Spotlight

Regional

From

Risk

to Opportunity:
by Helmut Kohlert Helmut Kohlert Mittelstand Consulting

Doing Business in Russia and the Ukraine

Le g Bu al uncert aint reau abilit cracy an ies y to p d No lan fo uncertain wo the b rking inf r politica Hig ig cities rastruct l decisio ure o n hs utsid s raw ensitivit e of Ba materia y for pric l nking e cha nges secto in r is n ot ve ry str ong

ecause of globalization, the extension of the European Union and all the political changes in the world, medium-sized companies are facing new challenges. Changes are also accompanied by opportunities, but companies have to be able to search for those opportunities, recognize them and use them. Companies everywhere in the world will have to work on strategies, both current and future, that provide answers beyond simply optimizing business processes and reducing overhead costs. These kinds of optimized business models have a very limited charm. A strategic alternative is to look for new country markets. While everybody looks at China as the gigantic market for Western products, the real backyard of Western Europe, namely Russia and the Ukraine, has

Ex is Ec ting mar onom ke ic gro t potentia pric Ro e of natu wth beca l ra u b Ne ust dom l resourc se of hig estic h e d fo dem es Go r and od p moderniz rofit Co ation m s in th Po t advanta argins e ind entia ges ustry techn l of well -train ical f ield ed st aff in the

Figure 1: The advantages outweigh the disadvantages when it comes to doing business in Russia and the Ukraine.

not yet fully arrived in the consciousness of the Western companies.

Russia and the Ukraine as appreciated locations

Often, companies are driven by market expectations. A 2005 study by the PBN Company of 107 companies that have already invested in Russia and 51 companies that at that point had not yet invested came to the following conclusions: 88 percent of the

respondents said the size of the Russian market was the main feature that attracted foreign investors; 77 percent said it was the countrys sustained economic growth. (PNB Company: Russia. Investment Destination, 2005, p. 32.) Some of the advantages and disadvantages of the Russian and Ukrainian markets are shown in Figure 1. In spite of different challenges,
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Regional Spotlight

the attractiveness of Russia and the Ukraine is very high. However, the advantages of Russia are based on the present windfall profits, because of the high gas prices. The Ukraine does not have this advantage.

Sales

70%

Service/Spare Parts

19%

Production/Assembly

11%

Cultural differences of the big neighbor

If you ask the Russians how they see themselves, the following characteristics are often mentioned: Generous, hospitable Ready to learn, open to new ideas Big hearted, ready to help Courageous, but also distrustful Want to do everything on their own Very accepting of authority; do not question authority. These answers present a picture that reflects their values and norms; these will affect business behavior.

0%

10% 20% 30% 40% 50% 60% 70%

Figure 2: The majority of German medium-sized companies doing business in Russia and the Ukraine are involved in sales.
German medium-sized companies in Russia and the Ukraine. See Figure 2. A major area of concern for the companies in the study was how to manage sales activities. How are sales managed in Russia and the Ukraine? See Figure 3. Nearly two-thirds of all the companies that maintain sales activities in Russia and the Ukraine use free representatives or trading houses. It is obvious that many medium-sized companies enter the two markets with the least possible commitment and rather hesitantly. The message then is that there is a high degree of uncertainty in strategic decisions. On the other hand, only big corporations are really able to manage the full expense and effort of carrying out extensive market research, to found full-sized subsidiaries in foreign markets and to cover the losses of the initial years of business. Medium-sized companies often have limited financial resources and also limitations in human resources.

Present engagement in Russia and the Ukraine

A 2005 study by PricewaterhouseCoopers examined the division of
5% Sales Organization From Third Country

5% Joint Venture

Figure 3: Most companies that maintain sales activities in Russia and the Ukraine use independent reps or trading houses.

Medium-sized companies market entry with small steps

Relying on a staticly developing market, a phase-by-phase market entry is possible. An export situation arises from the initial contacts that are often generated through trade shows, Chambers of Commerce, etc. Opportunities to receive market information exist only if the initial contact will be intensified and the personal contact is established. Often this is used more as a market test.

11% Representative

16% Have Own Salespeople

63% Independent Sales Reps or Trading Houses

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Regional Spotlight

The first actual entry by a business into the Russian or Ukrainian market often starts with an independent sales representative or a trading house. Unfortunately, the company receives only limited information about customers, market and competition. This kind of information is the asset of sales representatives and trading houses, and they will not share it with their customer for free; there is nothing like a free lunch! If steady sales are achieved, the company thinks about opening its own sales branch in the country, which might handle the spare part business as well as other offerings in the new market. Now market information can be collected systematically by the company itself and personal customer contacts can be built up. See Figure 4.

Export

Independent Sales Reps, Trading Houses Development of already existing customers by third parties, as well as sales Limited access to information on customers, market and competition

Own Sales Organization

Direct export to already existing or new customers Making contact through, for example, exhibitions or Chambers of Commerce

Direct sales and customer care Offering of services and parts Full information about customers, market and competition is available

Initial Phase

Test Phase

Market Entry

Get Started

Check for Sustainability

Engagement Without Risk

Figure 4: A phase-by-phase market entry plan.

relations there are limited business relations: Business is people or, as the Russians used to say, You should not have 100 rubles, but 100 friends. 2) Hospitality is very high in Russia and the Ukraine, so business visitors have to plan on spending much more time interacting than in other countries. While you go with the customer for lunch in Germany, you have to spend with the Russian a whole week. Indeed, this investment is well spent, because if you have a foundation of trust, it will help later. The further you get from Moscow, the more friendly and cordial the people. 3) The qualification of employees is excellent and education in general is considered very good. However, it is necessary to start a stringent selection process to find the right people. There is a big interest in technology, so many people from different departments attend technical presentations. In the areas of marketing, sales organization and logistics, a need for training still exists. 4) Risk consciousness is prevalent, primarily in the sense that a lower price often leads to a higher risk. However it is difficult to evaluate whether a higher price really means a higher value. Risk assessments of the Russians and Ukrainians are very often focused on formal data, but not on unforeseen incidents. There is simply not enough experience upon which to develop a true analysis at this time. 5) The general director is not always the final decision maker. The

In search of the Russian soul

To better prepare for doing business in Russia and the Ukraine, it is important to understand the culture, from both a societal and business standpoint. 1) Russians and Ukrainians are considered straightforward. Emotions are mixed with business at a good ratio. Without solid personal

Business visitors have to plan on spending much more time interacting than in other countries. this investment is well spent, because if you have a foundation of trust, it will help later.
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Regional Spotlight

decision-making processes can be very long in Russia and the Ukraine; e.g., four months for the assessment phase, then the decision is made and they expect a delivery time of four days. However, it is often the financial investors anonymous investors who are far away from the company who have the decision power. If the investors have learned it the hard way, they absolutely change their decisions. 6) Business dinners and drinks play a big role in this business world it is one of the bases of new friendships. If the foreign businessman wants, he can limit himself to the toast.

reason why a long-term, strategic plan is absent in many Russian and Ukrainian companies the unsteady macroeconomical sphere and the missing know-how of the management in this field. The business plan is often more a preparation for negotiations with banks than a management tool. 8) The often-criticized passiveness of many Russians and Ukrainians is more than understandable. For more than two generations there was little room for creativity and divergence from the norm was punished immediately. Initiative was prevented and additional work undesirable. So companies tend to need more staff for the

off what they have: the right car, the elegant clothes and the watch brand are status symbols. This does not mean, however, that the foreign businessman should do the same. Openness, politeness, modesty and good behavior are appreciated very much, while arrogance and boasting are considered unacceptable. 11) Even if the Russians and Ukrainians are very open to Western knowhow, knowledge deficits can hinder the negotiations. There can be a great deal of need for explanation, so one must have patience. Remember one small but important difference: One should explain, but not teach! The very dis-

The executives of Russian and Ukrainian companies are well trained, have good manners and a healthy self-confidence. They are able to create the feeling of I am customer, you are supplier.
It is not required for the foreigner to fully keep up; it is sufficient to sip while raising the glass. 7) Only ones own general director may offer criticism. Only an approved authority accepts criticism, then, however, without contradiction. The executives of Russian and Ukrainian companies are well trained, have good manners and a healthy self-confidence. They are able to create the feeling of I am customer, you are supplier. According to Management la russe, an article in the Harvard Business Manager, the people primarily live for today, because it is hard to foresee the future, and detailed planning has a slim chance of being realized (Gladkov, Sabine: Management la russe, Harvard Business Manager, No. 06/2005, p. 111). This may be the
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same type of work than they do in Western countries. In addition, motivational problems can appear due to outdated manufacturing sites as well as past leadership behavior. However, that does not apply to young engineers. Responsibility has to be exercised. It is often seen by employees as a burden and not, like in Western companies, as a motivation. 9) Corruption is not unusual in Russia and the Ukraine, but it is also not new. It originated under the czars, who paid low wages to their officials, yet had free reign concerning the private enrichment in their own lives. The official committed no crime as long as he became rich at the expense of the society and the economy, but not at the expense of the crown. 10) Russians and Ukrainians show

tinctive national pride of the Russians and Ukrainians can quickly misunderstand input as interference. R

Prof. Dr. Helmut Kohlert is the MBA academic director of International Industrial Management at the University of Applied Sciences, Esslingen, Germany. He teaches marketing and international marketing. He is also president of a consulting firm specialized in marketing consulting for mediumsized technical companies opening in new markets. He can be reached at helmut.kohler@hk-mittelstand.de or www.hk-mittelstand.de.

Reprinted with permission from Recharger Magazine (702) 438-5557