DSpace at VNU: Leadership in Times of Recession: An Empirical Research of Private Enterprise Leadership in Vietnam

DSpace at VNU: Leadership in Times of Recession: An Empirical Research of Private Enterprise Leadership in Vietnam tài l...

75

Leadership in Times of Recession: An Empirical Research of

Private Enterprise Leadership in Vietnam

Phùng Xuân Nhạ*, Lê Quân

Vietnam National University, Hanoi,

144 Xuân Thủy Str., Cầu Giấy Dist., Hanoi, Vietnam

Received 15 March 2013 Revised 15 May 2013; Accepted 30 May 2013

Abstract In 2012 Vietnam recorded that around 55.000 enterprises went bankrupt Currently,

only 312.600 enterprises are still in operation out of the 694.000 enterprises established since the enactment of Vietnam’s Law on Enterprises in 1999 This paper presents the results of an empirical study of business leaders through business decisions they made during 2008-2012 to ensure their companies’ survival; their forecast and expectations for when the recession is over and the competencies needed for successful leadership in times of recession The survey sample was composed of 478 CEO and 561 senior managers in Vietnamese private enterprises The paper concludes by suggesting top priorities for 2013 and also a set of leadership competencies needed for business leaders in times of recession The survey results show that business leaders are less optimistic than they have been in the last year about the economic situation and are still weak in economic forecasts, financial management and risk management During and after the recession, opinions and perceptions of business leaders have actively changed towards sustainable value and leadership Leadership in the new context requires greater flexibility, and better adaptation to the business environment, which is increasingly complex and difficult to predict

Keywords: Leader, leadership, Vietnam, private enterprises

1 Background∗

It is said that the explosion of private

enterprises in Vietnam in the last decade has

been associated with institutional reforms for

the private sector and with the opportunity to

access inexpensive capital

The concept of the private sector began to

be recognized in 1986 However, it was not

_

∗ Corresponding author Tel.: 84-4 37547670

E-mail: nhapx@vnu.edu.vn

until four years later, when the Law on Private Enterprises and the Companies Law were enacted that we have witnessed the birth and growth of private enterprises, especially in the

South of Vietnam In the later stage of Doi moi,

large private enterprises were often active in the field of consumer goods production to meet the huge demand from the local market at the time Meantime, some of the first foreign banks (ANZ, BNP) came to Vietnam in 1990 and the private sector began to take off In just 5 years from 1993 to 1997, there were nearly 20

thousand private enterprises newly

established(1) It can be said that at this stage,

the first generation of entrepreneurs and

business leaders of Vietnam was developed

However, opportunities always come with

challenges The battle to compete with foreign

competitors has forced numerous businesses to

go bankrupt or to sell their businesses

The normalization in relations with the

United States and in the joining of ASEAN in

1995 Vietnam showed that it had entered the

international integration The fact that the Law

on Enterprises was amended in 1999, then

revised again in 2005 stimulated young people

From then, the strength of the economy was

raised and officially booming when the stock

market and several commercial banks were

born and foreign capital flowed torrentially into

Vietnam from investment funds During

2000-2008, the number of newly established

non-state enterprises increased by 15-fold at an

average rate of 22% a year(2) The term private

enterprises, joint stock companies, limited

liability companies have been very popular

Image and brands of business are associated

with the image and reputation of the founder

The founder of the business is the leader

Several new businesses have just been

established, but are growing rapidly Their

common similarity was that they were usually

managed by members of a family (which was

considered effective and safe?) and actively

participated in the stock market and real estate

market (highly profitable?)

Financial and real estate bubbles breaking

(starting in 2008) led to the collapse of a series

of businesses Up until now, after 5 years, the

_

(1)

GSO, 2010.

(2)

http://vef.vn/2010-04-07-doanh-nghiep-tu-nhan-viet-

nam-khat-khao-ra-bien-lon-collapse has still had no sign of stopping Consequently, in the last 5 years, the GDP growth of Vietnam has twice reached the bottom according to the theory of consecutive recession in a W-shaped graph (the first time in

2009 when GDP growth reached 5.3% and the second time in 2012, when GDP growth was only 5.03%)(3)

Looking back at the 25 years of establishment and development of private enterprises in Vietnam (1987-2012), we see two basic elements that created success These were the change in the macro economy and investment from capital markets However, when the economy fell into recession with tighter lending conditions and declining purchasing power, private enterprises have gone bankrupt or suspended operation In this scenario, a series of seminars have been held to seek solutions for business difficulties and those seminars often talk about the role of business leaders Meanwhile, scholars, researchers and even business leaders agree that the key to success or failure in the past has been leadership capability Therefore, to help businesses out of a crisis, leadership is considered as one of the most important factors

2 Once the recession ends and a recovery begins

During 2008-2009, people experienced one

of the severest recessions in the world since the 1930s This recession touched the global economy and, unlike the previous recessions, the financial sector was identified as the main source of the crisis (Athey, 2009)

Question: How did small and medium enterprises (SMEs) respond to this recession?

_

(3) GSO, 2012.

According to many authors, SMEs have less

control over their external environment when

compared with larger firms (Smallbone, D.,

North, D and Kalantaridis, C., 1999) and SMEs

perceive recessions as “an externally controlled

condition over which they have no control” To

be able to overcome a crisis, SMEs must have a

strategy A literature review shows that SMEs’

strategies could be divided in two main groups:

One strategy is cost-cutting to survive the

recession and focus on growth to retain capacity

when the recession is over A cost-cutting

approach is evident in the construction and

manufacturing sectors and includes downsizing

the workforce, reducing products, reducing

stock, and freezing pay The other strategy is a

growth approach which means offering new or

improved products, competing on price, and

acquiring other firms that have been weakened

by the recession (Stone, 1975) Regarding the

growth strategy, a study of SMEs’ responses to

the 2008-2009 recession showed that product

diversification, including the introduction of new

goods/services and attraction of new customers,

was one of the most effective way to help SMEs

respond to recession (Kitching, J., Smallbone, D

Xheneti, M., Kasperova, E., 2011)

3 Seizing opportunity from crisis

Economic history teaches that after every

recession there is a recovery and there is always

opportunity in crisis The word “crisis” in

Chinese is composed of two characters One

represents danger and the other represents

opportunity(4)

Question: How to seize opportunity from

crisis?

_

(4)

John F Kennedy quote.

The economist Drucker always sees crisis

as providing great opportunities According to him, doing nothing (or not enough) in a time of crisis may sink companies Indeed, he states that there are no risks, only opportunities (Drucker, 1973) and in order to transform the risk into an opportunity the first step is to decide what to divest, meaning to make a clear decision on what to withdraw and on what to concentrate

One of the most important things to help to seize opportunity from crisis is confidence in economic conditions and expectations about the future These are considered as two key drivers for SMEs to continue to invest in and grow their business (Chow, M.J., and Dunkelberg, W.C) Our research shows that during a recession, business owners are considerably more optimistic than employees (Storey, 2011) and there is always the potential for entrepreneurial spirits to pursue opportunities counter-cyclically by creating their own confidence and bootstrapping resources (Rae, D., Price, L., Bosworth, G and Parkinson, P, 2012)

4 Developing leaders in times of recession

Leadership is different to management Management is often known as a maintenance activity, concerned with technical implementation of policies and procedures while leadership often links with shaping others’ goals, broader values and sense of purpose, especially in relation to change and mobilizing staff effort by engaging, inspiring and supporting individual and team performance (Cuban, 1988) Leadership can be conceptualized as a collective phenomenon where different individuals contribute to the

organization (Pettigrew, A., and Whipp, R,

1991) Leadership competencies refer to the

knowledge, skills, or abilities that facilitate

one’s ability to perform a task (Boyatzis, 1982)

In a crisis situation, leadership is collective

and dynamic, and it requires perception and

sense-making skills by leaders in order for them

to determine appropriate courses of action

(Weick, 1988) During crisis, leaders should

focus on decision making, communication,

creating organizational capabilities, sustaining

an effective organizational culture, managing

multiple constituencies, and developing human

capital (Bolman, 1997) Therefore, the

leadership competencies they need are related

to managing the operational, strategic, and

human resource functions, and also financial

functions (Denis, J., Lamothe, L., and Langley,

A (2001)

Effective leaders are leaders who manage to

encourage staff to actively engage in knowledge

acquisition and the formulation of strategies to

resolve the crisis (Dutton, J E., and Jackson, S

E., 1987) However, in most cases leaders are

not prepared to manage the crisis (Garcia,

2006) As business environments change and

grow increasingly complex, it is important that

leaders develop a set of skills that will help

them prevent and effectively respond to crisis

(Burnett, 2002)

5 Data collection and analysis

This empirical research was part of a

continuing research project under Vietnam HR

Day Vietnam HR Day is the largest open

forum to discuss human resource issues in

Vietnam and is also the annual human resource

forum for business leaders and human resource

specialists in Vietnam Vietnam HR Day 2012

had the topic “Quality of Vietnam Business

Leaders” with the goals of evaluating the quality of Vietnamese business leaders against the demand for development and international integration, including their responses to recession, forecast and expectations when recession is over and competencies are needed for successful leadership

To evaluate the quality of business leaders (including CEOs and Deputy CEOs) in Vietnamese private companies (total private ownership should be at least 51%), we divided the population into two treatment groups (a group of business leaders and a group of senior managers) and conducted two questionnaire surveys separately

In the first survey, the objective was to capture not only business decisions that the business leaders made during 2009-2012 to make their companies survival (especially during 2011- 2012 when the full-blown crisis) but also their forecast and expectations when the recession was over and the competencies needed for successful leadership in times of crisis

In the second survey, senior managers were asked to evaluate their leaders’ quality (strengths and weaknesses in competency) Survey steps: (1) E-mail invitations were sent containing a link to the internet-based questionnaire (www.vinatest.vn) These e invitations were sent separately to the members

of Vietnamese Young Leaders Association (more than 1000 CEO of SMEs) and of HR Link (more than 10.000 HR Managers) The survey started in July 2nd 2012 and closed on August 31st 2012; (2) Valid answers were checked and selected (478 valid answers from business leaders and 561 valid answers from senior managers in total); and (3) The data was coded and analyzed in SPSS

6 Results and findings

In this paper, we present the findings and

analysis of the two surveys: self-evaluation by

business leaders and assessment by senior

managers The survey results include a profile

of business leaders (age, gender, education, and

seniority), forecasts for Vietnam’s economic

recovery, top priorities in times of recession,

leadership and management performance, and

leadership competencies needed The SMEs

studied were diverse in terms of business area,

legal form, turnover and number of employees

Profile of business leaders

According to the survey results, women

leaders only accounted for 24.5% in 2012 of

surveyed leaders Leaders had a fairly high

level of education 58.5% of the leaders were at

the university or college level Notably, over

35% of the leaders had postgraduate training

This result was very encouraging compared to

previously published surveys of education

leaders of non-state enterprises (Le Quan,

2011) However, it is also noted that this survey sample was mostly from big cities and would not be nationally representative

Regarding ages, leaders surveyed have an average age of 38.6 years The oldest was 60 years old and the youngest 19 years old Thus, the average age of the leaders of non-state enterprises is relatively young Over 70% of business leaders participated as business operators before the age of 35

Regarding general management experience (managerial participation), 34% of the leaders had under 5 years experience in management The number of leaders having management experience from 5 to 10 years was 42.8% and 22.6% for those with 10 years experience Similarly, leadership experience of leaders participating in operational executives was commonly from 3 to 5 years (44.7%) and 5 years (29.6%) Up to 24.5% of new business leaders were involved in executive committees for at least three years time

Vietnam economic recovery forecast

Figure 1: Forecast for Vietnamese economy recovery (n=478)

In recognition of the economic cycle and

the estimated time of recovery of the

Vietnamese economy, 84% of the surveyed

leaders said that recovery would take 24

months The number of leaders that believed in

economic recovery in the next 12 months was

7% The number of leaders who were in favor

of Vietnam economics recovery by the end of

2012 and the first half of 2013 accounted for

only 4% These survey results are very different

from the results in the survey from Vietnam HR

Day in 2011 Before that, most business leaders

felt that the economy would recover after 6 to

12 months The practice shows that the

perceptions of business leaders in Vietnam,

when planning business in 2012, is cautiously

optimistic, and that business leaders are surely

adjusting their action as the recognition is less

optimistic at the moment The trend towards

safer recognition and the forecast form of

business leaders in Vietnam is increasing

Besides, the decision-making process of

business leaders seems to become increasingly

difficult when the elements from the business

environment outside are more and more unpredictable and unstable Most of the leaders highly agreed that the biggest challenge for current decision-making is that the business environment is becoming increasingly complicated (4.119) and risky due to policy changes (3.917)

Leadership and management performance

Compared to the our survey results of 2011, most indexes are at a moderate or below average level Specifically, the index of business performance; and leadership and management performance is just under 3.25 on the average

The administrative work that is evaluated at the highest level includes marginal cost management, production management and quality control (at level of 3.3-3.45) Risk management activities are evaluated lowly (2.97) Strategic management and human resource management also received low satisfaction levels It can be said that business leaders are unhappy about the administration work

on both overall dimensions and specific functions

Table 1: Leadership and management performance (n=478)

N Min Max Average Deviation

Business performances 471 1.00 5.00 3.1274 63641

Leadership and management performance 462 2.00 5.00 3.2403 63576

Human resource management 459 1.00 5.00 3.1111 76400

Financial management 459 1.00 5.00 3.1699 72200

Strategic management 459 1.00 5.00 3.1176 77579

Risk management 456 1.00 5.00 2.9737 88166

Marketing 453 1.00 5.00 3.0530 77962

Customer relationship management 450 1.00 5.00 3.2467 73962

Partner development and management 447 1.00 5.00 3.2886 77195

Production management 438 2.00 5.00 3.3356 71541

Quality management 444 1.00 5.00 3.3446 68568

Increasing operational efficiency in IT 447 1.00 5.00 3.2550 71644

Cost saving 459 1.00 5.00 3.3791 71484

Productivity 444 1.00 5.00 3.2432 65443

Valid N (listwise) 408

The challenge of recession

The process of leadership that seemed to be

facing a major challenge was the innovation of

chain value As recognized by the leaders, a

short-termed business trend is no longer a wise

choice (only 2.89 in average) Along with that

gross margin tended to decrease, low manpower cost was not feasible, and business opportunities were increasingly less Business labor productivity in 2011 and 2012 was in the decreasing direction and has not yet seen much improvement in opportunities

Table 2: Challenges of recession (n=478)

Business environment becomes more complex 477 1 5 4.119497

Risks of Government policy changes 474 1 5 3.917722

Necessity of business restructuring 477 1 5 3.899371

Predicting market trends will be more challenging 474 1 5 3.810127

Need to restructure the market towards internationalization 474 1 5 3.740506

Pressure from rising labor costs 477 1 5 3.698113

Decline in margins due to increasing input cost 477 1 5 3.679245

Tendency to a decrease in gross margin 477 1 5 3.616352

Business opportunities were increasingly less 474 1 5 3.556962

Shorter product life cycle 474 1 5 3.455696

Tendency for Public-Private Partnership 477 1 5 3.45283

Bankruptcy or suspension of operation 474 1 5 3.373418

Business opportunities were increasingly less 471 1 5 3.133758

Existing products meet market demand no longer 474 1 5 3.082278

Short-termed business trend 474 1 5 2.892405

ku

This suggested that 2012 was a pivotal year

for innovation for numerous companies in

Vietnam In the scenario of economic crisis,

businesses need to reconsider the chain value

and the competitive advantage to breakthrough

in business This perspective got high sympathy

among various business leaders as the average

value of the variable “need to restructure the

market towards internationalization” reached

3.74; and the “necessity of business

restructuring” was at the level of 3.899

Top 4 things that should be done in the

times of recession

Leaders’ prioritized decisions seemed to be selected according to 3 levels: instantaneous priority for decisions having an immediate effect, then, decisions affecting the medium and long term

To overcome difficulties in the current period, business leaders indicate that the decisions of top priority are restructuring and optimizing the financial system; cutting down operating costs; eliminating ineffective operational business activities; and reforming the reward system These are a group of solutions which would directly affect the outcome and efficiency of business in the short term

gj

Figure 2: Top priorities in the times of recession (n = 478).

Leadership competencies needed

Le Quan (2010) highly emphasized

creativity, learning, justice, and influence

(leadership skills) But the results of the survey

in the scenario of the economic crisis in 2012

showed that the three most important qualities

of business leaders were focus on sustainable

development, working enthusiasm, and willingness to take risks It seemed that these three qualities were appropriate for leaders to pass a crisis When the focus for sustainability

is ranked first by leaders, it would be a good sign for the economy in Vietnam in future years

Uo

Figure 3: Leadership competencies needed (n = 478)

In this survey, courage and risk-taking were

viewed differently Identifying and accepting

risks are different from bravery and sacrifice

Besides, qualities such as vision, global

thinking and clearly understanding the industry

were often in the selection of several leaders Realistic vision and pragmatism was probably never featured as highly appreciated

Because the survey was limited leaders had three qualities to choose from and leaders

would consider only the most important to

select The rise of the quality of vision was

pushed up, meaning the other important

qualities would be relegated Ambition, fairness

and modesty thus ranked last in the selection of

business leaders in 2012

Leaders’ competencies assessed by senior

managers

In the second survey, senior managers were

asked to assess their leaders’ competencies The

survey results showed that no leadership

competency is assessed as good or excellent by

senior managers All average values are less

than 4.0 Based on the results of SPSS data

processing, we have 8 groups of leadership

competencies according to the evaluation of

senior managers as follows (in order of highest

overall rating to lowest):

Group 1: Competencies that are rated the

highest belonged to the essential qualities of

leadership These qualities have the highest

average value, above 3.9 with a small standard

deviation:

1 Devoted to work

2 Optimistic about the future

3 Having a good and detailed memory

4 Assertiveness

5 Able to build good relationships

Group 2: Competencies that are evaluated

fairly include:

6 Persuasive communication skills

7 Management by deadline

8 Fierce job deployment

9 Quickly identify and solve arising

problems of business

10 React quickly to changes in the

environment

Group 3: Personnel management

competencies rated passable include:

11 Always encourage employees to learn

12 Always encourage employees to commit

to work

13 Always make employees confident in the future of the business

14 Always direct staff to higher achievement

15 Capture ideas quickly and staff are encouraged to give ideas

Group 4: Other managerial competencies rated passable include:

16 Practical thinking

17 Thinking openly to receive new ideas and initiatives

18 Recognizing good opportunities and challenges coming from the business environment

19 Establishing relationships inside and outside the enterprise to implement strategies

20 Deep understanding of functions and stages of business expertise

21 Thinking deeply and not rigid in decisions

22 Always prioritizes tasks to deal with

23 Always focus more on efficiency and results than on superficialities

Group 5: Competencies that are rated at an average level (average value from 3.3-3.5) include:

24 Exemplary (leads by example)

25 Does not mind little details and be mean

at work

26 Always has personal responsibility

27 Plays spokesperson role at the right time, right place

28 Listening skill and two-way communication

29 Always establishes behavioral attitude

norms at work

30 Always explains why businesses must

change

31 Encourages staff to recognize and

correct errors

32 Establishes a vision for clear business

Group 6: Competencies that are rated

unsatisfactory, in which there are many human

resource capacities:

33 Fair treatment for employees

34 Focuses on salary and bonus

35 Always interested in sharing and

orientating and supporting staff to develop

themselves

36 Communicates clearly work to the

individual and group

37 Often offers staff difficult tasks for

developmental opportunities

38 Always harmonizes between

employees’ benefits and the group’s benefits

39 Recognizes and appreciates correctly

success and failure of staff

40 Always attempts to make employees happy

41 Always orients employees to outreach

new competency standards from the context of

integration

Group 7: Competencies are rated weak by

senior managers, including:

42 Interested in balancing life and work of

employees

43 Good decentralization, focus on work

authorization

44 Feedback to employees about their work

and themselves

45 Always clarifies the rights and

responsibilities of each staff member

46 Always focuses on developing multi-talented staff who are knowledgeable about several areas of expertise

47 There are clear strategies and plans, and always communicates to employees to understand and share

48 Creates a good, qualified staff framework

49 Always clarifies the position of employees in enterprises in the short and long term

50 Always defines for the employees the link between the short-term goals and long-term goals of the company

51 Always interested in sharing with staff about the strengths and weaknesses and solutions to overcome them

Group 8: Competencies that are evaluated very weak include:

52 Evaluating employee performance scientifically and fairly

53 There are numerous human succession plans

54 Allows plenty of time for sharing and training for staff

55 Behaves less emotionally and adjusts quickly when making mistakes

As a result, business leaders were reviewed highly on their business positions Their leadership and human resources management competencies were not appreciated by senior managers Even in the area of human resource competency, skills that were appreciated better were often about encouraging subordinates to try and learn, rather than about rewarding good capabilities, training and coaching subordinates Business leaders spent little time for subordinates and behaved emotionally and did not establish a performance evaluation system