In this paper we explore the behaviour of state firms pre-privatisatio
n, the incentives and the constraints facing managers and the nature a
nd the power of the coalitions within the firms. We show that managers
on low incentive payment schemes with little formal stake in privatis
ation and who face possible redundancy have little incentive to embark
on restructuring. Hardened budget constraints, career concerns and po
tential stakes in the privatised firm, however, may strengthen manager
ial incentives to restructure. We then introduce an 'influence' functi
on which captures how the distribution of winners and losers within th
e firm and size of their loss and gain affects the probability of rest
ructuring. The function illustrates how strong opposition coming from
large concentrated losses is likely to dominate diffuse support from s
mall, widely distributed gains. Government measures such as hardening
budget constraints, financing of severance payments, and selective deb
t write-downs affect the distribution of gainers and losers and may be
used to overcome blocking coalitions and increase support for restruc
turing. Examination of a range of enterprise case studies vindicates o
ur hypothesis that the structure of control and production strongly af
fect incentives to restructure. Centralised management structures, the
presence of non-performing units and a functional division of activit
ies have all acted as serious constraints on the unbundling/restructur
ing process whilst the removal of state subsidies has been critical in
forcing firms to rationalise production and unbundle activities.