675.cross border strategy and operations finnish companies in russia a collection of cases

Saint Petersburg State University

Graduate School of Management

CROSS-BORDER STRATEGY AND OPERATIONS:

FINNISH COMPANIES IN RUSSIA

A Collection of Cases

Edited by Andrey G. Medvedev and Marina O. Latukha

St. Petersburg

2012

Copyright ОАО «ЦКБ «БИБКОМ» & ООО «Aгентство Kнига-Cервис»

Reviewers: Marina Yu. Sheresheva, Professor, National Research University Higher School of Economics;Karina V. Khabacheva, Executive Director, St. Petersburg International Business Association

Cross-Border Strategy and Operations: Finnish Companies in Russia. A Collection of Cases / Edited by Andrey G. Medvedev and Marina O. Latukha. — SPb.: SPbSU GSOM, 2012. — 196 p.

The aim of this book is to develop an understanding of strategic and operational decisions in internationalization process of Finnish companies entering the Russian market. The case book reflects on experiences of several Finnish firms doing business in Russia and provides insights for the various challenges, objectives and decision-making alternatives companies face in real internal and external organizational set-tings. The presented collection of cases reveals the main managerial functions to be applied in the field of international business, in particular, strategic management, organization design, marketing, and operations management.

This book is recommended for students of Bachelor, Master, and MBA levels at business schools as well as professional managers in decision-making on entering foreign markets.

ISBN 978-5-9924-0074-8

Copyright © 2012 SPbSU GSOM


CONTENTS

Preface ............................................................................................ 5

Atria: Post-Acquisition management solutions for the Russian subsidiary

Andrey G. Medvedev ...................................................................9

Nokian Tyres: A variety of investment decisions for RussiaAndrei Yu. Panibratov .............................................................. 39

YIT in Russia: Expansion to the East or escape from the West?Andrei Yu. Panibratov .............................................................. 59

Valio: Will Viola processed cheese maintain a leading position in the Russian Market?

Sergei A. Starov and Igor V. Gladkikh ........................................ 75

Konecranes: Balancing scale of operations and quality of services in the Russian B2B market

Andrei Yu. Panibratov and Marina O. Latukha ............................125

K-Rauta: Expansion in Russia in a time of world crisisVitally I. Cherenkov .................................................................143

Skanska: Withdrawal from the Russian market — failure or part of a strategy?

Andrei Yu. Panibratov ..............................................................175

List of Contributors .......................................................................194


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PREFACE

This book is the result of multi-year collaboration between two lead-ing European business schools: Aalto University School of Economics and St. Petersburg State University Graduate School of Management. Together with the authors’ extensive experience in research and teaching in inter-national management (with the main focus, for obvious reasons, on Finn-ish companies and Russia as a primary destination for internationaliza-tion) this has finally led to the appearance of this book.

Historically, Russia and Finland have an extensive tradition of scien-tific and business cooperation. With its very long shared border, Finland has always been closely connected with Russia and Finnish companies have become very familiar with the Russian business and policy environ-ment. At present, the cooperation between Russia and Finland focuses on Northwest Russia, in particular the Republic of Karelia, the Leningrad Region, Murmansk Region, and the City of St. Petersburg. This is clearly one of the main reasons why Finnish companies, in most cases, choose to start their foreign operations in Russia and St. Petersburg and why many Finnish and Russian universities have recently conducted various studies on Russia, its business environment, company strategies, and management practices.

The outward movement of Finnish companies is an increasingly im-portant phenomenon. Despite recent setbacks in the world economy, the growth of companies entering emerging economies continues and Russia is still seen to be a challenging direction for companies that are expand-ing around the world. The knowledge gained from joint research activities and long business and economic relationships between Finland and Russia is mirrored in educational collaboration, such as in developing graduate and postgraduate programs in universities in both countries. Courses such as Doing Business in Russia or Business Strategy for Emerging Markets are included in the curriculum of almost all international business sub-jects taught in business schools. Many Finnish universities invite Russian colleagues (including the authors of this book) as visiting professors for these courses. An interesting fact is that these courses are usually based on examples of real companies showing concrete strategic and operational


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Preface

decisions taken by Finnish firms. In other words, each course is always followed by a set of case studies aimed at integrating theoretical concepts and practical experience.

The main feature of this book is that it consists of a collection of case studies. Each case is devoted to a specific company and identifies the real business situation the firm faced on entering and operating in the Russian market. Starting with cases about the strategic opportunities for Finnish companies in Russia, the book includes cases devoted to the post-entry operational decisions in the areas of marketing, finance and organizational behavior. This not only shows the variety of managerial practices that can be vital for understanding how firms operate in a for-eign business environment but also helps identify and develop a helicopter view for planning and implementing an internationalization strategy.

There is no doubt that the use of case studies in business education is very popular. The reason for using case studies is to simulate real situations in a classroom where a range of discussions would usually be needed to understand the complexities of the decision-making process. In addition to developing analytical skills for critical thinking and problem solving, case studies actually show problems, managerial tasks, strategic and operational objectives, and challenges for managers in a changing in-ternational environment. The case method often involves students analyz-ing business situations both in complex and in detail with a factual de-scription of a challenge or task faced by a company together with the ex-ternal and internal environment, and management alternatives. Any case study used during the education process pushes students to understand and develop their own views on solving a wide range of organizational problems. The case method helps students not only find, understand and analyze the information, but also conceptualize and lay it out for deci-sion making. During case study analysis students may also play differ-ent roles such as researcher, investigator, creator, ideas generator, etc. that develop very important competencies for business and management. Therefore, we took the case method for explaining company results as it proved to be the main and only effective tool for connecting theory and practice in the educational process.

The purpose of this book is to familiarize management students with practical implications of international business theory and some rules on how to undertake business activities in Russia including foreign trade operations, industrial cooperation deals, and foreign direct investment projects. The book is aimed at those readers who are interested in under-standing why Finnish companies go abroad, how they internationalize, and what their perspectives are. Therefore, the book’s first, principal objective


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Preface

is to enhance the reader’s understanding of the real internationalization motives of Finnish companies. The second is to show the range of strate-gies and explain the choice of entry modes and post-entry operations by Finnish firms in Russian markets. The third is to discuss the prospects for future development of Finnish companies in Russia.

The book may serve as a useful support for international manage-ment studies at all levels of business education. The stories presented in this book are widely used at St. Petersburg State University Graduate School of Management as instructive cases to be analyzed by students at Bachelor, Master, and MBA levels. In particular, these cases are used on the International Management course of the school’s bachelor programs. Some cases may be effectively used on the International Business Strategy course delivered to students of CEMS-MIM and Master in International Business programs. They may also help when studying Marketing and In-ternational Marketing courses at both Bachelor and Master levels.

The Nokian Tyres and YIT cases are good illustrations of how firms decide on their foreign operation methods for their initial foreign entries and may be used while studying the foreign entry mode topic. These com-panies followed several stages for developing their activities in Russia before selecting a greenfield mode for establishing a substantial presence in both the Russian industry and the Russian market of car tyres and construction services. Post-acquisition management solutions are well il-lustrated by the Atria case, which focuses on how to integrate the activi-ties of a newly acquired subsidiary into the overall corporate set of oper-ations. This case may be included in the subsidiary-level strategy topic in the International Management or International Business Strategy course.

Marketing issues are better presented in the K-Rauta and Valio cases. In particular, these cases illustrate how firms have adjusted their consumer products or services to non-domestic conditions; therefore they may be used in topics such as market segmentation, branding, or promo-tion policy within the Marketing or International Marketing course. In the Industrial Marketing course, the Konecranes case may provide a good platform for discussing B2B relations, long-term cooperative agreements, and strategic alliances. This case may also find its application in the Op-erations Management course and in topics devoted to quality management in companies.

As industrial characteristics may significantly influence decisions tak-en by company managers in foreign countries, the YIT and Skanska cases are of particular interest in showing how management solutions are af-fected by regulations and competition in the Russian construction sector. These case studies may be considered in several International Management


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Preface

course topics. The Skanska case is particularly important in understand-ing the reasons to divesting operations in a foreign country.

The authors are certain that the cases presented in this book will help both students and acting managers understand better how to make decisions on entering foreign industries and markets, which foreign op-eration methods to select and how foreign operations should be integrated into the corporate set of activities. This book could also be interesting for managers and specialists from different industry-related companies that are planning to go abroad or already have foreign operations, in order to gain practical experience from the examples presented in this book.

Andrey G. MedvedevProfessor, Graduate School of Management,

St. Petersburg State University

Marina O. LatukhaAssociate Professor, Graduate School of Management,

St. Petersburg State University


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Andrey G. Medvedev

ATRIA: POST-ACQUISITION MANAGEMENT SOLUTIONS

FOR THE RUSSIAN SUBSIDIARY

In 2005 Finland-based Atria entered the Russian industry by acquiring St. Pe-tersburg–based Pit-Product which is now a subsidiary of Atria Plc. Established in 1996, Pit-Product is the largest meat processing company in the City of St. Pe-tersburg and surroundings. This case describes the activities Atria undertook in Russia, emphasizing the post-acquisition integration of Russian operations into the overall Atria strategy. It includes the description of the pre-acquisition situation and arguments in favor of Atria’s Russian expansion; the process of selecting an internationalization mode, the terms of the acquisitions and of Atria’s other deals in Russia; the benefi ts of the Russian expansion for the Atria Group; the situation that emerged at Pit-Product and other Atria divisions in Russia and post-acquisition solutions.

INTRODUCTION

In March 2006, Juha Ruohola, recently appointed as Atria Russia and Baltic Director, was preparing for a meeting with other members of the Atria Management Group to present his views of how to integrate Pit-Product, a newly acquired subsidiary of Atria in the City of St. Pe-tersburg, into the Atria Group. He was still working as the Purchasing and Investment Director of the Group and had considerable credibility with the Management Group. Yet, as he clearly acknowledged, there were significant problems in governing the integration process with the aim of improving the St. Petersburg subsidiary’s effectiveness. Operations in Russia posed a challenge to the company’s overall know-how, and success in meeting it would support the Group’s further progress.

The author would like to appreciate Juha Ruohola, Executive Vice President, Atria Russia, and Sergey Ivanchenko, General Manager, Atria Russia, for their kind support and valuable remarks.


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Atria: Post-Acquisition Management Solutions for the Russian Subsidiary

He looked at the slides again. „I have to emphasize how strongly the new Russian project fits our internationalization strategy”, Ruohola thought. Entry into Russia appears to be the next logical step for Atria. For several years, Atria Group’s vision was to become the industry leader in offering meat products and meal solutions in the Baltic Sea region. The Baltic Sea region is a natural substrate for Atria Group’s growth. Despite its national and market-related special characteristics, the Baltic Sea region is evolving into a contiguous market region. This provides Atria with opportunities for furthering both its turnover and its profit-ability.

Ruohola recalled his scholars at Turku School of Economics, where he graduated with an EMBA in 1999. They always emphasized that a firm developing its foreign expansion strategy must have clear answers to five questions. These questions are „why”, „what for”, „where”, „when” and „how”. The answer to the first question, „why”, is evident to managers at many Finnish companies. They recognize clearly that developing the do-mestic operations in the traditionally small domestic market at the same rate as international operations is hardly possible.

Thus, Atria being a leading meat processing company in Finland (see the brief overview of the company in the next paragraph), had little op-portunity to achieve significant growth on the domestic market. Growth through M&A in the Finnish meat processing industry would inevitably be blocked by the antimonopoly authorities.

OVERVIEW OF ATRIA (2005)1

Established in 1903 in Finland, when its oldest owner co-operative was founded, Atria Group Plc operates in the food industry, in particular, in meat and poultry slaughtering, cutting and processing and the manu-facturing of meat products, such as sausages, frankfurters and all-meat products, meat delicatessens and convenience food. Atria’s customers are the retail sector, restaurants, and hotels, the public sector (schools, hos-pitals, armed forces etc.) and industry. The Group’s factories are located in Finland, Sweden, Lithuania and Estonia. Its foremost brands are Atria, Dukes, Forssan, Lithells, Grillköket, Maks & Moorits, Vilniaus Mesa and others. Atria Concept AB, a fast-food division of Atria Group owns the Sibylla brand, which is well recognised in Northern and Eastern Europe. Atria’s market share in Finland is 30%; the Group is the largest manu-facturer of meat products in the Baltic Sea Area. In 2005, the Group had a turnover of €976.9 million and an operating profit of €40.2 million.

1 Atria’s overview is based on the company records and data.


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The head office of the Group is located in Nurmo, Finland. The Group comprises five manufacturing plants in Finland, three in Sweden, one in Lithuania and one Estonia. The Group employs some 4,400 people. Since 1994, the Group shares have been listed on the Nasdaq OMX Helsinki.

ATRIA’S INTERNATIONALIZATION

Atria’s acquisition in Russia was just the latest step in a process of internationalization that had begun a decade earlier. Expanding first to Sweden in 1997, by 2005 Atria’s operations in Sweden, Lithuania, Estonia and Russia accounted for 35% of its €976.9 million group-wide turnover. (Table 1 summarizes Atria’s international expansion).

Table 1

Atria’s internationalization timetable

Source: Company records.

Throughout its early expansion into Sweden, the company adhered to a set of principles established by Seppo Paatelainen, the Atria Group’s CEO 1991–2006. „The Finnish company has not to introduce its own brand onto foreign markets but must instead work with its foreign sub-sidiaries in promoting a well-recognized local brand.”2

Atria Group's first acquisition in Sweden in 1997 brought the expe-rience needed to develop a more international company to the organiza-tion. Besides investment in Sweden, Lithuania, Estonia and Russia, the company exports its products to the retail market in Latvia as well as to fast-food chains in Finland, Sweden, the Baltic States, Denmark and Poland.

2 St. Petersburg Times, June 17, 2005.

Year Countries Entered

1997 Sweden

2003 Lithuania

2004 Estonia

2005 Russia


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The share of exports in the turnover of Atria Oy, the Finland-based division of Atria Group, rose from 1.3% in 2000 to 11% in 2004, but acquisitions of manufacturing facilities in other countries reduced the share of Atria Oy’s exports to 7% of its turnover in 2005.

The answer to the second question, „what for”, seemed just as ob-vious. The main aim of internationalization is the company’s growth. Sustainable profitable growth is identified as the Group’s main task in all of Atria’s reports. Juha Ruohola remembered that a large number of products manufactured by Atria and its subsidiaries had already occupied a high market share in Sweden. In four of the six product groups, it exceeded 20%, reaching 40% for packaged goods. However, according to some forecasts, the growth of the Swedish consumer market was expected to be 0.5–1.5% per year. It was also evident that, while the Baltic mar-kets are nearby, they cannot become significant due to the small size of the individual countries’ markets. Therefore the answers to the third and fourth questions of the foreign expansion strategy, „where” and „when”, went without saying: „in Russia” and „as soon as possible”. A great deal of research confirmed that progress in Russia could be based on the as-sumption that the size of the Russian operations could, if successful, grow enormously in the future.

The situation called for a quick decision, yet Atria’s managers were cautious. They had to weigh all the pros and the cons before they started preparing a Russian entry plan for the company.

FEASIBILITY STUDY IN RUSSIA

Before entering Russia, Atria’s managers and experts made a pre-liminary study of the investment climate in Russia, first of all in the Northwest of the country (see map in Exhibit 1), and of particular op-portunities Atria had to start its business operations there. Besides St. Petersburg, the situation in Moscow, Samara and some other cities in Russia was also evaluated.

The results of the study sparked Rouhola’s interest.

Among the general political and legal characteristics of the business climate in Russia, Atria’s managers highlighted the opportunity to invest directly in Russian companies with 100% foreign ownership which is al-lowed by the Russian legal system, and the convertibility of the Russian ruble for current transactions which is enough to serve export and import operations (since July 2006, the ruble have been a fully convertible cur-rency). The substantial level of corruption in the country and the insuf-ficient transparency of businesses were marked out as threats.


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Exhibit 1. North and North-West economic zones of Russia

Among the macroeconomic characteristics, high growth rate of the Russian economy was emphasized, as well as the high inflation level and relatively low labor and energy costs. Very important social factors, such as improvement in people’s quality of life and growth of their purchas-ing power were mentioned as pre-conditions for an increase in meat con-sumption. In the St. Petersburg market area, development trends were positive in such product groups as raw sausages, smoked raw sausages, cured sausages, frankfurters and small grill frankfurters, and all-meat products3.

Among technological factors in Russia, one could mention the avail-ability of professional engineers and technologists, in the food sector in particular and also the obsolete technical base in many industries. Fur-thermore, a noticeable lack of qualified management staff was detected.

3 Atria Annual Report, 2005, p. 27.


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On the whole, the investment climate in Russia could be assessed as completely adequate for the targets stated by Atria’s management in re-spect to the company’s expansion to the East.

THE INDUSTRY STATEMENT AND COMPETITION

The industrial analysis made it possible to distinguish several char-acteristics of the meat processing industry in Russia relevant for the company’s business performance: quotas for meat and poultry imported into Russia, continuing talks on Russia’s WTO accession, the high level of state expenditures to develop the Russian agricultural sector as part of the so called „national projects”. As a part of the industrial analysis, the main characteristics of the meat processing industry in Russia were compared with those in Finland (see Table 2 for the characteristics of the industry in 2005).

Table 2

Some characteristics of the meat-processing industry in Finland and Russia

Finland Russia

High level of consolidation (CR3 about 80%)

Low level of consolidation (CR3 about 20%)

Small number of meat processing companies (5)

Large number of meat processing companies (about 60)

Low share of imported meat raw materials (about 5%)

High share of imported meat (about 50%)

High level of consolidation of grocery retail (CR3 about 85%)

Growth in centralized retail trade — rapid development of Russian and foreign retail chains

Growth in purchasing power of families

High level of meat consumption (70 kg per capita annually)*

Low level of meat consumption compared to developed countries (50 kg per capita annually)

*Note: In Sweden — 80 kg.

Source: Author’s interviews with market analysts.


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The most important conclusions of the industrial analysis were the following. Consumption of meat products grew annually by 15% in value terms. Every year the share of expensive products was growing by 2–3%. In 2005, the share of expensive sausages was 20%. However, per capita consumption of meat and quality sausages significantly lagged behind the European level. In 2005, the production volume of sausage products still grew and amounted to 2 million tons which is 5% more than in 2004. Sausages hold fourth place after dairy, fruit, vegetables and bread and bakery among FMCG products.

More than 97% of products in the Russian market are provided by local producers. It has been the regional, rather than the national, players, that have fared best in the Russian meat market, according to Musheg Mamikonyan, president of the Meat Union.4 The financial crisis of 1998 was a turning point for Russia’s domestic production of food stuffs. In 2000–2005, the imports of unprocessed meat grew substantial-ly. However, the imports of meat end-products have recovered very slowly which means that the Russian food industry recovered with the aid of imported raw materials while foreign producers have been unable to reach pre-crisis export levels in processed food products5.

The competition in St. Petersburg, the country’s second largest sau-sage market located next to Finland, is weak. Small companies representing manufacturing capacities of 1 to 3 tons of meat products daily and produc-ing un-branded products or not well-known brands, cover about 50% of the local market. Large producers must have strong brands and sound advertis-ing budgets to increase their market shares by replacing smaller players. Industry experts estimate the annual advertising cost needed to introduce and support a new brand in the market at no less than $1 million.

Trying to define a type of competition in the industry on the basis of the „multi-domestic — global” dichotomy, managers at Atria were re-lying on the practices of world players rather than on their own, as of yet limited, experience in internationalization. Though many process tech-nologies in the meat industry are the same in many countries, a product policy and other marketing components have to take account of local (national) peculiarities (taste preferences of the customers, traditions and habits, cultural differences, etc.). As Alexey Soshnikov, Moscow-based Dymov company General Director, explained, it is complicated to gain new regional market in the meat-processing industry. One reason for this

4 St. Petersburg Times, June 17, 2005.5 Kaipio H., Leppänen S. Distribution systems of the food sector in Russia: the

perspective of Finnish food industry. http://www.hse.fi/NR/rdonly res/E35C21BC-E473-436E-B73F-59DE390123C2/0/distribution_foodstuff.pdf


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is that the consumer prefers meat products produced by a trusted local manufacturer, and the quality of meat products implies freshness first of all. The company has to implement an appropriate strategy in every new territory trying to understand what product to offer on that market and what are the advantages the company has compared to its rivals that have operated in that market for a long time. Local products are usually cheaper. A manufacturer from another region can hardly keep low prices, partly because of logistics costs.6

Juha Ruohola looked at a study concerning the public image of Finn-ish food products in Russia. The study showed that the Finnish origin of a product still signifies quality for Russians, but now the situation has changed so foreign origin alone is no longer impressive. So, the Finnish label does not give any extra value for the product7. We should find a mode of operations in Russia which helps us explore the ability of a local partner to sell products in the Russian market effectively.

SELECTING AN ENTRY MODE

The fifth question for a foreign entry strategy is devoted to the se-lection of the most appropriate foreign operation method in Russia. Atria had already been exporting its products to Russia for several years. The monthly volume of exports was about 200 tons of raw materials for some $0.5 million. The St. Petersburg market alone consumes about 1,500 tons of meat monthly; 90% of this amount is imported from Germany, Hun-gary, Poland and Latin America. Thus acquiring a local meat-processor served as a forward vertical integration for Atria. Faced with an overpro-duction in the domestic market, the company could receive a guaranteed market for meat raw materials.

The exportation of meat products practically was not up for a point of discussion. Certainly, exportation is usually the simplest and least risky method for foreign entry. In principle, Atria could use its production fa-cilities in Scandinavia to supply the demand in the Russian market; there would be little start-up cost. There would be several constraints, however. As a multi-domestic player, Atria Oy had very limited experience in the exportation of meat products. The company could face an import duty on their products; in addition, Atria would be considered an outsider because its products would not be made with local factors of production.

6 RBC daily, June 17, 2005.7 Kaipio H., Leppänen S. Distribution systems of the food sector in Russia: the

perspective of Finnish food industry. http://www.hse.fi/NR/rdonlyres/E35C21BC-E473-436E-B73F-59DE390123C2/0/distribution_foodstuff.pdf


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A joint venture with an existing Russian company would be attractive from a financial viewpoint. The managers of an existing Russian company would be knowledgeable about the market and have established contacts and customers. But Finnish businessmen have historically been worried that making managerial decisions at joint ventures in Russia could pres-ent problems if the partners represent different management styles and look for different strategies for the jointly owned venture.

Atria’s managers practically never discussed the possibility of setting up a new wholly owned subsidiary in Russia. On the one hand, it would give the company a chance to build a new and modern production facil-ity. On the other hand, creating a new establishment would need substan-tial investment and time to build and staff a new facility. Besides, the lack of management familiarity with the local business conditions could raise some problems. The Atria’s managers would also lack contacts in the industry and the local area.

From the very beginning, the company’s management was drawn to the acquisition of an existing company as the most suitable entry mode in Russia. If Atria purchased an existing company, the facility and workforce would already be in place. They would have to modernize the production site and retrain the workers, but they would have established contacts to help Atria gain markets in Russia. Certainly, there was a risk that the managers and workers might not respond well to a take-over by a foreign company and that they might not be willing to adapt their style of work. However, there were definitely several arguments in favor of acquisition. To become a successful player in the local foodstuff mar-ket, a foreign company must be „local” in the market (e. g. the brand, tastes, habits). Thus, it is precisely the takeover of a sizeable local actor that would deliver the market share, brand equity, cash flows and a good source of growth for the entire group. Besides, acquiring local manufac-turers might deliver a guaranteed raw material market to Atria and help the company make preparations for Russia’s WTO accession.

In February 2005, Atria Group officially declared that it has plans to expand its business operations into Russia. As it was mentioned in a statement signed by Seppo Paatelainen, the company was hoping to es-tablish business operations in Russia for a year and a half and came to the conclusion that „this market is of a great interest, it promises suc-cessful companies a fast growth. Today, we can declare that realization plan is near its completion, however the specific dates will be announced only after making the final decision on this program”. Managers at Atria maintained that acquiring assets in Russia would strengthen Atria’s posi-tion in Northern Europe where the company is the biggest manufacturer


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of meat products. Seppo Paatelainen said: „We are mostly concerned with the raw materials deliveries. If we have a big partner, we may increase our exports to Russia”.8

Atria Group Plc made a broad review and analysis of companies in the St. Petersburg market. As early as in 2004, Atria asked the Finn-ish-Russian Chamber of Commerce about meat-processing companies in St. Petersburg area. According to the experts, only the Kronshtadtsky meat-processing plant and Pit-Product could be of interest to Atria in St. Petersburg: they were not very big but had relatively modern plants. Dmitry Gordeev, President of the Meatland Group, valued Kronshtadtsky at $30 million and Pit-Product at $10–15 million. According to Gordeev, Atria is well known in St. Petersburg market, since the company supplies it with a large volume of sausages and frankfurters.9

Finally, in June 2005, it was announced that Atria Group and the Pit-Product group of companies had signed an agreement on strategic partnership. In accordance with this agreement, Atria Group took on the role of a strategic investor and entered the share capital of Pit-Product. The two companies found a mutual interest in each other. Pit-Product’s owners themselves were looking for a strategic investor.

As Gleb Ognyannikov, a representative of Pit-Product’s shareholder group, Board Member at Trigon Capital, a Scandinavian investment bank representing owners of Pit-Product, explained, „the search for investor took two years, and Atria Group’s proposals proved most interesting from the viewpoint of further development of Pit-Product’ business. We are planning to enlarge our market share from 20 to 30%, expand the diver-sity of our portfolio significantly and increase sales volume”.10

In November 2005, Atria acquired 100% of Pit-Product’s shares after the deal had been approved by the Federal Anti-Monopoly Service. The deal was facilitated by the fact that Gennady Yemelianov, an owner of Pit-Product, demonstrated his willingness to sell the business to a strate-gic investor like Atria. When Pit-Product had been established, Gennady Yemelianov was its founder and the only owner. In 2001, under a re-reg-istration procedure, the shares were split between Gennady Yemelianov, Tatyana Yemelianova (they both have 45% of the shares) and Gennady Novikov (about 8%). The company’s profitability had been falling in re-cent months, and the competition was becoming tougher, so the owners of Pit-Product were thinking more often about selling the company.

8 Delovoy Peterburg, June 16, 2005.9 Vedomosti, February 22, 2005.10 Delovoy Peterburg, June 17, 2005.


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TARGET COMPANY

Juha Ruohola was sure that the decision to acquire the Pit-Product Group in St. Petersburg was absolutely well-grounded. (Table 3 summa-rizes Pit-Product’s main characteristics as of 2005).

Table 3

Brief overview of Pit-Product Group

The company was established as a sausage plant in April 1996 in St. Petersburg. In 1998, it started manufacturing conventional and original delicatessens and ex-clusive products at a new facility. At the same time, a vacuum system for product packaging was introduced.

In 1999, Pit-Product introduced modern, ecologically friendly, smoking technol-ogy. In 2001, another factory was established with its own slaughterhouse in the village of Sinyavino some 40 kilometers outside St. Petersburg (in the Leningrad Region). In 2002 and 2003, two new workshops started to produce raw smoked products.

The company acquired a pig-breeding farm in the Village of Irinovka, Leningrad Region and reconstructed it from the ground up. A bit later, Pit-Product began to use new FLOW-PACK equipment for sausage packaging, a new SHIWA production line to cut sausage products, and two new Sorgo climarooms. All of these innova-tions allowed the company to increase production volumes and the diversity of its portfolio of dry smoked sausages.

Pit-Product’ products are available in all large retail chains in St. Petersburg as well as in most unchained outlets. As early as in 1999, the company had established a successful partnership with the Pyatyorochka economy class outlets. In summer 2003, the first Pit-Product’s branded outlet opened in St. Petersburg.

In 2003, expansion to other parts of Russia continued: the products of Pit-Product began to be delivered to the Republic of Karelia, Tver, Murmansk, Novgorod and Arkhangelsk Regions as well as to the Far East of Russia (see Exhibit 5). In 2004, the company formed strategic alliances with the Lenta chain of hypermarkets, the Dixy discounter and the Ramstore supermarkets.

Pit-Product’s assortment includes 200 different sausages and meat products (of which frankfurters and grilled sausages cover 51% of sales, raw sausages 26%, partly smoked sausages 12%, smoked sausages 5%, and cured sausages and sliced products 6%). The company has grown at a rate of 30–50% in recent years.

In 2004, production volume totaled 15.5 thousand tons, and 19 thousand tons are planned to be manufactured in 2005. By the completion of the acquisition deal, Pit-Product was one of St. Petersburg's largest meat processors. Its share in the St. Petersburg meat product markets in 2004 was approximately 13%; in 2005 its market share for frankfurters and boiled sausages was close to 20%.

Source: Company web-site: http://www.pitproduct.ru/company/history.thtml


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Pit-Product has a good location in the healthily growing St. Peters-burg market. The St. Petersburg sea port is exactly the place to receive the main quota of imported meat. The company has a high growth po-tential. By 2005, its turnover reached €65 million. Pit-Product employs over 1,100 people. Among its important advantages, one could mention the availability of three warehouses, well established supply of meat raw materials and good coverage of modern retail.

OBJECTIVES AND STRATEGIC PLANS

The acquisition of Pit-Product corresponded with Atria Group’s Baltic Sea regional strategy and allowed Atria to use its previous experience of internationalization effectively. Even though the practices of manufac-turing and marketing implemented in Finland could not be transferred unchanged to the subsidiary, they created a good basis for specific ap-plications in Russia.

Exploring market opportunities in Russia. The acquisition of Pit-Product created new opportunities for the entire Group. According to Seppo Paatelainen, integration of Pit-Product into Atria’s business would allow the whole group to operate efficiently on the immense Russian mar-ket. „In the near future, the main challenge for Atria Group is establish-ing itself in the Russian market through St. Petersburg. First we will focus on Pit-Product takeover and learn how to operate in Russia. We have already begun planning for a new logistics centre and production plant. In the longer term, expansion to other areas in Russia, like Mos-cow, is also possible”.11 With Pit-Product, and its history of success in the North-West Russia, Atria would be able to plan penetration of other regional markets in Russia.

Improvement in manufacturing and procurement. Several tasks neces-sary for achieving synergy were already obvious to Atria’s management. To raise the performance of Pit-Product’s business operations, it was de-cided to invest €20–30 million in improvement of manufacturing processes to increase the production of meat delicatessens, and in the promotion of the Pit-Product brand. The appearance of a Finnish investor allowed Pit-Product to solve several of its strategic problems. Atria has access to re-sources through its own agricultural companies. As early as in the autumn of 2004, Atria invested approximately €21 million in the enlargement and basic renovation of the company’s pig slaughterhouse in Nurmo, Finland. Access to sufficient quality resources via the parent company can help Pit-Product ensure uninterrupted production of cooled pork.

11 RBC daily, June 17, 2005.


21


Meeting the demands of retail chains. Another important task for Pit-Product is building profitable relationships with retail chains. The centralization and concentration of the retail trade has generated huge challenges for the food industry producing fresh food. The private labels of retail chains are beginning to threaten traditional meat brands. Based on his experience in Europe, Seppo Paatelainen predicted that „manufac-turers will face much more serious competition from private labels of re-tailers, rather than from each other”. Growth in delivery density, smaller onetime purchases and the freshness requirements for fresh products is a tough challenge for the industry. The internationalization of retail chains has led to very important challenges for Atria Group. Their target re-gions were becoming large, so they wanted to co-operate with firms whose business and products are internationally competitive. (Table 4 presents a list of top the ten food retailers in Russia.)

Table 4

Top ten Russian food retailers

Source: Standard & Poor’s, July 29, 2005.

Ranking growth(%)

RetailerRevenues, $ million

Year-on-year

1 Pyaterochka 1,425 50

2 Metro 1,059 61

3 Tander 894 45

4 Perekrestok 771 72

5 Auchan 640 61

6 Seventh Continent 600 46

7 Ramstore 550 22

8 Dixy 490 60

9 Lenta 476 55

10 Kopeyka 415 70


22


To ensure the delivery capacity and reliability of Pit-Product, Atria’s top management immediately put a new logistics center in the St. Peters-burg area on the agenda. The logistics center was seen as vital to setting up the steady supply of fresh meat and processed meat that major gro-cery retail chains demanded from meat processors. It was estimated that the construction of a modern logistics center would cost between $7 mil-lion and $12 million.

As Seppo Paatelainen noticed, successful organization of all ope-rations and the construction of an ultra-modern logistics center have enabled a top-quality, cost-efficient operating chain of top quality that satisfies the customers in St. Petersburg and the surrounding areas. Maintaining and developing this position in the future is extremely im-portant for Pit-Product. Though Pit Product only supplied about 40% of its products to supermarket chains, mainly to economy class outlets Pyatyorochka, Nakhodka and Kopeyka, managers of the company hoped to raise that number, as they were in talks with Metro Cash & Carry and other retailers.

According to Sergey Yushin, Head of the executive committee of the National Meat Association, the construction of a logistics center for deep frozen products is well-timed. Most of the meat supply for the Rus-sian market goes through the St. Petersburg port. Large trade companies located in the city face the problem of storing the products creating a large unmet demand for logistics centers and modern freezers in St. Pe-tersburg.12

90 DAY INTEGRATION PLAN

In the beginning of 2006, the parent company made a decision to change the group’s development strategy. Instead of autonomous country-specific organizations Atria would become a unified globally managed group with a single development strategy and management approach. The basic goals behind this change were optimization of corporate financial management, acceleration of decision-making and greater focus on clients and consumers.

However, implementing the new strategy turned out to be difficult. Immediately after acquiring the St. Petersburg company, Atria Group managers faced a number of problems. After several months of growth, the profitability of Pit-Group dropped. Ruohola looked at the slide listing the problems. The daughter company lacked clear accounting standards;

12 RBC daily, October 26, 2006.


23


the logic of financial management (from purchasing to sales) was ir-reconcilable with Atria’s. The distribution of responsibilities within Pit-Product was ineffective; the meetings of the Board of Directors were erratic. Management was mostly reactive. The organizational structure was ponderous and confusing. It turned out that for a long time Gennady Yemelianov, the General Director of Pit-Product and the founder of the company was the only one making strategic and operating decisions in the company. Functional managers from Atria, who tried to integrate the corresponding divisions of Pit-Product into the global management struc-ture, could not easily understand how these divisions were managed.

All these problems forced Group management to think about steps to fix the situation. A 90-day plan for integrating Pit-Product into Atria Group structure was born. There was a tradition among the managers of the company to evaluate the results of strategic decisions 90 days after they were made. As Ruohola’s colleagues joked, „it’s as many as 10 days faster than the traditional 100 days”.

There were important reasons for appointing Juha Ruohola as Atria Russia and Baltic Director. He had worked at the company since 1997, first in Finland, then later in 1999–2001 in Sweden, where he was responsible for integration of the Swedish subsidiaries. After that he worked in Estonia and now he came to Russia. Wherever he was in the world, Ruohola was always faced with the familiar task of integrating a new division into the whole Atria Group structure. For two months, Ruohola observed how the St. Petersburg company worked, studied its organization, culture, and principles of corporate governance. He was a chief contributor to the 90-day plan for integrating Pit-Product into Atria Group structure.

Tasks of the integration plan. Before starting to realize the inte-gration plan, managers had defined an integration approach, identified functional units for integration, and assigned the ‘working pairs’ for each unit. At this stage, three critical tasks were defined and assigned for the ‘working pairs’ within each functional unit. To provide for the monitoring of the plan’s implementation, all tasks and activities had clear deadlines.

In accordance with the management structure for the integration project, nine functional teams were assigned: Corporate governance (CG); Hygiene, Quality, Safety (HQS); Logistics & Distribution (L&D); Produc-tion, Productivity, Investments (PPI); Sales; Marketing; Finance; Human Resources (HR); and Purchasing. (Critical tasks for each functional team are shown in Exhibit 2. Table 5 presents an example of the integration plan for a functional team).


24


Exhib

it 2

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25


Table 5

Integration plan for the Production, Productivity, and Investments functional team

Task Planned activities

Deadline Planned deliverables

Quick wins DecisionsInterim results

Production loss reduction

Compare PIT vs. • Atria production loss statisticsDevelop an Action • PlanPlan a new site• Analyze recipe • optimization routines (not started yet)

w 14

Planning • process replication from Atria’s existing methodology

Minimize • production losses at current site by 5%, assess prod. loss for new production site

Started joint • measuring of production losses, w 10

Capacity utilization improve-ment

Use more • accurate demand calculations (discuss with Marketing)Receive a proposal • and action plan for a new production and logistical siteMake a decision • about extra capacity options

w 14

Extra • capacity without investments, if contract supplier is foundPut together • capacity and production task groups

Plan new • process and capacity to new production site and new logistical centreFind short • term extra capacity for 2006

Gorelovo and • Sinyavino II new site offers requested, w 12Extra • capacity calculations completed, w 13

Production mainte-nance upgrade

Analyze machinery • performance and spare parts purchasing methodsDevelop new • working methods with Atria’s maintenance department

w 14

Compatible • data maintenance system (Atria+PIT) for launchCompatible • specification of machinery and equipment for launch

Increase • produc-tivity of maintenance organization, cut down spare part cost by 5%Atria’s • maintenance data system to new pro-duction site

Atria’s main-• tenance data system to new produc-tion site,not to exist-ing sites, w 12Comparison • of spare parts rou-tines and machinery investments, w 12



26


„Working pairs”. All task activities were led by the working pairs; an Atria Group specialist was the team leader and was also responsible for project deliverables. As a rule, all Atria specialists started by learning how a process was organized at Pit-Product and took the lead in problem solving. Representatives of Pit-Product were to provide their partners with the relevant information on the situation in the corresponding Pit-Product divisions and to provide local expertise in the implementation of management and production functions. They were invited to Nurmo to learn how similar processes were organized at Atria. Then both parties worked on streamlining those processes.

Team meetings were held on a weekly basis, and every meeting fol-lowed an agenda. Weekly progress reports were produced based on actual achievements, and findings discussed with the working pairs. Pit-Product Board progress review meetings were held once a month; Project Steering Group meetings were held twice a month. Findings were discussed inter-nally between functional specialists in Nurmo.

A team of consultants was invited to participate in the Pit-Product integration project. They were to undertake the following task:

assistance in formulating an integration approach and work plans; ♦project coordination; ♦activity streamlining (when needed) and troubleshooting; ♦progress and benefit tracking of functional teams; ♦making regular reports to the Board and the Steering Group; ♦operational counseling for the „working pairs”. ♦

A project consultant flagged setbacks encountered by the working pairs and facilitated the necessary discussions.

In cases when progress was not achieved a „request-for-help” message was sent to the Project Steering Group and the Board.

Difficulties in implementing the integration plan. When they tried to start the integration, Ruohola and his colleagues faced many difficul-ties. Team members from Pit-Product were poorly motivated to take an active part in the process, and Atria’s management had underestimated the scope of the problems to be solved through task activities. Delays in delivery took place across several task teams, and the process was not result driven in some teams.

When a consulting company completed the management audit at Pit-Product using surveys and interviews, it turned out that most of the di-rectors were not suited to their positions. The chief complaint was their professional incompetence. While Pit-Product’s top management members


27


struggled to accept the results of the management audit, the group’s management took decisive action, and all directors except the HR direc-tor and the General Issues director were replaced in 6–8 months. For a while, representatives from corporate headquarters worked at Pit-Product (Production director, Procurement director, and Sales director). Gradually, new Russian managers, most of them 30–35 years old, with good English and professional competence were found and appointed as directors.

Sergey Ivanchenko was an outstanding figure in the new cohort of Pit-Product’s directors. Born in Krasnodar in the South of Russia and educated at a local university where he received a degree in the field of mathematical economics, he passed the President of Russia’s Program in management education. Later, Ivanchenko spent several years in Sweden where he worked for a couple of Swedish companies, operating in a num-ber of foreign countries, including Russia. Looking for new candidates for Pit-Product, Matti Tikkakoski, who joined Atria in 2006 as the Presi-dent of the Atria Group, remembered how he met Sergey one day in Swe-den and recommended him for the position of Financial Director. Sergey Ivanchenko joined Pit-Product in August 2006 and was instrumental in the implementation of the integration plan at Pit-Product.

Organization structure. Ruohola often recalled his first days at Pit-Product. Gennady Yemelianov, Pit-Product’s General Manager, had 16 functional directors subordinate to him (see Exhibit 3). At 9 o’clock every morning, the General Director met his subordinates, who were waiting for immediate directives. The rationale for this structure had been Gennady Yemelianov’s ultimate policy of keeping all activities at Pit-Product under direct control, which made the delegation of responsi-bilities and operational freedom impossible. However, he failed to explain some of the titles in Pit-Product’s top management team to the Atria specialists and HR consultants.

In spite of Yemelianov’s evident resistance, it was clear that this structure had to be radically changed. So, one day, Juha Ruohola held out a sheet of paper to Gennady and said: „Look! Here is a new organi-zational chart! It contains all the necessary pre-conditions for effective management!” (Exhibit 4 presents the new structure.)

Though the old Managing Director did not understand the new struc-ture well, it had been approved by Atria executives and went into effect. Gennady Yemelianov remained the General Director of Pit-Product until November 2006, when Juha Ruohola replaced him (Ruohola continued work as Group Vice President for Baltic and Russian operations and as a member of Atria Group’s Executive Team). Yemelianov took a position on the Board of Directors; he left the company in May 2007.


28


Exhib

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29


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30


INVESTMENT PROGRAM FOR RUSSIA

The need to expand the production capability of Pit-Product and or-ganize a modern logistics center was reflected in the expanded investment program for Russia that was developed throughout the year. The invest-ment program approved by Atria Group Board of Directors in October 2006 included a new production plant and a logistics center with a total cost of about €70 million. This was more than initially planned, but the new plan proposed constructing both projects at one location in the Len-ingrad Region, just outside St. Petersburg. The new production plant was intended to produce high-margin products for the St. Petersburg market. Its projected capacity would increase Atria’s Russian production capacity from 80 tons per day to 170 tons per day.

The Leningrad Region was chosen as the building site for the pro-duction-logistics complex due both to its convenient location and potential tax breaks. According to regional laws, an investor can get a 4% break on corporate profit tax and an exemption from the property tax (2.2%) for the projected payback period plus two years. That added up to sav-ings of about $600,000 per year on the profit tax for Pit-Product. The property tax would amount about $1.1 million annually.13

In December, the general contractor for the construction of the com-plex was selected — YIT-Lentek, a subsidiary of the Finland-based con-struction group YIT.

PRODUCT SCOPE EXTENSION

In 2006, Atria Group had already signed a contract with OOO Neste St. Petersburg to develop fast-food outlets at Neste filling stations under Sibylla Concept. Sibylla is a brand owned by Atria Concept AB, which includes food for cafes and restaurants, in particular Grill Dog, French Dog and Burger Roll. Using patented Sibylla equipment, full meals, from mashed potatoes with meatballs or sausages with sauce and fried onions, can be cooked in a few minutes, right at the service station. While Atria Group operates in all of the regions with different brands, the Swedish-originated Sibylla brand is the only one which exists in all of the mar-kets. In Russia, Sibylla Concept is managed as a part of Pit-Product’s operations. The outlets are supplied primarily by Pit-Product.

In the end of 2006, fast-food sales at Neste stations reached ap-proximately 500 servings per station (25 of 38 Neste fuel stations offered fast food); annual sales across the chain reached 45 million rubles. The

13 Vedomosti, January 21, 2008.


31


chain operates using a modified franchising scheme: Sibylla partners rent the equipment, implement the concept developed by Atria and import in-gredients for preparing fast food. In early 2007, Atria signed a similar contract with JSC Petersburg Oil Company that operates another chain of filling stations in St. Petersburg and the Leningrad Region.

NEW PROFIT & GROWTH MODEL

In 2006, the activities of Atria Russia and Baltic business area in-curred operating losses of €7 million, whereas this division made an op-erating profit of €1.5 million in the previous year. For the whole group, comparable operating profit fell to €33.5 million from €40.2 million in 2005.14

Ruohola recalled asking himself: „What were the main causes for the decline of profitability? How can I explain the Pit-Product’s losses just a few months after the acquisition was completed?” It was an anxious time. Without finding out the causes of inefficiency it was difficult to build a new model for managing the profitability and growth of the company.

Three factors were primarily responsible for these losses: a full tax statement, the increased cost of raw materials, and ineffective product pricing. Immediately after the acquisition, Atria switched tax report-ing at Pit-Product to a fully official statement that negatively impacted the company’s profitability and cash position. In early 2006, the cost of imported pork increased by 30% due to bans imposed by the Russian sanitary authorities on meat supplies from Argentina and Brazil. The share of local supplies in Pit-Product’s meat purchasing was very low to compensate for this loss. As for the prices, historically Pit-Product’s pric-ing process was not based on material margin targets. A ‘gross pricing’ strategy was in use which reduced actual net prices by 20–25%, so the prices did not match the high quality of some finished products.

The new Profit & Growth Model developed in the company to ensure profitable growth of Pit-Product in the near term included two major components: a new profit model and a new growth model. The new profit model covered three main efforts: changing the pricing model, increasing productivity and reducing costs. It was decided to link the prices of the company’s products more closely to the price of materials and make the price more dependent on the quality of a particular product. Productivity had to be increased through new and improved production technology and better logistics, as well as recipe optimization (recipe optimization was

14 Atria Annual Report, 2006.


32


not welcome during the first stages). Costs were to be reduced through layoffs and getting lower prices for materials where possible.

The growth model included increasing the sales of innovative products (in particular, resealable packaging) to up-market buyers, based on Atria’s core competence in superior process efficiency. In 2007, Pit-Product was the first to launch resealable cold-cut packages in Russia. Their packag-ing and labels were recognized as the best in their category at Moscow’s international packaging industry trade fair15.

FURTHER DEVELOPMENT

In 2006, Atria Group faced a €2.7 million loss in Russia; in 2007, Pit-Product succeeded in turning a profit.16 According to Atria’s man-agement, the market share of Pit-Product in St. Petersburg increased from 20% in 2006 to 21% in 2007. By the end of 2007, Pit-Product’s products were distributed through over 1,500 retail outlets in St. Peters-burg, including such retail chains as Pyatyorochka, Lenta, Dixy, Metro, Ramstore, Seventh Continent, Quartal, Nakhodka, Perekrestok, Paterson, Î’Êey, Auchan and others.

At the same time, Atria Group continued to strengthen its positions in the Baltic Sea Region. It spent $100 million to acquire a controlling interest in Sardus, the largest manufacturer of meat products and fro-zen prepared foods in Sweden. The Group’s management was considering the possibility that production plants in the Baltic countries and Sweden might, in the future, specialize in producing certain products for the Finnish retail markets, within their areas of expertise.

In 2008, a new agreement was reached with JSC Petersburg Oil Com-pany to further promote the Sibylla fast-food concept at filling stations (the number of stations in Petersburg Oil Company chain with fast-food outlets increased from 18 to 30) with an investment of about €150,000. The logistics centre in Gorelovo started its operations, which made it pos-sible to close the three warehouses located in downtown St. Petersburg.

2009: NEW CIRCUMSTANCES, NEW CHALLENGES

It was a dark winter night in February 2009, and Juha Ruohola was recalling all these milestones in Pit-Product’s development. He had a Finnair ticket and was getting ready to leave Helsinki for Moscow in order to push the integration process at Campomos, a meat-processing

15 Atria Annual Report, 2007, p. 31.16 Delovoy Peterburg, July 31, 2007.


33


plant in Moscow, forward. Campomos was acquired by Atria Group in July 2008 from the Spanish Campofrio Alimentacion S.A. for € 72 mil-lion. Established in 1989, Campomos was the first international meat-industry company in Russia. However, the profitability of Campomos had been poor in recent years.

It was a spirit of adventure and a genuine desire to succeed in mak-ing Campomos profitable that led Juha Ruohola to Moscow. Since 2008, he had been the Executive Vice President of Atria Russia. „To make the Campomos business profitable, we have to launch a new program searching for synergies to be achieved with Pit-Product in areas such as purchasing, logistics, marketing and financial administration operations. There is no reason to worry”, Ruohola reassured himself. He was sure that Sergey Ivanchenko, recently appointed as Atria Russia General Man-ager and General Director at both Pit-Product and Campomos, would be able to handle the responsibility of managing the two companies.

Juha Ruohola looked at Atria’s 2008 annual report again. In 2008, Russian operations brought 5% of the Group’s turnover. The Group’s ex-ecutives had no doubts that Russia would be of even greater importance in the future. The growth in overall demand for meat products in modern consumer goods retail chains in St. Petersburg was approximately 7%. In terms of value, food made up about 32% in citizens’ consumption. Russia is still the world’s most significant net importer of meat; the country’s own meat production cannot satisfy the growing demand either in terms of quantity or quality. The share of the modern consumer goods retail trade is growing rapidly, though the combined market share of the five largest retail chains is approximately 12% of the Russian food market. The consolidation of the meat processing industry is just beginning in Russia. The biggest meat processing companies in Russia are small com-pared to European business. There are few international meat-processing companies. Since the acquisition of Campomos, Atria Group was in fact the largest international player in the country.

While Atria Group’s production plants in the Baltic countries and Sweden may, in the future, specialize in producing certain products for the Finnish retail markets, within their areas of expertise, it was yet not evident that such a model could be applied to the Russian subsidiaries.

„So, we were absolutely right to invite the Group’s top management, Board of Directors and a group of managers to attend a course on Rus-sian business practices tailored for Atria”, thought Ruohola.

The world economic decline brought a lot of problems in 2008–2009 because of the major changes in Atria’s business environment. The up-


34


ward trend in raw material prices weakened profitability dramatically in all of Atria’s business areas. The weakening of the Russian ruble and the Swedish krona substantially increased costs for Atria’s divisions in Russia and Sweden. Though not so dramatic as in the non-food indus-trial sectors, the recession had a significant impact on Atria’s sales and profitability. General consumer demand for fast-moving consumer goods decreased. Consumer demand shifted towards inexpensive products.

The management team of Atria Group considered the trends in the industry development and reached the conclusion that the international business environment depends on the following factors:

increasing global demand for food; ♦internationalization of the food industry and industrial processes; ♦internationalization of retailing and the food service industry; ♦the movement of raw materials across borders; ♦increasing pressure due to environmental and ethical issues; ♦more complex consumer behaviors; ♦operating models based on networking and ♦ partnership17.

* * *

It was a sunny early morning in the summer of 2009, when Juha Rouhola and Sergey Ivanchenko looked jointly at Pohjola Bank report on Atria. The conclusion of the report seemed to be optimistic enough, yet it emphasized several challenges Atria would face in the Russian market in the short-term. Volumes have dropped but the rise in prices has kept the value-based growth at over 10% level18.

The profit improved well after the first quarter of 2009. This was the result of Atria’s cost cutting actions for its Russian operations. The reduction of operating loss was influenced by synergy advantages in lo-gistics, cuts in staff expenses and an increase in consumer prices. Most of these cost savings were implemented successfully. Costs were reduced significantly when the Campomos’s logistic center in St. Petersburg was closed and centralized to Pit Product’s logistic center during the second quarter19. By the end of June, Atria had cut its Russian operations staff by 150 workers.

17 Atria Annual Report, 2008, p. 7.18 Atria — Venäjä etenee hyvässä vauhdissa. Pohjola Pankki Oyj, July 31, 2009.

From: https://www.op.fi/media/liitteet?cid=151135862&srcpl=319 Ibid.


35


Atria Russia’s performance was weighed down by the loss-making op-erations at Campomos. Campomos has about 1,000 employees. More than half of Campomos’s sales are in Moscow Region, the rest — in St. Pe-tersburg and other large cities. According to Matti Tikkakoski, the acqui-sition of Campomos allows Atria Russia to increase its still-low market share in Moscow. The company started to distribute its products in Mos-cow from St. Petersburg in 2007. And yet, making Campomos profitable was really a challenge.

Improve the profitability of Campomos and take the company out of the red into the black appeared as Atria Russia’s central goal for 2010. This means that the company’s position in the consumer goods retail trade must be strengthened in Moscow and St. Petersburg and other ma-jor cities in the European part of Russia. Other means to enhance profit-ability include increasing cost-efficiency, reducing costs and rationalizing primary production.

As the top-managers responsible for Atria Russia’s development, Ruohola and Ivanchenko faced the task of increasing the co-ordination be-tween the Group’s divisions. They knew that co-operation with the retail chains would be tightened further. The Group has to focus on success-fully merging the acquired companies with Atria and fully capitalizing on synergies.

As they looked again at the Pohjola Bank report on the desk they wondered how they could create more interest in their products. It was clear that in the minds of the Russians, price was the most important factor in deciding what food to buy. How could the higher quality, yet higher priced Pit-Product and Campomos products compete with lower priced and quality domestic producers? What would the demand for their products be? There were many more decisions to be made, and Juha Ruohola and Sergey Ivanchenko were counting on their knowledge of the Russian market. There was no doubt that they were the best people for the job.


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Appendix 1

Atria Group — financial snapshot

2005 2006 2007 20082009

(half-year)

Net sales, € million 976.9 1103.3 1272.2 1356.9 648.1

EBIT, ª million 41.5 94.5 38.4 6.8

Profit before tax, € million

37.8 34.6 80.6 16.7 –1.1

Earnings per share, € 1.24 1.15 2.56 0.42 –0.06

Return on equity, % 10.0 8.8 17.2 2.5

Return on investment, % 10.3 8.7 15.2 5.3

Equity ratio, % 43.0 42.8 47.6 38.4

Gross investments, € million

107.3 89.0 284.1 152.6

R&D expenditures, € million

6.7 7.4 8.4 9.9

Dividend per share, € 0.42 0.46 0.70 0.20

Dividend yield, % 3.3 3.1 4.0 1.7



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Appendix 2

Atria’s business areas: key indicators

2006 2007 20082009

(half-year)

Atria Finland

Net sales, € million 686.1 749.6 797.9 383.6

Operative EBIT, € million 32.2 39.7 34.4 17.8

Average personnel 2325 2394 2378

Atria Scandinavia


Operative EBIT, € million 7.4 20.5 15.4 1.9


Atria Russia


Operative EBIT, € million –2.7 4.3 –3.4 –8.9


Atria Baltic

Net sales,€ million 30.5 26.7 32.3 19.3

Operative EBIT, € million –3.4 –3.1 –3.8 –2.5




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Appendix 3

Atria’s EBIT by region, € million

2006 2007 2008 2009å 2010e

Atria Finland 33 40 34 41 41

Atria Scandinavia 7 21 14 12 22

Atria Russia –3 4 –3 –11 1

Atria Baltic –4.9 –4.4 –3.8 –4.5 –2

Source: Pohjola Bank report.

Questions for discussionDefine the strategic characteristics of Atria Group1. ’s internation-alisation (geographic scope; degree of foreign involvement; co-ordination and configuration issues; selection of a foreign strategy for Atria based on Integration-Responsiveness framework). Undertake a strategic analysis of the situation Atria faced in 2. 2005–2006, including a Russian business environment analysis, industry and market analysis. Evaluate the 90 Day Integration Plan of Pit-Product’s integration 3. into Atria Group and its implementation performance. What were the main problems of the integration? How have they been over-come? Assess the results of the five-year experience of Atria in Russia.Make an analysis of characteristics of Pit-Product and its envi-4. ronment in 2008–2009 in order to define the main task problem in the company. Identify the statement of Pit-Product’s strengths and weaknesses, the level of appropriate competencies, etc. Take into account branding policy and opportunities for brand exten-sion, solutions on advertising techniques and relationships with retailers.Provide Atria and Pit-Product managers with recommendations on 5. how to expand their activities in the City of St. Petersburg and other territories in Russia including proposals on competitive ad-vantage, product portfolio, geographic scope, production facilities, and expansion.


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Andrei Yu. Panibratov

NOKIAN TYRES: A VARIETY OF INVESTMENT DECISIONS FOR RUSSIA

This case study deals with the problem of choosing the right investment strategy for Russian tyre market. Nokian Tyres achieved a high brand recognition in the tyre market, which made it possible to create a strong premium brand in Russia. However, competition in the market had been increasing. International automakers were actively penetrating the Russian market. Nokian Tyres pros-pects gradually became less defi nite. The company-owned plant in Northwest Russia and a strong premium brand could no longer be regarded as a reliable shield against the activity of other world-known tyre manufacturers. The aim of the case study is to analyze the prospects of a large industrial company’s strategy in a rapidly changing business environment, including the problems connected with the management of direct investments and organization of marketing activities. The analysis of the case is based on a comparative analysis of pros and cons of strategies based on different levels of investment activities and on examining the marketing perspectives of supporting a MNC’s investment project in Russia.

INTRODUCTION

In 2004 the Finnish company Nokian Tyres made a decision to make investments in the town of Vsevolozhsk in the Leningrad Region, near St. Petersburg, becoming the first foreign company to establish its own plant in Russia. At the end of 2007, the project’s investment volume was as high as € 155 million, with plans in place to invest another € 200 mil-lion in 2008–2011, making it one of the largest projects in the Northwest Russia.

The author would like to thank Nokian Tyres General Manager Andrei Pan-tioukhov and Chief of Marketing and Communications Anna Gorokhova for their kind help and valuable comments.


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Nokian Tyres: A Variety of Investment Decisions for Russia

In 2009, the second year of the world financial crisis, after five suc-cessful years in the country, the sales revenues of Nokian Tyres in Rus-sia decreased by 62% compared to the previous year. The market share was lost due to consumers switching to less expensive brands, but Nokian Tyres maintained its leading position in the A-segment premium tyres market sector. Even though sales were forecasted to improve in 2010, this growth was not expected to be quick. Due to falling demand, Nokian Tyres was faced with the need to alter their production facilities, and five out of six production lines in the Russian factory were running at decreased capacity. Additionally, investments of € 15 million were made to increase the productivity of the factory in Vsevolozhsk.

Although it was only a few days before Christmas, the same thoughts had been troubling the General Manager of the plant, Andrei Pantioukhov since the end of November 2009. Why were other tyre producers in no hurry to establish their own plants in Russia and what advantages en-abled them to successfully compete with a company that was able to pro-duce its tyres within in Russia? What should Nokian Tyres do to prevent its development from stalling when faced with competition from strong and dangerous players, who are somehow able to compensate for the fact that they have no local production facilities of their own? What are the company’s prospects in view of growing activity of Russian tyre produc-ers? What will the consequences of the world financial crisis be for the company?

And, finally, what if the company’s production facilities in Rus-sia are the notorious fifth wheel which does nothing but slow down its growth rates in terms of profitability and competitiveness?

COMPANY BACKGROUND

An increasing number of MNCs began showing interest in develop-ing their operations on the markets in St. Petersburg (the second largest Russian city after Moscow) and the Leningrad Region at the beginning of the 2000s. Despite top government officials singing its praises, the so-called “Russian Detroit” was nothing more than part of a large-scale PR campaign to promote the economy of the Northwest; foreign automakers have been actively penetrating the Russian market and this process is gathering speed.

In the mid 2000s the world’s automobile manufacturing industry was no longer a standalone industry, capable of autonomously providing itself with everything that a car owner might need, from intelligent driver as-sistance systems to automotive glass and tyres, which were kept in stock


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for new cars leaving the factory. A number of major foreign car tyre manufacturers, having recognized the Russian automotive market’s pros-pects for growth, invested in building their own plants and sales centres, or in developing tyres specifically for Russian weather conditions. This is why Russian consumers became familiar with such brands as Bridgestone, Goodyear, Michelin, Nokian Tyres, Pirelli, etc.

Nokian Tyres was the first company to establish its own plant in Vsevolozhsk, without waiting for the world’s leading car manufacturers to appear in St. Petersburg and the Northwest Region and without hav-ing any definite information about their plans concerning the Russian market. In the middle of the 2000s when major automakers were expand-ing their operations in Russia and built plants here, the Finnish firm that had already established its tyre production locally had a considerable competitive edge over other players in this field.

Nokian Tyres was the largest automobile tyre manufacturer in North-ern Europe that produced summer and winter tyres for passenger cars and for many kinds of heavy vehicles (buses, trucks, purpose-built ve-hicles). The company also worked in retreading tyres for subsequent sale in Scandinavia. Nokian Tyres owned the Vianor retail chain, which sold tyres in Finland, Sweden, Norway, Estonia, Latvia, and Russia. In mid 2008, the company had 298 outlet stores, and 169 of them were located in Russia. Most of the Vianor stores were entirely owned by the com-pany, while some of them operated as franchises.

Nokian Tyres’ range of products included medium-class tyres as well as premium-class tyres. The company’s success had come from innovation and constant product development. According to management’s plans, new products were going to account for no less than 25% of the company’s annual sales.

Investment in research and development played a definitive role in the company’s success. Nokian Tyres operated under Scandinavian weath-er conditions and had to comply with the region’s product requirements, which definitely had a positive effect on the brand’s high reputation. Nokian Tyres’ core markets included the Nordic region, Russia, North America, Eastern Europe, and Germany. Nokian Tyres had trade subsid-iaries in Sweden, Norway, Germany, Switzerland, the Czech Republic, Russia, and the US.

The company’s headquarters was located in the city of Nokia, Fin-land, and was responsible for product development, marketing, and ad-ministration. The company owned two plants — in the city of Nokia and the town of Vsevolozhsk, Russia. The company also manufactured


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tyres on the basis of production contracts, using the facilities of other tyre manufacturers located in the USA, Indonesia, Slovakia, Japan, and China.

Nokian Tyres’ net sales in mid-2008 were as high as € 561.5 million, and the total number of employees exceeded 3,300 people.

The company’s mission was focused on both customers and climate: “We have a natural ability to understand our clients who live in a north-ern climate and to tap into their needs and expectations. We focus on tyre production and services that are highly valued by our clients, living in northern climatic conditions, with economically viable added value: these form the foundation for our company’s earnings growth and suc-cessful business”.

According to management, Nokian Tyres had been among the most profitable tyre manufacturing companies in the world for several years, as it had successfully combined growth with profitability.

HISTORY AND INTERNATIONAL EXPANSION OF THE COMPANY

Tyre manufacturing started with the production of bicycle tyres over 100 years ago, and it was only in 1931 that the decision was made to start producing automobile tyres. In 1936, the company started manufac-turing winter tyres branded as Hakkapeliitta, which remained the most popular Nokian Tyres product.

In 1945 a new tyre plant rapidly increasing production volumes was built in the city of Nokia. In the mid 2000s, the manufacturing process at the facility was highly modern and automated. The facility produced up to 18,000 car tyres daily.

Nokian Tyres plc was founded as a separate economic unit in 1988, while still remaining a subsidiary of the Nokia Corporation. In 1995, Nokian Tyres was listed on the Helsinki Stock Exchange and became an independent company.

Nokian Tyres has been gradually undergoing a process of internation-alization: it started by focusing on the domestic market and ultimately became a multinational corporation. The company experienced several stages of internationalization in the course of its development. The first stage — expansion of its trade operations from domestic to international markets — included export operations that started with occasional indi-rect exports and later transformed into a retail network owned by the company, as well as cooperation with a large number of independent im-porters all over the world.


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Further stages were based on more complex forms of penetration of foreign markets, which were a manifestation the company’s desire for more investments and greater penetration of these markets. These stages included off-take partnerships and contract manufacturing, while further international development of the company led to the establishment of joint ventures and subsidiaries.

In the mid 2000s, Nokian Tyres had considerable experience in inter-nationalization. Its first export operations began in 1926 as a result of growth in rubber plantation production capacity, saturation of the domes-tic market, and satisfaction of demand on the internal market. The first export operations involved the need to delegate considerable powers to the sellers, as well as intensive organizational work aimed at entering foreign markets, which represented significant difficulties. Already as early as the first stages of internationalization, the company had the opportunity to acquire knowledge about the rubber markets in other countries, which enabled Nokian Tyres to expand its area of operations in the future.

At the same time, the company’s volume of exports was insignificant compared to its domestic sales, which kept growing intensively up to the beginning of World War II. Moreover, high domestic demand prompted the company’s management to temporarily stop its supplies to foreign markets. In the mid-1960s export operations were renewed. At first the foreign markets in which the company conducted its operations were limited to the countries of Northern Europe, but later, the growth of investments in production and innovations resulted in expansion of the geography of their tyre sales. In 1964, the company started exporting its products to the Soviet Union.

The growth in the number of retail outlets selling tyres made the company think about creating its own retail network. In 2000 the Vianor retail chain was established, which consisted of around 300 company-owned stores by the end of 2008. The company was selling its products in Germany, Switzerland, and the US, while trading through independent importers in other countries.

Nokian Tyres established partnerships with other manufacturers who were targeting the global market, which was possible to do by means of increasing sales through product adaptation, gaining a market niche, and simplifying the production process. Many partnerships were organized on an off-take basis, which was, essentially, a type of manufacturing con-tract under which the product of a particular brand was manufactured by a different company, with standards and technology remaining the same. Examples of such arrangements were a partnership with the Michelin tyre


44


manufacturer established in 2000, and a 2004 agreement with a Chinese company, GITI Tyre on production of tyres under the Nordman brand, which was later manufactured in Indonesia. Nokian Tyres was engaged in contract manufacturing in the USA and India, and in 2003, the company negotiated a contract with the Matador Company on the production of the Nokian brand in Slovakia.

The company had entered into several joint ventures, thus demon-strating that it was ready for significant investments in the internation-alization of its operations and further penetration of foreign markets. In 2002, Nokian Tyres signed an agreement establishing a joint venture with the Russian company Amtel Holding, with the aim of increasing sales, product promotion, and business development in the CIS countries. How-ever, this joint venture was short-lived, and dissolved in 2004.

In 2003 the company made its first international acquisition, in this way obtaining more control over resources and decision-making compared to a joint-venture company: Nokian Tyres bought a Russian retreading plant located in St. Petersburg, called Euroban-dag. In 2004, Nokian Tyres made the decision to start building a new tyre plant in the town of Vsevolozhsk, Russia. From the very start, the facility was planned as a subsidiary and was to be entirely owned by the company, which was a radically new way of entering the market for Nokian Tyres. A massive resource base and full control made this project highly valuable for the company.

According to experts, the scope of the company’s international opera-tions was determined by two groups of factors — internal and external, which were closely interconnected. Among the most important factors in the first group was the continuous annual increase in production and sales (an average of 15% during 2001–2006), good profit performance, and cost-effective economic activity. The second group of factors included market conditions, proposals from potential partners, and a kind of the „locomotive” effect.

Nokian Tyres’ main competitors (Groupe Michelin, Bridgestone Cor-poration, Goodyear Tyre&Rubber Co, Continental AG, Pirelli S.p.A.) were also international players.

In the 2000s the company declared that the company’s key strategic aims would be determined by the following development factors:

To continue being the absolute leader on the internal market (in ♦the Nordic region) in terms of both production and sales. These markets were the most stable and mature, accounting for a con-siderable share of the company’s sales.


45


To continue maintaining the high quality of the core product, ♦namely, the tyres, suitable for Nordic weather conditions and se-vere climates, since this was the segment in which the company succeeded most of all, owing to its innovations and research. To continuously improve the company’s line of products.To have a strong position on the markets of Europe, the USA, ♦Russia, and the CIS. The company’s aim is to expand its influence, thus assuring dynamic growth and making the company an impor-tant international player.A high rate of productivity and relationships with clients, bringing ♦lar ge profits and giving the company a competitive advantage.Development of the spirit of enterprise and personnel management, ♦because corporate culture ensures the successful implementation of in-house processes and the further development of the company.

These strategic targets were regularly declared by the company, remaining constant and important; the company allocated considerable resources to achieving these goals, because, according to management’s vision, this guaranteed a strong advantage over their competitors.

RUSSIAN STRATEGY

The company became interested in the Russian market quite a while ago, and this might be the main reason why the knowledge and experi-ence that Nokian Tyres had gained over decades enabled the company to succeed and create a special competitive advantage over other tyre manu-facturers.

Development of the market

Nokian Tyres started exporting its products into the Soviet Union as early as 1964, and it was the first Western tyre producer introduced in the Soviet Union. Trade in tyres was organized within the framework of Finnish-Soviet bilateral clearing trade, and several generations of car owners had already been using these tyres in the Soviet era. Neverthe-less, these operations were not systematic and did not play much of a role in the company’s internationalization. Thus, the scope of the compa-ny’s activity in Russia had remained practically unchanged until the end of the twentieth century. At the end of the 1990s, the company started regarding the Russian market as strategically important, and, as a re-sult, made the decision to increase the scale of its operations in Russia. Market research, together with actively expanding activities on the target market enabled the company to become one of the leading tyre manufac-turers in Russia.


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At first, the company cooperated with independent importers, and had no dealer network in Russia. In the 1990s, Nokian Tyres became a share-holder in Sibur (a Russian tyre producer). However, after the company, made the decision to create its own chain or retail outlets called Vianor in the countries of Northern and Eastern Europe in 2000, Nokian Tyres started opening its retail outlets in Russia. The first store was opened in Moscow in 2001, and in 2008, the company had 169 Vianor stores in Russia, with part of them entirely belonging to Nokian Tyres, and others operating as franchisees. One year later, in autumn 2009, there were 325 Vianor stores in Russia and the CIS (Exhibit 1).

Source: Nokian Tyres own data.

Exhibit 1. Vianor outlets in Russia and the CIS as of September 30, 2009

First Investments

Exports into Russia (mainly sales of tyres for cars and trucks in the premium and medium price segments) occupied an important place in the company’s activities and accounted for about 10% of its sales. Neverthe-less, the company soon decided to establish a joint-venture company in Russia in order to produce tyres under the Nokian Tyres brand and orga-nize its sales throughout the CIS. In 2002, the company signed an agree-ment with a Russian holding called Amtel (currently Amtel-Vredestein). The joint-venture company was established on the basis of Amtel’s facil-


47


ity located in the town of Kirovsk. The manufacturing capacity of that plant allowed for the production of 3 million tyres annually, which was to be fully achieved by 2007 upon the investment of $ 110 million.

At that time, the Amtel Holding was the leader on the markets of Russia and the CIS countries, having a 30% share in the area in general and a 36.5% share in the segment of tyres for cars and utility trucks. The production of a broad assortment of tyres became possible owing to the acquisition of tyre plants in Voronezh, Krasnoyarsk, Kirovsk, and some facilities in Ukraine. At the time when the agreement with Nokian Tyres was signed, Amtel’s gross sales amounted to 11 million units, and the company employed about 30,000 people.

It later turned out that the productivity and capacity of the Amtel Holding were not as high as expected, and Nokian Tyres abandoned the production of its premium-class tyres in favour of medium-class Nordman tyres, which were mostly manufactured on an off-take basis. This system of contract manufacturing had already been used by Nokian Tyres before, at other facilities; however, it was the first step to starting their own production in Russia and to increasing its market penetration.

The joint venture with Amtel turned out to be unsuccessful for Nokian Tyres. The relationship between the partners did not work out, because their visions for further development on that market differed considerably. Nokian Tyres wanted to use greenfield investment, with the aim of producing premium-class tyres, which, in the company’s opinion, good prospects in Russia. The company considered several possibilities of how to invest in the Amtel facilities in Voronezh but, ultimately, after examining Amtel’s situation, made a different decision. In 2004, the joint venture was closed, with Nokian Tyres retaining the right to produce the Nordman brand. Later, the company moved the production of this brand to Indonesia.

One of Nokian Tyres’ other investments in Russia was a retread-ing plant called St. Petersburg Euroban-dag, which was bought in 2002 for €0.5 million. The company announced that this step was aimed at strengthening the company’s position on the market. This type of busi-ness was considered highly profitable, since the costs associated with retreading were quite low while the value of the final product was high. With only 11 employees, this facility retreaded about 2,000 truck tyres a year.

Also, Nokian Tyres made serious investments in logistics and the development of a distribution network all over Russia, establishing warehouses and retail outlets in Moscow, St. Petersburg, and, in 2007,


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Yekaterinburg. The company regarded the prospects of the Russian mar-ket favourably and was investing in it with the aim of simplifying the sales process and increasing sales in Moscow and St. Petersburg, while furthering the company’s hope of ultimately doing business all over the country.

Proprietary plant in Vsevolozhsk

In 2004, the company’s management decided to build a new tyre plant in the town of Vsevolozhsk. The first tyre was produced as early as June 2005, and in September 2005, the plant was officially opened. The facility’s total output in 2005 reached 300,000 tyres, while the planned output was 10 million tyres a year. This project was one of the largest and most dynamic in the Leningrad Region.

There were more than 100 potential locations to choose from when plans were being laid for establishing Nokian Tyres in Russia. Vsevo-lozhsk was chosen as the location for the factory due to its logistical advantages. The markets in Russia and the CIS were close, as was the Finnish mother company. Access to a harbor was important (rubber was imported by ship from the Far East).

Also, the Vsevolozhsk area already had a history as an industrial ar-ea during socialist period, so the basic infrastructure was already in place (although Nokian Tyres had to make a large investment in infrastructure while erecting the factory). Besides, and this is the key point, the local and regional administration was helpful, and supported the investment project (Nokian Tyres was among the biggest companies operating in the Leningrad Region).

Investments in the Vsevolozhsk facility during the period from 2004–2007 amounted to about € 155 million. An important role in financing the project was played by the European Bank for Reconstruction and Development and the syndicate of international banks, which granted the company a € 60 million loan. Initially, the facility’s planned production capacity was to reach 4 million tyres by 2008 and 8 million tyres by 2010. However, after the facility’s successful performance in 2006, when the Vsevolozhsk plant manufactured about 1.9 million production units, Nokian Tyres announced new plans for production growth — 4 million tyres by 2007 and 10 million tyres by 2011. These changes to the plan show that the company was serious about its intentions concerning sales growth and strengthening its power on the market.

Nokian Tyres’ strategy in Russia has been formulated as increas-ing its market share and sales volume, and is defined by such aims as


49


doubling sales in 2010 as compared to 2006, and reaching the figure of € 400 million, strengthening its position on the market so as to become the leader in the premium-class tyre segment, and developing its retail network. In order to reach these targets, the company planned to increase production output by building up all of the manufacturing lines included in the project.

Nokian Tyres regarded the Leningrad Region as an attractive area for tyre production. Proximity to a strategic market was of great impor-tance to the company, and Vsevolozhsk is a highly favourable place for direct foreign investments, enabling manufacturers to internalize sales profit inside the receiving country, owing to strong demand and sales growth. Proximity to St. Petersburg, which represented a large market outlet, was also important.

An important feature of the chosen area was the availability of a highly skilled workforce, which was essential for the complex manufac-turing process as well as management activity. Besides, the company had an opportunity to save on labor costs, since the difference between the annual earnings of Russian and Finnish workers was about €40,000 (€5,000 in Russia compared to €45,000 in Finland).

Another factor influencing the choice of Russia as a target market was the potential for considerable savings on raw material costs, since the prices for raw materials on the international market kept rising (they increased by 13% in 2006). Buying raw materials in Russia enabled the company to save on freight charges and deliveries to the plant. Nokian Tyres itself estimated that it saved about 20–25% on raw materials in 2005 as a result of entering the Russian market. The company obtained a considerable portion of their total savings thanks to the difference be-tween the cost of electric power in Russia and Finland (the price in Rus-sia was 40% less than in Finland).

It should be noted that the regional authorities gave considerable support to the company and increased the existing incentives and conces-sions in the Leningrad Region. First of all, the company was provided with advisory services concerning the choice of an appropriate building site; assistance was provided in expediting the necessary procedures and formalities connected with land acquisition and construction work. Among the guests present at the official opening of the Vsevolozhsk plant in September 2005 were the Governor of the Leningrad Region and other officials from the local administration as well as representatives of the Finnish authorities, which determined the importance of the project for the local economy.


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Furthermore, the company was granted a 10-year tax holiday (pay-back period plus two years); it paid income tax at a rate of 20%, which was 4% below the norm. Import duties amounting to € 6–15 per tyre were also waived. According to experts’ estimates, the company saved about € 80 million due to launching its tyre production in Russia.

THE RUSSIAN TYRE MARKET

Market dynamics in 2000–2006

The Russian tyre industry was regarded as one of the most promising and fast-growing segments of the country’s economy. By the end of 2005, the tyre market’s size amounted to some 60 million production units. The tyre market demonstrated rapid growth; according to Nokian Tyres’ esti-mates, the market grew by 15% a year.

The major factors causing this growth were:

the development of the Russian economy and favourable invest- ♦ment conditions;income growth; ♦growth of the car fleet and increased car sales in Russia; ♦modernization of the Russian tyre industry; ♦development of the sales network; ♦influence exercised on driving culture and drivers’ behaviour. ♦

Tyre manufacturing with the participation of foreign players in Rus-sia was organized in various ways. One was contract production, like Goodyear’s partnership with the Yaroslavl Tyre Plant and a joint ven-ture established by Continental AG and the Moscow Tyre Plant. Other international companies established their facilities from scratch (like the Nokian Tyres plant in Vsevolozhsk) or acquired an existing plant as a wholly owned facility (for instance, Michelin’s tyre plant in Davidovo in the Moscow Region).

Until the year 2000 a large number of tyres were sold in small shops or in market stalls. Later, retailers established large sales networks in the form of large modern centers that competed successfully with small shops on the basis of cost, product range and quality of service. In the beginning of the 2000s, foreign tyre manufacturers have also become involved in organizing sales, creating sales subsidiaries and partnerships with local importers to strengthen their market standing.

Total car sales in the Russian Federation in 2006 exceeded 2 million units, which was 20% more than in 2005. The total value of the car


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market in Russia was estimated at $32 billion. The increase in foreign-made car exports amounted to 76% per year (720,000 units in 2006). The intention of major automakers to invest into Russian production led to a decrease in production costs, better adaptation to local conditions, effec-tive marketing and an easy sales process, which ultimately resulted in an increased number of cars being bought.

In 2006 the number of cars of foreign brands manufactured in Rus-sia was as high as 280,000 units, which was 87% more than the year before. Many experts agreed, estimating that the total number of cars of brands sold in Russia in 2006 was over 1 million.

Another trend in the Russian car market was connected with the fact that an increasing number of car owners switched their attention to ex-pensive foreign brands. It was a significant fact that Nokian Tyres paid a great deal of attention to this trend, regarding it as an opportunity for growth in Russia, and took it into account when developing its Russian strategy.

Market segmentation

The Russian tyre market segments were: tyres for passenger cars and vans, tyres for light-duty trucks, tyres for heavy trucks, tyres for agri-cultural vehicles, tyres for tree harvesting machines, and tyres for other special purposes.

Tyres for passenger cars and light trucks (vans) accounted for the largest share of total sales, which was 76.9% in 2005. In 2006, the size of this segment amounted to 35.5 million units, while in monetary terms it was as high as € 1.147 million. However, according to other data, most likely including „gray” imports, the correct figure is 40–45 million tyres.

The truck tyre segment accounted to 22% of the market in 2005. The rest of the market included all other kinds of tyres (tyres for special heavy-duty trucks, tyres for agricultural vehicles, other types of tyres). Despite its small size, this segment of the market was regarded as quite promising, since it possessed high potential owing to the current trend for operations that use these types of vehicles to expand.

In terms of price and quality, the tyre market was always divided in-to three parts: the premium-class tyre segment (A), representing the most innovative product of the highest quality, thus commanding the highest price; the medium price tyre segment, or the segment with the optimal price-quality ratio (B); and the economy-class tyre segment, representing


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the cheapest tyres (C). In 2005–2008 it was segment C that was most represented in Russia, while the share of the segment B was minimal.

At the same time, the latest trends showed growth dynamics for groups B and A, as well as a downturn for group C. Medium price seg-ment tyres were represented on the market in relatively small numbers — 4.8 million units, or 13.5% of total sales in 2006. Other sources claimed that the share of segment B tyres amounted to 25–26%. The growth of segment B was predicted as 10–13% per year, until it reached 30% of the market, according to Nokian Tyres’ estimates.

Despite the fact that the economy segment accounted for the largest share of the Russian tyre market (58–60%, according to experts of RBC) in 2005, it was predicted that the segment’s share would gradually fall by 2–3% per year, until it reached 40.5% in 2010.

The tyre market was also segmented in accordance with weather and seasonal conditions of their use and, thus, can be divided into summer, winter and all-weather tyres. According to forecasts, the winter-tyre seg-ment, was going to grow; at the same time, the production of summer and winter tyres was supposed to experience a more profound differentia-tion, which became necessary due to the climate and weather conditions in Russia, as well as changing consumption patterns.

Competition and concentration on the Russian tyre market in 2007–2008

There were quite a few large, strong tyre manufacturers, both Rus-sian and foreign, on the Russian market in 2008; however, the sales vol-umes of the small firms were relatively low.

Before 2005 there were 12 tyre plants in Russia, many of which were small and had relatively old equipment. Later, this began to change, as new owners started to invest significant capital. Michelin’s new plant at Davydovo has a capacity of 2 million tyres and reached a stage of full production in 2005.

The majority of local manufacturers have been operating since the Soviet era, and by the mid 2000s their facilities had grown old, and their technologies outdated. The exceptions were companies that worked with foreign partners on a contractual basis, who bought equipment from foreign tyre manufacturers and tried to modernize their own facil-ities in order to compete with companies that possessed more advanced technologies.


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Among such companies striving for development, the following ones were especially noteworthy. The Russian tyre manufacturer with the larg-est share of the market was the Sibur-Russkie Shiny Company, part of the Sibur tyre holding, which owned the Omsk and Yaroslavl tyre plants, and also participated in a joint venture company called Matador-Omskshi-na. The company manufactured and sold 36.7% of all tyres produced in Russia.

The second largest tyre manufacturer in Russia was Nizhnekamsk-shina, part of the Kama Holding, which possessed 28.7% of the market. The third large tyre manufacturer was Amtel-Vredestein Holding, which owned a tyre plant in Kirovsk and Voronezh as well as the Amtel-Sibir tyre complex (Krasnoyarsk — Supershina, Krasny Yar — Shina), and pos-sessed 25.4% of the tyre market. The other Russian tyre manufacturers put together possessed 9.2% of the Russian tyre market in 2005.

Despite the fact that segment C was mostly represented by Russian manufacturers, a small share of imported tyres (tyres produced in two CIS countries, Ukraine and Belarus) belonged to the economy class segment. Segments A and B of the Russian tyre market were entirely dominated by foreign manufacturers, who imported their products or had built their own plants. Their share was estimated by Nokian Tyres as approximately 33%. The largest share of sales on the Russian premium segment in 2008 belonged to Nokian Tyres (30%), Bridgestone (14%), Continental (13%), GoodYear (13%), Michelin (13%), Yokogama (11%) and Pirelli (7%)1. The concentration on the premium-class tyre market was as follows: five large manufacturers possessed 71% of the market, which gave them a strong position as compared to other competitors.

Demand dynamics

The market for tyres in Russia had a volume of 50.5 million units in 2008. In the biggest segment — tyres for light cars — the sales went from 35.8 million units (2007) to 37.5 million units (2008) according to Sibur2. Out of this number, 32 million units came from the replacement market. According to different information from the Discovery Research Group, sales of tyres for light cars rose from 38.70 million to 40.24 mil-lion units. The fastest growing market segment was winter tyres. When it came to normal tyres, suppliers also registered an increase in demand for high-speed tyres over the past two years.

1 Nokian Tyres own data, 2009.2 http://www.eastwestbusiness.de/index.php?option=com_content&view=

article&id=943&Itemid=86


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Middle price segment

Middle-class consumers, who bought foreign brands of cars before the crisis and were also able to afford to buy expensive imported tyre brand for image reasons, switched to this product group. At the same time, however, the sinking purchasing power of the population increased interest in tyres from the low price segment, at least in the short term. If one looks at the true preferences of the Russian drivers, the major-ity preferred tyres from the middle segment, where they get “value for their money”. The quality of these products had improved during recent years, while the prices had remained affordable. The main loser was the premium-class segment. The trend favouring premium-class tyres was ex-pected to revive in 2011 or 2012, when the Russian vehicle market had recovered and returned to growth rates from pre-crisis times.

This development was already reflected in the figures for the 2008. 1.3 million tyres more tyres were sold in the middle price segment in 2008 than in the year before; only 100,000 more tyres were sold. How-ever, sales of premium-class tyres sank by 900,000 units.

Competition in the Russian market

Competition had intensified between local and foreign suppliers after the decline in sales following the financial crisis. Although the tyre mar-ket in Russia had grown continuously in recent years, domestic produc-ers had lost some of their market share. They only had a strong position in the middle price segment, which they also concentrated on in order to handle the market. In the low price segment, aside from traditional competitors like Belshina (Belarus) and Rosava (Ukraine), cheap suppli-ers from South Korea (Hankook, Kumho, Roadstone-Nexen), Taiwan and China VR (Sunny) are increasingly competitive with Russian suppliers. Against it foreign tyre brands dominated the premium-class segment like Michelin, Nokian, Bridgestone, Continental, Pirelli and Goodyear.

The turnover of truck tyres (business to business) had already de-creased in 2008, in contrast to the turnover of tyres for light cars (busi-ness to consumer). Since that time, this negative trend had even intensi-fied. The reason was the bad economic situation faced by logistics compa-nies, the industry in general, and the construction industry, which due to the crisis, demanded fewer tyres for trucks, construction equipment and mining machines. In the beginning of 2009 there were about 5.35 million trucks in Russia, according to estimates by the Abarus Market Research Company. 2.4 new tyres per year were required for each vehicle. This resulted in a demand of 12.8 million truck tyres per year. The Russian


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manufacturers Sibur — Russkije Shiny, and Nizhnekamskshina jointly held the lion’s share in the market (61%).

The foreign tyre manufacturers have recognized the trend favouring the middle price segment, adapted their range of products accordingly. And thus are competing with Russian enterprises. For example, Nokian Tyres presented two more affordable tyre models for 2009, named Nord-man SUV and Nordman 4 and Michelin introduced the new, less expen-sive “Tigar” brand to the Russian market.

The import segment

The competitive situation in 2007–2008 was reflected in the rising portion of the tyres sold in Russia that were imported (see Table). The importers scored in the segments of the tyre market with the brightest perspectives: the market for tyres for light cars and for all-metal tyres for trucks. In 2007, 39% of tyres for light cars came from abroad; in 2008 that number was already 46%, a substantial increase. The portion of all-metal tyres for trucks that were imported even amounted to 86% last year. Only one Russian manufacturer made all-metal tyres: Sibur — Russkije Shiny (brand: TyRex; share of the market: 14%).

TableTyres Imported into Russia3

3 https://www.gtai.de/DE/Content/Online-news/2009/13/medien/i1-auslaendi-sche-reifenhersteller-investieren-in-russland,https=1.html

CompanyValue 2007 ( $ million)

Units 2007 Units 2008Change,

%

Total 955.03 15,031,679 19,932,006 +32.6

Tyres for light vehicles

605.10 13,283,828 k.A. k.A.

Continental 105.15 1,890,559 3,032,456 +60.4

Bridgestone 171.49 1,838,724 2,254,275 +22.6

Michelin 167.18 1,748,889 2,334,767 +33.5


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Despite the rising prices of imports, caused by the devaluation of the ruble compared with the euro and the US dollar, they have not de-creased significantly in the course of this year. This means that domes-tic suppliers’ hopes of benefiting from the current crisis and increasing their market shares could not be fulfilled. This was mainly due to the fact that the effect of the devaluation was not felt, because the tyres imported to Russia by the multinational groups were made in Eastern Europe (Michelin in Romania, Goodyear in Poland) which had yet to in-troduce the euro. The currencies of those countries also strongly depreci-ated during the crisis.

To protect the tyre manufacturers producing in Russia against com-petition from imports, the domestic lobby tried to pass an increase in import duties on tyres from the current rate of 15% to 20% to a rate of 25% to 30%. This would substantially complicate market access for foreign suppliers.

THE CHALLENGES OF NOKIAN TYRES’ INVESTMENT PROJECT

As for Nokian Tyres, the company noted that the main problem con-nected with its investment project was power supply services. This issue was discussed directly with large energy suppliers, without any help from the local authorities. The Vsevolozhsk District, where many production facilities were located, had practically reached its maximum energy sup-ply capacity, while a lot of companies require considerable amounts of energy (and Nokian Tyres was one of them). The majority of the difficul-ties that the company had to face were connected with negotiations with the Russian energy monopolists, who possessed strong market power and were not interested in new energy consumers who require large amounts of energy. However, this problem was partially solved in the course of long negotiations.

In view of the company’s expected high demand for gas, Nokian Tyres held negotiations with Gazprom’s headquarters in Moscow, and af-ter a year, a final agreement was signed. For six months, negotiations on signing an agreement with Lenenergo had been held. An alternative for this period was the possibility of using temporary energy sources and reserves of more expensive fuel needed for the operation of the plant.

Thus, the investment project was not brought to a standstill, which prevented potential losses; however, the situation described above dem-onstrates a serious problem existing in the Leningrad Region, where the most industrially developed areas are reaching their maximum energy capacity and thus cannot supply enough energy to new foreign investors.


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At the same time, those areas that possess an excess energy supply po-tential are not attractive for large foreign investors, since their level of economic development is insufficient.

In addition to the problems related to the crisis (due to the economic recession and decline in cars), the biggest problem for Nokian Tyres in Russia was a shortage of labour. The lack of a qualified labor force was a continuous problem, and it is plausible that it could have become even more difficult, considering that the Russian population was decreasing about 400,000 people a year.

Nokian Tyres tried to compete for labor with relatively good sala-ries. Also, the company’s management decided to erect housing for their employees to buy at a very reasonable price in return for a commitment to work at the company for seven years. This was because about 30% of the workers live within eight kilometres of the factory. In order to get a flat, an employee must have a permanent work agreement and a recom-mendation from the company.

The site for the houses was bought on the free market. The houses were built in autumn 2008, and they were officially launched on Oc-tober 21, 2009. In November 2009, the first employees moved in. The construction of seven five-floor blocks of flats was planned, and four of then were ready in 2009 (167 apartments). The housing area was called Hakkapeliitta village. The flats were built and furnished in the Finnish style — they had washing machines etc. already built in.

The price the flats were sold for was 30–40% lower than the market price. Also, Nokian Tyres gave its employees loans with a 7.3% interest rate for 20 years. The employees’ share of the purchasing cost was 5%.

The program seemed to work effectively: the turnover of employees was about 15% a year in Nokian Tyres, whereas it was up to 50% a year at many other firms.

Among the other problems connected with the environment of the region, one might mention the boggy ground characteristic of this area. One should also not forget about the environmental problems, which were inherited by the Vsevolozhsk District from the plants and facilities that had previously operated there, such as industrial waste from military production facilities. Taking all this into consideration, the construction of the plant should come only after careful preparatory work, which is estimated to increase the costs of the project by up to 30%.


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Questions for discussionDo a SWOT-analysis for Nokian Tyres’ investment project in the 1. Leningrad Region. Characterize the comparative strengths and weaknesses of various 2. strategies as applied to the Russian market and analyze the ad-vantages and disadvantages of these strategies for Nokian Tyres.Analyze the pros and cons of Nokian Tyres’s decision to operate 3. exclusively in the premium segment of the Russian tyre market.Evaluate Nokian Tyres’ decision to build its own plant in Vsevoloz-4. hsk in terms of such strategic alternatives as first-mover/follower and greenfield/brownfield.Suggest a system of marketing actions that can strengthen Nokian 5. Tyres’ position in Russia.Work out the recommendations necessary to make effective use of 6. Nokian Tyres’ brand strength on the Russian tyre market.


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YIT IN RUSSIA: EXPANSION TO THE EAST OR ESCAPE FROM THE WEST?

This case study considers the problem of the strategy development for the Russian construction market via joint venture. The case focuses on the choice of strategic priorities related to the regional expansion and local partnerships in the Russian construction market by Finnish fi rm YIT in the context of growing competition and occurrence of problems in the world fi nancial markets infl u-encing global (and Russian) construction sector. The case is intended for the analysis of the prospects of Russian strategy by a large construction company in a rapidly changing environment. The discussion of the case supposes the assessment of the investment situation in the Russian market, the evaluation of prospects and problems of a large international construction fi rm, the com-parative analysis of strategy based on various degrees of investment activity in construction, and the development of recommendations on strengthening the brand of the Finnish construction fi rms in the Russian market in terms of a competitive aggravation from rivals.

INTRODUCTION

In 2005 the Finnish construction firm YIT decided to develop the eastern territories of the Russian Federation and paid much attention to the Ural region. YIT had chosen the Elmashstroy Company from Yekate-rinburg as a partner. This Russian company provided an extensive set of construction projects, from the development of building sites (lots), to finishing works according to the European standards. By 2008, the ma-jority of the shares in the joint venture YIT-Uralstroj were held by the Finnish partner, and the director of the YIT international operations had been nominated by the chairman of the Board.

The author would like to thank YIT Development Director Markku Ukkola for his kind help and valuable comments.


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YIT in Russia: Expansion to the East or Escape from the West?

A number of large European contractors demonstrated increasing in-terest in the development of the Russian market, since then they have entered the markets in Moscow and St. Petersburg with acquisitions or by establishing their of own branches. At the same time, YIT seemed to direct its focus toward the development of the eastern territories of Rus-sia. The company may face the threat of a weakening of their competitive advantage based both on their status as the first mover and as a highly recognizable brand.

COMPANY OVERVIEW

By the end of the 2000s the YIT Group was the largest Finnish con-struction company that offered services in such sectors as the construc-tion industry and telecom networks. The group was made up of 22,000 employees and operated in several markets: Russia, Estonia, Latvia, Lith-uania, Finland, Sweden, Norway, and Denmark. Its activities were concen-trated in three main business segments: Building Systems, Construction Services and Industrial and Network Services. The Group had been pursu-ing related diversification strategies, as its core business is construction. YIT was a market leader in building systems in the northern region and in all areas of operation in Finland. The most revenue was received from its construction services, which amounted to 45%.

Russia was considered the fastest growing market in which YIT had operated in the last decade. YIT had been on the market for 46 years and their growth rate was twice as fast in Russia as in Scandinavia. From January to September 2008, the company started the construction of 3,622 residential units in Russia (and around 2,800 in Finland). At the end of September 2008 YIT had a total of 11,768 units under construction.

In Russia it implemented the same scheme as everywhere else: it established a joint venture (mostly in Moscow and St. Petersburg) with a local partner with a more than 51% stake and the company’s top-man-agement team. Competitors commented that it would be more difficult for the foreign company to operate in the Moscow market due to a lack of administrative resources and lots. Besides, Finnish construction standards differed from those in Russia. Some experts thought that a joint venture with a local partner would be successful and the quality standards in the Russian market would increase.

Lentek company was the first joint venture in the construction and civil engineering fields established in Leningrad (St. Petersburg) in 1988. It was founded by the Finnstroy construction corporation from Finland, the Sevzapmebel furniture corporation and the Administration of Lenin-grad from Russia.


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Lentek established its own panel manufacturing plant in Leningrad, with an annual capacity of 30,000 meters of sandwich-facade panels. The company’s first tender project was the furniture factory ordered by the joint Russian-Finnish venture Lenraumamebel.

In 1997 Lentek became an affiliate of the largest Finnish construc-tion corporation in St. Petersburg and Northwestern Russia, YIT Raken-nus. In 2003 the name of the company was changed to ZAO YIT Lentek as YIT Corporation had many divisions in the Baltic States and had made several acquisitions, therefore it was decided to add the parent company’s name to all the subsidiaries’ names.

YIT Lentek was one of the first Russian construction companies to apply Western standards and technologies. The company’s primary advan-tages were the ability to ensure clients’ interests and a professional ap-proach to business. YIT Lentek had its own production plant. Their team of professional management staff and employees was built from Finnish and Russian specialists. All of this enabled YIT Lentek to offer its cli-ents a comprehensive set of services ranging from project planning to commissioning, and conclude contracts both for general contracting and managing projects, thereby shortening the production chain and making the project more cost-effective for the client. These factors ensured great opportunities for the company in the Russian market. The company’s most recent joint venture, YIT-Uralstroy was established in Yekaterinburg in 2006, where YIT’s share amounted to 71%.

YIT HISTORY AND OPERATIONS

YIT was a leading Finnish enterprise, providing services in the con-struction and industrial sphere, as well as engineering systems. Enter-prises incorporated into YIT operated throughout Northern Europe, the Baltic States and Russia, in addition to some countries in Central and Eastern Europe.

Yleinen insinööritoimisto (YIT) was founded in 1912; so it was actu-ally founded in the Russian Empire, in the Grand Duchy of Finland. In fact, YIT started to operate in Russia in 1917, and at that time, opera-tions were on a very small scale. In 1926 the company was acquired by Ragnar Kruger. This man, whose name became legendary, designed water supply systems for the entire city, free of charge, in order to win the contract for its construction, and also devised the idea of using wooden pipes for industrial water supplies.

After the recognition of Finland’s independence in 1917, YIT enter-prises operated actively domestically. During this time, one of the com-


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pany’s main activities was the development of Finland’s infrastructure. In particular, the Pellonraivaus/Perusyhtymä controlling company was created in 1940 to implement work on preparing plots of land for agri-cultural projects.

Larger scale business began in 1961 with the help of clearing and bilateral trade between Russia and Finland. The largest project involv-ing bilateral trade was the establishment of the Imatra Paper mill and building the mining town near Kostamus. When the Soviet Union col-lapsed, bilateral trade ended and all unfinished projects were cancelled overnight.

During its years of its operation, YIT has acquired a number of the large construction companies and has considerably expanded the scale of its activity. In particular, in the 1960s it acquired a large company, Vesto (formed in 1942), and in the 1970s YIT was actively engaged in building power stations. In 1995, the Huber company, founded in 1879, was also acquired. Therefore, YIT had considerably expanded its business in the field of equipment and pipeline installation services, ventilation systems, heating and water supply systems.

The next big step was taken in 1997, when YIT bought out its com-petitor, Lentek. After that the company had built many cigarette facto-ries, saw mills, the Ford car factory and a water purifying plant.

In 2002 YIT bought the Primatel company, which had previously be-longed to the Soner Group. Later, YIT Primatel became the market leader for constructing and servicing telecommunications networks in Finland.

In 2003 YIT redeemed the Engineering Systems division of ABB, spe-cializing in engineering systems for real estate and industrial facilities in Finland, Sweden, Norway, Denmark, the Baltic States, and Russia. As a result, the concern’s structure included ABB Building Systems, and the largest division YIT Engineering Systems for real estate (YIT Building Systems) was formed. YIT participated in building the best-known build-ings and structures in Finland. Among them were the new Opera House in Helsinki, the Messukeskus Exhibition and Sports center in Helsinki, the Palace of Tampere, the Männistö Church in Kuopio, the Tähtiniemi Bridge in Heinola, and the largest deep-water port in Finland, Mussalo, near Kotka. YIT’s shares have been listed on the Helsinki Stock Exchange since autumn 1995. In 2007, the company’s turnover was € 3.7 billion, with a commercial profit of € 337.8 million. The number of staff em-ployed by the company amounted to more than 26,000 people.

YIT had a vast experience with Russian culture and the business environment, initially during the Russian Empire, then in the Soviet


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Union and finally in the Russian Federation. Being involved with Russia through all its changes and turmoil during the last hundred years, YIT has had a competitive edge over other international competitors.

From the beginning of 2008 YIT’s commercial activity had been di-vided into four areas: engineering systems for real-estate projects, build-ing services in Finland and international building services, and also ser-vices in the production sphere and the networks industry. Three of YIT’s subsidiaries were responsible for these activities: YIT Building Systems, YIT Rakennus, and YIT Industry. Each enterprise, in turn, had its own affiliated companies.

On the market for real-estate engineering systems, YIT was a rec-ognizable player not only in Finland, but also in Scandinavia and some countries in Central and Eastern Europe. The company’s main activities in the field of engineering systems were the design, installation and maintenance of water supplies, sewerage, heating and ventilation systems, electricity, alarms, automation, as well as audio and video monitoring, fire alarm and access control systems. Furthermore, the services of-fered by the company included the optimization of energy consumption, maintenance of engineering systems for buildings, as well as property management. The group’s strength for providing services in engineering systems was based on an extensive network of offices, as well as real-estate management throughout the life cycle from design to installation and maintenance.

The construction sector of the company included residential construc-tion and reconstruction, office and industrial premises and services for the construction and maintenance of infrastructure facilities in Finland, Russia, Lithuania, Latvia, Estonia and the Czech Republic. The company’s construction projects included the construction of water supply and waste-water treatment facilities and environmental improvements in Scandinavia, as well as in some countries of the Middle and Far East. In Finland, YIT was the country’s largest construction company, and its main competitors in the domestic market were Skanska, NCC and Lemminkäinen.

One of YIT’s important advantages in the field of construction man-agement was its comprehensive set of services, ranging from land acqui-sition and actual construction through to customer services and sales, as well as follow-up services and maintenance of the facility. Their services included industrial design and service industries. Services for investment projects in industry included electrical engineering systems and piping, as well as supplying tanks, instrumentation and automation for various technological processes. The aim of these was to ensure smooth produc-tion processes and to increase customer productivity.


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INTERNATIONAL ACTIVITY

The first international projects dated back to the First World War, when a specialist from PBL YIT Yleinen Insinööritoimisto, Grankvist, worked on the construction of a water system for Yuzovka in the Ukraine. Later, in 1916, a specialist in the construction of hydropower stations worked in Tver, and on the upper Yenisey in Siberia, and then in 1918 on the Caspian Sea. The YIT Group’s current international activities be-gan in 1958, when the company started the construction of wastewater treatment plants and water distribution networks, as well as power lines, in Iraq. In a short time, this export project spread to many other coun-tries in the Middle East, Europe and Africa. Construction was carried out on water projects in Jordan and Saudi Arabia in the 1960s.

Since the 1970s the company had been involved in Finnish Govern-ment projects to provide assistance to developing countries. Related con-struction projects included water and wastewater treatment facilities of various types, as well as projects for the development of water supply systems in rural areas. Among the first projects was the implementa-tion of a series of water supply systems for Mtwara, Lindi, Tanzania, in which YIT participated in its capacity as a member of the Finnwater con-sortium. The second stage was the project to supply water to the Western Province of Kenya, carried out in 1980. Kefinco consortium also worked simultaneously on a project to establish health systems and electricity in Somalia. The implementation of a water supply project in Hanoi was launched in 1985 by the YME-Group consortium. In the 1990s the com-pany assisted in the reconstruction of water supply systems in Egypt.

YIT’s Middle Eastern companies worked for tripartite ventures for various facilities, including fairly large-scale projects, starting in the mid 1970s. Among these projects were water supply systems for Medina, Ri-yadh, Jeddah, grain elevators in Tabuk and Davasir in Saudi Arabia, a power plant in Yemen, residential buildings in Nigeria, a bomb shelter in Iraq, industrial and warehouse facilities in Libya, and many others. By the early 2000s, the group’s international activities included about forty states. At all times, the group’s main branches were exporting to West-ern countries, as well as developing countries, and were designing and constructing water supplies and providing technological equipment, con-structing industrial sites and housing, involved in land excavation activi-ties and hydro-facilities. In the late 1980s, YIT constructed recreational facilities in Spain, mainly for holidaying Finns.

Changes in the international business environment had forced compa-nies in other countries, both neighbouring and distant, to shift attention and resources from their international activities for overseas projects to


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their local subdivisions. YIT had strengthened its market position by ac-quiring a controlling stake in local companies YIT Lentek St. Petersburg, AB YIT Kausta in Litveb Calories AB in Sweden, and through joint ven-tures with local private entities, namely the AU YIT Ehitus in Estonia, SIA YIT Seltniechiba in Latvia, UAB YIT Moskoviya in Moscow Region, YIT SitiStroy in Moscow, Ural YIT. The portfolio of projects implemented by the company in the 1990s included a variety of facilities overseas.

In Northern Europe YIT had won a leading position in the field of complex technologies for water supplies and environmental protection. In order to conduct business in this region AB YIT Environment was estab-lished in Finland and AB Watts & Mileteknik was founded in Sweden.

YIT IN RUSSIAN MARKET

The company resumed some activity in the Soviet Union after 1961. YIT had carried out many large projects in various cities. One of the group’s enterprises, AB Perusyhtymä Rajajooseppi, built a highway from the Russian border to the Tulomskaya Hydroelectric Station. Immedi-ately after the oil crisis of 1973, the long trade boom with the Soviet Union began. With an enormous increase in oil revenues the neighboring country, Finland, on the basis of trade clearing and long experience in commercial activities in the Russian market, formed a close and mutu-ally beneficial cooperation with the Soviet Union from the outset. As a founder of Finnstroy, YIT took part in the construction of the Svetogorsk Pulp and Paper Factory and the Kostomuksha Mining Plant. As part of the Portal Group consortium, a project was implemented to establish the Novotallinsky grain port, and construct a lumber mill in Priozersk.

As a member of these groups, the company took part in the erec-tion of the Friendship Hotel in Vyborg and Olympia Hotel in Tallinn, the Kommunar shoe factory and a giant high-rise automated warehouse for AvtoVAZ in Toliatti, the new building for the Tretyakovskaya Gal-lery in Moscow, as well as a number of more specialized projects, such as providing the supplies for the construction of all the infrastructure in Yamburg, a town of 9,000 inhabitants in Western Siberia.

In the 1980s they carried out reconstruction work on the Metropol Hotel in Moscow and Astoria in St. Petersburg, as well as the construc-tion of a plant for the production of Phoenix program management sys-tems in St. Petersburg.

At the beginning of the thenty-first century, the group had several companies working in Russia: YIT Lentek and YIT-Peter in St. Petersburg, and YIT Moskoviya and YIT Elmek in Moscow and the Moscow Region.


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Competitors’ activities

A number of international companies (mostly Finnish) have shown in-terest in the development of the Russian construction market, beginning to enter the St. Petersburg market through acquisitions or establishing their own branches. An example of the high degree of activity in this ar-ea was the Skanska company. In 1998, its Finnish unit, Skanska Oy, ac-quired a 45% stake in the Finnish company Honkavaaran Maastorakennus, working in the field of civil engineering, and had significant experience working in St. Petersburg and the Leningrad region, and later founded a new company in St. Petersburg — Skanska Stroy, which was assigned the functions of a general contractor for Peterburgstroy-Skanska, as well as a number of projects for industrial and residential construction.

Skanska’s strategy was always based on the maximum localization in each of its overseas markets. The companies within the Skanska Group were well aware of the specificity of local markets, and at the same time made use of Skanska’s global experience, which was constantly increasing due to the revitalization of the company in different countries. In the 2002, Skanska East Europe acquired a controlling stake in Peterburg-stroy, one of the leading housing construction companies in St. Peters-burg. Skanska concentrated 80% equity in its hands, while 20% remained in the ownership of the company director. The main factors that defined this choice were the transparency of the potential partner, willingness to learn, an understanding of Western business principles and experience in the Russian market. Around the same time, Skanska established yet an-other branch of its own in Moscow, Skanska Olson.

Peterburgstroy-Skanska was one of the top five developers in St. Pe-tersburg. Skanska sold technologically sophisticated projects such as a set of Southwestern Wastewater Treatment Plants through other companies, trying to separate its different types of activities. From the very begin-ning in Russia, Skanska’s strategic goal was to become a local contractor and a supplier for project services. The acquisition of local companies has been a significant step towards implementing this strategy in St. Peters-burg. In 2007, Skanska decided to leave the Russian market. According to experts, Skanska quit the Russian market because of the loss of sup-port from local authorities, as well as obstacles that the company saw in light of the adoption of a new Housing Code.

The work of another Finnish group, Lemminkäinen, was more ef-fective. From the very beginning of its presence in Russia, it had paid considerable attention to the standardization of construction processes and management practices. Thus, a subsidiary company, Dom Lemkon, had


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been managing the project on the basis of the so-called “Lemkon model of project management”. According to this model, the entire construction process was divided into separate packages, which were tendered and con-tractors hired. Among the advantages of this approach was the potential to save time allotted for a preparatory period and the actual construction process, the ability to inspire competition among subcontractors and sup-pliers, leading to a reduction in costs, as well as to minimize conflicts of interest between contractors and customers, since the latter were always aware of the current status of the project and the associated real costs.

YIT subsidiaries in Russia

The first joint Soviet-Finnish company in the field of construction was YIT Lentek. It was established in Leningrad in 1988 and founded by Finnstroy on the Finnish side, and Sevzapmebel and the Administration of Leningrad on the Russian side. At the beginning of its activities, Lentek established its own panel factory for sandwich panel facades in Leningrad and the company’s first construction project turned out to be a furniture factory, ordered by a joint Russian-Finnish company, Lenraumamebel.

In 1997 the company became part of the largest construction group in Finland, YIT, becoming its branch in St. Petersburg and Northwestern Russia. When YIT acquired subdivisions in all the Baltic countries, and al-so such large corporations as Primatel in 2002 and ABB Building Systems in 2003, it decided to streamline the names of all entities of the group, attaching the name of the parent company to those of the subsidiaries. Since December 2003, Lentek has been called YIT Lentek. The main ac-tivities of the company were: industrial and commercial construction, residential construction, reconstruction and restoration of sites, includ-ing historic and cultural monuments, architectural and structural design, technical surveying of buildings and structures, and project approval by official agencies. Since the late 2000s the company has been a 100% sub-sidiary of the YIT Group.

YIT Lentek was one of the first companies in Russia to apply West-ern technology and standards in the construction sector. The enterprise became one of the first to offer the market a comprehensive set of ser-vices, ranging from design projects to commissioning on a turnkey basis, and entered into contracts for general construction work, as well as proj-ect management, reducing the production chain and making the project more cost-effective for the customer.

By the end of the 2000s the company had more than 160 sites on its books, from a network of petrol stations to water treatment plants, large plants and factories. Among them were Southwestern Wastewater Treatment


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Plants, Vienna brewery, Philip Morris Izhora Factory, Kirishskaya Power Plant, Lenraumamebel Plant, Ford Motors, JTI, Philip Morris, and Neste.

By the beginning of the 2000s, the company’s main focus was housing. The first project was a complex of four buildings in Priozersk, built by the company in the late 1980s. Since 1998, YIT Lentek had actively developed investment housing. The first project under the company’s management, a residential complex of three buildings, the Primorskaya Pearl, was imple-mented within a three year period from 1999–2002. Since 2004, the company began housing construction under the brand name YIT Dom (YIT House).

By the end of the first decade of the twenty-first century, YIT Lentek employed around 800 people, participated in several projects in the sphere of housing construction and supervised work, conducted on a number of locations throughout St. Petersburg. At all of these sites the company acted as developer, customer and general investors, guarantee-ing the agreed-upon quality and performance of all phases of construction from planning to transferring the apartments to buyers, as well as the construction of residential buildings on schedule, thereby eliminating the traditional investment risks for those buying apartments in buildings un-der construction. Established in St. Petersburg, its first plant in Russia was designed to build multifamily housing; finding this experience a suc-cess, the group had commenced negotiations with several leaders of the construction industry in the Moscow region. The outcome of these nego-tiations was the creation of YIT Moskoviya in December 2003. Like YIT Lentek, the company was represented on Moscow market and the Moscow Region by YIT Dom.

The main activities of YIT Moskoviya included: work in the field of capital and housing, including maintenance, training and project manage-ment, construction sites for civil use, structural design, real-estate sales, excavation work, external engineering networks and hardware for internal engineering systems, roads, landscaping, installation of manufacturing equipment, design, and evaluation work.

In 2005 YIT SitiStroy was established for housing in Moscow. Its two main areas of activities were investment in housing construction and sale of housing at various stages of construction.

THE RUSSIAN CONSTRUCTION MARKET

Industry overview

The Russian construction industry generated total revenues of $51.5 billion in 2007, representing a compound annual growth rate (CAGR) of


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10.6% for the period spanning 2003–2007. In comparison, the Polish and Hungarian construction industries grew with CAGRs of 7.8% and 8.2%, respectively, over the same period, to reach respective values of $35.4 billion and $9.8 billion in 2007. The non-residential segment proved the most lucrative for the Russian construction and engineering industry in 2007, generating total revenues of $29.5 billion, equivalent to 57.3% of the industry’s overall value. In comparison, the civil engineering segment generated revenues of $22 billion in 2007, or 42.7% of the industry’s aggregate revenues.

The Russian construction and engineering industry grew by 10.3% in 2007 to reach a value of $51.5 billion. The compound annual growth rate of the industry in the period from 2003–2007 was 10.6%. It was domi-nated by the non-residential segment, which accounted for a 57.3% share of the industry’s value. The civil-engineering segment accounted for re-maining 42.7% of the industry’s value. Russia accounted for 7.5% share of the value of the European construction and engineering industry.

The construction industry of the Russian Federation was made up of over 130,000 organizations and enterprises. Approximately 90% of all organizations operating in the sector were small businesses (up to 50 employees). According to Russia’s Federal Statistics Service (Rosstat), the Russian construction sector employed 4.9 million people in 2007 (4.4% more than in 2004), representing 7.3% of Russia’s total workforce.

Russia tended to be an extremely dynamic and volatile market about which Western Europe and the West, in general, knew little. To illus-trate, its largest westward neighbour, Poland had 38 million inhabitants and approximately 345,000 construction firms. Meanwhile in Russia, 130,000 enterprises attended to the building needs of over 143 million citizens. This was the reason large companies such as Bouygues, Hochtief, Strabag, Vinci, Codest were also working in the Russian market.

In Russia, it took two years to build a housing project because of the large size of the residential complexes, while it would take only one year in Finland. Also, in Russia the apartments ready for sale were not equipped and were unfinished (this was unacceptable to Finnish custom-ers). In this way, foreign contractors tried to use the same standards in Russia that would have been valid in more developed countries.

The volume of foreign investments in the Russian construction sec-tor was soaring before the financial crisis of 2007. According to Rosstat data, foreign investments channelled as much as $1.5 billion into Russian real-estate projects in 2006, nearly twice as much as in 2005. This is not surprising, given the fact that real-estate investors were seeing returns


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of over 10% in Russia, while the property markets of Western European and the US did not yield more than 4–5%.

In 2012 the Russian construction and engineering industry was fore-cast to have a value of $80.3 billion, an increase of 56% since 2007. The compound annual growth rate of the industry in the period from 2007–2012 was predicted to be 9.3%. The performance of the industry was forecast to decelerate, with an anticipated CAGR of 9.3% for the five-year period from 2007–2012, which was expected to drive the indus-try to a value of $80.3 billion by the end of 2012.

The competition on the market

The development of relations between the European Union and Russia had affected the construction industry as well. The investment climate was improving, competition was becoming fairer and entrepreneurial cul-ture was improving in Russia. Management had become more profession-al. According to the study “New Tendencies in the European Real Estate Market in 2007” by PricewaterhouseCoopers, the Russian market was one of the major destinations for investment. There was a lack of commercial and residential real estate and huge growth potential.

European companies in the Russian construction industry dealt most-ly in the construction materials and construction instruments markets. Some companies exported, others established their own manufacturing facilities. German firms were among the most active foreign investors in the Russian economy. For example, Knauf, which started its operations by acquiring a construction materials manufacturing facility for the Mos-cow region in 1993, was the major investor in the Russian construction industry in the mid 2000s. Manufacturers of windows (Rehau, Veka), finishing materials (Caparol, Bau-Color), glues (Henkel Bautechnik), sani-tary engineering (Grohe, Villeroy&Boch), construction instruments (Bosch, Hilti, Kress) had been successfully operating on the Russian market for several years.

The exports of these numerous companies were so massive that they decided to develop their own production in Russia. In many cases, West-ern companies preferred to employ the services of familiar partners while deciding to establish a manufacturing facility in Russia. For example, the plants for Philip Morris, Rothmans and Gillette, were built by Skanska.

The most efficient strategies used by local contractors were based on one of four focuses: product action, pricing action, marketing action, ca-pacity action (see Table).


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TableCompetitive strategies of Russian firms

Focus Description Implementation

Product

Substantial investment in new product development and related technology

LEK launched studio-flat style hosuing. After a couple years of this type of residence became very popular on the real estate market in Russia

Pricing

Price cuts, rebates, and discounts

LenSpecSMU avoided investments in lots and the construction process at once. The company offered significant discounts to those buyers who were ready to pay for housing in the initial stages of the construction process

Marketing

Marketing campaigns, advertisement investments, brand management

Stroimontazh, being very active in marketing, had created a new brand , Mirax, when establishing the Moscow partnering company, investing into this brand when moving into the markets of former CIS countries

Capacity/outputChanges in the company’s capacity or output

M-Industria established its subsidiary in Bavaria (Germany), activity focused on training and educating the company’s employees and also on attracting foreign specialists to work at the com-pany’s sites in Russia; Etalon-LenSpecSMU, when planning entry onto the Portuguese and Spanish markets, had to seek lots in these countries

Source: developed by the author.

These models, which were launched by large Russian construction companies in the 2000s, and predominantly in Russia, also explain their response to the inward investments in the industry.

Russian construction companies, which had started their internation-alization process, pursued various goals: the strategy renovation, compen-sating for the lack of lots in big cities, searching for new sales opportu-nities or just attempting to improve the image of the company. Each of these goals was related to at least one of the competitive strategies in the table above.

Effects of the financial crisis

In 2008, with the emergence of the global credit crisis, property de-velopers began to encounter problems in finding financing for their proj-ects. Banks became more stringent and selective in lending to both cor-porations and individuals. In Russia, the impact had been less significant than in other CIS countries and this was reflected in the healthy growth figures in the value of construction projects completed in 2007 and the first half of 2008.


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According to “Construction Sector in Russia 2008 — Development Forecasts for 2008–2011,” a report published by PMR Consulting, many Russian developers have not had to rely on borrowing at all, and have been able to complete development projects using only their own funds. Another reason was that infrastructure development projects dominated the structure of construction output in Russia, and the completion of these projects was largely financed from the state budget. As a result, in 2007, the increase compared to the previous year in construction output matched the 2006 figure of 18.2%, and had reached €94.1 billion. This was followed by an even higher increase of over 22%, in the first half of 2008, when construction output reached €48.9 billion. However, PMR expected the impact of the international liquidity crisis to deepen in the Russian construction industry. It was possible to expect that the growth rate for the whole of 2008 would thus be lower than in 2007, and this was followed by a further slowdown in 2009.

CREATING A NEW JOINT VENTURE IN THE URAL REGION

In 2005 YIT Group decided to develop the eastern territories of the Russian Federation, focusing on the Ural region, considering this region to be promising. In comparison with the Moscow and St. Petersburg mar-kets that were quite saturated, the Ural market promised enough room for development. This region was rich and there was trend of population migration to big cities in Russia, like Yekaterinburg. There was a lack of commercial and residential real estate and a huge growth potential in this city.

The focus of local government was in building new residential areas (with schools, shopping malls, kindergartens and transport networks). Also the project for the Great Eurasian University, that should consolidate all regional universities, research institutes and technoparks together with new hotels, medical centres, and art galleries made YIT optimistic about this area. It was a challenging project that could start the process of the city’s expansion and the creation of new technical projects. Another huge project was the construction of the Yekaterinburg City business centre and two skyscrapers, the “Ural Guards”. Yekaterinburg was the third ranked city (after Moscow and St. Petersburg) for the construc-tion of tall buildings and the construction industry itself was the most rapidly developing industry in the region. Besides, the mortgage credit system development was supported by the national project “Available and comfortable housing for citizens of Russia”. So, the potential in construc-tion was huge, that is why establishing a subsidiary to work in housing construction was considered crucial.


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The Finnish company chose a small Ural company, Elmashstroy, which was located in Yekaterinburg and formed on the basis of the Kalinin Capi-tal Construction Engineering Plant, as a business partner. The company had undertaken a range of construction projects, starting with pre-training and encompassing everything up to compliance with European standards. The company’s capacity was 100 units of construction equipment, and its performance amounted to 15,000–20,000 square meters of housing per year. By the mid 2000s, the company was quite well known on the Yeka-terinburg market and had participated in numerous projects to construct and repair government buildings and structures. Each year the number of projects involving Elmashstroy increased. It was due to its popularity and rapid development, intensive cooperation in the implementation of lo-cal projects that this company attracted the attention of the YIT, which outlined entering the Ural region market as one its objectives, since the Moscow market had already been developed, and the Ural region was promising in terms of the development dynamics, sufficiently limited competition and also due to the fact that the competition had not fully developed a market niche.

The strategic agreement between the Finnish company YIT and the Ural company Elmashstroy was signed in late 2006. Under this agreement, a new YIT Uralstroy company was created, which was specialized mainly in housing. According to the contract, Elmashstroy made a contribution to the joint venture by providing land, technology, machine systems and staff. With regard to the participation of YIT in the JV, their main function was to finance the initial stages of construction until the project could be financed by customers; YIT was largely financing construction by providing money. The project involved partial management by the Finnish company, and Finnish systems were used for project management.

The Finnish side was responsible for the quality control system over accounting, distribution and resource management, as well as advanc-ing technology. The strategy of the company jointly established by YIT-Uralstroy focused on housing, economy class and business class areas in Elmash and Uralmash, as well as in Upper Pysh, Berezovsky, regional centres of the area, including the proposed construction of cottages. By 2008, a controlling stake in the joint venture YIT-Uralstroy was owned by the Finnish side, and the Director of International Operations of YIT had been appointed as chairman of the board of directors.

After setting up a joint venture of YIT-Uralstroy, company got three projects from Elmashstroy1 by right of succession. These projects were

1 «Delovoy Petersburg», June 06, 2008.


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the starting point in housing for YIT-Uralstroy. The company was testing the region with these projects, and after bringing them to a successful conclusion, they have decided to apply for new projects. As a result, new investment should be forthcoming from YIT as a financing partner in this joint venture.

The first step of constructing detached houses was complete and YIT would continue with building housing complexes that match European quality standards. There were many such projects initiated by the state and the company was already participating in three of them.

The following prospects for the development of YIT-Uralstroy were considered by the company’s management:

1) contract works and project development;2) getting a considerable market share of the housing industry (with the

plan to achieve at least the same capacities as local market leaders);3) moving towards commercial construction;4) breaking into the new neighbouring regions.

The same strategy, which YIT had applied in Yekaterinburg, was con-sidered by the company management as vital for other regions, such as Samara, Perm, and Nizhny Novgorod.

Questions for Discussion Discuss the preconditions and motives for internationalization in 1. the Russian construction business. What investment strategies might be recommended to foreign con-2. struction companies when entering the Russian market, and why? Define and discuss factors that primarily determine the interest 3. of Finnish companies in the Russian market for construction and real estate. Discuss the motives and prospects of the YIT-Uralstroy joint 4. venture. Develop a system of promotion for the YIT brand on the Russian 5. construction market, taking into account the lack of strong ad-ministrative resources.


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Sergei A. Starov and Igor V. Gladkikh

VALIO: WILL VIOLA PROCESSED CHEESE MAINTAIN A LEADING POSITION

IN THE RUSSIAN MARKET?

This case study is based on the analysis of a range of problems associated with the Viola brand’s long-term development strategy by the Finnish company, Valio, in the Russian processed cheese market. The Valio company was one of the fi rst companies that started branding in the Russian processed cheese market. By using the “fi rst step” advantage, Valio won a steady position in this market. However, in recent times, the competition in the Russian market has sharpened, the appearance of strong players has fostered Valio losing its leading position. The attack of competitors made the company take new effective decisions in marketing and branding to fasten its position.

INCUMBENT COMPANIES CHALLENGED

The beginning of the twenty-first century was marked by a large-scale geographic expansion in the Russian processed cheese market. Pre-vious leaders were prepared for repartition of the market. Leaders of the Russian processed cheese market still comprise companies known to Russians from the Soviet era, i.e. Karat, which produces such cheeses as Yantar and Druzhba, as well as Valio with the Viola brand. However, in recent years their positions were actively attacked by new players. In 2003, one of the leaders of the European market Lactalis, which produces processed cheese under the President brand, set up its own cheese pro-duction in Russia. At the same time, the leading player in the Russian

The authors express special gratitude to CEO of the OOO Valio in Russia Mikko Koskinen, Director for Marketing OOO Valio in Russia (St. Petersburg) Ele-na Smirnova, Head of the Product Managers Department Elena Kasperskaya and Product Group Manager Olga Voevodova for substantial support in the work on the case and discussion of problematic issues of the case.


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Valio: Will Viola Processed Cheese Maintain a Leading Position in the Russian Market?

dairy market, the Wimm-Bill-Dann Company joined the circle of play-ers. Having set up a factory in Timashevsk (Krasnodarsky Kray), which produced processed cheese under the Vesiolyi Molochnik brand, the com-pany entered the processed cheese market. A little bit later, it put into operation a processed cheese production hall at their factory in Ufa. A year later the example of Lactalis was followed by the German company Hochland, which immediately began with a winning market position in a rather aggressive way.

Those new companies were regarded as arch rivals to the incumbent companies. To build a complete picture, one company was missing, i.e. Kraft Foods, which owned one third of the world processed cheese mar-ket. So in 2004, it came to Russia with the Kraft cheese brand. During the first six months the company acted with discretion, studying the market and importing small production lots from Belgium. However, very soon the company started to think about ranking as one of the top three cheese selling companies in five years.

Eventually, at the beginning of 2008 almost three quarters of the market belonged to five leading companies, the rest — to small regional producers. It meant that some of the leaders had to make room for the others. Was the incumbent company Valio with the Viola brand able to carry on its position? What marketing and branding actions should Valio execute in the fight with the competitors in striving for repartition of the market?

THE RUSSIAN CHEESE MARKET

Manufacture. In Russia a few more than 150 factories produce butter and cheese, and about 100 produce only cheese. The majority of them are small Russian manufacturers with limited influence in the regional mar-ket. They mainly produce non-packaged cheese, which is sold by weight, and supply products to certain points of sale situated within a certain region.

It is worth highlighting several large international and Russian com-panies, whose products dominate the Russian cheese market. In the yel-low cheese market such companies are Valio Oy (Finland), Wimm Bill Dann (Rus sia), Svalja (Lithuania). In the processed cheese sector the big-gest players are — Va lio Oy (Finland), Hochland Russland (Moskovskaya oblast), Lactalis Vos tok (Moskovskaya oblast), ZAO Moskovsky Zavod Plavlennyh Syrov Karat.

The Russian cheese market has gradually grown. It has happened at the same time as a shift of consumer demand towards premium products,


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offered mainly by large manufacturers. As a result, the cumulative share of the processed cheese market value controlled by 10 leading manufactur-ers grew from 29% in 2001 to 40 % in 2007.1 The situation in the yellow cheese market differs a lot as the production is much less concentrated.

Also it should be mentioned that currently small sectors of premium and white cheeses are growing with significant speed. Development of modern retail and consumer income growth stimulate a widening of the cheese variety including niche sectors. The Russian culture of cheese con-sumption is approximating European consumption. This trend is strongly supported by European producers. As an example the Finnish company Valio is driving the light-cheese sector with the Oltermanni 17% brand, the Danish company Arla and German Hochland are both promoting feta-type cheese with Appetina and Fetaksa brands respectively.

The sector for premium yellow cheese, which is quite moderate at the moment, also shows a positive dynamic. This sector is represented mainly with Italian cheeses like Parmeggiano Regiano and Grana Padano and their copycats produced by Baltic producers. This mentioned cheese type offers an opportunity for producers and retailers to get a high margin and also to differentiate from their competitors with a unique variety.

Problems of Russian cheese producers. Among the problems that Russian cheese manufacturers still cannot solve, the lack, expensiveness and low, raw material quality, as well as the obsoles cen ce of equipment and the lack of turnover funds, are listed. Cheese ripens (in the least) in the course of 2–3 months, and for this peri od the funds of cheese pro-ducing factories are static.

The production technology of original high quality cheese assumes the purchase of natural crude material which is expensive. In connection with that, some manufacturers to lower costs decide to alter the recipe by replacing some components and adding cheaper ingredients. For in-stance, animal fats are replaced with vegetable fats, organic cow’s milk is replaced by mixtures and processed milk. That drastically change the quality.

Russian manufacturers sometimes try to make copies of traditional French, Italian, Danish or German cheeses, but because of climatic, raw material and technological characteristics they could not be compared to the originals. Among other problems of the industry is inefficient organi-zation of cheese distribution, disunity of local cheese manufacturers and slow-pace implementation of state support to the industry.

1 Euromonitor International research.


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Import. Beginning from the 1990-s the Russian cheese market showed a gradual decrease in the share of local producers and an increase in the import share. In that situation Russian manufacturers needed protection and support from the state. In connection with that, in 2005, it was decided to increase in some cases the rate of customs duty on cheese de-pending on the customs cost of the in-coming products2 (Table 1).

Table 1Imported cheese by country in value terms, in %

Source: Russian customs data base, 2006.

The supply of imported products is seasonal. For importers the sum-mer period is marked by the increase in domestic cheese manufacturing. When the volume of milk yield increases, domestic manufacturers get the raw material. During the cold weather period the milk yield decreases and Russian cheese-makers give a significant part of the market space to im-porters. For the latter the oscillation between the summer sales slowdown and winter rise in sales, depending on the group and price category of cheese, could comprise from 20 to 100%3.

2 Government Commission of the Russian Federation on preventive measures in external trade and customs tariff policy in 2009 made corrections in the rates of customs duty on certain in-coming types of cheese. As the press service of the Ministry of Agriculture informed, the rates are changed by the initiative of the respective agency. The Commission approved of the rate of the customs duty on in-coming products concerning some types of cheese, namely 15%, but not less than 0.5 € per 1 kilo. Now the rate of the customs duty rate on in-coming goods depends on the declared customs value of the cheese: at the value up to 1.65 € per 1 kilo — it is 0.7 € per 1 kilo;at the value from 1.65 up to 2.0 € per 1 kilo —it is 0.65 € per 1 kilo; above 2.0 € per 1 kilo — it is 0.3 € per 1 kilî.

3 www.labex.ru.

Countries % of imported cheese total value

Germany 19

Ukraine 16

Lithuania 9

Finland 8

Netherlands 5

Argentina 3

Other 40


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Market capacity. According to 2010 estimations, the cheese market increased by about 5% in volume terms and reached 840 thousand tons. The Rosstat federal agency of statistics informed that in 2009 the growth rate of import supplies, compared to 2008, by estimate was 5%4.

Cheese consumption per capita in the Russian Federation comprises a little more than 4 kilos a year (in 2009) with the recommended for hu-man norm of cheese consumption — 6.5 kilos a year. In most countries this index equals 10–15 kilos, and in Italy, France and Israel — more than 20 kilos. While in Russia cheese consumption was decreasing (in the last decade by one third), in Europe and USA it increased annually by 1.8–2%5.

According to the data of the Food and Agricultural Policy Research Insti tu te (FAPRI), cheese consumption per capita in Russia would grow and by the most conservative forecasts in 2016 would comprise 5.6 kilos a year (Table. 2)6.

Table 2

Forecast of cheese consumption per capita in Russia (kg per person a year)

Year 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

Consumption (Kg)

4.3 4.5 4.6 4.7 4.8 5 5.1 5.3 5.4 5.5 5.6

Source: FAPRI, 2008.

In total, one can forecast a significant growth in demand on cheese in Russia. The AC Nielsen marketing agency evaluates the potential cheese market volume in Russia as 1.7 million tons, which is more than the current volume by two times. At the same time new, little-known types and sorts of cheese would be in demand7.

Characteristics of consumer behavior. In Russia, certain stereotypes of cheese consumption have become established. They are different from

4 Data of Rosstat.5 www.gotovoedelo.ru.6 Data of the Food and Agricultural Policy Research Institute (FAPRI).7 Data of the AC Nielsen agency.


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European traditions. First of all, cheese is considered by the majority of Russian consumers not as a separate dish, but rather as some kind of component of other dishes, like sandwiches, salads, etc. Cafes, restaurants and other eating places include in their menus various dishes with cheese (even cheese sliced-to-order) within the appetizers menu, and it is consid-ered as a dessert least of all (as opposed to France and Italy). It is con-sidered customary and traditional for Russians, to consume hard cheese and (to a lesser extent) pickled cheese, as opposed to Western Europe, where soft cheeses and blue cheeses are more popular8.

The market structure by product type. In accordance with the Eu-romonitor International data, Russian consumers still mainly prefer natu-ral yellow cheeses, which are considered good for health. In 2010 the processed cheese comprised only 12% of retail sales in volume terms (Table 3).

Among product groups, in 2010, the major growth — 25% of retail sales in va lue terms — was marked in the category of packaged hard cheese (pieces and slices).

Table 3 Structure of the Russian cheese market by types

of product in volume terms, %

Source: FAPRI, 2008.

In value terms the share of packed/packaged products in the hard cheese sector remained rather low — less than 8% of sales, and that opened vast opportunities for the development of these kind of sales9.

Distribution

Today the cheese market is a market of major players: distributing companies, which not only distribute products but also pack/re-pack them

8 htpp:// atlant.ru/9 Euromonitor International marketing research.

Types of cheese Volume terms, %

Hard cheese 77

Processed cheese 12

White and soft cheeses 11


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and even manufacture, and retail chains, like for example Perekrestok which would sell products manufactured by other companies under the chain’s private brand, thus fulfilling one of the distributing companies’ function.

Recently the influence of retail chains became dominant. An eternal question for manufacturing companies, when working with major distri-bution companies, is whether to sell under their brands or make them promote one’s own brand. Having a wide array of opportunities to deliver a product, and pack it, a manufacturer could delegate it to retail chains without involving professional distributors.

Branding

The special characteristic of the cheese market is the domination of sorted products, i.e. promoted not as branded products, but as products with a traditional name, for instance, Rossiisky cheese or Gollandsky cheese. It is only in Moscow and megalopolises, where personal incomes are above average, that consumers are oriented towards high-quality branded products in bright and handy packaging. An average Russian consumer virtually cannot identify domestic brands and is hardly aware of the imported cheese varieties.

Promotion with the help of marketing communications

Nowadays, the market is very active in brand building, and insuf-ficient work in the sphere of image, characteristic of regional manufac-turers, would significantly reduce sales, and catastrophically diminish their presence within the retail chains of megalopolises. Cooperation with chains in the local market should be as tight as possible employing the whole BTL complex (point-of-purchase advertising, competition and lot-teries organization, promotion, merchandising, direct marketing). It is also necessary to realize that expansion to two or more regions in the European part of Russia would require large investments connected with ATL-promotion (television, radio, press, outdoor advertising).

During 2010 the following companies were active in ATL communica -tions in the yellow cheese market — Valio with the Oltermanni brand, Wimm Bill Dann with the Lamber and Granfor brands. In the processed cheese sector the main advertisers were Valio with the Viola brand, Lac-talis with the President brand, and Hochland.

Market development tendencies

The cheese market is not yet saturated. The recipe for success in such a situation is to offer broad and innovative product lines.


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Therefore, innovative products are regularly introduced on the mar-ket. Moreover, innovations are associated with gustatory qualities, unusual ingredients and recipes, as well as a new shape of a product. Nowadays, one can see sliced cheese, as well as ground and grated cheeses. At the moment, one can clearly observe the tendency for growth of the packaged cheese share.

Manufacturers also improve packaging to make products more eco-logical and user-friendly, and to prolong the shelf life. In recent years the customers’ interest has been for healthy, organic (low-calories, bio, etc.) products, as well as for exotic ones. Demand for cheeses with rich and intensive tastes, made especially of goat, sheep and buffalo milk, has been growing. Tremendously popular have been pickled cheeses like feta cheese and brynza.

In general, the growth dynamics are observed first of all in the seg-ments of medium and upper price levels, due to an increase in cus tomers’ incomes and an improvement of overall living standards.

Market development forecasts

The forecasts of Euromonitor International stress the significant po-tential of the Russian market, unavailable for satiated markets of West European countries (Table 4). In the coming years the Russian cheese market growth in value terms would comprise 40%, and that would be far ahead of expected growth indices in such regions as North America and Western Europe.

Table 4

Forecast for the Russian cheese market, growth rates in volume terms, as related to the previous year, %

Category

Period(years)

2009 2010 2011 2012

Processed cheese 6.1 5.2 4.6 4.1

Not processed cheese, including 8.1 7.2 6.1 5.2

Packaged hard cheese 13 11.7 9.3 8.5

Non-packaged cheese 8 7.2 6.1 5.1

Source: Euromonitor , 2008.


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In the expert opinion of Euromonitor International, most likely, is Russia’s transfer from simple commodity markets, where price is the main determining factor for consumers, to branded markets, where brand competition is determined by added cost. Thus, innovations and brand po-sitioning would play the decisive role in the strategic planning of the ma-jority of Russian cheese producers and international companies, which op-erate or promote their products in the Russian cheese market. Only those manufacturers would survive, which were able to hold off private labels through the development of premium tastes and other distinctive charac-teristics. Smaller players, which have insufficient financial resources for investing in innovations would gradually give their place in the market to large companies by moving to the niche of manufacturing private label products for retail chains. As a result, for the survival of smaller manu-facturers, which have their own brands, it would be vital to have joint distribution and marketing alliances with other smaller manufacturers.

The most significant growth was expected in the packaged hard cheese sector — the sales in the period from 2007 to 2012 would increase by more than 70% in volume terms. It would happen due to the overall transition of reta il food store chains from selling cheese by weight to selling pre-packed cheese.

Euromonitor International also forecasts that in the course of the on-coming years the segment of healthy lifestyle products would actively grow, i.e. products containing pro-biotics or low-fat products. The growing demand from the high-income group of customers who care about their health in megalopolises, such as Moscow and St. Petersburg, would foster that tendency. However, in the midterm the sales of “healthy” products would be rather insignificant, compared to ordinary cheese sales.

THE RUSSIAN MARKET FOR PROCESSED CHEESE

Market structure and dynamics

The processed cheese sector reflects to some extent all the changes, which occur in the Russian cheese market, in general. Notwithstanding the fact that the share of retail sales in the structure of all cheese ty pes sold in Russia, has a tendency to decrease as the cost of hard chee se con-sumption increases, the market share of processed cheese is still signifi-cant. According to OOO Valio data the market has drama ti cally changed in last five years, in 2010 the volume share of processed cheese sold in Russia is 12% while hard yellow cheese is about 77%.10

10 OOO Valio data.


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More than 100 companies manufacture processed cheese in Russia. Regional companies are gradually squeezed by nation-wide companies. At the same time, consolidation in the processed cheese market does not oc-cur: large players prefer to squeeze small ones, with the help of recog-nizable branded products of stable quality and an increase in the volume of production. The “squeezing” companies include those, which gradually but steadily increase the market share, such as Valio Ltd. (Finland, Viola brand), Hochland AG (Germany, Hochland brand), Lactalis Group (France, President brand), as well as metropolitan manufacturers ZAO Karat and ÎÀÎ Wimm-Bill-Dann (Exhibit 1).

Hochland AG (Germany, Hochland brand) with the index 16.2 % of market share (in volume value) takes the leading position in the Rus-sian market. The runner-up is Valio Ltd and its brand Viola with the index 14.6%. At the same time, Karat, whose assortment comprises such brands, known to Russians since the Soviet era, as Druzhba, Yantar and Volna snap at the heels of Valio — by volume of sales, its cheese oc-cupies 10.3 % of the market in volume value. WBD who is quite a new player in the market of processed cheeses occupies 5.6% of the market.

Exhibit 1. Share of leading players in the market in the general sales volume, in volume value, %, 2010

Source: internal data of the Valio Company.

Processed cheese, National, Volume share 2010

Total WBD; 5.6 Total Hochland;

16.2

Total Valio; 14.6

Total Karat; 10.3

Total Lactalis; 5.3

Total Karat Total Lactalis Total Hochland Total WBD Total Valio


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However, the Moscow and St. Petersburg market which have the ma-jor sales share, the Valio Company holds prime position (Exhibit 2).

Exhibit 2. Market shares in the total sales volume of processed cheese in Moscow and St. Petersburg in volume value, % 2010

Source: internal data of the Valio Company.

Processed cheese, Moscow, Volume share 2010

Total Valio; 31

Total WBD; 1.4

Total Hochland;19.3

Total Lactalis; 8.7

Total Karat; 23.3


Processed cheese, Moscow, Volume share 2010

Total Valio; 31

Total WBD; 1.4

Total Hochland;19.3

Total Lactalis; 8.7

Total Karat; 23.3



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The position of this company is especially strong in the market of its geographic neighbor, in the St. Petersburg market (the break-off from the pursuer, the Hochland Company, is 27.5%).

Such a high index of sales in Moscow and St. Petersburg could be associated with the so-called habit of the Viola cheese consumption, which was formed during Soviet times in Moscow and St. Petersburg.

The popularity and high-level brand awareness made some large retail chains in those cities imitate the package design and name of the Viola brand. “Viola brand loyalty and high popularity level fostered the birth of clone brands. They use various brand imitation effects by demonstrat-ing formal resemblance with the original”, says Director for Marketing OOO Valio in Russia (St. Petersburg) Elena Smirnova. Thus, in a large retail chain Pyaterochka in St. Petersburg, they started to sell processed cheese Paola, in which the package design has a girl resembling the girl placed on the Viola cheese packaging.

Market geography

A quarter of the country’s processed cheese is sold in the Moscow and Central Federal Region. Moscow sells three times more cheese, than in St. Petersburg, and six times more cheese than in Siberian cities, and 1,7 times more cheese than in 15 megalopolises of the European part of the Russian Federation11. However, by tempo of sales growth the regions are far ahead of the center. It is explained by the fact, that markets in St. Petersburg and Moscow are relatively saturated by products of the category considered. In conditions of tough competition, suppliers have to search for new markets. Thus, the tendency for the re-distribution of the processed cheese have increased the regions’ share of sales volumes.

Regional markets, compared to the center, traditionally have more products sold by weight. It is not surprising, that for regions, where the population has a lower income, the price factor plays the prevailing role, and such relatively cheaper products, as cheese sold by weight (for example processed link cheese) are more appealing.

Price segments of the processed cheese market

Regardless of the fact, that the price level was changing, price ratios and price positioning in the processed cheese mar ket we re relatively sus-tained in the course of recent years.

The processed cheese market could be di vided by price positioning in the following segments (Exhibit 3):

11 OOO Valio data.


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Premium price segment: Viola, Hochland and President. For a long ♦time Viola was a little more expensive than Hochland, but in the course of the previous year the company managed to fix the price policy in a way, which would help place Viola on an equal price level or even a bit lower. In 2010 President has lowered its price positioning, which helped to increase consumers take off and in-creased the market share (in some regions, the share was doubled).Medium price segment: Vesioly Molochnik, Karat (and its sub- ♦brands), as well as a number of regional manufacturers. Lowest (general) price segment: products of the Voronezhsky and ♦Rya zansky processed cheese factories (various low-cost cheeses under such brands as Yantar, Corall, Orbita, etc.) Processed cheeses in blocks (packed as small blocks in foil), link processed cheese with a wide range of assorted products manufactured by local regional players.

Exhibit 3. Price indices of the retail audit for 2009 and 2010 (price ratio per 1 kg of processed cheese, in rubles)12

Source: data of the ACNielsen company.

12 When forming the index, 100 is accepted as the average price of retail price on the shelves in a store. Indices higher or lower than 100 show, that not only prices of the considered brand deviate from average significance by product category.

0

20

40

60

80

100

120

140

160

180

JJ 2009 AS 2009 ON 2009 DJ 2009 FM 2010 AM 2010

Total Valio Total Hochland Total Lactalis Total Karat Total WBD


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The tendency of branded products’ consumption growth, mainly of foreign “origin”, was conditioned by the increase in the population’s well-being. People simply did not want to consume processed cheese of custom-ary “Soviet” brands. Further on, that tendency could lead to an increase in the share of medium and premium segments.

Consequently, middle-segment saturation lead to toughening competi-tion among manufacturers, demanding more investments in brands ad-vertisement, package restyling etc., since it is impossible to strengthen competitiveness by just significantly lowering the price. In that case, the product would be jeopardized by being transferred to another price seg-ment and consumer perception of that product would change.

Consumer behavior

Buying frequency. By the frequency of consumption, processed cheese is left behind hard cheese. According to the Capital Research Group data, only 8% consumers buy processed cheese every day. The majority of con-sumers (50%) buy processed cheese 3–4 times a week (Table 5)13.

Processed cheese is often compared to a one-time-buy product. Never-theless, recently the cheese product line significantly expanded — various cheeses with different flavors appeared in the market, as well as pro-cessed cheese of expensive elite sorts. Therefore, the perception of this product by consumers gradually changes, and, perhaps the demand for various types of processed cheese would increase.

Table 5

The buying frequency of processed cheese, % of the number of consumers

Source: the data of the research company Capital Research Group, 2007.

13 Data of the research company Capital Research Group.

The buying frequency of processed cheese

% of the number of consumers

Every day 8

3–4 times a week 50

1–2 times a week 29

2–3 times a month 13


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Taste preferences. Flavored processed cheeses are dominant on the market (about 55% of total sales in category). Consumption of a creamy (natural without flavors) taste is about 45%. The most populàr flavors are mushrooms/champignon, ham/bacon and assorted cheeses in portions. Consumers are still very interested in new unusual flavors, which have entered the market.

Attitude to packaging. In accordance with the ACNielsen data in 2009, in the processed cheese sales pattern, the share of the packaged product sector traditionally takes a large place — 82.2% for physical and 90.8% for value volume. Processed cheese packed in plastic containers is the biggest segment (51%). Processed cheese packed in slices comprised nearly 13%. Processed cheeses packed in portions (usually in a triangle shape) occupies about 14% of the market. Traditional from the Soviet era type of processed cheese package — foil and cellophane (cheese in blocks 50–100 g) occupies about 20%, but this type is most demanded in regions rather than in Moscow or other regional capitals14.

Attitude to the product’s place of origin. Through the place of ori-gin processed cheese could be divided into three sectors — domestic, im-ported and produced by international companies in Russia. However, as the research results show, the majority of consumers, more than exactly 54%, do not care where the cheese they buy was manufactured (Table 6). Consumers are inclined rather to divide cheese in tasty or tasteless, expensive or affordable, than by imported or domestic.

Table 6

Consumers’ preferences accorging to the place of origin of the processed cheese, % of the number of consumers

Source: data of the research company Capital Research Group, 2007.

14 Ibid.

Consumers’ preferences according to the place of origin

of the processed cheese

% of the number of consumers

Imported 15

Domestic 31

Does not matter 57


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Retail sales

The largest share of sales of the packaged processed cheese is sold in food stores and large serve-over-display stores, such as deli stores, which differ from grocery stores through their large selling space. By the data of retail sales audit for the period March–April, 2005 both of those channels in sum-total had 47% of the total sales volume of these types of products (Table 7). Moreover, their share in the processed cheese market continued to grow. The sales volume in food stores was also rapidly growing.

Table 7

The processed cheese supply structure by the place of sales in volume terms, March–April, 2005

Source: data of the research company Capital Research Group, 2007.

One of the major tendencies is the decrease in the share of outdoor markets, which went down by 1% in the past half year. The decrease in the share of that channel reflected the common tendency, characteristic of the overall sales of the majority product categories.

The processed cheese supply structure by the place of sales

in volume terms

% of sales in volume terms

Grocery store 26.3

Deli 20.4

Outdoor retail market 19.9

Self-service store 13.8

Pavilion 12.5

Stand 4.3

Dairy store 2.8


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Factors influencing the creation and development of the demand for processed cheese

Ubiquity of product distribution. Packaged in small packages, easily transported and having a long shelf life, processed cheese could be distrib-uted to any part of the country, extensively increasing the level of sales. In the first stage of product distribution the low cost of cheese of general and medium market segments, meets a contradiction concerning the vastness of geographic range, which increases the cost of the product due to the ex-pense of transportation. However, later on, lodgment in remote territories provides a high-level of loyalty to the manufacturer and makes it easier to introduce new brands. For instance, the Hochland Company made a decision about the construction of a factory in Russia after a two-year probation period during which it managed to consolidate ground countrywide.

High situational context of usage. Processed cheese is not a prod-uct of primary importance. It is not an essential part of the so-called consumer basket, and that allows it to be associated with goods of situ-ational demand. The choice of such products is conditioned in many cases by what they are used for: both dessert and processed cheeses mainly go with sandwiches, but at the same time they are perceived, like many oth-er products, as lifestyle forming products. Such perception makes price segmentation very important, because products should reflect product groups’ images, which consumers have formed in their minds.

Consumption traditions. Earlier in the Soviet era processed cheese was considered by the Soviet people as “a product you buy when no mon-ey is left”, which nowadays helps companies producing processed cheese to sell it to those who used to buy cheap cheese and gradually introduce more expensive products, for example, cheese with added flavor.

Package variety. Today domestic cheese factories offer products known for the variety of package designs. Thanks to that, the perception of Rus-sian brands gets closer to the foreign ones. On the other hand, there is a rigid difference between consumer preferences depending on age, habits, and social status of consumers. If young people, for instance, prefer the so-called fast-food products, which do not belong to the premium segment, the senior generation, no doubt, is more inclined to buy higher quality and more expensive products. And it is the package that can demonstrate to which group of customers the product appeals.

Well-recognized brands. At the moment this factor provides a great competitive advantage in the market to the brands Viola, Hochland and President, as well as Vesioly Molochnik (Wimm-Bill-Dann), which rapidly grew in popularity thanks to its advertisement campaign.


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Manufacturers, both small, local ones and large, national ones, such as the Moscow factory of Karat processed cheeses, which manufactures a wide range of processed cheeses, found themselves in a complex situation of a blurred perception of the product range through high and low level brand recognition.

MAJOR PLAYERS IN THE RUSSIAN MARKET FOR PROCESSEDCHEESE

Valio Ltd

Valio was established as an exporter of Finnish butter in 1905. The company was called Valio, in Finnish it means — the best, high quality, elite. The company belongs to 22 farmers’ cooperatives — dairy products manufacturers.

Valio Ltd is the biggest milk pro-cessor in Finland, by net turnover, at € 1.8 billion. Valio is the market leader in all key dairy-product groups in Fin-land and a world-class pioneer as devel-

oper of functional foods.

Valio is the leading brand in Finland and is strongly positioned in neighboring countries Russia, Sweden and the Baltic States with subsid-iaries in the USA, Belgium and China.

Sales responsibility has been increasingly handed over to subsidiaries. The goal is a local presence in the principal market areas. Valio now has subsidiaries operating in all of its key export markets: Russia, Sweden, the Baltic States, Belgium and the US.

The history of the Finnish Valio Ltd is closely connected with Russia. At Valio they are proud of the fact that since 1908 butter was deliv-ered to Tsar Nicolas II. In 1956, Valio started exporting Viola processed cheese to the USSR. Nowadays, Valio is a major dairy company in Fin-land. The company comprises 80% of dairy products manufactured in Finland (about 2 million tons a year). The company owns 15 factories in Finland, two in Estonia and one in Belgium.

Popularity of the Valio products in the international market is based on a traditionally high quality of products, which are prepared with the


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help of modern technologies, and are safe both for health and the en-vironment. Finnish milk is the main ingredient of Valio products. It is always associated with high quality. The international statistics products’ data show that milk produced in Finland is among the cleanest in the European Union countries.

Mika Koskinen, CEO of the OOO Valio in Russia says: “Our brand has great potential. We emphasize the fact, that Valio products are manufactured in Finland, where, as you know, the cleanest milk in the European Union is produced”.

By steadily following their principle — supplying the best product, Valio developed the system of quality control at the stage of dairy prod-ucts’ marketing. Recipes and package technologies were selected in such a way, that they provided retention of products’ freshness, as well as nutrients and good taste without using preservatives. In June, 2000, the Valio Company in addition to the certificate of quality control ISO 9001 received the certificate of conformity to the environmental control prin-ciples in accordance with ISO 1400115.

At 18 company factories more than 1000 products are produced and exported to 60 countries in the world. Today Valio is one of the larg-est dairy products manufacturers. Among the manufactured products are hard and processed cheeses, milk, butter, sour milk, yoghurts. 30% of Valio’s exported products are sold in Russia.

Valio brand positioning

The Valio brand promise is to promote a balanced life by creating good feelings, happiness and enjoyable sensations. Valio products redeem this promise with good quality, taste and health-promoting properties. The slogan “Bringing taste to life” crystallizes the promise.

The Valio brand engenders trust. A strong brand will endure even in fierce competition, as long as it repeatedly redeems its promise and is able to reinvent itself in line with consumers’ needs without losing its core identity. A strong position also guarantees the branded products a place in the consumer’s shopping basket.

Valio in Russia

Since 1994 in Russia the company Valio is represented by ZAO Valio St. Petersburg, which is registered as a company with 100% foreign capi-

15 Company’s web-site: htpp: // valio.ru.


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tal. In Russia Valio works exclusively as an importer, although its main global competitors — the German company Hochland (Hochland brand), and the French company Lactalis (President brand) –localized manufac-ture long ago. The Valio Company only announced on the construction of its factory in the Moscow suburbs in 2006.

Construction of Valio-Lobnya factory was finished in 2009. The rated capacity of Valio-Lobnya was 20,000 tons, and if functional conversion of buildings were held — 30,000 to 40,000 per year (at the moment part of the territory is occupied by a logistics complex). At the Valio-Lobnya factory they produce processed cheese out of semi-manufactured products delivered from Finland. The problem is, that there is still nothing to process. The Finnish company in Russia faced the problem of the lack of milk which would fulfil Valio’s requirements. It means that the factory virtually only packages milk, and this does not solve the major problem of the company — the reduction of production costs.

Valio’s distribution

Today Valio LLC has more than 200 clients in St. Petersburg, Mos-cow, Novosibirsk, Krasnoyarsk, Rostov-on-Don, Krasnodar, Samara, Vladi-vostok and other regions of Russia. Russian distribution companies ac-count for a large majority of the imported products. The companies, which are located in Moscow, St. Petersburg and other major cities of Russia, distribute Valio products. The other components of the products (for retail) are delivered from Finland directly to retail shops, small wholesalers and food companies.

Valio LLC has the following subsidiaries:

a subsidiary in Moscow; ♦a subsidiary in Ershovo. ♦

The subsidiary in Moscow was opened in 2003 in order to support sales as well as to maintain and promote Valio products in all distribu-tion channels in Moscow.

Ershovo subsidiary (Moscow Region) started to operate in 2009 as a logistics and distribution center with its own warehouse and own line for the production of Viola processed cheese in portions (triangle 140 grams). Modern production equipment used by the company guarantees a high quality of its products; its technology and quality control system complies with the world standards.

The company aims at expanding the sales geography, to enhance its regional presence in the dairy products market of Russia. Mika Koskinen


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says, “More than 40 Valio distributors work in Russia. We intend to expand our regional presence, since we see a vast untapped market. We will change the brand portfolio and in some regions, where the purchas-ing power is lower, than in Moscow and St. Petersburg, we will lay the emphasis on less expensive products”.

Marketing communications

Unlike its competitors, Valio does not spend much on advertising its brands in Russia. According to TNS Gallup Media, it is Danone that spends more than other players on advertisement in Russia. From Janu-ary to August 2008 they placed advertisement 58,300 times in the mass media, Wimm-Bill-Dann — 27,100, the direct Valio competitor, Hoch-land — 6,300 times. In 2008 the Finnish company had only 1,900 adver-tisement issues. The management of the company explained that “in the end advertisement increases the cost of products”16.

Hochland (brand Hochland)The Hochland Compa-ny was established mo -re than 75 years ago. It is a family en ter pri se engaged in chee se ma-nufacture and sa les. The holding com pa ny Hoch -land AG owns 10 fac to-ries in six countries, in-cluding Germany, Fran-ce, Spain, Poland and Romania. A yearly tur-nover of the compa ny comprised about € 790

million in 2007, the sales volume was 215,000 tons. Currently Hochland cheese is exported to 30 countries.

The brand portfolio of the company, besides Hochland, includes fresh cream cheese Almette, Patros cheeses, and Valbrie. The Hochland Compa-ny penetrated the East European markets in the beginning of the 1990s. Since 1994, the products manufactured under the Hochland brand started to sell in Russia (Exhibit 4).

16 Finn with butter (Valio) // sostav.ru.


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Exhibit 4. Processed cheese Hochland and fresh cream cheese Almette

It is the number one company in Russia. The market share of Hoch-land, by the data provided by the Valio Company, in 2010 comprised 16% of sales of all the processed cheese in Russia. The company concentrated its efforts on the promotion of processed cheese and at this cost tries to keep its leading position in Russia.

In 2000, Hochland was the first among international companies that aligned manufacturing in Russia by renting production space from the German company Ehrmann, and later in 2004 bought it out. By Novem-ber of 2003 the holding company Hochland built near the Ehrmann facto-ry its own cheese producing factory in the Raos village of the Ramensky region of Moscow Region.

The designed capacity of the factory was 20,000 tons per year. It was fearsome for competitors. It was twice as much as the volume of the leader in sales, i.e. Finnish Valio (market share — 12.9%), which was importing all of its products. Hochland spent the record sum in 2005 for the industry — approximately $6 million.

The problems of company development in the Russian market were associated with a number of circumstances. Firstly, high promotion costs, which decreased the business profitability. Secondly, although Hochland built its own factory in Russia, it was still planning to import some of


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its products. First of all, the Germans explained this due to shortage of necessary raw materials (high quality butter, milk and hard cheese). In the opinion of BKG analyst Rimma Chainikova, it would be hard for the German company to find the necessary amount of milk powder and but-ter. Actually, the Hochland management found Russian suppliers of hard cheese and milk powder, but it still had to buy butter from the world market (imported from New Zealand and Holland). The company opti-mized the logistic chains at the cost of local manufacturing.

The company was trying to make production lines in Russia work at full capacity, provide brand representation in megalopolises, and subse-quently in cities with populations of 500 thousand people, and win the leading position from the Valio Company in Moscow and St. Petersburg.

In 2007, aiming at strengthening its position in the market, the Hochland company modified its main processed cheese product line, suple-mented by package restyling. The new graphic image of the brand was supposed to reflect more vividly the preferences of potential buyers, as a premium-segment natural product.

Along with launching the product line, the complete product line was restyled and became brighter and trendier. The complete set of works on creating the Hochland packaging style was done by the BQB advertising agency.

Karat (brands Yantar, Druzhba, Shokoladny)

The Moscow Factory of Processed Cheese was established in 1934. It became the first factory making this product. In the 1960s, such cheese brands were Druzhba, Yantar, Volna, Shokoladny, Gorodskoi, etc. In 1996, the factory received its name Karat. In total, the factory produc-es about 60 brands of processed cheese in a variety of packages. The majority of trade marks from Karat in the price positioning aspect were introduced mainly

in the medium and low price segments.

In 2000, Karat registered in Rospatent its brands Druzhba and Yan-tar. Subsequently Karat started to make claims addressed to other cheese manufacturers, which used the same brands, and the latter, in their turn started to file appeals on rejection of rights by Karat (Exhibit 5).


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Exhibit 5. Famous Soviet processed cheese brands Yantar and Druzhba

The renowned 100-gram foiled briquettes Volna, Orbita, Gorodskoi, Osoby, Ostry s Pertsem (“spicy with paprika”), S Lukom dlya Supa (“with onion for soup”), and many others were still popular. Each kind of cheese had its unique flavor: Yantar a rich creamy flavor, Druzhba had a cheese flavor, Volna was piquant. For medical and dietary nutrition medical doctors recommend Kislomolochny cheese (“lactic”), made of a natural ferment used in dietary dairy products’ manufacturing. Processed cheese Shokoladny, loved especially by kids, is made of fresh rennet cheese by adding cocoa and sugar.

In February, 2004, the company launched a production line, which produces slices (each slice of processed cheese wrapped separately) at the capacity of ten tons in 24 hours. At present, slices are produced under the following brands: Yantar, Slivochny, S Vetchnoi, S Gribami, S Kre-vetkami.


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Today Karat ranks as one of the most dynamically developing food industry enterprises. In 2007, the volume of output reached 53,400 tons against 34,800 tons in 2006.

The head company — ZAO Karat — is located in Moscow. The company employs more than 2,000 persons. All enterprises of the holding company undergo reconstruction and re-equipment, and have modern hi-tech equip-ment installed. The Moscow factory has three new cheese production lines producing Domashni cheese, processed cheeses, and fresh cottage cheese, Violette. The company is planning to install new lines for hard cheese manufacture in the regions, as well as the development of a dairy line.

Deputy CEO on Strategy and External Relations, Viktoria Pyatanova said: “The major competitive advantage of Karat — manufacture of only high quality products in accordance with Russian taste traditions and habits. All types of cheese are made of natural, ecologically clean raw stuff and components by the recipes developed in the Soviet time. We believe, that quality standards set forth during that historical period are among the highest in the world”17.

ZAO Karat for many years supplied high schools with cheese and dairy products, having obtained permission from the chief state health inspector and resolution from the Institute of Nutrition of the Russian Academy of Medical Sciences for using its products in the public insti-tutions for schoolchildren, and this is the highest accolade of products’ quality and their nutritional properties.

Products of ZAO Karat are present in all regions of Russia — from Kaliningrad to Vladivostok. They are also exported to Kazakhstan, Belorus-sia, Ukraine, Armenia, the US, Israel, Azerbaijan, Turkmenistan and Uz-bekistan. Within the government contract, the factory remains the supplier of natural products for the Russian army, FSB, the state border police, Emergencies Ministry, and Ministry of the Interior of the Russian Federa-tion. In 2005 Karat was awarded the right by the Russian Federation Gov-ernment to supply processed cheese to astronauts, so the company supplies on a regular basis its products to the International Space Station.

The company takes third place in the market (in 2010 — 10.3%) and aims at becoming the leading Russian manufacturer. The company’s fac-tory was the first in 2000 to register its right of renown since the Soviet era for the Yantar and Druzhba brands, which were produced by many regional factories, and started to manufacture these brands in a restyled fashion, and increased its production capacity by buying out assets in the

17 www.my-gb.ru.


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regions. Today it has to face disputes from manufacturers, fighting for the abolishment of the exclusive rights for the Yantar brand and for its return to the government. But formally it still keeps the rights to Yantar and Druzhba.

The company strives to create the largest cheese holding company in Russia. It actively keeps buying new assets in Krasnodar, Altai, Novosi-birsk and expands its Moscow factory. New brands are introduced to the market. They would replace the old ones in case the right to Yantar and Druzhba would cease to exist. In the future Karat aims at winning 40% of the Russian cheese market and becoming the major domestic, universal cheese and dairy company, which produces ecologically clean and healthy products.

Lactalis (President brand)

The Lactalis Company is the European leader in the manufacturing of high quality dairy prod-ucts. It owns 66 factories in France and also 15 enterprises outside the country. In 2006 the sales volume of Lactalis comprised € 5.23 bil-lion, 39% being operations outside of France. The main brands of the company are the fol-

lowing cheeses: President, Bridel, Valmont and Lactel. Besides cheese, Lactalis manufactures other dairy products and meat.

The Lactalis holding company in Russia is introduced by ZAO Lactal-is Vostok, which was established in Russia in 1997. The company imports to Russia such dairy products as elite French cheese (Roquefort, Brie, Camembert), butter, milk, sour milk and President processed cheese. In connection with its expansion, in 2003 the company opened its first fac-tory on manufacturing processed cheese in the Moscow satellite town of Istra, which can produce 12,000 tons a year.

Lactalis had a large factory in Russia. Premium “President” cheeses were produced at the factory. That provided vast opportunities for mak-ing cheese products. However, by referring that cheese exclusively to the premium segment, the company kept the number of buyers low, narrowed its market potential (because they could not attract buyers from the middle segment), and thus, limited the sales volume and hindered the growth of the company’s market share, so the company changed its pricing policy.

The company constantly expands the range of cheeses by creating new sectors in accordance with an analysis of consumer preferences. For ex-ample, ZAO Lactalis Vostok offered an array of President processed


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cheeses in “round-shaped boxes” (Exhibit 6). The new specially styled round-shaped packaging was brighter and more attractive. It drew more customers’ attention to shelves, compared to competitors’ packaging.

Exhibit 6. Processed cheese in a round-shaped package President

New products — Assorti (an assortment of cheeses) — allowed cus-tomers to try all original flavors of the President cheese. Thus, President made a new unique offer, i.e. the big round-shaped package Semeiny Krug (translated as “Family Circle”), which introduced the most popular cheese flavors (creamy, ham, mushroom and Assorti). In 2008 the compa-ny ranked fourth with a market share of 5.3%. It was actively indulged in creating the infrastructure base for further market dominance. The company had to divide resources for promotion of five equally important lines: processed cheese, butter, blue cheese, desserts, sour milk and cot-tage cheese, under the umbrella brand President. At the same time the company was not sufficiently represented, compared to leading brands, in the key markets — Moscow and St. Petersburg.

One could mention that Lactalis, to a certain extent, lagged behind other international companies. However, recently the company made prog-ress, its products appeared on the shelves of major retail chains. Lactalis aims at taking, in two years, more than 10% of the Russian processed cheese market by value, launch the second production line at the factory and increase capacity up to 12,000 tons of processed cheese a year.

Lactalis conducted a mass promotion campaign on leading Russian TV channels (Channel 1, Rossiya, NTV, TNT). Every month Lactalis con-ducted various sales promotion activities for customers (sampling, price discounts, contests, etc.).


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MARKETING OF THE VIOLA BRAND

In 1956, Valio started to supply Viola processed cheese to the USSR. It was the first product, introduced by the company in the Soviet Union. At first, the cheese was delivered in plastic boxes with paper labels, which covered the boxes on all sides. A blond girl with a bouquet of huge violets was depicted on the box cover. The Valio logo was hardly seen — it was printed in black (Exhibit 7).

Exhibit 7. A photo of a paper cover of the Viola processed cheese package in the 1950s

Then the box with a paper cover disappeared. It was replaced by a box made of red plastic. The appearance of boxes remained the same. Soon in the USSR they started to sell Viola in big containers, triangle-shaped packages and slices.

Product line of the Viola brand

The Valio Company produces a wide product line of processed Viola (see Appendix 11). The company expands its processed cheese assortment each year, trying to satisfy the demand of different customer segments. For instance, the assortment of Viola includes not only the flavors ev-erybody is used to like, i.e. original, ham, mushrooms but also the new unique flavors are chanterelle and paprika. These flavors were launched in 2009.

As Mika Koskinen says, “Viola brand will keep winning consum-ers’ hearts by providing the opportunity for them to taste their favorite


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cheese with various flavors”. The Viola cheese could be used both, as an appetizer and a dessert, and it could be used in cooking.

The Viola processed cheeses are made of special kinds of yellow cheese produce. This processed cheese is only made of natural dairy products, such as hard cheese (made from high quality milk) and butter (the Viola processed cheese does not contain any dairy substitutes like margarine or vegetable oil).

Marketing communications in promoting the Viola brand

To promote the Viola brand and create a high level brand awareness (see Appendix 3), the Valio Company uses different means and platforms of marketing communications, such as outdoor advertising (billboards, A2 format posters, stickers in the subway), advertising in the press, as well as on the radio. Thus, in the summer of 2008, the Nebo advertising agency fulfilled a series of works, consisting of two prints and a couple of radio commercials (see Appendix 12). The agency faced the problem of explaining to the consumer that cheese slices with Viola are very easy-to-use and indispensable in the summer house, at a picnic or fishing party. The summer advertisement campaign was held in ten Russian megalopo-lises.

To promote the Viola brand the transit advertisement in public trans-portation was used. Thus, in the spring of 2007 on the roads of some Russian cities bright-red trams appeared. They were decorated with the depictions of containers with the new ham Viola and dill-and-cucumber Viola.

The company also uses contests and lotteries. Thus, in the spring of 2007, the communication agency SPN Ogilvy Public Relations arranged a spring campaign: “For each wish there is a Viola!” aimed at promotion of the processed cheese Viola. The campaign was held in nine Russian mega-lopolises from March 1 to April 30, 2007.

The campaign participants were offered to send a poem, story or pic-ture about Viola. More than 3,000 persons within the campaign received presents, and the best authors received super-prizes.

The tactical advertising campaign of 2009 supported the launch of novelties — Viola with chanterelles and paprika in 200-gram tubs. Non-TV media campaign took place in seven largest Viola markets (Moscow, SPb and five regional cities). (see Appendix 12).

In 2010 and 2011 Valio conducted several ad campaigns which aimed to increase consumption of Violà cheese by widening of consumption situ-ations. Several occasions from real consumer lives explained how conve-


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nient Viola cheese was to use in different situations: on a picnic, fishing, in the office when it is late and you have to stay longer or when you get stuck in a traffic jam. Viola was promoted as a good snack. The headline of the campaign is “Viola is more then welcome” (see Appendix 12). This campaign has been supported by outdoor advertising, light-boxes in busi-ness centers where Viola’s target audience inhabit and radio.

Co-branding

One of the working branding instruments, used by the company in the practice of creating the brand exposure, are the co-branding cam-paigns. For instance, in 2008, the Valio Company chose the major bread factory in the Northwest region of Russia ÎÀÎ Khlebny Dom to promote the Viola brand (Exhibit 8).

Exhibit 8. Co-branding of the companies Valio and Khlebny Dom


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Viola restyling

Soviet brands became fashionable (and Viola definitely was one of the Soviet era’s symbols) and this motivated many companies to keep the “brand antiquity”. Obiedinennye Konditery nourish and cherish the choco-late bar Alionka, chocolate candies Mishka Kosolapy and chocolate sticks Rot Front, and do not change the authentic design, not by a fraction. VAT keeps manufacturing Prima and Belomor cigarettes. In tea parlors they keep selling “that very tea” — with a picture of an elephant, in a yellow packaging. Many Russian and Western companies insist that brand exposure and customer loyalty developed in earlier years — is the major brand value18.

Package restyling

The processed cheese Viola was introduced in the Russian market 50 years ago. It is the first imported processed cheese, which was ordered by the Soviet Union distributors in the 1950s. Thus, Viola is well-known to three or four generations of consumers. In those years Viola became the quality benchmark among processed cheeses and its great cream taste is well known and loved by many consumers.

In May 2008, the processed cheese market celebrated an outstanding event — the Viola cheese packaging was restyled (Exhibit 9).

Viola processed cheese, for many years of successful sales in Russia, became a quality benchmark and finally it was getting a restyled logo and a more up-to-date package design. The Valio Company decided to expand the product line of processed cheese Viola, contrary to the conservatism of its consumers and existing tendency on the consumer market to restore the “tastes of childhood”19.

Restyling was inevitable according to the Vice President of the cheese product line of the Valio company, Urki Heinimo: “Legendary brands the same way as the other need restyling and style modernization. Viola re-mained unchanged for the last decade, at least, and… started to go out of date. We realized that in 2004, when the company’s sales in Russia went down. In the situation of a rapidly growing competition in the processed cheese segment, Viola became vulnerable facing competitors, i.e. products which were introduced to the market far more later and accordingly had a more up-to-date design”20.

18 Should legends be modernized? // www.ko.ru.19 Ibid.20 Ibid.


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A. B.

A. B.

Exhibit 9. A. Old package; B. New package of the Viola brand after restyling

Does the Viola restyling assume threats? Is the Valio company afraid of a decrease in consumers’ loyalty, or an outflow of Russian consumers, who know the Viola brand since 1950s? Urki Heinimo answered “No!” to those questions. He believed that the changes in the Viola design were “soft” and “did not interfere in the life of the legend”, but allowed to make design more up-to-date. At the same time, the packaging design was not radiacally changed, the packaging was recognizable21.

It was far from being the first restyling in Viola’s 70-year history. However, everybody was glad that changes were rather subtle. So subtle, that when looking on the “new” Viola consumers were able to catch a spirit of novelty, but leave untouched certain details of renovation. “We always tried to introduce new features in rapport with the existing im-age. It is an obligatory condition of legendary brands restyling. All basic

21 Ibid.


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elements should remain. In connection with that Urki Heinimo states: “I can say for sure, that no matter what transformations would Viola go through further on, its package would carry the image of the girl named Viola, and the background would remain red-colored (in the new design the Viola package received a more contrasted image it became red and white, while the “extra” colors were take away, like for instance, yellow background)”22.

After that some changes have touched Viola again. In summer 2009 the Valio corporate logo was renewed. This is why all sub-brands logo-blocks were refreshed. The new logo looks more modern and dynamic. All of corporate values, such as naturalness, health care, clean milk and tradition were embodied in the new logo (Exhibit 10).

Exhibit 10. New Valio corporate logo

Conclusion

Supplying Viola processed cheese to Russia since 1956, Valio won the market and customer loyalty in a competition-free field. However, re-cently the competition in the Russian processed cheese market has become sharp, and new strong players have appeared on the market. All this has made Valio lose its leading position. What should Valio CEO do to remain a frontrunner of the Russian market? What marketing strategy should be applied? What new branding activities should be held under these new conditions? Top executives repeatedly ask such questions.

22 Ibid.


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Appendix 1

Types of Cheese

Hard cheese is generally boiled and not boiled-pressed cheese. This type of cheese is covered with either wax or natural crust. There are practically no molded cheeses among hard cheeses, since the technology of hard cheese manufacturing allows mold cultures to develop well inside the cheese.

Soft cheese is generally covered with a soft cream or cottage cheese texture, made without additional processing such as smoking or melting. When manufacturing lactic cheese milk is fermented with the help of lac-tic acid. The fermented cheese curd has a high acidity content, so virtu-ally only lactic acid is involved in the cheese ripening process.

Processed cheese is a relatively young product. In 1911 the scientist Walter Herbert and Fritz Slotter (Switzerland) succeeded in preparing processed cheese by using sodium citrate.

Processed cheeses could be considered full-flavored, since they have extraneous fats of vegetable origin. In texture they are close to soft cheese but differ in the method of preparation (additional melting af-ter the ripening) and taste. Being the product of additional treatment, packed in foil or hermetically sealed containers, processed cheese has a longer expiry date and is less sensitive to temperature fluctuations, and this prolongs its length of sale, as well as distribution area.


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Appendix 2

Types of Processed Cheese

Sliced. Processed from rennet cheese (50–70%) by adding other dairy products. The taste of such cheeses is strongly marked. The texture is plate-shaped, slightly stiff. The cheese is easily cut into slices. The cheese is packed in 30, 62.5 and 100-gram bricks.

Sausage-shaped. Processed on the basis of low-fat cheeses by adding rennet cheeses and dairy products (cottage cheese, butter, powdered milk, whey concentrate and powder, etc.) The cheese flavor is conditioned by smoking it and adding fillings (cumin, pepper). The texture is rather thick, slightly stiff. The cheese is easily cut into slices. Processed sau-sage-shaped cheeses are packed in links 6–8 centimeters in diameter, up to 3 kilos each.

Paste-like. Cheeses of this group are characterized by a high fat content and pronounced cheese or filler tastes. The majority of cheeses are packed in polystyrene boxes and cups with net weights of 100–200 grams. Some types could be packed in foil bricks.

Sweet. When processed this cheese is filled with beetroot sugar and such fillers, as honey, nuts, cocoa, fruit and berry flavor essences, chic-ory, syrups, juices, etc. They make the cheese taste and aroma special. Sweet cheese texture vary from sliced to paste-like. Sweet cheeses are packed mainly in foil, some types in polystyrene boxes and cups.


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Appendix 3

Consumption level, brand loyalty and spontaneous brandawareness of leading players in the processed cheese market,

2010

Source: TGI, 2010.

Viola Hochland President

Countrywide in Russia (% of respondents)

Consumption 29.7 31.3 19.9

Brand loyalty 19.1 19.0 10.0

Brand awareness 53.3 58.2 49.7

In Moscow(% of respondents)




In St. Petersburg(% of respondents)





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Appendix 4Sociodemographic profile of Viola and Hochland brand

consumers, age

Source: TGI, 2010.

Source: TGI, 2010.

Age of consumers, Russia (2011)

12.4

25.2

18.516.7

27.2

32.6

16.7 14.9

23.1

12.6

0

5

10

15

20

25

30

35

0 - 24 25-34 35-44 45-64 65-100

Viola Hochland

Age of consumers, Moscow (2011)

29.3

17.0

25.2

17.2

11.3

19.816.2

24.1 25.7

14.2

0

5

10

15

20

25

30

35

0 - 24 25-34 35-44 45-64 65-100

Viola Hochland


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Source: TGI, 2010.

Age of consumers, St. Petersburg (2011)

32.1

15.313.4 15.2

24.1

18.2

37.0

9.1

21.7

13.9

0

5

10

15

20

25

30

35

40

0 - 24 25-34 35-44 45-64 65-100

Viola Hochland


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Appendix 5

Sociodemographic profile of Viola and Hochland brandconsumers, personal income

Source: TGI, 2010.

Source: TGI, 2010.

Personal income of consumers, countrywide in Russia

21.225.1

12.8

36.8

2.6

31.3

24.4

14.1

2.9

24.8

05

10152025303540

Over 30,000rub

15,000 -30,000 rub

9,000 -15,000 rub

5,000 -9,000 rub

Less than5,000 rub

Viola Hochland

Personal income of consumers, Moscow

0.97.1

26.,3

40.0

24.0

0.88.5

30.3 34.025.3

0

10

20

30

40

50

Over 30,000rub

15,000 -30,000 rub

9,000 -15,000 rub

5,000 -9,000 rub

Less than5,000 rub

Viola Hochland


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Source: TGI, 2010.

Personal income consumers, of St. Petersburg

1.8

15.9

26.5

48.6

4.5 0.7

11.6

44.0

24.217.5

0

1020

30

4050

60

Over 30,000rub

15,000 -30,000 rub

9,000 -15,000 rub

5,000 -9,000 rub

Less than5,000 rub

Viola Hochland


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Appendix 6

Processed cheese, Russia, weighted distribution, %

0

10

2030

40

50

60

7080

90

100

DJ 2008 FM 2008 AM 2008 JJ 2008 AS 2008 ON 2008

Total Valio Total Hochland Total Lactalis Total Karat

Processed cheese, Moscow,weighted distribution, %

0

20

40

60

80

100

120

DJ 2008 FM 2008 AM 2008 JJ 2008 AS 2008 ON 2008



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Processed cheese, St. Petersburg, weighted distribution, %

0

20

40

60

80

100

120

DJ 2008 FM 2008 AM 2008 JJ 2008 AS 2008 ON 2008



117


Appendix 7

General chart of Moscow market potential of processed cheese,based on brand loyalty and appeal variables

(December 2008)

Main indices: 69% of all Viola cheese consumers are loyal to this brand (k of Appeal) ♦21% of those Viola cheese non-buyers who know this brand are accessible ♦(i.e. ready to start buying this brand) (k of Appeal)

Size of the circle stands for the group of the processed cheese brand consum-ers during a month.

Source: Company recerds.

Viola

Hochland

Druzhba (Karat)

President

Vesioly Molochnik

Yantar(Karat)

Volna

Svalya

VesiolayaBurionka

Orbita

0,00

0,05

0,10

0,15

0,20

0,25

0,30

0,35

0,1 0,2 0,3 0,4 0,5 0,6 0,7 0,8 0,9

Loyalty (average 0.53)

Appe

al (

aver

age

0.16

)


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Appendix 8

General chart of processed cheese,St. Petersburg December, 2008

Main indices:85% of all Viola cheese consumers are loyal to this brand (k of Loyalty); ♦18% out of Viola non-buyers, who know the brand are accessible (i.e. ♦ready to buy this brand) (k of Appeal).

The circle size means the group size of consumers who buy processed cheese of this brand in a month’s time.

Source: Company recerds.

Viola

Hochland

Yantar (Karat)

Vesioly MolochnikPresident

Druzhba (Karat)

Svalya

Yantar (Voronezh factory)

0,00

0,05

0,10

0,15

0,20

0,25

0,0 0,1 0,2 0,3 0,4 0,5 0,6 0,7 0,8 0,9 1,0

Loyalty (average 0,68)

App

eal (

aver

age

0,11

)


119


Appendix 9

Processed cheese brands image, Moscow (2008)

The diagram shows the significance of attributes for the image of various brands. The significance of attributes is calculated as the difference between expected and received indices of a given attribute of a given brand. The result shows the up-ward or downward bias from the expected significance in standard deviations. If the significance is more than +2, and less than –2, they are statistically significant.


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Appendix 10

Product line of Viola processed cheese

Fat content 28% Packaging: 0.1 kilos Plastic cup

Viola cheese, slicedFat content 23% Packaging: 0.15 kilos, plastic

Fat content 28% Packaging: 0.4 kilos, 0.4 kilos Plastic cup

Viola cheese with ham, slicedFat content 23% Packaging: 0.15 kilos, plastic

Fat content 28% Packaging: 0.2 kilos, 0.4 kilos Plastic cup

Viola cheese with mushrooms, slicedFat content 23% Packaging: 0.15 kilos, plastic

Viola cheese with cucumber and dillFat content 28% Packaging: 0.2 kilos, Plastic box

Viola cheddar cheese, slicedFat content 23% Packaging: 0.15 kilos, plastic

Viola cheese with hamFat content 28% Packaging: 0.2 kilos, Plastic box

Viola cheese, triangles

Viola cheese with paprikaFat content 28% Packaging: 0.2 kilos, Plastic box

Viola cheese with chanterelleFat content 28% Packaging: 0.2 kilos, Plastic box


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Appendix 11

Product line of Viola cottage cheeses

Cottage cheese Viola natural, light

Fat content 13% ♦Packaging: 150 grams, Plastic ♦cup

Cottage cheese Viola with herbs and onion


Cottage cheese Viola with smoked salmon, light


Cottage cheese Viola with orangeFat content 27% ♦Packaging: 150 grams, Plastic ♦cup


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Appendix 12

Valio advertising campaigns for Viola promotion (2008�2011)

Advertisement campaigns Picnic and Fishing party (2008)23

Advertising campaigns “Chanterelles” and “Paprika” (2009)24

23 Captures in the pictures: “Fish soup is far from being ready, but Viola is at hand!” “Barbeque is far from being ready, but Viola is at hand!”

24 Captures in the pictures: “Fish soup is far from being ready, but Viola is at hand!” “Barbeque is far from being ready, but Viola is at hand!”


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Advertising campaign “Viola will be more than welcome” (2010)

If you are here… Viola will be more than welcome!

Advertising campaign (2010–2011)Wherever you are … Viola always more than welcome!

Viola will be more than welcome!


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Questions for discussion

What are the distinguishing features of the Russian cheese con-1. sumers’ behavior?Conduct a SWOT-analysis of the Valio Company in the Russian 2. market. What benefits for the Valio Company does the creation of a 3. strong brand, Viola, provide in Russia? Estimate the Viola brand’s strength in Russia using the BrandAsset® Valuator (BAV) model developed by the Young & Rubicam Company. Estimate Viola’s brand equity using the brand equity model of 4. D.Aaker.What brand strategies does the Valio Company use when promoting 5. the Viola brand in the Russian market? What advantages and disadvantages does each of these strategies have? Analyze the packaging design of the Viola processed cheese from 6. the viewpoint of the graphic image of the brand architecture. Estimate the necessity of maintaining the restyling of the Viola 7. brand. What advantages and disadvantages are connected with restyling activities? What marketing activities should the Valio company conduct in 8. relation to the Violà brand to increase cumulative demand on its products?


125

The authors would like to thank ZAO Konecranes executives: General Director Fedor Yelagin and Technical Servicing Director Igor Bardin for their kind support and valuable remarks.

Andrei Yu. Panibratov and Marina O. Latukha

KONECRANES: BALANCING SCALE OF OPERATIONS AND QUALITY OF SERVICES

IN THE RUSSIAN B2B MARKET

This case study deals with the problem of the quality focused strategy development for B2B markets in Russia. The Finnish fi rm Konecranes (industrial cranes and loading works) activity is considered as the case. Customers traditionally enjoy high quality, stable reliability and a unique speed control system of Konecranes’ equipment. Once the company has got a large contract, its executives have to decide how to preserve a customer oriented approach and a high standard of work when operations potentially grow manifold. The area of this case discus-sion is the management of foreign subsidiary and organization of the system of the quality support when implementing the contract abroad. The work with this case involves an analysis of the international strategy of the company car-rying out operations in the markets of emerging economies of which Russia is a core example, the evaluation of prospects and problems of an international fi rm in the B2B markets of emerging economies, and the branding policy for B2B-sector discussion.

INTRODUCTION

On June 6, 2008 ZAO Konecranes received one of the biggest orders for cranes in the company’s history. A new customer, The Fourth Ste-vedoring Company, one of the biggest stevedoring enterprises in St. Pe-tersburg, ordered four ship-to-shore cranes and ten rubber-tyred gantry cranes. According to the contract, this equipment, worth in excess of € 40 million, was to be supplied, beginning in the third quarter of 2009.

Such big contracts were vital for the company’s reputation. Taking into account the high contract price and its significance for both the Russian affiliate and Konecranes as a whole, the day after signing the contract, the general director of ZAO Konecranes, Fedor Yelagin invited


126

Konecranes: Balancing Scale of Operations...

technical servicing director Igor Bardin to discuss how to preserve a customer-oriented approach and a high standard of work when operations were expected to grow several times larger.

COMPANY BACKGROUND

Konecranes Oy (known as KCI Konecranes till March 16, 2007), a Finnish company headquartered in Hyvinkää, Finland, manufactured and serviced cranes of various sizes and lifting capacities. Konecranes was a world leading manufacturer of lifting equipment, and the biggest player in the international market for industrial and port cranes. Every tenth crane in the world was made by Konecranes, about 80% of the equipment it pro-duces was going to manufacturing facilities, with the rest being used by ports and terminals. Among the company’s customers were: numerous paper mills, metal and mining works, automotive factories, ports and wharves, power plants, recycling plants and other industries all over the world.

The three primary industries that Konecranes worked in were: manu-facturing standard lifting equipment, heavy-duty cranes, and service. The last one gave the company about 30% of its annual profit. It was the world leader in routine maintenance and modernization of lifting equipment. There were over 340 Konecranes’ service centers all over the world. In 2008, Konecranes operated more than 500 enterprises, which employed about 9,500 workers in 43 countries. In 2007, sales volume reached € 1.7 billion1.

The industry was extremely competitive in terms of efficiency and quality. The high quality, stable reliability and unique speed control sys-tem of Konecranes’ equipment were in high demand, which made it pos-sible to generate high profits from investment in products and services. Konecranes’s specialists ensured a professional approach to servicing cranes, which lowered operating costs and extended operational life. Ac-cording to experts and company executives, Konecranes’ high competitive-ness was based on cutting-edge technologies and an international network of affiliates.

Konecranes came to Russia after World War II when it started sup-plying its equipment under intergovernmental agreements. Following growing demand, KCI Konecranes opened an affiliate in St. Petersburg on January 1, 1994, called ZAO Konecranes. The reason for this choice of location was twofold most key customers were located in St. Petersburg, which is very close to the Finnish headquarters.

1 Konecranes annual report 2009.


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KONECRANE’S HISTORY AND PROFILE

Founded in 1910 as a repair shop for electric drives, it grew into one of Finland’s largest machine construction companies. Konecranes had been producing cranes since the 1930s as part of a division of KONE Corporation. In its current state, Konecranes was formed on April 15, 1994, when KONE Corporation, a Finland-based group listed on the Hel-sinki Stock Exchange, as part of structural changes, which involved the disposal of all its operations, excluding its elevator business, sold the operations of its crane division. In 1996, KCI Konecranes went public on the Helsinki Stock Exchange and soon became one of the best issuers of Benchmark OMX Helsinki 25.

Throughout its 80-year history, Konecranes has been growing sig-nificantly by using its internal resourses efficiently and acquiring other companies. Konecranes’ products included all kinds of lifting equipment, such as building power cranes, cranemobiles, gantry trucks and other lift-ing platforms (Exhibit 1).

Exhibit 1. Konecranes’ products

Light-lifting equipment included: workstation cranes, jib cranes, monorails and systems, chain hoists, explosion-proof. Workstation cranes were used for different loads, span and operational requirements, due to

Konecranes’ products

Light-lifting equipment

Cranes for ports & wharves

Industrial cranes & components

Process cranes


128


their modular design with various profile sizes and suspension compo-nents where loads of up to two tons have to be transported. Standardized parts and simplified mounting techniques made installing and modifying the crane system straigtforward.

Jib cranes were commonly used for load handling around a machine or other small area. Konecranes built an extensive range of jib cranes, from 80 kg up to 5,000 kg. Depending on the size and configuration of the area, either a wall mounted or a pillar jib crane could be chosen, with a rotation angle of 180°, 270° or 360°.

A monorail system with a load range from 125 kg up to 2,000 kg was able to transport light loads between workstation units. It made load handling effortless, and the availability of curves, turntables and switches made it possible to build a tailor-made solution. The compact electric chain hoists, ranging from 65 kg up to 7,500 kg, combined safety with performance and high technology with modern design. Explosion-proof chain and belt hoists were designed specifically to be used in an explo-sion-hazardous environment. Major industries that required explosion-proof equipment were: chemical and petrochemical, pharmaceutical, food processing, gas power, water treatment, and electronics.

Industrial cranes and components were used in almost all industries. Their lifting capacity increased to 80 tons and included wire rope hoists, industrial cranes, explosion-proof cranes and components. Process cranes ensured that material would be handled continuously, offering high speeds, automatic and special control systems, load swinging prevention, and re-sistance to difficult operating environments. Heavy-duty industrial cranes were a subsection of process cranes for special applications. Service-duty cranes (erecting, mounting) were used in mounting, assembly, and repair work. The most important features were the highly accurate positioning of loads and smooth movements and stops. Lifting devices were used to handle loads and materials in virtually all kinds of industries, being typi-cally applied where automation was required. If the job was unusual or complex, an engineer or manufacturer offered customized solutions.

Konecranes manufactured a wide range of lifting equipment for all metallurgy processes. Cranes were customized for the industry’s most difficult environments and extreme temperatures. Konecranes built their largest and most complex cranes for ports, harbors, shipyards and the offshore industry.

Konecranes’ bulk cranes operated in over 70 ports of the world. Container cranes were designed in close cooperation with customers’ rep-resentatives (engineers and maintenance specialists.) Konecranes launched


129


container cranes of three types: rubber-tyred gantry (RTG), rail-mounted gantry (RMG) and ship-to-shore (STS). Warehouse container cranes were also equipped with a unique, patented load swindling prevention system, and a precision horizontal load positioning system (known as micromove-ment).

Multipurpose port cranes were designated to work in hook, grab, magnet and spreader (to handle containers) modes. Konecranes also manu-factured a comprehensive range of jib portal and Goliath gantry cranes for shipbuilding.

Konecranes’ wide range of services included crane maintenance to meet customers’ needs (Exhibit 2). The worldwide network of affiliates provided maintenance, modernization and spare parts. Maintenance ser-vices covered all activities, necessary for trouble-free crane operation.

Konecranes’ services

Inspection Port crane services

Maintenance Consulting & training

Modernization

Repairs Installation

Spare parts & components

Exhibit 2. Konecranes’s services


130


Konecranes offered customized inspection programs which were en-hanced by unique maintenance software programs. A statutory scheduled inspection determined whether usage of the crane had caused any damage that may impinge on safety, and addressed in particular the following: material fatigue, wear, corrosion and other damage. The operational re-liability inspection covered the safety of the user, the persons working within the operating zone of the lifting equipment, and service and repair personnel. The purpose of a condition monitoring inspection was to en-sure the operation of the equipment through increasingly frequent inspec-tions. Where required, the condition monitoring inspection can be linked to scheduled service — as a preventive measure. The procedures focused on the critical components and parts of the equipment.

Konecranes’ preventative maintenance program monitored and pre-vented equipment failure. By scheduling routine repairs, maintenance work and inspections, it helped to not only prevent equipment safety is-sues, breakdowns and compliance violations but also prevent component failure. This customized program not only maintained the customers’ equipment, but also predicted possible failures. Konecranes offered to its clients full-maintenance agreements that allowed customers to have a fully managed staff, ready to take care of their complete crane equipment and maintenance needs. Highly trained technicians and inspectors with the knowledge and tools available to take care of all crane needs allowed customers to concentrate their time and manpower on their production.

Major degrees of modernization were upgrading cranes to meet today’s demands, improving their availability, reliability and safety; and cost saving in their operation and maintenance. Pre-engineered modernizations were typically carried out on light-duty cranes and executed quickly by Konecranes’ service organization, such as hoist replacement or new motor controls of inverter type for long travelling. Engineered modernizations were project type cases for heavy-duty cranes executed by Konecranes’ specialist modernization teams. Engineered modernizations were turnekey projects, including the design phase, engineering, and production ending in installation and commissioning.

Konecranes worked with customers’ operation schedules and time constraints to fulfil „planned repair” needs. Planned repairs were sched-uled according to inspection and maintenance reports. The company of-fered emergency or planned repairs. An emergency service agent was on call. Expert technicians were on stand by, ready to respond to a call, 24 hours a day, seven days a week. Service trucks arrived at customers’ facilities stocked with spare parts, which saved operation hours of down-time spent waiting for parts.


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Installing lifting equipment included the erection and start-up of new hoists and cranes; installation and start-up of very large cranes (VLC); installation of runways and electrification systems. It required experience and know-how to prevent potentially dangerous safety issues. Konecranes offered unparalleled experience and expertise in erection and start-up in-stallation of overhead cranes.

Konecranes’ part centers around the world supplied replacement parts for all makes and models of cranes — even older cranes that were no longer being manufactured. They handled orders, shipped goods and gave technical support to customers worldwide. Part centers were original equipment manufacturers for all Kone parts, having archived all of the original drawings for Konecranes. In addition, the worldwide part cent-ers were one-source suppliers for all makes and models of cranes, hoists and accessory parts. Regardless of brand, if a part was not in stock, Konecranes’ engineering and fabrication department can quickly design and manufacture custom solutions, meeting both the timetable and local overhead crane standards. Worldwide part centers had resources and ac-cess to many original equipment manufacturers drawings, allowing them to fabricate parts for cranes and hoists no longer in production.

Training centers all over the world provided state-of-the-art train-ing and instruction for both Konecranes’ technicians and inspectors and customers’ service personnel and crane operators. In addition, the com-pany offered unique services such as load testing, runway analysis and equipment specification consulting. With so many different services and offerings, Konecranes was able to cover everything and anything that was crane related.

Service was an important part of Konecranes’ business emphasizing the importance of preventive maintenance and continuous modernization of equipment. For these activities Konecranes had formed a global divi-sion, Konecranes Port Service, serving the port industry. With a head-quarters in Finland, it combined the existing port service resources in all major markets. Konecranes Port Service provided a complete service for all makes and brands of port and harbor cranes.

KONECRANES’ STRATEGY

Konecrane’s management wanted the company to be the undisputed leader of the lifting industry, and a benchmark for business performance and customer service. Konecranes’ major goal was to increase customers’ performance by using cutting-edge solutions and providing maintenance services.


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Konecranes’ strategy was based on the synergy of the two business-es — supply and maintenance of lifting cranes — and developed accord-ing to the principles of growth, leadership in R&D and efficient use of resources (Exhibit 3).

Konecranes’ executives saw prospects for market share growth primar-ily in growing maintenance services. Although more and more companies tended to outsource crane maintenance, industry experts estimated that about 70% of the total maintenance volume was performed internally. Two-thirds of all maintenance work was outsourced, which also made it possible to increase their market share.

Exhibit 3. Konecranes’ strategic development principles

Another growth area was acquisitions. Konecranes had the financial and managerial resources to lead the consolidation of the industry. The Konecranes’ growth strategy was based on continued organic growth in markets where it was established, paired with an aggressive plan for acquisitions to enter new geographical markets or to fill a gap in their product portfolio. Well-recognized local or regional brands, with large installed bases, remained the primary target for Konecranes’ acquisition policy.

Growth of equipment sales was ensured by continuous customer rela-tions through service centers that employed over 2,000 crane maintenance specialists. Retaining its leadership in R&D was one of Konecranes’ top strategic priorities. By applying concurrent engineering principles in

Konecranes’ strategy

Market share growth

Efficient use of resources

Leadership in R&D


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R&D, Konecranes has been consistently able to launch new products to ensure cost-effective and safe operations for customers.

Konecranes’ products were based on modulation and standardization. Maintaining a globally uniform product platform gave them valuable flex-ibility in terms of capacity utilization and resource allocation. To improve cost levels, the company was constantly investing in the development of production methodology and equipment. Process automation increased the efficiency of the production scheme in use.

Konecranes’ R&D analyzed the lifting equipment market and located opportunities for new technologies to increase efficiency. This approach has always helped launch new products to ensure cost-effective and safe operations for the customers. The company applied concurrent engineering principles in its R&D. The fact that Konecranes was a fully integrated company — as the manufacturer, distributor and service provider for material handling products — gave it a clear advantage over its competi-tors. Every development project team consisted of experts from engineer-ing, production, sales, purchasing and service. Konecranes’ R&D for both its own and joint (including international) projects was enhanced through close collaboration with universities and research institutes. This was done to promote a spirit of innovation and enable the company to lead the way in the development of crane technology in the future.

The company aimed for the efficient usage of every resource — from material to human ones — in each and every activity. Konecranes in-vested in personnel training, offering its employees the opportunity to improve their qualifications and grow professionally, including such inter-national training programs as Academy and Konecranes Academy.

KONECRANES WORLDWIDE

As one of the world’s biggest crane manufacturers, Konecranes suc-cessfully operated in Europe, the Middle East, Africa, Central Asia, South America and the US.

Konecranes’ international strategy was mainly based on acquisitions. By acquisition, the company was aiming to go to new geographical areas or to fill gaps in their product portfolio. Konecranes has been acquir-ing mainly local, well-known brands in different countries2. In 1973, the company expanded internationally and made its first acquisition in Nor-way (Wisbech-Refsum). In 1983, the company established its first foot-hold in the US. (R&M Materials Handling) in Springfield, Ohio. In 1986,

2 Konecranes’ own data.


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Konecranes acquired a company in France (Verlinde) headquartered in Vernouillet. In 1991, the company established its own offices in the UK by acquiring the company Lloyds British Testing with operations in the UK and Australia. In 1997, KCI Konecranes made its first acquisition in Germany, MAN SWF Krantechnik.

In 2002 KCI Konecranes was the first foreign crane company in Chi-na to receive a complete range of business licenses including import and export. The same year, it succeeded in creating a bridgehead in Japan by establishing a joint venture agreement with Meidensha Corporation.

In 2004 reach stackers and lift trucks were added to the company’s product range through the acquisition of SMV Lifttrucks AB of Markaryd, Sweden. In 2005 KCI Konecranes’ acquisition of R.STAHL AG’s material handling division, R. Stahl Fördertechnik of Germany, brought together some of the crane industry’s strongest brands and most innovative tech-nologies, with Stahl being a significant player in the field of specialized lifting applications.

In the beginning of the 2000s the investment climate was rather low in Konecranes’ markets in Europe the US. However, the markets in the Asia Pacific region, especially in China, were growing fast. Konecranes had started sales activities in China as early as the 1980s but in 2002 the company received full licensing for all of its products in the country. In addition, during the same year Konecranes’ hoist assembly factory in Shanghai was established. In 2002, the company established a joint ven-ture with Japanese Meidensha Corporation3.

As the Asian market differed notably from Konecranes’ previous markets, the joint venture was quite a good choice for the company. The joint venture provided the company with the opportunity to share risk and gain better knowledge of the host market. Moreover, access to distributors became easier since the host country organizations created networks.

Unlike developed markets, where the company has settled down late in the twentieth century, developing markets offered new opportunities in the area of loading. One such market was Thailand. The country’s loading equipment market was developing along with the growth of the economy as a whole. In August of 2008, Konecranes received an order for four reachstackers and three empty container handlers from TPS Co. Ltd, which was the operator of Laem Chabang Port’s terminal, which was located about 130 km southeast of Bangkok. The equipment was to be de-

3 Konecranes world 2004.


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livered by February 2009. The value of the order was not disclosed, but was expected to be quite significant. A Konecranes’ representative office was opened in Singapore in 2001, when the first maintenance order was received.

An important direction that Konecranes’ international expansion took was investment in personnel training worldwide. The company offered its employees comprehensive training and career development, as well as international educational programs such as the Konecranes Institute. This was a two to three year educational program.

In 2008 Konecranes became internationally recognized for striving to comply with the highest environmental requirements. The company’s designers were doing their best to develop equipment that does not harm the environment, is efficient in its consumption of power and natural re-sources, and can be safely reused or recycled. Moreover, Konecranes was a leading supplier of inverter control systems that consumed 40% less power than traditional ones that were widely used.

OPERATIONS AND COMPETITION IN RUSSIA

The Russian affiliate that opened in 1994 had grown to 110 employ-ees (about 40 of them in St. Petersburg) and over € 50 million annual turnover.

The company’s presence in Russia was extensive. It was located in the following cities: Yekaterinburg, Magnitogorsk, Moscow, Novokuznetsk, St. Petersburg, Taganrog, and Cherepovets. Generally speaking, the company has been known in Russia since the end of World War II when its cranes were used to restore the nation’s industry.

From the very beginning of its operations in the country, Konecranes had completely Russian personnel at its local enterprises. It also had Russian managers on the top of the local divisions, who had a proper understanding of the market and the local conditions. Their customers represented mainly manufacturing industries and were diverse. These were ferrous and non-ferrous metallurgy, heavy machine construction, pulp & paper, ports and wharves. The company supplied huge shipments of its products to the Novokuznetsk Iron & Steel Plant, the Magnito-gorsk Iron & Steel Works, the Severstal, United Metallurgical Company, the Svetogorsk Pulp & Paper Mill and other industrial giants in Russia. Konecranes’ cranes were shipped to the St. Petersburg Seaport, compo-nents and spare parts were shipped to the Port of Novorossiysk. Port cranes and components were supplied to places as far as the Russian Far East.


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To provide remote support for customers, Konecranes created service centers. In 2007 the company planned to open three centers where the existing and potential customers were concentrated: in St. Petersburg (Northwest Russia and neighboring regions), Magnitogorsk (the Urals and neighboring regions) and Novokuznetsk (West Siberia and neighboring re-gions). Customers outside of these three macro regions were serviced by the company’s specialists, sent to their premises. Konecranes also trained the employees of its biggest customers that needed constant presence of maintenance personnel.

Expanding geographically, the company decided to restructure its ter-ritorial and industrial specializations. The process was going in two direc-tions: the company was being divided into divisions, and new divisions were created in the regions closest to customers.

The company’s division in St. Petersburg — ZAO Konecranes — serv-iced customers located in the city and neighbouring areas. Thus, it pro-vided a guaranteed service for two ship-shore container cranes in the St. Petersburg Seaport — modern cranes with elevators for personnel. Their capacity was 50 tons, with the outreach of 32 meters. A few years ago, Petrolesport (Timber Port of St. Petersburg) bought a rubber-tyred gantry container crane, and subsequently modernized.

The company also planned to service enterprises in the Port of Ust-Luga, whose terminal was managed by the National Container Company (NCC). Konecranes was going to take part in the tender for supplying equipment. Equipment for the terminal was purchased under NCC’s in-vestment program. According to it, the total capacity of NCC’s terminals should be increased to 9 million TEU by 2019, with the total investment volume exceeding $1.7 billion.

Konecranes cooperated with Svetogorsk Pulp & Paper Mill, supplying new cranes, modernizing old ones of its brand and shipping spare parts. The company’s regular customers were the Scania bus factory in St. Pe-tersburg and the Nokian Tyres factory in Vsevolozhsk. Konecranes pro-vided all kinds of cranes for Southwest Sewage Treatment Facilities in St. Petersburg. In the early 2000s, the company modernized several wharves. Severnaya Verf shipbuilding plant received five 50 ton gantry cranes.

Another Finnish competitor for Konecranes in Russia was Mantsinen. In 1998, Mantsinen opened its subsidiary in Russia. The reason for es-tablishing this subsidiary was growing demand and low competition in Russia. Mantsinen were asked to deliver two unloaders to the Ust-Luga timber terminals. The Russian enterprise became Mantsinen’s third sub-sidiary in the former Soviet countries. Other subsidiaries were located in


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Estonia and Latvia. During the first stages in Russia, the company in-vested in educating their salesmen and maintenance team in Moscow. The idea was to have local salesmen, who would deliver orders from Russia to Finland. At the beginning, the company organized educational services in Finland, but as their results showed the education for crane workers needed to be in Russia and in the Russian language4.

This might be compared with Konecranes who established their sub-sidiary in 1994 and had been present at the market during the early transition following the end of the Soviet Union. From the very begin-ning of its operations, Konecranes started aggressive investments in Rus-sia. As a first step, the company invested in employees and educational services, establishing it in three highly professional all in one service centers. Aside from the sales team, they had also repair and mainte-nance personnel. These service centers were established in St. Petersburg (Nortwest Russia and neighbouring regions), Magnitogorsk (the Urals and neighbouring regions) and Novokuznetsk (West Siberia and neighboring regions).

Basically, both companies had similar cranes for similar uses, but from the technical standpoint, Konecranes was the front runner and Mantsinen was the follower. Besides, Konecranes had investments in lo-cal business through working deeply within Russia, having regional sales networks, which included over 110 employees all around Russia. At the same time, Mantsinen had only one office in Moscow, which had sales and maintenance teams. The company worked mainly in Northwest and Central regions.

During the world financial crisis, sales of big cranes almost ceased. According to Mantsinen, during the crisis over half of turnover came from service, such as the repair or the hiring of crane workers. For both companies the effect of the crisis was a decrease in new orders. Moreover, in Mantsinen, over half of the factory was laid off in January 2010. New orders were expected to appear when banks started to give cheaper loans for crane customers5.

In the crane industry, companies are very dependent on government regulation and government orders. Konecranes had about 50 million USD of annual turnover in 2008. According to experts, most of Mantsinen clients were privately or partially privately owned companies. Because of low investments in Russia, Mantsinen did not have the competitive ad-vantages to grow as fast as Konecranes in Russia.

4 Mantsinen, 2010.5 Mantsinen, 2010.


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THE RUSSIAN CRANE MARKET

A major factor fuelling demand in the market for cranes and lifting services in the twenty-first century was the increasing availability and pop-ularity of leasing schemes. The high-rise construction sector in Russia was the most attractive in the high tower cranes segment. Russian cranes were poorly represented in this segment. Besides, companies that did not possess their own crane fleet dominated this segment. Additionally, quick and ex-tensive repair and maintenance services were extremely valuable assets.

Before 2008 the crane industry appeared to be in the middle of a global boom cycle, supported by non-residential construction. Despite of the crisis, Russia continued to offer Western construction equipment companies enormous opportunities for growth and expansion. Over 50% of construction equipment in Russia was outdated, hence the need for larger quantities of more reliable equipment was surging6.

On the Russian market, the main international competitors were Demag and Liebherr from Germany, but the main overall competitors were local crane producers, which operated only in Russia. The largest share of overall Russian production — 49.9% — was held by the prod-ucts of OJSC Nyazepetrovsky Crane Building Plant. In the Russian mar-ket for tower (column) cranes, its share exceeded 50%.

Konecranes always supplied expensive cranes, compared to local com-petitors. In the second half of the 2000s, price level differences had nar-rowed and, as such, local Russian producers were losing their ability to compete with imported products. In 2005–2007, the volume of domestic production increased by 1.9 times, while the import of column cranes into Russia increased by 4.3 times. Subsequently, the openness to new tech-nologies and vendors is now very high and foreign imports are popular where electric cranes and remote controls are concerned.

The volume of the Russian market for heavy and special cranes was worth around $250 to $300 million per year. It was estimated that the market demanded 400 to 500 new units every year, with the installed base of cranes somewhere between 200,000 and 300,000 units7. Experts claimed that replacing and upgrading cranes was difficult, as the in-stalled base of cranes was so large compared to the relatively non-existent service network. They believed that more than 50% of all general-purpose overhead travelling cranes, 60 to 70% of gantry cranes, and about 95% of portal cranes had completed the life cycle and need replacing.

6 Construction expert, No. 3, 04.05.2009.7 Construction expert, No. 3, 04.05.2009.


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Appendix 1

Konecranes’ Development Milestones

1933

KONE Corporation started to build sizeable Electric Overhead Travel-ling Cranes. The main customers were at first mainly from the pulp and paper and power industry.

1936

The company started to manufacture Electric Wire Rope Hoists.

1947

Harbor cranes were added to the company’s product range.

1950’s

The harbor cranes business line experienced strong growth in the post-war economy.

1962

KCI Konecranes signed the first Preventive Maintenance Contract with one of its customers.

1973

The company starts to expand internationally and makes its first ac-quisition in Norway (Wisbech-Refsum). In 1983, the company establishes its first foothold in the U.S. (R&M Materials Handling) in Springfield, Ohio. In 1986, Konecranes acquires a company in France (Verlinde) head-quartered in Vernouillet.

1988

Crane operations were organized into the KONE Cranes Division of KONE Corporation.

From 1990 onwards the company has kept a distinct focus on estab-lishing technical leadership.

1991

The company establishes its own offices in the UK by acquiring the Lloyds British Testing company, with operations in the UK and Australia.


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A large restructuring Program was launched, which continued until 1994. Among other actions, crane production facilities were cut from 19 to 4.

1994

On January 1, 1994, Konecranes starts working in Russia by opening an office in St. Petersburg.

KCI Konecranes was formed on April 15, 1994, when KONE Corpo-ration, a Finland-based group listed on the Helsinki Stock Exchange, as part of structural changes which involved disposing of all its operations, excluding its elevator business, sold the operations of its crane division.

1996

KCI Konecranes was listed on the Helsinki Stock Exchange. KCI Konecranes is an internationally broadly held company.

1997

KCI Konecranes made its first acquisition in Germany, MAN SWF Krantechnik. KCI Konecranes has experienced high organic growth in Germany and continued with several bolt-on acquisitions in 2000.

2002

KCI Konecranes was the first foreign crane company in China to re-ceive a complete range of business licensees, including import and export. The same year they succeeded in creating a bridgehead in Japan by estab-lishing a joint venture agreement with Meidensha Corporation.

2004

Reach Stackers and Lift Trucks added to its product range through the acquisition of SMV Lifttrucks AB of Markaryd, Sweden.

2005

KCI Konecranes’ acquisition of R.STAHL AG’s material handling di-vision, R. Stahl Fördertechnik of Germany, brings together some of the crane industry’s strongest brands and most innovative technologies. Stahl is a significant player in the field of specialized lifting applications.

2006

KCI Konecranes acquires MMH Holdings, Inc and expands its product range. The acquisition also brings new opportunities for growth in Main-tenance Services through the large installed base of MMH cranes.


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Appendix 2

An example of engineered modernization

In the late 1990s the Rautaruukki steel mill in Hämeenlinna, Finland felt the urge to increase efficiency. The company’s equipment had been modernized three times since the late 1960s. Crane capacity had been increased from the initial 120 tons up to 140, then 160 and finally 200 tons. Trolley capacity had been increased from 30 to 60 tons.

Having thoroughly examined the cranes and their planned usage, Konecranes’ specialists concluded that wheel loads were appropriate for the crane runways (building), whereas the gantries should be reinforced according to their classification group. New trolleys and cutting-edge inverter drives with extended speed range (ESR) and emergency control options were installed.

The project was carried out within eight months, on schedule. Each crane was modernized over the course of one week, every other week, which made it possible for the mill to operate without interruption. The project was completed in close cooperation with the customer. The cranes were enhanced to comply with modern standards and all key components replaced with new ones. This modernization cost about half of what a new crane would have cost.


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Questions for discussionDo a SWOT analysis for Konecranes in Russia.1. Characterize the advantages and disadvantages of different 2. stra tegies in the Russian market and their pros and cons for Konecranes.Evaluate opportunities for Konecranes to expand its presence in 3. the Russian market.What functional and structural change can increase Konecranes’ 4. efficiency and competitiveness?Discuss the prospects of quality-oriented brand development by 5. Konecranes in Russia.


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Vitally I. Cherenkov

K-RAUTA: EXPANSION IN RUSSIA IN A TIME OF WORLD CRISIS

In 2005, Rautakesko, the Leading Retailer of Home Improvement Products and Services well-known in the world market as an international rather than diver-sifi ed and networked actor, entered the Russian home improvements market under the K-rauta brand by acquiring St. Petersburg-based Stroymaster, one of the Russian DIY store networks based in St. Petersburg. Before entering the said market Rautakesko had successfully used many different entry modes into Sweden, Norway, the Baltic countries and Belarus. The present case describes how the pre-crisis time as a time of economic growth and high demand on K-rauta’s items was drastically altered in 2008. Having developed St. Petersburg as a platform market K-rauta stated Napoleonic plans to capture the Moscow Region and many others remote regions. The world crisis (2008) was a point of bifurcation: to continue or to cease the K-rauta’s expansion. Relevant data and data sources as well as opinions of those who are skilled in the art (K-rauta’s top-management included) are presented to help readers to estimate after-crisis K-rauta’s situation and its strategic decisions.

INTRODUCTION

That fabulous time (mid-2008) is remembered as the time of the highest oil prices. The world financial crisis was in every headline. In spite of the fact that the world crisis was propagating rapidly, Russian politicians and all of the media continued to consider the economic situ-ation in Russia as a well-defended one.

The author would like to appreciate Mikko Passanen, former Country Director for Russia, Rautakesko, Mikko Nissinen, present Rautakesko's Country Director for Russia as well as Elena Fofanova, Executive Assistant for communication and infor-mation supporting. Also, I wish to thank him for his deep and fruitful interviews concerning the concept, sense and scope of Kesko strategic decisions in Russia and also for attentive reading of the drafts of the present case.


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K-rauta: Expansion in Russia in a Time of World Crisis

However, in a time of total globalization, it is clear that nothing and nobody can be free from the impact of the world crisis. Nowadays, Nouriel Roubini, a leading U.S. economist who predicted the 2008 finan-cial crisis, is warning of what he described as a „perfect storm” of brew-ing threats, which, he says, could slam into the global economy as early as 20131. So, for any foreign actor on the Russian market, this crucial dilemma, — „To expand or not to expand?” or „To invest or not to in-vest?” remains a very relevant one. Before the said crisis, a well-known Finnish retailing company, Rautakesko, decided to continue developing its Russian home improvement market under the K-rauta brand2. Naturally, a business risk could be revealed in this strategic decision. Why, in that ambiguous time of crisis, did Rautakesko not restrict but rather enlarge its activities in Russia, both geographically and financially? To answer this question and questions related to it, it is necessary to analyze the historical roots and strategic options providing Rautakesko’s contempo-rary flexibility and courage in the Russian market3.

In accordance with the most commonly available information4 Kesko Corporation, founded in 1940 and based in Helsinki (Finland), together with its subsidiaries, operates in the trade sector, offering various prod-ucts and services in the Nordic and Baltic countries, and at the right time, crossed new borders and expanded its distribution network into Belarus and Russia. Nowadays, Russia could be defined as the most significant market where the Kesko Corporation has operated under the K-rauta name. The Kesko Corporation is a powerful, flexible and diver-sified international retailer. This large international retailer consists of different divisions5:

Kesko Food operates the chain of K-food stores, offering grocery 1. products to consumers and business customers; Rautakesko is engaged in the hardware and building supplies, and 2. interior decoration trade; VV-Auto imports and resells passenger cars and commercial vehi-3. cles, providing after-sales services at its retail outlets;

1 New wave of global crisis looms – http://english.ruvr.ru/2011/06/21/52189359.html

2 www.k-rauta.ru3 The case „RAUTAKESKO: Hammering International Path for a Finnish

Retailer to the Baltic Sea Area” prepared by Katja Kolehmainen and Tiina Ritvala at Helsinki School of Economics (HSE Case 308-042) had given the author an op-portunity to make the corresponding reference in lieu of acquiring data concerning previous stage of Rautakesko’s internationalisation.

4 http://www.linkedin.com/companies/7995/Rautakesko+Oy?trk=pp_icon5 www.kesko.fi


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Keswell offers home and speciality goods through furniture, inte-4. rior decoration, sports, home technology, shoes, optical, and de-partment store chains; Kesko Agro purchases and resells animal feed, chemicals, and ma-5. chinery to agricultural entrepreneurs; Konekesko imports and resells construction and environmental ma-6. chinery, trucks and buses, and recreational machinery including boats to be sold in Finland as well as to be re-exported to other European countries; Kauko-Telko division specializes in international technical and raw 7. materials trading.

At the end of 2009, there were 1,030 K-food stores, 330 building and home improvement stores in eight countries and 90 agricultural stores in Finland, VV-Auto’s retail sales network consisted of 40 dealers selling Volkswagens and 59 service workshops, and 41 dealers and 58 service workshops for Volkswagen commercial vehicles. The corresponding figures for Audi were 17 and 39, respectively. Seat cars were sold by 23 deal-ers and maintained and repaired at 40 shops in Finland and three in the Baltic countries6.

As is well known from international marketing management textbooks, in order to manage any huge distribution network, it is necessary to have adequately strong and ambitious top-management for especially remote (in terms of so-called psychological or marketing distance) retail chains. In internationalizing its business, Rautakesko’s headquarters in Finland had to assign and support well-educated, country-sensitive and psychologically strong regional managers for every national/industry area: namely, Mikko Pasanen, former Country Director for Russia at Rautakesko7, a man with an open, kind face and very gentle manner of speaking that belied a very strong personality of the sort that becomes a good manager. Sometimes the milestones of a business leader’s CV help us to understand their character as a person. His previous job (before Rautakesko) was as an area manager at Outokumpu8, an international stainless steel company with the vision to be the undisputed number one in its industry, with its success based on its operational excellence. Therefore, to manage K-rauta successfully during the world financial crisis, the „operational excellence” as well as „stainless steel management” features of this company were necessary to formulate

6 Kesko Annual Report 2009 // http://81.22.170.195/PageFiles/10802/Kesko%27s%20Annual%20Report%202009.pdf.

7 Now, this position is occupied by Mikko Nissinen, assigned in the Summer of 2010.

8 www.outokumpu.com/


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and implement an innovative marketing strategy on such a very difficult emerging market as the one in Russia.

Hence, when oil prices (which may be the most important factor in the well-being of many if not all Russians in the post-communist time) dropped down from their peak (summer 2008) the problem of choice arose. On the one hand, — after the Stroymaster9 chain was taken over and K-rauta’s outlets were greenfield-built, — maintaining marketing success demanded that this expansion continue. Nine K-rauta outlets in St. Petersburg were as ready as nine guard regiments under yellow-blue-white banners to conquer new Russian regional markets. Their cylindri-cally curved front glass walls (like fortress walls and towers) demonstrat-ed K-rauta’s ability to compete with domestic and foreign competitors in St. Petersburg, that serve and exploit the same DIY and/or Gardening concept. On the other hand, considering the need for more careful busi-ness behavior under the crisis, a waiting strategy might be if not the wisest then at least the most prudent decision, expected by stakeholders. However, the events of the next two years (after 2008) became a strik-ing illustration of courageous and well-grounded marketing decisions by K-rauta under the management of Mikko Pasanen. Considering K-rauta’s marketing strategy, one could sense that his previous work with stainless steel products gave him a good degree of protection against the world financial crisis and other surprises in the global marketing environment.

Living in St. Petersburg and visiting local K-rauta outlets one can see almost endless racks of shelves filled with materials and tools used for home improvement, so similar to the racks in the chain outlets of their main competitors. Therefore, it is only possible to guess about the rea-sons for K-rauta’s explosive expansion in St. Petersburg, a city designed to become a platform market. Considering former Stroymaster’s outlets and comparing them with „greenfielded” K-rauta’s ones, is it possible to find any differences between them? Are there any strategic marketing differences in presenting the same product ranges and, perhaps, the same business models, also using the DIY („do-it-yourself”) concept10? Notwith-standing the significant devaluation of the Russian currency (the euro/ru-

9 The Stroymaster, — A former Russian DIY store network based in St. Pe-tersburg, which was taken over by K-rauta in 2005.

10 Balló, Z. Review of the Competition between DIY Store Chains in Hungary // Delhi Business Review. Vol. 11, No. 1 (January — June 2010); Santos, A., Rocha, C.G., Lepre, P.R. Barriers and Opportunities in Developing “Do-It-Yourself” (DIY) Products for Low-Income Housing // Journal of Construction in Developing Coun-tries, Vol. 15(2010);


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ble rate jumped up to 28% from June 2008 to June 200911) and the fact that imported goods predominated on the shelves of K-rauta, new K-rauta stores emerged in Yaroslavl, Kaluga, etc. together with falling factual family incomes and new, attractive finishing materials… Unemployment growth and steady demand for construction materials… Questions, ques-tions, and more questions... Indeed many questions crowned by the main one: What is K-rauta’s further expansion in Russia about? Is it the right strategic decision? If „Yes!”, then „Why?”

BRIEF HISTORY AND SHORT PROFILE OF RAUTAKESKO

A new actor on the St. Petersburg home improvements market, K-rauta, was warmly accepted by urban residents as well as home repair/improvement companies. Some of them traditionally perceive any Finnish brand as a symbol of high quality goods and services. Others, mainly those of the new generation, used Google to learn more about this new market brand. Fast and cheap internet searches revealed that Rautake-sko12, the second largest business of the Finnish trading group Kesko, is the Finnish mother company of the K-rauta retail chain which had been rapidly developing its chain stores in Russia. There are some Nor-dic companies (e.g., Nokia and IKEA) involved in satisfying people’s so-called basic needs, which should be read here as communications and home comfort, respectively. Their successful choice of product and the right business model helped them to harvest the ample „benefits of glo-balization” due to economies of scale and scope. Let’s take Nokia as an example. This Finnish global giant — which was included for many years in the Fortune 500 list, exploits consumer’s needs, wants, and expecta-tions that are quite consistent and strong across the entire globe. Any improvements in standards of living are attractive almost for everyone, everywhere. This statement also applies to improvements to housing or accommodations. Besides, many people (especially men) like to handle projects themselves in order to see themselves as „real men” and/or keep to a family budget. The DIY concept (DIY and Gardening concept13 in more advanced countries) that is held to function as part of K-rauta’s business model seems to be of the same nature as Nokia’s and IKEA’s business concepts, allowing for a long market life and bringing in solid profits. Searching for the said economies of scale and scope were the main boosters for their businesses in the process of becoming global. Then, since Rautakesko also served basic human needs and wants, like

11 http://1.44mb.ru/dinamic/euro/2009/; http://1.44mb.ru/dinamic/euro/2008/ 12 http://www.rautakesko.com 13 http://www.euromonitor.com/DIY_And_Gardening


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the Nordic giants mentioned above, this Finnish company had no choice except to expand abroad in order to make use of the benefits of globali-zation.

Thus, country-by-country international expansion into geographically proximate areas was the next feature of Rautakesko’s internationalization. This international marketing strategy went through an accelerated and ag-gressive internationalization process since its initial entry into the Swed-ish market in 1995 (by 2008, there were 19 K-rauta home improvement stores14). Expanding abroad looked like an imperative in order to meet shareholders’ and other stakeholders’ expectations, due to the restricted size of the domestic market, with a population of approximately five mil-lion and modest market demand of approximately € 3.7 billion. The total globalization of the world economy has forced companies operating in the retail industry (since about the mid-1990s) to increase their growth expectations. As a result, the retail industry, which is traditionally more domestically focused and less consolidated than almost any other indus-try, faces the challenges of customizing product ranges according to local requirements, and is internationalizing rapidly.

Rautakesko had a rather high rate of internationalization. The diver-sity of their options for internationalization15 provided for a considerably flexible international strategy. Rautakesko made its first assault abroad in 2008, when the company established retail chain operations in Sweden, Norway (Rautakesko owns Byggmakker Norge AS, which manages the By-ggmakker hardware and building’ supplies chain of 119 stores), Estonia (8 K-rauta stores), Latvia (8 K-rauta stores), Lithuania (15 stores owned by UAB Senuku prekybos centras — known also as Senukai — acquired by Rautakesko), Russia (see further), and Belarus (3 OMA stores pre-sented as subsidiaries of Senukai). They provided hardware and builders’ supplies, as well as interior decoration items. Financial results for the year 2008 were as follows: the net sales outside of Finland made up over 60% of the business division’s total net sales € 2,129 million), foreign sales growth over two years amounted to 12.3%.

Again, a creative combination of different entry modes made Rau-takesko’s international expansion highly flexible; namely, programs rang-

14 Hereinafter we illustrate contemporary Rautakesko development abroad us-ing data concerning K-rauta being under consideration as the main subject of the present case study extracted from Kesko Year 2009 // www.kesko.fi until other data source is indicated.

15 See more detailed history in: Kolehmainen, K., Ritvala, T. RAUTAKESKO: Hammering International Path for a Finnish Retailer to the Baltic Sea Area // ECCH case for learning — HSE Case 308-042


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ing from direct and camouflaged M&A operations (Sweden, Russia and Lithuania, Belarus, respectively) to greenfield operations (Russia) requir-ing different investment levels and depending on different risks (political risks included).

SHORT PROFILE OF K-RAUTA AND ITS STRATEGY IN RUSSIA16

Rautakesko made its entry into the Russian market through St. Pe-tersburg, which served as a platform market. Three main reasons for this decision can be identified. Firstly, St. Petersburg is the biggest market in the Northwestern region of Russia for the K-rauta chain, due to consider-able construction growth and higher than average family income.

Secondly, St. Petersburgers perceive Finnish goods as having high brand value due to the so-called „country of origin” effect; the historical roots of this phenomenon date back to the Soviet era, when Lenfintorg im-ported Finnish products. High quality imported Finnish goods were always better than domestic ones, and the imported goods from the so-called „socialist countries” of Central and Eastern Europe.

Thirdly, the DIY concept is the core of K-rauta’s business model (Exhibit 1) and as such is close to Russian mass consumer consciousness. Lack of home improvement services in the Soviet Union and the thrifty habits of the older generations formed a special consumer consciousness that matches the said business model. The new generation of Russians, on the other hand, perceives DIY as a hobby and a way to improve one’s image.

Rautakesko’s strong market position was ensured by the corporate characteristics formulated in its mission, — „Rautakesko, working together with its customers, contributes to better homes in the Nordic and Baltic countries and Russia”, and a vision of being the „Leading hardware, build-ing supplies and home improvement company”. Rautakesko explains its ra-tionale for internationalization as follows „The structure of the trade sector is changing in the Nordic countries; there is vigorous growth in the Baltic states and Russia; competitors and suppliers are growing and becoming international; concepts and operating systems are competitive export items; K-rauta’s concept, international purchasing and logistics, electronic infor-mation management and business operations”. This rationale is represented visually in Rautakesko’s operating model (Exhibit 1) by Matti Halmesmäki17 and modified by the author in the context of K-rauta’s main market.

16 www.k-rauta.ru17 the President of Rautakesko, September 2004.


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Exhibit 1. Rautakesko’s operating model with two-fold customer array

Legend: DIY-Customers — sub-array of pure „DIY & Gardening” individual/family customers;

P-Customers — sub-array of pseudo „DIY & Gardening” incorporated/non-incorporated customers;

Source: „Rautakesko — a growing and profitable operator in the hardware, build supplies and home improvement trade” // excerpted (and redesigned by the au-thor) from the presentation made by Matti Halmesmäki, the President of Rautakesko Ltd, on September 1, 2004.

Matti Halmesmäki explains18:

Historically, beginning from the Soviet times, Russian market is very important for Finnish exporters. This market is the place where our companies have an opportunity to use many of the competitive advantages acquired before. First

18 http://www.kesko.fi

Management of K-rauta and

the Rautia Chains

Leading hardware, build supplies and

home improvement company

Electronic information

management and business operations

P-Customers

DIY-Customers

International purchasing and

logistics

Competitive consumer and professional

consumer concepts


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of all, I would like to list among them positive attitude of Russian customers to „Made in Finland” goods, our good knowledge of the Russian marketing envi-ronment, and personal business relations. It is impossible to overestimate such economic/geographical factors as quite well developed transportation arms to supply our retail chain stores in St. Petersburg and our good understanding of St Pete’s consumer preferences, formed by their climate, habits, and culture. So, St. Petersburg is a very important K-rauta’s platform market due to higher household incomes in this metropolitan area.

Further expansion of K-rauta took place in Yaroslavl, a densely popu-lated city demonstrating rapid development. About 300,000 people, almost half of the city’s population, live near a K-rauta store. The store has a total sales area of 16,500 m2, of which 7,200 m2 are heated and, the rest of which is a partially covered outdoor sales area. Their product range includes more than 30,000 products for building, renovation, interior decoration and the yard and garden. The store has showrooms displaying interior decoration solutions to facilitate customers’ decision-making and offer new ideas19.

The Rautakesko Company is one of the most rapidly developing Kesko subsidiaries, accounting for 26% of the Company’s total operating profit. Rautakesko, which owns over 350 DIY-stores, is on the top-five list among other largest companies in the European building and home improvement market. Stroymaster JSC, which has a strong business repu-tation, is very popular among consumers and has operated in St. Peters-burg since 2005, was the first DIY chain owned by Kesko to operate in the Northwest region of Russia. Stroymaster JSC had played a role as an additional „booster”, representing the K-rauta brand in St. Petersburg and then in the Northwest region of Russia (see Exhibits 2a and 2b).

Exhibit 2a. K-rauta chain store as a subject of acquisition by Rautakesko (formerly Stroymaster) (13, Kima prospect, St. Petersburg, Russia)

19 http://www.rautakesko.com/default_page.asp?pageid=416


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Exhibit 2b. K-rauta chain store as a subject of Rautakesko’s greenfield operation, presenting the international K-rauta concept including „Zeleny Dvor”

(gardening items) (163, Tallinskoye shosse, St. Petersburg, Russia)

The layout of the sales area, as well as prices and goods assort-ment play a very important role in attracting consumers and winning their loyalty. The topology of the said „sales space” depends on the entry mode being used. While Rautakesko’s choice of entry mode for the Russian market was already historical, its lessons are useful for Rautakesko’s future expansion into Russia. As any relevant textbook states, there are four types of entry modes for foreign investors entry modes: greenfield, acquisition, brownfield and joint venture. The history of Rautakesko’s internationalization illustrates all of these modes20. The Kesko Corporation subsidiary, Rautakesko Ltd, received approval from the local government to acquire a St. Petersburg DIY store chain called Stroymaster. The deal was completed by July 28, 200521. However, the most important period of post-acquisition integration begins after the deal is done22. While employees are relatively easily hired, dismissed, rotated, and trained using the investor’s management skills, technology and know-how, goods/services assortment and integrated marketing com-munications (IMC) are adjusted in a manner appropriate to the target market, the said sales space is mainly inherited from the former owner, the Stroymaster DIY retail chain. Alternatively, while using the green-field entry model, it is easier for investors to control resources that could be transferred internally and can constitute the core competences

20 Kesko’s history – http://www.kesko.fi/21 KESKO Acquisitions and divestments - http://www.kesko.fi/22 Haspeslagh, P., Jemison, D. B. Managing acquisitions. – Free Press, New

York, 1991.


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of the new business unit. However, start-up costs and the associated risks are among the largest problems23.

Nevertheless, when opening its first DIY-hypermarket in St. Peters-burg (September 15, 2006) Rautakesko aspired to transfer its entire busi-ness model. This hypermarket was designed in full compliance with the international concept of Rautakesko’s chain. There are nine K-rauta DIY-hypermarkets operating in St. Petersburg, visited by over 700,000 retail and wholesale customers each month. As a result, K-rauta has acquired over 17% of the relevant market share in St. Petersburg. K-rauta’s repu-tation as a reliable partner provides this marketing success, and secures its strong position in the Russian market. K-rauta’s competitive goods and services attract not only individual consumers but also wholesalers or „small wholesalers” (over 5,000). In 2009, K-rauta expanded to the fed-eral level. Masterstroyprof JSC was founded (in 2008) to start doing busi-ness in the Central region of Russia. The first Masterstroyprof’s hyper-market, operating under the K-rauta brand, opened in Yaroslavl in March 2009. At the same time, the plan to expand Moscow operations (to open six DIY-hypermarkets in 200724) was postponed due to the world financial crisis. Nevertheless, K-rauta’s investment plan to expand in the Moscow region, — Kaluga, Ryazan, Tula, — remained in place25. Mass media cov-ered this expansion process extensively. K-rauta’s future in Russia looked optimistic due to its strong commitment to exceeding customers’ expec-tations, advanced recognition of customers’ needs and striving to offer customers positive experiences through constant operational improvement and emphasis on entrepreneurial activity. In spite of the fact that this policy has been widely discounted, K-rauta offers customers the best qual-ity products and services on the market to ensure long-term competitive-ness and marketing success. K-rauta’s expansion into remote regions of Russia does not exclude the possibility of such traditional international marketing tools as product range/assortment adjustments; namely, goods/services packaging26.

23 Bradley, F. International Marketing Strategy. — FT-Prentice Hall, Harlow, England – New York, etc., 2005.

24 https://www.irn.ru/news/13185.html25 The text of this quotation was preserved and presented on an “as is” ba-

sis. However, new K-rauta hypermarkets were opened in Kaluga and Tula by May 2011. See the Last Chapter at the end of this case. The total number of K-rauta hypermarkets in Russia has reached 13 units.

26 Dynamic End 2 End Supply Chain Optimization: ASN — Product Outline // http://www.agentlink.org/agents-zurich/presentations/2%20OSCT%20ASN%20Product%20Flyer_v2.5%20HEC.pdf


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RUSSIAN DIY (AND GARDENING) MARKET UNDER THE CRISIS

In accordance with a Euromonitor International market report en-titled „DIY And Gardening in Russia”27 the present worldwide crisis af-fected greatly the performance of the Russian DIY and Gardening market. By the end of 2008, the growth in the DIY and gardening sectors was much lower than in previous years. It is understandable that the growth of the DIY sector depends on the growth of housing stock and increasing disposable income.

It would be incorrect to say that the world financial crisis had no ef-fect on Rautakesko’s expansion in Russia. However, due to adverse macr-oeconomic indicators, Rautakesko’s expansion was not stopped but contin-ued. „The opening of the first two Moscow stores, planned for Q1 2008, is to be delayed for at least a year, reported Retailer28.” The deteriorating global environment, contracting global demand, falling commodity prices, and tightening credit pushed Russia’s economic downturn, especially in the first quarter of 2009. According to preliminary data from the World Bank data for the period from January to May 2009: GDP growth [%] = –10.1; real disposable income growth [%] = –0.4; real wage growth [%] = –2.0.

Oil prices reached a record high in May of 2008, and fluctuated near the $150/barrel mark. An oil generated flood of incoming dollars caused drastic improvements in the living standards of different socio-economic layers of the Russian population. At last they could satisfy the expen-sive needs and wants that had been deferred before, home improvements included. The very popular slogan, „We are not that rich to buy cheap products”, — could be applied to K-rauta stores in Russia. The question „to stop or not to stop?”, asked at the beginning of this case, does not apply to Rautakesko’s marketing strategy for the Russian regional mar-kets. Times have changed dramatically since the crisis started in 2008. This crisis has had a profound impact on the Russian lifestyle. Previously known as a high-spending hedonist, the middle-class Russian consumer in metropolitan areas (Moscow and St. Petersburg) and „millionnic cities”29 (e.g., Kazan, Krasnodar, Novosibirsk, Omsk, Rostov-on-Don, Samara, Vol-gograd, Yekaterinburg) has slashed his or her spending on luxuries, even on basic items such as food. And, although businesspeople are seeing

27 http://www.euromonitor.com/DIY_And_Gardening_in_Russia#exec28 Retail Update Russia — Issue No. 5 (58) — Tuesday, March 4, 2008 //

http://www.pmrpublications.com29 „millionnic cities” — Russian professional jargon; refers to cities with more

than one million inhabitants.


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green shoots of recovery, analysts warn that the new austerity is here to stay for the foreseeable future. In spite of optimistic declarations on the part of Russian and foreign analysts concerning the bottom of the crisis falling out, there are contradictory points of view. The World Bank’s lead economist for Russia, Zeljko Bogetic, argues30 that „the real incomes of the Russian population in 2009 are likely to fall further and the number of unemployed is expected surpass 13% by year’s-end… and larger economic contraction in 2009 will result in an additional increase in the number of poor and further shrinking of the middle class”. Con-sidering the fact that the demand for home improvement products is a derivative of the output of the construction industry illuminates the last point.

The conditions on the Russian construction market (Table 1) began to deteriorate in the second half of 2008 and this slowdown deepened toward the end of the year. Due to growing construction output, the growth rate for the entire year remained strong. Without the buffer of the strong first six months, 2009 has witnessed a fully-fledged construction crisis, with output, employment and other key indicators for the industry falling sharply. In ruble terms at the time of publication, the Russian construc-tion industry contracted by 18.4% in the first three quarters of 2009. In dollar terms, however, and due to the depreciation of the ruble, the value of the industry plummeted to just $81 billion for the period be-tween Q1 and Q3 2009, down from $ 129 billion in the same period one year earlier. Robert Obetkon, Senior Construction Analyst wrote recently31 that „the construction industry in Russia has been hit hard by the global economic downturn. The slowdown on the domestic construction market began in 2008 and has intensified in 2009. The majority of construction projects have been suspended and virtually no new residential or com-mercial property projects have been started. For the first time this dec-ade, the value of construction work will have shrunk — by over 15% in comparison with 2008”. However, the final conclusion is that the worst of the storm has passed and market stability should return in 2010, with the promise of growth in 2011.

Residential construction data indicates that this segment has thus far not been dramatically affected by the economic crisis. After growth

30 Bogetic, Z. Russian Economic Report #19: From Crisis to Recovery — Poli-cies Matter — World Bank Moscow Office, June 24, 2009 // http://siteresources.worldbank.org

31 Obetkon R. Light at the end of tunnel for the Russian construction in-dustry // Report “Construction sector in Russia 2009 – Development forecasts for 2009–2012” – www.constructionrussia.com


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of 6.5% last year (Table 2), the number of housing units built in Rus-sia underwent a slight decrease during the first nine months of the year. The total floor space of apartments completed (up 4.6% last year) fell by 0.6% in Q1-Q3 2009. However, the decline in housing construction levels is expected to intensify in the upcoming months, as hardly any new resi-dential projects are being started.

Table 1

Construction output in Russia, 2004–2009

Source: Report „Construction sector in Russia 2009 – Development forecasts for 2009–2012”, PMR Publications, a division of PMR, 2009 // www.construction-poland.com

Table 2

Total number of housing units built in Russia (‘000 units and real y-o-y change), 2003–2009

Source: Report „Construction sector in Russia 2009 — Development forecasts for 2009–2012”, PMR Publications, a division of PMR, 2009 // www.construction-poland.com

Years 2004 2005 2006 2007 20082008

Q1-Q32009

Q1-Q3

Construction output, billion ruble

1.314 1.754 2.351 3.293 4.598 3.093 2.629

Real y-o-y change, %

10.1 13.2 18.1 18.2 12.8 17.0 –18.4

Years 2003 2004 2005 2006 2007 20082008

Q1-Q32009

Q1-Q3

000 units 427 477 515 609 721 768 397 386

y-o-y change, %

7.8 11.7 8.0 18.3 18.4 6.5 5.7 -2.7


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The Russian market for construction materials will remain extremely challenging in 2009 on account of the following factors32:

the industry expanded strongly until 2008 and was characterized ♦by steady and strong growth, especially in densely populated cit-ies/regions. However, the spread of the global financial crisis to Russia caused a slump in 2008 and a virtual standstill in early 2009 in view of the impending liquidity crunch facing numerous projects – many of which have been stalled, with hundreds of oth-ers facing a similar fate;this situation has also been compounded by the increase in prices ♦for most of the imported construction materials, e.g. the price of metal fittings increased by a whopping 40%, coupled with lower demand for a few critical items, such as cement and allied prod-ucts (consumption lower than in 2007).

However, despite the adverse outlook, the current downturn presents an ideal platform for international players seeking:

inorganic expansion, especially on the Russian market that is ♦likely to abound in opportunities arising out of bankruptcies and M&A activity;organic expansion, as the cost of entering Russia has fallen sig- ♦nificantly in view of decreasing rents, labor costs and prices for locally manufactured construction materials;to supply innovative products and technologies, especially for af- ♦fordable housing projects;to address the market for direct imports of construction materials ♦and equipment from leading suppliers/manufacturers in Europe.

Comparative competitive analysis shows that the main international DIY retailers presented in Russia (Table 3) have serious investment plans. Furthermore, the relevant competitors’ landscape of St. Petersburg (Exhib-it 3) presents Russian actors on the same home improvement market. The significant number of large foreign and domestic competitors illustrates good prospects for the Russian DIY & Gardening market. Therefore, it would be a wrong strategic decision to stop Rautakesko’s market expansion due to the following considerations:

in accordance with RosBusinessConsulting (RBC) and Rautakesko’s ♦ data, the total and home improvement market in the St. Petersburg region was estimated at € 1.0 billion in 2007 and was expected to increase by 15–20% in the future.

32 Despite the economic slowdown, Russia’s building materials industry offers some opportunities // www.pmrpublications.com


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Table 3Investment plans of international DIY & Gardening retailer in Russia,

2009–2011

Headquarters Business Owner Location TimeFloorSpace

Groupe Adeo, FranceLille

Leroy Merlin

DIY and Garden Superstore

Moskovskoye Shosse, Samara

Fall 2009 (N) 7000 + 3000 GC

Omsk Fall 2009 (N) 7000 + 3000 GC

Kingfisher, United KingdomEastleigh

Castorama IY Superstore

Retail Park Severny Mall, St. Petersburg

Fall 2009 (N) 10000 + 3000 GC

Prospekt Mira, Moscow

Fall 2009 (N) 8000 + 2000 GC

Retail Park Akadem-ichesky, Yekaterinburg

Spring 2011 (N) 9000 + 3200 GC

OBI, GermanyWermelskirchen

OBI

Construction and DIY Superstore

Krasnodar Fall 2009 (N) 10000 + 3000 GC

Volgograd Fall 2009 (N) 10000 + 3000 GC

Shopping mall, Stavropol

Spring 2010 (N) 7000 + 3000 GC

Kamyshenskoye Pla-teau, Novosibirsk

Spring 2010 (N) 10000 + 3000 GC

Shopping mall «Airport», Novosibirsk

Spring 2010 (N) 10000 + 3000 GC

Shopping mall «Samolet», Rostov-on-Don

Ende 2010 (N) 7000 + 3000 GC

Rautakesko, FinlandHelsinki

K-rauta DIY Superstore

Kaluga Fall 20092 8000

Ryazan Fall 2009 (N) 8000

Tula Fall 20093 8000

Kazan Spring 2010 (N) 8000

Moscow Spring 2010 (N) 10000

Source: http://www.rohn.de/index.php?id=496&type=98


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in spite of deteriorating macroeconomic indicators in Russia, the ♦average sales per store for K-rauta in Russia increased from $22.5 million (2007) to $26.7 million (2008). despite the crisis, Rautakesko is currently planning/implementing ♦a number of investment projects to expand to other Russian „mil-lionic cities” (e.g., Tula, Ryazan, Kazan).

Exhibit 3. Contemporary landscape of brands using the DIY concept in St. Petersburg

(main Russian and international competitors are written with dash-and-dot outlines and coloured gray)

www.obi.ru/ru/ www.leroymerlin.ru/

www.castorama.r

www.maxidom.ru

www.metrika-market.ru/


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Current business news gives evidence of the fact that the status quo has been preserved for Rautakesko’s pre-crisis marketing strategy. The next strategic decision for this international Finnish retail network in Russia is as follows: „Rautakesko intends to construct a shopping com-plex, selling industrial and construction products, on a three-hectare site in Ryazan (Central Russia). The investments in the project amount to approximately € 14 million. It was previously announced that Rautakesko intends to build another new K-rauta store to sell DIY goods in Kaluga (Central Russia) in 2009. The investments in opening each store are estimated at around € 20 million”. It was true, and on April 3, 2010 the Mayor of Kaluga, Nikolai Ljubimov, in his opening speech, thanked Rautakesko for enhancing the retailing of building supplies in Kaluga. He said that „Kalugas inhabitants value the wide selection and high avail-ability of goods at competitive prices at K-rauta. He is also sure that new kinds of services, such as the design service, will arouse much interest. Mayor Ljubimov hopes the example set by Rautakesko will also encourage other Finnish companies to invest in the Kaluga region”.

K-RAUTA’S TWO-FOLD MARKET CONCEPT APPLIED IN RUSSIA

K-rauta’s two-fold market concept realization differs from that of its key competitors, who tend to focus either on professional customers (e.g. Finnish Starkki chain) or ordinary consumers (e.g. Bauhaus). The „two-fold” in this context means that K-rauta targets both business and consum-er market segments or, in other words, the combined B2C/B2B-market. The percentage of sales made to ordinary consumers vs. professional customers varies among markets. Ordinary consumers constitute 70% of Rautakesko’s sales on the domestic Finnish market, while the same ratio is 50/50 on the Baltic markets. Rautakesko’s market concept includes a heated outlet (5000–8000 m2) and an outdoor area, where a customer can drive directly up to pick up and pay for goods. This market concept sets specific condi-tions for potential K-rauta’s sites. These sites have to be large enough to incorporate a substantially sized one-storey outlet, a large outdoor area to serve professional customers and a large parking area for customers. A clear shortage of potential acquisitions in developed Western markets, and in Sweden in particular, lead Rautakesko to proceed with greenfield investments. On the other hand, the greatest difficulties in the Eastern markets are a sharply increasing price level, lack of suitable infrastructure and often unclear conditions and procedures for site-selling procedures.

K-rauta’s logistics are based on modern, centralized IT systems. In autumn 2006, Rautakesko signed an agreement with an international con-sulting company to establish a retail sector SAP solution for Rautakesko’s


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operations33. The project was aimed at improving efficiency by standard-izing business processes and developing more uniform chain operations, while the multiple languages and cultures across the company are taken into consideration. Rautakesko uses a wide range of supply management tools including Efficient Consumer Response (ECR) in order to increase their consumer focus and supply chain cost-effectiveness.

K-RAUTA’S FURTHER EXPANSION IN RUSSIA UNDER THE CRISIS34

The financial crisis (2008) exerted a distinct negative impact on the performance of the DIY and Gardening market in Russia. As a result, contemporary market data bears witness to sluggish growth in the DIY and gardening sectors due to the following: 1) the slow growth of apart-ment blocks; and 2) an decrease in disposable household income. The growth of apartment blocks was lower at the end of 2008, owing to the decreasing level of investment; many construction sites were „frozen” for the next two to three years. The decreasing disposable income of Rus-sian consumers is another reason for the sluggish growth in demand for apartment blocks. Therefore, many key DIY market actors stopped their development activities. However, they increased their efforts to keep their existing market segments. The growth in the gardening sector also depends on disposable household income. Due to the fact that this income decreased at the end of 2008, Russian consumers spent less money on gardening products. The most affected areas were barbecues and garden-ing equipment. These items had become fashionable among the Russian middle class in metropolitan areas as a status symbol before the crisis.

Oil and gas, the source of contemporary Russians’ well-being was weakened. As a result, Russian consumers can not afford to buy new houses, flats or summer houses as before. In contrast with the West, Russian construction companies build and sell dwellings without interior furnishings. One says in Russia: „we buy bare walls or simply square meters”. Therefore, consumers need building materials such as wallpaper, sanitary equipment, and DIY products. This additional demand has a long-term positive influence on the market’s performance. At the same time, the Russian government introduced new legislation regarding increasing the number of flat and house owners, introducing a special mortgage sys-tem to stimulate Russian consumers to buy real estate.

33 Kolehmainen, K., Ritvala, T. RAUTAKESKO: Hammering International Path for a Finnish Retailer to the Baltic Sea Area // ECCH case for learning — HSE Case 308-042

34 This section is predominantly based on the following source: http://www.euromonitor.com/DIY_And_Gardening_in_Russia?print=true


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The new level of Russian household income created a new standard of living. Consumers shift from relatively simple needs to more sophis-ticated wants or desires. A dwelling becomes the main place for a fam-ily’s investments and, naturally, it has to be cosy and nice. Increasingly, Russians consider their „dachas” (summer houses) not only a place to plant fruit and vegetables, but also a place of leisure, so more Russians are buying barbecues and garden equipment. As a result, all necessary conditions (growing demand) and sufficient conditions (growing income) are fulfilled for the DIY and Gardening market sectors growth in Russia. K-rauta is well known as a diverse chain retailer for the DIY sector. It offers building materials, kitchen and bathroom equipment, and accesso-ries. The same is true for the gardening sector, where the fastest grow-ing categories are barbecue and garden equipment. Similar trends exist in other cities being developed by K-rauta. The competition on the market developed by K-rauta in 2008, where ten main companies held about 21% share, was not too severe35. A Euromonitor report36 suggests that in the next five years, the key actors will control 80% of this market. Today, the huge relevant market share is served by small independent stores that are too weak to be serious competitors at the same level as international or local retail chains in the near future. Another reason for the low level of competition is that demand for home improvement items, in spite of the crisis, is higher than supply (DIY stores are crowded), which means that the number of specialized DIY shops is low to this very day. This fact is increasing the market’s attractiveness for foreign investors.

However, it would be wrong to estimate the DIY & Gardening mar-ket in Russia in the previous terms. The growth is expected to be slower than in previous years, although the market will continue to grow. Some sectors will even demonstrate a decrease. High demand and a lack of some DIY materials are increasing prices in some DIY sectors. As con-sumers become increasingly price sensitive, this could affect the market’s performance negatively. Due to the financial crisis, large companies are projected to continue their discount policies, putting pressure on their profit margins. A significant number of small or independent companies could become bankrupt or could be forced to merge with larger compa-nies. Kesko strives to retain its competitive position as it was explained by Matti Halmesmäki, Kesko President and CEO, who had stated37 that

35 http://www.euromonitor.com/DIY_And_Gardening_in_Russia?print=true36 Ibid.37 Halmesmäki, M. Kesko — a retail specialist. // Expert article 165 Baltic

Rim Economies, 29.2.2008 http://www.tse.fi/FI/yksikot/erillislaitokset/pei/Docu-ments/bre2008/expert_article165_12008.pdf


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„Kesko’s strategic growth area is sales to consumer-customers. The tar-gets are customer satisfaction that exceeds that of competitors, and sales growth. Success in consumer-customer trade requires clear customer and brand promises and delivering on these promises every time a client vis-its the store. Customer promises are delivered on with high-quality and competitively priced products, a comprehensive store network, and good service”. It is somewhat reminiscent of Caterpillar’s pricing policy: to have relatively high prices underpinned by excellent quality and corre-sponding services.

In accordance with Kesko’s overall strategy38, Kesko Food aims at growth exceeding that of its competitors. Food trade with steady demand is the largest and more stable in the demand sector in comparison with more cyclical lines of business, presented in Russia by K-rauta’s DIY & Gardening items. The K-food stores’ joint operations are to be increased and chain operations intensified in order to offer customers better qual-ity and price benefits, not only in Finland, but abroad. A strong focus is to be placed on increasing staff professionalism and developing retailer entrepreneurship. Competitiveness and profitability are to be improved by eliminating unprofitable business and investing in new store sites. All K-food stores will be run by retail entrepreneurs. It is a good time for Kesko Food to enter the St. Petersburg food market with strong concerns for bad food quality. In 2008, Kesko had informed Russia’s Federal An-timonopoly Service that the negotiation process for the acquisition of the St. Petersburg-based hypermarket chain Lenta had not progressed39. It was also announced that the chain would be developed through both or-ganic growth and M&A deals. After its plans to acquire the Lenta chain were deferred, Kesko is interested in acquiring the Russian assets of Car-refour40. Kesko has also revealed its plans to develop a grocery chain in Russia in September 2009. Thus, it seems that Kesko is reaffirming its intention to enter St. Petersburg as a food retailing chain, using M&A and/or the greenfield entry mode. Physical proximity between K-rauta and Kesko Food could be considered the source of a synergy effect.

The previous Russian economic crisis in 1998 did not last for a long period of time, and the economy and investment activity started to recover rather quickly. The present oil price fluctuation adversely af-

38 Kesko’s Strategy — http://www.xn-kryhm-kra.com/vuosikertomus2005/toiminta/strategia_eng.html

39 Interfax Russia & CIS Food and Agriculture Weekly. - http://goliath.ecnext.com/coms2/gi_0199-9618865/Interfax-Russia-CIS-Food-and.html

40 Kesko may buy Russian assets of Carrefour (2009-10-29) http://www.rus-siaretail.com/index.php?item=Retail_Russia_Online.


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fects household income for many Russians. There are good prospects for growth in the demand in K-rauta’s market sector. Besides, the Russian domestic home improvement industry is not a viable competitor today. Therefore, strategic plans for K-rauta’s expansion in Russia are fully feasible. The most important strategic task is to make the most valu-able offer. Rautakesko’s Western DIY-format competitors such as OBI, Leroy Merlin and Castorama (Kingfisher) are also active in St. Peters-burg, along with local competitors (e.g., Maxidom, Starik Khottabych). The most visible difference between K-rauta stores and the competitors’ chains is the variety of goods and solutions for builders and renovators, not only for retail consumers but also for professional customers, the core of the two-fold market strategy. Wholesale buyers are served by a special outdoor unit in each store of the K-rauta chain. The important factor of the K-rauta’s sustainability under crisis conditions is that its product range does not include electronics, toys, bicycles and houseware, demand for which has drastically decreased. The demand for home improvement items is a fundamental and long-term one. A Russian country-specific risk mostly includes ambiguous political events and unstable economic developments, together with an unpredictable regulatory and legislative environment. Such risks pose major challenges for any foreign firms. The Russian regulatory environment is obviously perceived as excessive, bu-reaucratic, opaque, and contradictory, sometimes including unethical busi-ness practices and corruption. Understanding contemporary Russian busi-ness, Rautakesko strives to comply with Kesko’s fundamental corporative values, norms, and ethical principles. Nowadays, Rautakesko estimates the Russian country-specific risk as acceptable for business development, and the business environment as moving towards Western criteria, mak-ing direct foreign investments a feasible alternative.

Małgorzata Machnicka, the Head Retail Analyst of PMR41, present-ing „Retail in Russia 2009 — Regional focus, March 2009 report42, con-cluded: as a result of the global crisis and the weakening of the Russian economy, the retail market, as well as many chains developing in Russia, are unable to grow at the same pace as previously. However, while some retailers already announced their reconsidered strategies, trying to adapt to the new market conditions (e.g. slashing the number of SKUs on of-fer, developing ranges of private label, putting plans for expansion on hold), others intend to continue their growth on the Russian market. The largest players are expected to withstand the crisis, but 2009 is likely to

41 http://www.polishmarket.com42 http://www.polishmarket.com/pdf/Leaflet_Retail_in_Russia_2009_Region-

al_focus_5.pdf


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see troubles for some medium-sized and small national and, more impor-tantly, regional and local players, which in turn, is expected to stimulate M&A activity in the retail industry. It may well be that the existing players will increase their total number of stores or new foreign players will enter the Russian market through the acquisition of entities already present there”.

Finally, a simple increase in Russian household income combined with K-rauta’s competitive advantages is not sufficient for K-rauta’s to achieve marketing success in Russia. Despite many negative factors, some experts express positive opinions43. Indeed, the construction industry in Russia has been hit hard by the global economic downturn. The slowdown on the domestic construction market began in 2008, and deepened in 2009, with 80% of construction projects suspended and virtually no new residential and commercial property projects being started. For the first time in the period of 2000–2010 the amount of construction projects decreased. How-ever, the worst scenario for the Russian construction industry seems to be over. The market for dwellings seems to have stabilized and will begin to grow again in 2011. Therefore, K-rauta’s further expansion into Rus-sia has a good chance of being successful.

THE END OF THE CHAPTER

The process of making an HBS format case or production cycle is rather time consuming. The author started working on this case almost immediately after the crisis and sufficient time has elapsed. Some econo-mists and politicians talk about post-crisis recovery. Others state that we are at the brink of a new, more severe crisis. In our case, we propose listening to Mikko Nisinen, Rautakesko’s Country Director for Russia. Opening the thirteenth K-rauta store (Komendantsky) (St. Petersburg again — see Exhibit 4) he said44:

Business in Russia is recovering from the decline in housing construc-tion. There is a great need for construction and renovation. The new K-rauta is located in a rapidly developing area around which several residential areas and new blocks of flats are being built. Moreover, some 5,000 new homes are rising in the immediate neighbourhood of the new K-rauta and some of them have already been handed over to the buyers.

43 http://www.polishmarket.com/pdf/Leaflet_A_Construction_Sector_in_Rus-sia_2009_2012.pdf

44 Rautakesko to open Russia’s 13th K-rauta - http://www.rautakesko.com/default_page.asp?pageid=560


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The interim total of K-rauta’s activities in Russia is presented in the Table 4. The future will show us how good Rautakesko’s strategy is for times of crisis. Now, Table 4 serves as good evidence of the correct steps made by K-rauta on the Russian market.

Exhibit 4. Thirteenth K-rauta hypermarket in Russia (St. Petersburg, Komendantsky pr., 4)

Table 4

Dynamics of K-rauta network geographical expansion in Russia, 2005–2011

Years/Cities 2005 2006 2007 2008 2009 2010 2011Totals by

Cities/Mas-ter Total

St. Petersburg 5 2 1 1 1 10

Kaluga 1 1

Yaroslavl 1 1

Tula 1 1

Moscow 1 1

Totals by Years/Master Total 5 2 1 1 1 2 2 14

Source: http://www.diynews.ru/nets.aspx?NetID=165 (updated by the author using data extracted from www.rautakesko.fi/default_page.asp?pageid)


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Rautakesko continues to expand its operations to the Moscow area. Two more K-rauta stores are being built in Moscow this year, and ten more new K-rauta stores will be opened in 2012–2015. Last min-ute K-rauta expansion in Russia news are presented from Moscow45. Rautakesko opened its fourteenth and at the same time Russia’s largest K-rauta outlet in Moscow — K-rauta Moscow Varshavskoe. The second department store for building and interior decoration will open in Mos-cow in Spring 2012. Probably the best resume for the contemporary stage of Rautakesko’s expansion in Russia is made by Mikko Nissenen, Rautakesko’s Country Director for Russia:

Russia is strategically a very important market for Rautakesko. We have gained valuable experiences from St. Petersburg and cities around Moscow, which we can leverage in the business and concept develop-ment. The store opening in Moscow, Russia’s number one metropolis, is a logical step in the implementation of our expansion strategy in Russia. The store network expansion will improve the competitiveness and visibility of the whole K-rauta chain in Russia.

Therefore, Rautakesko’s expansion on the Russian market continues and both parties, sellers and consumers, are to be well satisfied. The latest news is that: K-rauta Komendantsky employs over 100 people throughout the year. The new store has a floor area of 6,500 m2, of which 5,700 m2

is a heated sales area. The outdoor sales area is 2,000 m2. In light of so-cially-oriented marketing, the same could be said concerning other chains in Rautakesko’s retailing network in Russia. They expect that the Finnish retailer, Kesko Food, plans to open four grocery hypermarkets in Russia in 2012–2013 and will look at options to expand further by acquiring businesses in St. Petersburg or Moscow46.

Naturally, they could discuss rationales for expanding abroad, es-pecially waiting for a new wave of the world crisis on a threshold, but Kesko continues to internationalize its business. Sales growth of 8.7% has been announced47 by the building materials and DIY retail division of the Finnish Kesko Group for the first nine months of 2011. The division recorded sales of € 2.1146 billion over this period. The increase of 11.0% to € 1.530 billion abroad was well above the domestic figures. Sales in Finland rose by 6.1% to € 961.6 million. Some discuss strategic marketing items, while others accept these correct and brave strategic decisions.

45 www.rautakesko.fi/default_page.asp?pageid46 Finland: Strength overseas for Kesko // DIY Global, 2 November 2011

www.diyglobal.com47 ibid


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Appendix 2 K-rauta’s “Theater of War” in Russia

(according to an interview with Mikko Pasanen, spring 2010)

Source: Interview with Mikko Pasanen, spring 2010.

“Northern Foothold”

St. Petersburg – 10 stores

“Central Battlefront” Moscow – 1+9* stores Yaroslavl – 1 store Kaluga – 1 store Tula – 1 store

“Volga Battlefront” Nizhny Novgorod Kazan Samara Volgograd

“Southern Battlefront”

Rostov-on-Don Krasnodar

Sochi


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Appendix 3

Rautakesko’s market growth rates and market shares in Russia, 2006–2010

* Rautakesko starts activity in Russia on September 15, 2006 in St. Peters-burg.

** According to the Q1 2010 Report.*** No data because of uncompleted 2010 year.

Appendix 4

Rautakesko’s net sales and number of stores in Russia, 2006–2010

* According to the Q1 2010 Report.

Year Growth rates, (%) Market share, (%)

2006* 15% –

2007 10–15% 15%

2008 15–20% 15%

2009 (25%) 2%

2010** (7%) —***

Year Net sales (million €) Number of stores

2006 102 7

2007 151 8

2008 203 9

2009 169 10

2010 35 12


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Appendix 5

Rautakesko’s financial highlights (from its entry point into Russia), 2006–2010

2006 2007 2008 2009 2010*

Net sales (€ million) 2,129 2,537 2,518 2,312 495

Operating profit (€ million) 139.3 117.8 16.3 19.6 –

Operating profit as % of net sales (%) 6.5 4.6 – – –

Operating profit excl. non-recurring items (€ million)

91.2 115.9 53.3 11.9 (13,8)

Operating profit as % of net sales, excl. non-recurring items (%)

4.3 4.6 2.1 0.5 (2,8)

Depreciation (€ million) 24.2 25.7 31.6 – –

Investments (€ million) 75.8 77.0 121.1 84.7 18

Return on net assets** (%) 31.9 22.7 9.2 1.8 –

Personnel average 7,420 9,111 10,158 8,789 –

* Estimations according to the Q1 2010 Report.** Cumulative average.


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Appendix 6

The formats of K-rauta’s DIY stores

Rautakesko aims to be the leading service provider in the building and home improvement trade.

Rautakesko’s building and home improvement store chains, K-rauta, Rautia, Byggmakker, Senukai and OMA serve both consumer and profes-sional customers.

Consumer customers mainly consist of home, leisure home and yard builders, renovators and interior decorators.

Important professional customers include construction companies, the manufacturing industry, and public institutions.

In terms of its chains’ retail sales, Rautakesko is one of the five larg-est companies on the European building and home improvement market.

The principal European competitors operating in Rautakesko’s market area are Castorama (Kingfisher Group), Leroy Merlin (Groupe Adeo), DT Group, Bauhaus, Hornbach and OBI. Rautakesko is a partner in tooMax-x, a purchasing alliance. Rautakesko’s partnership in tooMax-x made it the third largest European sourcing channel for home building and interior decoration items.


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Appendix 7

K-rauta’s strong chain concepts

Rautakesko’s operations are based on strong chain concepts, effi-cient sourcing, and best practices, which are duplicated internationally. Rautakesko operates in the background of these chains, combining their improvements to category management, purchasing, logistics, information system control and networks.

The benefits of synergy and economies of scale that have been achieved enable the company to offer products and services to customers at competitive prices. K-rauta is Rautakesko’s international concept.

K-rauta operates in Finland, Sweden, Estonia, Latvia and Russia. The K-rauta concept focuses on wide selections, total solutions that make customers’ lives easier, and a good price-quality ratio.

This concept combines the service, selection and business models for consumers, builders and professional customers.

Overall, the K-rauta chain’s competitive advantages include stores and attached builders’ yards that are larger than those of its competi-tors.

The new K-rauta store concept focuses on interior decoration and gardening.

Product groups and categories are presented in a centralized display area, close to desks providing service and design assistance. More compre-hensive product information and signage facilitates self-service.


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Questions for discussionWhy did Rautakesko (under the K-rauta brand name) begin with 1. an M&A operation in Russia (2005) (Stroymaster in the case of St. Petersburg) but is now using the greenfield approach in newly developed regional markets (e.g., Yaroslavl, Tula, Kaluga)?What could you say about the geography of the K-rauta chain in 2. Russia?Using available analytical methods, evaluate the applicability of 3. the DIY and Gardening concept for retail chain business models in Russian metropolitan and regional markets, and abroad.What do you think about the strategic decision made by K-rauta/4. Rautakesko’s top-management to continue their expansion on the Russian market in spite of the world financial crisis and its im-pact on the purchasing power of Russian consumers?


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SKANSKA: WITHDRAWAL FROM THE RUSSIAN MARKET —

FAILURE OR PART OF A STRATEGY?

The Skanska active investment policy in the 1990s — fi rst half of the 2000s led to the growth of its brand recognition in the Russian construction market and allowed for the creation of a strong brand, the result of which was the company acquiring a highly competitive position in the country. Despite the rise of attrac-tiveness of the rapidly growing construction market the company left Russia in 2007. Does this mean that the local company’s management was confronted with an inability to continue to follow the Skanska course of competitiveness and strategic stability of its business in emerging markets and that Skanska’s other operations should draw a lesson from this experience? The case study is devoted to the problem of a strategic priorities’ defi nition with respect to the uneven prospects and the lack of the long-term view of Russian market. The analysis of the case can refer to the organization and management by the sub-sidiary’s operations, and to cultural and ethical strategy dilemmas with regard to the complicated rules of the game in Russia’s construction.

In February 2007, one of the world’s leading construction companies, Skanska AB, shut down its business in Russia and withdrew completely from the market there. Skanska entered the Russian market at the be-ginning of the 1990s, when the market for construction work in Russia was in crisis, with no legal regulations. After 13 years of hard work, the Swedish construction holding made the decision to leave the Russian mar-ket, which is now more profitable, promising and much easier to operate in than it was in previous years.

Skanska was a truly multinational organization with huge experience in different markets, and had numerous successful projects in the USA, China, Latin America, Eastern and Northern Europe. What made such a strong international company such as Skanska leave the Russian market?

The author would like to thank Pertti Naulapää, who was the President of Haka Corporation from 1988 to 1992, for his friendly support and valuable remarks.


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Skanska: Withdrawal from the Russian Market — Failure or Part of a Strategy?

In 2007, the Russian real-estate market was extremely profitable. If in Europe and the US the rate of profitability of the commercial real es-tate did not exceed 7% annual, in Russia this indicator constituted 10% and above, moreover, profitability of some projects were much higher. Why did Skanska after years of hard work on the emerging, unstable and unpredictable Russian market decide to leave just as it reached its burgeoning stage?

INTRODUCTION TO THE COMPANY

In the middle of the 2000s Skanska, Scandinavia’s largest construc-tion and property development group, operated in more than 30 countries worldwide, especially in Europe and the US. The group’s areas of opera-tion included construction (residential and civil), residential development (housing development and sales), commercial development (office build-ings, malls, and logistics centers), and public-private partnerships (roads, schools, bridges, power plants). It also provided financing for its clients through its financial services operations.

Skanska, based in Sweden, was ranked one of the world’s top ten international construction and related services companies, and one of the top five construction companies in the US. Although the Scandinavian countries and the US formed the company’s largest markets, Skanska was actively pursuing expansion elsewhere, particularly in Poland, Rus-sia, and other Eastern European countries; the United Kingdom; and in Latin America, starting with its 1999 acquisition of Argentina’s largest construction company, SADE.

Skanska participated in nearly every construction and property deve-lopment sector, from residential construction to large-scale public works projects, including bridges and projects such as the Öresund link between Denmark and Sweden, which opened in 2000, and stadia, such as the Houston NFL stadium, a project worth some $ 350 million. Skanska also made a speciality of sorts in the construction of telecommunications and Internet infrastructure projects, such as the construction of a high-speed fiber optic network for RNC Corporation, which began in 1999.

While operating in more than 50 countries, Skanska had pursued a policy of establishing a „local” presence in its markets, combining acquisi-tions with organic growth to build a position as a domestic player in each new market. In 1999, Skanska, which was traded on the Stockholm Stock Exchange, posted more than SKr79 billion ($9.28 billion) in revenues, with a net income of SKr4.3 billion ($500 million). Skanska was led by President and CEO Claes Björk.


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Many large international contractors entered the Russian market through the acquisition and establishment of subsidiaries, and Skanska could be counted as an example. It was especially active on the St. Pe-tersburg market. In 1998, Skanska’s Finnish subsidiary, Skanska Oy, acquired 45% of the shares in the Finnish civil engineering company Honkavaaran Maastorakennus Oy, which operated mainly in the St. Pe-tersburg area. Then Skanska established a new company in St. Peters-burg — ZÀÎ Skanska Stroy. The Skanska East Europe and Peterburgstroi-Skanska merged their specialists into one construction company, Skanska Stroy, which acted as a general contractor for Peterburgstroi-Skanska’s developments and for industrial and civil construction projects for other clients. This step embodied the company’s international strategy: to be as local as possible in each foreign market. Hence, the companies working in the Skanska group were knowledgeable about the specifics of the lo-cal market, but at the same time, they used Skanska’s global experience, which constantly increased during its operations in different countries. Peterburgstroi attracted the foreign company because of its access to building sites and projects.

In 2002 Skanska East Europe Oy had acquired a majority stake in OAO Peterburgstroi, which was one of the leading producers of residen-tial housing in St. Petersburg. Skanska held 80% of the share capital. The operations management of the company held another 20%. The cri-teria for the final choice were the transparency of the potential partner, willingness to study, understanding of Western business principles and experience in the Russian market. In Moscow, Skanska established a subsidiary, Skanska Olson. Peterburgstroi-Skanska was one of the five leading developers in St. Petersburg. Skanska completed its technologi-cally complex projects, such as the Southwestern Wastewater Treatment Plant, through another representative office, so as not to mix different businesses. From that moment on, Skanska operated under the brand Pe-terburgstroy-Skanska in St. Petersburg. From the very beginning, Skan-ska’s strategic aim had been to become a local provider of construction and project development services in Russia. This agreement became a significant step towards the consolidation of this localization strategy in St. Petersburg. At the same time, Skanska had considerably diversified its available services in the area. Thanks to this acquisition, Skanska was also operating in the local commercial and residential construction sector.

In 2007 Skanska decided to leave the Russian market. It sold its sites for $ 25 million to the Moscow company. The Moscow subsidiary of Skanska was sold in 2006 to a company from Kazakhstan. Previously, in


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2005 Skanska sold one of its general contractor organizations, Skanska Stroy, and referred to it as „diversification” of their business.

The experts supposed that the reason for Skanska’s decision to leave was the loss of the support of the administration and the new Hous-ing Code. The representatives of the company commented that Skanska’s business in Russia was too small and it decided to concentrate on other markets. The company’s representative office was still operating after the withdrawal from the market because of the few projects that were still under construction in St. Petersburg.

THE HISTORY OF SKANSKA AB

Skanska began in the late nineteenth century as a manufacturer of cement-based decorative building elements, used for decorating up Swe-den’s churches and other public buildings. The company was founded as Aktiebolaget Skanska Cementgjuteriet (or Scanian Pre-Cast Cement) by Rudolf Frederik Berg in 1887. Yet Berg’s background as an engineer soon enabled him to expand the company’s field of operations beyond decorative elements and into the construction arena itself. By the end of its first year, Skanska had begun producing materials for general con-struction, such as concrete blocks and other cement-based fittings. But the company also participated in construction projects themselves, build-ing upon its expertise in working with concrete.

Although Skanska remained interested in the general construction market, it also became known for its prowess in various construction specialties, such as bridge building, in which the company specialized in erecting concrete bridges. The budding telecommunications industry also provided an opportunity for Skanska and led to the company’s first in-ternational contract. By 1897 Skanska had begun to handle large-scale orders for its concrete fittings. This led to a contract with the United Kingdom’s National Telephone Company to supply some 60 miles (ap-proximately 100 kilometers) of hollow concrete blocks used for support-ing telephone cables. Skanska was to use this and other similar orders to develop itself as one of the leading telecommunications infrastructure specialists in Scandinavia and the world.

The British order led the company to seek further foreign contracts. A new large-scale order came at the beginning of the twentieth century, when Tsarist Russia sought to replace the pre-existing wood-based sewer system in the city of St. Petersburg and throughout the Russian empire. Skanska won the contract to produce the concrete pipes that provided the basis for Russia’s modern sewer system and opened its first non-Scandi-navian facility in St. Petersburg in 1902.


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Skanska’s Scandinavian domestic base remained its primary market, however, and over the next three decades, Skanska was able to claim credit for building much of the modern infrastructure in Sweden, Nor-way, Denmark, and Finland, as it established itself as one of the region’s largest construction companies. Among the company’s most significant projects during this time was its construction of Sweden’s first asphalt road, completed in 1927 in Borlänge, in the country’s central region. Skanska’s completion of the Sandö bridge in 1943 provided another tri-umph: at 264 meters, the Sandö bridge gained fame as the world’s longest concrete-based arch-span bridge — a distinction it held until the 1960s.

Skanska began to focus more on its international growth after World War II. The company reached a milestone with the introduction of its Allbetong method. Using this system, Skanska was able to produce pre-fabricated elements for large-scale construction projects, such as apart-ment buildings and others. Manufactured in Skanska’s factories, the ele-ments were then put into place using construction cranes. The Allbetong method helped cut down on the time and labor involved in a construction project and played a pivotal part in Skanska’s international development, as the company turned increasingly to markets beyond its Scandinavian base.

The company’s listing on the Stockholm Stock Exchange in 1965 helped to fuel its expansion. Following the listing, Skanska stepped up its international growth, moving into new markets in Africa and the Middle East. After securing a strong position for itself in these markets by the late 1960s, Skanska returned closer to home, entering Poland and the Soviet Union in the early 1970s. Among the company’s major projects in the Eastern European markets during this period was its construction of the Forum Hotel in Warsaw, which featured 750 rooms and also marked the first turnkey hotel project completed by Skanska outside of its Swed-ish domestic base.

Skanska also began to move into the US, one of the world’s largest con struction markets. As elsewhere, Skanska sought to foster its inter-national expansion by creating a local presence in each of the markets it hoped to serve. For this purpose, the company pursued a number of ac-quisitions, including Slattery, active on the East Coast, and Sordoni, later renamed Sordoni Skanska and placed under the Skanska USA subsidiary. The company was then able to pursue an organic growth strategy in its new markets through its local subsidiary companies.

In the 2000s Skanska operated in four business streams — construc-tion, residential development, commercial development and infrastructure development. The primary markets were the Nordic region (including the


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Scandinavian countries and Russia), the US, the United Kingdom, Cen-tral Europe and Latin America. The Group’s operations were based on local business units. The firm generally had several thousand ongoing projects.

SKANSKA'S INTERNATIONAL ACTIVITY

By the early 1980s Skanska’s international business had increased to become a significant percentage of its sales. As an acknowledgment of this fact, the company simplified its name, abandoning the full AB Skan-ska Cementgjuteriet name for nearly 100 years to become Skanska AB in 1984. Over the following decade, Skanska continued to expand its busi-ness, placing itself among the world’s top ten internationally operating companies, and occupying a major position on the US market.

The company’s position in the US was strengthened with the addi-tion of Barclay White Inc., based in Philadelphia, Pennsylvania. Barclay White had long played a prominent role in the US construction industry. Founded in 1913, the company originally focused on the greater Phila-delphia area, where it completed projects for such clients as the Midvale Steel Company, Swarthmore College, Bryn Mawr College, Friends Hospi-tal, and Friends Central School. Major clients in the 1950s and 1960s included SmithKline, Penn Fruit Co., Merck Sharp & Dohme, Continental Can, and General Motors. After adding construction management services at the beginning of the 1970s, the company became private. During that decade, and into the building boom years of the 1980s, Barclay White tripled in size, as it took on such projects as the Franklin Institute Futures Center, Bell of Pennsylvania’s Corporate Computer Center, the corporate headquarters of State Farm Insurance, and others. By the late 1990s, Barclay White’s revenues had topped $ 300 million.

By the mid-1990s Skanska had succeeded in establishing itself as one of the top US construction companies, winning such contracts as a large share in the $ 380 million extension of Boston’s Central Artery. Back home, the company was preparing to fulfill one of its longtime plans. In 1994, Skanska, as the majority shareholder in the Sundlink consortium, won the contract to build the bridge portion of the Öresund bridge and tunnel link between Sweden and Denmark, marking the first permanent physical link between the European continent and the Scandinavian region.

Skanska had been involved in some of the earliest plans to link the two countries across the Öresund channel. The first proposals to build a tunnel crossing had appeared in the late 1800s. Skanska, joining with Danish construction group Hojgaard & Schultz, launched its own proposal


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in the 1930s to build a road, rail, and bicycle bridge across the Öresund. World War II prevented further consideration of the project. As the Scandinavian economies once again began to grow in the 1950s, Skanska and Hojgaard & Schultz again joined together to present a bridge and tunnel proposal. Yet indecision about the project persisted for another 30 years. Finally, in 1991, the Danish and Swedish governments reached an agreement to build a toll-based bridge and tunnel link between the two countries. Bids were accepted, and in 1995, Skanska, as part of the Sun-dlink consortium, which included, besides Hojgaard & Schultz, Austrian Hochtief, and Danish Monberg & Thorsen, won the contract to build the bridge portion of the Öresund link. Construction was completed and the link opened to traffic in 2000.

By the time it had signed the Öresund contract, Skanska already had completed a major move to enhance its US presence, when it ac-quired the Beers Construction Company in 1994. The Beers acquisition gave Skanska a significant presence in Beers’ primary Southeast market, where the company had built up a position as one of the leading con-struction companies in the area, with operations across Florida, Georgia, North and South Carolina, Virginia, and Tennessee, and with a presence in more than 17 additional states across the country. Beers was founded in Georgia by two Frenchmen in 1905 as the Southern Ferro Concrete Company, specializing in fireproof construction projects using reinforced concrete. Harold W. Beers joined the company in 1907 as senior engineer, then gave his name to the company in 1935. Beers’ Atlanta base put it in position to participate in the phenomenal growth of that city, which saw Atlanta rise to become one of the South’s largest urban centers by the 1990s. The company was involved in the construction of a number of landmark structures in Atlanta, including the Southern Bell Headquarters building and others. After developing expertise in hospital construction in the 1970s and 1980s, Beers expanded its operations into the sports world, where it became one of the region’s leading arena construction contrac-tors. After completing the Georgia Dome in the early 1990s, Beers, now a part of Skanska, won contracts to build a substantial part of the Atlanta Olympic Games infrastructure, including the Centennial Olympic Stadium, later renamed the Turner Field. In 1999, Beers won the contract to build the Houston Stadium, which was set to become the largest NFL stadium upon completion in 2002.

In Scandinavia, Skanska ran into a hurdle after it acquired a major-ity share of Scancem, the region’s largest cement producer, which held a near-monopoly on cement production in Scandinavia. Skanska was forced to divest itself of the Scancem holding in 1998. In 1999, the company


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beefed up a number of its international operations, including in the US, with the acquisitions of the A.J. Etkin Construction Company, renamed Etkin Skanska, and the Gottleib Group. Skanska also entered the South American market for the first time, acquiring Argentina’s largest con-struction group, SADE Ingenieria y Construcciones S.A. as a beachhead for Skanska’s expansion throughout Latin America.

Closer to home, Skanska continued to pursue its expansion in Eastern Europe. After acquiring a majority share in Poland’s largest construction company, Exbud, in April 2000, Skanska added a controlling share of IPS Praha a.s., the largest construction company in the Czech Republic. Meanwhile, the company was pursuing expansion in a number of new areas, including enhancing its telecommunications and Internet infrastruc-ture arm and boosting its operations in facilities management. Skanska also began to divest itself of a series of non-core operations — such as its shares in the Piren AB in real estate group and bearings manufactur-er Aktiebolaget SKF, as well as a number of its real estate holdings, such as properties in London, sold to Sun Life for some US$60 million at the beginning of 2000. Shedding these assets was part of Skanska’s commit-ment to rebuilding its identity beyond that of a pure construction group and become a full-scale international construction services provider.

In mid-2004 Skanska decided to divest itself of its Asian assets, which had been acquired indirectly, and sold its Indian subsidiary to the Thailand-based construction firm Italian Thai Development Company.

In 2005, Skanska became the subject of an official investigation by the Argentinean tax enforcement office (AFIP) in which Skanska repre-sentatives in Buenos Aires finally admitted to having paid bribes to gov-ernment officials. Skanska was building part of two gas pipelines, and in what still is an open investigation and a high profile case in Argentina, involving influential Planning and Public Investment Minister Julio de Vido, it is believed that Skanska paid bribes of up to $ 17 million. As a consequence of the scandal, Skanska finally fired its Latin American CEO and six other executives, and launched an internal audit that has been provided to all the Argentine authorities for their use in the investiga-tion. Skanska is still committed to the Latin American market.

In 2008 Skanska USA was denied the opportunity to bid for the con-struction of a new city hall in Olympia, Washington. The city of Olym-pia’s laws governing contracts mandated that if a company wished to do business with the city, and offered benefits to heterosexual couples, they were also obligated to extend those benefits to same-sex couples. Skanska refused to sign an affidavit to that effect, and was subsequently cut out of the bidding process.


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As for Skanska’s major projects, they have included 30 St Mary Axe in London, completed in 2004. Skanska was actively participating in the construction of the Heron Tower in London, which was going to be 246m tall when complete, the tallest in the City of London and the UK, before being quickly overtaken by the Bishopsgate Tower and the London Bridge Tower. Heron Tower was to be completed by early 2011. In New York City, Skanska was part of the Second Avenue Subway tunneling contract consortium, awarded in 2007. In 2008, Skanska was chosen as a construc-tion manager for the Madison Square Garden’s renovation project.

SKANSKA IN RUSSIA: HISTORY AND STRATEGY

Skanska appeared on the Russian construction market at the very beginning of its formation and had concentrated its activity in the North-west region. In St. Petersburg, the Finnish company Haka had a license for operations in the Soviet Union and a set of contracts, because its man-agement included members of communist party of Finland. In the begin-ning of the 1990s, Haka was close to bankruptcy. At the same time, Skan-ska’s international expansion had begun. As a result, the Swedish company bought the Russian division of Haka, which was operating successfully despite the difficult situation in which the Finnish company found itself.

Pertti Naulapää, former president of Haka Corporation, said: „Haka Corporation was the biggest construction company in Finland. It had long experience in the Soviet market and was also the largest Finnish builder there. In the late 1980s, the Soviet construction market was becoming more difficult for Finnish operators because new competitors from the USA and Germany were actively entering the Soviet and Russian markets. That was the reason why we started cooperation with foreign construc-tion corporations and developers. Our objective was to become the leading Western construction company in Russia. In 1992, we had achieved our target. When I left the company we had about 40 construction projects in Russia, five military villages were under construction and the business was booming. We had delegated Russian operations to the Hakastroi com-pany, which was responsible for all our business activities in Russia. We had several joint ventures with Russian organizations”.

After Skanska had received the assets of Haka, it established about 15 subsidiaries in Russia. One of the first and biggest subsidiaries was Peterburgstroi Skanska, founded in 2002. This company was established as a joint venture by Skanska East Europe Oy, which was a Finnish branch of Skanska, and the Peterburgstroi construction company, located in St. Petersburg.


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Skanska East Europe Oy had been operating in Finland and the CIS countries, Estonia, Latvia, Lithuania and Hungary before entering Russia. The company’s activities included building construction, civil construc-tion, building services and facilities management. Peterburgstroi focused on development, meaning that the company owned lots and built apart-ments by using subcontractors. Peterburgstroi also focused on implement-ing commercial projects and investments financed from the state budget. Peterburgstroi at that time was considered to be the fourth biggest in its field in Russia, and the number one in St. Petersburg.

Skanska East Europe Oy had been on the Russian market since 1994 and had completed more than 60 construction projects. Skanska East Europe Oy was mostly focusing on public construction and business-, industrial-output and premises-output construction. The first IKEA store in Russia was built in 1999 by Skanska East Europe Oy in Moscow. The company had also built two well-known multifunction arenas, one in St. Petersburg and one in Yaroslavl. In St. Petersburg, Skanska had been developing Russia’s first industrial and technology business park, Nova Park, a 60-hectare project near the city. This joint venture with Peter-burgstroi Skanska East Europe Oy gave the company the chance to enter the field of apartment construction.

Pertti Naulapää felt that in the beginning everything was going well for Skanska in Russia. But when the Russian markets collapsed and Skanska started to experience losses, the situation became difficult, especially in Moscow, where the company faced problems with the City organization.

In the period from 1993 to 2006, Skanska had constructed a few dozen residential apartment buildings and commercial real estate sites in Russia. However, all these projects were not helping Skanska to become a market leader. According to experts, it was possible for Skanska to oc-cupy nearly 2–3% of the St. Petersburg market, and annual volumes of construction did not exceed 100,000 sq. m. The company’s last project in St. Petersburg was an elite apartment complex on Morskoy Prospect.

In the beginning of the 2000s Skanska did make an attempt to en-ter the Moscow commercial real estate market. The especially established Skanska Olson operated as the general contractor for large commercial projects, including the first stage of the Central City Tower business cen-tre, the „Kulon-Baltia” warehouse complex, and also offices for divisions of Lukoil. As an entry strategy for the Moscow’s market, the Swedes had chosen the same approach as in St. Petersburg — acquisition: in 2001 Skanska purchased an active player, the company Olson Construction Company for $2 million, and then rebranded it. Besides the transferred


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projects in the Moscow Region, Skanska participated in building the first two Mega shops by request of IKEA, as well as a few other large centers for shopping and recreation. According to rumors, IKEA, the investor be-hind Mega, remained dissatisfied with the terms and quality of the work of their compatriots. Later on, IKEA changed the contractor — instead of Skanska, they began to work with the Turkish company Renaissance Construction.

Another Skanska project on the Old Arbat experienced problems with the Moscow authorities, which held that the project exceeded the maxi-mum permissible height. After all of these difficulties, the management of the Swedish company decided to sell the Skanska Olson division. In September 2006, a buyer was found and the Kazakh company, Eurasia, agreed to pay Skanska more than $ 6 million for its Moscow assets. These developers from Kazakhstan have received a few small projects, such as the Rolf-Mercedes trade/technical center, the office of the legal company Clifford Chance and the Akzo Nobel Lakokraska factory. Experts explained the low amount of transactions as the result of the fact that Skanska was mainly responsible for painting and decorating on these projects.

According to Pertti Naulapää, „Skanska experienced enormous losses in Moscow, partly because they were not willing to pay bribes, at least they said so, and, certainly, partly because of how the business problems were handled. They fired the Finnish management and the Swedes took over. The Swedish management did not understand the Russian markets and relied mainly on Russian partners, and coordination suffered. Hence, business really started going down”.

Skanska’s difficulties with the completion of projects were not lim-ited to Moscow. Its largest failure was the project of the erection of Nova Park in St. Petersburg. In 2001 Skanska created a joint venture with the city government. This joint venture, named Skanska St. Peters-burg Development had received the 64 hectare lot free of charge. The company was obligated to transfer all established infrastructure to the city. However construction hadn’t even begun, and in 2003 all construc-tion obligations passed to the local company. In turn, the city authorities tried unsuccessfully to sell half of the shares in Skanska St. Petersburg Development for 21 million rubles, then for three times less. There were no buyers. Experts explained the absence of interest in this project as the result of a lack of assets on its balance.

In 2003 Skanska started to depart from several markets where it had a small and, to some extent, unprofitable business. Prior to leaving Rus-sia, Skanska pulled out of other developing markets, including China and India, so that it could focus more on developed, profitable and reliable


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countries. Also, with global demand for its services soaring, Skanska in-tended to be selective toward orders, so as to maintain margins and meet its stated goals and strategies.

Over the last three years before the withdrawal from Russia, Skanska had already reduced its operations because of the fierce competition from Russian and Turkish construction companies.

In 2005 Skanska AB sold its St. Petersburg subsidiary, Skanska Stroi, to the Finnish company Hansastroi Oy. Skanska AB’s stated reason for selling the company was that the construction business was not that profitable anymore — apartment development was considered to be a bet-ter option for the company. Skanska decided to concentrate its business in Russia and to focus on residential real estate in St. Petersburg and construction services in Moscow. In 2006, Skanska sold its subsidiary, Skanska Olson, to the Kazakh Eurasia Group.

THE CONSTRUCTION INDUSTRY IN RUSSIA

The construction sector was privatized in the early 1990s, but the rate of completion of residential housing, as well as industrial and other large state-run projects, had deteriorated further. Housing, utilities and transport infrastructure were all urgently in need of repair and upgrad-ing. An estimated 30% of the Russian population lived in accommodation that lacked either running water, or electricity, or both. However, since most Russian households still paid only a fraction of their housing and utilities costs — with the balance covered by direct state subsidies to the providers—there was little investment going into the sector. The reform of the welfare system, which started with the replacement of welfare ben-efits in kind by cash payments, was expected to eventually change that, especially as housing is next on the reform agenda.

The government hoped to accompany the introduction of a better-targeted housing system with a large-scale program of new housing con-struction, and aimed to finance a 30% increase in housing construction in order to provide affordable housing. As part of this effort, the govern-ment had allocated RUB 100 billion ($ 3.7billion) in state guarantees an-nually to the Agency for Mortgage Credits and Direct Expenses — com-pared with RUB 20 billion a year in earlier years.

Nevertheless, Russia’s real-estate market overall remained under-developed. Growth rates in the residential segment reached around 50% in 2004–2006 and there were plans by the Federal Agency for Construc-tion to double the volume of new housing to around 80 million square


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meters per year by 2010. Investments in commercial real estate in the country were projected to exceed € 3 billion in 2006, putting Russia among the top ten European real estate investment markets.

The land code passed in October 2001 enshrined the principle of pri-vate land ownership for urban and commercial land in federal law. Hith-erto, private land ownership, where admitted, was based on local rules and presidential decrees, and most real estate developers and industrial producers relied on long-term leases rather than titles of ownership. For many companies, the insecurity related to the previous contradictory legal framework was exacerbated during the interim period, as federal, regional and local administrations fought over claims to Russia’s most valuable commercial land. Eventually, the new code should allow for the develop-ment of a functioning real-estate market, where land can be freely sold, leased and put up as collateral, although numerous legal and administra-tive problems remain to be resolved, in particular relating to land regis-tration, taxation and mortgage lending.

Since 2001 property development has been booming in Moscow, and, increasingly, in St. Petersburg. During most of the 1990s an imbalance between demand and supply had driven up rents for class-A office space to $ 700–800/square meter, making Moscow one of the most expensive business locations in the world. Demand for office space collapsed in the aftermath of the 1998 crisis, however, with most large-scale construc-tion projects being put on hold and rents plunging by one-third. The Moscow market had recovered, with over 500,000 square meters of new office space coming on the market annually. Between 2001 and 2005, the amount of office space nearly doubled, from 2.6 square meters in 2001 to 4.6 square meters.

The boom was expected to continue and foreign investors were al-ready interested in expansion to Russian regions. Cranes were not only visible on the skylines of Moscow and St. Petersburg; some of the larg-est investments were being executed in Novosibirsk, Yekaterinburg and Krasnoyarsk.

After fluctuations in growth between 2003 and 2007, the Russian construction industry was expected to decline in 2008, followed by a slow and steady recovery in the next four years. The Russian construction in-dustry generated total revenues of $51.5 billion in 2007, representing a compound annual growth rate (CAGR) of 10.6% for the period spanning 2003 – 2007. In comparison, the Polish and Hungarian industries grew with CAGRs of 7.8% and 8.2%, respectively, over the same period, to reach respective values of $35.4 billion and $9.8 billion in 2007.


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The non-residential segment proved the most lucrative for the Rus-sian construction and engineering industry in 2007, generating total revenues of $ 29.5 billion, equivalent to 57.3% of the industry‘s overall value. In comparison, the civil engineering segment generated revenues of $22 billion in 2007, equivalent to 42.7% of the industry’s aggregate revenues.

The construction industry of the Russian Federation was comprised of over 130,000 organisations and enterprises. Approximately 90% of all organisations operating in the sector were small businesses (under 50 em-ployees). According to Russia’s Federal Statistics Service (Rosstat), in the mid 2000s, the Russian construction sector employed around 5 million people, representing approximately 7.5% of Russia’s total workforce.

The bustling real estate market and high volume of construction were closely related to each other. The construction boom in Russia has been remarkable for many years, especially in 2000–2007, being interrupted by world financial crisis shortly after in 2008.

Moscow and St. Petersburg were unquestionably the hubs of the Rus-sian construction — and real estate business. It was estimated that more than half of the real estate business (measured in terms of the monetary value of total trade) was located in Moscow. The demand for property was extremely high in these areas, as the land in the city was limited and mostly already in use.

Price levels for real estate in Russia’s major cities were extremely high by 2007, compared to rest of the country or, for example, Finland. For example, in Moscow, the price of property per square meter was ap-proximately € 5,000 and in St. Petersburg it was € 3,000. In Helsinki, prices were approximately on the same level as in St. Petersburg. The same price in other parts of Finland varied between € 1,500 and € 2,000 depending on the construction company and the location of the plot.

The land between St. Petersburg and the Finnish border was very ex-pensive because of the constantly increasing growth of housing construc-tion. The price of a one hectare lot in Zelenogorsk or Repino (prestigious suburbs of St. Petersburg) exceeded € 2 million. Not only the price of land, but also indirect costs affected the real estate and construction business, and thus the whole construction industry. Such expenses included, for example, interest rates. In Russia, interest for mortgages could exceed 20%, whereas in Finland interest for mortgages was 5–6%. The loan rate in Russia in 2007 was around 10%.

The construction industry in Russia in the 2000s was still clearly characterized by the legacy of the Soviet Union’s housing policy, even


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though several reforms have been implemented in the Russian housing sector after the collapse of the Soviet Union. After the reforms in the beginning of the 1990s, the main responsibility of housing and utilities services has been on the local municipal authorities. However, they were financially highly dependent on federal and regional governments. Manag-ing existing lots and allocating new ones turned out to be difficult for construction companies, as they were either partly privatized or under the jurisdiction of the bureaucratic (and corrupt) administrative systems of the municipal authorities. Additionally, municipal authorities were le-gally obligated to control the quality of housing and utilities services, but they were effectively avoiding this obligation.

The shortage of housing and quickly deteriorating housing stock provided huge potential for the Russian construction industry to grow. Unfortunately, corruption in the construction sector presented a restraint on the growth of the construction through free competition (80% of the housing sector was considered by experts to be „closed” due to munici-pal authorities forbidding competition for contracts; road building was considered as the most corrupt area of business in Russia, with 50% of funds going to politicians’ pockets in order to receive contracts). Another factor restraining the growth was difficulty of getting credit, both for customers and construction companies.

In 2005 the Russian government introduced a new housing legislation package that consisted of 27 laws, which were supposed to increase the rights of home owners and competition in the housing sector. It was also aimed at stimulating the growth of the construction industry by making it possible for mortgages and credits to be received with significantly lower interest rates and longer repayment time. Additionally, the increase in Russians’ incomes and the massive investments by the government in improving infrastructure have also been reasons for the rapid growth of the Russian construction industry, which was expected to grow to a value of $80.3 billion by the year 2012 (56% increase for 2007). The Russian construction market was under-saturated, as there were only 130,000 companies (of which 90% were small companies employing under 50 people) catering for the needs of a nation with around 145 million inhabitants.

The lucrative (albeit volatile and inauspicious) market environment had resulted in a situation where foreign investment in the Russian con-struction industry was growing rapidly, which meant that competition was increasing and getting more international, as large investments applied their resources, knowledge and experience from the global markets to the Russian construction business. The growth centers were Moscow and


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St. Petersburg, but other Russian localities were increasingly developing and attracting investments in the construction business. Foreign firms successfully entering Russia had entered the market by using acquisitions and partnerships with the local market (and especially business culture) knowledge and existing contacts with customers, suppliers and authori-ties. Using existing contacts enables foreigners to function „locally” and exploit the personal networks that are extremely important in Russia, and the established bribery systems. Customer loyalty, supplier/subcon-tractor control and securing building projects/lots from the authorities were cornerstones of success in the Russian construction business, and they were all gained through informal (and corrupt, when it comes to the authorities) personal networks. Additionally, one success factor for international companies was the concentration on products and services of high quality. Quality in the construction sector was increasingly im-portant for Russian customers, but the local firms were not yet able to provide it on their own.

SKANSKA’S RETREAT FROM RUSSIA

The first rumors of Skanska’s retreat from the Russian market ap-peared in August 2005. The former managers sold the company’s main Russian contract to Skanska System. The company had been renamed Hans Stroi and operated on the St. Petersburg market. In February 2006 the company was left by the general director of Peterburgstroi-Skanska and its top-manager Vitaly Votolevsky, who finally led the development division of the Russian Railways. In three months, the first deputy direc-tor and the director for company development followed him.

In the beginning of 2007 Skanska decided to gradually close down its construction business in Russia and pull out of the market for good. Before the decision to withdraw, Skanska sold sites in St. Petersburg destined for residential construction, on Morskoy Prospect and in the 66A quadrant of the city, to Moscow’s AT-Alliance Development. The sum of the transaction, according to the experts, was about $30 million. Thus for the first time, the management of the Swedish company offi-cially declared their withdrawal from the Russian market. The company’s losses, according to its own data, for its operating time in Russia have amounted to several dozen million dollars.

After the decision was made, Skanska still had projects to be complet-ed — residential buildings on Morskoy Prospect and at the junction of De-santnikov Street and Leninsky Prospect — Skanska decided to finish these projects as scheduled and fulfill all the obligations the company had.


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In the beginning of 2007 Skanska made an official announcement that „Skanska has made the decision to cease trading in Russia and to sell the remaining affiliated companies”. The Press Secretary of the Swedish firm, Peter Gamble said: „Our business in Russia was too small, therefore we have decided to leave the market and to concentrate on other coun-tries”. In the same press release Skanska’s representatives explained this decision by claiming that „We are a company with very high standards of job safety and ethics. In Russia, very few clients are ready to pay for compliance with these standards. And we are still against corruption”.

Skanska’s business in Russia was very small — only 0.5% of Skan-ska’s total turnover — and it had not been profitable in the final years of its operations in the country. Skanska decided to concentrate more on the markets in which it had been successful, such as Poland and the Czech Republic.

Pertti Naulapää pointed out: „There were many reasons for Skanska’s failure in Russia but I believe that Skanska’s basic problem in Russia was the lack of real strategic interest in the Russian market. In 1988, when I became the president of the Haka Corporation, I visited the presi-dent of Skanska in Sweden and we discussed their marketing strategies. I proposed cooperation in the Soviet Union but he told me that they were not interested in the Soviet market because it is a strange market for a Swedish company and they did not have the necessary resources to devel-op that market. But when Skanska took over Haka’s Finnish operations in 1994 they also got into Russian business as an extra operation. They decided to operate in Russia through the resources of Haka and Haka’s market base. So, during the first years it was a completely Finnish op-eration. The Swedish top management never showed intimate interest in Russian customers and Russian market development”.

Skanska’s failure in the Russian market also was explained by its high standards of corporate culture and unwillingness to bribe Russian officials. According to participants in the market, the situation was much more difficult. The basic feature of the Russian market was its precipi-tancy. Experienced in the struggles characteristic of wild capitalism, Rus-sian investors and developers were inclined to fast decision-making.

At the same time, their western colleagues, behind whom there was quite often the multi-billion dollar power of financial organizations, lost in this competitive struggle because of their slowness and excessive ‘cor-porationism’ when no significant decision could be made without a long process of coordination with London or New York. Russia’s ever changing business reality and its specific characteristics were one of the reasons


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why Western companies on the Russian real estate market preferred to work with Russian partners to make use of their skills and knowledge.

Another version of why Skanska withdrew from the Russian market centers on increasing competition. At the end of 1990s, the international giants like Hines and AIG/Lincoln, Fleming Family and Partners, Raven, London and Regional Property, Immoeast, Quinn Group, etc. entered the Russian real estate markets because of their high profitability. Also, the problems in Skanska’s head office hardly helped. In 2001 Skanska was displaced from first to fourth place among the world’s best construction companies in terms of volume of sales. In 2002 there was a crisis on the Swedish real estate market, and Skanska made a decision to sell those parts of the business related to the possession of real estate assets.

What first came around was the fact that Skanska entered the Rus-sian real estate market in the very beginning in 1993, when there was no reason to form alliances or joint ventures with local companies, because they had neither necessary market knowledge nor modern construction technologies, neither existing contracts nor unique resources. Also, there was no chance to acquire an already existing construction project, because in 1993, such projects were practically non-existent.

In 1993 there was no demand for business centers, modern plants or warehouses facilities, so the only option was to concentrate on housing construction. Besides, in 1993, the Russian market was in an emerging stage due to the well-known political and economic situation during the transition from a centrally planned economy to a market economy. So, a possible reason for Skanska’s withdrawal was that the company continued to think of Russia and act in that country in the middle of the 2000s as if it was the beginning of the 1990s. In other words, the Russian real estate market changed rapidly, but the assumptions underlying Skanska’s decision-making process stayed in 1993.

Pertti Naulapää felt that „Skanska never really considered Russia as a strategic market as Haka did. The Swedish and Russian business cultures were far from each other. Skanska came to the Russian market accidentally and were there reluctantly. Their strategic interests were elsewhere...”

However, there were plenty of reasons why Skanska could shut down its business in Russia. None of those reasons, in and of itself could be the force that made such strong and experienced international company as Skanska leave the Russian market. It is likely that all of these factors created an environment in which Skanska’s strategic goal to be the „lead-ing company in each market” couldn’t be completed with a satisfactory


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cost level. From the point of view of a multinational company there was no reason to try to reach goals at any price in Russia, when the same goals could be achieved with much smaller costs in other countries, like China or the US.

To sum up, the answer to the question: „Why did Skanska shut down its operations in the Russian real estate market, despite its high profit-ability and adequate experience?” lies in the logic of the international business strategy of any company: do business in those countries where you can be the leader with smaller costs.

Questions for DiscussionEvaluate Skanska’s decision for Skanska to withdraw from Russia 1. within the context of general approaches to internationalization. Describe and analyze the investment strategy of Skanska from the 2. point of „first mover — later entrant”, „greenfield — brownfield”, other alternatives. Analyze the prospects and potential problems of partnerships in 3. the Russian construction market. Should Skanska be more adaptive or more „global” in its strategy? 4. How could its Russian strategy be improved/developed in these terms? What is the role of subsidiaries in the overall strategy of Skanska? 5. What would you recommend to Skanska in order to be more efficient when managing a Russian subsidiary? What organizational changes/improvements could you recommend 6. to Skanska instead of leaving the Russian market?


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NOTES ON CONTRIBUTORS

Vitally I. Cherenkov

Vitally Cherenkov is Professor of Marketing at the St. Petersburg State University Graduate School of Management (SPbSU GSOM) where he teaches International Marketing, International Operations & Logistics, and International Business for Bachelor, Master, and MBA programs: Vitally Cherenkov holds a PhD degree in Economics and Grand PhD in International Business and Marketing from St. Petersburg State University of Economics and Finance. Professor Cherenkov has graduated from several postdoctoral programs: the Swedish Higher School of Economics (Helsinki), the University of Westminster (London), Manchester School of Business, the Academy of Competitive Intelligence (Chicago), Han-kamer Business School and Baylor University (Wasco, TX). Professor Cherenkov is the author/editor/co-author of many monographs, case studies, academic articles, text-books, explanatory dictionaries, and the GSOM Wiki on International Logistics and Supply Chain Management. His academic research focuses on international business, managing and marketing hi-tech innovations, general marketing theory, competitive intelligence and sci-entific translation theory and techniques. He is a member of the Advisory Board of the World Association for Case Method Research & Application and a member of the Eastern Academy of Management (USA).

Igor V. Gladkikh

Igor Gladkikh is Associate Professor of Marketing at the SPbSU GSOM where he teaches Marketing and Pricing Strategy for Bachelor and MBA programs. Igor Gladkikh holds a PhD degree in Economics. He has received a Certificate of Higher Education in Business Administration from the University of Lausanne, Faculty of Economics and Business Administration (HEC). Igor Gladkikh is the author of numerous case studies and articles on case method development, including those registered at ECCH and published in international journals. Five case collections were published under his editorship or co-editorship. His academic work focuses on price management, pricing strategy and pricing research. Since 2006, Igor Gladkikh has been Director of GSOM Case Development Centre. He is also a member of the Russian Managers Association, Professional Pricing Society, and World Association for Case Method Research and Application.

Marina O. Latukha

Marina Latukha is Associate Professor of Organizational Behaviour & Human Re-sources Management at the SPbSU GSOM where she teaches International and Strategic Human Resource Management for Bachelor, Master, and MBA programs. Marina Latukha holds a PhD degree in management from St. Petersburg State University. Marina Latukha has graduated from several postdoctoral programs in leading European and USA business schools (the Harvard Business School, the Haas School of Business, the London Business School and the HEC School of Business). Her academic work focuses on international human resource management; personnel education and development, talent management, HR evaluation and professional skills development. She is also a member of the Strategic Management Society, the Academy of International Business and the Academy of Human Resource development.


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List of Contributors

Andrey G. Medvedev

Andrey Medvedev is Professor of Strategic & International Management at the SPbSU GSOM where he teaches Corporate Strategy and International Business Strategy for Mas-ter and MBA programs. He holds a Doctoral degree in Innovation Management from St. Petersburg Institute for Engineering & Economics. Andrey Medvedev’s research and teaching interests lie in the field of international business strategies and management of multinational corporations. Since 1992, he has been visiting professor in these subjects at business schools in Austria, Finland, France, Italy, Latvia, Sweden, Switzerland, and the UK, including such leading institutions as Vienna University of Economics & Business (Austria), Aalto University School of Economics (Helsinki, Finland) and University of St. Gallen (Switzerland). Professor Medvedev is a member of the CEMS Global Strategy facul-ty group. He is the author of several textbooks published in Russia and abroad, research monographs, and a number of academic articles. Andrey Medvedev has won several case study writing contests organized by the Stockholm School of Economics and CEEMAN. Professor Medvedev was the academic leader in several EU projects in Russia on such topics as Innovation Management in SMEs and ICT in Transition Economies. He is also a member of the Academy of International Business.


Andrei Panibratov is Professor of Strategic & International Management at the SPb-SU GSOM where he teaches Contemporary Strategic Analysis and International Business Strategy courses. He holds a PhD in Economics from St. Petersburg University, a MBA degree from the University of Wales (UK), and a Doctoral degree from Moscow State University of Management (Russia). Professor Panibratov has attended professor training programs and development workshops at the Haas School of Business UC Berkeley and Texas A&M University (USA), HEC-Paris (France), Aalto University School of Economics (Helsinki, Finland), ECCH (France; Singapore) and WACRA (UK; Canada). He has par-ticipated in consultation and research projects for the World Bank (USA), UMIST (UK), Aalto University School of Economics and Tampere University of Technology (Finland) and European and Russian companies. He is a visiting professor at Lappeenranta University of Technology (Finland). Professor Panibratov’s research interests include the strategy of western multinational enterprises in Russia, marketing decisions when going abroad, in-ternationalization of emerging economy companies, outward FDI from Russia, and Russian MNEs. He is the author/co-author of a number of monographs, several case studies, and many articles published in Russia and abroad.

Sergei A. Starov

Sergei Starov is Associate Professor of Marketing at the SPbSU GSOM where he teaches Marketing and Brand Management for Bachelor and MBA programs. Sergei Starov holds a PhD degree in Economics from St. Petersburg University. He has graduated from several postdoctoral programs in leading European and USA business schools: the Haas School of Business (USA), the Katz School of Business (USA), Instituto de Empresa (Spain), Aalto University School of Economics (Helsinki, Finland) and Swedish Institute of Management – IFL (Sweden). Sergei Starov is the author of numerous case studies and articles on case method development, including those registered at ECCH and published in international journals. His academic work focuses on marketing, sales promotion and brand management. He is also a member of the World Association for Case Method Re-search and Application.


Cross-Border Strategy and Operations: Finnish Companies in Russia

A Collection of Cases

Edited by Andrey G. Medvedev and Marina O. Latukha

Published according to the resolutionof Educational Programs Commission at SPbSU GSOM

Authorized: 20.03.2012. Author’s sheets: 8,0.300 copies.

Publishing House of the Graduate School of Management, SPSUVolkhovsky per. 3, St. Petersburg, 199004, Russia

tel. +7 (812) 323 84 60www.gsom.spbu.ru


675.cross border strategy and operations finnish companies in russia a collection of cases

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