Behind the former Iron Curtain:

Business Success in a Transitional Economy

By
Steven J. Kelly M.A. CPT and M. Mari Novak M. A. CPT

**************

It is not easy to re-start a new country. And when you are working in the area of business
performance, you are not quite sure where to start. Macroeconomics? New postage
stamps? Take down the old statues? The tendency is to throw everything out, the bath
water and the baby! That is not necessarily the best approach, because – you begin to
understand – ‘the system works perfectly; the system does not work at all’.

We set up shop in Central Europe in summer, 1990. That has given us the luxury of
participating and observing the entire process of the transition from a former communist
region to a newly capitalistic one. “The Transition” is the polite reference to regime
change in this part of the world. The former regime having been discredited, it was now
possible to ‘join the West’. But, which ‘West’?

The abundance of punctuation marks in the above paragraphs is meant to

discombobulate. Because the business community was that, upset and confused. And a
lot of that was due to the Iron Curtain.

Basically similar, but fundamentally different

There has been a case made that the Curtain was really ‘lace’. There was political
engagement, trade, and a great deal of research and espionage. The reality was the
distortion of facts and understanding, from all sides. So, when the countries of the former
Soviet influence began to work with the West, life, work, and achieving valuable
outcomes became that much more fascinating and challenging.

The national, regional, European, and world political actors were not experienced in the
scope and nature of this transition. Various donor and international agencies each had
their best priorities. And Central Europe was given a very short training period, before it
was thrown into the global economic and business arena. Assessment seems to be a good
place to start when you have to do everything, or have to decide which to do first. But
the confusion was not immediately recognized by very many. Companies and
organizations assumed…

Those assumptions delayed and frustrated progress. The assumptions contributed to the
decision by many western firms to send inexperienced and ineffectual personnel to set up
offices and take over businesses. There was a gap of over 50 years between the beginning
stages of WWII and the implosion of the Warsaw Pact. This left gaps in the regulatory

Behind the former Iron Curtain: Business Success in a Transitional Economy 1

environment and financial/accounting procedures, in contract law, and a dearth of
experience in civil law. This does not even include the impact on human psychology,
especially as it affected the workplace.

Our human performance technology firm decided to look into the possibilities of Central
Europe in the late 1980’s. Just months after the Velvet Revolution in (then)
Czechoslovakia, we began assessing the situation and the opportunity for marketing our
services. We were successful, in part because we had experience in both the commercial
and donor markets, in part because we had some academic and personal background in
Central European politics and culture, and in part because we were willing to listen and
learn. The breadth and depth of our experience and analyses have led us to several
observations, and lessons learned.

Transition is ongoing

There is value in understanding what happened. How the system changed and resisted
and overcame is a case study on large scale organizational change. The recent entry of
several Central European countries into the EU will change its perspective and
operations. The evolution, the transition, of this chunk of the world’s geography and
capacity will alter the increasingly multimodal political and economic power. And most
importantly, understanding this transition may aid the transition that is developing in your
countries.

The transition has not been without pain or problems. It is ongoing. Most people have
had to rethink their approaches and their assumptions. These countries now boast
success. Their experience of the last 15 years gives them an advantage in the next phase
of transition, which surely is occurring in the Middle East, China, the EU, and Western
Europe, North America, South America. Everywhere.

One can observe that the world economy and polity are undergoing structural changes.
These affect government and macroeconomic policy issues, and then, criteria for value
performance. Once again, how do you start a new country?

The first indication of the density and diffusion of that iron curtain was the discomfort,
the anomie, of experienced international managers. It was clear that they did not know
‘the ropes’, did not grasp the rules and had difficulty identifying them. Language was an
issue. There was no word for ‘marketing’ in such languages as Czech or Slovak. Yet the
biggest problem was the difference in how people saw the world, and each other.

How we got here

We decided to headquarter from Prague, Czechoslovakia (Note: on January 1, 1993,

Czechoslovakia peacefully split into two separate, distinct, and unique countries: the
Slovak Republic and the Czech Republic. Another transition!) . These remarks are
primarily about our experiences in these two countries, although we have worked within
every country of the former Soviet Union’s influence.

Behind the former Iron Curtain: Business Success in a Transitional Economy 2

Our company KNO was founded 25 years ago in 1979. In the late 1980’s we decided to
expand our services into the European Community, with the intention of locating before
the new regulations took effect. In clarifying our strategy, it was clear that the principals
were very interested in Central Europe and we revamped our orientation to Helsinki and
Vienna, as portals into Central Europe. Just as these decisions were being made, ‘the wall
came tumbling down’. In 1990 we made our first evaluation and marketing foray. By
May 1991 we had relocated our headquarters from Lake Tahoe, Nevada, to Prague,
Czechoslovakia. We were one of the early registered corporations, and a pioneer in the
nonexistent human resources discipline.

As we look back over our accomplishments and challenges met, it seems insane to have
tried. We came into the situation with experience in a full range of HRD, advanced
academic degrees, more years of experience than we care to admit, and overweight
luggage full of our tricks, tools, and training courses. We also came with an unmistakable
American view of the world that soon became exposed, in both its strengths and
weaknesses.

We redid everything.

Back in the early 1990s

In 1990, there were virtually no private firms. All decisions were centralized. “Sales”
was not a concept; rather, production and inventory were the keys. The bureaucracy and
infrastructure functioned well – for their purposes. Many good comrades took to a “get
rich quick” capitalist mode easily. There was a plethora of ‘carpet bagger’ foreign
consultants. And all transactions were in cash. It’s hard to imagine bringing in a sack of
$20,000 to buy a car, or a stuffed briefcase to purchase a house or office… but, that was
the reality.

In countries like Czechoslovakia, everything important had been state-owned. Of course,

there were a few small service shops – bakers or butchers. Mostly, there were huge
conglomerates. In most cases, investments had not been made in infrastructure, and the
economy had virtually collapsed. It was a period where everyone complained about the
so-called magic circle. “I can’t pay my bills, because no one is paying me!” No one knew
who had the authority to rent a space or to sign contracts. It was a time of opportunity…
and horror. The Czechs created a new meaning for the word tunneling – when someone
gained control of former State assets and drained the wealth out leaving skeletons. A
kind of “wild west” environment, a period of making new rules, with high risk balancing
huge potential.

Life was not terrible. There were examples of excellence: technical education, children’s
activities and care, public transportation. One of the horrors of the former regime, we
slowly understood, was the cult of mediocrity. Stay in the middle; don’t get noticed.
Don’t excel, don’t question. This extended to power and position. Yet it was not totally
successful. We have met and worked with excellent medical personnel, excellent

Behind the former Iron Curtain: Business Success in a Transitional Economy 3

managers, excellent artists and craftspeople. But, the demands of the centralized
planning system influenced behaviors and success strategies – in both macro and micro
ways. Some short examples may illustrate the crazy, but logical results.

In undocumented research by a US think tank manager, the question as to why there had
always been toilet paper shortages was resolved. It started with the revelation about
where to buy toilet paper in 1990. It is a paper product, therefore, you would buy toilet
paper at a stationery store. Under the production quotas, a paper manufacturer would be
required to produce “x” annual tonnage of paper. Toilet paper is light, and you would
have to make a lot of it to meet quota. Thus, there was always a surplus of cardboard,
which is heavy, making it easier to meet quota. So, not a lot was produced and shortages
resulted. However, the manager achieved success because the factory outputs were in no
way related to consumer needs, or actually profitability. He or she just had to make the
plan.

A mother of elementary school children was explaining to the authors one day that it was
confusing to be a parent in these new times. What did you tell your children? Should you
encourage them to ask questions, to challenge the information, to try to understand? In
the old days, you listened and did what you were told. Life was simple, if limited. You
followed the rules, kept within your very limited zone of action, and discussed the
absurdities quietly with friends over a beer (which still maintained the quality of some of
the best in the world for pennies).

This is a sign that was posted in most businesses when we first arrived:

Knihu přání a stížností předloží na požádání vedoucí provozu.

If you want to make a complaint, first talk to the manager, to get the complaint book.

Few people asked to sign the book.

Competition amongst service organizations has become increasingly an issue of customer

service and performance standards. This area of performance is perhaps the most
significant challenge for these countries. Awareness is evident, but progress is slow.

Working on a project with the major employer in a town, KNO staff was housed in the
major hotel, always having a large and elaborately decorated restaurant. After settling
into a table, after a long and difficult day, we noticed that the group of 8 waiters was
hovering in one corner. No one had approached us. We waited. No one approached.
Finally desperate for food and tired, we went to ask the group if someone could wait on
us. We were informed that the waiter, whose section we were sitting in, was not at work
today. Period. We moved tables.

This extreme example, often joking referred to as “the school of no eye contact”, is
common in moderation. The flip side of this is the acceptance of questions. Professionals
are not accustomed to being questioned. They are used to working things out in their own

Behind the former Iron Curtain: Business Success in a Transitional Economy 4

way and own time. As an expatriate, who speaks basic language, it is more a matter of
surprise and struggling to explain. But in the normal operations, sharing information is
still an issue.

The growth of human resource specializations

It was not so different in the ranks of all business operations. In the 1990’s, training was
not a profession. Training was indoctrination. Communications and “people skills” were
unknown and unimportant. Senior staff didn’t manage, they followed instructions. Given
all these factors and all the calculations, almost no useful management skills were
evident. They had been successfully “trained” out. As a result, as new private business
or joint ventures started, there was a tendency to write off anyone over 40. Thus, very
young and inexperienced people were hired into key positions, their qualification being
English or German language capability. It was felt, and proved to be correct, that it was
better to train from a blank slate rather than to try to modify ingrained behaviors. Not
that new management didn’t attempt the challenge, but there was extremely limited
success.

There was obviously a need for performance improvement. Every manager, ministry
official, and investor asked for it. But having needs does not always a market make!
Paying for training, consultation, and organizational realignment was beyond grasp, was
not part of the local experience. Foreign investors did not want to bother with training, at
first. Their priority was to get the financial considerations sorted out. They figured they
would bring in regional experts (although at great cost and language inefficiencies) to
sort things out. Regional support departments initially took on the challenge happily… it
allowed for bigger budgets, new promotions. But, the reality of the immense difficulty
soon began to set in. So we had to educate our (potential) clients, and wait through the
first phases of ineffective interventions.

The process of this slow education taught us and our clients. Most operational managers
and (technical) consultants believe that you can drop a new system or investment or
technology or demands into an organization, and things will sort themselves out. Most
business ventures proceeded in that way. Others understood that time was essential.
There was not the luxury of unwinding the old system. Companies went out of business.
Entrepreneurs lost their startup money. One had to compete. Now! So what could
accelerate the process of change while keeping expertise? A performance improvement
market developed.

Auto sales… a typical example

This was a painful process, a ruthless process, and a professionally challenging process.
Some examples from the early years illustrate this.

General Motors, with their Opel arm, moved into Central Europe very quickly in the
1990s. They had previously gained connections through the trade agency, and hired a

Behind the former Iron Curtain: Business Success in a Transitional Economy 5

former transport minister as the general manager. After losing the competitive struggle to
buy the Czechoslovak auto monopoly Skoda to Volkswagen, they started to build an
import sales organization from the ground-up. KNO came into the picture very early as
the local PI/training contractor to bring the European sales and service model to newly
formed dealerships. The goal was clear. Build market share, create a service culture, and
push manager/owners to start to “manage” their newly formed teams. Performance gaps
were too numerous to imagine. The initial priority was to build sales skills, sell cars. An
initial problem – there was no word in the Czech or Slovak language for “sales”, other
than traditional shop clerk assistance. Consultative sales process? What on earth for?

For years, customers had bought cars from picture books. Test drive?? Open the hood???
Not likely. Pay the full price cash now. Maybe add a small bribe to get your name further
up the list. They’d call you in 6 months or so when a car arrived – whatever color it
happened to be. Proactive sales approaches, no way. Just wait and take the order. There
were always orders because of the shortages. The sales agents were kings… the
customers beggars.

Together with the national organization and more savvy dealers, we worked together on
all fronts. Regional training programs were available, but needed great adaptation to the
local culture. Basic standards, process checklists, and compensation/motivation systems
were adapted, evaluated, revised, and re-installed. The “new” idea of mystery shopping
to measure training results and service levels was explained, sold, and implemented. It
was a heady time. The gaps were so huge that great progress could often be made: 6 steps
forward, 4 back, and 8 more ahead if you chose the correct performance issues. Within 5
years, by the mid 1990s, GM/Opel was the top importer of the moment (bearing in mind
that the former State monopoly still held over 70% of the car market!). After the initial
half decade with GM, KNO went on to work with other brands such as Ford, Volvo, and
Citroen in these markets to build sales and market share.

Stabilizing the labor market

In the meanwhile, as many investors were looking to enter the marketplace, there was a
huge gap of knowledge about compensation levels. What was the fair salary for a
lawyer, a sales manager or a technician? No one had any idea. Government statistics
were obviously incorrect. Salaries in foreign firms were obviously higher, but how much
higher. Expatriate managers got into bidding wars, or ignorantly offered Western
salaries, creating turmoil. Start-up recruiting and headhunter firms happily poured fuel
on the inflation, as their fees were tied to awarded compensation. Into this confusion
during 1992, principals from KNO and a large Big 6 accounting firm determined to close
this knowledge gap. We determined to introduce a Comprehensive Country Salary
Survey for foreign companies where none had been attempted before.

That first year, we attracted a grand total of 14 firms, all multinationals just starting up.
We analyzed about 24 job positions. That first report was put out with using simple
spreadsheets and calculators. By the time our Big 6 partner had merged with another
some ten years later, the product had become institutionalized. Over 200 companies

Behind the former Iron Curtain: Business Success in a Transitional Economy 6

participating annually in what had become the two countries of the Czech Republic and
Slovakia. The truly amazing thing about the project, which was a 50/50 profit share, was
that it survived as a hand-shake deal the whole decade. No actual contract was prepared
until KNO sold our share to the newly merged, now Big 4 firm, early in the millennium,
so they could fold it into their regional product line. This research product, a simple
salary survey, helped to establish a more stable marketplace for professional staff at a
time when chaos reigned in the labor market. It helped companies to control costs,
allowed employees to be paid fair rates, and allowed the sharing of best practices among
the participating firms who were dealing with a constantly changing employment law. All
achieved by identifying, and then helping to reduce a key knowledge gap.

Looking toward the future

Starting a new country, breaking from old rules and cultures, is a daunting task.
Maintaining or improving a viable business base at the same time is quite another. There
are many who may claim victory or responsibility in this realm for the Czech Republic
and Slovakia. As a strong influence, KNO would attribute the countries’ success to a
solid and very successful history of business savvy, quality products, and manufacturing;
to the willingness of personnel to grab onto the challenges at hand and maximize their
own competitive advantages; and to a cognizance and commitment to tapping into
productivity and quality performance of its workforce.

The situation currently has a very mixed outlook. That speaks to a “normalization” of the
business environment. The top-down decisions, the massive macroeconomic shifts, the
energy and emphasis focused on ownership, accounting, and banking system are
resolved. Alas, these issues are now being re-considered based on requirements and
integration with the European Union. The normal situation is that these issues are now a
normal part of doing business. Another now-normal part of doing business is the
recognition that the human resources are a critical, contributing, costly, and priority
element.

The profession and professionals are 15 years more experienced. There is more
knowledge and experience. There is recognition. Yet there is still little real application
and CEO support. This is also a ‘normal’ situation. In the first years, most businesses
brought in expatriate managers or consultants in the executive positions. Currently
organizations have mostly local management teams. The teams are still young and
learning. The early years were often seen as quite successful, despite the lack of
experience. In reality very little true “selling” was going on. Rather there was a response
to pent-up demand, taking orders, as everyone was upgrading equipment and technology.
Only more recently have down cycles taken place as demand is satiated, providing new
types of stress for the local teams.

Another challenge with the joint ventures and multinational corporations are multi-
national management teams. These multinational teams pose a specific strength and
weakness. Wise and effective management have recognized both and have worked to

Behind the former Iron Curtain: Business Success in a Transitional Economy 7

open communications and agree on a corporate style. It has been crucial to recognize the
different styles, perspective, terminology and issues on these teams.

Coupled with local management teams, is the reality of a cadre of over-trained young
people. They are spoiled. They do not have the experience of the past, of the communist
system; nor of capitalism. They expect the benefits of both and the drawbacks of neither.
Their expertise is primarily language, lots of training courses, coupled with intense
opportunity and they “want it now”. The issues of management teams, plus the youth of
key personnel, tie together in that coaching, appraisal and evaluation are weak.

Addressing the developments and weaknesses in performance has become more difficult
as markets and the legal framework has differentiated in each country of Central Europe.
This is complicated and eased by entry into the EU, yet special considerations have to
some degree restricted flow of labor and ownership.

The professionals are gaining insight into deficient performance, productivity problems,
and introducing new information and technology. The response is typically: training!
That is the tool that is generally available and of which line and staff managers are aware.
So it is the tool with which to attack any problem. However, the percentage of businesses
which are aware of performance and capacity development is growing.

The Central European countries such as the Czech Republic and Slovakia are well placed
moving into this new millennium. The very young teams from the 1990s are slowly
maturing, with individuals who were given very serious responsibilities early in their
careers. Of course, they made mistakes. But, an individual who became a regional sales
manager or finance director in their early 20s (as opposed to 40s in the West), learns from
these challenges and will prove to be tough and effective leaders in the upcoming
decades. As they join the new club of the EU, they will soon be exerting competitive and
innovative pressures in the global marketplace.

***

Bio: Steven J. Kelly, an almost native Nevadan, founded KNO in 1979, soon after
completing military service as an intelligence officer. He has degrees in business,
management, and political science which have proved invaluable in this line of work. In
the mid 1980s, he was joined as a partner by Ohioan M. Mari Novak, who has advanced
degrees in community development and training. During this period, KNO focused
primarily on projects with utilities and local government. Seeking adventure and
expansion in the early 1990s, they relocated KNO to the beautiful Prague in
Czechoslovakia.

During the past decade, the two with the support of a dedicated staff has completed
dozens of performance improvement assignments with both multinational firms and
donor agency clients. Active in community affairs, Mari served as the elected President
of the Slovak-American Chamber of Commerce in early 2000, while Steven spent 5 years

Behind the former Iron Curtain: Business Success in a Transitional Economy 8

as a Board member of the Czech-American Chamber in the 1990s. Both partners were
awarded Certified Performance Technologist status in 2003.

Currently, in addition to commercial work, they are involved in a long term development
project funded by the World Bank. This challenging effort will result in the
establishment of a permanent training operation for the potential 20,000 clients of the
newly established Slovak State Treasury by 2006. Contact them at
www.knoworldwide.com or email know@login.cz .

Behind the former Iron Curtain: Business Success in a Transitional Economy 9