The Multinational Company from the UK Enters the Russian Market - Case Study Example

Introduction For centuries, the business community has always been in the pursuit for new opportunities. In the coming years identifying new avenues for business will be a major factor in the survival and growth of an organization. When companies adopt a globalised strategy, it becomes very important to evaluate the external trends and events that influence the business environment. Geographical factors, cultural influences, differences in business practices can pose challenges to the business manager. According to Fred. R. David (2007, P129) "Organizations have to be more proactive, than adopting a reactive approach in their industry. A company's brand image and its strengths in the local market can be used to leverage its global strategy". When an organization like Volvo competes in the International market, it can use its power in the industry to its advantage because of its improved negotiating power among the suppliers, creditors, distributors and other stakeholder groups. When a multinational company from UK enters the Russian market, the factors that have to be taken into account in the macro environment are discussed in this essay. PEST analysis which provides a comprehensive idea about the various environmental factors has to be used. Hence, this essay focuses on the different factors from the external environment that have to be evaluated in order to create a strategy for exploiting the Russian markets. Though the company is successful in the various countries, the factors that influence the business environment in specific to Russia have to be focused. Hence, this report is presented for the perusal of the Board of Directors. Political environment 1. Transition economy: Russia is changing dynamically in every aspect of operations. Because of the opening of the economy, there are a huge number of opportunities created. It can be noted that Russian economy is in a boom and the global recession has not had a very disturbing effect on the economic growth of the country. Market implication - When new sectors are opened up and there is a huge increase in the demand for heavy vehicles and construction vehicles. The basic factor for the business development which is the demand for products is created. Strategic implication - Entering into the markets in Russia can benefit the stakeholders of the company. 2. Local government role - A reform introduced by the president of Russia stipulates that the regional heads are to be appointed based on the key success factors such as economic growth of the region, social stability and political loyalty. Hence, there is a competition among various regions to attract investment. The regions are creating Investment Promotional Agencies. Many Russian regions maintain websites in other languages and participate in international exhibitions to welcome investors. Market implication - these moves by the government shows that the Russian government is committed to boost foreign investment. Strategic implication - This will help in a more favorable climate and the business community can expect more reforms in the coming future which will be helpful in establishing business in the country. 3. Political stability - Russia is a former super power, trying very hard to maintain its global dominance. The economy is in the transition and there are a number of pitfalls in the administration. Foreign companies often complain that there are numerous administrative procedures and bureaucratic hurdles to start business, but the country has a stable political climate and the commitment to reform process has been confirmed strongly by the government measures. Strategic implication: though there is a politically stable climate, it is necessary to note that because of the war climate with Georgia, foreign investors were concerned and the stock markets were affected. Hence, the company has to keep in mind the political factors that may lead to economic downturns as stated here. 4. Government procedures: Often it is annoying for the international investors about the need for political clout to overcome bureaucratic hurdles. Rules are not followed because of corruption and the role of mafia in the government functioning is rampant. It may be difficult for the foreign investor to cut across the bureaucratic lines. There is lack of transparency in the government decisions. One has to fulfill innumerable bureaucratic procedures, to open a new foreign company in Russia Strategy implication: Comparing the hassles in creating a company in Russia, it is easier to open a branch in Russia, instead. Hence, it can be recommended that a branch can be opened in Russia to begin operations on a much faster pace in the short run and also there are various tax and legal benefits which are highlighted in the later part of the essay. In the long run, the market conditions and business practices can be understood and then strategic entry in a big way should be planned. 5. Future plans: As published in Factsheet report(2009), "in the first year of his term, President Medvedev has highlighted the priorities of the government such as infrastructure, innovation, investment, and institutions. It is also mentioned in the state plans to further privatize industries so that the role of government is reduced, combating corruption, and improving the judiciary" Strategic implication: the economy is going to expand further and the government is hinting about going further with privatization in infrastructure sectors, which Russia has to improve to a greater extent. When our company enters the market in this economic and political climate we can enjoy an edge over our competitors. Economic environment 1. Strong economy: According to the facts published by the CIA(30th July, 2009), the Economy of Russia is showing an average GDP growth of 6% for the past 10 years straight. After the economic crisis in 1998, the economy of Russia is stable with an average growth of 7% which is a strong sign about the strength of the economic condition. Also, the personal income of the people has increased by more than 10%, indicating the increase in spending capacity of people. Major export of Russia is still Oil and gas and when there is a decline in the oil process, whole economy gets affected. Hence, the government has created two sovereign wealth funds from its bullion reserves to stabilize the economy in times of downturn of oil prices and to induce infrastructural development. 2. Tax reforms: The government has introduced a number of tax reforms since 2000 to rationalize the tax system, reducing the number of taxes and to ease the corporate tax burden. "Changes in the tax system with effect from January 2001: Flat rate of personal income tax of 13% Simplification of the administration of social security contributions. Corporate tax rate is from 35% to 24% at the start of 2002. The basic rate of value-added tax (VAT) is reduced from 20% to 18% at the start of 2004 Regional 5% sales tax is abolished. Corporate tax rate is reduced from 24% to 20% at the start of 2009. The government also unveiled a $20 billion tax cut plan and other safety nets for society and industry" *Source http://www.economist.com/Countries/Russia/profile.cfm'folder=Profile-FactSheet 3. Import and export climate: if we analyze the import and export trends of Russia, it can be understood that Russia's major export is oil and gas at nearly 65% of the country's total exports. The major imports are machinery and equipments at 43.9 %. Strategic implication: It can be noted that the majority of the equipments and machinery are only imported, than being manufactured in Russia. In future if the government is regularizing the business environment with more flexible rules and regulations, it will be helpful for foreign companies to establish production base in Russia. 4. Oil is the only major export in Russia - The economy is dependent on the oil market fluctuations. Oil price fluctuations can be a major force on the economic performance of the country. When the oil prices dropped drastically in 2008, it affected the economy as a whole which was shown explicitly in the state budget for the year. Also, in the same year, the government devalued the currency which caused panic among the foreign investors and it caused decline in the flow if foreign investment. It also caused problems in the local industry causing unemployment and decline in local production. Strategic implication: As the Russian government has not yet diversified its economy to achieve broad-based economic growth, the oil prices will determine the performance of the entire economy; so, other industries will also get affected. This may cause impact on consumer spending patterns as well. Also, when the company is considering investment in Russia, calculated risk has to be undertaken, to be safe in future currency crisis. 5. Industrial climate : According to Sabel andZeitlin(1997), "there are two social systems of production: the social system of mass standardized production and the social system of flexible production". 'The mass production being the ideology of the socialistic economy . But in today's globalised and consumer oriented economic conditions, flexible production systems have to be established. For a flexible production system to operate successfully, the stakeholders have to create relationships which are based on mutual trust. The trust among the stakeholders of an organization can be achieved through long-term commitment on the part of the management and transparency in management practices. Strategic implication: When the industrial climate is clouded with mistrust and doubt about the intentions of the management, it does not result in the maximum productivity. Hence, establishing a production base in Russia has to be decided upon after further research into this matter. Social environment The major social factors that have to considered are, 1. Russia is a vast country with a wide variety of cultures, languages and traditions. These different cultures and subcultures may pose initial difficulties in establishing business contacts. 2. In Russia the company has to be careful about the infringements in the Intellectual Property Rights. The government regulations are still not very strict in this area and the dominance of mafia and corruption go hand in hand wotht he IPR infringements. The company has to protect its IPRs more carefully when operating in Russia. 3. If the growth of the living standards of people is analyzed it can be understood that, poverty has reduced. But growth and development is only in the major cities and majority of families with single parents are still under poverty line. A study conducted by Kuznetsov(2006), shows that, Poverty of rural population is much greater than that of urban population The highest rate of poverty is among one-parent families and families with many children (62-85%) Feminization of poverty (single mothers and pensioners) Vast regional differences (in third of regions more than halve of the population lives in poverty) Technological environment 1. More dominance of locally manufactured products in the light vehicle segment. Consumers are more used to the local brands than the foreign ones, as it is more maintenance free as highlighted by Dolomanov(2001) 2. Russia is lagging behind in its vehicle design but there is no lack of inventive designers. On the contrary, Russian car designers often invent unique solutions that have no analogs in the world, but the outdated technological and production base prevents these ideas from becoming reality. 3. Foreign companies are at an advantage when it comes to pollution control technologies for heavy vehicles. Though locally made brands have pollution control matching the European standards, high cost of research and development in Russia and lack of strong technology base makes it difficult for the local companies, to improve their environmental standards. Hence, this factor can be very beneficial for the company at present. 4. For the long run establishment of business, the local companies can be invited for coordinated production processes in light and commercial vehicles. This can help in acquiring low cost production technologies which are suitable for Russian markets. 5. Manpower has to be trained and developed to suit the needs of the company. Though there is a good supply of educated human resource, the country lags behind in professional corporate governance and business practices. So the company has to develop its staff to maintain the quality in the production facilities. Marketing strategy for the company In the short run, finding distributors, financing, trouble shooting and coordination of activities will yield results, but in the long run establishing a production base in Russia is more advisable. Having a production base in Russia is advantageous because of the following reasons: 1. The tax structure is friendlier and the government is planning to introduce more tax reforms to benefit in future. 2. Russian people have an appetite for business with UK which is evident from the success of many companies from UK. 3. Located at an advantageous proximity to UK 4. There are large pockets of wealth, that can create new growth prospects 5. Less expensive to create a company compared to many countries 6. Constant rate of growth in the economy for more than 10 years 7. Politically stable for a considerable period of time even after the collapse of socialism. 8. Availability of skilled low cost labor that is adaptable to new methods of production. 9. High literacy rate of the common people, hence training and development of human resource is easy 10. Margin of profit is high in the sale of each product than many booming economies. 11. Cost of raising capital in Russia is high, for the local companies which are dependent on local funding, it is disadvantageous, but for multinational companies it is advantageous. Conclusion To conduct successful business in Russia, market exploration will be the first step. After exploration and estimation of the size of the market, the company has to decide its long term and short term strategies. In the short run, the company can appoint distributors and develop the distribution chain. But in the long run, a production base has to be set and the stakeholders should be coordinated based on the principles and policies of the company for the success. The factors like climate, size, language, socialistic mentality of the workers, bureaucracy, capital flight, lack of infrastructure and high inflation can be some of the external environmental factors that have to be taken into account when the detailed operational strategies are formulated. Sources 1. Central Intelligence Agency. 2009. The world fact book publications, available at https://www.cia.gov/library/publications/the-world-factbook/geos/rs.html (accessed on August 5th, 2009) 2. Economic intelligence Unit. 2009. Factsheet , Country Viewswire available at http://www.economist.com/Countries/Russia/profile.cfm'folder=Profile (accessed on August 5th, 2009) 3. David R. Fred .2007. Strategic Management - Concepts and Cases. Prentice Hall. New Jersey 4. DOLOMANOV J.2001. Enjoying steady growth. The Russia Journal. Issue No.193. 5. Kuznetsov, A.2006. Taming the Corporate Power: How to Remove the Divide between Big Business and Society in Russia, available at http://www.paisley.ac.uk/schoolsdepts/business/cces/documents/AndreiKuznetsov.DOC 6. Sabel, C. and J.Zeitlin (eds).1997. World of Possibilities: Flexibility and Mass Production in Western Industrialization. Cambridge: Cambridge University Press. Read More