Hungary should focus resources on a few key industries and promote hyperspecialization. Interviews found that Hungary spreads resources thinly and current organizational forms waste time and money. Hungary could amend labor laws to allow dividing work into smaller tasks done by specialized cooperators through intermediaries. New education would train cooperators and marketing would promote the role. This could boost key industries and increase Hungary's annual GDP growth to 5% within 8 years.

1. Hungary
Being Small in a Global World
What can Eastern Europe do to escape the bind between the more productive West and more
Q
cost-efficient East?
Eastern European countries, and Hungary in particular should
A • Focus resources on a few key industries, become world class in them and sell globally
• Incite hyperspecialization to support the key industries with efficient specialists
Team information
Team name HOW Consulting Group
Leader Gergely Balázs (Hungary, Rotterdam School of Management)
István Juhász (Hungary, Corvinus University of Budapest)
Members
Jasper de Vries (Netherlands, Rotterdam School of Management)
Mentor Miklós Stocker (Hungary, Corvinus University of Budapest)

2. Macro analysis shows1 that Eastern Europe (EE) has significant
opportunities in the grip of the West and the East2
Both the West and the East outperform EE in Still, EE has significant advantages over the
most fields West and the East
Comparison of West, East, EE and Hungary Outperforms EE in 11 out of 12 CC
WEF Competitiveness Criteria (CC), higher is better Relative strengths: business sophistication,
West institutions, market efficiency and low level of
Institutions
Innovation 140
Infrastructure corruption2
120
Business 100
Outperforms EE in 10 out of 12 CC
sophistication Macroeconomic East Relative strengths: less tax regulations and
80
environment lower tax rates plus all strengths of the West
60
40 Advantage over the West
20
Health • Less restrictive labor regulations2
Market 0
& primary
size education Advantage over the East
EE • Lower inflation and higher political stability
Higher • Higher technological readiness, although this
education advantage is likely to diminish due to high
Technological & training FDI in the East
readiness
Outperforms EE in 10 out of 12 CC
Goods market
Hun-
Financial market We see the less restrictive labor regulations3
Labor market efficiency gary as a good basis for growth
development
efficiency
1. The WEF Competitiveness Report (2012-2013 edition) was used to identify key regional differences. The report contains analysis of all countries of the world and uses hundreds of indicators to
measure the competitiveness of each country. We analyzed the Top10 countries (by nominal GDP) of all three regions and looked at nearly thirty factors including basic competitiveness criteria and
the most problematic factors for doing business in order to identify key regional differences.
2. Regions and observed countries (Top10 by nominal GDP). West: USA, Germany, France, UK, Italy, Canada, Australia, Spain, Netherlands, Switzerland. East: China, Japan, India, South Korea,
Indonesia, Saudi-Arabia, Iran, Thailand, UAE, Malaysia. Eastern Europe: Russia, Turkey, Poland, Czech Republic, Romania, Ukraine, Hungary, Slovakia, Croatia, Bulgaria
3. Conclusion from analyzing "The most problematic factors for doing business" in the WEF Report. These factors are not represented on the spider chart.
HOW_ChallengeFuture.pptx ChallengeFuture 2

3. Industry analysis shows that Hungary has an advantage over
the rest of EE in certain knowled-based sectors
Hungary’s solid education and innovativeness … including pharmaceutical, ICT, logistics and
supports knowledge-based industries… vehicle manufacturing
Quality of math and science education1 (Top5 in EE)2 Pharmaceutical
4.8 • In Hungary, 42% of foreign students study life sciences,
4.6 4.5 4.3 4.2 demonstrating the high quality education in this field
• In life sciences and health care, 4 out of the 10 biggest
EE companies are Hungarian
Croatia Ukraine Hungary Russia Romania
ICT3
• ICT goods exports account for 25.6% of total goods
Quality of management schools (Top5 in EE)2 exports in Hungary. The only other EE countries with a
4.1 4.0 3.9 3.8 3.8 ratio over 10% are Slovakia (19.3%) and the Czech
Republic (15.0%)
Logistics
Hungary Poland Croatia Czech R. Turkey • Geographical advantage: Hungary lies in the middle of
the EE region with 3 out of 10 Pan-European transport
corridors passing through the country
Innovation competitiveness (Top5 in EE)2
3.8 3.6 3.3 3.3 3.2 Vehicle manufacturing
• Mercedes-Benz, Audi, GM-Opel and Suzuki have plants
in Hungary, accounting for ~2.5% of the country’s GDP
• In manufacturing, 3 out of the 10 biggest EE
Czech R. Hungary Turkey Poland Ukraine companies are Hungarian (including Audi Hungaria)
1. Furthermore, the Hungarian government changed the higher education system in 2012 in order to increase the number of students in certain fields such as engineering, physics and IT
2. Including only the Top10 EE countries (by nominal GDP). Competitiveness criteria measured on a scale of 7 3. Information and communications technology
Source: Deloitte TOP-500 Ranking: Central and Eastern Europe’s largest companies; Deloitte Technology Fast 50; Deloitte CEE CFO survey; Education at a Glance 2012: OECD Indicators, WEF
Competitiveness Report (2012-2013 edition), World Bank Indicators
HOW_ChallengeFuture.pptx ChallengeFuture 3

4. Interview finding #1: Hungary hasn't got a lot of natural
resources and still spreads it around all industries1
Hungary is relatively poor in resources and its inner market is small
• Both the West and the East have more natural resources
• The average Western country has 3.5 times the GDP per capita as Hungary (~49,000 USD2 vs. ~14,000 USD)
• Hungary's population is 1/7 of that of the average Western country and 1/30 of that of the average Eastern country
Small countries can focus their resources on key industries and sell globally
• Switzerland is famous for its financial services industry, watches and chocolate
• Hong Kong and Singapore are very export-oriented with an export/GDP ratio of ~200% (Hungary: 92%)
Hungary wanted to do the same but specialization plans were discontinued
• Hungary realized these issues and created special action plans to focus on four key industries in 2009:
pharmaceutical, ICT, logistics and vehicle manufacturing
• The goal was to enable these industries to reach higher added value
• Plans were based on months of consultation with industry leaders and experts
• Unfortunately, these action plans were cancelled by the new government in 2010 for reasons not specified
Hungary should focus its resources on a few key industries,
become world class in them and sell globally
1. Source: Interview with István Szatmári PhD, metabolism and pharmacokinetics manager at Chinoin Zrt, Budapest. Date: November 17, 2009
Interview with Dr. István Juhász, professor at Budapest Business School. Date: January 25, 2013
2. Average of Top10 Western countries (by nominal GDP)
3. Information and communications technology
HOW_ChallengeFuture.pptx ChallengeFuture 4

5. Interview finding #2: Current organizational forms are not
efficient: companies waste money, employees waste time1
Current organizational forms are not suitable Less stringent regulation in EE and the web
for every situation make new organizational forms possible
People spend an increasing amount of time not Labor and tax regulations are far less strict in
working2 Hungary than in the West
• The average employee spends 1.5 hours wasting time • Employees can be evaluated (and if necessary, laid off)
at work on the basis of performance
• A 25-year-old wastes four times as much time as a 65- • When working for different employers, tax discounts are
year-old required to make freelancers pay taxes proportionately
(compared to someone in a traditional job)
Big projects without a tight schedule make it difficult
to check what employees are doing Online platforms make it possible to divide tasks into
• Smaller chunks of work are easier to manage into tiny parts which can be carried out by specialists
• Smaller chunks could be done by specialists who are • InnoCentive: a global web community for open
efficient and find their work meaningful innovation where 300,000 specialists compete to solve
• Specific skills may not be found in the vicinity of the science and technology problems initiated by
firm: these skills to be sourced via the internet companies such as P&G
• TopCoder: a global community of programmers who
People are not paid on the basis of performance or divide work and create quality applications for a fraction
output of the average market price
• A lot of employees refuse performance-based pay and • This phenomenon is called crowdsourcing and is
prefer a flat (monthly) salary considered as the basis of hyperspecialization.
Hungary should promote a new, more effective organizational form
which leverages hyperspecialization
1. Source: Interview with Dr. István Juhász, professor at Budapest Business School. Date: January 25, 2013
2. http://blog.tempoplugin.com/2012/how-do-people-spend-their-time-at-work-infographic/
HOW_ChallengeFuture.pptx ChallengeFuture 5

6. Hungary should focus on key industries and incite
hyperspecialization to become more competitive
Timeline (see the next two slides for implementation)
Lack of competitiveness Road to competitiveness Increased competitiveness
Phase (1990-2012) (2013-2021) (2022-)
• Compete & lose with the West • Educate specialists focused on • Create intermediaries
on knowledge selected key markets • Market hyperspecialization to
Action • Compete & lose with the East • Make beneficial labor laws population and global markets
on efficiency
• Small markets • Better work (people work • Sustainable form of
• Low resources exclusively in their area of competitiveness, unique to EE
• Medium innovation capacity expertise) • World leader in key industries
Result • Weak overall competitiveness • Faster work (work is done in • High innovation capacity
parallel) • Awareness of this org. form in
• Cheaper work (result of the the population and satisfied
previous two) "cooperators"
Hyperspecialization1 is an extreme form of the division of labor, facilitated by advances in IT and communication
technology. It involves dividing work previously done by one person into more specialized pieces done by several people.
Labor
Intermediaries Education Marketing
regulations
Key resources Key activities
1. Source: Malone, A., Laubacher, L., Johns, T. (2011). The big idea: the age of hyperspecialization. Harvard Business Review, p.1-11
HOW_ChallengeFuture.pptx ChallengeFuture 6

7. Implementation of key resources: intermediaries and laws
Intermediaries enable firms to outsource work … which can be made possible and incited by
to cooperators… new labor regulations
EE and Hungary is in a special position regarding
labor regulations
• Western countries have strict, inflexible regulations
because they want to prevent unskilled immigrants
from entering their labor markets
• Countries of the East have very loose labor regulations
because they want to attract FDI and also, regulations
are feared to curb economic growth
This chart shows how
intermediaries function as Hungary should exploit this unique situation and
a link between firms and amend its labor regulations1
specialists (cooperators), • Provide legal grounds to enable:
how they are supported and • Division of work into smaller parts
what their inderpedencies • Intermediaries as a new business entity
are • Cooperators as a status that can be
represented by a union
• Incite people currently working illegally (black and gray
market) to go legal as cooperators2
• Incite output-based compensation with tax benefits
• Make the labor market transparent which will lead to
increased competition and efficiency – meaning that
intermediaries will find the suitable cooperators
1. Hungary changed its labor code as of July 1, 2012. This new law was a step in the direction of Western regulations. Nonetheless, we are confident that the directions are not final since neither
employers nor employees were satisfied with the new, inflexible rules.
2. Although several attempts to accompish this have failed in the past, the cooperator status (with low tax rates) is estimated to be an attractive alternative to the undeclared worker status
HOW_ChallengeFuture.pptx ChallengeFuture 7

8. Implementation of key activities: education and marketing
New education method to train future
cooperators Script for a 30-second TV spot
EXT. STREET - DAY
Present method1 Future method1 A little girl and her grandmother walk holding hands.
Projects Individual Team projects GRANDMA
What do you want to be when you grow up?
Lexical knowledge Competency-based
Focus The child has a puzzled face, seemingly she has no
practical knowledge
idea. She looks around and sees a billboard
Languages Focus on grammar Focus on speaking advertizing the Most Wanted Profession: Cooperator.
Relation to Separated Interconnected CUT TO:
firms Camera zooms in her face and we see a future day of
hers. She has a happy life; we see her doing
meaningful work, going out with her girlfriends and
sleeping for as long as she wants.2
CUT TO:
Stakeholder Motivation Camera zooms out of the girl's face and she looks at
another billboard. It depicts some office worker3 who
looks tired due to stressful work. This billboard
Students Gamification and clear career prospects advertises a brand new painkiller. The girl grimaces.
The girl points at the cooperator billboard with an
Parents More competitive children intent look on her face; that's what she wants to be.
Grandma smiles and gives her an approving nod.
Government More competent workforce
GRANDMA
Teachers Increased wages Good choice.
1. The present method has German/Prussian origins, the future method is based loosely on the one used in Anglo-Saxon countries and the Netherlands
2. As a cooperator she only needs to work on things she likes and is truly great at, helping her country getting more competitive in the long run
3. A management consultant
HOW_ChallengeFuture.pptx ChallengeFuture 8

9. Financial forecast shows an annual GDP growth of 5%
Revenues and global market shares of key
Growth rate assumptions1 Hungarian industries show high growth
Base GDP 1.5% Industry2 2012 2022
Pharmaceutical industry 17%
$2.5 bn $17.6 bn - $21.5 bn
Vehicle manufacturing 7% Pharmaceutical
0.3% 1.2% - 1.5%
ICT 17%
Vehicle manufacturing
$12.7 bn $30.3 bn - $37.0 bn
1.6% 2.8% - 3.4%
Logistics 7%
$1.3 bn $10.1 bn - $12.3 bn
All other industries 0% ICT 0.1% 0.5% - 0.6%
$7.0 bn $24.4 bn - $29.8 bn
Logistics 0.7% 1.2% - 1.5%
Proposed strategy pays off in 8 years
Base GDP (bn USD) GDP with proposed strategy (bn USD)
+5%
191 191 200 203 210 216 221 231
150 150 157 156 165 163 173 172 182 181
140 140 142 143
2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022
1. For Hungary 2. Industries not listed in the table contributed 117 bn USD to the Hungarian nominal GDP in 2012. Estimated contribution in 2022: 126-154 bn USD.
Source: http://www.businessvibes.com/blog/industry-insight-global-pharmaceutical-industry, http://www.huembwas.org/Business/hungary-auto_en.pdf,
http://www.researchandmarkets.com/reports/2078480/global_it_services_industry_analysis_20122017, http://www.authorstream.com/Presentation/suvrata.nandy-893815-analysis-of-logistics-industry/
HOW_ChallengeFuture.pptx ChallengeFuture 9

10. Summary1 of the proposed strategy
PART N ERS KEY ACT IVIT I ES VA LU E PROPOSIT ION CH A N N ELS CU STOM ER SEGM EN T S
Government backing Increase firms' Trade on the
competitiveness international marketplace
Hungary's Global marketplace
government Educate specialists
Output -
Better Firms Internat. market International
Increased Advance labor People work on market for
GDP & tax laws what they
specialized in
Hungary's key
markets
Hypespecialization
Hungary's Faster Marketing through
companies in Mobilize specialists & Work can be done in education system &
key markets firms by marketing parallel intermediaries
Increased campaign
Provide Intermed. Specialists
competiti- jobs
veness Cheaper
Result of efficiency
Hungary's KEY RESOU RCES & speed CU STOM ER RELAT ION S
intermediaries
Co-creation
Quality Split jobs & Specific work agreement
control & mobilize
integration specialists
Flexible labor/tax laws
Split jobs
Firms Internat. market
Hungary's
specialists Mobilize people
Check quality
Collaboration In-depth Input -
skills expertise Specialists
Integrate parts Communities
Hungary's Stimulate interpersonal
education Intermediaries that
Competitive advantage process
system facilitate collaboration
for facilitation by
Educating specialists intermediaries Intermed. Specialists
CA SH OU T CA SH IN
Cost of educating specialists = from 5% of national GPD to 7.5% GDP rise in 11 years through increased
Cost of marketing campaign = 0.01% of national GDP competitiveness from hyperspecialization:
Extra 6% GPD growth
1. Business model canvas by Alexander Osterwalder
HOW_ChallengeFuture.pptx ChallengeFuture 10