Eva Kiss was appointed Marketing Manager of BHG in the summer of 1995.
She is a graduate of the University of Economics in Budapest, and had been working for BHG as a Product Manager for five years. The company has been struggling over the past five years to stay in business. After several restructurings, 1994 finally proved to be a successful year: the company had revenues of Ft5.2 billion, which led to a Ft45 million profit. BHG executives believed that the solution to keeping the company on a profitable path was to strengthen the marketing and sales activities. In 1995 Kiss was among the officers who believed that marketing could solve the company’s problems, so she was anxious to put her ideas into action.
Until 1990 BHG was one of the biggest telecommunications equipment producers, employing 7,700 persons in its main plant in Budapest and sev-eral smaller plants in the countryside. All the telephone exchanges in the Hungarian telecommunications network were produced by BHG, and it had 80% of the market share of smaller telephone switches (PABX). The com-pany also produced auxiliary telecommunications equipment and tools and parts for the maintenance of its products.
During the centrally planned economic regime, BHG was a major vendor of the Hungarian Telecommunications Company (MAT ´AV). MAT ´AV was the state-owned telephone monopoly that provided telephone service for the whole country and also developed and owned the network. BHG’s capacity was able to serve more than the Hungarian market, so the company exported about two-thirds of its products. Its major customers were the Soviet Union, the countries in the Council for Mutual Economic Assistance (CMEA), and some developing countries friendly with the Soviet Union (Algeria, Syria, and Iraq). Of these trading partners the Soviet Union was the biggest: 2.5 million Soviet telephone lines were connected to BHG switches annually, compared with 180,000 lines in Hungary.
By the late 1980s it was clear that the Hungarian government intended to change the central-planning economy to a market system. It was expected that other CMEA countries would soon change as well. In 1989 the Hun-garian market began opening to outside competition: import restrictions were lifted, and new companies mushroomed. The government started to channel the exports of Hungarian companies toward the Western markets by imposing a 26% tax on exports going to the socialist countries. These two steps and the economic collapse of the former Soviet bloc markets had several major effects on BHG.
BHG’s management had anticipated these changes and started to take steps to compete in the new situation. Some of the company’s exports to the socialist countries were still profitable despite export taxes. However,
the company started to look to the West and decided to invest in new dig-ital technology developed by Northern Telecom of Canada. BHG signed a licensing agreement with Northern Telecom for the production of digital ex-changes. The investment in new production and technology left BHG with a Ft900 million debt. However, management was encouraged by MAT ´AV’s development plans, which included the development of a digital backbone network connected through state-of-the-art digital switches. A contract for these switches would have more than paid off the investment.
The 1990–1991 period turned out to be the start of a new era for the company. During this period CMEA markets collapsed, leaving BHG with 40% excess capacity. The worst situation developed on the Soviet market:
the company already had contracts signed for exchanges, production had started, but the Soviet partners declared that they were unable to pay, so the products stayed in BHG’s warehouses.
BHG tried to sell these products in other markets. However, it faced difficulties, as all the other former socialist countries started focusing on imports from the West, discriminating against products from their former economic allies and favoring Western-made products. This resulted in a further general decrease of possible exports to former CMEA countries.
BHG’s expectations regarding the Hungarian market failed to material-ize, as Western products were increasingly preferred over Hungarian-made products. The new companies entering Hungary, most of which were dealers for Western equipment, aggressively marketed their products. BHG was not used to competing on these terms; therefore, it started to lose its market share. Moreover, when MAT ´AV put out the tender for the new digital ex-changes of the national grid in 1991, BHG lost against Siemens and Ericsson.
With this loss, the company’s market share of exchanges shrank overnight from 100 to 20%.
The company took another hit from the financial field. BHG took out a loan to finance the investment in the Northern Telecom digital technology in the late 1980s at a 6% annual interest rate. After 1990 this interest rate increased to 30%, placing a tremendous strain on the company. Under these circumstances management had to face two questions: Will BHG be able to stay in existence? What steps could be taken to save the company?
With its 7,700 employees, BHG was one of the biggest employers in Hungary. Management hoped it might be able to find some sympathetic politicians and receive some help from the state, which was the owner of the company. The pleas were answered; BHG was included in the group of companies that were considered important and allowed to participate in the crisis management program of the government providing assistance during restructuring.
The company’s debt was eliminated in two steps. BHG sold its sub-sidiaries (three plants in the countryside). These sales totaled Ft450 million, which was used to pay off half of BHG’s debt. The other half was covered by a Ft450 million capital increase, which was provided by the state owner.
In the course of the crisis management program the company applied for technical assistance grants from the World Bank and PHARE. (PHARE is the European Union’s aid fund for former socialist countries. The fund can be used for reconstruction and investments in new technology.) As part of these grants consultants visited BHG and prepared an asset evaluation and a restructuring plan. The consultants’ report and the restructuring plan were accepted by the state owner in 1994.
The restructuring plan called for the closing of all plants in the country-side, limiting the company to its main plant in Budapest. BHG converted its rural plants into subsidiaries and sold most of them. The remaining few plants were maintained at a minimum level until buyers could be found for them.
The Budapest operation was also restructured. Before the changes BHG was a product-based company. The new structure focused on four new divi-sions: main exchanges, PABXes, parts and tools, and maintenance. The re-structuring plan required that each division remains largely independent, so that each could be privatized separately if necessary. Management expected that this new structure would improve the company’s flexibility. However, this structure also required that each division have its own administrative staff, leaving the company with relatively high administrative costs.
The elimination of the rural operations and the restructuring of the Budapest operations decreased the work force from 7,700 to 1,200. Laying off employees was a difficult action to take, but management had no choice.
Management retrained a number of workers, but the remaining employees were laid off and received six-month severance pay, on average.
BHG also sought new areas to enter into. The company developed new products to bridge the gap between telecommunications technology that was in operation and the new digital technology that was to be installed grad-ually. These products had good market potential not only in Hungary, but also in the neighboring countries. The company also started developing its connection to Western markets more aggressively than before. BHG digital products had initial success in Germany. This was an encouraging sign, and it was thought that with further marketing efforts sales could be increased in that country. BHG also formed a joint venture with Antenna Hungaria, the Hungarian Broadcasting Company, for transmission-related production and services.
As a result of these efforts the company realized a small profit in 1994.
However, management knew that the company was still a long way from
being a market-oriented company. The strengthening of the marketing area was a top priority. The sales staff needed to be trained to be more aggres-sive, and new markets and products had to be developed both in Hungary and abroad. Management was especially worried about the local market.
Management decided to start negotiations with the state owner to try to obtain a government decision that would oblige MAT ´AV to buy 5% of its annual purchases from BHG. Management believed that this would be a solid basis to help the company stay profitable.
When Kiss took on the position of Marketing Manager, she knew that she had to show positive results immediately in order to strengthen the company’s market position. This strategy was important not only for the survival of the company, but also to support management’s long-term plans.
Management and the state owners were planning to privatize the company through a sale to a strategic investor within three years. The company needed to build up its income statement and balance sheet to attract serious potential investors.