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Expert article 898 Baltic Rim Economies, 21.12.2011 Quarterly Review 5�2011 Adaptation of business models to local conditions in Russia – five Nordic companies' experience By Kim Wikström and Elena Ganskau Nordic companies are increasingly interested in establishing business in Russia. They face challenges in adapting their business models to the local environment. The reason for this lies in severe differences regarding culture, legislation, technology, available capabilities and competition. There is also a considerable amount of incorrect stereotypes to be found in their guidelines for conducting business locally. There is an urgent need to find suitable approaches for how these companies should act and perform so that they meet local expectations and requirements. At the same time they should utilize their global capabilities and innovate for potential quantum leaps in a strongly emerging market. PBI Research Institute has for several years analyzed various types of business models in project-based firms globally and in Russia. In 2010-2011, PBI conducted a study of how Nordic companies adapt their business models to local conditions and which factors play a decisive role in their development in Russia. Five Nordic companies representing different industries in Russia were selected for the analysis. In total, 26 interviews with the companies’ managers and customers as well as industry experts were conducted and analyzed in combination with an analysis of documentation, such as strategic intentions and webpages. The aim was to discover the companies’ approach to conducting business in Russia. The focus was on summarizing best practices and existing problems, and giving recommendations for further development of the companies’ activities in Russia. Despite the fact that the results are based on the experience of only five companies, they provide valuable insight and guidelines regarding how foreign companies strive to establish and develop operations in Russia. The companies studied employ different types of approaches in Russia and have different experiences and levels of maturity in their operations in Russia. The following business models were identified: (1) The production-centered business model builds on local production for different industrial segments within serial and individual projects. Priority is given to product development, including design and innovation when considering local needs and demands. In addition, the closeness to the market ensures quick decisions and adaption. These companies have a strong market position and support from local authorities, giving them more openings as regards prospects for further growth. Moreover, they have close collaboration with the local universities and suppliers. They mainly faced problems related to poor infrastructure, underdeveloped legislation, and having to obtain numerous approvals and permissions. Additionally, the various political situations in specific regions were often challenging for the local production. However, a cost benefit has been achieved, at least until now, as there are significant import duties if the products are produced abroad. (2) The sales-centered business model is based on the organization of sales, distribution, and delivery process. These companies can capitalize on strengths using an efficient supply chain, unique benefits, lower pricing, a broader product line, or more customization options. However, customs duties and other costs linked to 56 transportation make the position of foreign companies without a local production base quite vulnerable. Furthermore, the importance and benefit from the local office is more limited. The model does not allow too rapid growth and it is not seen as a sustainable way to do business from a Russian point of view as local embedding is important. Moreover, sudden changes or disturbances at the border can dramatically impact the business. The benefits are flexibility and also the possibility of growth by extending the sales network. (3) The service-centered business model means that the company’s activity is focused on service solutions supporting the customers' value generating processes, e.g. design, installation, maintenance, after-sales support, etc. This model functions well if a company has long-term agreements with customers, quickly responds to inquiries, and has a wide network of service centers and warehouses with spare parts. However, the Russian market for services is underdeveloped and unpredictable. In addition, the level of competition is high – small local companies offer lower prices and acceptable quality, as well as flexible contract terms and fast delivery. This model gives constant feedback from the customers that could be better utilized by establishing a stronger presence by having spare parts, a certain degree of expertise and sales personnel in Russia. Furthermore, as the business environment is evolving quite rapidly, the companies tend to suffer from the distance involved. (4) The essence of the investment-centered business model relates to organization and development of local projects aimed at meeting the interests of investing organizations. The investing company’s role is to connect the sources of investment with local networks, including experts, authorities, producers, and suppliers. The outcome of projects may include both new material objects and intangible effects (e.g. ecological). This model is quite flexible and does not require launching large local facilities, although it is strongly dependent on a well managed network of partners, as well as political and legal factors. Thereby it is also rather vulnerable and there is a risk of missing business opportunities, because the local presence is weak. This is especially true for the early phases, when new investments and projects are discussed and planned. There are significant differences when working with key clients in Russia and Nordic countries. It is quite problematic to develop long-term relationships, networks, and trust because of local, specific peculiarities. At the same time, the established personal contacts between managers and clients remain a significant reason to continue collaboration. Relationships between the customer and subcontractors in Russia often have a complicated structure, and different interests have to be balanced. Foreign companies cannot be involved in “the game” because of their ethical norms or lack of information or. A point of development was in all five cases to increase the local presence. To pay attention to the collaboration between the local operations and the other relevant actors within the company is important. As for relationships with headquarters, it is interesting and important that the independence of local management � Pan-European Institute � To receive a free copy please register at www.tse.fi/pei �
Expert article 898 Baltic Rim Economies, 21.12.2011 Quarterly Review 5�2011 in making local decisions had a positive impact on motivation and development of the operation. However, our observations also revealed cases, where the headquarters tended to ignore initiatives and suggestions from the Russian side. As a result, the offering was designed and developed irrespective of local market needs or the decisions were accepted on the level of the entire company and were therefore not efficient locally. Cultural and language differences remain significant and create a problem when introducing the parent company’s values and standards. Moreover, the opposite was observed where the local operations with autonomy became isolated and could not benefit from the experience and knowledge base in the Nordic companies. Training multicultural (multilingual) managers and transferring international experience through “best practices” can be a solution, blended with job-rotation and working in joint projects. Nonetheless, a strong motivation to work in Russia is important for local success. It is not easy to adapt Nordic values and business standards to Russian market conditions; collaboration needs to be based on respect, trust and a well-built value base. A strong interest from the executive level and involvement from the headquarters seems to support a sustainable local development, as long as local management is not micro-managed. 57 Kim Wikström Professor at Åbo Akademi University Founder of PBI Research Institute Finland Elena Ganskau Dr. and Managing Director PBI Research Institute St. Petersburg Russia � Pan-European Institute � To receive a free copy please register at www.tse.fi/pei �
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