Survival Strategies of East German Companies in a Competitive Market after Reunification

Diplomarbeit von Ilka Wiedemann

Introduction:

The speed with which the Berlin Wall fell on the 9 November 1989 was both surprising and inspiring. No longer would the people of East Germany be held captive under a repressive regime that deprived them, not only of western commodities, but of the most fundamental of human needs, the freedom to thrive.

On 18 May 1990, politicians from the East and West signed a treaty creating an economic and social union. This was followed by the Treaty of Unification on 31 August 1990. The dream of one Germany had become a reality. It was now up to the German people to build a unified economy, a task that posed difficult questions – most importantly, what to do with the state owned businesses that comprised the former GDR (German Democratic Republic).

The former states of the GDR contain some of the highest growth regions in Europe. Despite this, there is social instability and high unemployment. As of October 2003, the unemployment rate in East Germany was 17.3% compared with 8.0% for the West, and 8.1% for the European Union.

While there is a necessity to improve the situation for all of Germany, many hurdles remain. In the case of unified Germany, „Deutschland einig Vaterland” is more than a slogan of unity; it is a statement for economic survival.

The aim of this thesis will be to explore the following questions:

How did three East German companies – the Rotkäppchen sparkling wine company, the Florena cosmetics company, and the Fit detergent company – survive and even thrive after reunification? How did the Treuhand Anstalt (THA), or Trust Agency, help these companies, and what affect has this had on the German economy? What were some peripheral reasons for economic survival, including government incentives, global economic expansion during the 1990s, and „ostalgia?” What were some East German companies that did not survive, and why did they fail when others succeeded? How could these survival strategies be applied to other companies in other nations and what are the lessons for the future?

In answering these questions, it will be necessary to explore the history, not only of the three companies, Rotkäppchen, Florena, and Fit, but also of the East German market.

Due to the complexity of this topic, however, this thesis will remain focused on three main survival strategies. These will include how finding a niche market, using mergers and acquisitions, and using company and product diversification have helped companies survive in a competitive market. There will also be an overview of secondary reasons for economic success.

The following is an outline of the format of this thesis, beginning with the introductory chapter through the appendix. The introductory chapter of this thesis will define the problem and outline the goals of the study. The purpose of the introduction will be to propose a series of questions that are addressed throughout the thesis. The second chapter will provide an overview on the history of the East German economy, including details of the planned economy, import and export relations with other countries, the failure of the planned economy, and finally German Reunification.

The third chapter will detail life after communism in East Germany, and the steps taken to move from a planned to a market economy. This will include a study on the role of the Trust Agency in the privatization effort, including the Management Buy-Out and Management Buy-In options.

The fourth chapter will contain examples of the three East German companies Rotkäppchen, Florena, and Fit, and how each of these companies survived in a new competitive market. A history of each company will be provided prior to and following reunification, and each company’s survival strategy will be outlined in detail.In the fifth chapter, other reason for economic survival will be mentioned, including government incentives, global economic expansion during the 1990s, and ostalgia.

The sixth chapter will examine several East German companies that did not survive privatization, including enterprises that manufactured automobiles, electronics, and textiles. Reasons for economic failure will be outlined, including consumer trends, environmental reasons, and competition.

In the seventh chapter, the thesis will be summarized along with findings and a final analysis. Additionally, questions will be answered about how these findings might apply to other companies, countries, and the world. The eighth chapter will contain the appendix, which will include a personal interview with Silke Bretscher, product manager of the Fit GmbH conducted by the author of this thesis on 17 April 2003.

Chapter nine will contain a will contain a glossary of abbreviations used throughout this thesis with a brief explanation of their meanings. The final chapter, chapter ten, will contain a list of all references that were gathered from books, encyclopedias, newspapers, magazines, and Internet web sites.

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