BEMM160 Group members Sarah Naylor Sen Zhai Ka Ki Tsang Phatiphat Tanasuwanthan 580005089 610009431 610044810 590070608

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Critical analysis of the Ukraine market for further investment by Deutsche Brauerei company

Introduction

This report aims to analyse the attractiveness of the Ukraine’s market for

further long-term capital investment in a brewing capacity by Deutsche

Brauerei (DB). DB first invested in the Ukraine in 1998 with Ukraine

consumers ‘accounting for most of the unit growth in Deutsche’s sales over

the past three years’ (Deutsche Brauerei 2007) and thus this suggests

potential for future investment. A detailed analysis of the weaknesses and

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strengths, and also risks and opportunities is needed in order to decide on

any structural changes and cultural changes needed if implementation is to go

ahead.

PESTEL

Political:

Since 1991, the Ukraine has declared itself independent from the Soviet

Union and preceded a constant political and legal reform for the past 20 years

and has now achieved a better stable political status since Viktor Yanukovych

won the presidential election in 2010. In order to support its economic growth

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Furthermore. 4 . the parliament has passed legislation that endows foreign investors the right to purchase property and businesses. to repatriate profits and revenues. These factors are all attractive to potential investors however. Its corporate income tax rate in the Ukraine is a flat 25% which is lower than in Germany or other Europe countries.by foreign investment. and to receive compensation if the business or property is nationalized by the government (DATAMONITOR. informal economies and corrupt practices are widespread in the Ukrainian workplace (Rogers. 2010). the Ukraine entered into World Trade Organization in 2008 and intends to join the European Union by 2015.

the decreasing trend of inflation will be attractive to potential investors. (DATAMONITOR 2010). 5 . However in 2009 there was a substantial decrease and a decreasing tend is expected to continue to approximately 8% by 2013. Economic Before 2008. despite the current high inflation. 2007).Williams 2008) with the ‘Orange Revolution’ anti-corruption campaign in 2005 having minimal impact (Neutze. Consequently. karatnycky. the inflation rate increased steadily but saw a dramatic increase in 2008 which was detrimental to the Ukraine economy.

Figure 1 showing the consumer price index and CPI-based inflation in Ukraine from 2002 to 2013 6 .

Figure 2 showing the GDP and GDP growth rate from 2003 to 2013 7 .

Figure 3 showing percentage of population living below $1 a day (absolute) from 2000-15 From 2003-2008 there was a reasonably steady economic growth which then suddenly dropped in 2009 (Figure 2) and the unemployment rate increased dramatically. These changes were caused by the global recession in 2009 but 8 .

The resulting decrease of the percentage of the population living below $1 a day (DATAMONITOR 2010) indicates that the residents income would increase from 2010-15.the worst is potentially over with an expected increase in GDP rate until 2013 (Figure 2). Social 9 . The government’s response to this negative economic impact was to raise the wages of certain public-sector workers and draft a 2010-11 budget proposing a minimum hourly Ukraine wage.

the amount spent on alcoholic drinks has increased by 1% from 2001 to 2011 and the consumption of alcoholic beverages increased substantially in 2007 and has continued to increase steadily since 2001 (Barnes Report 2011) 10 .The population of the Ukraine has seen a steady decrease since 2001 which would be seen as disadvantageous to companies wishing to invest further. the sex ratio shows 1. However.06 males to every female which is favorable as statistically males consume more alcohol than females with men accounting for 64% of alcoholic drinks consumption in comparison to 36% for women and men accounting for 71% of beer consumption (Humphries 2010). Moreover.

Figure 4 showing the total mid-year population (Absolute) in Ukraine from 200015 11 .

Figure 5 showing the fertility rate (Absolute) in Ukraine from 2000-15 12 .

Figure 6 showing the death rate (Absolute) in Ukraine from 2000-15 13 .

Figure 7 showing the spending pattern of citizens in the Ukraine in 2001 14 .

Figure 8 showing the spending pattern of citizens in the Ukraine in 2011 15 .

Total Retail Sales.Country Statistics .Alcoholic Beverages. Volume(Absolute) 16 .

Figure 9 showing Alcoholic beverages, Total Retail Sailes, and Absolute Volume in the Ukraine

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Technology

Since the fall of the socialist regime in 1991 the country’s telecommunications

has developed rapidly. For instance the mobile growth rate had reached more

than 180% in 2006. The Ukraine has weak internet penetration when

analyzed by European standards however, the dramatic increase of internet

access of residents since early 2000 indicates that internet advertising is more

convenient and useful in the 21st century Ukraine. (Market Research report

2011)

Environmental

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According to U.S. Department of Agriculture (USDA), recent climate change

together with new crop varieties and better technology could increase crop

yields in Ukraine significantly (Impacts of Climate Change in Ukraine, 2010).

Furthermore, the development of biotechnology in the Ukraine allows

enhanced efficiency of barley production and thus a stable production supply.

(DATAMONITOR 2011)

Legal

The Ukraine is set to integrate into the European Union in the near future,

having already undertaking an obligation to gradually harmonize its legislation

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which provides equal business conditions for national and foreign investors. publishing and broadcasting (Deloitte. 2009) 20 . However. (The New Legal Frame work). E. It endows foreigners with the rights to invest in the Ukraine to the same extent as Ukrainian legal entities and individuals. The main legal framework of foreign investment in Ukraine is the Law on the Foreign Investment Regime.g. it should be noted that there are still some restrictions in place in certain areas.with European Union laws pursuant to Article 51 of the Treaty on Partnership and Co-operation between Ukraine and the European Community and their Member States of 14 June 1994.

Table 1 21 . Enhanced technology for the production of barley may lower Ukraine production costs in the long-term compared to Germany.Swot analysis DB prides itself on quality and thus a key strength of it is that is has the benefit of their brewer’s expertise which makes it possible for them to gain a competitive advantage over rival companies. Furthermore. However. DB has only five distributorships. despite its apparent popularity. This weakness might result in a lack product availability within the Ukraine especially if production was to increase in the case of further investment.

below shows that German beer companies are considered the best beer producers from a consumer viewpoint which suggests that consumers would respond well to the marketing of new beer products by DB. 22 .

they are more inclined to buy famous brand products. If DB cannot operate efficiently and reduce 23 . the fact that it enforces corrupt practices may lead to increased overhead costs from bribery. Increased investment interest in the Ukraine market increases both the level of competition and the overall marketing costs which is consequently detrimental to all beer companies in the market. Since Ukraine customers are brand conscious.Ukraine has an informal economy with an inflation rate higher than 10 %. Furthermore. If prices rise at a faster rate in Ukraine than in Germany then that will affect the exchange rate and transaction costs as the purchasing power of each currency has changed.

brand and availability and thus loyalty to local 24 . taste.manufacture costs then the selling price will be high and will not be able to compete on the same level as those famous brands. Ukrainian consumers consider Country-of-origin to be less important than quality. (Swift 2010) Five porters’ analysis Buyers: Buyer power is weakened by the fact that the Ukrainian consumer is brand conscious. Consequently. these may all be threats to the company in terms of establishing itself successfully within the Ukraine market.

due to the Ukraine having a lower average standard of life. The Ukraine beer market is vast though so consumers are able to switch to brands best suited to their preferences at different economic times (Khmel’nyts’ka.e.beers is feigning whilst demand for foreign beers increases. Swift 2010) Suppliers: The Ukraine. has many suppliers of the input goods and resources required for beer production i. and the previous years’ recession. malted 25 . compared to other European countries. as a nation of substantial beer consumption. Ukrainian consumers will appeal to a lower-priced market. Moreover.

have their own raw material manufactory which consequently reduces suppliers’ bargain power. This makes it an attractive. Thus there is a low switching cost for companies wishing to change suppliers within the Ukraine.grain. At the same time. some companies. with the specific aim of maintaining unique quality and taste. hops and apples. New entrants: The Ukraine has a relatively large population (some 48 million) and a large and increasing demand for beer with beer import increasing by 63% over 2010. market for the major 26 . but competitive.

international brewers. Children prefer to 27 . From the chart below. (Pivnoe-delo 2011) Substitutes: There are a number of beverage substitutes to beer. Moreover. we can see that non-alcoholic beverage sale volume has been increasing for the past several years. the Ukraine implements policies to integrate European and domestic regulations creating a similar economic situation to that of other European countries and consequently making it easier for European countries to invest in the Ukraine. such as wine or soft drinks.

There are no switching costs and many different beer brands for consumers to choose from. Figure 10 Country Statistics ..Non-Alcoholic Beverages. Total Value (Absolute) (Datamonitor 2011) 28 . Retail Sales.Beverage and adults are more like wine and beer.

but rather company image and brand popularity thus companies should be innovative and create new brands to meet customers’ demands. (Foodmarket 2011). and whose output and sales far exceed the industry’s average. This makes them strong competitors for any new brewers entering into the Ukraine marketplace. 29 . Quality is no longer the key characteristic of the product.Rivalry: 80% of the marketplace is controlled by the “Big Eight” brewers whose brands are well positioned on the market.

Part b) Corporate culture: The Ukraine market has a different organization and corporate culture than that of Germany. The specific advantages of family business. unity and commitment. Germany operates a family oriented business compared to the Ukraine’s market-oriented subsidiary business which is ultimately inflexible enforcing bootstrap operations. ensure a competitive advantage to achieve market expansion in the Ukraine as long as the balance between family interests and business development is 30 .

Thus previous generations’ knowledge and cultural information should continue to be acknowledged in order to maintain and improve the business reputation long-term (Academy of Entrepreneurship 2004). 2004). (Gallo and Cappuyns. they may have different assessments and goals within the company which may cause uncertainty as to the company’s actual goals which would be detrimental to business development and productivity and upset the balance. They should continue to take advantage of the ensured commitment to the businesses success when run by family members but the negative effects such as reluctance to punish employees for wrong-doings because of the 31 . For instance since family members are different from employees.maintained.

means consideration of what is a suitable dividend percentage for satisfying both shareholders and company development is important. The balance of the shareholders and business interests is important to control when moving into the Ukraine. the fact that business is controlled by family shareholders with more than half retired and relying on dividends for the rest of their life. This could be a big issue as it may result in conflict between the businesses two vested interests: management and its 32 .family tie and the disinclination of older generations to trust younger generations. For instance.

thus enhancing their reputation. As Ukraine distributors are small businesses with little room for capital increase individually. DB can increase the time allowed for credit repayment. as there is opportunity for longer credit repayments in the Ukraine compared to Germany. (Rise 2007) High gearing is dangerous for the volatile revenues in the Ukraine. which would help to build strong relationships with numerous distributors. The gearing ratio for the Ukraine is extremely high which suggests narrow profit 33 . Moreover. (Worldpress 2011). DB should establish strong distribution networks to guarantee vast product availability.shareholders.

margins in the future. Thus they won’t be targeted by Governments in the long term as there are trends towards nationalistic government in the Ukraine i. DB would have a shareholding of less than 50 per cent of the Ukraine company’s equity capital and thus it would have to deduct earnings (or losses) attributable to minority. company. with parties like ‘our Ukraine’ and ‘Pro Ukraine’ potentially putting foreign companies at a disadvantage. rather than international. (Smartcompany 02/12/11) 34 . Setting up the Ukraine subsidiary independently but having DB buy minority stakes in the company may resolve this issue.e. There will be reduced risk because they then become a national.

Organizational structure: The best organizational structure would then be divisional which divides employees and resources along divisional lines. So DB would be at the top of the hierarchy and on the next level it would be split geographically into Germany and the Ukraine. production etc. each with their own separate functional departments for distribution. so the German and Ukraine divisions are distinctly separate. These divisions are created as self-contained units. The advantages of this are that each unit will be small and tuned into its environment and thus will be responsive to change and flexible in an unstable 35 .

the drawbacks can be overcome through strict controlling of resources etc and so this still remains the most efficient organizational structure for DB in the Ukraine.. However. (Daft. However there is potential for duplication of resources across divisions. and coordination across divisions is often poor i. Furthermore it fosters concern for customer needs and ensures excellent communication across functional departments.environment. resulting in lost efficiency and economies of sale. software not matching up. Vershinina 2010) 36 .e. Kendrick.

Figure 11 showing the functional division organizational structure (Bscdesigner 2011) Oleg Pinchuk is currently acting as the Chief Executive Officer (CEO) in charge of the DB operation in the Ukraine and all of the functional 37 .

He should continue to be the top manager for this division due to his successful implementation of the company into the Ukraine market via the three distinct stages for achieving behavioral and attitude change: freezing.departments. the further investment and expansion of the business may require the implementation of separate functional department managers to ensure continued efficiency as there will greater demands on each department. changing and refreezing. This may be cost detrimental to begin with but will be cost beneficial long-term if expansion is successful (Deutsche Brauerei 2007) 38 . However.

g. The reward and incentive structure will most likely be action oriented as it is a family company so there will not always be a direct link between performance and rewards as an action oriented structure adheres to family unity and 39 .Control measures: A machine control (result oriented) control archetype will be most applicable to the DB structure as it is decentralized as it has outsourced to the Ukraine and has clearly defined areas of responsibility and accountability e. the Ukraine division CEO can allocate budget to functional divisions at his discretion but his total financial budget for the year will come from the DB board.

When evaluating and monitoring performance and in terms of standardization. Being a family business a ‘do your best’ approach would be undertaken with no ex ante standards and targets. To conclude.commitment. . (Spekle 2001). the Ukrainian beer market provides much opportunity for investment. Its contrasting culture to that of Germany suggests that a divisional organization structure would be most suitable in order to allow 40 . but there are risks to consider including increasingly intensive competition. an explanatory control archetype will be relevant as it will refer to emerging standards of the Ukraine and German markets separately.

. Control measures should ensure a safe and successful further investment without losing the unique family values of the company. Datamonitor. References Swift. 2010 Global Brewers. Beer in the Ukraine: consumer choice criteria.. et al. Reference Code: 0199-2015 41 . The CEO will remain at the head of the Ukraine subsidiary but now with separate functional managers to aid him. S. May 2011. J.adaptation to each country’s environment easily to ensure efficiency and the best competitive advantage.

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