INTERNATIONAL BUSINESS

What We Don’t Know About

Soviet Management
by Charalambos Vlachoutsicos and Paul R. Lawrence
FROM THE NOVEMBER–DECEMBER 1990 ISSUE

W estern managers nurse a number of untested assumptions about Soviet

management. The most common are:

1. The Soviets know little about management. Their system has failed and failed widely. They are
basically trying with very limited success to apply superior Western management methods.

2. Western and Soviet management systems are operationally incompatible.

3. The two aims of perestroika—to increase both centralization and democratization—are

conflicting and therefore impossible.

These beliefs are at best half-truths and at worst real obstacles to cooperation. Western-Soviet
joint ventures face so many hurdles already that we must try to strike ignorance and
misunderstanding from the list. Bureaucratic red tape, materials shortages, and currency barriers
are pretty much inevitable impediments to joint venture success, but we can eliminate our
mutually distorted views of each other’s management techniques. In other words, insight and
understanding can greatly improve Western access to the Soviet Union’s vast resources and
markets.

Given our adversarial history, our cultural differences, and the lack of any opportunity during
most of this century to observe each other’s systems at close hand, it is no wonder that
misapprehensions exist. But while a joint venture can import and apply Western technical know-
how with little fuss and friction, managerial know-how is quite another matter. In order to
succeed, joint ventures have to create an amalgam of Western and Soviet management systems
by adjusting and integrating the essential features of both.

In late 1987, we entered into a partnership with the Soviet Institute of External Economic Affairs
to study managerial behavior in each country. We picked comparable enterprises in the United
States and Soviet Union and examined the way they made decisions. We studied not only the
moment of closure but also the available facts about predecision activity and follow-up action (or
inaction). We reconstructed past events by interviewing key players. We looked at where the
decision sequence was initiated; how the action cycled and recycled from role to role, group to
group, and level to level; who made the key choice; who influenced that choice; and what were
the dominant arguments. Along the way, we were able to look into such central functions as
planning, finance, procurement, manufacturing, marketing, and human resource management.

In the spirit of glasnost, the Soviet enterprises that opened their operations to us were remarkably
candid. Our researchers attended different types of management meetings, had access to official
documents, and interviewed people on the factory floor, in the central Soviet ministries, and
everywhere in between. The authorities gave us permission to audio-tape all interviews and to
put 170 hours of meetings and interviews on video. The entire U.S.-Soviet research team visited
sites in both countries and held intensive analysis and writing sessions in Moscow and Boston.
The Soviets were struck by aspects of our system that we take for granted—our informality, for
instance—and were frank about their misconceptions.

For example, they found American companies unexpectedly employee oriented. Anticipating
ruthlessness, they were surprised at the care and consideration most companies give their
workers and at the elaborate due process generally required in order to discharge someone. They
were also surprised to find that new-product work is continuous. In the Soviet Union, managers
are not likely to start thinking about a new model until the old one has been in place for many
years.

At the heart of the difficulty Westerners have in understanding the Soviet system lie two
unfamiliar and confusing features of Soviet management structure: the structural task unit and
the seemingly impossible marriage of central control and democratic decision making.
In the United States, hierarchy functions through a vertical chain of command, but
communication at all managerial levels takes place horizontally as well as vertically.
Accountability flows up and down the command ladder one step at a time, each step a discrete
link in the chain. Although managers carry out assignments from, report to, and occasionally
seek decisions from their direct superiors, each management position carries its own separate
authority that is not directly included in the authority of the position above it, and superiors are
not normally allowed to short-circuit the system by assigning work and responsibility directly to
their subordinates’ subordinates. Indeed, the system’s principal shortcoming is that managers
often find themselves cut off from their areas of responsibility by the wall of subordinates that
obstructs their direct contact with lower echelons.

One of its strengths, conversely, is that each individual on the ladder, possessed of a certain
autonomy, talks about problems and decisions—formally and informally—not only with
immediate superiors and subordinates but also with peers and colleagues at comparable levels
elsewhere in the organization. In other words, people quite freely bypass hierarchical structures
horizontally, for information purposes, though not vertically, for command purposes. U.S.
managers take this system for granted and are uneasy when it’s violated.

Soviet managers also have a system that they take for granted: a set of deeply rooted principles,
traditions, values, and priorities that they show no sign of abandoning in favor of Western
techniques. In fact, their management system (as opposed to their economic system) may not
have served them as badly as Western businesspeople assume. Given the economic realities of
peremptory centralized planning, state monopoly, and constant shortage, a remarkable number
of Soviet enterprises produce usable, sophisticated products and care for their workers as well.
As alien as Soviet management practices may seem to Western managers, we must try to
understand them if we are to make our joint ventures succeed.

The Structural Task Unit

Authority structures in Soviet organizations differ conceptually from such structures in the West.
Soviet organizational thinking begins and ends with the collective, which in its broadest sense is
a social and ideological as well as a structural concept. Since we cannot hope to explain it entirely
in a few sentences, we will stick to its hierarchical significance. The core of traditional Soviet
hierarchy is a form of collective called the structural task unit, or STU, which is essentially any
group charged with performing a specified task.
Soviet enterprises are themselves STUs, and each contains as many administrative, service, and
production STUs as are necessary to carry out its mission. The smallest production STU is the
brigade, which may have as few as three or four individual members, while the greatest STU of
which it is a part may have more than a hundred thousand.

Members of STUs refer to themselves as “we” and show an astounding cohesion, solidarity, and
camaraderie. They are fiercely loyal to one another and to their leader. As collective entities, they
are practically impossible for the members of other STUs to penetrate. In fact, divulging
information to outsiders, even on trivial matters, needs the leader’s clear approval. While this
feature of STUs has obvious advantages for morale, it can lead to excessive
compartmentalization. In cases of weak leadership at the top of the organization, it can diminish
the unity of the enterprise and underline the tendency of subordinate STUs to give priority to
their own parochial interests.

“Soviet Management Structure: The STU in the STU in the STU,” shows how each structural task
unit contains all the units below it. By the same token, each STU is a microcosm of all larger ones
and a model for all smaller ones.

The power of STU leaders in an enterprise can be

Soviet Management
Structure: The STU in the STU
in the STU
Each structural task unit in a Soviet
enterprise is contained within another. If
an enterprise has more than one plant,
there are typically ve progressively
smaller STUs and ve hierarchical levels
of line managers: the director general of
the enterprise, the plant managers, the
workshop managers in each plant, the
foremen in each workshop, and the
brigade under each foreman. The most
critical—and the most alien—feature of
this system for Westerners is that each
manager has direct authority over all
subordinate managers and workers. Thus
the director general may skip over
subordinate managers and give orders
compared with a nested set of traditional
Russian matrioshka dolls. The largest doll holds
all the others, and each progressively smaller
doll contains all the dolls that are smaller still. In
the same way, each STU leader has authority
over all subordinate STUs, their leaders, and
their members, which means that STU leaders
can bypass subordinate managers and
communicate with, give instructions to, receive
reports from, interfere with, and—for any length
of time they see fit—assume authority over any
employee on any subordinate level of the
hierarchy. The only real restriction on this
behavior is that leaders are expected to jump
echelons only with good reason. Usually, they
also inform the intervening manager—at least
after the fact.
 directly to and receive reports directly Subordinates from all levels also have the right
from any employee in the entire
of direct access to their leaders. Most managers
enterprise.
post office hours and make themselves available
to meet with any employee (or any member of
the employee’s family) who may want to consult
them on any matter whatsoever. This right of
access is a crucial feature of the Soviet system
and was one of the first that Stalin sought to
stifle.

To be seen as a good leader, a manager must

inspire confidence, create a sense of purpose
and pride throughout the organization, and
show concern for the well-being of subordinates—in addition to being an administrative
perfectionist and disciplinarian. Even the general director of the enterprise is a walk-around,
face-to-face manager, a taskmaster and parent figure whose influence is felt everywhere, from
the executive suite to the production floor. (For an idea of how hard these managers work and
what they do, see “A Day in the Life of a SovTruck Factory Manager.”)

A Day in the Life of a SovTruck Factory Manager

This direct contact between all levels of hierarchy—one of the Soviet management system’s most
fundamental and distinct characteristics—has a number of far-reaching implications. On the
positive side, it boosts morale, improves a leader’s picture of what actually goes on in the
organization, and greatly enhances vertical integration in the organization and in the entire
Soviet enterprise. On the negative side, it tends to overload vertical and block lateral
communication channels.

This absence of horizontal integration is especially unfortunate. Even simple acts of direct
coordination between separate STUs do not take place. When fulfillment of some task entails
crossing STU boundaries, managers usually go up the hierarchy to their common boss for every
decision. Even forming effective work teams from members of different STUs is next to
impossible. Because only the leader of an STU has the right to make decisions, members of cross-
STU teams are reluctant to commit themselves or even to volunteer opinions without consulting
their STU leader first.

The most effective councils are those in which STU leaders participate directly—meetings of
brigade leaders presided over by their foreman, for example, or of foremen presided over by their
shop manager. If the direct participation of unit leaders is not practical, then cross-STU teams
will work only if the leaders expressly authorize the STU’s representatives to make commitments.

The enormous authority of STU leaders is partly the product of custom and tradition (see “The
Written and Unwritten Rules of STU Behavior” ) and partly a result of their twofold legitimacy—
the fact that they are first elected by their subordinates and then confirmed by superior authority.
In fact, one reliable indicator of which managers are line STU leaders is whether or not
perestroika’s enterprise law requires them to be elected. (Managers of staff units and deputies,
including deputy directors, are appointed without being elected.) Although a recent change in
the law permits future private owners to choose managers any way they wish, the process of
appointing managers will have to include some mechanism for genuine input from the members
of the collective.

Combining Centralized and

The Written and Unwritten
Rules of STU Behavior
1. All members are held strictly
accountable for their actions. Each
employee’s assigned authority and area
Democratic Decision Making
The second feature of Soviet management that
Westerners find especially hard to comprehend
is the simultaneous use of centralizing and
 of responsibility are taken very seriously decentralizing forms of leadership. Yet in
by peers, subordinates, superiors, and
practice, the centralization of one-person
outsiders as an obligation to society, to
the enterprise, and above all, to the leadership and the decentralization of
immediate STU. No one ever meddles in collectivism are not impossible to reconcile.
the private turf of a peer.
Both are deeply rooted in Russian history and
2. Subordinates are unconditionally tradition, and the Soviets resolve any apparent
obedient to superiors. Discipline is an
conflict by alternating the two in distinct phases
essential ingredient of the system and is
explicitly stipulated in Articles 2 and 14 of a coherent system of decision making.
of the Law on the Soviet State Enterprise.
Today, as throughout Russian history,
Collectivism has its origins in the collegial
there is a general fear that without such
discipline, confusion and chaos will decision making of the medieval Russian
reign. An informal, implicit deal is made peasant commune. It puts authority and
between STU members and their leader:
responsibility into the hands of a group of
members must obey the leader’s
instructions, and the leader must protect people who deliberate and decide all basic
them from outsiders at all times and in questions by majority vote. Once a decision is
every way possible. made, all members of the group commit
3. STU leaders bear complete themselves to its implementation. Collective
responsibility for managing their STUs as
leadership of this kind is practiced in the
a whole. Their authority and
responsibility encompass all subordinate politburo of the Central Committee of the
authorities and responsibilities within Communist Party, in the State Council of
their domains.
Ministers, at the Soviet Academy of Sciences,
4. Leaders may bypass immediate and—in the form of grassroots democracy—in all
subordinates and deal directly with any
the organizations and production units covered
member of their STU at any lower level.
Subordinates from all levels also have by the 1987 Law on the Soviet State Enterprise.
the right of direct access to their leaders.
5. STU members are bound to One-person leadership is equally rooted in
condentiality about the inner workings
centuries of tradition. At the end of the 1700s,
of the group. There are solid walls even
between STUs. Closely knit groups have Emperor Paul I borrowed the idea from the army
always been a part of getting things done and introduced it into Russian public
in Russia. Examples include the
administration. Lenin endorsed it as a basic
peasants’ communes and artels, the
principle of Soviet administration in 1918.

Russian leaders have always sought to strike a

balance between centralized leadership and collective management methods. In 1906, for
example, the Russian revolutionary movement introduced the notion of democratic centralism in
an effort to synthesize the two concepts. In its original form, democratic centralism had four
elements: democratic election of party leaders at all levels, accountability of party organs to their
respective party organizations, strict party discipline and majority rule, and the absolutely
binding character of decisions on party organizations and members.

Lenin believed democratic centralism would promote the public interest by institutionalizing
both central direction of the economy and local control over local management and conditions.
Before perestroika, however, the gap between practice and policy was enormous. The democracy
in democratic centralism had virtually disappeared. In fact, abuses of power were so widespread
that the public came to associate democratic centralism with Stalinism. A fundamental aim of
perestroika is to restore to Soviet enterprises the latent energy of grass-roots participation.

Consequently, the Law on the Soviet State Enterprise explicitly retains the principle of one-
person leadership in the administration of enterprises but entrusts a great deal of decision-
making power on important issues to the labor collective (which consists of the entire personnel
of the enterprise) and to the elected employees’ council. In the Soviet plants we studied, the
decision-making process made regular use of these democratic mechanisms.

We discovered that the Soviets combine power from the top down and power from the bottom up
by alternating centralized and decentralized phases of the decision process and by treating both
phases as inseparable parts of an integrated whole. If one phase is ignored or exaggerated,
effectiveness declines and implementation becomes much less likely. Although the number and
duration of the phases will usually vary depending on the importance of the decision and the size
of the STU, a typical decision process has six phases that switch from centralized to collective
deliberation and action. Shifts from one phase to another are usually signaled by social rituals—
seating arrangements at meetings, for example, or the announcement of decisions and proposals
by leaders and others.

Phase One: Top Down. The leader poses the issue for subordinates and specifies the goals to be
attained.

Phase Two: Deliberation. Lower levels of the STU take part in a broad, open discussion.

Phase Three: Bottom Up. The council of the labor collective submits a proposal to the leader.

Phase Four: Deliberation. The leader reviews and considers the proposal.
Phase Five: Top Down. The leader issues a firm decision and clear instructions.

Phase Six: Implementation. The STU as a whole takes unified, committed, and disciplined action.

As outlined, this process may seem to present a good opportunity for leaders to abuse their power
by paying only lip service to the recommendations of the collective. The leader’s ultimate
decision, after all, is final. Yet the power of the collective is real, partly because the 1987
enterprise law so stipulates, partly because effective implementation depends on a sense of
collective participation, but mostly because STUs involve intense and active vertical integration,
reinforced by the labor union and other social and political organizations, in transmitting
messages, securing commitments, and monitoring the leader’s exercise of authority.

These two features of Soviet management practice—STUs and modernized democratic centralism
—are so basic that it is unlikely any Western manager can manage a joint venture successfully
without understanding how they work.

The comparable Western practice that Soviets need to understand and implement is the use of
lateral networking and decision making across functional borders and between the enterprise
and its suppliers and customers. Unfortunately, lateral networking is not only foreign to Soviet
managers, it actually violates the unwritten STU rules. Clearly, managing joint ventures is going
to require ingenuity and flexibility on both sides.

We feel comfortable that our own management system works. Surprisingly, so does theirs.
Despite the epic failures of Soviet central planning, features of Soviet management are clearly
worth preserving. Certainly they need to be incorporated into the operations of joint ventures,
which are thus in a unique position to combine the complementary strengths of lateral
networking with the close vertical integration of the STU and its democratically centralized
decision making.

SovTruck Engine Factory X

In the actual working world of a Soviet enterprise, of course, theory yields to practice, with all its
complications and exceptions to the rules. During the period of our study, one of our subject
factories lost a manager to resignation and had occasion to choose a new one—in fact, two new
ones in rapid succession—more or less as we watched. The process confirmed our earlier
observations about the combined operation of central control and democratic decision making
within a large Soviet STU. At the same time, it offered us some interesting insights into the
weaknesses, problems, and possible abuses of the system.

SovTruck employs 120,000 people at 15 plants in 12 cities and produces more than 200,000
trucks annually—a quarter of all trucks made in the Soviet Union. SovTruck’s Moscow complex
has 65,000 workers in two million square meters of production space consisting of 10 separate
factories, 32 workshops, and management headquarters. SovTruck (not its real name) is a fully
integrated truck manufacturer and does everything from raw castings to machined components,
truck assembly and finishing. It also produces consumer goods—refrigerators, microwave ovens,
and kitchen cabinets, to name a few. It operates its own hospital, supermarket, and technical
institute, runs schools and summer camps, owns more than 100 apartment buildings, and
publishes its own daily newspaper.

What we will call Factory X is situated in the main Moscow complex, employs about 2,300
workers, and turns out 900 gasoline engines a day. Because of a labor shortage, 450 of its workers
are temporary. Turnover runs at about 8% annually, which management feels is too high. On an
average day, 10% of the work force may be absent for vacation, illness, child-care problem, work
in a pioneer camp or other social activity, or holiday without pay. In the fall, the labor shortage is
particularly acute because some workers must leave to help bring in the harvest. Being absent
without an excuse is grounds for dismissal.

As a critical feeder for the main assembly line, Factory X is under substantial pressure to meet its
production targets. But because the long-term plan is to convert from gasoline to diesel engines,
it receives little money for modernization and capital improvement. These difficulties may
explain the recent heavy turnover in managers—altogether, four in a two-year period. The last
two, chosen since the new enterprise law in 1987, were first elected by the workers then
confirmed by SovTruck headquarters.

The story begins in 1981 when SovTruck headquarters named I.F. Ptichkin manager of Factory X.
For several years, he was a strong leader and did a good job, but then he seemed to run out of new
ideas, and the plant began to decline. In 1986, headquarters reassigned him and put G.F. Priakhin
in his place. Top management did its best to bolster Priakhin by replacing some equipment and
increasing the wage fund, but Priakhin did not do well. He tried to solve all his problems by
making workers put in overtime, which was not a popular move. In April 1988, he resigned
voluntarily and was reassigned.

The vacancy left by Priakhin provided the first opportunity for the employees’ council to elect a
new plant manager. The council proposed an internal candidate, A.S. Tumanov, who had been
Priakhin’s first deputy. Tumanov had joined SovTruck in 1970 as a mechanic but had spent most
of his career as a union representative and personnel administrator. Headquarters considered
Tumanov unsuited to the position, expressed its reservations to the employees’ council, and
suggested an alternative candidate from headquarters—A.S. Gorian. The SovTruck personnel
director for engineering and technical staff, E.S. Kalinin, also doubted Tumanov’s qualifications.
Kalinin had worked with Tumanov in personnel and praised his people skills, ability to
communicate, and mild disposition, but he felt Tumanov lacked the strong technical skills
essential in an effective plant manager.

Nevertheless, when it realized that the shop managers, the Party, and the union wanted
Tumanov, headquarters decided to back off and leave the decision to the employees’ council.
According to Kalinin, the time was not right to insist. The council seemed determined to have a
“nice guy” from within its own factory. At the April balloting, three workers on the 33-member
employees’ council gave Tumanov a negative evaluation, but the others favored him, and he was
elected.

It was obvious from the beginning that Tumanov was in over his head. Kalinin believes Tumanov
probably knew he was unqualified but took the job because he didn’t want to go against the
workers’ wishes. It may also be that he didn’t want to admit his lack of technical expertise. In any
case, he persisted in the job for three months despite serious health problems, including an
operation on his back. In late July, Tumanov returned from sick leave and tendered his
resignation.

The Factory X personnel manager and Party secretary discussed a successor and agreed there was
no suitable internal candidate. They informed Kalinin, who informed the deputy director for
personnel, who told E.A. Kratov, director general of SovTruck. Kratov met with Tumanov before
he left, and Tumanov admitted that he had overestimated his own abilities. He also mentioned
his health problems. Kratov said he didn’t blame Tumanov personally. He put the blame on the
workers, “who did not do a proper analysis.”
In fact, there are conflicting opinions about the causes of Tumanov’s failure. Kalinin insists that
Tumanov was not qualified and did not have enough experience managing a large-scale
operation. He says Tumanov should have seen that only strong initiative from below—from the
shop-floor level—could do much to solve the problems of an operation as large as Factory X. But
Tumanov organized no such initiative. Several units in the factory came to his aid, but he was
incapable of setting priorities to turn the plant around.

Many workers seem to disagree. One member of the employees’ council, a 41-year-old brigade
leader with 19 years at SovTruck, thinks Tumanov was a good person, well qualified, with a lot of
drive. Although he admits that Tumanov lacked technical expertise, he believes Tumanov had
the workers’ support and might not have resigned if headquarters had helped him repair or
replace the old equipment.

Director General Kratov’s own explanation of why he did not interfere with the council’s choice
of Tumanov is surprisingly candid:

“We knew that in the end we would win the game. Election of managers is completely new, and
often the collective doesn’t understand that electing a candidate gives him full power to make
decisions. If the manager wants to solve these problems, he must be demanding and persistent.
And not everyone likes that. Often people in such situations elect a candidate who is softer and
less demanding, not understanding that in the end the collective itself will suffer. In August, we
went to the collective and told them they had made a poor choice and got themselves in a bad
way. After that incident, headquarters will have definite advantages in future elections
throughout the enterprise, and people will put more faith in the candidates we propose. It taught
them a lesson.”

In any event, Tumanov submitted his resignation to the director general and withdrew his name
for reelection. The next day, representatives of the administration, the Party, the union, and the
employees’ council met to discuss the matter. At that meeting, one member of the factory’s Party
bureau spoke in favor of Tumanov, while the rest of the representatives kept silent. Only 2 of the
33 council members voted against letting Tumanov go.

Kalinin then rose to say that the group had made a mistake, that a plant manager with a strong
technical background was needed. If the factory itself couldn’t find a good candidate,
headquarters could. Then for the second time he nominated Gorian, deputy chief engineer at
headquarters, pointing out that Gorian had done a good job for Factory X in that capacity, and
emphasizing that he would be able to open doors for the plant among top managers.

Kratov himself had suggested Gorian’s nomination for the position. Having identified him as a
man with top-management potential, Kratov had for years been grooming Gorian for
headquarters advancement. Recently, however, he had decided that Factory X needed Gorian
more than headquarters did. The Party organizations at headquarters and Factory X had also
discussed and agreed to Gorian’s candidacy.

The election for Factory X manager was held on August 4. The employees’ council was
authorized to elect the manager, but some 300 people came for the debate.

The meeting was chaired by the Party secretary for the factory, who invited delegates to give
their opinions and ask questions of the candidate. Gorian answered questions about his own
background and about his willingness to take the job. He made a short speech praising the hard
work of the employees, condemning the antiquated state of the machinery, bemoaning the labor
shortage, and promising to improve supply services, to pay everyone well for their regular work
hours, and to stop using bonus money for overtime, saving it instead for notably conscientious
efforts.

When he finished, a person in the audience asked whether they could expect help from
headquarters, and Kalinin spoke up to say that a plant manager in another city had promised to
lend them 150 to 200 workers for two years. According to SovTruck’s own newspaper, this
answer was concrete but failed to answer the question on everyone’s mind—why hadn’t
headquarters helped when Tumanov was in charge? As the paper put it, “The ice of mistrust and
resentment did not melt away.”

The delegates took an open vote, with Gorian still in the room, and, with one abstention, the
entire council voted for his appointment.

After the election, Gorian commented that he expected to get new equipment. He said the plant
produced one million rubles worth of engines every day and was so valuable to the enterprise as
a whole that it would have to help the factory replace its 827 pieces of faulty equipment.
SovTruck’s chief economist, however, noted that the plant would be shut down in ten years and
switched to diesel. “Since we are winding down the gasoline engine,” he said, “it would be a
waste of money to put in all new equipment.”

Kratov’s comment was similar. “Of course, Gorian doesn’t know the limits of the help he can
expect from the enterprise. His desires are greater than the possibilities.”

Kalinin predicted that Gorian would stay in his new job for three to five years and then get a
horizontal transfer or promotion. He claimed, “If we left a manager longer, he would stagnate.”

Six months later, Kratov reported that Factory X was operating smoothly and successfully under
Gorian’s leadership in spite of not receiving new equipment.

A version of this article appeared in the November–December 1990 issue of Harvard Business Review.

A former businessman and consultant, Charalambos A. Vlachoutsicos is an Adjunct Professor at Athens University of
Economics and Business in Greece.

This article is about INTERNATIONAL BUSINESS

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