11

Development of Development of Business & Trade in CE Business & Trade in CE

NationsNations

Week 8Week 8

22

The Challenge of ImprovementThe Challenge of Improvement

Within the context of E European marketsWithin the context of E European markets EU accessionEU accession Value congruenceValue congruence De facto congruenceDe facto congruence Technological developmentTechnological development Media exposureMedia exposure Real income improvementsReal income improvements ExpectationsExpectations

33

Business environment – not Business environment – not much change at the topmuch change at the top

44

Paradox of the marketParadox of the market

How similar are Eastern European How similar are Eastern European MarketsMarkets

How homogenous is the regionHow homogenous is the region Should marketing be Should marketing be LocalLocal Pan-EuropeanPan-European What of local companies?What of local companies?

55

Strategic Management & Strategic Management & Strategic MarketingStrategic Marketing

Adapting an organization to changes in the Adapting an organization to changes in the environmentenvironment

To achieve optimum performance To achieve optimum performance organizations must:organizations must:

AlignAlignStrategy and structureStrategy and structure Strategy and environmentStrategy and environment Structure and environmentStructure and environment Strategy - determine long term goals and Strategy - determine long term goals and

adapt courses of action and resource adapt courses of action and resource allocationallocation

66

StrategiesStrategies

DefendersDefenders maintain small niche concern with costs and maintain small niche concern with costs and

efficiencyefficiency AnalysersAnalysers only enter new markets after viability is proven cost only enter new markets after viability is proven cost

efficient but must be able to seize new opportunitiesefficient but must be able to seize new opportunities ProspectorsProspectors locate and develop new marketslocate and develop new markets ReactorsReactors show inconsistent and unstable adjustmentsshow inconsistent and unstable adjustments

77

TAMIV SA Romania(1998)TAMIV SA Romania(1998)

Leather processingLeather processing Employs 300 peopleEmploys 300 people 15-20% of production exported15-20% of production exported 75% of raw materials imported75% of raw materials imported Totally privatized – Totally privatized –

management/employee buyout in 1993management/employee buyout in 1993 Is profitableIs profitable

88

Organisational culture – Organisational culture – independent dimensions of independent dimensions of

practicespractices 5 dimensions – following Hofstede (1990)5 dimensions – following Hofstede (1990) Process or results orientedProcess or results oriented -results-results Job or employee oriented Job or employee oriented -job-job Parochial or professionalParochial or professional -parochial-parochial Open or closedOpen or closed -open-open Tight or loose controlTight or loose control -loose high & tight lower-loose high & tight lower

99

Strategy of CompanyStrategy of Company

Performance stable in non-complex sectorPerformance stable in non-complex sector Strong homogeneous dominant coalition Strong homogeneous dominant coalition

exists in the firm with same objectivesexists in the firm with same objectives Firm has simple structures without Firm has simple structures without

administrative problemsadministrative problems Management uses rational pragmatic Management uses rational pragmatic

decision making processes decision making processes Strategy and strategic position = defenderStrategy and strategic position = defender

1010

Organisation and PromotionOrganisation and Promotion

Tamiv is pretty typicalTamiv is pretty typical Production versus ServicesProduction versus Services Does this “defender” position affect Does this “defender” position affect

marketing strategymarketing strategy Is there a link between organisational Is there a link between organisational

strategy and product promotion?strategy and product promotion? Vorhies & Morgan (2003) – Vorhies & Morgan (2003) –

emphatically!emphatically!

1111

Under attack?Under attack?

If local CEE companies operate defender If local CEE companies operate defender strategies then this informs how they strategies then this informs how they market?market?

If external companies have prospector If external companies have prospector marketing strategies…marketing strategies…

What would they be andWhat would they be and What impact on local companies?What impact on local companies? Should local defenders “move out of character”?Should local defenders “move out of character”?

1212

TechnologyTechnology

1313

Spread of the internetSpread of the internet

1414

E-businessE-business

Drivers of internet as sales mediumDrivers of internet as sales medium Improved internet securityImproved internet security Rising internet penetrationRising internet penetration Greater standardisationGreater standardisation ConstraintsConstraints Fears of lack of securityFears of lack of security Little evidence of e-business successLittle evidence of e-business success Thaler May 2001Thaler May 2001

1515

Market or Sell?Market or Sell?Computer or other mediaComputer or other media

Analysis of markets can determine Analysis of markets can determine strategy rather than organisationstrategy rather than organisation

Product typeProduct type Preferred mediaPreferred media Similar/dispersed marketsSimilar/dispersed markets

1616

Europeans aren’t all the same!Europeans aren’t all the same!

1717

More proof – “Brand Strategy” More proof – “Brand Strategy” 02/0402/04

1818

Lessons?Lessons?

In terms of how to promoteIn terms of how to promote There is a clear distinction even between the There is a clear distinction even between the

advanced new EU membersadvanced new EU members In terms of media in UK we don’t read!In terms of media in UK we don’t read! A standard method of promotion cannot be A standard method of promotion cannot be

employedemployed In terms of e-business/promotion CEE likely In terms of e-business/promotion CEE likely

to take time to matureto take time to mature

1919

Marketing in Czech Firms: 1999 Marketing in Czech Firms: 1999 - 2003- 2003

83% use web to advertise83% use web to advertise 23% use web for ordering/purchasing23% use web for ordering/purchasing Conclusions of studyConclusions of study Underestimation of value of marketingUnderestimation of value of marketing Few clear marketing strategiesFew clear marketing strategies Positive shift in perception of disciplinePositive shift in perception of discipline Increase in internet useIncrease in internet use

Enthusiastic take up is encouragingEnthusiastic take up is encouraging Evidence of a trend in transition economies to view technology Evidence of a trend in transition economies to view technology

as a surrogate for entrepreneurial successas a surrogate for entrepreneurial success Technologies should be developed in tandem with strategic Technologies should be developed in tandem with strategic

visionvision

2020

Marketing standardization in Marketing standardization in CEECEE

Shuh (2000) conducted a survey of 8 Western Shuh (2000) conducted a survey of 8 Western companies marketing in CEEcompanies marketing in CEE

In all except Beer standardized approachIn all except Beer standardized approach Reasons:Reasons: Most CEE markets are small and customization Most CEE markets are small and customization

does not pay offdoes not pay off The markets will converge to West standards in 10 The markets will converge to West standards in 10

yearsyears Differentiated markets are inefficient (economies Differentiated markets are inefficient (economies

of scale)of scale) Market structures and consumer behaviour can be Market structures and consumer behaviour can be

changed over timechanged over time

2121

Market changesMarket changes

In transition markets product preference can In transition markets product preference can go through rapid changego through rapid change

Eg 1998 Poland analysisEg 1998 Poland analysis Overall growth but emerging patternOverall growth but emerging pattern High end premium brands perform wellHigh end premium brands perform well Low-end “value” brands hold upLow-end “value” brands hold up Pressure on mid-priced products Pressure on mid-priced products

(particularly in FMCGs like coffee & (particularly in FMCGs like coffee & chocolate)chocolate)

2222

Meaning….?Meaning….?

As emerging markets mature product As emerging markets mature product profiles “establish”profiles “establish”

Basically first 10 years are atypicalBasically first 10 years are atypical Needs corporate responsesNeeds corporate responses Cadbury began to produce on site Cadbury began to produce on site

(Wedel factory) = 13% year on year (Wedel factory) = 13% year on year volume growthvolume growth

2323

Pliva D.D. – Croatia SWOT Pliva D.D. – Croatia SWOT analysisanalysis

2424

Multinational entry modesMultinational entry modes

Joint venturesJoint ventures

Greenfield sitesGreenfield sites

AcquisitionsAcquisitions

Brownfield sites/investmentBrownfield sites/investment

2525

Brownfield investmentBrownfield investment

Acquisition method which leads to Acquisition method which leads to radical restructuring of acquired firmradical restructuring of acquired firm

External growth strategies are inhibited External growth strategies are inhibited by poor quality local firmsby poor quality local firms

Internal growth strategies that depend Internal growth strategies that depend on specific local resourceson specific local resources

2626

DefinitionDefinition

Brownfield investment is a foreign Brownfield investment is a foreign entry that starts with an acquisition but entry that starts with an acquisition but builds a local operation that uses more builds a local operation that uses more resources, in terms of their market resources, in terms of their market value, from the parent firm that from value, from the parent firm that from the acquired firmthe acquired firm

2727

Research suggests major Research suggests major motive for FDI is…motive for FDI is…

Buying a market shareBuying a market share First mover advantagesFirst mover advantages

Schöller Lebensmittel a German frozen-food Schöller Lebensmittel a German frozen-food manufacturer acquired majority share in Hungarian ice-manufacturer acquired majority share in Hungarian ice-cream factory Budatejcream factory Budatej

Reconstructed factoryReconstructed factory Introduced 4 new production linesIntroduced 4 new production lines Rebuilt factoryRebuilt factory Built new warehousesBuilt new warehouses Replaced freezers in retail outletsReplaced freezers in retail outlets Even discontinued local brand (perceived low quality)Even discontinued local brand (perceived low quality) 4 years later fully acquired company4 years later fully acquired company

2828

Reasons for strategyReasons for strategy

Obtain faster access to marketObtain faster access to market Benefit from company’s existing market Benefit from company’s existing market

shareshare Used imported production technology and Used imported production technology and

international brand namesinternational brand names Provided intensive training to impart Provided intensive training to impart

management knowledgemanagement knowledge Used only few of local firms assets but did Used only few of local firms assets but did

use customer base and networksuse customer base and networks

2929

Danisco A/S – Danish food Danisco A/S – Danish food companycompany

Acquired East German sugar companies because Acquired East German sugar companies because sugar quotas for firms were set by EUsugar quotas for firms were set by EU

Acquisition of sugar refiners increased Danisco’s Acquisition of sugar refiners increased Danisco’s available production quotas.available production quotas.

East German refiners were technically backward but East German refiners were technically backward but production were location bound and had to use local production were location bound and had to use local sugar farmers produce. Strong competition sugar farmers produce. Strong competition developed to acquire these refiners.developed to acquire these refiners.

A company seeking to enter a new market may adopt A company seeking to enter a new market may adopt a brownfield policy rather than Greenfielda brownfield policy rather than Greenfield

3030

Availability of suitable trading Availability of suitable trading partners may influence entry partners may influence entry

modemode British Vita sought to expand into Poland.British Vita sought to expand into Poland. 30 years policy of expansion by acquisitions30 years policy of expansion by acquisitions ““In general, we found the companies were In general, we found the companies were

overmanned and the equipment old. For example, overmanned and the equipment old. For example, we currently employ 38 people in production to we currently employ 38 people in production to manufacture 8-9,000 tonnes per year. A company we manufacture 8-9,000 tonnes per year. A company we looked at in Lodz produced 4,000 tonnes a year looked at in Lodz produced 4,000 tonnes a year using 350 people”.using 350 people”.

British Vita invested in Greenfield siteBritish Vita invested in Greenfield site Schöller established a Greenfield plant in Poland to Schöller established a Greenfield plant in Poland to

manufacture ice-cream because the industry was far manufacture ice-cream because the industry was far more underdeveloped than in Hungarymore underdeveloped than in Hungary

3131

The advantages of brownfield The advantages of brownfield investmentinvestment

If local industries are advanced they If local industries are advanced they may make retaliatory moves if may make retaliatory moves if Greenfield strategy adoptedGreenfield strategy adopted

Greenfield does not guarantee a market Greenfield does not guarantee a market shareshare

Costs of market entry would be higher Costs of market entry would be higher with Greenfieldwith Greenfield

3232

What conditions determine entry What conditions determine entry method?method?

If the strategic intent of an investment depends on If the strategic intent of an investment depends on local resources it is less likely to be Greenfieldlocal resources it is less likely to be Greenfield

Firms with transferrable resources (excess Firms with transferrable resources (excess management, access to finance) are more likely to management, access to finance) are more likely to choose Green/Brownfield investmentschoose Green/Brownfield investments

Entry via acquisition is more likely if local industry Entry via acquisition is more likely if local industry possesses assets that are valuable for foreign possesses assets that are valuable for foreign investors (eg internationally competitive technology)investors (eg internationally competitive technology)

Entry via acquisition is more likely if existing firms in Entry via acquisition is more likely if existing firms in the industry are protected by high barriers to entrythe industry are protected by high barriers to entry

Entry into a country with low quality of resources Entry into a country with low quality of resources available on the free market, reletive to those available on the free market, reletive to those available in firms, is more likely to be in the form of available in firms, is more likely to be in the form of acquisitionacquisition

3333

Inward FDIInward FDI 20012001 Worldwide decline in FDI had no impact on transition Worldwide decline in FDI had no impact on transition

economieseconomies Overall FDI inflows remained unchanged from Overall FDI inflows remained unchanged from

previous yearprevious year Decline only affected advanced economiesDecline only affected advanced economies CauseCause Stagnation of leading economiesStagnation of leading economies Loss of market value of some TNCs lead to scaled Loss of market value of some TNCs lead to scaled

back investment plansback investment plans This may have an effect this/next year on transition This may have an effect this/next year on transition

economieseconomies

3434

Why?Why?

Thanks to recent productivity gains, most east European Thanks to recent productivity gains, most east European transition economies have been able to improve their transition economies have been able to improve their cost competitiveness vis-à-vis their main trading cost competitiveness vis-à-vis their main trading partners. partners.

This on-going improvement in competitive position This on-going improvement in competitive position obviously helped east European exporters to perform obviously helped east European exporters to perform better on west European markets in 2001 than some of better on west European markets in 2001 than some of their competitors. their competitors.

The gains in competitiveness and the improved export The gains in competitiveness and the improved export performance has led to an increase in eastern Europe's performance has led to an increase in eastern Europe's share of the EU's extra-EU imports from 9.9 per cent in share of the EU's extra-EU imports from 9.9 per cent in 2000 to 11.1 per cent in 20012000 to 11.1 per cent in 2001

Economic Intelligence UnitEconomic Intelligence Unit

3535

So what did happen then?So what did happen then? September 22 2003--Foreign direct investment (FDI) September 22 2003--Foreign direct investment (FDI)

inflows into the transition economies of eastern inflows into the transition economies of eastern Europe this year are expected to be similar to, or Europe this year are expected to be similar to, or even exceed, the record total of US$34bn achieved even exceed, the record total of US$34bn achieved in 2002. in 2002.

Economist Intelligence Unit (Economies in Economist Intelligence Unit (Economies in transition, September 2003) reports data for the first transition, September 2003) reports data for the first half of 2003, which support the expectation that the half of 2003, which support the expectation that the region will continue to buck the global trend of FDI region will continue to buck the global trend of FDI decline. Continued buoyant inflows into eastern decline. Continued buoyant inflows into eastern Europe are forecast for the medium term. However, Europe are forecast for the medium term. However, despite EU enlargement in 2004, the main traditional despite EU enlargement in 2004, the main traditional FDI destinations in eastern Europe will attract a FDI destinations in eastern Europe will attract a declining share of regional FDIdeclining share of regional FDI

3636

Drivers of FDIDrivers of FDI Continued FDI inflows into the region are being achieved despite Continued FDI inflows into the region are being achieved despite

slow OECD growth and the ongoing difficulties with privatisation slow OECD growth and the ongoing difficulties with privatisation programmes in some countries. programmes in some countries.

This has been offset by the increased relative attractiveness of This has been offset by the increased relative attractiveness of the region compared with most other emerging markets, and the region compared with most other emerging markets, and cost-cutting pressures on Western companies that have cost-cutting pressures on Western companies that have increased the incentive to relocate operations to eastern Europe. increased the incentive to relocate operations to eastern Europe.

Strong growth in much of the region; assured access to EU Strong growth in much of the region; assured access to EU markets for many countries; and the continuing pull of abundant markets for many countries; and the continuing pull of abundant natural resources in some CIS states have also played a role. natural resources in some CIS states have also played a role.

Despite the weak global economy most transition economies Despite the weak global economy most transition economies have continued to perform well in 2003 in terms of output have continued to perform well in 2003 in terms of output growth. growth.

The Economist Intelligence Unit forecasts that average real GDP The Economist Intelligence Unit forecasts that average real GDP growth in 2003 in the transition economies will accelerate to growth in 2003 in the transition economies will accelerate to 5.1%, from 4.3% in 20025.1%, from 4.3% in 2002

3737

A shift away from east central A shift away from east central EuropeEurope??

The overall FDI figure for the region masks some The overall FDI figure for the region masks some important intra-regional shifts and changes in FDI important intra-regional shifts and changes in FDI patterns. First-half year data reveal significant year on patterns. First-half year data reveal significant year on year declines of FDI into the leading central European year declines of FDI into the leading central European economies (the Czech Republic, Poland, Hungary and economies (the Czech Republic, Poland, Hungary and Slovenia), which has in part been offset by the rising Slovenia), which has in part been offset by the rising trend in all the other sub-regions. trend in all the other sub-regions.

In Hungary inward FDI was actually negative in the first In Hungary inward FDI was actually negative in the first half of 2003, as disinvestment by existing companies half of 2003, as disinvestment by existing companies exceeded new investments. Hungary has been hurt by exceeded new investments. Hungary has been hurt by strong wage growth and the real appreciation of the forint strong wage growth and the real appreciation of the forint in 2001-02, as well as generally weakening performance. in 2001-02, as well as generally weakening performance.

However, the data may portray a somewhat distorted However, the data may portray a somewhat distorted picture because official Hungarian FDI data omit picture because official Hungarian FDI data omit reinvested earnings, and these—according to some reinvested earnings, and these—according to some estimates—continue to be significantestimates—continue to be significant

3838

South East Europe – South East Europe – hinderances to inward FDIhinderances to inward FDI

Slow rate of privatizationSlow rate of privatization Mixture of insufficient regulation and control Mixture of insufficient regulation and control

and too many administrative rules and and too many administrative rules and institutional involvementinstitutional involvement

Lack of transparency – leading to briberyLack of transparency – leading to bribery Local business which has become a mixture Local business which has become a mixture

of the legal and the illegalof the legal and the illegal Unstable politicsUnstable politics