Things tend to run to a pattern.  When Middle East markets started to develop I witnessed how the initial surge of ex-pat managers was replaced wholesale by cheaper local workers just as soon as their bosses felt they could handle things.  Things started to slide shortly afterwards giving rise to the scramble to reinstate many of the key ex-pat managers before the appropriate balance of local/ex-pat managers was finally established.  Not for the first time the adage “there’s no substitute for experience” was given credence.  But, history repeats itself and I’m now watching the same pattern unravel in Central Europe.

Nobody would fail to understand the pride that drives people in emerging markets to take control of their own businesses as soon as they feel able.  However, there’s often an element of naivety associated with this process and that has definitely been the case in some of the Central European nations who have chased off their “expensive” ex-pat managers, or large corporates who have reassigned their senior foreign managers, to other parts of the world.  Nobody would deny the progress that these nations have all made from their Communist roots to the realities of commercialism, but maybe one important reality has been missed.

The fact is that the growth and development that Central Europe has experienced, has, so far, been against a backdrop of a strong European/world economy.  Such was the local competition that for many businesses, success in these markets has been a case of nothing more than turning up and opening your doors for business, but its all change as small consumer bases are spoilt for choice, investors look to other regions of the world for bigger and quicker returns on their investment and the state of the world economy has called time on the gravy train.  Now its game on, real business and the question is “are local managers up to the challenge?”

It seems that the local managers in the CE offices of global giants are better-trained and therefore better equipped than those of smaller, albeit still often multi-national, concerns (although I know of one global where the levels of competence demonstrated by local managers is truly appalling).  However, as the economy shifts and the challenges it represents change, businesses here are definitely sliding further and faster than you would expect in the West and already a couple of businesses that I know of are busy enticing back the ex-pat managers they waved goodbye to not too long ago.  You just can’t make up for fifty years of isolation, in a period when technological and commercial advances were faster and more substantial than ever before, with fifteen years of training in a cushy market, however intensive that training may be.  When the chips are down you need your best men and women and it looks like the best here are reaching the limit of their capability.

A few years ago my then teenage son spent his summer in Prague working as an intern in an advertising agency.  He was assigned to an account team among graduates who were all a good few years older than he was.  Within a couple of weeks he naturally assumed control of a major presentation, which was highly successful, giving rise to a comment by the agency MD that my son was a genius.  Much as fatherly pride might allow me to acknowledge this observation, in reality I have to point out that the truth is that, in this context at least, he wasn’t anything special.  However, having been brought up in a commercial environment he had learned by osmosis and his responses to decision-making situations and his understanding of basic commerce meant that many choices that his temporary colleagues were able to make only as a result of training, he made instinctively and therefore far quicker and appropriately.  These days there isn’t quite such a gulf between the decision-making capability of westerners and locals, but there’s no doubt that local managers are often less confident than you would expect their counterparts in Western markets to be.  Furthermore, where there is confidence it is still frequently and dangerously miss-placed.

To be fair I also have to acknowledge that a notable number of ex-pats who didn’t have the skills and experience to succeed in business in the West have, in the absence of any serious local competition, managed to create quite substantial businesses in these countries.  Such businesses are not excluded from the laws of business gravity though, and many now show signs of having reached the limit of their competence.  It seems that the limitations of their founders and the usual and consequential lack of a capable senior and mid-level management structure have conspired to leave many of these organisations vulnerable too.

So where are we going with this?  The so far gravity-defying Czech economy, despite vastly inflated property prices and increasing supermarket bills, appears on the surface to be healthier than most of its European neighbours, but if things start to slide it would seem that it will take the best that the best managers can offer to avoid some serious retrenchment.  Whether local managers (indigenous or ex-pat) are up to the challenge is yet to be seen, but so far the signs are not good and my guess is that the skills of those who are good enough wll be stretched far too thin.

There are a healthy number of SMEs in the Czech Market for example, but when you study them closely they are largely one-man-and-a-dog operations that are going nowhere, even in the favourable conditions that have prevailed so far.  Czechs are largely not commercially ambitious and most of those who are, set their sights on the trappings of success rather than the performance standards and quality of execution that will bring them.  My guess is that the commercial landscape of countries like this will change dramatically in the near future.  A purge of dead wood maybe and a wake-up for the complacent who think that they had “made it”.  Its all grist to the mill of commerce, but I am sure that some of the people that I see on a daily basis in Central Europe will be shocked to say the least, to see substantial organisations that they had assumed, because of their scale, were bullet-proof, disappearing from the business map.  The writing is on the wall for some already.

I am sure the tourism sector will be among the first to face the challenge.  Until now places like Prague have represented good value for travellers from the West, but this is no longer the case.  Strength of the Czech Korun combined with the high margins that typically inefficient businesses require, mean that prices for most things are (at least) equal to those in the UK.  Branded goods are usually more expensive and quality of domestic products and service remain well below the West.  Service is a particular issue.  With hard-pressed Westerners forced to be picky about where they spend their holiday money, it may be that the summer surge of tourists on which economies like Prague’s depend will be reduced to a trickle.  There’s a counter to this of course, because while the traditional Western tourists to Prague may turn away, everyone in the West will be sliding down the holiday scale a little and it may be that travellers who had previously gone to more exotic resorts or cities will discover the alternative that is Central Europe.  Somehow, though, I don’t think so.  Word travels fast, especially in the holiday sector.

I’m not predicting a dramatic collapse by any means, but I would be very surprised if we weren’t going to witness a watershed in the commercial development of some of these Central European countries.

Michael Weaver
August 29, 2008

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