Restructuring of the Russian Enterprises and the Role of Middle Management

Restructuring of Russian Industrial Enterprises and Middle Management

Veronika Kabalina,

Institute of World Economy and International Relations,

Russian Academy of Sciences, Senior Researcher

Institute of Comparative Labour Relations Research, Moscow branch, Director

Many researchers, who are studying the behavior of Russian enterprises during the transition to a market economy have identified the role of top management as the main agent of change at enterprise level. But the role and position of middle management in the process of adjustment of the industrial organism to the new external conditions has hardly been dealt with. There is not enough information on this question because the focal point of enterprise research in the 1990s have been primarily the external relations of enterprises with the state, suppliers, consumers, banks and emerging external structures. Conjunctural (business) opinion polls have been used to this end as well as questionnaires (sometimes together with interviews) addressed to enterprise directors. But the most effective method of studying the processes of intraorganisational change is the case study method, which has only recently begun to be used by Russian sociologists.

The position of middle management, its relations with top administration and workers (as well as other problems) were the focus of a study «The Restructuring of Management and Industrial Relations in Russia», carried out in 1992-1994 in four regions of Russia (Kuzbass, Samara, Syktyvkar and Moscow) by researchers from the Institute for Comparative Labor Relations Research (ISITO) directed by Prof S. Clarke and Dr P. Fairbrother (Warwick University, Great Britain). Alongside case studies of 12 enterprises the situation in a further 30 enterprises in different branches of industry, transport and construction was monitored.

This article puts together the results of the study mentioned above, which have been partly published, as well as preliminary outcomes of the current research of ISITO in which the role of middle management in employment restructuring is being studied. The published works of other research groups are also analyzed in the article. Large and medium-sized enterprises, mostly industrial, of the state and privatized sectors with more than 200 employees will be at the center of our attention. These enterprises, different in size and branch, have different structures of management and middle management varies both in its size and its role. However, the common conditions in which all enterprises found themselves at the beginning of the 1990s have given rise to common tendencies that I shall analyze in this article.

Firstly I shall look at the position and functions of line managers which were formed under conditions of the administrative-planned economy but are still reproduced. The main part of the article will deal with changes in the status and position of middle management in the context of enterprise adaptation to conditions of the transition economy in 1991-1996. The three main components of the process of enterprise restructuring which have to a certain measure defined the changes in the position of middle management will be pointed out here: these are the change of organizational structure of the enterprise, privatization and the restructuring of production and employment.

1. The Position and Role of Middle Management in Soviet Production

In the traditional Soviet enterprise middle (or line) management played the main role in the production process. Its position and functions have been formed in the course of a long period of time since the 1920s. The general idea concerning the position of middle management in the managerial structure of an enterprise is linked to an interpretation of the Soviet economic system as a planned-administrative one of hierarchical and bureaucratic character, of which the enterprise was an organic part. Accordingly, the management structure of the enterprise was oriented to the fulfillment of the plan and consisted of three levels of a hierarchical structure of management. The main function of top management was formal interaction with the upper level of state organs on problems concerning the working out of the plan and informal interaction with other enterprises on problems of its fulfillment. The middle level of management was responsible for taking the plan down to the lower level and interaction with the upper level of management, while the plan was carried out. The main task of the low level of administration was the organization of work at the level of the production unit (shop, section, shift) to achieve the plan. In fact, the functions of the middle and lower levels of management were closely linked with each other, so Soviet researchers in general did not single out the lower level of management. This article includes in the term ‘middle (line) management’ shop and section chiefs (and their deputies), senior and shift foremen and ordinary foremen.

So, the accepted point of view of the position of middle management was that it acted as the last link in the chain which transmitted the requirements of the plan to the level of the ordinary workers. Although this point of view was widely held, it was not based on empirical research into the real behavior of this group of management, but as a result of a so called ‘normative’ approach. This gave rise to a myth which overstated the hierarchical and bureaucratic character of the administration in a Soviet enterprise and gave a biased view of the position of middle management.

Our research points to the fact that even at the level of the formal ranking of managers in the enterprise, their hierarchy was not and is not of a fixed character. On the contrary, the structure of managers’ posts, their spheres of responsibility and functions are formally ill-defined. The shop chief holds no fixed place in the classification of managers. In some enterprises shop chiefs are put together with brigadiers, foremen and section chiefs. In other enterprises they are classified in one group with the director. Very often the boundaries of the functions of shop chief and foremen are formed under the influence of situational and personal factors (individual style of management, orientation of a shop chief either towards work or leisure).

The vagueness of the formal duties laid out in instructions contributes to the overlapping of the functions of shop chief, section chief, foreman and brigadier. As a result, «everybody deals with everything». Supply, maintenance of equipment, hiring and firing, maintaining discipline - all these questions are resolved by the shop chief, section chief, foremen and even brigadiers. The research of Dergalo and Ovchinnikov, carried out in the 1980s, when the brigade system of work organization was in use, has shown that from 18 functions prescribed to a foreman 13 coincided partially or totally with the responsibilities of the brigadier. These include: operational management of workers, the control of technological discipline and quality of products, the effective use of basic production assets, the raising of the qualification level of workers, maintaining discipline, the development of creative activity and training of workers.[1]

Another characteristic feature of the position of line managers in the Soviet enterprise was the mismatch of the three components of the status of managers: theirduties, rights and responsibilities. Based on research at Siberian agricultural enterprises over the period 1982-1986, another group of sociologists came to the following conclusion: «We find that the majority of groups of managers who have a very large volume of responsibility have a deficiency of aauthoritative rights».[2] The formal rights and the levers of influence on the workers mainly took the form of administrative punishment (deprivation of leave at a time convenient for the worker), or financially punished the careless worker indirectly(transfer to«unprofitable» work, deprivation of bonus). Their application in practice was complicated by the labour legislation in force and complex bureaucratic procedure. Thus, in the mechanical-assembly section of an automobile factory in which we conducted research, the right of the foreman to move the workers within the limits of the section from one job toanother is limited by the responsibility «to observe the current legislation allowing the use of the worker only for that work, for which he has been employed by the enterprise».

With only limited levers of authority, the middle managers are unable independently to ensure a continuous course of production and corresponding fulfilment of the plan. They have to secure the support of the workers, relying on informal mechanisms not stipulated by the instructions. Our research into the labour relations between the line managers and workers in the shop show that line management was heavily involved in informal relations and a network of interdependence with the workers.[3]As a result production management in the Soviet enterprise was a bilateral process, and the line managers took an intermediary position not only as conductors of the instructionsof the director to the worker, but also as representative of the interests of the direct producers.[4] In the absence of bodies of workers’representation (the trade unions in practice were a social department of the administration) line managers became the channel of expression of the moods of the workers, their industrial and social interests. The chiefs of divisions played an important role in the definition of industrial conflicts, their dispersion at the lowest level and prevention of their distribution to the level of the enterprise.

The hierarchical subordinated structure of management of the soviet enterprise was designed for the unilateral flow of orders «from above - downwards» and did not provide institutionalised channels of feedback for the resolution of industrial problems. These were replaced by informal personalised interactions («eyeball to eyeball» conversations with the director of the enterprise). The middle managers tried to affect the management of the enterprise, relying first of all on their good personal relations, or using intermediaries. Therefore inside the enterprise distinctions in the organization of wages in different divisions and in the status of shops could be observed which grow out of the informal arrangements between their chiefs and senior management.[5]

The network of informal dependences covers not only the relation between the workers and chiefs, and between middle and senior managers, but also between the chiefs of industrial divisions and services, connecting the enterprise as industrial organism in a functioning system. As a whole horizontal administrative interactions are one of the least formalized mechanisms of operation of business, their efficiency first of all depends on whether or not personal relations between the chiefs of the appropriate divisions have developed.

Informal interactions are the form of realization of mutual relationships at the level of the enterprise in the course of planning and current management. During these interactions there is an exchange by material resources, statuses, and also «papers» and money.[6]

2. Structural reorganization of the enterprise

Organizational restructuring, which was accompanied by a breaking down of traditional administrative hierarchies, became one of the directions of adaptation of the enterprises to the new environment. They have caused inconsistent tendencies in the position of average management. In the past the structure of enterprise management was technocratic and this was reflected in the existing hierarchies. So, the second in line after the director was the chief engineer. Line management, which was subordinate to the chief engineer, was on the main axis of authority inside the enterprise. With the transition to the market line management has come to be involved in the decision not onlyof industrial, but also economic questions. The functions of middle managers have been extended. But the same process of extension of commodity-money relations to the enterprises has resulted in the status of industrial divisions and their chiefs being reduced.

The structural transformations in enterprise management began at the end of the 80s. Their underlying ideological reason was the ideas of perestroika, which penetrated deep into the enterprises, namely, to increase the stimulus to labour, by bringing closer together the results of labour and payment to the direct producer andthe to increase mobility and maneuverability of production. The middle managers were active supporters of these ideas. At all those enterprises in which we observed a process of decentralization at the end of the 1980s and beginning of the 1990s, the initiators of internal self-accoiunting were the young chiefs of divisions, some of whom came from other enterprises attracted by the promise of receiving their independence.

The main direction of decentralization in this period was the granting of functional and economic independence within strictly defined limits - without granting legal and financial independence. It meant that the divisions of the enterprises could independently conclude contracts with outside customers, but did not have their own bank account and could not independently dispose of all the profit received. As a rule, the lion’s share of the profit went in «the common pot» of the enterprise, where it was redistributed by the administration of the enterprise between well and poorly working divisions. The transition to internal cost accounting began with minor divisions, or from those divisions which were not rigidly connected to main production. On the one hand, non-productive departments (such, as toolmaking, transport and so on) found customers more easily, than did the main shops, whose production was almost wholly directed to consumption within the factory. On the other hand, it hardly seemed sensible to the director of the enterprise to lose control of those shops which determined the activity of the enterprise by allowing them to go their own way.

However, these first steps in the introduction of even a truncated kind ofinternal economic relations already resulted in the erosion of traditional hierarchies in the organizational structure of the enterprise. The chiefs and workers of minor divisions began to receive higher salaries than the chiefs of the main production shops.

At the beginning of the 90s, line managers began to a greater degree to be involved in the resolution of the economic problems of the enterprises, which appeared with changes in the external environment owing to the collapse of the previous system of purchase and sale and the breakdown of economic relations.

In 1991-1992, when there were serious difficulties, at first with supply and then with sales, the responsibility of line managers forfinding new consumers of the production of the enterprise was added to their independence in search of orders. And when the enterprises began to run up against the problem of shortage of working capital and non-payment of debts by its partners, chiefs of shops, sections and foremen were involved in the resolution of these problems.Under the direction of line managers the groups of tolkachiwere formed, whose purpose was to beat out the money for delivered production.

Once enterprise management came to realise that the instability of production conditions connected first of all with the absence of any guarantees of supply and sales was not a temporary phenomenon but an unavoidable attribute of a market economy, they began to search for a management structyre which could ensure a flexible response to varying environmental conditions. Therefore management reorganization first of all affected those divisions which serve the external relations of the enterprise. With the transition to the market economy «market» divisions (marketing,financial-economic and external economic services) began to format the enterprise whose purpose was the search for and securing of markets for the goods. With the beginning of mass privatization at some enterprises, especially those which were involved in struggle with external shareholders, departments to deal with financial securities were established and the role of legal services expanded.

The general tendency was for an increase of the status of these services and groups of specialists and a reduction of the role and change of functions of the departments of the administration (first of all planning departments), which served the operating needs of the enterprise in the administrative-command system, and also of the industrial divisions. The first indicator of changes in the administrative hierarchy of the enterprise is a change “of the influential figures” personnifying the main functions for the enterprise at a given moment. If in the past the second person at the enterpriseafter the director was the chief engineer, now it becomes the chief economist, who is named as the director for economy. Among other people who become important for the enterprise are the directors for marketing and foreign economic relations.

In 1992-1993 the idea of a divisional industrial structure became popular among managers of various levels. At different enterprises (not only large, but also medium) the establishment of independent production units was considered, but in most cases the enterprises did not have the resources to put such plans into effect. The following example is typical. In 1995 the senior administration of an engineering factory (1,2 thousand employees) consideredthat the time for separating the shops into independent divisions had passed - they prefer to go through a time of trouble together and, what is much more important, today they have lost the opportunity of manouvering, which they had still had a year or two before.[7] At the same time, one does not see any initiatives to receive greater economic freedom on the part of line managers today. Those who aspired to independence, as a rule, have already left the enterprise.