Linking the East and the West
How to enter new markets?
Company A
Wouter Valkema
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Linking the East and the West
How to enter new markets?
Company A Supervisors:
1st supervisor: Mr. X 2nd supervisor: Mr. Y
Faculty of Management and Organization International Business
Supervisors:
1st supervisor: Prof. Dr. A.M. Sorge 2nd supervisor: Mr. Drs. H.A. Ritsema Author:
Wouter Valkema
Student number 1154206 Groningen, December 2006
‘The author is responsible for the content of this report; the copyright rests at the author.’
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Preface
During the years of studying International Business at the Faculty of Management and Organization at the University of Groningen, I expected the concluding part to be the most interesting and challenging.
Finally combining theory and practice by extensive research proved to be a great experience for me, learning the way business is conducted in Central and Eastern Europe and comparing this to scientific theories and literature.
I would like to mention that the Sector XB and Sector XA segments within Sector X proved to be very interesting sectors in an ever changing environment. Sometimes it was very hard to keep up with these changes, but after all it was Bill Gates that stated: “One calendar year consists of four Sector XB years.”
This experience in Sector X, a sector of which I had little knowledge, has even resulted in a great job opportunity at Company A.
First of all, I would like to thank Mr. Z for introducing me to Company A.
I would like to thank Company A and its employees for the opportunity to execute my final research.
Their open-mindedness towards my research provided me insightful information concerning the company and its business environment. Although it was always very busy and hectic, they would always take the time to have discussions or help me.
In particular, I would like to thank my supervisors at the company: Mr. x and Mr. y. They offered me much freedom in the way the research was executed and always supported me during the whole process.
I would also like to thank my supervisors of the University of Groningen. To my first supervisor Prof.
Dr. Arndt Sorge, I am very grateful for his support, tips and time during my research. Providing me with challenging issues proved to be very helpful. Visiting him in Berlin is an experience that will always bring back fine memories. I am very thankful to my second supervisor of the University of Groningen, Mr. Drs. H.A. Ritsema for his willingness and time to judge this report.
Last, but certainly not least, I am very thankful to my family, friends and especially my girlfriend for their everlasting support. Their encouragement, tips and humor provided a great source of inspiration during the whole research and writing process.
Enjoy reading this report lying in front of you!
Groningen, December 2006 Wouter Valkema
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Management summary
Company A is a small Sector X provider aiming to sell Sector XA and Sector XB services in Central and Eastern Europe. Currently, the company is mainly focusing on Ors sales to sell typically wholesale products. Company A currently only serves Enterprise customers in Estonia.
It feels the need to shift its strategy from Ors only to the Ors and Enterprise segments for all its current country markets, mainly because the opportunity to create a long term relationship with Enterprise customers is greater. Company A also sees new business opportunities in the Sector X market of the Ukraine. After increasing requests from Ors customers for connectivity to this country, the company has decided to enter this country market in the near future by offering services to Ors customers.
Company A desired a market research resulting in international strategies applicable for its strategic shifts. Therefore, the objective of this research is:
‘To provide Company A with international strategic advice usable for its strategic shifts on the Central and Eastern European Sector X market.’
To fulfill this objective the following research question is formulated:
‘How should Company A execute its international strategic shifts?’
To answer this research question, analyses of Company A’s internal organization and its external environment are made. The results of these analyses are confronted in a SWOT-analysis, which forms the input for international strategy to be executed by Company A.
The Internal Analysis results in the following characteristics of Company A’s organization:
Company A is a company that has a restricted access to capital. However, it is a flexible, responsive, customer oriented and growing company that offers a broad service portfolio. This has resulted in a positive image among its customers; these value the fact that the company is locally present in each of its country markets. The company also has extensive network coverage in the Central and Eastern European region, but lacks local network coverage in the countries where it is active. It is hard for Company A to compete in certain parts of the Central and Eastern European region, certain big competitors that have their own glass, enjoy cost advantages over other companies.
The company has a very strong and experienced Management Team; the members have substantial international Sector X experience. However, Company A is having problems finding suitable
personnel.
Company A’s general strategy is one that is logical and offers action-points that could improve their performance and enable future growth in a changing business environment. Its International Business Level strategy can be typified as a ‘Focus strategy’, as the company aims at delivering a wide variety of Sector XB and Sector XA services for business customers into and from the Central Eastern European Region. The company also tries to keep its cost basis on a low level. Company A’s international corporate level strategy can be typified as an ‘International strategy’. Knowledge, experience, capabilities and innovations are transferred from Headquarters to foreign subsidiaries. It also strives to profit from local knowledge.
Company A has formed strong strategic alliances, a combination of horizontal and vertical alliances.
These strategic alliances create many economies of scale and scope that have a positive influence on Company A’s competitive position. However, these alliances have also created Company A being somewhat dependent on their partners.
The External Analysis results in the following characteristics of Company A’s environment:
Ors customers within Sector X markets can be characterized as regarding regional network coverage of a supplier as very important, but they also easily change supplier due to more attractive prices offered. Enterprise customers within Sector X markets can create sticky business for suppliers, as they often do one-stop-shopping. These require a lot of handholding and customer relations on a personal basis from/with the supplier, which results in an intense sales process when dealing with this type of
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customers. Local network coverage offered by a supplier is also regarded as important, as these customers mostly have local needs.
Something that is considered to be quite normal in Sector X is the fact that competitors can also be suppliers, customers and/or partners. Retaliation could be provoked from these parties when Company A enters the Ukraine and the Enterprise markets in Latvia, Lithuania, Poland and Russia.
Large competitors within Company A’s markets usually are in possession of their own glass, which enables them to beat Company A on pricing. These companies can also be typified as having capital available for acquisitions, R&D and expansion of their network. However, these companies have a negative image of being bureaucratic, not very responsive and impersonal. Small competitors of Company A can be characterized as lacking market power, regional network coverage and extensive service portfolio.
The general business environments in Russia and the Ukraine are considered to be very difficult and complex. This is an advantage for Company A in Russia, where the company is already present and experienced. Concerning the Ukraine, this poses a threat for the company in a country where it has no presence or experience.
Competition on the Sector X markets in the Baltics and Poland can be considered to be more intense than in Russia and the Ukraine. In the Baltic and Polish SectorX market many suppliers are available which indicates high buyer power, in Russia and the Ukraine not that many suppliers are available indicating high supplier power. The size, population, current status and growth of the SectorX markets of Russia and the Ukraine, could indicate that the Sector X markets there have high potential.
The Republic of Belarus is a country that might have future potential for Company A and its activities.
However, the Belarusian Sector X market is not yet liberalized; this is planned for the year 2007.
The SWOT-Analysis results in the following strategic options for Company A:
The most suitable entry mode for the Ukrainian Sector X market is setting up a wholly-owned
subsidiary by making a Greenfield investment. This due to the fact that that the Sector X market in the Ukraine can be typified as being in the ‘window phase’. This makes the market very attractive for a company like Company A, also implying that there is still time to enter the Ukrainian Sector X market.
When entering the Enterprise markets in Latvia, Lithuania, Poland and Russia; Company A should make small acquisitions that are complementary to Company A and create synergy with its activities.
These markets are characterized as being in the ‘competitive growth phase’; acquisitions have to be made in order to circumvent the handicap of being a late-comer. Another reason for this entry strategy is that Company A prefers to have full control of its subsidiaries. However, when pursuing an
acquisition strategy Company A should also strive to grow via organic expansion.
The international business-level strategy that best suits Company A is a Focus strategy, where the company is a niche player within certain markets. The company remains focused on offering services within the Sector XA- and Sector XB- segments to specific (Ors- and Enterprise-) customer groups within the Sector X markets of the Baltics, Poland, Russia and the Ukraine. Means to enable the company to implement a strategic combination of focused cost leadership and a focused differentiation is forming Non-equity strategic alliances.
To achieve both global efficiency and local responsiveness, the international corporate-level strategy that Company A should follow is a Transnational strategy. This strategy should enable Company A to successfully operate on the Ors- and Enterprise segment of the Estonian, Latvian, Lithuanian, Polish and Russian Sector X markets, and on the Ors segment of the Ukrainian Sector X market.
Company A should make use of its competitive advantages by being a flexible, responsive, customer oriented Sector X provider that offers a broad service portfolio within a extensive regional network coverage. The company should also form vertical alliances with suppliers that are not competitors. It can also be recommended that the company should strive for continuous improvement of its service portfolio, it should start to offer consultative services and bundled complementary services. Company A should train its current sales staff and hire qualified and experienced personnel to increase its ability to serve Ors and Enterprise customers. It can be advised that the company starts investigating business opportunities in Belarus before liberalization of the Sector X market (planned in 2007) is completed, to possibly create early entrant advantages in the future.
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Index
Preface...2
Management summary... 3
Chapter 1 Introduction ... 7
1.1 Company A BV... 7
1.2 Organizational overview ... 7
Chapter 2 Research Framework ... 10
2.1 Introduction... 10
2.2 Background ... 10
2.3 Owners of the problem ... 10
2.4 Problem statement ... 11
2.5 Research method ... 14
2.6 Theoretical framework... 15
2.7 Definitions and abbreviations ... 17
2.8 Research structure ... 18
Part I A Internal Analysis ... 19
Chapter 3 Performance Analysis ... 20
3.1 Introduction... 20
3.2 Financial performance... 20
3.3 Customer satisfaction and loyalty ... 20
3.4 Brand/ Firm associations... 20
3.5 Quality of services ... 21
3.6 Research and Development... 21
3.7 Personnel ... 22
3.8 Conclusion... 23
Chapter 4 Strategy Analysis... 24
4.1 Introduction... 24
4.2 Strategy of Company A ... 24
4.3 International Strategy ... 25
4.4 Strategy evaluation... 26
4.5 Conclusion... 27
Chapter 5 Strategic Alliances Analysis... 28
5.1 Introduction... 28
5.2 Master Services Agreements ... 28
5.3 Peering ... 30
5.4 Disadvantages Horizontal/Vertical Alliances... 31
5.5 Conclusion... 31
Part I B Internal Analysis ... 33
Part II A External Analysis ... 34
Chapter 6 Customer analysis ... 35
6.1 Introduction... 35
6.2 Ors segment... 35
6.3 Enterprise Segment... 36
6.4 Conclusion... 37
Chapter 7 Competitor Analysis ... 39
7.1 Introduction... 39
7.2 Analyzed competitors ... 40
7.3 Company E AB... 40
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7.4 Company F Inc. ... 43
7.5 Company G AS ... 45
7.6 Company H SIA... 46
7.7 COMPANY D Energis ... 48
7.8 Company I Lietuva ... 49
7.9 Company J ... 51
7.10 Conclusion... 52
Chapter 8 Environmental analysis... 54
8.1 Introduction... 54
8.2 The general environment of Russia ... 54
8.3 The general environment of the Ukraine... 56
8.4 Conclusion... 59
Chapter 9 Market Analysis... 61
9.1 Introduction... 61
9.2 Threat of entry ... 62
9.3 Intensity of rivalry among existing competitors ... 62
9.4 Pressure from substitute products ... 63
9.5 Bargaining power of buyers ... 63
9.6 Bargaining power of suppliers... 64
9.7 Conclusion... 64
Chapter 10 Potential countries analysis ... 66
10.1 Introduction... 66
10.2 Delimitations ... 66
10.3 Selection variables ... 66
10.4 Method ... 67
10.5 Results ... 68
10.6 Conclusion... 68
Part II B External Analysis ... 69
Chapter 11 SWOT-Analysis ... 70
11.1 Introduction... 70
11.2 Main input for SWOT-analysis ... 71
11.3 SWOT Matrix... 72
11.4 Strategic issues ... 72
Chapter 12 Strategy... 76
12.1 Introduction... 76
12.2 Entry strategy ... 76
12.3 International strategy... 77
12.4 General Strategy statement ... 79
Chapter 13 Conclusions and recommendations... 81
13.1 Introduction... 81
13.2 Conclusions ... 81
13.3 Recommendations ... 83
13.4 Evaluation of research... 84
Bibliography... 86 Appendices...
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Chapter 1 Introduction
1.1 Company A BV
Company A (abbreviation for Company A BV) is a professional and dynamic international SectorX company offering quality solutions to crss and orss. Company A focuses on connecting Russia, the Baltic States and Poland with the Nordics, Western Europe and the rest of the World. Company A fully owns and operates a glass network covering the countries surrounding the Baltic Sea.
The Company A optical glass network connects the main business centers in the Baltics, Poland and Russia with key Presences in Northern and Western Europe. It is composed of terrestrial and
submarine high capacity resilient rings and links, providing advanced services at industry standard service levels. Utilizing the SectorX network infrastructure, Company A connects the high economic growth areas of Russia, Estonia, Latvia, Lithuania and Poland with Western Europe, Scandinavia with extensions to the U.S.A., Asia and Latin America. For an extensive overview of the Company A Network, see Appendix A: Company A Network.
Company A’s Headquarters is based in Amsterdam (the Netherlands); other offices are based in Moscow (Russia), Tallinn (Estonia), Riga (Latvia), Vilnius (Lithuania) and Warsaw (Poland). Company A also has other legal entities in the Netherlands, Finland, Sweden and Germany. The start-up of legal entities in Hungary and the Ukraine is planned for the future.
For an extensive overview of the Company A structure, see Appendix B: Organogram. For an extensive overview of the Company A development over time, see Appendix C: Company A development over time.
1.2 Organizational overview
Structure
Company A’s organizational structure can be typified as an Adhocracy or an Innovative Organization (Mintzberg, 1993). The coordination of labor within the company mostly takes place via mutual adjustment, where the employees coordinate their own work. For example: Sales Managers generate their own customer leads, it is their responsibility to select potential customer companies that fit within the company’s strategy. Company A is a young organization that operates in a complex and dynamic environment, the Transition economies of Central and Eastern Europe. Headquarters and business units are small, where Headquarters has been functionally grouped and the divisions have been grouped to the market. The behavior within Company A can be typified as organic, little formalization takes place.
However, Company A has a few characteristics of the Simple Structure as well. The Management Team or Strategic Apex can be seen as the key part of the organization, their experience and expertise of the (Central and Eastern European) Sector X market seems irreplaceable. Most of the power within Company A lies at the Management Team. The organization is rather centralized; most of the decision-making is done at Headquarters. Some selective decentralization takes place. For example: Country Managers (only in Estonia and Russia) have decision making power to a certain extent, but in certain situations must ask authorization of the Management Board. But in general, decision-making can be seen as top-down.
Entities
Headquarters of Company A is based in Amsterdam (the Netherlands). Apart from being Headquarters, Rest of the World sales is also handled here.
Company A consists of several other legal entities, in the following those entities are described. The history of these entities is described and typified according to the ‘Investment Strategies and Investment Forms’ model of Djarova (1999).
Company A’s past investment strategy can be typified as a ‘Go alone’ strategy, which is very popular among foreign companies entering CEE markets (Djarova, 1999: 31). Company A’s business units are
‘fully controlled and owned’, the company is the 100% owner of every entity in their possession.
For each of Company A’s entities the investment form will be described on the next page.
8 The Netherlands:
Company A Holding BV, acquired as a shelf company in 2000, is a BV that is currently not in use but can be for future purposes.
Transnordic Sector X BV was incorporated in 2001. This entity can be typified as a ‘Greenfield Investment’, as it concerns the start-up of a completely new entity. This BV is currently not in use, but can be for future purposes.
Estonia:
Company A Estonia OÜ is a merger company, formed when former Company A Eesti OÜ was merged into, the already existing, Company A Estonia OÜ. This merger took place in mid 2006.
Company A Estonia OÜ, acquired by Company A as Sector XA Sector X in 2005, first served as a sales organization focused on connecting Enterprise customers in Estonia. The Network Operations Centre was also part of this former entity. The investment form that is applicable here is ‘take-over’, as an existing and fully operating company was bought by Company A.
Company A Eesti OÜ, incorporated in 2001, served as a sales organization focused on connecting Ors customers from and into Estonia. This entity can be typified as a ‘Greenfield Investment’, as it concerns the start-up of a completely new entity. The Estonian office was established in 2002.
The new merger company, Company A Estonia OÜ, is a combination of the Network Operations Centre and a sales organization focused on connecting Ors and Enterprise customers in, from and into Estonia.
Latvia:
Company A Latvia SIA, incorporated in 2001, serves as a sales organization focused on connecting Ors customers from and into Latvia. This entity can be typified as a ‘Greenfield Investment’, as it concerns the start-up of a completely new entity. The Latvian office was established in 2003.
Lithuania:
UAB Company A, incorporated in 2001, serves as a sales organization focused on connecting Ors customers from and into Lithuania. This entity can be typified as a ‘Greenfield Investment’, as it concerns the start-up of a completely new entity. The Lithuanian office was established in 2005.
Russia:
ZAO Company A CIS, incorporated in 2001, serves as a sales organization focused on connecting Ors customers from and into Russia. This entity can be typified as a ‘Greenfield Investment’, as it concerns the start-up of a completely new entity. The Russian office was established in 2003.
Poland:
Company A Networks Poland Sp.Zo.O., Poland (formerly named Mindory 3), 100%, acquired on 16 February 2001. The ‘Subsidiary’ investment form is applicable here, an empty shelf company was bought but the company itself did not exist yet.
Company AInternational Services Sp.Zo.O., Poland (formerly named Mindori 9), 100% owned by Company A Networks Poland Sp.Zo.O., acquired on 18 July 2001. The ‘Subsidiary’ investment form is applicable here, an empty shelf company was bought but the company itself did not exist yet.
Due to legal reasons Company A Networks Poland Sp.Zo.O. was acquired, this entity functions as a Holding company for the operational subsidiary Company AInternational Services Sp.Zo.O..
The Polish office was established in 2004.
Sweden:
Company A Sweden AB was acquired as a shelf company in 2002. This legal entity was bought to enable Company A to gain the needed licenses to operate in Sweden and enabled the company to build a Point-of-Presence in Stockholm. The ‘Subsidiary’ investment form is applicable here, an empty shelf company was bought but the company itself did not exist yet.
9 Finland:
Incorporated in 2002, Company ANetworks Finland OY serves as a legal entity that enabled Company A to gain the needed licenses to operate in Finland. It also enabled the company to build a Point-of- Presence in Helsinki. This entity can be typified as a ‘Greenfield Investment’, as it concerns the start- up of a completely new entity.
Germany:
Company A Germany GmbH, incorporated in 2006, also serves a legal entity that enabled Company A to gain the needed licenses to operate in Germany. It also enabled the company to build a Point-of- Presence in Frankfurt. This entity can be typified as a ‘Greenfield Investment’, as it concerns the start- up of a completely new entity.
Headquarters vs. Subsidiaries
The most critical relationship a subsidiary has is that with its corporate headquarters (Johnston, 2005:
5). Here, the type of relation between Headquarters and subsidiaries of Company A will be described.
Hence, only the subsidiaries with a sales organization, thus a physical organization, are analyzed.
Headquarters, based in Amsterdam, mainly has a controlling and coordinating role towards the other subsidiaries. Strategy is decided by the Management Team, who is based at Headquarters.
As Appendix D: Revenue per Entity shows, most revenue is gained by Headquarters of Company A.
This is logical, considering the fact that Rest of the World sales account for the biggest part of sales revenue 2005; and most of the Rest of the World sales are handled by Headquarters.
The appendix also shows that the biggest selling subsidiaries in 2005 were Estonia and Russia.
The role of the Estonian entity can be typified as a ‘Strategic Leader’ (Bartlett and Ghoshal, 2000:
592), it accounts for 29% of total revenues gained by Company A in 2005. Company A Estonia OÜ is the biggest subsidiary within Company A; it has its own Country Director responsible for Estonian affairs of Company A. This Country Director has to report to the Management Board, has decision making power to a certain extent and has influence on the Company A Estonia OÜ strategy. Estonia has high strategic importance for Company A. The company’s own Baltic Sea Ring starts in Tallinn and subsequently their Network Operations Centre is based there.
ZAO Company A CIS, the Russian subsidiary, can also be seen as a ‘Strategic Leader’ (Bartlett and Ghoshal, 2000: 592). It accounts for 9% of total revenues in 2005 and is the second largest subsidiary of Company A. The Russian subsidiary has its own Country Director. This Country Director has the same responsibilities as his Estonian colleague. The Russian market, with Moscow in particular, is a huge market with a lot of potential for Company A.
The Polish, Latvian and Lithuanian subsidiaries of Company A can be typified as ‘Implementers’
(Bartlett and Ghoshal, 2000: 593) of strategy developed by Headquarters. This due to the fact, that they are very young and small organizations which consist only of Sales Managers. These Sales Managers have to report to the Director of Sales and Business Development, who is based at Headquarters and reports to the Management Board. In general, these Sales Managers are young and inexperienced; obliging them to report to the Director of Sales and Business Development can be seen as a way to limit risk. These country markets have little strategic importance for Company A, as their sales figures are low.
Financial overview
As a young, fast growing company, Company A needs a strong basis to retain expansion of its operations. This is the main reason why the company, at the end of 2005, experienced a negative Total Cash Flow. Company A recorded a negative EBITDA of € xxx million at the end of 2005, implying a decrease of 7.6% compared to 2004.The company also recorded a negative Result before Tax and thus a negative Net Result of € xxx million for 2005. However, it experienced significant growth in Total Revenues of € xxx million (2004) to € xxx million (2005), an increase of 74%.
Company A aims to become Cash Flow positive at the end of 2006 (Company A Annual Report 2005, 2006).
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Chapter 2 Research Framework
2.1 Introduction
After introduction of the organization in the first chapter, this second chapter concerns explaining the research. The chapter starts with describing the background of the problem for the organization, and then the problem statement of this research is explained. Next, the used theories are mentioned;
which are the input for a conceptual model. Subsequently, the methods used in this research are described. Followed by an explanation of used definitions and abbreviations. The final part of this chapter concerns the outline of the research, resulting in a research model.
2.2 Background
Company A is a small Sector X provider aiming to sell Sector XA and Sector XB services in Central and Eastern Europe. Currently, Company A is mainly focusing on Ors sales to sell typically wholesale products. The Sector X Ors market is an unpredictable fast pace market, where for example prices of a service can drop by 80 percent within six months. These markets seem controlled by incumbent Orss and other national Orss, who together usually own almost 100% of physical networks within their country, and are protecting their market Also, contracts in the Ors market in Central and Eastern Europe tend to have a lifecycle of one year or less. Small companies like Company A cannot afford to depend on short term contracts with big customers; this can be seen as very risky.
History in the Sector X market has shown, that after some time companies tend to shift their focus from an Ors strategy to a strategy where not only Orss are targeted but also the Enterprise segment will be addressed. Company A currently only serves Enterprise customers in Estonia.
The company feels the need to shift its strategy from Ors only to the Ors and Enterprise segments for all its current country markets, mainly because the opportunity to create a long term relationship with Enterprise customers is greater. This is very important to small companies like Company A, because long term relationships with customers contribute more added value to their company. It enables the company to become more flexible and less dependent on one group of big customers. It can also increase the opportunity of attracting more investor funding, as the company can offer a (potential) investor more certainty on Return-on-Investment on the long run. When attracting more customers, the opportunity to create economies of scales rises. This could enable a company to lower its costs, which enables a company to get higher margins on their services.
Company A also sees new business opportunities in the Sector X market of the Ukraine. After increasing requests from Ors customers for connectivity to this country, the company has decided to enter this country market in the near future by offering services to Ors customers.
2.3 Owners of the problem
An analysis of owners of a problem within an organization concerns the problems of its members (De Leeuw, 1996: 183). In general, the whole of Company A is the owner of the problem. The way the strategic shifts are executed influences the whole of the company. In this case, there are multiple specific owners of the problem.
The Management Team as a whole is an owner of this problem, as it is responsible for the strategy of the company. Executing the strategic shifts, as decided by the Management Team, requires a suitable strategy that will guide it to success. The decision to enter the Ukrainian Ors market and the Latvian, Lithuanian, Polish and Russian Enterprise markets will have a great impact on the company as a whole.
The Director of Sales and Business Development is a particular member of the Management Team that requires this problem to be solved. Both these strategic shifts are his direct responsibility. He requires knowledge about the internal situation of the company and its external environment. A suitable strategy for the Ukrainian Ors market will support the company when entering this completely
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new country market. The question of which organizational requirements are needed to enter the Latvian, Lithuanian, Polish and Russian Enterprise markets, is also of great importance to him.
The Director of Human Resources is another member of the Management Team that thas special interest in this problem. Most of all, he requires knowledge of the consequences the strategic shifts will have on his human resource policy. He questions whether the staff is sufficient, both quality and quantity wise, when entering new markets.
The staff of the Latvian, Lithuanian, Polish and Russian entities of the company is also an owner of this proble. The strategic shift towards serving Enterprise customers in their country markets has a great effect on them. They require knowledge of their new target customers, if they are able to serve them and how they should do this. This strategic shift wil have effect on their national offices and the way these develop in the future.
2.4 Problem statement
The problem statement of a research can be divided into a research objective, a research question and limiting conditions (De Leeuw,1996: 85).
Research objective
The research objective states for whom the research is done, what they get out of it (product) and why that’s important to them.
‘To provide Company A with international strategic advice usable for its strategic shifts on the Central and Eastern European Sector X market.’
Research question
The research question formulates the main research question which corresponds to the objective, but is formulated in preliminary analysis accessible terms. This means that the research question must connect to the theoretical framework or the conceptual model.
‘How should Company A execute its international strategic shifts?’
Sub questions
The research question can be divided into sub questions, in order to answer the research question and fulfil the research objective.
These sub questions are divided into stages according to De Leeuw’s DOV-model (De Leeuw, 1996:
182). To answer the subquestions, primary and secondary data has been collected from various sources. Saunders, Lewis, & Thornhill (2000: 188) define primary data as new data collected for a specific research, whereas secondary data is defined as data already collected for other purposes.
- The Diagnosis stage concerns the analysis of the problem of the organization (De Leeuw, 1996:
182). To get a broad and clear idea of the problem, this stage has been divided in an Internal Analysis and an External Analysis. The results from these analyses are then confronted in a SWOT-Analysis.
Multiple theories and source of literature are used to get a multiform image of the organization and its environment. Judgement of the current situation has been made by analyzing the owners of the problem. But also by using normative theories and literature applied on the organization and its environment. These are also tools used to describe the organization and its environment.
The following sub questions (as parts of the mentioned analyses) are part of the Diagnosis stage of this research:
Internal Analysis
• How can Company A’s performance be valued?
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Primary Data has been gathered from interviews with customers and employees of Company A.
Internal company documents and literature concerning measurement of performance were used as sources of Secondary Data.
• How can Company A’s current international strategy be typified?
Internal company documents were used, as well as theories and literature concerning strategy evaluation and international strategy. These were used as sources of Secondary Data.
• How do the Strategic Alliances between Company A and other Sector X companies influence the company’s performance?
Interviews with employees of Company A have resulted in Primary Data. Secondary Data has been derived from theory and literature on strategic alliances, websites, and internal company documents.
External Analysis
• What are the specific characteristics of Ors customers and Enterprise customers?
Primary Data has been gathered from interviews with customers and employees of Company A.
Secondary Data was gathered from theory and literature concerning customer analysis.
• What specific characteristics do large and small competitors of Company A posses?
Interviews with employees of Company A have resulted in Primary Data. Information from theory and literature on competitor analysis, websites, and documents of the analyzed competitors can be regarded as Secondary Data.
• How can the environments in Russia and the Ukraine analyzed?
Only Secondary Data has been gathered, derived from theory and literature on environmental analysis, websites, and a report from the ITU.
• How can the country-markets in which Company A acts be described?
Interviews with employees of Company A have resulted in Primary Data. Theory and literature on environmental analysis, websites, and a report from the ITU were sources of Secondary Data.
• Which country-market can be interesting for Company A to enter in the future?
Theories and literature on environmental and market analysis, websites, and a report from the ITU were used as sources of Secondary Data.
SWOT-Analysis
• Which Internal Strengths and Weaknesses, and External Opportunities and Threats influence the strategic choices Company A has to make for a suitable implementation of its strategic shifts?
Theory and literature on SWOT-analysis were used as sources of Secondary Data.
- The Design stage concerns designing solutions for the problem of the organization (De Leeuw, 1996:
185). Strategies are designed that can be used by the organization to execute its strategic shifts. The advized strategies result from the Diagnosis stage.
The following sub questions are part of the Design stage of this research:
Strategy
• Which entry strategy is most suitable when entering the Ukrainian Sector X market?
• Which entry strategy is most suitable when entering the Enterprise segments of the Sector X markets in Latvia, Lithuania, Poland and Russia?
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• Which international strategy is needed for successful implementation of the strategic shifts of Company A?
• Which general strategy can be formulated for Company A?
Separate brainstorming sessions with all members of the Company A Management Team were used as sources of Primary Data. Theory and literature on international strategy were used as sources of Secondary Data.
- The Implementation stage is the stage where designed solutions to the problem are made practical (De Leeuw, 1996: 187). The advized strategies result in concrete recommendations for the
organization to implement.
The following sub question is part of the Implementation stage of this research:
Conclusions and recommendations:
• What recommendations can be made to Company A?
Separate brainstorming sessions with all members of the Company A Management Team were used as sources of Primary Data.
- The Evaluation stage is the final stage of a research. The implemented solution for the problem is tested (De Leeuw, 1996: 188). This research is evaluated in paragraph 13.4. Due to time limitations this is done by evaluating if the research objective is fulfilled and if the research question is answered.
Limiting conditions
The limiting conditions give the restrictions to which research results and methods are liable. Also which requirements and conditions the customer demands with respect to the research and the results. It concerns product limitations and process limitations. Product limitations are limitations concerned with the end result of the research and process limitations are limitations concerned with the process of the research itself (De Leeuw, 1996: 213).
Product limitations:
• This research is demarcated to the Data and Sector XB segments of the Sector X market, the segments in which Company A is active.
• This research is demarcated to Russia, the Ukraine, Poland, Estonia, Latvia, Lithuania, Belarus, Kazakhstan, Netherlands, Romania and Turkey.
The extensiveness of description of the countries can be subdivided in three groups (the higher the number, the less extensive the country will be discussed):
o Russia, the Ukraine
o Poland, Estonia, Latvia and Lithuania
o Belarus, Kazakhstan, Netherlands, Romania and Turkey
The main reason for this distinction in extensiveness is mainly a limitation in time available to conduct this research. After discussions with Company A, it was agreed that the main focus of this research lies on Russia and the Ukraine; these countries are being viewed as high potential for the country. Russia was chosen, because it’s the biggest country market in which Company A is active. The reason the Ukraine will be extensively discussed, is that it’s a new country market for Company A.
Poland, Estonia, Latvia and Lithuania are also analyzed but to a lesser extent, as the company sees less growth potential here than in Russia and the Ukraine. These form the other country markets in which Company A is active.
Finally, Belarus, Kazakhstan, Netherlands, Romania and Turkey are analyzed as potential country markets for Company A to enter.
• This research is demarcated to Ors and Enterprise customers, the customers Company A focuses on.
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• The result of this research is an elaborated three year strategic plan, which results from a market research and the new strategy shift already determined.
• The result of this research must be both theoretically justified and practically manageable.
• Three versions of the result of the research are made available, one for Company A and two for the University of Groningen (secret version and publicly available version).
Process limitations:
• The research will be executed during seven months, from which six (from the 6th of March 2006 till the 8th of September 2006) will be spend at Company A.
• During the research, the progress of the research will be reported to the University of Groningen supervisor and to the supervisor of Company A.
• The result of this research will be written in English for both the University of Groningen and for Company A.
2.5 Research method
Type of research
This research can be typified as a ‘Policy supportive research’ (De Leeuw, 1996: 205).
This type of research aims at producing concrete (in the problem statement specified) knowledge which is useful in a specific situation for a particular customer, and satisfies part of the total need for knowledge. The term customer also means that agreements exist between the researcher (producer) and customer (consumer). Policy supportive research asks for a careful specification of the customers and the specific knowledge needs of the research. Products of Policy supporting research can be:
assertions, designs, approaches and instruments.
When analyzing this specific research and the characteristics described above, the following can be said why this research is policy supportive:
• Need for concrete knowledge: Company A expects the result of this research to be a concrete strategy.
• Specific situation: Future strategy for Company A in Central and Eastern Europe.
• Particular customer: Company A is the customer of the researcher (student).
• Satisfies part of the total need for knowledge: Not every country market of Company A is analyzed and described to the same extent due to time limitations.
• Agreements between researcher and customer: An agreement regarding subject and end- result has been reached and signed.
• Results: The results of this research can be supporting for future policy of Company A. The decision to what extent the results of this research will be used is their responsibility.
Data collection and analysis
Within this research, data is collected by executing desk research and interviews.
Desk research answers part of the total need for data, this is information already collected by other persons, authorities and institutes (Baarda and De Goede, 1999: 25). In other words, desk research is used to collect secondary data. Collecting data via desk research has the advantage that it is
information that is already available. Desk research has resulted in the collecting of internal company documents, theories and literature, websites and external reports of institutions, governments, authorities and other Sector X companies.
Interviews have been held to generate primary data. In-depth interviews were held with employees of Company A. This type of interview is defined as informal, where general areas in which the researcher is interested are explored in-depth (Saunders et al., 2000: 244). This type of interview was chosen to gather information about the difficult subject of Sector Xmunication, starting with a subject and further on keeping it non-directive. This in order to gather as much information as possible.
Semi-structured interviews were held with customers of Company A, see Appendix E for the Interview scheme and the bibliography for their details. This type of interview can be characterized by the fact that a list of themes and questions are covered with room for expansion (Saunders et al., 2000:
243).The analysis of the interviews has been executed in a qualitative, non-statistical manner.
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Separate brainstorming sessions with all members of the Company A Management Team have been held. First, the SWOT-Analysis has been discussed. In reaction to this possible strategies were discussed with the members of the Company A Management Team. Seperate brainstorming sessions were held with each member, as the optimal group size here is two (Alsem, 2001: 218).
2.6 Theoretical framework
In general, this research is executed in terms of Aaker (2005); which divides a market research in an Internal Analysis (performance, strategy, and strategic alliances) and an External Analysis (customers, competitors, environment, and market). The analysis of potential countries was added to the External Analysis by the author of this report.
The analysis of Company A’s performance is done in terms of Aaker (2005), which divides
performance in financial, customers, brand/firm associations, quality, research and development, and personnel. The international strategy of the company is typified in terms of Porter (1980) and Bartlett &
Ghoshal (2000). An evaluation of Company A’s past strategy is made using theory of Rumelt (1980).
Strategy is tested on consistency, consonance, advantage, and feasibility.The final part of the Internal Analysis, describing Company A’s strategic alliances is made with theory of Elg and Johansson (2001).
Aaker (2005) is used when analyzing Company A’s customers, identifying market segments, motivations, and unmet needs. Selected competitors of the company are analyzed in terms of Porter (1980). Their profile, future goals, assumptions, capabilities, strategy, and response profile are described. The general environments of Russia and the Ukraine are discussed using theory of Hitt et al. (2001). This identifies the demographic, economic, political and legal, socio-cultural, technological, and global segments. Then, the markets of Company A are analyzed according to the Competitive Forces model of Porter (1980). This deals with threat of entry, rivalry, substitutes, buyer power, and supplier power. Potential countries for Company A, being the last part of the External Analysis, are partly analyzed in terms of Hitt et al.’s environmental analysis (2001) and partly in terms of Porter’s Competitive Forces model (1980).
Subsequently, a confrontation of strengths and weaknesses (resulting from the Internal Analysis) and opportunities and threats (resulting from the External Analysis) is made using theory of Alsem (2001).
Resulting from this confrontation, entry strategies for the Ukraine and the Enterprise market are designed in terms of Lasserre (2003). The company’s entry objectives, timing of entry, and mode of entry are described. The international strategy best suitable for Company A is advised according to Hitt et al. (2001), dividing this into international business-level strategy and international corporate- level strategy. Both entry- and international strategies have an influence on a general strategy
statement for Company A, designed using the Strategy Diamond of Hambrick and Fredrickson (2001).
The above has resulted in a conceptual model (Figure 1), where the mentioned parts of the research are shown. The analysis of the internal organization results in strengths and weaknesses of the company. The analysis of the external environment of the company results in opportunities and threats for the company. Both results from the Internal and External analysis are then confronted with each other in a SWOT-matrix, measuring connections between these parts which result in strategic issues for Company A. This is used as input for entry strategies and international strategies to be pursued by the company, both these strategy proposals will lead to a general strategy statement.
16 Performance:
• Financial
• Customers
• Brand/ Firm associations
• Quality
• Research &
Development
• Personnel
Strategy:
• General strategy
• International strategy
• Evaluation
Strategic alliances
SWOT Confrontation
Entry strategy:
• Entry objectives
• Timing of entry
• Mode of entry
International strategy:
• International business-level strategy
• International corporate-level strategy Internal
organization
Customers:
• Market segments
• Motivations
• Unmet needs
Competitors:
• Profile
• Future goals
• Assumptions
• Capabilities
• Strategy
• Response profile
Environment:
• Demographic
• Economic
• Political and Legal
• Socio-cultural
• Technological
• Global Market:
• Threat of entry
• Rivalry
• Substitutes
• Buyer power
• Supplier power
Potential countries:
• Country information
• Country market development
• Entry barriers External
environment
General strategy:
• Arenas
• Vehicles
• Differentiation
• Staging
• Economic logic Figure 1: Conceptual model
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2.7 Definitions and abbreviations
Baltics:
The Baltics refer to Estonia, Latvia and Lithuania (en.wikipedia.org).
CEE:
Abbreviation for Central Eastern Europe.
Enterprise customers Company A:
Company A terminology explains Enterprise customers as: Retail customers such as Businesses, Governmental and educational institutions who are end-users of the services.
Glass:
Glass can be used as a medium for Sector Xmunication and networking because it is flexible and can be bundled as cables. Although glasss can be made out of transparent plastic, glass, or a combination of the two, the glasss used in long-distance Sector X applications are always glass (en.wikipedia.org).
Incumbent:
In Sector X, the term incumbent is used to describe existing companies often first established as regulated monopolies. These include Sector X companies who first existed at regulated utilities with exclusive rights to serve an area. Incumbents in this context typically have extensive market power (en.wikipedia.org).
Local network coverage:
Company A terminology explains local network coverage as network coverage within a country on a city-to-city level or within a city.
Ors customers Company A:
Company A terminology explains Ors customers as: Crss, Orss and service providers who resell the services to retailers.
Presence:
Presence is an artificial demarcation point or interface point between SectorX entities. An Sector XB Presence is an access point to the Sector XB. (en.wikipedia.org).
Regional network coverage:
Company A terminology explains regional network coverage as covering a region of countries with network.
R&D:
Abbreviation for Research and Development.
Sector X:
Abbreviation for Sector X.
Sector X:
The art and science of “communicating” over a distance by tepe, telegraph, radio and Sector XB. The transmission, reception and the switching of signals, such as electrical or optical, by wire, glass, or electromagnetic (i.e. through-the-air) means (Newton, 2001: 683).
18 Sector X service:
Any service provided by a Sector Xmunication provider. A specified set of user-information transfer capabilities provided by a group of users. The Sector X service provider has the responsibility for the acceptance, transmission, and delivery of the message (Newton, 2001: 683).
2.8 Research structure
The structure of this research is portrayed through the research model (as given below). Chapter 2 Research Framework forms the basis of this research; here the problem statement is given. Then, the research can be divided into two parts.
First, Part I deals with the Internal Analysis of Company A. Within this Internal Analysis, first an analysis of the company’s performance will be made in Chapter 3. Next, in Chapter 4 Company A’s strategy is analyzed and evaluated. In Chapter 5, the strategic alliances in which the company is participating are discussed. Finalizing Part I Internal Analysis is done by summing up the Strengths and Weaknesses found in the previous chapters.
Part II concerns the External Analysis of Company A’s environment. First, an analysis of potential and current customers is made in Chapter 6. Then, an analysis of current and potential competitors is made (Chapter 7). Followed by an environmental analysis of Russia and the Ukraine in Chapter 8. An analysis of the markets where Company A is active is made in Chapter 9. Subsequently, five potential countries for entry are analyzed in Chapter 10. The final part of Part II External Analysis consists of the Opportunities and Threats derived from chapters 6 till 10.
The results from Part I Internal Analysis and Part II External Analysis form the input for Chapter 11 SWOT-Analysis. In turn, the strategic issues from the SWOT-Analysis form the basis of Chapter 12 Strategy and Chapter 13 Conclusions and recommendations. The strategy designed in Chapter 12 also forms input for the conclusion and recommendations.
Performance Analysis (Chapter 3)
Strategy Analysis (Chapter 4)
Strategic Alliances Analysis (Chapter 5)
Customer Analysis (Chapter 6)
Competitor Analysis (Chapter 7)
Environmental Analysis (Chapter 8)
Market Analysis (Chapter 9)
Potential Countries Analysis (Chapter 10) Internal Analysis
(Part I B)
External Analysis (Part II B) SWOT-Analysis
(Chapter 11)
Strategy (Chapter 12)
Conclusions and recommendations
(Chapter 13)
Figure 2: Research model Internal Analysis
(Part I A)
External Analysis (Part II A)
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Part I A Internal Analysis
This part of the research concerns the analysis of Company A’s internal organization.
Understanding a business in depth is the goal of an internal analysis (Aaker, 2005: 113). To achieve this, in this part analyses of Company A’s performance, strategy, and strategic alliances are made.
These result in internal strengths and weaknesses of the company (described in Part I B), which will be used as input for the SWOT-Analysis.
The following chapters deal with the following sub questions:
Chapter 3 Performance Analysis:
How can Company A’s performance be valued?
Chapter 4 Strategy Analysis:
How can Company A’s current international strategy be typified?
Chapter 5 Strategic Alliances Analysis:
How do the Strategic Alliances between Company A and other Sector X companies influence the company’s performance?
