9.3 Market entry strategies

Market entry into the CEE countries more or less conforms to the modes laid down in internationalization theory, which is based on the experiences of European and US firms in Western Europe and other parts of the world in the 1970s. The dominant tendency is to increase resource commitments gradually over time (Engelhard and Eckert, 1993; Schuh et al ., 1994; Shama, 1995). Three major entry modes have been popular among Western firms: exporting, forming a joint venture with a local partner, and acquiring a local firm in the course of the privatization process.

International companies start with less risky entry modes such as exporting. Exporting to retailers or wholesalers presents the lowest financial risk and provides companies with valuable feedback on the acceptance of their products and the effectiveness of their sales tactics in the market in question. When sales rise and the local business outlook is favourable, companies may invest more in the market and open a representative office or a sales office. Representative offices allow companies to gain more information on the market, to educate customers and middlemen, and to secure better control over their marketing efforts. If the business develops according to plan the office may be transformed into a marketing and sales subsidiary, and parts of the production process (for example assembly or component production) may be shifted to the CEE.

The example of Philips Consumer Electronics depicted in Figure 9.1 can be regarded as a typical entry sequence in the mid 1990s. It also highlights the correspondence between level of commitment and the perceived economic development and political stability of the entered countries.

Figure 9.1: The entry of Philips Electronics into the CEE countries

Besides exporting, joint ventures between Western and CEE partners have been very popular (Shama, 1995). There are several reasons for the attractiveness of joint ventures. At the beginning of the 1990s, in some countries (for example Russia) foreigners were not allowed to be the sole owner of a domestic company. Even where full ownership was permitted joint ventures were viewed as an effective mode of operation in non-transparent business environments such as economies in transition where a strong local partner s knowledge of the market and business customs , integration into the local business network and relationships with government officials were valuable assets for the foreign investor. Moreover it was often politically impossible or unwise to sell an established national flagship company to a foreign investor. Although the people in CEE were aware of the economic stimulus generated by foreign direct investment they were emotionally averse to the sale of their country s ˜crown jewels . A joint venture where a major stake remained with local owners , mostly state agencies, gave the impression that local representatives still had a say in the company. However a look back tells us that most of the joint ventures were only temporary in nature. Local partners acted mostly as caretakers, knowing full well that in order to survive they depended on the capital, management know-how, technology and business network of the investor. Success stories such as the acquisition of the majority share of the Czech car manufacturer Skoda by Volkswagen, and of the Slovak white goods producer Tatramat by Whirlpool Europe, show that major restructuring efforts and the subsequent turnaround happened only after the foreign investor obtained a qualified majority or full ownership of the firm.

When the privatization of state-owned companies began in the mid 1990s, the sale of large national companies offered a unique opportunity for established foreign companies to expand their market position and for new entrants to become major players in the market. While internationalization theory presupposes a trend from exporting to local production, the pattern in CEE was not uniform and differed by country and industry. Local production by foreign firms was more common in the consumer goods industry, where mass markets were served and therefore geographic coverage was important (for example in the case of retail outlets, breweries and petrol stations ), and of course in financial and other services and telecommunications. The cultural rootedness of products such as chocolate, dairy products and beer in terms of taste and regional identity made local producers attractive takeover candidates for foreign companies, and major players such as Nestl , Unilever, Kraft Foods and Danone seized the opportunity offered by the privatization process to establish a presence in the region.

Nowadays entering CEE markets has become more costly and difficult, new entrants are faced with stiff competition from well-entrenched international competitors and well-known local brands have already been bought up, although new local companies are mushrooming. Advertising prices have soared, making media campaigns more expensive. However, as retailing in CEE has been Westernized in the last few years (with the arrival of Metro, Carrefour, Tesco, Rewe/Billa, Spar and so on), entry via a retail partner has been another market entry option. The idea here is to capitalize on good business relations with Western retailers in the home market by following them into the CEE region. Exporting through a middleman suits producers of consumer goods aimed at upper market segments (for example spirits, confectionary, cosmetics) whose growth is highly dependent on overall economic development and where sales volumes are still very small. For smaller MNCs that cannot afford huge up-front investments the incremental approach offers a good balance between returns and risks.