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Critical analysis of the Ukraine market for further investment by Deutsche Brauerei company
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
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
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
by foreign investment. the Ukraine entered into World Trade Organization in 2008 and intends to join the European Union by 2015. informal economies and corrupt practices are widespread in the Ukrainian workplace (Rogers. and to receive compensation if the business or property is nationalized by the government (DATAMONITOR. 2010). to repatriate profits and revenues. 4 . the parliament has passed legislation that endows foreign investors the right to purchase property and businesses. These factors are all attractive to potential investors however. Furthermore. Its corporate income tax rate in the Ukraine is a flat 25% which is lower than in Germany or other Europe countries.
the decreasing trend of inflation will be attractive to potential investors.Williams 2008) with the ‘Orange Revolution’ anti-corruption campaign in 2005 having minimal impact (Neutze. (DATAMONITOR 2010). karatnycky. Consequently. the inflation rate increased steadily but saw a dramatic increase in 2008 which was detrimental to the Ukraine economy. However in 2009 there was a substantial decrease and a decreasing tend is expected to continue to approximately 8% by 2013. 2007). despite the current high inflation. Economic Before 2008. 5 .
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 .
These changes were caused by the global recession in 2009 but 8 .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.
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 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.
Moreover. 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 sex ratio shows 1. However.The population of the Ukraine has seen a steady decrease since 2001 which would be seen as disadvantageous to companies wishing to invest further.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).
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.Alcoholic Beverages. Volume(Absolute) 16 .Country Statistics .
Figure 9 showing Alcoholic beverages, Total Retail Sailes, and Absolute Volume in the Ukraine
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
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.
The Ukraine is set to integrate into the European Union in the near future,
having already undertaking an obligation to gradually harmonize its legislation
2009) 20 . (The New Legal Frame work). The main legal framework of foreign investment in Ukraine is the Law on the Foreign Investment Regime. However. It endows foreigners with the rights to invest in the Ukraine to the same extent as Ukrainian legal entities and individuals.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. which provides equal business conditions for national and foreign investors. it should be noted that there are still some restrictions in place in certain areas. E. publishing and broadcasting (Deloitte.g.
Table 1 21 .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. despite its apparent popularity. Enhanced technology for the production of barley may lower Ukraine production costs in the long-term compared to Germany. This weakness might result in a lack product availability within the Ukraine especially if production was to increase in the case of further investment. DB has only five distributorships. Furthermore. However.
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 .
Ukraine has an informal economy with an inflation rate higher than 10 %. they are more inclined to buy famous brand products. If DB cannot operate efficiently and reduce 23 . Furthermore. 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. 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. the fact that it enforces corrupt practices may lead to increased overhead costs from bribery. Since Ukraine customers are brand conscious.
Consequently. (Swift 2010) Five porters’ analysis Buyers: Buyer power is weakened by the fact that the Ukrainian consumer is brand conscious.manufacture costs then the selling price will be high and will not be able to compete on the same level as those famous brands. brand and availability and thus loyalty to local 24 . these may all be threats to the company in terms of establishing itself successfully within the Ukraine market. Ukrainian consumers consider Country-of-origin to be less important than quality. taste.
Swift 2010) Suppliers: The Ukraine. and the previous years’ recession. as a nation of substantial beer consumption. Ukrainian consumers will appeal to a lower-priced market.e. malted 25 . Moreover. compared to other European countries.beers is feigning whilst demand for foreign beers increases. due to the Ukraine having a lower average standard of life. has many suppliers of the input goods and resources required for beer production i. 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.
hops and apples.grain. 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. have their own raw material manufactory which consequently reduces suppliers’ bargain power. some companies. market for the major 26 . This makes it an attractive. with the specific aim of maintaining unique quality and taste. At the same time. but competitive. Thus there is a low switching cost for companies wishing to change suppliers within the Ukraine.
From the chart below. 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. we can see that non-alcoholic beverage sale volume has been increasing for the past several years. such as wine or soft drinks. Moreover. Children prefer to 27 . (Pivnoe-delo 2011) Substitutes: There are a number of beverage substitutes to beer.international brewers.
There are no switching costs and many different beer brands for consumers to choose from. Retail Sales.Beverage and adults are more like wine and beer.Non-Alcoholic Beverages.. Figure 10 Country Statistics . Total Value (Absolute) (Datamonitor 2011) 28 .
Rivalry: 80% of the marketplace is controlled by the “Big Eight” brewers whose brands are well positioned on the market. and whose output and sales far exceed the industry’s average. but rather company image and brand popularity thus companies should be innovative and create new brands to meet customers’ demands. 29 . Quality is no longer the key characteristic of the product. This makes them strong competitors for any new brewers entering into the Ukraine marketplace. (Foodmarket 2011).
The specific advantages of family business. ensure a competitive advantage to achieve market expansion in the Ukraine as long as the balance between family interests and business development is 30 . unity and commitment.Part b) Corporate culture: The Ukraine market has a different organization and corporate culture than that of Germany. Germany operates a family oriented business compared to the Ukraine’s market-oriented subsidiary business which is ultimately inflexible enforcing bootstrap operations.
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). For instance since family members are different from employees.maintained. 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 . (Gallo and Cappuyns. 2004). 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.
This could be a big issue as it may result in conflict between the businesses two vested interests: management and its 32 . The balance of the shareholders and business interests is important to control when moving into the Ukraine. means consideration of what is a suitable dividend percentage for satisfying both shareholders and company development is important. For instance.family tie and the disinclination of older generations to trust younger generations. the fact that business is controlled by family shareholders with more than half retired and relying on dividends for the rest of their life.
as there is opportunity for longer credit repayments in the Ukraine compared to Germany. (Worldpress 2011). which would help to build strong relationships with numerous distributors. thus enhancing their reputation. DB can increase the time allowed for credit repayment. As Ukraine distributors are small businesses with little room for capital increase individually. DB should establish strong distribution networks to guarantee vast product availability. Moreover.shareholders. (Rise 2007) High gearing is dangerous for the volatile revenues in the Ukraine. The gearing ratio for the Ukraine is extremely high which suggests narrow profit 33 .
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.margins in the future. rather than international. company. Thus they won’t be targeted by Governments in the long term as there are trends towards nationalistic government in the Ukraine i. (Smartcompany 02/12/11) 34 . There will be reduced risk because they then become a national. with parties like ‘our Ukraine’ and ‘Pro Ukraine’ potentially putting foreign companies at a disadvantage.e. Setting up the Ukraine subsidiary independently but having DB buy minority stakes in the company may resolve this issue.
so the German and Ukraine divisions are distinctly separate. 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 . These divisions are created as self-contained units. 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. each with their own separate functional departments for distribution.Organizational structure: The best organizational structure would then be divisional which divides employees and resources along divisional lines. production etc.
(Daft. However. Vershinina 2010) 36 . resulting in lost efficiency and economies of sale. and coordination across divisions is often poor i. software not matching up.. However there is potential for duplication of resources across divisions.e. 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. Furthermore it fosters concern for customer needs and ensures excellent communication across functional departments.environment. 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 .
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. 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. This may be cost detrimental to begin with but will be cost beneficial long-term if expansion is successful (Deutsche Brauerei 2007) 38 . changing and refreezing. However.departments.
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. 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 .g.
but there are risks to consider including increasingly intensive competition. When evaluating and monitoring performance and in terms of standardization.commitment. To conclude. . 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 . (Spekle 2001). Being a family business a ‘do your best’ approach would be undertaken with no ex ante standards and targets. an explanatory control archetype will be relevant as it will refer to emerging standards of the Ukraine and German markets separately.
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