Business strategies in a transition economy: the case of Egypt

Business strategies in a transition economy: the case of Egypt

Samir Youssef

ABSTRACT

Egypt, a country in transition from a socialist to a free market economy suffers from underdeveloped institutions, inept bureaucracy, limited and uncertain resources and inadequate organizational capabilities. Business organizations have developed a number of strategies to deal with this situation. Some companies have clung to the past, sought government protection, focused on the local market and exploited opportunities resulting from the institutional void. These types of strategies are classified as either defender or reactive. Some other companies have capitalized on cheap local resources, sold locally and abroad, established links with multinational companies developed their internal capabilities and still benefited from government incentives and market imperfections. These strategies are classified as analyzer or analyzer/defender. A common pattern in most is to dominate the market through acquisition or related diversification or to follow unrelated diversification strategy. Companies which operated outside the domain of the government, while benefiting from its incentives, appear to be more viable.

1. INTRODUCTION

The issue of what business strategies are followed in transition economies (TEs) has been the subject of major interest in the management field. A number of theories have been found useful in explaining the constraints imposed on business firms in turbulent environment and the ensuing business strategies. Institutional, transaction cost and resource-based theories are of particular relevance (Hoskisson, Eden, Lau & Wright, 2000). Immediately in the aftermath of dismantling a centralized socialist system, the underdeveloped capital and labor market, absence of a strong legal system, binding business norms and a price mechanism to guide resource allocation increase transaction costs (Choi, Lee, and Kim, 1999). The prevailing methods prior to the transition continue to be used, such as bureaucratic decisions, personal connections, networking and counter-trade. These strategies reflect opportunistic behavior and a focus on external growth rather than internal growth (Peng, 1997, Peng and Heath, 1996, Khanna & Palepu, 1997, Hoskisson, Hill, & Kim, 1993).

Business strategies in TEs are constrained by environmental forces, shortcomings of government actions and policies as well as inadequate response of business firms due to their weak internal capabilities. Using Egypt as an example, this paper will identify these various constraints as well as the business strategies followed by a selected group of Egyptian private companies. Due to the difficulty in obtaining data in a systematic manner reliance is made on published sources. Macro level issues and concerns of the business community are discussed in daily official and unofficial statements in the local media as well as in local publications. Conclusions therefore are to be taken as only indicative and not conclusive.

2. PERFORMANCE OF THE BUSINESS COMMUNITY

Most of the private business companies in Egypt are closed family companies. Single proprietorships accounts for 61 percent, partnerships account for 29 percent, 8 percent are closed corporations and only 2 percent are open corporations where shares are traded on the stock market (World Bank, 1994). While the focus of this paper will be on family companies, reference will be made to the other types if the need arises to substantiate or qualify certain conclusions.

One way to judge the performance of the business community is to look at macro-economic indicators. While the rate of growth of the Egyptian economy during recent years has hovered around 3 or 4 percent, export record of the economy is still low and there is high level of unemployment. This is a serious matter considering the high growth rate of the population.

In addition to low export performance, a number of sectors suffer from unutilized capacity. (1,2) Products are expensive and not of high quality.

3. BUSINESS ENVIRONMENT

Uncertainty in TEs is higher than in developed countries due to larger number of dimensions and more difficulties in perception (Prime, Love & Shaffer, 1999). In TEs institutional changes mean changes in the rules of the game and the underlying logic of relationships. The institutional context exerts normative pressure on organizations to change ,as distinct from the market context, which exerts mostly efficiency-based pressure on organizations (Newman, 2000). Lacking the new logic, managers rely on their old logic ,such as personalized exchanges (Peng and Heath, 1996).

Factors causing difficulty of business perception are definitely more heavily represented in TEs. The business community suffers from a prolonged departure from modern business analysis of situations. Unavailability and inaccuracy of information in addition to weak internal capabilities of firms do not make this perception an easy task. Difficulties in establishing causes and effects of events as well as in predicting consequences of responses to events are also prevalent (Golden, Johnson & Smith, 1995; Gerloff, Muir, & Bodensteiner, 1991).

Government officials, like business owners and managers, suffer from similar perceptual problems. The complexity of the environment far exceeds the capability of these officials to decipher the available information and in an optimal way (Hosseini, 2001). This results in fluctuation in the economic and political arena which generates a great deal of uncertainty for the business community (Beamish & Spiess, 1991). During transition, governments issue confusing and conflicting announcements motivating businessmen not to take them seriously (Peng and Heath, 1996).

In order to fill in this institutional void in the transition stage, the Egyptian Government (Government) has enacted or still preparing a number of laws to give guidance to its regulatory role. Examples include antitrust law, intellectual property law, consumer protection law and an environmental protection law. Preparation and implementation of these laws are not easy due to administrative inefficiencies and the underdeveloped status of market forces.

When institutions are inadequate, inefficient entrepreneurs will be able to succeed based on political connections or questionable practices. Resources will not be allocated on the basis of a transparent and equitable criteria. This includes land, loans, permits, etc. The issue of settling claims has been a problem since the State adopted the free market economy. Under socialism, business contracts hardly existed since most of the transactions were conducted between public sector companies. It was inconceivable that delinquency in payment would result in a legal battle since every thing belonged to the State. Even international transactions were conducted on the basis of barter agreements based primarily on book keeping entries. This created a void in both business values, practices and the legal system which led to some practices that proved harmful later one. For example, out of convenience businessmen started using deferred cheques, not only as a method of payment but as a way of obtaining credit by delaying the date of payment and submitting them to banks as collateral. The legal void encouraged many to write bad cheques, which led to a loss of faith in this tool of payment. (3) The Government failed on several occasions to ban this practice out of fear of prolonging the current recession. Businessmen got accustomed to this reluctance on the part of the government and always expect it to step in and save them in the critical moment.

During transition government units are in the process of replacing their old role of an owner-manager by a regulator role. Government strategy and policies do not suddenly become guided solely by efficiency considerations but social welfare is still important. Failure to achieve the proper balance, in face of an inept bureaucracy, leads to sending conflicting signals to business firms. While the declared strategy of the Government since the mid-seventies has been the adoption of a free market economy, implementation has not always been clear cut. The various policies to implement this strategic shift are clear including privatization, liberalization of foreign trade, directional instead of centralized planning, freeing exchange rates, encouraging the private sector and freezing the role of the Government as an employer. However there is uncertainty as to the pace, magnitude and timing of change. There has also been reversal of direction, reverting back to direct government interference, contradictions between declared objectives and implementation in addition to tacit approval of violating the law (Harik, 1998).

Despite privatization effort the Government still dominates many fields such as infrastructure projects, health and education. It uses its power to influence the economy and is ever reluctant to give up entirely its welfare function. After six years of prudence between 1993 and 1998, a recession forced the Government to broaden state employment and to loosen spending constraints. While the declared strategy is transformation to a free market economy, the Government, under the mounting pressure of a growing population and a recession, had to abandon the hands off policy of hiring people and announced a program to hire several thousands. The State capital expense budget is a major target for many business firms aspiring to get government contracts. However, this does not come risk free. Faced with tremendous responsibilities and limited resources the Government is not always forthcoming in paying its financial obligations, which has caused many contractors a great deal of hardship due to limited liquidity. (4)

3.1 RESOURCES

For businessmen to plan in the future they need to be assured of the availability of various resources and the predictability of the cost of these resources. During the socialist era, businessmen were required to submit a feasibility study to an Investment Authority for approval prior to initiating the project. This was often done as a formality in order to satisfy a bureaucratic requirement. Under the pressure of businessmen this condition was lifted and the matter was left to be decided directly between the businessman and his bank (Youssef, 1994).

While the credit granting capability of Egyptian banks has improved considerably compared with the socialist era, organizational and information deficiencies have made it difficult to make objective assessment of credit requests. As a result, subjective judgment by bank officials was essential particularly in a period where banks had considerable liquid funds they needed to employ. Businessmen used whatever personal contacts they could muster from their network of relationships. (5) The result was high concentration of bank credit among a few favored clients, endangering banks’ portfolios resulting in a number of publicized cases of bad debt.

Foreign exchange is a scarce resource in a country like Egypt which relies extensively on imports of machinery, raw material and parts. This market is always subject to control measures which are usually announced unexpectedly and are often retracted shortly after they prove useless. Relying on administrative orders to solve a problem which is essentially an economic one, has often failed to stem demand for foreign currencies (Harik, 1998).

Businessmen have found it difficult to plan and focused instead on the short term. Others sought export markets to hedge against any possible devaluation. Sometimes official declarations contradict perceptions of businessmen. For example, the Government had stood fast at times against the request by the IMF to devalue the pound, arguing that the bulk of Egypt’s exports are price inelastic. Devaluation, the Government argued, will increase the price of imports, thus fueling inflation. This persistence lasted until the pressures of the market were so strong that the Government relented. It has been a habit of government officials to make declarations that the Egyptian pound is solid and will not be devalued. This has frequently been taken to mean the opposite.

3.2 MARKET ESTIMATE

Growth of the Egyptian economy depends to a large extent on receipts coming from tourism, remittances from Egyptians working abroad, Suez Canal fees and oil exports. All these sectors are influenced to a large extent by political and international events. Instability of these sources have always threatened the Government’s ability to undertake ambitious development projects and has often threatened to slow down or to halt on-going projects. This has frequently dealt severe blows to local businessmen. Some even became extra cautious in expanding their business out of fear of a sudden slum.

Even when information is available on macroeconomic indicators it could be contradictory. Import figures differ between those published by the Government and those published by international agencies and trading partners. (6) Export figures published by custom authorities, the central bank and the European Union are often different. (7)

Only companies which are publicly traded on the stock market are required to publish their financial statements. The private sector currently controls 70 percent of production but it mostly consists of closed companies which value secrecy, possibly for tax evasion reasons. Efforts by business associations to develop information base on available capacity and raw material has failed due to inadequate trust. (8)

Unofficial or hidden economy is estimated at between 30 and 60 percent of GNP. It is unofficial, in terms of not being registered with the Government, but is not necessarily illegal. (9) It is estimated that the informal sector supports some 2.5 million workers in around 1.5 million “micro” businesses, with less than five employees. (10) The unofficial sector does not pay taxes but it provides employment and creates demand for goods and services. The existence of a large informal economy makes businessmen unduly optimistic or pessimistic in their forecasts which reinforces reliance on judgment rather than seeking information.

3.3 ECONOMIC INDICATORS

There is now several attempts in Egypt to develop indicators, financial and non-financial, to serve as warning signals of impending economic crises. However, this effort is still hampered by the availability of accurate data. Furthermore, even with the availability of these indicators, it is no substitute for sound business judgment. Not all businessmen are capable of relating economic forecasts to business plans.

So, in the absence of accurate and timely data, it is possible that an official may paint an unduly rosy picture of the economy. With the absence of more direct indicators of the movements of the economy, the Government had to rely on indirect measures such as total energy usage, rate of growth of bank credit and number of bankruptcies. Using these indirect measures the Prime Minister argued on national television, in the after math of the 11 of September, against the country going through a recession when every body was feeling the crunch. (11)

During the socialist era when the State controlled 90 percent of the economy, there was a standardized accounting system and rigid requirements for reporting business results. Now, with a multitude of players, the issue is too complex to handle. There could be disagreements between the Government and Business Associations on interpreting the data on industry potential or market size. The Government, with the help of the European Union, is currently undertaking a modernization program of some chosen sectors of Egyptian industry which have a potential competitive advantage. However, conflicting figures would make it difficult for the Government to establish priorities. This was reported to be one reason why the Federation of Industries differed with the Government about including the engineering industry among the candidates eligible for modernization help. (12) In the food industry, the Government has used the excess capacity argument to convince potential investors that this industry is saturated. However, using a definition of market size based on the difference between actual and potential consumption levels the Association of Food Industries argued the opposite. (13)

4. ORGANIZATIONAL CAPABILITIES

Internal governance of firms in transition economies is problematic. Managers may not be suited to the needs of market conditions (Barberis, Boycko, Shleifer & Tsukanova, 996). The shortage in management resources limits the businessman’s ability to have an internal focus and can put a constraint on his ability to manage diversified activities. It also limits the possibility of developing competencies and sources of competitive advantage. Resources carried over from the socialist stage, are not particularly relevant to a free market economy stage. Companies usually have excesses of physical resources, shortage in financial and management resources (Lyles & Baird, 1994; Filotchev, Hoskisson, Buck & Wright, 1996).

4.1 AUTHORITY AND STRUCTURE

The system of management in Egypt can be characterized as authoritarian-paternalistic, where the top manager wields considerable power, particularly in financial and human resource matters. Technical managers are available in all functions and the level of knowledge and sophistication is constantly increasing. Many companies are applying information technology, at least to replace the existing manual system, but not necessarily as a decision making tool. While these improvements are noticed at the functional level, but is still inadequate in interdepartmental matters. Structure is mostly functional in terms of form and philosophy. The situation is much better in branches of multinational companies and private companies oriented toward export, notwithstanding the indispensable role of the top manager in an environment still constrained by bottlenecks and a huge bureaucracy. Matrix structure and other dynamic structures are found in companies operating in the communication, information, consulting and technical fields. However, reaping the full benefits of these modern structures is constrained by cultural and environmental forces.

4.2 BUSINESSMEN

Quite a number of businessmen in Egypt were originally traders and agents of foreign companies. Traditionally, trade is a very lucrative activity which enjoys high sales turnover, limited investment and therefore high return on capital. As the government adopted the import-substitution policy in the mid seventies, many businessmen started assembly operations in order to benefit from the tax differential between an imported fully assembled product and a knocked down one. In terms of experience and temperament these businessmen feel at ease with trading activities. They enjoy the quick profit of the deal and the high turnover of this business. Agents enjoy the fixed commission they get, especially when it involves limited commitment of resources. These businessmen are no organization builders in the modern sense of the word. This kind of activity is not as exotic as making a deal. It is difficult to harness the unlimited energy of the entrepreneur for the effective development of a formal management system. He enjoys concrete feed back on his effort, usually in the form of short term market results. It is difficult to sell him the idea that developing a management system will lead to positive results in the long run. It can be safely said that the Egyptian entrepreneur is more externally oriented than internally oriented. This is not inconsistent with him letting his professional middle managers develop the various functional systems that are needed to carry out the task, constrained by his frequent interference and his intuitive judgment.

One of the interesting tasks that the Egyptian entrepreneur finds intriguing is to handle the organizational-environment interface. This is the point where resources are acquired, opportunities are detected and markets are found. Business owners may find it essential to network with government officials in order to secure resources. It is expected that after externalities are exhausted more serious attention will be given to efficiency considerations.

Faced with an uncertain environment and an incapable organizational system to deal with it, the entrepreneur can apply his intuition and sense of the market to find opportunities. If there is a major deficiency in information, as in developing countries, there is a stronger role for perception and a higher chance of a gap between perception and reality, eventually causing business failure. The role of professional managers in the organization is essential to reduce this gap by providing a solid foundation of an information base to help the entrepreneur reach his judgment. (Oliver,1991) However, this role is constrained by the personality make up of the entrepreneur.

Along with the patrimonial values inherited from years under socialism under a patron state, an emerging value system is appearing in export-oriented companies as well as companies in the field of information and communication. These companies are led by entrepreneurs who have exposure to the west and are keen on developing a modern management system in their companies to fit the requirements of their markets. Despite their relative isolation from the bureaucracy they are still vulnerable to its predatory habits. To fend off any possible threat they need to exert considerable effort in external activities which distract them from the organizational building task. (Youssef, 1997)

4.3 MANAGERS

Many managers in the private sector acquired their experience during the socialist era where the State was characterized by many as patrimonial. Political skills and networking are important in this kind of environment. These skills are still important during the economic transition stage where the State still controls resources and markets. As the economy becomes more competitive careful planning of using resources becomes essential in order to meet market demands. Technical skills are needed here to estimate market size and to relate it to company resources. A number of difficulties are immediately encountered. The bureaucratic-authoritarian culture, if dominant, will frustrate the professional tendencies of young managers. The European program to modernize Egyptian industry has faced considerable difficulties in getting Egyptian companies to participate due the emphasis of the program on developing the internal management system of companies through consultation rather than providing direct financial or technical help, which is the preference of many businessmen. Apparently, there is no adequate appreciation yet of the importance of an efficient management system.

Due to the predominance of the government and the authoritarian culture managers with a previous public sector or military background can help with matters connected with lower level government units, such as getting permits or hassling after necessary approvals. The role of professional managers may be important in formalizing the work system. However, for the organization to develop certain competencies, it is important to institutionalize certain process concepts in business firms such as equity, accountability, clarity of objectives, coordination as well as well thought-out decisions. Development of these processes is important for institutionalization. An entrepreneur with the traditional mentality of a trader will not help with this evolution. (Youssef, 1997)

5. BUSINESS STRATEGIES

Given the institutional environment described above, a number strategies that were adopted by private businessmen can be identified. The typology of strategies developed by Miles el. (1978) can be useful, where four types are identified: prospector ,analyzer ,defender and a reactor. Prospector is the most extroverted and opportunistic type and displays an interest in new product and market opportunities. The defender tends to be efficient in a market that it tries to defend. The analyzer maintains a balance between a stable market and new product and market opportunities. The reactor senses the environment but does not appear to develop appropriate responses and as a result exists in a state of perpetual instability. The pure prospector strategy is difficult to find in a country like Egypt due to institutional shortcomings, shortage of entrepreneurs and limited indigenous sources of innovations. The other three strategies are more likely to be found as explained below. Due to unavailability of information, the effects of these strategies on performance can not be determined in all cases.

Elements of strategy that are followed here are based on a model developed by Hambrick and Fredrickson (2001). Some of the elements that are relevant to a transition economy include the arenas of operations or what business the company is in. This include product categories, market segments, geographic areas, technologies and value-creation stages. The second element is the vehicles of growth or how to get there question such as internal development, joint ventures, licensing and acquisition. The third element is the differentiators the company possess such as image, price, styling, service and product quality. These three elements are the substance of a strategy. The fourth element is the staging of these different moves; i.e., the sequencing of initiatives. The fifth element is how profits will be generated; e.g., through using scale and/or scope economies to achieve low cost or through charging higher prices due to unmatchable service or proprietary product features. This model will serve to categorize examples of companies in the Egyptian scene. These elements of strategy can be applied whether the company is following a prospector, analyzer, defender or a reactor strategy using the classification developed by Miles.

5.1 ANALYZER STRATEGIES

Companies following the analyzer strategy have tried to utilize the local market as a stable portion of their domain and in the mean time have made some inroads in the export market. These companies have developed an external market orientation whereby they capitalized on the comparative advantage Egypt has in highly qualified engineers or cheap labor and available raw material either in the form of independent operations or to place Egypt on the value chain of multinational companies. Owners of these companies have a global mindset and their strategy can be classified as an analyzer (Peng, 2001).

A good example of an analyzer company is Al Ahram for Beverages (ABC). This company after proving successful has sought foreign capital and technology through selling equity to multinational companies. ABC, Egypt’s sole brewery and wine producer is a 105-year old brewery aiming its products largely at the tourist sector. This company was nationalized in the 1960s to be sold out in 1997 to a group of Egyptian and foreign investors, as part of the privatization program. The new owners have moved the facilities to a new industrial zone to benefit from special tax exemptions. In order to turn the company around they used foreign management, modern technology and obtained new licenses for producing new products (especially non-alcoholic beverages made of locally produced barely) that were exported to Gulf and Far Eastern Moslem countries. In the four years following privatization the company has achieved an average 38 percent growth in after-tax profits. (14)

The Dutch beverages group, Heineken International recently bought a 98.7 per cent stake in the company for a total value of $287 million, representing a capital gain of more than 300 percent over the purchasing price of $85 million in 1997. According to the terms of the deal, ABC will keep its name, its largely Egyptian management and its well known brand names. The company enjoys a monopolistic position in a highly protected market with tariffs on imported alcoholic beverages reaching more than 300 percent. Prior to the sale to Heineken the company had managed to acquire two other competing companies giving it sole control over the market. Part of the success of ABC is due to sound financial management when one of the acquisitions was financed through a local and foreign consortium, for the loan to be paid off over a five year period. The sale to Heineken has been finalized in the absence of a law on monopoly which has been revised 16 times since 1994 due to objections from businessmen and inter-ministerial conflicts.

Another company which has adopted an analyzer strategy is Vetrac which specializes in producing different varieties of jam. The company was established in 1981 to exploit the increasing shift toward fruit production after the government relaxed its grip on agriculture. Company management decided to export different varieties of jam in a processed form, initially to neighboring Arab countries. Due to difficult competition from imports in Arab countries the company adopted a differentiated price strategy whereby the export price was less than the local price. As a result exports during the period from 1983 to 1986 increased from 300 to 600 tons which was still an insignificant percentage of total production.

Successive devaluation of the Egyptian pound coupled with a strategy of differentiated products and prices enabled the company to extend its export markets to Australia and Japan. Because food consumption is influenced by indigenous tastes the company had to use the brand names of others. Recently the company placed itself on the international value chain when a Japanese producer asked Vetrac to produce the product on his behalf using his company’s brand name. In addition to price differentiation the company had to pay attention to consistent quality and specifications. Company management is always keen not to let importers doubt company’s capabilities. Due to its solid position the company was recently able to attract a multinational company to buy a significant portion of its shares. (15)

Another example of a successful analyzer is Oriental Weavers, a family-owned producer of machine-made carpets. The company originally targeted the local market but with a determined export orientation. In its initial stages it benefited from protection from imports and from tax exemptions, being located in a new industrial zone. Currently, the company controls a significant market share of this product category in the U.S. market. It originally sent samples to international fairs with no apparent success, then a market study was conducted to identify preferences of the American consumer. Compared with the Egyptian market the American market was found to be highly differentiated. An expert designer was hired and the different designs were executed in the Egyptian factory. The quota system imposed on imports to the U.S. market put a limit on the quantity that could be exported. To get around this hurdle a joint trade company with American partners was established. Later on, company management realized that a ceiling on growth was achieved due to shipping delays. In order to respond quickly to market needs, a decision was made to establish a production line in Georgia where this industry is concentrated. Currently the company is dealing with a total of 2500 different types of sales outlets in the United States. Oriental Weavers and other similar companies have looked at exporting as a strategic objective and not only as a residual activity of the local market; an attitude developed during the socialist era and is still very difficult to dislodge.

Other examples of companies adopting an analyzer strategy are those in the area of information technology which develop software programs on contracts for multinational companies based in the West. Some companies have established offices in the United States. Egypt can have an edge in IT industry because it is labor intensive and the local value added is high. The IT sector grew by 17 percent last year against an overall growth of just 3 to 5 percent. For example, Raya Holding company has developed expertise in customized software. It has recently won a deal to automate the Central Bank of Jordan and has created a network for the Cairo Stock Exchange. Total exports of this sector now stands at $ 50 million per year worth of software and is expected to grow. (16)

Traditionally, Egypt had a comparative advantage in producing long fiber cotton. However, due to its high cost, it is not considered any more economical in producing shelf- items ready made cloths. Some companies have adapted to this change in sources of comparative advantage by importing relatively cheap cotton fabrics from the Far East, used relatively cheap local labor and imported modern technology and re-exported their production to western markets to be sold under foreign brand names. These export-oriented textile factories have placed themselves on the international value chain by acting as production platforms for multinational companies and using the latter’s labels. These companies are using modern technology, followed international specifications and accepted supervision by foreign clients. They outsourced accessories and material, trained their workers and differentiated their prices where exported shirts are sold at less than half the local price.

Other companies in the fields of ceramics and leather have taken advantage of locally available cheap material and labor to produce high quality products that can compete effectively in the currently open local market and even to export abroad. These companies have also benefited from tax rebate on the tariffs paid for their imported inputs. All these companies have successfully adapted to the new requirements of the open economy.

5.2 DEFENDER STRATEGIES

EHz Company for Steel is the largest company in the industry, after it acquired another major company, Eldekhilla. Ezz is using modern technology, has 51 percent of total local production capacity and controls 68 percent of the market and the remaining share is controlled by a total of 19 smaller firms. Due to its high quality the company is favored in the government mega infrastructure projects. The company has been accused of monopolistic practices after it raised its prices due to the rising cost of imported components which reaches 53 percent of total cost. This was caused by the rise in the price of the dollar vis-a-vis the Egyptian pound. The head of the company, a prominent businessman, is also active politically, being a member of Parliament and a head of one of its committees. He is highly vocal trying to protect his company and to fend off accusations of monopoly. He argues that his company size is below the average economic size in this industry where economies of scale are crucial. The industry at the international level is highly competitive which forced the United States and Europe to adopt protective measures. The Egyptian Government recently succeeded to get the U.S. Government to exempt steel imported from Egypt from the recently imposed punitive tariffs. This type of government assistance as well as high reliance on the local market is essential to the survival of a company like Ezz. However, within the limitations of its size it is considered more efficient than locally competing companies. The strategy of this company can be classified as a defender strategy.

Some companies that also adopt a defender strategy have a primarily local orientation with limited export activity to nearby markets. An example is Olympic Group which produces heaters and water boilers. It adopted a related diversification strategy by acquiring a public sector refrigerators company offered for sale in the privatization program. The acquisition was consistent with the company’s desire to maximize the use of its distribution and service network. Olympic has been in business for a long time and has established reputation in reasonably priced and quality products combined with an extensive network of after-sale service. This strategy has worked in creating a mass local market which is price conscious. (17)

5.3 REACTIVE STRATEGIES

There is another group of companies which have remained local in orientation. Having a local mindset they adopted a reactive strategy and always demanding protection. Despite clear signals they are not yet quite ready for the eventual integration between local markets and global markets (Kadia & Mukherji, 1999). The most vivid example is a total of 17 automobile assembly factories currently operating which are based on licenses and are not allowed to export, except to nearby markets not covered by mother companies. They are highly inefficient but they are profitable based on the difference in tariffs between a totally assembled imported car and a knocked down one. While these businessmen may amass huge fortunes but their long term viability in face of the continuous removal of barriers to trade is in question. This strategy has been encouraged by the import substitution policy adopted by the Government and the reluctance to replace it by an export promotion strategy, fearing social repercussions. (18)

5.4 ANALYZER/DEFENDER STRATEGIES

The change of status from an analyzer strategy to a defender strategy appears to be a characteristic of a number of Business Groups which initially took risk by venturing into new fields of operations, but later demanded protection. Many of them are currently unstable financially due to poor financial management in addition to the limited experience of the owner-managers in managing unrelated fields. They may even slip into the reactor category if they fail to manage their financial problems. Many of these Groups started initially with a small equity base and obtained huge credits from banks. Poor financial management, right from the start, would threaten the company’s ability to maintain its analyzer strategy.

An example of this type is the Alkan Group which has an annual turnover exceeding $150 millions, is affiliated with a number of multinational companies, primarily in an agent capacity. The company is engaged in activities ranging from cellular network, construction, petroleum, pharmaceuticals, aviation, travel and cotton manufacturing in addition to financial services. The Group is one of two companies which currently controls the mobile telephone network in Egypt but it also has a significant trade activity. The Group has suffered major losses due to the recession which has lasted for several years. The owner of the company blames government policies for his misfortune. Specifically, this includes keeping interest rate and the value of the Egyptian pound high in addition to Government’s delinquency in settling its debt to the company. The company’s involvement in distribution activity makes it constantly facing problems related to late payments. Alkan Pharma, one of the group’s companies which is engaged in distribution, has been closed down and the employees laid off. This company was serving some 2000 pharmacies and not meeting its profit margin. The Group is also part owner of a pharmaceutical factory producing insulin. The owner claims the Ministry of Health is fixing the price of insulin below cost, considering that he has to buy dollars at a price higher than the official one. Pharmaceutical companies have been notorious complainers of the Ministry of Health pricing policy; a claim rebuffed by Government officials. Another threat, voiced by the Alkan owner is the Government intentions to let a third competitor comes in the telecommunications industry which will endanger his market share in a market which is hardly growing. While entering this new field several years ago would qualify Alkan as an analyzer, these frequent complaints and request for protection change its status to a defender. (19)

Another example of a Business Group suffering from this demise is Bahgat Group, owned by one family, has 30 affiliated companies and a total turnover around $120 million dollars. Its core activity is electronics but is also involved in real estate, recreation parks, gulf courses, sports, furniture and T.V. Stations. It controls 47 percent of the local television sets market. It also entered the field of digital receivers capitalizing on the growth of satellite transmission in the region. It currently produces 200000 units, fifty percent is for export. The Group is adopting a low price strategy and is constantly increasing its local content. An initial low equity base, over-expansion in real estate and over-borrowing is causing a liquidity problem forcing the company to reschedule its debt. According the owner, this over expansion was a response to the State’s encouragement of the private sector during the expansionary period of the eighties when Egypt was expected to be the New Tiger. It is not surprising that the euphoria of that period made businessmen over-optimistic to the point of not paying enough attention to sound financial management. The owner now blames cheap imports and smuggling for his trouble. (20)

6. CONCLUSION AND RECOMMENDATIONS

The various examples explained above show that in the long term it is better to operate outside the government domain. The government, being a major customer and a provider of resources, encourages rent seeking behavior and discourages internal growth and the development of internal capabilities. Government behavior is unpredictable and inconsistent which could be due to the difficulty encountered in managing a TE. In a poor economy the government finds it difficult to relinquish its welfare function. In the mean time it is under pressure to observe efficiency and the rules of the market. Businessmen can still benefit from tax exemptions and imperfections of the market still existing in the transition stage. While companies may try to take advantage of the institutional void in a transition stage, to survive in the long run they need to develop their internal capabilities and preferably develop an export orientation. Due to the absence of an anti-trust law ,achieving market dominance appears to be a favorable choice among businessmen. Lacking enough long-term business orientation, businessmen tend to plan in a linear fashion without giving enough considerations to the possibility of an economic slow down ,which could be severe in a developing country due to immobility of resources. Application of sound financial management in the early stages of a project is a good safeguard against imprudent expansion. This will help the businessman in being proactive rather than reactive in his strategies.

Financial management is essential at the formation stage where appropriate capital/debt ratio is applied to avoid early strangulation of the project due to lack of liquidity and to safe guard against delinquency behavior of creditors especially that of the government. While the institutional void exemplified by the inefficient banking system may create a tempting situation for businessmen to have a lower capital/debt ratio, the results are disastrous, if a sudden recession hits the country. Sound financial management has shown its effect during the recent recession which has been in effect for several years and especially in the aftermath of the 11th of September attack when the Egyptian pound had to be devalued. Companies which have followed a conservative financial policy, had operations abroad or an export activity have gained while others which rely heavily on imports and the local market have lost.

END NOTES

(1.) It is expected that as a result of finally removing trade barriers a number of plants, estimated at 1570 primarily in the food and textile sector will go bankrupt, Interview with Minister of Industry, Al-Ahram Weekly, June 25-31, 2001.

(2.) Excess capacity is estimated at 15 % in cement, 17 % in fertilizers, 40 % in shoes, 40 % in medicine, 90 % in passenger cars. AL-Allam Elyoum, December 12, 2000.

(3.) It is estimated that there is currently about 10 million cases of bad cheques being handled by the courts. Al-Akhbar, August 11, 2002.

(4.) For example, the Government owed considerable money to Arab Contractors, a major construction company, which put the company in real difficulties. Also, the Lakah Group, a diversified private holding company, failed to meet its debt obligations and the owner fled the country. He claimed that the Ministry of Health owed him 360 million Egyptian pounds in deferred payments for supplying medical equipment of turn-key hospitals, Al -Ahram Weekly, August 16-22, 2001.

(5.) Estimates of bad loans out of total bank loans vary between 5 percent to thirty percent depending on the source.

(6.) Ahmed El Naggar, Crises in the Egyptian Foreign Exchange, Al- Ahram, January 4, 2000

(7.) Statement by Minister of Foreign Trade, Boutros Ghali, in the Peoples Assembly, Economics Committee, Al-Allam Elyoum, February 2, 2002

(8.) Interview with Ahmed Ezz, Head of Sadat City Business Association, Al-Ahram El- Ektisadi. Issue 1752, August 5, 2002

(9.) Statement by Mahmoud Abddel Azeez, Head of National Bank of Egypt, Al-Ahram Round Table, Al-Ahram, February 12, 2001

(10.) Business Monthly, February 2002,p.42

(11.) Interview with Prime Minister, Economic Forum Program, Egyptian National Television, November 11, 2001

(12.) Al-Allam Elyoum, April 11, 2002

(13.) Al-Allam Elyoum, December 19, 2002

(14.) Al-Ahram, September 14, 2002; Al-Ahram Weekly, October 3-9, 2002; Al-Ahram, September 9, 2002.

(15.) L. Elkhawagah, The case for Egyptian exports, Center for Developing Countries Studies, Al-Ahram Publications, No.176, August 2002.

(16.) Business Monthly. September 2001.

(17.) Currently the company controls 55 percent of the market of refrigerators, 80 percent of oil heaters, 65 percent of water boilers and 65 percent of washers. Al- Allam Alyoum, February 4, 2002.

(18.) Total unutilized capacity in passenger car industry is estimated at 90 percent. Total market size is only 100000 units with 40 percent imports. Percentage of local content in total cost is estimated at 23 percent. Al- Allam Elyoum, December 21, 2000.

(19.) Interview with AlKan CEO, Al-Ahram Weekly 4-10, April 2002. Interview with Minister of Health, Al-Ahram, November 11, 2002.

20. Interview with Ahmed Bahgat, CEO of Bahgat Group, Dream TV, November 2, 2002.

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Dr. Samir M. Youssef earned his Ph.D. at University of Iowa in 1971. Currently he is a professor of management and international business at the American University in Cairo, Egypt.

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