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Romania through international eyes

In Search of Excellence

The Romanian business model:
firma saraca, patron bogat (poor company, rich owner)

Peter Jansen
May 2005

When Tom Peters and Robert Waterman wrote their bestselling management book In Search of Excellence in 1982 the American economy was in a slump, and Japanese imports were threatening the very existence of the once mighty American corporations. In their book Peters and Waterman examined what made companies such as IBM, Procter & Gamble, Bechtel and Johnson & Johnson so successful over a long period of time. With Romania at the doorstep of EU accession, it seems an interesting idea to analyse the extent of Romanian companies’ preparedness for increased competition, using the very attributes of excellence that Peters and Waterman found in their research. In order to create a level playing field I want to start with an outline of the Romanian business model as I have found it over the years that I have been doing business in Romania.

Last year, a friend of mine, a business owner, told me that he had been awarded the first prize at a contest organised annually by the Bucharest Chamber of Commerce, for the best small and medium sized company in his sector. I asked him what this meant. He said: “It means I’m the only idiot that pays all his taxes!”

The response says a lot about Romanian business. Romanian bosses are not motivated by profit maximisation, as a Western CEO would be. They are only interested in increasing their personal wealth. The way to do this is to increase your costs in order to lower your profit to subsequently pay less profit tax, working with black money and in general avoid paying as little tax as possible. The positive cashflow resulting from this practice is skimmed off by the owner and goes directly into his pockets. The Romanian entrepreneur/shareholder is no homo economicus, like his Western counterpart. He is merely using the existing Romanian legislation to his own advantage.

The moral side of this practice has serious consequences for the competitiveness of these companies, the growth of their business, and ultimately the health of the Romanian economy. But that is not the scope of this article. I believe the Romanian entrepreneur/shareholder is just as much a homo economicus as his foreign counterpart and as such will adapt to the changes in the local business landscape that will soon take place. Because one thing is clear: The golden days of the Romanian business model will soon be over.

Why is that? Firstly, due to the changes in the Fiscal Code - in particular the introduction of the flat tax and the introduction of prison sentences for tax evasion, the enforcement of the fiscal laws will increase. In other words, tax evasion will become more difficult. This in itself will bring hundreds, if not thousands of Romanian companies to the brink of bankruptcy, as they have never learnt to compete in an economy in which fiscal laws were actually applied.

Secondly, EU accession in 2007 (or 2008) will further increase competitive pressures, as goods from other EU member nations will begin to flood into the country. Goods, and to a lesser extent services, that will be both cheaper and of better quality. The result will be equally devastating for many Romanian companies.

By and large, Romanian entrepreneurs and shareholders have two options. They can continue to do business the way they have always done, by skimming excess cash flow from the company to the point of bankruptcy. Or they can fundamentally change the way they conduct business.

This means creating a finance and accounting department based on both Romanian and international accounting standards, bringing a clear and coherent business strategy that will provide a sustainable competitive advantage, investing in upgrading the company, divesting non-core activities, and hiring well paid people. And even then, not all companies will be able to survive on their own and will need a foreign strategic partner to do so.

Some Romanian entrepreneurs will choose the second option. Why? Romanian entrepreneurs – at least some of them - are homo economicus. Choosing the first option means capital destruction and will leave any company ultimately with less money. The second option will mean first of all an awareness - that entrepreneurs have to realise they have a problem. For the majority of Romanian company owners this will already be one step too far, as they truly believe they know it all. Secondly, they will have to seek professional support, most likely in the form of an outside consultant who can help sort things out and advise on making the right decisions. Thirdly, they will have to invest in the company in order to make it more competitive and as a consequence accept a lower cash inflow in the short-to-medium term.

In all honesty, many company owners will be incapable of making this transformation, as it goes against everything that made them into what they are right now. And even if the owner goes through all these steps, that still doesn’t guarantee that he will actually survive in the long term. It might be, after all, “too little, too late.” There is still a chance to turn some companies around, but time is running out.