Development of Business

1
Development of Business Trade in CE Nations

• Week 7

2
Transition problems/barriers

• Steep fall in production
• Tough stabilization and comprehensive
  liberalization success
• Fast and comprehensive privatization does not
  necessarily cause restructuring
• Decisive factor has been the state in
• Developing new market institutions
• Setting out clear and stable rules

3
Most successful countries

• Czech Republic
• Poland
• Hungary
• Estonia
• Slovenia

4
Steep fall in production WHY?

• Break up of planned economy led to
• Loss of subsidies on raw materials
• Loss of markets
• Loss of economic networks

5
Replacement required

• Creation of new networks and links
• New products
• New production methods
• Results were that around 1/3 of output between
  1990 and 1992 had negative value added
• i.e. costs of production were greater than world
  market prices for products

6
Why the improvements in some countries and not in
others?

• Cannot implement full market model in one go
• The longer the transition process the greater the
  holes that can be exploited
• Cultural transition
• Collective consciousness pre command economy
• CIS
• Others
• Tough shock therapy of Poland and Estonia

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Why the improvements in some countries and not in
others?

• Key elements
• Stabilization
• Liberalization
• Privatization
• Initial conditions
• Liberalized prices lead to inequality between
  prices and purchasing power
• The effect is an increase in prices
• In January 1992 in Russia prices rose by 300 in
  one month

8
Why the improvements in some countries and not in
others?

• Pre-1990 Hungary already had market-orientated
  prices so saw only a small rise
• Price stabilization is necessary to reduce
  inflation and allow the market to obtain
  comprehensible signals
• Tough stabilization
• Hungary
• Poland
• Lax stabilization
• Russia
• Ukraine
• THERE IS A CLEAR LINK BETWEEN LOWER INFLATION AND
  GROWTH IN OUTPUT

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Why the improvements in some countries and not in
others?

• Liberalization
• Entry to and exit from the market
• It is important to allow enterprises access to
  the market
• But also
• To establish clear rules and the possibility of
  exit from the market
• It is a mistake to block exit by soft credits and
  subsidies
• Inefficient enterprises block entry of
  potentially more efficient new enterprises
• Bankruptcy procedures
• Tough - Hungary and Estonia
• Lax - Czech Republic and Russia
• ..\budget constraints.doc

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Why the improvements in some countries and not in
others?

• Privatization
• Voucher Czech Republic, Russia and Lithuania
• Direct Sale - (favours capital owners especially
  foreign investors)
• Estonia and Hungary
• Insider - (management/employee buyouts)
• Romania, Ukraine and Albania
• Restructuring
• Defensive
• Deep Strategic

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Why the improvements in some countries and not in
others?

• Conclusions
• High achievers
• Are most advanced in integration process
• Have highest levels of FDI
• In the future we may predict they will
  demonstrate
• Further integration with Western Europe
• Integration into international networks of
  production
• Full restructuring of production
• Development of labour - markets attitudes
• Further development of financial markets, legal
  systems
• and the administrative capacity of the state

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Growth Drivers

• Economic growth is positively correlated with
• Foreign investment
• Export growth
• Negatively correlated with
• Inflation
• Matkowski - Post socialist countries (June 2004)

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What drives business performance?

• Does privatization enhance performance?
• Study of Estonian business performance 1993-1997
• Arguments
• Privatization by sale to a core owner (direct
  sale) is considered the best method (beyond
  vouchers or buyouts)
• Privatization is beneficial because of the
  incentive effect and access to outside finance
• Privatization to outsiders is better in terms of
  ownership structure because of alleged agency
  problems having enterprise employees as owners
• New enterprises with no links to former state
  sector are the most dynamic part of the economy

15
What drives business performance?

• Estonia mass privatization through sales
• Observations
• Sales increase in the year after privatization
  then fall
• SOEs sales performance increased in the period
  93-97
• Conclusions
• Privatization may be a boost for sales initially,
  but its impact is not that strong
• Firms may deliberately deteriorate sales in the
  year prior to privatization to lower the price
  (particularly if insider groups are buying)
• SOEs may perform better because weaker opposition
  has been removed by bankruptcy
• Is stability, perhaps, a key to performance
  enhancement?

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What drives business performance?

• Observations
• In terms of profitability insider-owned firms do
  better than outsider-owned firms. This despite
  some outsider-owners being foreigners with
  greater access to capital
• Sales per employee are higher in foreign-owned
  firms, but they also have greater investment per
  employee.

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What drives business performance?

• Conclusions
• The view that the externally-owned enterprise
  should generate more wealth does not seem to
  hold.
• Insider-owned firms are more profitable and have
  greater ability to survive
• This is even in comparison with foreign-owned
  firms which have greater investment potential

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Real Sales and Productivity Growth
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The mind of the worker

• Poland 1999 study
• Focus on young business minded Poles
• Work ethic and concerns have dramatically changed
• Have richer understanding of and key appreciation
  for market concepts
• Recognise critical need for personal development
  for effective performance in the workplace
• Notion of dynamic and efficient markets is absent
• The role of goal-setting in wealth accumulation
  figures less in their thinking

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Czech study on Human Resource practice

• Labour costs (1995) for manufacturing
• per hour
• Czech Republic 1.30
• Hungary 1.70
• Poland 2.09
• UK 13.77
• US 17.20
• Germany 31.88
• Efficiency is much lower in reforming countries
• Labour productivity level in Czech Republic was
  15-20 of EU average

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East German Study (Meyer Moller)

• Knowledge transfer learning by doing
• New methods of integration hierarchy
  communication
• Top management change by transfers in
• Lower level integration of existing culture
  corporate strategy
• Plan desertion leads to breakdown of behaviour
  patterns
• Pay attention to the human side!

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Organisational unresponsiveness Russia

• Study based on 2 Danish companies working in
  participation with Russian companies
• Lack of incentives for knowledge sharing
• Knowledge is treated as a source of individual
  power and not a corporate resource
• Managers are keen to acquire knowledge and
  demonstrate they have it but will not transmit it
• Everybody in Russia was trained to keep things
  confidential
• Departmentalisation
• Single units are oriented toward their own tasks
  and goals without considering the company as a
  whole

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Organisational unresponsiveness Russia

• But, interpersonal relationships may substitute
• In Russia one needs friends, or friends of
  friends. Otherwise one cannot do anything
• Fear of admitting mistakes
• Managers do not see mistakes as a potential for
  learning
• Russian organisational culture believes mistakes
  and problems should be avoided at all costs
• Our slogan is we do not have the right to make
  mistakes
• Coercive bureaucracy

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Organisational unresponsiveness Russia

• Not Invented Here syndrome
• Rejecting knowledge created elsewhere
• Doubt regarding reliability of external knowledge
• Prestige of creating something yourself
• This impacts on RD and technology transfer

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Organisational unresponsiveness Russia

• Lack of absorbtive capacity
• It is noted that to transfer knowledge in a firm
  it is necessary to prepare the recipient in
  advance, to ensure a relationship between source
  and recipient and have norms and procedures to
  support unlearning prior knowledge
• Recipients often do not have the knowledge to
  allow them to evaluate knowledge

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Organisational unresponsiveness Russia

• Hierarchical status
• Managers have difficulty accepting that they can
  learn from people at hierarchically lower levels
• Resistance and dissatisfaction to working in
  groups with these people
• Communication is only top down
• I am at a lower management level that is why I
  cannot suggest anything to be changed at the
  upper level
• People need to know where their position is
  located and act accordingly

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Company level management problems
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Development of Business Trade in CE Nations

• Week 8

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The Challenge of Improvement

• Within the context of E European markets
• EU accession
• Value congruence
• De facto congruence
• Technological development
• Media exposure
• Real income improvements
• Expectations

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Business environment not much change at the top
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Paradox of the market

• How similar are Eastern European Markets
• How homogenous is the region
• Should marketing be
• Local
• Pan-European
• What of local companies?

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Strategic Management Strategic Marketing

• Adapting an organization to changes in the
  environment
• To achieve optimum performance organizations
  must
• Align Strategy and structure
• Strategy and environment
• Structure and environment
• Strategy - determine long term goals and adapt
  courses of action and resource allocation

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Strategies

• Defenders
• maintain small niche concern with costs and
  efficiency
• Analysers
• only enter new markets after viability is proven
  cost efficient but must be able to seize new
  opportunities
• Prospectors
• locate and develop new markets
• Reactors
• show inconsistent and unstable adjustments

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TAMIV SA Romania(1998)

• Leather processing
• Employs 300 people
• 15-20 of production exported
• 75 of raw materials imported
• Totally privatized management/employee buyout
  in 1993
• Is profitable

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Organisational culture independent dimensions
of practices

• 5 dimensions following Hofstede (1990)
• Process or results oriented
• -results
• Job or employee oriented
• -job
• Parochial or professional
• -parochial
• Open or closed
• -open
• Tight or loose control
• -loose high tight lower

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Strategy of Company

• Performance stable in non-complex sector
• Strong homogeneous dominant coalition exists in
  the firm with same objectives
• Firm has simple structures without administrative
  problems
• Management uses rational pragmatic decision
  making processes
• Strategy and strategic position defender

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Organisation and Promotion

• Tamiv is pretty typical
• Production versus Services
• Does this defender position affect marketing
  strategy
• Is there a link between organisational strategy
  and product promotion?
• Vorhies Morgan (2003) emphatically!

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Under attack?

• If local CEE companies operate defender
  strategies then this informs how they market?
• If external companies have prospector marketing
  strategies
• What would they be and
• What impact on local companies?
• Should local defenders move out of character?

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Technology
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Spread of the internet
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E-business

• Drivers of internet as sales medium
• Improved internet security
• Rising internet penetration
• Greater standardisation
• Constraints
• Fears of lack of security
• Little evidence of e-business success
• Thaler May 2001

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Market or Sell?Computer or other media

• Analysis of markets can determine strategy rather
  than organisation
• Product type
• Preferred media
• Similar/dispersed markets

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Europeans arent all the same!
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More proof Brand Strategy 02/04
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Lessons?

• In terms of how to promote
• There is a clear distinction even between the
  advanced new EU members
• In terms of media in UK we dont read!
• A standard method of promotion cannot be employed
• In terms of e-business/promotion CEE likely to
  take time to mature

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Marketing in Czech Firms 1999 - 2003

• 83 use web to advertise
• 23 use web for ordering/purchasing
• Conclusions of study
• Underestimation of value of marketing
• Few clear marketing strategies
• Positive shift in perception of discipline
• Increase in internet use
• Enthusiastic take up is encouraging
• Evidence of a trend in transition economies to
  view technology as a surrogate for
  entrepreneurial success
• Technologies should be developed in tandem with
  strategic vision

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Marketing standardization in CEE

• Shuh (2000) conducted a survey of 8 Western
  companies marketing in CEE
• In all except Beer standardized approach
• Reasons
• Most CEE markets are small and customization does
  not pay off
• The markets will converge to West standards in 10
  years
• Differentiated markets are inefficient (economies
  of scale)
• Market structures and consumer behaviour can be
  changed over time

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Market changes

• In transition markets product preference can go
  through rapid change
• Eg 1998 Poland analysis
• Overall growth but emerging pattern
• High end premium brands perform well
• Low-end value brands hold up
• Pressure on mid-priced products (particularly in
  FMCGs like coffee chocolate)

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Meaning.?

• As emerging markets mature product profiles
  establish
• Basically first 10 years are atypical
• Needs corporate responses
• Cadbury began to produce on site (Wedel factory)
  13 year on year volume growth

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Pliva D.D. Croatia SWOT analysis
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Multinational entry modes

• Joint ventures
• Greenfield sites
• Acquisitions
• Brownfield sites/investment

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Brownfield investment

• Acquisition method which leads to radical
  restructuring of acquired firm
• External growth strategies are inhibited by poor
  quality local firms
• Internal growth strategies that depend on
  specific local resources

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Definition

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

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Research suggests major motive for FDI is

• Buying a market share
• First mover advantages
• Schöller Lebensmittel a German frozen-food
  manufacturer acquired majority share in Hungarian
  ice-cream factory Budatej
• Reconstructed factory
• Introduced 4 new production lines
• Rebuilt factory
• Built new warehouses
• Replaced freezers in retail outlets
• Even discontinued local brand (perceived low
  quality)
• 4 years later fully acquired company

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Reasons for strategy

• Obtain faster access to market
• Benefit from companys existing market share
• Used imported production technology and
  international brand names
• Provided intensive training to impart management
  knowledge
• Used only few of local firms assets but did use
  customer base and networks

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Danisco A/S Danish food company

• Acquired East German sugar companies because
  sugar quotas for firms were set by EU
• Acquisition of sugar refiners increased Daniscos
  available production quotas.
• East German refiners were technically backward
  but production were location bound and had to use
  local sugar farmers produce. Strong competition
  developed to acquire these refiners.
• A company seeking to enter a new market may adopt
  a brownfield policy rather than Greenfield

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Availability of suitable trading partners may
influence entry mode

• British Vita sought to expand into Poland.
• 30 years policy of expansion by acquisitions
• In general, we found the companies were
  overmanned and the equipment old. For example,
  we currently employ 38 people in production to
  manufacture 8-9,000 tonnes per year. A company
  we looked at in Lodz produced 4,000 tonnes a year
  using 350 people.
• British Vita invested in Greenfield site
• Schöller established a Greenfield plant in Poland
  to manufacture ice-cream because the industry was
  far more underdeveloped than in Hungary

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The advantages of brownfield investment

• If local industries are advanced they may make
  retaliatory moves if Greenfield strategy adopted
• Greenfield does not guarantee a market share
• Costs of market entry would be higher with
  Greenfield

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What conditions determine entry method?

• If the strategic intent of an investment depends
  on local resources it is less likely to be
  Greenfield
• Firms with transferrable resources (excess
  management, access to finance) are more likely to
  choose Green/Brownfield investments
• Entry via acquisition is more likely if local
  industry possesses assets that are valuable for
  foreign investors (eg internationally competitive
  technology)
• Entry via acquisition is more likely if existing
  firms in the industry are protected by high
  barriers to entry
• Entry into a country with low quality of
  resources available on the free market, reletive
  to those available in firms, is more likely to be
  in the form of acquisition

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Inward FDI

• 2001
• Worldwide decline in FDI had no impact on
  transition economies
• Overall FDI inflows remained unchanged from
  previous year
• Decline only affected advanced economies
• Cause
• Stagnation of leading economies
• Loss of market value of some TNCs lead to scaled
  back investment plans
• This may have an effect this/next year on
  transition economies

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Why?

• Thanks to recent productivity gains, most east
  European transition economies have been able to
  improve their cost competitiveness vis-à-vis
  their main trading partners.
• This on-going improvement in competitive position
  obviously helped east European exporters to
  perform better on west European markets in 2001
  than some of their competitors.
• The gains in competitiveness and the improved
  export performance has led to an increase in
  eastern Europe's share of the EU's extra-EU
  imports from 9.9 per cent in 2000 to 11.1 per
  cent in 2001
• Economic Intelligence Unit

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So what did happen then?

• September 22 2003--Foreign direct investment
  (FDI) inflows into the transition economies of
  eastern Europe this year are expected to be
  similar to, or even exceed, the record total of
  US34bn achieved in 2002.
• Economist Intelligence Unit (Economies in
  transition, September 2003) reports data for the
  first half of 2003, which support the expectation
  that the region will continue to buck the global
  trend of FDI decline. Continued buoyant inflows
  into eastern Europe are forecast for the medium
  term. However, despite EU enlargement in 2004,
  the main traditional FDI destinations in eastern
  Europe will attract a declining share of regional
  FDI

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Drivers of FDI

• Continued FDI inflows into the region are being
  achieved despite slow OECD growth and the ongoing
  difficulties with privatisation programmes in
  some countries.
• This has been offset by the increased relative
  attractiveness of the region compared with most
  other emerging markets, and cost-cutting
  pressures on Western companies that have
  increased the incentive to relocate operations to
  eastern Europe.
• Strong growth in much of the region assured
  access to EU markets for many countries and the
  continuing pull of abundant natural resources in
  some CIS states have also played a role.
• Despite the weak global economy most transition
  economies have continued to perform well in 2003
  in terms of output growth.
• The Economist Intelligence Unit forecasts that
  average real GDP growth in 2003 in the transition
  economies will accelerate to 5.1, from 4.3 in
  2002

64
A shift away from east central Europe?

• The overall FDI figure for the region masks some
  important intra-regional shifts and changes in
  FDI patterns. First-half year data reveal
  significant year on year declines of FDI into the
  leading central European economies (the Czech
  Republic, Poland, Hungary and Slovenia), which
  has in part been offset by the rising trend in
  all the other sub-regions.
• In Hungary inward FDI was actually negative in
  the first half of 2003, as disinvestment by
  existing companies exceeded new investments.
  Hungary has been hurt by strong wage growth and
  the real appreciation of the forint in 2001-02,
  as well as generally weakening performance.
• However, the data may portray a somewhat
  distorted picture because official Hungarian FDI
  data omit reinvested earnings, and
  theseaccording to some estimatescontinue to be
  significant

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South East Europe hinderances to inward FDI

• Slow rate of privatization
• Mixture of insufficient regulation and control
  and too many administrative rules and
  institutional involvement
• Lack of transparency leading to bribery
• Local business which has become a mixture of the
  legal and the illegal
• Unstable politics