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...

VNU Journal of Economics and Business Vol 29, No (2013) 75-86 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 Background∗ 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 years from 1993 to 1997, there were nearly 20 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 75 76 P.X Nhạ, L Quân / VNU Journal of Economics and Business Vol 29, No (2013) 75-86 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 collapse has still had no sign of stopping Consequently, in the last 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) 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 to have the ambition to take part in and to lead 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 20002008, the number of newly established nonstate 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?) 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 Financial and real estate bubbles breaking (starting in 2008) led to the collapse of a series of businesses Up until now, after years, the _ (1) GSO, 2010 http://vef.vn/2010-04-07-doanh-nghiep-tu-nhan-vietnam-khat-khao-ra-bien-lon(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 P.X Nhạ, L Quân / VNU Journal of Economics and Business Vol 29, No (2013) 75-85 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) 77 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) Developing leaders in times of recession 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 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 78 P.X Nhạ, L Quân / VNU Journal of Economics and Business Vol 29, No (2013) 75-86 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) 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 P.X Nhạ, L Quân / VNU Journal of Economics and Business Vol 29, No (2013) 75-85 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, 79 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 years experience in management The number of leaders having management experience from 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 to years (44.7%) and 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) 80 P.X Nhạ, L Quân / VNU Journal of Economics and Business Vol 29, No (2013) 75-86 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 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 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 Besides, the decision-making process of business leaders seems to become increasingly difficult when the elements from the business Table 1: Leadership and management performance (n=478) Business performances Leadership and management performance Human resource management Financial management Strategic management Risk management Marketing Customer relationship management Partner development and management Production management Quality management Increasing operational efficiency in IT Cost saving Productivity Valid N (listwise) N 471 462 459 459 459 456 453 450 447 438 444 447 459 444 408 Min 1.00 2.00 1.00 1.00 1.00 1.00 1.00 1.00 1.00 2.00 1.00 1.00 1.00 1.00 Max 5.00 5.00 5.00 5.00 5.00 5.00 5.00 5.00 5.00 5.00 5.00 5.00 5.00 5.00 Average 3.1274 3.2403 3.1111 3.1699 3.1176 2.9737 3.0530 3.2467 3.2886 3.3356 3.3446 3.2550 3.3791 3.2432 Deviation 63641 63576 76400 72200 77579 88166 77962 73962 77195 71541 68568 71644 71484 65443 P.X Nhạ, L Quân / VNU Journal of Economics and Business Vol 29, No (2013) 75-85 81 t 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 Risks of Government policy changes Necessity of business restructuring Predicting market trends will be more challenging Need to restructure the market towards internationalization Pressure from rising labor costs Decline in margins due to increasing input cost Tendency to a decrease in gross margin Business opportunities were increasingly less Shorter product life cycle Tendency for Public-Private Partnership Bankruptcy or suspension of operation Business opportunities were increasingly less Existing products meet market demand no longer Short-termed business trend N 477 474 477 474 474 477 477 477 474 474 477 474 471 474 474 Min 1 1 1 1 1 1 1 Max 5 5 5 5 5 5 5 Average 4.119497 3.917722 3.899371 3.810127 3.740506 3.698113 3.679245 3.616352 3.556962 3.455696 3.45283 3.373418 3.133758 3.082278 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 things that should be done in the times of recession gj Leaders’ prioritized decisions seemed to be selected according to 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 82 P.X Nhạ, L Quân / VNU Journal of Economics and Business Vol 29, No (2013) 75-86 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 83 P.X Nhạ, L Quân / VNU Journal of Economics and Business Vol 29, No (2013) 75-85 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 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: Devoted to work Optimistic about the future Having a good and detailed memory Assertiveness Able to build good relationships Group 2: Competencies that are evaluated fairly include: Persuasive communication skills Management by deadline Fierce job deployment 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 achievement direct staff to higher 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 communication skill and two-way 84 P.X Nhạ, L Quân / VNU Journal of Economics and Business Vol 29, No (2013) 75-86 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 46 Always focuses on developing multitalented 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 framework a good, qualified staff 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 scientifically and fairly performance 53 There are numerous human succession plans 40 Always attempts to make employees happy 54 Allows plenty of time for sharing and training for staff 41 Always orients employees to outreach new competency standards from the context of integration 55 Behaves less emotionally and adjusts quickly when making mistakes 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 responsibilities of each staff member and 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 P.X Nhạ, L Quân / VNU Journal of Economics and Business Vol 29, No (2013) 75-85 for staff scientifically and fairly In addition, business leaders were estimated lowly in successor's development Conclusion The economic crisis is incredibly meaningful to business leaders Through the crisis, business leaders revealed several weaknesses that they have not recognized before and it has also provided an opportunity for business leaders to reconsider and evaluate corporate administration The survey showed that earlier business leaders were considerably optimistic and paid little attention to macroeconomic forecast When the economic difficulties appeared constantly with growing and prolonged influence, that optimism was associated with subjectivity which led to incorrect decisions such as scattering investment strategy, lack of focus on financial management and human resource management, and diversifying too quickly Year 2012 marked a shift towards a more sustainable value of the business leaders in Vietnam Risk in policy changes and the environment had great pressure on the decisions of business leaders Consequently, various business leaders turned from the extreme of exceeding optimism in investment to the extreme of caution and worry when making decisions Most business leaders’ extation of a recovery in the next 24 months would lead to cautious decision and restrictions in investment Prior business objectives shifted from increasing growth to higher quality and safety According to economic theory, this would lead to investment flows of foreign enterprises to reduce in the future if the government did not quickly have measures to improve the situation and develop confidence in the business environment Business leaders in private enterprises are highly evaluated on quality and thinking However, there are numerous skills that are 85 weak, especially people management skills such as training, subordinate guidance, and developing high-quality human resources As the systematic operation is not good, corporation hierarchy cannot be developed The obvious consequence is that the firm will have a difficulty in attracting talent Recommendations Corporate management and governance should be based on a “cool head” rather than a “hot head” The disadvantages of today's business, besides the objective reasons, mostly came from the results of downplayed strategic management, risk management and operational management (financial, human, marketing, production ) The survey results in 2011 indicated that businesses were growing hot on the low quality of human resources To be able to innovate a value chain strategy and move towards sustainable competitive advantages and improve value, corporate investment should be prepared for many years The fact is that successful business in the modern world is only dependent a little on clients from the public sector Therefore businesses need to focus on developing products and services towards the private sector This helps the development to be more sustainable and less risky due to pressure from public spending cuts The economic crisis is a challenge; but on the other hand, it is an opportunity Enterprises should define long-term advantages on the basis of spending time and effort to prepare the next steps for the next years within the crisis The economic cycle is increasingly short in span 2-3 years Therefore, positive managerial thinking is actively exploiting the economic crisis as a treatment phase, preparing the 86 P.X Nhạ, L Quân / VNU Journal of Economics and Business Vol 29, No (2013) 75-86 foundation for the next stage Managing a team of key personnel, building a culture of creativity and innovation, and decentralizing greatly to build a compact system, are all necessary Differentiated and focused strategy has been confirmed During the growing phase, profit might be sought from various places and sources However, if the investment spreads widely, the economic crisis will immediately cause the death of the business Therefore, business leaders need to identify clearly strategies and consistency Investing in people always brings a lasting effect Therefore, business leaders should focus on training for themselves and embrace learning actively Only when business leaders organize their work well, have good leadership and good management systems, business will attract, use, and develop capable people A business leader with poor competencies will find it difficult to attract and use talent References [1] Athey, G., Economic Development in the UK: Challenges During and After the Recession Local Economy, 2009, 604-611 [2] Smallbone, D., North, D and Kalantaridis, C (1999) Adapting to peripherality: a study of small rural manufacturing firms in northern [3] [4] [5] [6] [7] [8] [9] [10] [11] [12] [13] England Entrepreneurship and Regional 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