1. 1 Development of Business & Trade in CE Nations Week 8

2. 2 The Challenge of Improvement Within the context of E European markets Within the context of E European markets EU accession EU accession Value congruence Value congruence De facto congruence De facto congruence Technological development Technological development Media exposure Media exposure Real income improvements Real income improvements Expectations Expectations

3. 3 Business environment – not much change at the top

4. 4 Paradox of the market How similar are Eastern European Markets How similar are Eastern European Markets How homogenous is the region How homogenous is the region Should marketing be Should marketing be Local Local Pan-European Pan-European What of local companies? What of local companies?

5. 5 Strategic Management & Strategic Marketing Adapting an organization to changes in the environment Adapting an organization to changes in the environment To achieve optimum performance organizations must: To achieve optimum performance organizations must: AlignStrategy and structure AlignStrategy and structure Strategy and environment Strategy and environment Structure and environment Structure and environment Strategy - determine long term goals and adapt courses of action and resource allocation Strategy - determine long term goals and adapt courses of action and resource allocation

6. 6 Strategies Defenders Defenders maintain small niche concern with costs and efficiency maintain small niche concern with costs and efficiency Analysers Analysers only enter new markets after viability is proven cost efficient but must be able to seize new opportunities only enter new markets after viability is proven cost efficient but must be able to seize new opportunities Prospectors Prospectors locate and develop new markets locate and develop new markets Reactors Reactors show inconsistent and unstable adjustments show inconsistent and unstable adjustments

7. 7 TAMIV SA Romania(1998) Leather processing Leather processing Employs 300 people Employs 300 people 15-20% of production exported 15-20% of production exported 75% of raw materials imported 75% of raw materials imported Totally privatized – management/employee buyout in 1993 Totally privatized – management/employee buyout in 1993 Is profitable Is profitable

8. 8 Organisational culture – independent dimensions of practices 5 dimensions – following Hofstede (1990) 5 dimensions – following Hofstede (1990) Process or results oriented Process or results oriented -results -results Job or employee oriented Job or employee oriented -job -job Parochial or professional Parochial or professional -parochial -parochial Open or closed Open or closed -open -open Tight or loose control Tight or loose control -loose high & tight lower -loose high & tight lower

9. 9 Strategy of Company Performance stable in non-complex sector Performance stable in non-complex sector Strong homogeneous dominant coalition exists in the firm with same objectives Strong homogeneous dominant coalition exists in the firm with same objectives Firm has simple structures without administrative problems Firm has simple structures without administrative problems Management uses rational pragmatic decision making processes Management uses rational pragmatic decision making processes Strategy and strategic position = defender Strategy and strategic position = defender

10. 10 Organisation and Promotion Tamiv is pretty typical Tamiv is pretty typical Production versus Services Production versus Services Does this defender position affect marketing strategy Does this defender position affect marketing strategy Is there a link between organisational strategy and product promotion? Is there a link between organisational strategy and product promotion? Vorhies & Morgan (2003) – emphatically! Vorhies & Morgan (2003) – emphatically!

11. 11 Under attack? If local CEE companies operate defender strategies then this informs how they market? If local CEE companies operate defender strategies then this informs how they market? If external companies have prospector marketing strategies… If external companies have prospector marketing strategies… What would they be and What 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?

12. 12 Technology

13. 13 Spread of the internet

14. 14 E-business Drivers of internet as sales medium Drivers of internet as sales medium Improved internet security Improved internet security Rising internet penetration Rising internet penetration Greater standardisation Greater standardisation Constraints Constraints Fears of lack of security Fears of lack of security Little evidence of e-business success Little evidence of e-business success Thaler May 2001 Thaler May 2001

15. 15 Market or Sell? Computer or other media Analysis of markets can determine strategy rather than organisation Analysis of markets can determine strategy rather than organisation Product type Product type Preferred media Preferred media Similar/dispersed markets Similar/dispersed markets

16. 16 Europeans arent all the same!

17. 17 More proof – Brand Strategy 02/04

18. 18 Lessons? In terms of how to promote In terms of how to promote There is a clear distinction even between the advanced new EU members There is a clear distinction even between the advanced new EU members In terms of media in UK we dont read! In terms of media in UK we dont read! A standard method of promotion cannot be employed A standard method of promotion cannot be employed In terms of e-business/promotion CEE likely to take time to mature In terms of e-business/promotion CEE likely to take time to mature

19. 19 Marketing in Czech Firms: 1999 - 2003 83% use web to advertise 83% use web to advertise 23% use web for ordering/purchasing 23% use web for ordering/purchasing Conclusions of study Conclusions of study Underestimation of value of marketing Underestimation of value of marketing Few clear marketing strategies Few clear marketing strategies Positive shift in perception of discipline Positive shift in perception of discipline Increase in internet use Increase in internet use Enthusiastic take up is encouraging Enthusiastic take up is encouraging Evidence of a trend in transition economies to view technology as a surrogate for entrepreneurial success 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 Technologies should be developed in tandem with strategic vision

20. 20 Marketing standardization in CEE Shuh (2000) conducted a survey of 8 Western companies marketing in CEE Shuh (2000) conducted a survey of 8 Western companies marketing in CEE In all except Beer standardized approach In all except Beer standardized approach Reasons: Reasons: Most CEE markets are small and customization does not pay off Most CEE markets are small and customization does not pay off The markets will converge to West standards in 10 years The markets will converge to West standards in 10 years Differentiated markets are inefficient (economies of scale) Differentiated markets are inefficient (economies of scale) Market structures and consumer behaviour can be changed over time Market structures and consumer behaviour can be changed over time

21. 21 Market changes In transition markets product preference can go through rapid change In transition markets product preference can go through rapid change Eg 1998 Poland analysis Eg 1998 Poland analysis Overall growth but emerging pattern Overall growth but emerging pattern High end premium brands perform well High end premium brands perform well Low-end value brands hold up Low-end value brands hold up Pressure on mid-priced products (particularly in FMCGs like coffee & chocolate) Pressure on mid-priced products (particularly in FMCGs like coffee & chocolate)

22. 22 Meaning….? As emerging markets mature product profiles establish As emerging markets mature product profiles establish Basically first 10 years are atypical Basically first 10 years are atypical Needs corporate responses Needs corporate responses Cadbury began to produce on site (Wedel factory) = 13% year on year volume growth Cadbury began to produce on site (Wedel factory) = 13% year on year volume growth

23. 23 Pliva D.D. – Croatia SWOT analysis

24. 24 Multinational entry modes Joint ventures Joint ventures Greenfield sites Greenfield sites Acquisitions Acquisitions Brownfield sites/investment Brownfield sites/investment

25. 25 Brownfield investment Acquisition method which leads to radical restructuring of acquired firm Acquisition method which leads to radical restructuring of acquired firm External growth strategies are inhibited by poor quality local firms External growth strategies are inhibited by poor quality local firms Internal growth strategies that depend on specific local resources Internal growth strategies that depend on specific local resources

26. 26 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 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

27. 27 Research suggests major motive for FDI is… Buying a market share Buying a market share First mover advantages First mover advantages Schöller Lebensmittel a German frozen-food manufacturer acquired majority share in Hungarian ice- cream factory Budatej Schöller Lebensmittel a German frozen-food manufacturer acquired majority share in Hungarian ice- cream factory Budatej Reconstructed factory Reconstructed factory Introduced 4 new production lines Introduced 4 new production lines Rebuilt factory Rebuilt factory Built new warehouses Built new warehouses Replaced freezers in retail outlets Replaced freezers in retail outlets Even discontinued local brand (perceived low quality) Even discontinued local brand (perceived low quality) 4 years later fully acquired company 4 years later fully acquired company

28. 28 Reasons for strategy Obtain faster access to market Obtain faster access to market Benefit from companys existing market share Benefit from companys existing market share Used imported production technology and international brand names Used imported production technology and international brand names Provided intensive training to impart management knowledge Provided intensive training to impart management knowledge Used only few of local firms assets but did use customer base and networks Used only few of local firms assets but did use customer base and networks

29. 29 Danisco A/S – Danish food company Acquired East German sugar companies because sugar quotas for firms were set by EU Acquired East German sugar companies because sugar quotas for firms were set by EU Acquisition of sugar refiners increased Daniscos available production quotas. 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. 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 A company seeking to enter a new market may adopt a brownfield policy rather than Greenfield

30. 30 Availability of suitable trading partners may influence entry mode British Vita sought to expand into Poland. British Vita sought to expand into Poland. 30 years policy of expansion by acquisitions 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. 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 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 Schöller established a Greenfield plant in Poland to manufacture ice-cream because the industry was far more underdeveloped than in Hungary

31. 31 The advantages of brownfield investment If local industries are advanced they may make retaliatory moves if Greenfield strategy adopted If local industries are advanced they may make retaliatory moves if Greenfield strategy adopted Greenfield does not guarantee a market share Greenfield does not guarantee a market share Costs of market entry would be higher with Greenfield Costs of market entry would be higher with Greenfield

32. 32 What conditions determine entry method? If the strategic intent of an investment depends on local resources it is less likely to be Greenfield 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 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 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 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 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

33. 33 Inward FDI 2001 2001 Worldwide decline in FDI had no impact on transition economies Worldwide decline in FDI had no impact on transition economies Overall FDI inflows remained unchanged from previous year Overall FDI inflows remained unchanged from previous year Decline only affected advanced economies Decline only affected advanced economies Cause Cause Stagnation of leading economies Stagnation of leading economies Loss of market value of some TNCs lead to scaled back investment plans Loss of market value of some TNCs lead to scaled back investment plans This may have an effect this/next year on transition economies This may have an effect this/next year on transition economies

34. 34 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. 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. 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 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 Economic Intelligence Unit

35. 35 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 US$34bn achieved in 2002. 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 US$34bn 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 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

36. 36 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. 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. 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. 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. 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 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

37. 37 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. 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. 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 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

38. 38 South East Europe – hinderances to inward FDI Slow rate of privatization Slow rate of privatization Mixture of insufficient regulation and control and too many administrative rules and institutional involvement Mixture of insufficient regulation and control and too many administrative rules and institutional involvement Lack of transparency – leading to bribery Lack of transparency – leading to bribery Local business which has become a mixture of the legal and the illegal Local business which has become a mixture of the legal and the illegal Unstable politics Unstable politics