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• Le g a l u n c e r t a i n t i e s • B u r e a u c r a c y a n d u n c e r t a i n
a b i l i t y t o p l a n f o r p o l i t i c a l d e c i s i o n s
• N o w o r k i n g i n f r a s t r u c t u r e o u t s i d e o f
t he b i g c i t i e s • H i g h s e n s i t i v i t y f o r p r i c e c ha n g e s i n
r a w ma t e r i a l • B a n k i n g s e c t o r i s n o t v e r y s t r o n g
• E x i s t i n g ma r k e t p o t e n t i a l
• E c o n o mi c g r o w t h b e c a u s e o f hi g h
p r i c e o f n a t u r a l r e s o u r c e s
• R o b u s t d o me s t i c d e ma n d
• N e e d f o r mo d e r n i z a t i o n i n t he i n d u s t r y
• G o o d p r o f i t ma r g i n s
• C o s t a d v a n t a g e s • P o e n t i a l o f w e l l - t r a i n e d s t a f f i n t he
t e c hn i c a l f i e l d
Because 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 opportuni-
ties, 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 over-
head costs. These kinds of optimized
business models have a very limited
charm. Astrategic alternative is to look
for new country markets. While every-
body looks at China as the gigantic
market for Western products, the real
“backyard of Western Europe,”namely Russia and the Ukraine, has
not yet fully arrived in the conscious-
ness 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 fol-
lowing 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 country’s sus-
tained economic growth. (PNB Com-
pany: Russia. Investment Destina-
tion, 2005, p. 32.)
Some of the advantages and dis-
advantages of the Russian and
Ukrainian markets are shown in
Figure 1.
In spite of different challenges,
From Risk to Opportunity:
Doing Business in Russia and the Ukraine
by Helmut Kohlert • Helmut Kohlert Mittelstand Consulting
www.rechargermagazine.com • April 20, 2007 • 49
R e gi on al
S p o t l i g h t
Figure 1: The advantages outweigh the disadvantages when it
comes to doing business in Russia and the Ukraine.
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Regional Spotlight
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he attractiveness of Russia and
he Ukraine is very high. How-
ver, the advantages of Russia are
based on the present “windfall
profits,” because of the high gas
prices. The Ukraine does not have
his advantage.
Cultural differences of
he ‘big neighbor’
If you ask the Russians how they
ee themselves, the following charac-
eristics are often mentioned:
• Generous, hospitable
• Ready to learn, open to newdeas
• Big hearted, ready to help
• Courageous, but also distrustful
• Want to do everything on their
wn
• Very accepting of authority; do
not question authority.
These answers present a picture
hat reflects their values and norms;
hese will affect business behavior.
Present engagement in
Russia and the Ukraine
A 2005 study by Pricewaterhouse-
Coopers examined the division of
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 com-panies 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 “commit-
ment” and rather hesitantly. The mes-
sage then is that there is a high
degree of uncertainty in strategic
decisions.
On the other hand, only big corpo-
rations are really able to manage thefull expense and effort of carrying
out extensive market research, to
found full-sized subsidiaries in for-
eign 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.
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 gen-
erated through trade shows, Cham-
bers 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 moreas a “market test.”
0% 10% 20% 30% 40% 50% 60% 70%
Sales 70%
Service/Spare Parts 19%
Production/Assembly 11%
63%Independent Sales Reps or
Trading Houses
16%Have OwnSalespeople
11%Representative
5%Joint
Venture
5%Sales OrganizationFrom Third Country Figure 3: Most companies
that maintain sales activi-
ties in Russia and the
Ukraine use independent
reps or trading houses.
Figure 2: The majority of German medium-sized companies doing busi-
ness in Russia and the Ukraine are involved in sales.
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Regional Spotlight
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• The first actual entry by a
business into the Russian or Ukrain-
an market often starts with an inde-
pendent sales representative or a
rading house. Unfortunately, the
ompany receives only limited infor-
mation about customers, market and
ompetition. This kind of informa-
ion is the asset of sales representa-
ives and trading houses, and they
will not share it with their customer
or free; there is nothing like a free
unch!
• If steady sales are achieved,
he company thinks about opening
ts own sales branch in the country,
which might handle the spare part
business as well as other offerings in
he new market. Now market infor-
mation can be collected systemati-
ally by the company itself and per-
onal customer contacts can be built
up. See Figure 4.
n search of the Russian
soul’
To better prepare for doing busi-
ness in Russia and the Ukraine, it is
mportant to understand the culture,
rom both a societal and business
tandpoint.
1) Russians and Ukrainians are
onsidered “straightforward.” Emo-
ions are mixed with business at a
good ratio. Without solid personal
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 Rus-
sia and the Ukraine, so business visi-
tors 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 invest-
ment 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 cor-
dial 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 selec-
tion process to find the right people.
There is a big interest in technology,
so many people from different
departments attend technical presen-
tations. In the areas of marketing,
sales organization and logistics, a
need for training still exists.
4) Risk consciousness is preva-
lent, primarily in the sense that a
lower price often leads to a higher
risk. However it is difficult to evalu-
ate whether a higher price really
means a higher value. Risk assess-
ments of the Russians and Ukrainians
are very often focused on formal
data, but not on unforeseen incidents.
There is simply not enough experi-
ence upon which to develop a true
analysis at this time.
5) The general director is not
always the final decision maker. The
Independent
Sales Reps,
Trading Houses
Export
Own Sales
Organization
• Direct export to
already existing or
new customers
• Making contact
through, for
example, exhibi-
tions or Chambers
of Commerce
• Development of
already existing
customers by third
parties, as well as
sales
• Limited access to
information on
customers, market
and competition
• Direct sales and
customer care
• Offering of
services and parts
• Full information
about customers,
market and compe-
tition is available
Initial Phase Test Phase Market Entry
Get Started Check for Engagement
Sustainability Without Risk
Figure 4: A phase-by-phase market entry plan.
Business visitors have toplan on spending much
more time interacting than
in other countries.
… this investment is well
spent, because if you have
a foundation of trust, it willhelp later.Reprinted with permission from Recharger Magazine (702) 438-5557
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Regional Spotlight
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decision-making processes can be
very long in Russia and the Ukraine;
.g., four months for the assessment
phase, then the decision is made and
hey expect a delivery time of four
days. However, it is often the finan-
ial investors — “anonymous
nvestors” who are far away from the
ompany — who have the decision
power. If the investors have learned it
he hard way, they absolutely change
heir decisions.
6) Business dinners and drinks
play a big role in this business world
— it is one of the bases of new friend-
hips. If the foreign businessman
wants, he can limit himself to the toast.
t is not required for the foreigner to
ully “keep up”; it is sufficient to sip
while raising the glass.
7) Only one’s own general director
may offer criticism. Only an approved
uthority accepts criticism, then, how-
ver, without contradiction. The execu-
ives of Russian and Ukrainian compa-
nies are well trained, have good
manners and a healthy self-confidence.
They are able to create the feeling of “I
m customer, you are supplier.”
According to “Management à la
usse,” an article in the Harvard Busi-
ness Manager, the people primarily
live for today,” because it is hard to
oresee the future, and detailed plan-
ning has a slim chance of being real-
zed (Gladkov, Sabine: Management à
a russe, Harvard Business Manager,
No. 06/2005, p. 111). This may be the
reason why a long-term, strategic plan
is absent in many Russian and Ukrain-
ian companies — the unsteady macro-
economical 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 immedi-
ately. Initiative was prevented and
additional work undesirable. So com-
panies tend to need more staff for the
same type of work than they do in
Western countries. In addition, moti-
vational problems can appear due to
outdated manufacturing sites as well
as past leadership behavior. However,
that does not apply to young engi-
neers. Responsibility has to be exer-
cised. It is often seen by employees as
a burden and not, like in Western com-
panies, 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 pri-
vate 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
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 busi-
nessman should do the same. Open-
ness, politeness, modesty and good
behavior are appreciated very much,
while arrogance and boasting are con-
sidered unacceptable.
11) Even if the Russians and Ukraini-
ans are very open to Western know-
how, 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-
tinctive national pride of the Russians
and Ukrainians can quickly misunder-
stand input as interference. R
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.”
Prof. Dr. Helmut Kohlert is the
MBA academic director of Interna-
tional Industrial Management at
the University of Applied Sciences,
Esslingen, Germany. He teaches
marketing and international mar-
keting. He is also president of a
consulting firm specialized in mar-
keting consulting for medium-
sized technical companies opening
in new markets.
He can be reached at
or www.hk-mittelstand.de.
Reprinted with permission from Recharger Magazine (702) 438-5557