the ability to acquire companies with an "eastern" expertise
simultaneous preferential market access to both the European Union and the former centrally planned economies
The decision to enter the region is also driven by the current strengths and weaknesses of its countries. Some of the strengths are large populations, low wages, geographic proximity to Western Europe, privatization opportunities, low market entry costs and long-term growth potential. On the other hand, low per capita income, limited management skills, low productivity, overdrawn expectations, poor infrastructure, an unstable business environment, large bureaucracies and short-term decline and crises represent some of the weaknesses (Kostecki 1993).
Strengths and weaknesses differ from country to country and from industry to industry. Central and Eastern Europe is not an economically homogeneous bloc and disparities in the pace and depth of ongoing transformations continue to widen the differences between countries. Therefore, strategies must be differentiated towards the heterogeneous market requirements and customers in these countries rather than standardized. Another strategic consideration concerns the competitive orientation of a company entering this market. The still existing demand overhang in the region combined with the weak purchasing power of many potential customers suggests the adoption of a cost leadership strategy. Firms can also prolong the life cycle of their existing products by implementing market penetration and market development strategies. Strategies of product development and diversification can often be delayed until competition is increasing.
A targeted marketing effort, i.e. concentration on specific market segments within in each country is the preferred option to reach customers in an efficient way. As for market entry timing, the train is leaving the station. Many opportunities in these markets can be explored best through a pioneer strategy. By entering these markets before competitors do, existing, but rapidly shrinking knowledge, technology, and process gaps can yield an advantageous investment position and high payoffs.
Low wages in the transition economies can also enable Western companies to pursue cost leadership by shifting labor intensive production to them. Average wages in Central and Eastern Europe are only 15 % or less of the wages in the European Union (see figure 1). Nevertheless, it is important to view this difference in the context of the qualifications, skills and productivity of the Eastern European work force, which in some areas correspond more or less with the Western standards, while falling far short in others. In addition, the gradual decrease of the labor proportion in the total cost of manufacturing may impose limits on this alternative.
Of major overall importance is the choice
between adapting to the marketing environment in the host country and working
toward changing it. The decision will be a function of the time horizon
and resources of the firm. When using a long-term perspective, Western
firms may find it beneficial to pursue a strategy of altering the marketing
environment step by step in order to move it closer to a functioning market
economy. Such an approach, however, requires an understanding of current
societal weaknesses, accompanied by a willingness not to exploit them to
the detriment of individuals. In addition, significant investments are
necessary into employee training programs which focus not only on achieving
knowledge transmission but also facilitate behavioral change (Czinkota
1997). Furthermore, programs need to be developed which educate and assist
suppliers, customers and policymakers to understand the workings of a market
and enable them to make better decisions. While such an approach to new
market opportunities may appear to be overly cautious and expensive, it
is crucial to take these steps in order to gain gradual acceptance for
a market orientation in the former centrally planned economies. Rapid changes
and substantial economic dislocations have imbued many private individuals
and policy makers with suspicion and weariness towards marketing. Unless
Western marketers are able to convincingly demonstrate how competition,
variety, and freedom of choice can improve the quality of life, one of
the great opportunities for marketing to become a discipline which transforms
society will have been lost. Such a loss would also damage severely the
long-term prospects for Western corporate success in the region.
Market Entry Strategies
Market entry deals mainly with market selection and the determination of suitable market entry modes. By analyzing potential customers and competitors, the firm expects to identify those markets which best satisfy company objectives. Typically, one uses checklists, evaluative screens, scoring models, and country portfolio analyses to make a market selection. Markets are evaluated based on one or several criteria, which allow for rankings and facilitate the selection decision (Cavusgil 1985). Aside from general selection criteria such as market potential, market growth, market volume and market access, an assessment of the transformation process and of specific commercial risks is useful when evaluating markets in Central and Eastern Europe. Among other factors, one needs to assess the progress of economic reforms, the extent to which state monopolies have been abolished and the direction of the governmental budget deficit. Figure 2 provides more detail on some of the commercial factors to consider.
In addition to these commercial factors, however, the firm should also deliberate the extent to which its market selection will hasten the economic transition. It should be understood that economic change in Central and Eastern Europe does not take place in isolation from outside factors. Rather, the change will be encouraged or retarded by the actions of external forces. Each corporate market entry decision will therefore have an effect on the rate and success of change, which firms should take into account. This is not to say that firms should ignore the results of their traditional analyses of market entry, but rather that they should be cognizant of an important additional dimension. The German Treuhandgesellschaft, the institution in charge of privatizing East German state property, considered the profitability of a corporation, the burden of privatization on the public purse, and the employment plans of prospective owners, alongside with any privatization proceeds in making a final decision about the disposition of assets. Similarly, Western marketers in Central and Eastern Europe should consider an evaluation of those non-traditional factors which may have a bearing on the long-term success of their activities.
With regards to market entry modes, the region could in the past only be entered via exports or, in some countries (Poland, Hungary, Romania), through joint ventures. Now, export, direct investment, licensing, franchising, contract manufacturing, and management contracts can all be pursued. Yet, many Western companies still favor the traditional approach. In general, they prefer to use the low risk market entry modes of exporting and the establishment of sales subsidiaries. High risk entry modes such as production subsidiaries are used much less often. Firms persist on such patterns even in those countries which are considered to be more aggressive reformers in the transition process, as a study of the market entry behavior of German subsidiaries based in Austria, which have entered the markets in Central and Eastern Europe confirms (see Figure 3). As a result, many firms deprive themselves and their target markets of the investment benefits mentioned earlier. They also demonstrate a lack of presence and commitment which, in the long run, may place them at a disadvantage against their more enterprising competitors.
Buying Behavior
Development of a marketing mix strategy requires an understanding of the changes in consumer and organizational buying behavior which have accompanied the transformation from a planned economy to a market economy. Historically, the buying behavior of consumers was shaped somewhat by limited purchasing power, but mainly by continuous shortages in supply. Due to very limited access to substitutes, consumers hardly compared quality and prices, and bought products as soon as they reached the shelves in order to buy something. Price played a subordinated role in the buying decision, since purchasing power was larger than supply, and prices were the same in all retail outlets.
These conditions have changed. Now supply is expanding, prices are varied, but money is the bottleneck. Price has therefore become a decisive buying factor. The main features of the buying behavior of consumers in Central and Eastern Europe are:
Reduced consumption due to price increases and limited purchasing power;
thorough price observation and careful comparison of different offers;
avoidance of risky or impulse purchases;
preparation of buying decisions in the family;
growing brand consciousness (Shama 1992).
With regards to organizational buying, the decisions formerly taken by the central planning apparatus, are now made by newly independent companies. Changes in the organizational buying behavior can be demonstrated by the results of a study of the buying behavior of end users and importers of industrial equipment in the former Czechoslovakia. During the summer of 1991 we questioned 18 industrial companies which were a representative sample of Czech and Slovak firms importing industrial products from the West. Their most important buying criteria were product quality, followed by price and guarantee conditions. After sales service, time of delivery and stability of the relationship were also seen as important. On the selling side, interviews conducted with Western purchasers during 1992 and 1996 indicated that to them three dimensions were at once the most important and the most problematic. Western firms purchasing products from the Central and Eastern European region considered timely delivery, the delivery of the agreed upon quality and the delivery of the agreed upon quantity as the most critical dimensions.
In the context of organizational buying it is worth reiterating that all the countries in the region have a history of treasuring the personal relationship. Business typically is not done between organizations but between individuals. Personal contacts and connections have long been an important organizational resource. The same continues to hold true today. Therefore, the development, building, and maintenance of long-term relationships are basic preconditions for long-term corporate success (Lehtinen 1996).
Marketing Mix Strategies(1)
Product Policy
The product policy for the markets in Central and Eastern Europe is heavily influenced by the technological gap between Western industrialized nations and the former Socialist countries. This gap is largely the result of the export control policy implemented by the West during the period of the Cold War, which was designed to preserve the technological advantage of the West (Czinkota and Dichtl 1995). In spite of today's openness of markets and rapid diffusion of innovation, most firms in the region are still a decade or more behind the technological standard of the West. As a result, product policy decisions for markets in Central and Eastern Europe can focus on the selection of products from the existing company portfolio for export to or production in these markets. In the early years of market opening, concentrated research of user needs and problems in order to find ideas for new products was of secondary importance for initial market entry. However, growing competition from indigenous firms which are close to their customers increases the importance of such research.
In positioning established products in these markets, branding is a very important tool. So far, brand awareness has been underdeveloped, since most products were sold as generics or local brands. The few international brands which used to be offered only in special restricted shops acquired an aura of very high prestige. Early on in the transition, Western brands in general were seen as being of higher quality and preferable to domestic products. More recently, however, consumers have discovered that Western products are not necessarily better than their domestic counterparts. A resurgence of domestic pride and fond memories of the olden days have translated into renewed demand for domestic products, be they soft drinks, bread or soap.
To a large extent, however, branding in the markets in Central and Eastern Europe is still an empty field. Most brands still lack character and personality and remain interchangeable to the consumer. Investing in brand positioning can greatly enhance brand loyalty, especially if companies pursue a pioneer strategy. Focused branding strategies combined with a positive country-of-origin image are very effective because brand awareness can be developed quickly and at relatively low cost (Schweiger and Frieders 1994). The branding strategy must, however, be accompanied by a truly superior product in order to achieve consumer loyalty.
Marketing Communication
Both companies and consumers typically still have insufficient information on potential partners and products from the West to make decisions. Marketers have to take into account that most eastern individuals and companies have been separated from the world market for generations, and that privatization has created new companies that are considering internationalization for the first time.
Marketing communication must therefore, above all, aim to reduce the information deficit of potential customers and partners. Yet it must do so in ways which are seen as honest and appropriate. It must be remembered that public messages in Eastern Europe used to consist mainly of propaganda, designed for ulterior motives, and despised by many. Today, in virtually all countries, communication instruments such as advertising, personal selling, public relations, and sales promotion can be used and a wide variety of media channels is available.
The most important communication instrument is advertising. In the development of advertising campaigns for consumer goods, the following guidelines apply:
Customers in Central and Eastern Europe react more sensitively to advertising messages than customers in industrialized countries.
Consumers are interested in rational advertising which clearly states its message. They expect advertising to help them in sorting through numerous and confusing offers, and they prefer information about products to efforts at persuasion. Hyperbole engenders mistrust and builds up a psychic distance to the product and its seller. A survey of consumers in the eastern states of Germany provides insightful findings: 87 percent of Easterners believed that advertising makes them buy things they don't need; 64 percent believed that advertising gives a misleading impression of products; and 59 percent believed that advertising takes advantage of them (Lipman 1991).
Advertising on television is not as accepted as advertising in the daily press. TV advertising often does not meet the information requirements of customers. Ads in papers, especially with informative and well structured arguments, are seen as most useful to prepare buying decisions.
Advertisers need to remember that not all domestic brands have a poor image, and that some of them are increasingly being rediscovered and valued. In such cases, sensitive treatment of domestic brands is necessary in order not to offend customers.
One question often raised is whether special advertising campaigns should be designed for the region or whether campaigns successfully implemented in Western markets can be transferred. Both approaches are possible, as long as the advertising strategy takes into account the information needs of the customers in Central and Eastern Europe. Practical experience shows that adjusted Western strategies can be implemented very successfully. However, it is useful to rely on local talent, which is best able to judge local reactions, to modify existing advertisements and to create new ones for this market.
With local input into the design of advertising campaigns, care must be taken to understand the still existing limitations. Useful as local agencies are for local companies, firms may be ill served if they use locals to develop campaigns for Western customers. While local experts may be able to copy the West, they do not necessarily understand the underlying dimensions. For example, Aeroflot, the major Russian airline, produced an advertising campaign to attract new customers from the West. But even though planes were shown off and the staff wore new uniforms, no fun of flying was conveyed in the advertisement. Rather, the advertisement transmitted an image of the Russian army.
Finally, the importance of personal communications should not be underestimated. Relationships matter! This point is driven home when one observes the success in the region of direct marketers such as Avon, Mary Kay, Tupperware and Amway. For example, without any advertising, Amway has 94,000 representatives in Hungary, which move more than $39 million of product (Muraskin 1994). A focus on personal orientation therefore may well become a prime tool for marketing communication.
Channel Management
The abolishment of the foreign trade monopoly
and the right of companies in Central and Eastern Europe to engage in foreign
trade on their own has opened new options for Western companies in channel
management.
Imports from Central and Eastern Europe
In the past, the Western buyer was not permitted to choose between several suppliers. Now, companies can choose between various import channels such as:
Direct import from the manufacturer;
Import through trading houses;
Import through export co-operatives or trade associations of small and medium sized companies.
The opportunities for direct imports will increase if manufacturers in Central and Eastern Europe develop the prerequisite capabilities to satisfy their clients. Many buyers have found that selling is still not part of the economic culture in the region. Available descriptive materials are often poorly written and devoid of useful information. Obtaining additional information about a product may be difficult and time-consuming. The quality of the products can also be a major problem. In spite of their great desire to participate in the global marketplace, many producers still tend to place primary emphasis on product performance and, to a large extent, neglect style and product presentation. In many instances, the international customer needs to forge agreements that require the manufacturer to improve quality, provide for technical control, and ensure prompt delivery in order to develop a satisfactory relationship. It may be necessary for the buyer to provide personnel and process assistance to the seller in order to improve performance to desirable levels. Alternatively, companies will have to source from trading houses or cooperatives, which, for a price, can take on some of these preparatory functions.
Exports to the Region
Several export channels are open to Western suppliers:
Direct export to the end user, especially for industrial products.
Many customers, especially buyers of industrial products, have an interest in buying directly. Domestic intermediaries, above all the Foreign Trade Organizations (FTOs), which the state had placed in charge of all international trade during the decades of central planning, are often avoided. Therefore, the establishment of direct links to users is not difficult. A problem that arises is that some of the users do not have any experience with foreign trade. If this is the case, then direct links can be risky and be subject to misunderstandings, particularly when it comes to exchange rate management and interest payments. In case of doubt, the services of a trading house should be used.
Export through trading houses, which operate as intermediaries (dealer or agent) and establish direct contacts between foreign suppliers and domestic users.
For both options, one has to be aware of the differing sophistication of private wholesalers and retailers in the countries of Central and Eastern Europe (Iwinska-Knop 1992). For example, in the successor states of the former USSR, a functioning wholesale trade system still does not exist. Commodity exchanges are taking over the functions of wholesalers, as well as those of retailers. Some retail systems are very underdeveloped. For instance, per capita only half as many shops exists in the former USSR as in Hungary.
Export to wholesalers and/or retailers, whereby trading houses can be part of the distribution chain.
Export through subsidiaries or joint ventures of Western companies in Central and Eastern Europe, which serve end users or function as channel members.
Channel management must also take into account the shortcomings of the current logistics systems in the region. For example, in the United States, 40 percent of shipments are under a just-in-time/quick response regime. For the U.S. economy, the total cost of distribution in 1995 was close to 11 percent of GNP. By contrast, some of the countries in the region are battling poor lines of supply, insufficient warehousing facilities, a lack of distribution and service centers, limited rolling stock and inadequate transportation systems. Producers are uninformed about issues such as inventory carrying costs, store assortment efficiencies, and replenishment techniques. The need for information development and exchange systems, for integrated supplier-distributor alliances, and for efficient communication systems is only poorly understood. As a result, distribution cost in some countries of Eastern and Central Europe remain at well above 30 percent of GNP (Czinkota 1994). These infrastructure constraints also often mean that Western firms initially may only be able to reach major cities. In addition, criminal elements in these societies in upheaval endanger the distribution system. Lenders and insurance providers are wary about supporting distribution in areas where the tendency of shipments is to disappear, sometimes in part, sometimes altogether, sometimes temporarily, sometimes forever (Canna 1994). Western companies exporting to these markets must therefore be prepared to shoulder the burden of a whole range of distribution functions, such as financing, risk management, product assortment structure, transportation, storage, packaging, security, communication, and after sales services.
Contractual and Price Policy
The ongoing transformation means that the framework for contractual and pricing decisions is constantly changing. Customer and supplier relations are being reorganized. New customers are entering the market. Stable supplier-customer relationships have yet to be developed. The new legal framework is opening the way towards a wide variety of contract types and contract conditions. But even though most countries now have a property rights framework, bankruptcy laws and other commercial legislation, they often have not been applied sufficiently widely and consistently to yield any consensus concerning their practical content. Weak implementation has been paralleled by jurisdictional conflicts that have resulted in outright confusion as to which laws have precedence. In addition, many government authorities have not as of yet become convinced of the inviolability of contracts (Banerjee et al. 1995). On the corporate level, one additional major problem of contractual policy is to find mutually agreeable financial arrangements. In many countries, particularly those of the former Soviet Union, classical forms of foreign trade financing are available only on a limited scale. Restricted access to convertible currencies, limited liquidity, and systemic weaknesses in the banking sector continue to pose major problems. As a result, countertrade often remains an important instrument of contract policy.
The rapid changes also require the constant observation of customers in order to recognize upcoming difficulties early on. It is important to have steady and direct contact with one's trading partner in the East. Personal contact with top management creates a basis for trust. Very important is also the ongoing evaluation of the reliability and creditworthiness of customers. Doing so should include asking for banking references with regular updates.
Pricing decisions must be based on the specific market conditions, the target groups envisioned, and the company objectives. For most standardized mass products, a low price strategy seems to be the most market oriented one in light of limited purchasing power, decreases in the standard of living and a high price sensitivity on part of consumers. However, a growing number of customers are ready and able to pay higher prices, especially for high quality technical products which offer substantial benefits. For example, in Hungary, the cellular telephone company WESTEL decided not to sell phone instruments on a subsidized basis, as is done in the U.S., but rather sold the instruments with a relatively high markup. In light of a very outmoded land-line telephone system with long installation delays, the resulting high price was no deterrent, but rather led to the attraction of customers with heavy use. The social desirability of cellular phones, combined with growing business needs have lead to deep market penetration and high profitability. Such high price strategies need to be seen of course in the context of demand, but also in light of growing purchasing power in the future.
Conclusions
The strategy patterns of marketers working in Central and Eastern Europe will vary depending on corporate goals and the specifics of the marketing environment. Basic strategic options are summarized in figure 4. The shadowed cells illustrate the strategy path implemented by Henkel Austria. Key elements of the Henkel strategy are an early presence in markets (pioneer strategy), market entry by majority joint ventures with the option of complete take over, product mix of local and international brands, informative product related advertising, and newly developed distribution channels controlled by Henkel (Stara 1994).
The economic region of Central and Eastern Europe is characterized by growing differences between countries with regard to their political, economic, legal, and institutional conditions. The "old" and the "new" countries of Central and Eastern Europe cannot be treated as a unique economic bloc for which a standardized marketing strategy can be implemented. Rather, marketing strategies have to be tailored to the specific requirements of each country market. Yet there are commonalities in the areas of market selection, and marketing mix development which can be of use to firms desiring to enter these markets and to researchers who wish to pursue further work in this field.
Both companies and researchers should investigate the extent to which pre-existing business practices in the East can be of value in furthering the marketing concept. For example, the development and maintenance of close, personal relationships are of major importance in the region. Conservation and recycling are much more ingrained in the minds of customers in the former centrally planned economies than in the West - albeit for reasons of shortage and not because of environmental awareness. Some might even go so far as to claim that the socialist tradition of primacy of society over the individual is increasingly permeating the "capitalist" economies. In light of the fact that in the West the notion of ownership appears to be gradually replaced by temporary possession (e.g. leasing of cars, stockholding in mutual funds which continuously change their portfolios, renting rather than buying a home), perhaps even the traditional key issue of private property, which separated the East from the West may not remain such a core issue at all. For the marketer, all this means that rather than simply aiming for a total replacement of previous practices, it may well be worthwhile to investigate the usefulness of some of them for further progress in the societal aspects of marketing.
Overall, it must be remembered that both the economies in transition as well as the market economies of the West are faced with an unprecedented situation, for which there are few guide posts. Both parties are only gradually gaining experience in how to adjust to the new realities. Until the time comes where both systems are closely intertwined, it is important to listen to each other, carefully observe environmental change, and to attempt to develop new approaches which are beneficial to and in harmony with society.
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Thomas; Lutz, Mark S.; Marrese, Michael; and Saavalainen, Tapio O. , Road
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3/1994, p. 117.
Figure 1: Costs per labor hour in the manufacturing industry in 1994 (figures in % compared with EU-12)
Source: Industrie, No. 46,
15. Nov. 1995
| Criteria | Dimensions |
| progress of economic reforms | reduction of state monopolies
degree of decentralization and deregulation containment of inflation, reduction of deficits in the state budget |
| international openness | conditions for outside participation in
privatization
options for buying real estate equal treatment of foreign companies |
| distribution conditions | availability of distribution channels
transportation and logistics systems |
| competitive platform | acceptance of competition from abroad
structure for fair competition |
| assessment of commercial risks | contract risk (Non-compatibility of commercial
laws in C&E-Europe with international laws, implementation of different
trade rules. Existence of arbitration system.)
customer risk (Liquidation of companies can cause disturbances in supplier customer relations) payment risk (Bankruptcy in process of privatization.) credit risk (Limited access to int. foreign trade financing. Change in credit conditions of C&E-European banks.) product risk (Technological compatibility.) distribution risk (Efficiency of national distribution systems.) price risk (Price regulation in response to resistance to economic reforms.) inflation risk (Hyperinflation, difficulties to calculate prices on a long-term basis.) acceptance risk (Mistrust and aversion against Western products, companies and managers.) |
Figure 3: Entry modes of companies with
German parent company in the countries Czech Republic, Slovakia, Hungary
and Slovenia*
Source: Moser, R., Springer, R.,
Gaisbauer, H., Ostkompetenz Österreichs in der EU, Studie im
Auftrag des Kuratoriums der Deutschen Handelskammer in Österreich,
Wien 1996, p. 80
* Frequency of entry modes used in absolute numbers based on a sample of 55 companies.
| Strategy
dimension |
Match of single strategy options with the marketing environment in Central and Eastern Europe |
| very likely | likely | less likely | |
| Focus on competitive advantage | cost leadership | quality leadership | mix of cost and quality leadership |
| Scope of strategy variation | differentiation, adaptation | standardization combined with local adaptation | plain standardization |
| Product-Market-Combinations | market penetration | market development | product development, diversification |
| Concentration on specific market areas | segmentation by country markets | regional segmentation in country markets | market segmentation by purchasing power |
| Market entry timing | pioneer strategy | follower strategy | late comer strategy |
| Market Entry Modes | export | direct investments exploiting the opportunities
offered by privatization
(Buy-Strategy, Build-Strategy) |
contractual market entry
* contractual manufacturing * licensing * franchising |
| Product Policy | Product selection | Product modification | Product innovation |
| Channel Policy | direct control of channel | design and make of own channel | use of independent channel members working for different suppliers |
| Communication Policy | informative, product related rational advertising based on differentiation | brand based advertising based on a combination of standardization and differentiation | highly standardized advertising, focus on emotional advertising messages |
| Contractual Policy and Pricing | risk minimizing contracts,
low price strategy |
combination of low and high price strategies based on a corresponding product mix | standardized world-wide price strategy |
Source: Stara, F., Henkel Austria. Aufbruch in den Osten - Strategien und Erfahrungen, Werbeforschung & Praxis, 3/1994, p. 117.