times higher
        than in EU);
    • arrears in introducing energy-saving technologies and, in particular,
        continuous steel casting (almost 100% - as compared to industrially
        developed countries and about 50% - in the Russian Federation);
    • excessive specific spending of almost all kinds of resources - raw
        materials, supplies, fuel, energy (not less than 10% above the average);
    • low labor productivity and output per 1 worker (2-3 times lower than in EU);
    • adverse tax environment.
    For the Latvian metallurgy the positive factor is the absence of quotes for
    the delivery of metallurgical products to the EU countries, which makes
    partnership with the joint-stock company "Liepajas Metalurgs" attractive
    for the Russian enterprises. The negative factor is, first of all, the absence
    of sources of raw materials for metallurgy and own energy resources.
19. The research has allowed to construct a factor model for the influence of
    the key parameters of the external and internal environment of the leading
    enterprises of the structuring industries. The model has shown a greater
    importance of the management and organizational factors as compared to
    the production and technological ones (the relevant weights of the factors
    make the following values: factors connected to the management quality -
    0.158; to the production organization - 0.149; to the personnel
    qualification - 0.145; to marketing - 0.137; to distribution - 0.131; to
    technology - 0.155). The model has allowed to rank the principal
    directions of the development of the enterprises by their importance for the
    growth of the value of the enterprises and business.
20. The analysis of the work of the enterprises belonging to the structuring
    industries has allowed to find and formalize the procedure of identifying
    three stages of a crisis situation development, including:
    • early stage characterized by separate instances of inefficiency in the
        production and sales;
    • intermediate stage characterized by shortage of resources, as well as
        problems with the quality of products;
                                          94

     •  late stages of the crisis, at which the enterprise as a whole is in a
        chaotic state.
    There have been formed the concepts and notions of anticrisis management
    including both preventive measures aimed at preventing the occurrence of
    bankruptcy indicators, and managing effects influencing the enterprise at
    one of the three abovementioned stages.
21. The study has allowed to generate a system of methods and techniques for
    the realization of the personnel and social components of reforming
    suggesting specific ways to prevent and/or minimize the conflicts and
    social stresses in the course of reforming. They include:
    • method of adaptive changes, when strategic changes take place by
        gradual imperceptible steps during a long period of time;
    • crisis situation management envisaging a set of measures to fight the
        panic in a serious time trouble;
    • resistance management ("accordion" method) envisaging reforms within
        the time limits depending on the occurrences in the external environment;
    • compulsory method presupposing the use of authority to overcome the
        personnel resistance. This method is expensive and undesirable, but it
        may be advantageous taking into account the time of strategic response.
     Among the principles of socially oriented restructuring of the enterprise the
following are suggested:
     • principle of the personnel potential optimization;
     • principle of forming a unique personnel potential;
     • principle of orientation at the professional nucleus of the personnel potential;
     • principle of the management roles conformity in the situation of reforming.
     On the basis of the above special strategies of the enterprise management
     are suggested.
22. The set of studies performed has allowed to construct a model of effective
     reforming of the enterprise; as the representative object there was taken the
     Open joint-stock company «Novolipetsk Iron & Steel Corporation* (OJSC
     "NI&SCo"). The integrated works diagnostics has allowed to establish the
     mission and strategic directions of its reforming:
     • reorganization and reengineering of production business processes, as
         well as technical re-equipment of production;
     • restructuring of the organizational structure and the control system of
         the integrated works on the basis of the methods suggested;
     • reforming of the financial system of the integrated works.
23. The research has shown that the business system of the enterprise is a
     projection of its mission, purposes and strategy. This provision formed the
     basis of the developed adaptive methodology of organization planning
     envisaging the necessity of working out a number of stages.
     In the new organizational structure the provisions developed were realized
     in the form of a system of the so-called Centers of responsibility.
                                        95

    At the same time it was possible to deny the existing opinion that
    reforming should in all cases result in the reduction of the number of the
    managerial personnel. It has been shown that the purpose of structural
    reforming consists in ordering the functions, which does not exclude the
    necessity of a certain increase in the number of the employed. Thus, the
    organizational project of the OJSC "NI&SCo" has shown the necessity to
    increase the number of the enterprise management employees by 5 to 7%.
24. The study of the enterprise financial management system has allowed to
    develop an effective system for the management of operational, currency,
    credit and interest risks, as well as the liquidity risk. The OJSC "NI&SCo11
    risk management task was to reduce the negative influence of the external
    environment on its financial results.
    The integrity of the financial planning system was achieved through the
    coordination of the marketing and production programs, capital expenses
    plans and social spending of the enterprise in the development of the
    budgets. Together with the budgeting system a new system of management
    reporting was developed.
25. The results of the studies and their practical realization have allowed to
    estimate the efficiency of reforming, including:
    • efficiency of the principal activity of the enterprise, i.e. its business
        efficiency;
    • efficiency of the enterprise management system - in fact, the
        management efficiency.
    As a result of systematic activity to restructure the OJSC "NI&SCo" the
    growth of the production volumes achieved materially exceeded the industry
    parameters. The commercial output profitability in 2002 grew by 46% as
    compared to that of 2001. Being an enterprise forming the nucleus of a
    company town (Lipetsk) and the budget of the Lipetsk region, the OJSC
    "NI&SCo" provides the jobs for 11% of the total number of the employed in
    the regional economy and accounts for more than 87% of the consolidated
    budget of the region (profit tax). The social spending of the OJSC "NI&SCo"
    during the period beginning with 1998 grew more than 4-fold. Effective
    reforming of the management system has allowed the enterprise to concentrate
    resources on priority directions of its development, the most important of
    which is moderniEation by 78% financed out of its own means.
26. For the Latvian metallurgical enterprise - the joint-stock company
    "Liepajas Metalurgs" - characterized by its being the only (unique)
    enterprise of the kind in all Baltic countries there exist specific restrictions
    and requirements to its restructuring, as all the other industries depend on
    its efficient functioning. The situation is further complica ted by the
    absence of sources of raw materials in the republic. Therefore the
    technologies of reforming suggested by the author for the metallurgical
    enterprises of Russia and allowing their integration with the complete
    technological cycle happened to be impossible to be employed for the
    Latvian enterprise without certain alterations. The author of the present
                                       96

    study has suggested methods for creating a horizontal network
    organizational structure including a stable system of the suppliers of raw
    material and supplies, the enterprise itself with a wide range of products,
    transport enterprises ensuring the delivery of the products to the end users
    and the end users of the enterprise products.
27. The methods suggested by the author for reforming the Latvian metallurgical
    enterprise of the joint-stock company "Liepajas Metalurgs" have allowed the
    enterprise management to generate an effective horizontal network
    organizational structure including foreign suppliers of raw materials and
    semifinished metallurgical items, as well as a wide network of foreign
    consumers of its products. This has allowed to improve the stability of the
    enterprise functioning and turn the joint-stock company "Liepajas
    Metalurgs" into the largest processing enterprise in Latvia and eighth in the
    country by its turnover. As a result of reforming the production profitability
    increased from 2.7% in 1998 up to 1% (estimated) in 2003.
28. The long-term strategy of further development of the joint-stock company
    "Liepajas Metalurgs" suggested by the author of the research includes the
    formation of a stable and advanced production ensuring a high level of
    competitiveness and formation of the intellectual potential aimed at stable
    supply of the home market and expansion of the external market.
    Further reforming of the joint-stock company "Liepajas Metalurgs", as
    suggested by the author, should provide an increase of the share of high-
    tech products. For that it is proposed that the enterprise should reconsider
    the production structure to expand the scope of rolling products and reduce
    that of the open-hearth process, which will allow to produce deeper
    conversion products with a higher added value.
    The rolling output capacity escalation, in the author's opinion, may be
    ensured by including in the horizontal network structure of Russian and/or
    Ukrainian enterprises supplying the initial raw materials of the rolling
    production - blanks and slabs.
    The variants of cooperation with the Russian and Ukrainian suppliers of
    semifinished steel items for the joint-stock company "Liepajas Metalurgs"
    suggested by the author include the following:
    1. Trade interaction
    1.1. Informal partnerships created with no binding agreements or risk
         restrictions of the partners aspiring only to increase their income.
    1.2. Contracts of independent parties providing long-term steady mutually
         advantageous relations. With such cooperation none of the partners
         has the formal right to influence the policy of another partner, though
         his informal influence can be significant.
      2. Strategic alliances, including:
      2.1. Non-joint-stock alliances based on functional agreements and
           envisaging first of all coordination of activity (noncommercial
                                          97

           partnerships, etc.) with the purpose of joint promotion of products in
           the market and creation of uniform commodity-promoting networks.
      2.2. Joint-stock alliances with the partner's participation in the capital,
           envisaging long-term relations and allowing to establish strong
           contacts at the policy-setting level. Such an alliance is meaningful
           when the investments are focused on the product and the markets of
           strategic interest for the partners, therefore the investing enterprise
           may not influence the partner only in its interests.
      2.3. Joint ventures presupposing partial or complete consolidation of assets
           of their participants. Such enterprises founded by the partners unite any
           elements of their financial and industrial potential and interests and
           provide ample opportunities for the sharing of risks and joint control.


Suggestions
1,   The Ministry of economic development and trade of the Russian
     Federation should provide systematic supervision and coordination of
     activity of the industries to reform the enterprises in view of the results of
     the research performed.
2.   The Ministry of education of the Russian Federation should introduce a
     new economic discipline in the curricula of higher educational institutions:
     "Restructuring of enterprises and companies".
3.   The Russian metallurgical enterprises and companies should develop,
     approve and introduce uniform "Methods of reforming ferrous metallurgy
     enterprises" based on the results of the research performed.
4,   The Russian metallurgical enterprises and companies undergoing
     restructuring should be guided by the following rules:
     4.1. Priority should be given to the development of the mission, concept,
          strategy and organizational plan for the business development focused
          on the market.
     4.2 It is necessary to create conditions for internal entrepreneurship by
          minimizing the management influence on the divisions, for which it is
          required to liquidate intermediate levels of administration managerial
          control between the top management and the divisions, transferring
          their mutual relations to the contractual basis.
     4.3. The principal functions of management - marketing, sales,
          manufacture, R&D - should be carried out by the divisions during the
          whole life cycle of the product or until considerable losses in the
          synergy appear.
     4.4. The heads of divisions have an actual right of vote in appointing the
          leading managers and exercise complete control over those performing
          all significant functions.
     4.5. There should be developed and realized an information control system
          presupposing "transparency" of financial flows, reliability and visibility of
                                         98

          the system of planned and reported financial indicators for the top
          management of the company, as well as an adequate financial management.
    4.6. It is necessary to create a control system stimulating the spirit of
          entrepreneurship and capable to resolve conflicts between the
          divisions and top management.
    4.7. The development of the company-uniform corporate culture and
          realization of the concept of the organization "self-training".
5. The OJSC "NI&SCo" should:
    • introduce the practice of economic monitoring of the restructuring process,
    • complete the development of the program of reforming, taking into
          account the necessity to ensure the system level of transformations,
    • continue the realization of the personnel policy aimed at forming a
          new personnel management system and focused at achieving not only
          economic, but also social effects.
6. On the basis of the methodologies suggested by the author of the present
    study the joint-stock company "Liepajas Metalurgs" should develop a
    "Program of system reforming of the enterprise", presupposing
    development of the horizontal network organizational structure towards a
    wider inclusion of the Russian and Ukrainian enterprises supplying
    semifinished metallurgical items.
7. It would be advisable to ask the "Russian steel" consortium to head the
    scientific and methodical activity to create a "Program for the development
    of Russian metallurgy till 2010", based on the scientific postulates of the
    present research.
8. The principal provisions of the developed socially oriented policy of
    restructuring should be brought to the knowledge of the heads of the
    federation subjects and municipalities hosting metallurgical enterprises.
9. The Ministry of industrial development and science of the Russian
    Federation should be recommended to spread the experience gained in the
    course of studying metallurgical enterprises to other industries.
10. It would be expedient to recommend that the Institute of steel, Central research
    institute for ferrous metallurgy (TsNIIchermet), as well as other scientific and
    educational institutions of the Russian Federation should continue the studies
    aimed at increasing the efficiency of ferrous metallurgy.
11. It would be expedient to publish the results of the study in the form of a
    monograph / brochure stating the principal provisions of the developed
    methodology of reforms.

Published scientific works;
I. Corporate management. Guide for professionals:/ ed. by I.I. Mazur. ISBN 5-
    06-004587-0. Moscow: Vysshaya shkola, 2003. Shenkman A.I. Strategic
    management of the company: Chapter 4, pages 187-206.
                                        99

2.   Corporate management. Guide for professionals:/ ed. by I.I. Mazur. ISBN
     5-06-004587-0. Moscow: Vysshaya shkola, 2003. Shenkman A.I.
     Anticrisis management: Chapter 18, pages 650-687.
3.   Shenkman A.I. System approach to the industrial enterprises' reformation
     in the conditions of transitional economics // Economics, II.,: Latvian
     University / ed. by E. Doubra. ISBN 9984-698-90-4. Riga,: Nauka, 2003.-
     vol. 659, pages 275-296.
4.   Shenkman A.I. Company's investment as a factor of its efficiency and
     competitive strength// Globalization of economics and its problems.
     Proceedings. ISBN 9984-725-36-7. Riga: Latvian University. 2002. p.163-171.
5.   Shenkman A.I. Company's investment as a factor of its efficiency and
     competitive strength // Development problems of economics and
     management, IV: Scientific papers / ed. by E. Doubra, ISSN 1407-2157,
     volume 647. Riga: Latvian University. 2002 - vol. 647, pages 739-747.
6.   Shenkman A.I. The experience and problems of reformation of structuring
     industries on the example of metallurgy in the conditions of the transitional
     economy of Russia // Financial market and management. Proceeding // ed.
     by E. Zelgavis. ISBN 9984-735-64-2. Riga: Latvian University. 2003.
     pages 333-356.


Prepared for publication:
1.   Shenkman A.I. Prospects of the development of ferrous metallurgy as a
     structuring branch of Russia during with European Union // Enlargement
     of the European Union in the Baltic Sea Region: social and economic
     challenges and opportunities. Proceedings. - Riga: Latvian University.
     2004.
2.   Shenkman A.I. Problems of corporate restructuring as the basis for
     improving the quality of management and the value of the company.
     Reports of the International seminar «Corporate management: business
     development technologies*, Moscow: Academy of national economy at the
     Government of the Russian Federation, Institute for investment
     development, September 25-26,2003.
3.   Shenkman A.I. Conceptual approach to system reforming of JSC «Liepajas
     metalurgs» // Humanities and social sciences Latvia: Integration of the
     Latvian economy into the European Union. - 2004 - 10 p.
4.   Shenkman A.I. The problems of reformation of the structural industry
     enterprises on the example of the Latvian metallurgy complex //
     Conditions of sustainable development: new challenges and prospects. -
     Riga: Banking Institution of Higher Education. 2004.-10 p.
                                        100


Reports at international conferences:
1.   Shenkman A.I. Company's investment as a factor of its efficiency and
     competitive strength// Globalization of economics and its problems. - Riga:
     Latvian University. March 15,2002.
2.   Shenkman A.I. The experience and problems of reformation of structuring
     industries on the example of metallurgy in the conditions of transitional
     economy of Russia // Financial market and management. - Riga: Latvian
     University. 2002.
3.   Shenkman A.L Prospects of development of ferrous metallurgy as a
     structuring branch of Russia during with European Union // Enlargement
     of the European Union in the Baltic Sea Region: social and economic
     challenges and opportunities Riga: Latvian University. June 20, 2003.
4.   Shenkman A.I. Problems of corporate restructuring as the basis for
     improving the quality of management and the value of the company. //
     Corporate management: business development technologies. Moscow,
     September 25-26, 2003.
5.   Shenkman A.I. Restructuring problems of the enterprises of structuring
     industries on the example of the metallurgical industry of the Latvian
     Republic // Conditions of sustainable development: new challenges and
     prospects. Riga. Banking Institute of Higher Education. September 11-12,
     2003.

				
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