Essay: The importance of strategic management (Private Railway Industry, EU)

Introduction

The importance of Strategic Management in today’s business environment is an issue that can hardly be contested as it offers continuous direction and makes sure that the company stays permanently on the right track which leads to the achievement of its long term goals and objectives.

For my graduation thesis, I have come up with the daring idea of analyzing and monitoring the activity of a private railway operator on a foreign market outside its home borders in order to identify some real life managerial problems specific for such a big industry and then by using the knowledge gained throughout my experience at International University of Monaco try and generate some plausible solutions in hope of solving complex matters that require advanced strategic thinking, experience that will most surely prepare me for facing the challenging career of a world class manager.

The focus of my research is to acquire valuable insight on the Private Railway Industry in a European Union country like Romania with the help of various tools such as SWOT Analysis or Porters Five Forces Model and then narrow my concentration to the private railway operator that I have chosen for this applied project with the goal of showing how important it is to take Strategic Management into consideration when expanding operations to a non-EU country such as Serbia and how a lack of such thinking can bring numerous difficult problems that can undermine the companies offshore activities and thus, severely affect its long term profitability.

General Concepts of Management

1.1 The History, Definition and Importance of Management

The History

Any society or culture assumes the existence of different forms of social, political or economical organizations that require the knowledge of Management and the advanced skills of managers; At national level the role of managers is undertaken by presidents, kings or councilors but nevertheless, the modern management theories date back many centuries ago, to ancient times to be more precise, when management was applied under various forms to handle every day tasks.

The Egyptian Society represents the best example of a complex civilization were the first concrete management functions can be identified as they were among the ancient pioneers which were able to come up with advanced management practices to address issues such as delegation of authority, the hierarchical structure of decision making within teams as well as a complex system of tools to evaluate and forecast crop fertility and water level of rivers, to conduct commerce and trade, to manage governmental income and expenditure and last but not least, design one of the biggest wonders of the world, the pyramids.

The famous German economist, Max Webber has dedicated much of his time carefully analyzing the evolution of organizations from the early first traces of management, much before management was granted significant importance, as it was not until the beginning of the 19th century that it became an interesting subject of research shortly after the industrial revolution.

In his studies, the German economist found out that organizations which were run in the Feudal period by the few influential classes like famous aristocratic families, had in fact benefited from the advanced problem solving capabilities of a relatively small group of people with titles such as “councilors” who, even though restricted in taking decisions, possessed many of the skills attributed today to the top managers who help run companies efficiently.

Defining Management

Throughout history defining Management has often resulted in intense debates among specialists because many of the given definitions were in fact only partially describing the object of the managerial activity without successfully illustrating it’s true complexity.

The Encyclopedic Dictionary defines Management as being “the assembly of organizational and leading activities with the purpose of adopting optimal decisions in projecting and controlling the microeconomic processes; The science of organizing and leading enterprises.”

American Specialists Reece and O’Grady consider management as being “the process of coordinating human, informational and financial resources in achieving organizational objectives”.

As it can be easily seen, numerous definitions of management have a strong focus on organization, coordination and resources allocation of enterprises but in reality management is much more complex.

In the last decade, together with the further development of management as a science, specialist have managed to agree upon the following definition of management:

Management is the assembly of knowledge and activities that lead to predicting, organizing human resources, coordinating activities, personnel and organizational structure of the company, control and evaluation of results all of which have as final scope increasing the competitiveness and efficiency of the organization.

Management, put in more simple words represents the act of organizing, planning, leading and controlling an organization and its people to achieve desired goals and objectives.

The Importance

In the modern and dynamic world that characterizes the present, management has developed significantly as it is often seen as “an art” that needs special attention because if put into practice effectively it can create a true launching ramp for the organization and arm it with a real competitive advantage that would propels it far from its competitors and allow it the benefit of setting the pace on a continuously changing market.

Imagine what would happen with an organization if there would be no well defined set of rules to help maintain a clear focus on the goals and objectives of the company and if there was no one to organize the people and motivate them.

Some of the essential attributes of a specialist in management called “manager” are precisely that of being able to guide the people in the lower organizational levels and motivate them in order to obtain their maximum efficiency that will overall help the company advance in the proposed direction.

1.2 The Birth of a new Practice : Strategic Management

Strategic management as a separate and independent discipline from what was, until then, known as a universal form of Management had first appeared in the late 50’s early 60’s. Although the new science had many significant contributors , the most influential pioneers were considered to be Alfred D. Chandler, Philip Selznick and Peter Ducker.

Before the emergence of new management practices, the numerous management functions simply were conducted separately with an almost non existent strategic coordination between them. The many interactions which took place between the various organizational departments had a single manager, or in the most positive scenario two, who had the challenging assignment of coordinating and facilitating the flow of information which was transmitted in a closed system among the organizational departments, and this sometimes resulted with slow and biased decision-making framework .

It was Alfred Chandler that first identified the importance of coordinating the different aspects of management under one well planned strategy so that the company would be allowed to develop a long term focus when looking into the future, being of belief that such an approach can give a company direction, structure and focus.

Another great specialist, Philip Selznick, in the year 1957, formulated the innovative concept of creating a link between the internal factors of an organization and the complex external environment with which it interacts. This revolutionary theory was later redefined and put together in a different perspective by Andrews and his colleagues from Harvard Business School and became one of the most renown tools in modern management, the famous SWOT analysis. The basic application of the SWOT Analysis means that the strengths and weaknesses of the company are assessed with the parallel analysis of the opportunities and threats that arise from the business environment.

When it comes to great achievements in management ,the name Peter Ducker, an American economist and theorist who published several books addressing numerous management issues, with a very rich career extended to over fifty years of dedicated and internationally recognized work , is one of the few economist that can be associated to great contributions in strategic management where he managed to give the new discipline a rather new perspective. He underlined the importance of defining and meeting clear objectives because,as he put it , a complex organization with blurry objectives is like an explorer with no compass to guide him through dangerous jungles. This belief of his resulted in 1954 with his famous theory of management based on objectives (MBO). According to the American economist, setting objectives and monitoring your progress towards completing them should involve the entire organization from top to bottom.

Just like it is always the case upon formulation of a new theory, there have been several attempts to define Strategic Management as a science but only a few of the ones that have tried have actually succeeded in maintaining the core ideas and focus as to what it means and what it’s purpose is within the organization.

“Strategic management is an ongoing process that evaluates and controls the business and the industries in which the company is involved; assesses its competitors and sets goals and strategies to meet all existing and potential competitors; and then reassesses each strategy annually, quarterly or whenever it decides a revaluation is needed to determine how it has been implemented and whether it has succeeded or needs replacement by a new strategy to meet changed circumstances, new technology, new competitors, a new economic environment., or a new social, financial, or political environment.” (Lamb 1984)

Taking into consideration the research of many famous specialist in management from the very birth of the first ideas that formed strategic management and up until the present modern world of today, having a more clear insight on the purpose for which strategic management serves, we can now try and formulate a definition.

Strategic Management represents a set of managerial decisions as well as actions taken at the highest managerial level which lead to the development of effective strategies and plans that help achieve an organization’s objectives and prepare the organization to face the challenges of today’s dynamic business environment, as well as stand prepared to meet all possible future environmental changes.

1.3.1 A Top Level Challenge

Within an organization there can be numerous levels of management and different people with different expertise levels involved in various tasks which all contribute to assures the success of the entity, yet considering the complexity that characterizes the business environment, the role of top management is always crucial as top managers have the essential responsibility of making sure that everyone understands the direction and the objectives of the organization in order to stay on the road that leads to success.

It is precisely for these reasons that Strategic Management is considered to be the highest possible level of management in an organization as it is applied broadly to the whole entity being the one that provides direction to the achievement of corporate goals, to the integration of corporate beliefs and the right use of corporate culture.

When it comes to Strategic Management, top managers must often rise to the challenge of drafting, successfully implementing as well as constantly monitoring the effectiveness of cross-functional decisions things which, provided that they are managed properly, will open the door for the company and allow it to reach its long term goals and objectives.

1.3.2 A Guideline to Effective Planning

It is a know fact that managers who focus on planning can easily anticipate possible issues before they even emerge and thus, can propose viable solutions that can be effectively transposed in a swift action plan, eliminating costly problems prior to their appearance.

In Strategic Management effective planning plays a key role because it is the managerial function that represents the core layer for all the remaining essential managerial skills like organizing, staffing, leading, and controlling which combined provide direction for a company and thus increases a company’s potential for success in accomplishing its goals.

Due to the ever changing business environment, Strategic Management constantly assures that the plans that have initially been implemented are able to follow market changes in order to keep their effectiveness but in case a plan is outdated, it is the responsibility of the strategic manager to find a solution and come up with a new plan that will assure the success of the company on a long-term basis.

1.3 Creating Sustainable Competitive Advantage

Everywhere in the world, no matter in which industry a company is operating in, creating a competitive advantage is the key to success as it gives the company the possibility of gaining an edge in front of its main competitors allowing it to set the pace on the market and thus consolidate its position.

In order to come across such a potential competitive advantage a company must first identify what it does best or what does it have unique in the industry that no one else among competitors can reproduce and that will help it achieve its goals and objectives more efficiently; A competitive advantage can be anything from a special skill to a unique technology and it can be used as that special “ secret weapon” that will, in the end, add value to the company and allow it to grow and prosper.

The next step after identifying the competitive advantage is to make best use of it and differentiate from main competitors to later be able to reach market leadership.

The important issue that needs to be kept in mind at all times is that the competitive advantage stays a competitive advantage only as long as the competition can’t replicate it, because the moment that happens due to some technological breakthrough of the competitor or due to industrial espionage that is gaining popularity with incredible pace in the past few decades, the company must rebuild its strategy and start searching for a new core competency that can be turned into a competitive advantage.

The European Railway Transportation Industry

2.1 The Environmental changes that affected the Railway Industry

Ever since the European Union had decided to take the first official procedural steps of creating a common market with free movement of goods, capital and people, the European way of thinking took a considerable turn as both companies and entrepreneurs from all over Europe were out of a sudden changing their strategies and reorganizing to prepare for a new and more challenging approach on the market in order to fully benefit from such environmental changes supported by massive EU funding.

Before 1990 the railway transportation in all of the countries of Europe was run under no special international norms, the absence of which permitted state owned railway companies to use diverse organizational styles that consequently made it really difficult for the new idea of a common market to be possible , however, after encountering much resistance by critics, in the Spring of 1993, the first steps toward such a unification were taken.

The state owned railway companies, slowly but surely, forced by the circumstances, were obliged to come up with new forms of organization in order to cope with the new emerging industry trends to avoid being taken by surprise by, what it seemed like ,the new wind of change.

Prior to such changes, the majority of state owned railway companies were following custom build organizational forms that included both infrastructure and train transportation services financed by governments in a package deal but after the new international norms for railway transportation were redefined in 1993 , the railways companies were forced to adapt a unique organizational system which stated that the infrastructure, passenger transportation and cargo transportation must be separate autonomous branches of one big pyramid-like structure characterizing the new railway regime.

The new international railway laws that entered into force in 1993, together with the idea of improving the efficiency, quality of services and customer satisfaction were some of the key factors that influenced the entrance on the railway market of a new type of operator that acted independently from the state railway company having its own buildings, personnel, and financing resources, marking the beginning of a new and more sophisticated railway transportation era.

This idea of allowing a private operator to develop its activity in the presence of the state’s national company was a revolutionary success as in a short period of time the private operators managed to bring more quality in the transportation service with the implementation of ultra modernized trains and locomotives that were by far superior to those used by the state and thus, offered better quality to passengers for prices just a slight higher than the ones charged by the national railway.

2.2 Associations that promote the new railway system

UNIFE – Is one of the largest and most respected associations in the Railway Industry created at the beginning of the 1991, being formed at the initiative of numerous private railway operators as well as several national railway companies with associate member status in order to cooperate and collaborate for a more efficient harmonization of the railway transportation in Europe. Before its official mandate, private railway operators were dispersed into one of the three existing associations AICMR (Association Internationale des Constructeurs de Matérial Roulant) AFEDEF (Association des Fabricants Europeens d’Equipements Ferroviaires) or CELTE (Constructeurs Europeens des Locomotives Thermiques et Electriques) which had there main headquarters in France.

Because of the rapid need for restructuring in order to organize and anticipate the future of the industry after the implementation of the Single European Act in 1986, changes needed to be made so that the single market system would generate new opportunities and thus, just before it was introduced in 1993, these three associations based in France managed to unite under one big association in 1991 which would inherit all the functions and expertise of the previous ones and thus, the UNIFE was born.
One year after it began its activity, in the spring of 1992, UNIFE was relocated to be closer to the European Institutions in Brussels and ever since it has successfully established a strong communication framework and in the present it serves as a direct representative of the major European railway operators which participate in the manufacturing and design of trains and train parts, maintenance as well as refurbishment of railway equipment and electronic systems, and all other directly appointed activities in the industry. In time,it was decided that national companies that wish to contribute with technical assistance and support so that they can benefit from mutual agreements as well as technological research and advancement might apply for entrance but can only be accepted under the title of “associate member”.
Today the major role that UNIFE’s has revolves around representation in various forms of the general interests of it’s members in the main European as well as international institutions. It’s clear mission states that is must be actively involved in railway industry development so that it can facilitate the creation of the highest level of competitiveness of the industry that will, as a final result, bring innovation on the market and encourage more the use of both commercial and passenger railway transportation.

2.3 The Rail Transportation in Romania

The Romanian National Company called CFR S.A which is 100% owned by the state, administrates the 4th largest railway network in Europe (11,430 Km of which 3,782Km of electrified track). Bucharest is the most important hub of Romania’s railway, with 8 main railway lines that spread from the capital to numerous domestic as well as international routes. CFR (formerly known as SNCFR) was re-organized in October 1998 into five separate companies:

• CFR, Infrastructure
• CFR Marfa, Freight
• CFR Calatori, Passengers
• SMF, Management services
• SAAF, Administration of the assets

Railway Operator	Train Cir	Train KM	Brut T/train		%
CFR Marfa	11.926	842.791	1.206		50.37
Unifertrans	767	119.543	1.246		8.16
Rompetrol	489	71.475	1.512		5.71
Servtrans	1719	135.563	1.128		7.89
GFR	2375	216.453	1.374		15.47
ClassFer	73	8.194	1.066		0.48
TFG	364	58.087	1.185		3.69
Cargotrans VAG	577	87.244	1.200		5.42
Logistic	20	1.739	1.650		0.17
VIA terra Sped	59	2.467	1.020		0.10
ICIM Arad	33	2.049	709		0.07
Kairos	35	2.750	1.059		0.15
CTF	244	35.993	1.159		2.33
Transblue	0	0	0		0.00
TOTAL	18.781	1.584.348

2.4 Differences between State Owned and Private Operators

Unlike a state railway operator that can be defined as the country’s national entity which is directly financed from the governments budget and that has thousands of employees and a very vast fleet of trains and locomotives used in both passenger and cargo transportation which operate on routes covering the whole country and beyond, the private operator is a company with a privately raised capital that operates on a limited number of routes on either bought or rented railway tracks from the state but which has in its possession it’s own trains and locomotives fleet and that conducts many operational activities in accordance to its primary goals and objectives set by the top management and it’s shareholders.

2.5 The Railway Market Profitability

The railroad industry plays an important role in a nation’s economy as it is a provider of transportation for many basic industries and, increasingly, for exports and imports that travel by rail.

Considering the importance of the Rail Transportation in the modern world of today that accounts for about 45% of the total means of transportation currently in use, it shouldn’t be a surprising factor that the Rail Market is one of the most profitable markets which brings yearly a rough 84 billion Euros.

Among other outstanding performances, it can be noted that from 2005 to 2007, the railway industry witnessed a nominal growth rate of the orders placed in the market of 9% per annum. And many profitability studies predict that this will grow by between 2.5% and 3% per annum until 2016, when the accessible market will top out at around 111 billion Euros.

3.1 Short History of Grup Feroviar Roman

Grup Feroviar Roman is a private railway company with a private social capital that was founded in 2002 to respond to the market needs for quality and flexible railway transportation services, competitive prices, offering secure transportation conditions.

Grup Feroviar Roman has build a strong image for itself since its first appearance on the market considering its registered results, the potential and the availability, the owned park of wagons and engines, transport capacities, maintenance and repairs, which all recommend the company as being one of the most important railway operators in Romania with services corresponding to the highest European Union standards.

After a short period of time since its start-up, Grup Feroviar Roman became an affiliated member of the International Railways Union (UIC) and an associate member of the Organization for Collaboration of Railways (OCCF) with international licenses that allow it to operate in Hungary, Bulgaria, Ukraine and Serbia.

The companies main objects of activity are freight railway transportation and wagon shunting as well as maintenance and reparation of wagons, locomotives and railway lines for which the company has at its disposal an impressive 2300 wagons out of which 1200 are in private property of GFR, a number of 100 locomotives out of which 75 are in GFR property (25 are rented) and 3 ultra modern factories with the latest technology used in the reparation and assembly of train parts.

For sustaining at a higher quality level at large service range, SC GFR disposes of:

• License for railway transport for performing goods transportation;
• Safety certificates for performing about 90% of railway departments from Romania.
• Certificate regarding the implementation and maintenance of a quality management system SR EN ISO 9001/2001 certified by the Romanian Railway Authority (AFER), both for railway transportation and also for maneuver activity.
• The authorization for railway provider for current maintenance and repairs for railway lines in manual execution.
• Authorization for railway provider for revisions and accidental repairs for electric diesel locomotives and hydraulic diesel.
• Authorization for railway provider for accidental repairs on the merchandise wagons

3.2 Operational Activity

Considering the fact that the state owned railway company has a limited operational activity, and taking into consideration the advantages of being a private operator, Grup Feroviar Roman has the possibility of offering a broad range of services to its customers

through individualized service packages, according to each beneficiary’s request guaranteeing them quality transportation activities.

Grup Feroviar Roman S.A. in its wide range of railway services at the highest quality level offers:

• Conveyance of material on the public and private railways infrastructure;
• all types of technological manoeuvres of the railways rolling stock:
• Composition of trains and manoeuvre convoys;
• Decomposition of trains and manoeuvre convoys;
• Introducing and pulling out the wagons from the loading / unloading platforms;
• Matching at the loading / unloading platforms;
• Choosing (separating) the wagons on categories given by the goods type, wagons type, wagons condition, forwarding or receiving customers, etc.
• Overhaul and current maintenance of the engines and goods wagons;
• Current maintenance and periodic repairs at the railway lines;
• Railway logistics;
• Specialized assistance in the railway transportation field;
• Renting wagons for goods transportation;
• Renting of engines;

3.3 Facing Challenges on Global Markets

3.3.1 Expansion plans on Eastern-European Market

As in every new company that starts at the beginning from scratch with modest goals and objectives and then somewhere along the way gains valuable experience on the domestic market reaching exceptional results, inevitably after a while, the people that contributed to such performances begin to search for new challenges as ambitions grow to replace the old goals and objectives and make way for truly complex expansion plans.

When referring to Grup Feroviar Roman and its evolution, it is important to know that in the past few years the company has continuously been making efforts to expend its operational activities abroad because such strategy is part of the company’s global perspective that has served as a guideline for its long term orientation.

In addition to the already well established domestic activities through out all its home country networks in Romania, Grup Feroviar Roman has acquired licenses to expend its operations in Hungary, Ukraine , Bulgaria and Serbia.

In 2006,after recognizing the need of extending the companies operations abroad and after a careful market analysis, the window of opportunity that opened up offering the possibility of expansion pointed out to Serbia.

The market analysis conducted by GFR indicated that Serbia was considered an economically developing country in transitional recovery after the NATO bombing in 1999 , with a solid railway infrastructure but with poor wagons and locomotives that need servicing and maintenance, reason for which the Serbian state, carefully taking into consideration its interests of reducing its costs and making best use of foreign capital, decided to organize a tender for the privatization of an old trains reparation factory called Zelvoz Smederevo in the city of Smederevo with the purpose of allowing a foreign private railway operator to enter the Serbian market and modernize the factory at its own cost, preparing it for servicing domestic wagons and locomotives.

Immediately recognizing the huge business opportunity, with the possibility of opening up a new factory for train servicing in a favorable situation, GFR mobilized and organized its resources to meet the tender requirements and after several rounds of negotiation with the state and its organs, where the company had to present in detail its operational plan, it was awarded the right to buy the factory and put it back on its feet.

Having won the tender for the acquisition of “Zelvoz Smederevo”, GFR began making the needed preparations for putting the plan in use and reopening the factory gates but unpredictably gets stuck on the way.

3.3.2 The History and Acquisition of “Zelvoz Smederevo”

The Factory “Zelvoz Smederevo“ was constructed and declared operational in 1916, under the name of “The Repair Workshop“. It was build to satisfy the need for maintenance of railroad wagons, of the then already developed branch of industry of railroad traffic. The first units of the factory had burned in the great fire of 1923 and the construction of the new one followed shortly after, so that the production process would be established on the current location. During the major part of the postwar period, the company operated under the name of “Heroj Srba“, in the various forms of organizational and status character. In 1994, the company became a corporation with limited liability, that is, a dependent corporation or “satelite company“, of which the founder and the owner of 100% of the capital was Railway Transportation Company “Beograd“, entity that was founded by the Republic of Serbia as a public, State-owned company, which indirectly determinated the character of the assets of Factory “Zelvoz Smederevo“.

Since 2005, The Factory of “Zelvoz Smederevo“ is in the ownership of the State up until the very begining of 2008 when “ Zelvoz“ is bought by the Romanian private railway operator “Grup Feroviar Roman“ that becomes the majority owner buying 70 % of the company’s assets.

3.3.3 Major Setbacks after “Zelvoz Smederevo“ Acquisition

Out of the four foreign markets where GFR has set up diverse activities, the Serbian market represents the last yet most challenging one that the company has ever worked in.

Shortly after the final steps of taking over “ Zelvoz Smederevo ” were finalized, Grup Feroviar Roman mobilized a competent team of highly trained specialist and managers and send them to begin the necessary procedures in hope of starting up the business, however once the team arrived at the factory with instructions to take over, they were shocked to see a general state of chaos and serious problems that needed careful planning and special attention before the factory could start its activity.

At the time of entry, the Romanian owner of “Želvoz Smederevo ” found the following state of the factory :

• Employees General Strike
• Numerous unpaid monthly wages
• 10.000.000 Euros hidden debt of unpaid state taxes
• Several million Euros debt to main suppliers
• Significant debt towards management
• Technological aged equipment and installations
• Disorganized structure of the company
• Inappropriate organization of employees with more than two thirds being employed at administrative level, with no such qualifications and no official business contracts.
• Poor Fiscal Records
• Inefficient work programs
• Inadequate Management Motivational and Incentive Schemes

4.1 Competitive Analysis

4.1.1 Political, Economic, Socio-cultural and Technological Analysis

( PEST Analysis )

It is crucial that an organization has a good knowledge of its environment before beginning its activity. In fact, it is advisable for the environmental analysis to be continuous in order to complete all the aspects of planning.

At macro-economic level, the PEST Analysis helps a company asses weather it should or shouldn’t adventure on a new foreign market because in any scenario the risks of such an important decision must be minimal.

Political Factors

The political factor has a great influence on the regulation of businesses, as well as on the purchasing power of consumers and other businesses.

In the case of Grup Feroviar Roman and its expansion on the Serbian Market, the political stability of Serbia in the past decade has been negative as the country is well know for its prolonged history of wars and conflicts although there are important signs that Serbia is making efforts to stabilize under close European Union supervision.

The Republic of Serbia is ruled in accordance to a constitution, which was adopted by a referendum in October 2006. The Serbian parliament is the lawmaking body of the country. The political risk associated with doing business in Serbia is still high compared to other countries from the region. The primary issues of concern in Serbia revolve around the stability of the weak coalition government in Serbia and its response to Kosovo’s declaration of independence of February the 17th 2008.

Investment Opportunities

As far as the financial Incentives and regulations are concerned, the Serbian state is trying to provide favorable investment terrain. For this the state offers several incentives such as grants for both greenfield and brownfield investments that will boost the economy in the long run. The targeted state intervention is valid for most industries with the exception of the following sectors: agricultural, trade, hospitality and tourism. In order to qualify for such the applicant companies must proof commercial activity in competitive manufacturing sectors, booming service sectors and R&D. Favorable tax policy is implemented, including 10% corporate profit tax, exemption from corporate profit taxes for period of 10 years in some cases (investment over EUR 7,5 million or at least 100 employees on indefinite contracts). VAT tax is 18% standard and 8% lower rate (for basic food stuffs, daily newspapers, utilities etc)

Economic Factors

In the year of 2007 the Serbian economy managed to continue its positive performance by reaching 7.5% growth for the 2007 year. This number marks a significant increase of 1.8% in comparison to the 5.7% growth in 2006. The steady increase in the GDP of the country has been a trend ever since 2001 after the periods of stagnation in the 1980s, decline in the 1990s after the Federal Republic of Yugoslavia breakup, and collapse and hyperinflation in the 1999-2000 period. However, according to the Vienna Institute for International Economic Studies, Economic growth in Serbia will slow down to 5% this year and this pace will continue in the next two years.

Inflation

Serbian inflation is high in comparison to other countries from the region. This sends a clear message to the domestic and foreign investors that the country still experiences macroeconomic disorder. According to the Vienna Institute for International Economic Studies, this year’s inflation in Serbia will amount to 12% if there are no sharp price increases on the global market and will drop to 8% annually by 2010. The consumer price index rose by 6.1% for the first half of 2008 which refute the government’s economic plan predicting a rise in inflation of 6.5% for the whole year. Inflation in Serbia in June 2008 was 1%. The highest price increase was recorded in industrial non-food products which amounted to 2.2%, driven mainly by the rise in fuel prices.

Socio-Cultural Factors

Population, Language, Ethnic Composition

The following chart represents the diversification of ethnicity of the Republic of Serbia. It is quite multinational, fact which is mainly a consequence of the rich past of the country characterizes by numerous civil conflicts and territorial changes. The majority of the country’s citizens however are Serbs. Yet, other 37 ethnicities coexist on the country’s territory and all of them benefit from equal rights and duties while living in a fully integrated cultural system.

The official spoken and written language used in Serbia is Serbian with a rather rare bilingual national script which is written both in Cyrillic and in Latin.

As far as the zonal occupancy where minorities predominate , there is a law stating that these minorities have the right to chose their language and the scripts for official use although there are certain rules that must be respected before such request can be granted.

Christian Orthodox is the official religion in Serbia but apart from the majority population that willingly follows it, there are several other existing communities in Serbia as well such as : Roman Catholic, Islamic, Jewish, and they all enjoy governmental support.

Technological Factors

Research and Development- Traditionally, a significant level of research was undertaken in research institutes and universities in Serbia. These institutes had linkages with a wide range of industrial sectors and also had an extensive experience of research cooperation with camps in Western Europe, USA and Canada. Many of the activities of these institutes have now been privatized through spin-off of separate self-financing companies. The universities are also developing separate “campus based” initiatives to foster entrepreneurship and develop closer cooperation with foreign industry on research and product development. These institutions, companies and campus initiatives have developed internationally

traded expertise and prototype systems in areas such as Radio Frequency Identification, remote data acquisition, expert process control systems, communications software and embedded systems.

Industry Development

The Serbian government has announced that it plans to assign 43 million Euros from the National Investment Plan for a project to set up an integrated electronic network that will cover state organizations.

According to a recent announcement, the administration has set out a program for rapid development of electronic equipment , with the schedule providing for the network to be established at both the national and local level within a four-year period. The initiative is in line with the government’s policy objective of modernizing local government and of public procurement procedures.

With the new pro European integration in mind, the Serbian government has initiated a vast privatization process of state owned enterprises and the future will definitely bring new opportunities for companies seeking to enter Serbian markets.

4.1.2 SWOT Analysis of Grup Feroviar Roman

The SWOT analysis is a complex measurement used to describe the Strengths, Weaknesses, Opportunities, and Threats that represent strategic factors for a company.

The SWOT analysis as a tool should allow, besides the possibility of management to identify the organizational core competencies, also the received information to be correctly used in order to identify the perfect windows of opportunities which a company might be neglecting due to organizational myopia that can greatly limit it’s chances of reaching full potential.

SWOT Analysis Diagram

STRENGTHS WEAKNESSES

• Monopoly on cargo transportation – High State Intervention
• Large Infrastructure – High Infrastructure expense
• Modern Factories and Technology – Dissatisfied Labor Unions
• Numerous Experts in train reparation – Slow management Decision-making

OPPORTUNITIES THREATS

• Foreign state privatization – Western competition on Serbian market
• High potential in train reparation – Minimal growth of passenger trans
• Rail expertise useful in Central Europe – Increase in Electricity prices
• Servicing foreign trains in transit area – Stagnant world economy due to crisis

4.1.3 Porter’s Five Forces Model

In conducting a detailed Industry Analysis and determining how Grup Feroviar Roman can position itself on the market making sure that it will not be affected by forces that it can not control, the use of Michael Porter’s five Forces Model becomes important.

1. Rivalry

In terms of rivalry characteristic on the newly entered Serbian Market, Grup Feroviar Roman can, for the moment, breath normally as it is one of the few private railway operators present in the area.

The status that the company benefits from can be described as being the result of a disciplined industry as there haven’t been many company’s willing to expend their activity in such a risky business environment as the one found in Serbia.

An important issue of rivalry, although not the case in the present, can be the high exit barriers set by the Serbian government that does not allow an easy escape of the signed obligations once engaged in the privatization process and in case of future rivalry intensification, Grup Feroviar Roman would be obliged to remain on the market and fight for market share.

2. Threats of Substitutes

Because the railway industry is a complex and costly one, substitutes are often seen as alternative means of transportation like land, sea or air.

In the Railway Industry, Grup Feroviar Roman has a significant number of possible threats coming from other transportation means.

The most significant threat that can have negative results on the railway company are the low cost airlines that have been growing in popularity among passengers in the last 4 years because of low travelling prices, stealing away valuable clients and thus affecting the already decreasing railway passenger transportation even more.

In the present, on the Serbian market there are 5 active low cost airlines: Air Berlin, German Wings, Climber Air, Norwegian Air Shuttle and Wizz Air which concentrate on 20 major European Destinations however as Serbia is advancing toward European Integration, more and more airlines are considering Serbia as a potential business target.

3. Buyer Power

Like in most of the industries, the private railway industry is one that involves offering high services to customers and if there are many suppliers on the market, like in the case of the Romanian railway market that has more than 33 private operators, the power of the customer is high.

A buyer that comes in search for high quality at low prices has 33 options to choose from and it is in the company’s best interest to make sure that it can come up with an interesting offer that will not draw the customer away into the webs of the competitor.

When it comes to reparation of wagons and locomotives, Grup Feroviar Roman is the only private operator in Romania that can afford to offer customers personalized package deals as in that sector it is the market leader.

On the Serbian Market there is little differentiation as there are little competitors which increases the probability of a low power of buyers that will certainly allow for more profitable earnings.

4. Supplier Power

It is no secret that a producing industry such as the railway industry, requires the use of raw materials for which many times a trustworthy supplier is needed.

Generally speaking, suppliers if powerful, can influence the industry by selling raw materials at higher prices to capture some of the industry’s profits.

The power of the supplier in an industry such as the railway one, is determined by the possibility of the railway operator to easily cooperate with the supplier .

Usually the relationship between the supplier and the buyer in the railway industry are long term oriented as there is a mutual interest for the two to cooperate at the most efficient possible level because the necessity of often custom orders brings both parties profit as long as each party respects the other one.

“Grup Feroviar Roman S.A” uses more than one supplier for the acquisition of its raw materials and with such a diversified portofolio strategy it makes sure that it does not depend only on one supplier thus, avoiding to provide it with the possibility of charging unnecessary higher prices.

5. Entry Barriers

In theory, any firm should be allowed to enter and exit a market whenever it wishes to but in the real life things are different as high profitable firms that benefit from monopolies do not allow other firms to enter and grab their share of the pie.

In the Railway Industry, the entry barriers are set in such a way that it is not easy for a new operator to come and start-up its business.

In addition to the very high start-up costs that such an action involves, the state also requires many special permits that do not come easy unless the conditions of work are meat and this is why the railway industry is considered to be a pool of big sharks.

”Grup Feroviar Roman S.A” was forced to implement many new working norms and regulations before it was given green light from the Romanian government to start operating on the domestic market in 2002 but now it can proudly state that it has become one of the market leaders that are assaulted by smaller rivals for benchmarking.

As far as GFR’s entry on the Serbian market is concerned, the government of Serbia has been extremely helpful in lowering some of the entry barriers like the condition of investing minimum 5 billion Euros in infrastructure or erasing part of debts at the end of the privatization process but even so, GFR still experienced trouble respecting the harsh labor norms which, in the end, when drawing the line, make of Serbia a difficult market in terms of entry barriers.

3.5 Solutions to Existing Company Problems

After having seen the major problems that “Grup Feroviar Roman S.A” encountered when it unsuccessful attempted to enter the factory “Zelvoz Smederevo” and begin its activity as planned, and after conducting numerous research such as PEST Analysis, SWOT Analysis and Industry Analysis with the help of Porter’s Five Forces Model,I would like to try and bring some of my own personal points of view in coming up with some possible solutions that can help remediate the unfavorable situation and turn things around for “Grup Feroviar Roman S.A”.

First, I would like to take a closer look at the organizational level of” ”Zelvoz Smederevo S.A” because a factory with such serious administration problems must be brought to order.

My solution would be to bring a whole new team of management to replace the old one and make structural changes by removing the unqualified people from management positions and reassign them in accordance to their expertise level. A line manager can not occupy a top management position because he will be inefficient.

Regarding the numerous employees strikes, I believe the best solution would be to organize a general meeting with the labor Unions and hear them out as it is impossible to speculate the main causes of the employees dissatisfaction. After discussing and listening to their problems, a future meeting should be established in which the management will come up with some possible remediation solutions.

In this phase it is crucial that GFR tries to learn about the past corporate culture of the factory and tries to modify it in order to impose a new set of rules that must be respected and that will guarantee order and efficiency in the future.

Another major setback in the company’s planning was the unrevealed hidden debt of 10 billion Euros that seriously put the company’s future in danger.

The solution that would seem most plausible in this delicate matter would be the help of the state by debt erase. GFR should bear in mind that it is also in the state’s interest for the factory to become operational as soon as possible to help service the Serbian

locomotives fleet, therefore a debt erase from the state would see both parties satisfied.

In the end it is not GFR’s debts from direct activity that the private operator must pay, it is the old debts of the factory to its many suppliers with which GFR has no involvement with.

Concerning the poor fiscal documentation, my solution would be the hiring of one of the four biggest Audit companies (Delloitte and Touche, Ernst and Young, WaterPriceCoopers and KPNG ) in the world for a clean and from scratch audit at the whole organizational level in order to determine exactly all other existing problems that might interfere with the well functioning of the company as well as prevent set backs in the future due to fiscal irregularities and by doing so, prevent documentary fraud.

5. Conclusion

As it has been discussed in every step of the graduation thesis and demonstrated many times in real life, careful Strategic management planning can often prevent a company from committing mistakes that will later on take valuable time to correct.

In the situation of “ Grup Feroviar Roman S.A ”, the problems that arouse after the successful privatization license was obtained from the Serbian State destroyed the company’s plans of easily beginning its activity and delayed it with a few disastrous months that only brought more debts to the company instead of profit.

Even though the problems that have been identified will be solved in time, the risky factor of uncertainty could have been avoided if only “Grup Feroviar Roman S.A” had used a more serious managerial approach with measures taken at the right moment that would have guaranteed the permanent control of the situation.

Brought to analysis, I have managed to propose a series of possible solutions to GFR’s problems that might just help the Romanian Company in a few key issues.

All in all, I am very proud to have had the honor of engaging in such a complex problematic that represented a huge challenge at every step of the way, a challenge that will serve me as the perfect example of the real life time managerial problems that arise in a continuously dynamic business environment.