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Free Article - PMR Consulting Surviving Competitive Inteligence projects in Central and Eastern Europe and Russia

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Competitive Intelligence for business purposes is still a new concept in the Central and Eastern European region. The communist era was one in which free market “competitiveness” was almost unknown and “intelligence” was associated with the security services.

The contract killing of Russian journalist Anna Politkovskaya in October 2006 and killing of Magomed Jewlojew owner of independent internet portal in Igushetia, despite the police protection underlines the fact that the largest country and market in this region does not operate to the same rules as we are used to in the traditional arenas of research. Simultaneously the Monopoly board game square “Go to Jail, go directly to jail, do not pass Go, do not collect $200” certainly seems relevant to us at PMR. We advised one client that their proposed methodology could land them and those they intended to interview in prison.

It is, however, both practical and feasible to include Central-Eastern Europe and Russia on the map of countries considered in a Competitive Intelligence study. For companies with significant international business interests for whom Europe is an important market, it is not only desirable but necessary.

This article explains why Central and Eastern Europe and Russia are important to CI projects and gives some guidelines as to how to approach projects in this region.

Why worry about these Central European countries at all?

It is still common for western business executives not to take Central Europe or Russia too seriously, with their unfamiliar languages and customs, and as the home of rather few companies at the top of Financial Times/Fortune 500 type listings. The communist-era semi exclusion of these countries from the global economy continues to affect global business consciousness. Can a company from Slovakia really matter? However, the days when it just didn’t matter what was going on East of Germany are comprehensively over. The rapid and much discussed takeover of Europe’s gas distribution infrastructure by the Russian giant Gasprom have forced this issue onto corporate agendas in Europe. The facts speak for themselves, it is not just Gasprom; in market after market, sector after sector to be credible one cannot ignore the Central European competitive dynamics. There are three big issues that have to be taken into account: new competitors, existing competitors acting in the region, and new markets.

New locally owned competitors

Unknown competitors are emerging “from nowhere” and achieving such strong positions in the tough competitive markets in Central Europe that when they turn their attention westwards their impact may not be unlike the market entry of the Japanese or Koreans a couple of generations ago. How many international soft drinks, vitamins or pasta companies have thought of Maspex as a competitor? A few minutes on its website (www.maspex.com.pl/en/) is a thought provoking exercise. Note its international acquisitions in Hungary, Czech, Slovakia and Bulgaria and greenfield investments elsewhere, and heir innovative product launch strategy. Maspex is far from alone. In furniture, Nowy Styl (www.nowystylgroup.com) has become one of the largest chair manufacturers in Europe with 12 daughter companies and distribution network in 60 countries globally. Poland is second only to China on Ikea’s list of global supplier countries. In higher technology, there are also many examples of strong local players. The German-Polish company EBS (www.ebs-inkjet.pl/english/o_firmie.php) is a smaller example of a company taken very seriously by industrial ink jet manufacturers. The international marketing director of an old established American industrial ink jet printer manufacturer told me “there’s not much companies like us can do about competitors like EBS” in 1998. Two years later the company he worked for was acquired. In life sciences the Barr Pharmaceuticals $2.5bn took over the Croatian generics manufacturer Pliva o be taken over by Teva (which already owns assets around CEE region) in 2008. Another good example is MIH Naspers’ acquisition of Gadu-Gadu (operator of the biggest Polish internet communicator) and Tradus plc (owner of several highly successful e-commerce auction platforms, including the Polish Allegro and the Czech Aukro shows just how highly valued some Central European assets are by the wealthier international players. The Czech Republic’s Moravia (www.moraviaworldwide.com) with offices in Japan, US, Argentina, China and Ireland is executing a more logical and aggressive strategy than its West European and American competitors in the booming localisation market. Its CEO Katerina Fostingerova certainly deserved her Ernst & Young Entrepreneur of the Year award a few years ago. Who hasn’t heard of Estonia’s Skype – which, with its high-quality free internet telephony, has not only become one of the most downloaded pieces of software in history, but has also caused tremendous upheavals in the world of telephony. The price Ebay paid for Skype showed again the value being created in the ex-communist countries.

The “so what” is that the rapidly moving and dynamic business environment in Central Europe is generating new powerful players, who are going to be increasingly significant in international markets, many of whom are unfamiliar to international executives. While the competitive responses may be obvious once the threat is assessed, until the facts are known and the reasons for their competitiveness understood, it is hard to formulate the correct strategy.

Known global competitors are sourcing or producing in the region

For many companies’ CI departments, what they know about Central Europe and Russia is that their global competitors are “up to something”. They are sourcing, organising supply chains, joint venturing, acquiring or making greenfield investments. When global competitors are stock-exchange listed companies it is usually easy to get information by looking at filings in their home markets. If more detail is needed about what exactly is going on, it can be found through standard CI methods. If the competitors are private companies, particularly coming from higher cost European countries with trade union issues, companies sometimes keep their Central European production plans very low profile for fear of provoking a backlash and it is harder to gather the facts.

The reasons why globally competitive companies are active in the region are obvious. They are doing business in Central Eastern Europe and/or Russia to cut costs or to gain business advantage: to take advantage of lower costs, more highly motivated and freely available skilled workforce than accessible in the countries they produce in at present.

As with every intelligence project, knowing one fact raises the question: “what else don’t we know?”; often the trigger for a project for PMR is a statement like “we know that our top competitor from Asia worldwide has just decided to shift their factory from Luton, UK, to Kosice, Slovakia. What will their cost and tax advantages be and what else is going on that we don’t know about?”

The “so what?” here is that too many international companies are taking advantage of the favourable cost structure in the region as part of the competitive strategy for the European market to ignore. The fact that it is hard to get to the full-picture answers is not a reason not to start researching the facts.

There are important clients and markets in the Central-Eastern European region

This is a new and emerging issue. Historically and for good reasons, like the relatively low income per capita, Central and Eastern Europe has not been a priority market. However, thanks to the relatively large population and the much faster economic growth rates than in the “old European Union”, companies are often finding that their sales in Central Europe are both larger in the euro or dollar terms than in countries like Portugal, Belgium or Ireland and are growing much faster.

The CI questions are:

  • Who are our competitors in this region, how are they doing, and what is their route to market?
  • Our sales are going well but are we achieving our full sales potential?
  • Why are we not selling at all and our competitors are doing well and what can we do about it

Are the sales in the CEE region secure or could we be at risk from a targeted attack on our distribution channels? An Asian world leader in water soluble adhesive tape took over the major importer in Central Europe for their top European competitor. The Europeans are still suffering from millions of euros in lost sales. Their American competitor has been opening factories in the region. The European former market leader could have protected its position ahead of time had they foreseen the risk and acted in time.

The political, economic and social considerations of doing business in the region are important and can be assessed, but they are not the focus of this article.

How to do Competitive Intelligence projects in Central-Eastern Europe

The rules are similar, but not quite the same as elsewhere.

Work with people you can trust and verify the claims they make

While every CI consultant (including PMR) will advise you that you need to work with professionals who have experience, often the experiences of the people you might first come across are very troubling. One company in the region is run by a former intelligence officer who cheerfully admits that he buys data off the police computers, and if the data he wants isn’t in the police computer, he bribes people. While this approach can produce data in the short run, it displays a lack of commercial experience and knowledge of the risks that executives from the US and some other countries would face if caught working with such a company. Not all experience is equal. Relevant experience is fundamental. Check that the vendors you choose are members of a respected trade body. Work with people who you can trust, and verify he claims they make. Ask if your vendor can offer references, and take the time to check them.

Don’t trust official data

Official statistical office data can be extremely unreliable. Although checking the official data should be part of any desk research project, and desk research is an excellent low cost research tool, do not rely on official data as a stand alone source of information. Insist that other observations and sources back up (or challenge) the story the official data tells. Low quality official statistical data is partly a consequence of communist era standards and partly of a lack of professionalism; often under-resourced statistical offices don’t have the leverage and authority to get reliable data from the people who should supply it. The culture of not telling the truth to the authorities goes back a long way and tax evasion issues complicate matters further.

Language issues are even more important than usual

Local language research by experienced researchers is a must. While major international databases and Google can take you a long way in developed economies in French, Italian, German and Spanish, (and of course English), this just doesn’t work for Central-Eastern Europe and Russia. The same database brands you can rely on in the advanced countries do not have the same quality of data in Central Europe. So, not only should you check Estonia in Estonian, but you should also work with people who have a thorough knowledge of how good each of the local data sources are in Estonian. English language research is not good enough.

Interviews

The picture formed with primary research and targeted interviews is complex, and hard to summarise in a few sentences. The key is to understand that the culture varies by country and by organisation. A greater degree of suspicion/lack of trust in all communist societies, as a consequence of the destruction of many civil society institutions based on voluntary association – the “Soros” issues, has created an environment in which it can be very hard to get executives to talk to strangers, especially over the phone. On the other hand at PMR we have sometimes experienced a much more favourable response rate to executive interviews than would be normal in more advanced and mature economies due to a lack of “interviewee fatigue”. We find that often the key factor to a successful interview project is the creation of the right scenario. Tell a target you want to take them over and the shutters go down. Tell them that you are considering potential sourcing projects and possible JVs and investments down the line, and the doors open. Both stories are true, but in one case the presentation creates an image of threat and aggression, in the other – the opposite. In Russia, Belarus and some other countries in the region, as in China, people can go to prison or worse for annoying the authorities. You have to make sure not only that you cover your back but make sure that the scenario for your interviewee is also safe and defensible.

Be prepared to be surprised

Local business practices and reality are sometimes very surprising: a very senior executive from one of the world’s largest retail pharmacy chains and a PMR client, told me that he had visited pharmacies all over the world in his career and he had never seen anything like the scene we showed him in a Central European pharmacy as a result of its ultra low pricing strategy. The venue looked dreadful and was terribly overcrowded. Elsewhere as part of the same study we visited other locations which he described as some of the best looking pharmacies in Europe. (The grotty location was later firebombed – probably by another pharmacy owner.)

Local business realities and culture

This issue applies as much to the countries of Central-Eastern Europe and to Russia as to any other developing country. It is almost impossible for an executive who has not experienced the region in detail to accurately interpret the facts presented. It is very hard for someone who has not worked with and in international companies to understand the way that business is done in larger corporations. Work with CI professionals who know both the local culture but also understand international companies and business.

Conclusions

Competitive Intelligence about Central Eastern Europe and Russia is an important issue for larger international companies. The same questions and issues as everywhere (costs, competition, clients, people, process, products and strategy) are valid, important and need to be understood. Using standard CI methodologies without adjusting research processes to the constraints, challenges and characteristics of the region will not work. If you decide to do CI research in the region, work with a vendor who is experienced.

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