Business Strategies in Transition Economies

Citation

MacInnes, A. (2000), "Business Strategies in Transition Economies", European Business Review, Vol. 12 No. 4, pp. 230-232. https://doi.org/10.1108/ebr.2000.12.4.230.3

Multinational companies pursue a diverse set of international strategies, according to a new study of the dynamics of international competition. On the surface, it may appear that worldwide players typically adopt a global strategy. Closer examination, however, reveals that this is not necessarily the case and points to the existence of a significant group of “quasi‐global” firms. These do not have a presence in all markets and tend to adapt in some ways to local conditions.

Through a detailed analysis of four important but quite different industries – paint, cables, chocolate and sugar confectionery, and footwear – Calori et al. look at the particular features of businesses with a worldwide geographical scope, such as quasi‐global players and companies concentrating on a global luxury niche. The authors also analyse the characteristics of companies with more focused geographical positions, including continental leaders and country‐centered firms. Based on in‐depth interviews with managers from more than 100 multinationals in the four sectors, The Dynamics of International Competition takes as a starting point existing theories on international strategies. Building on these by exploring the international dynamics of organisations and competitive systems, the book, which is aimed both at managers and academics, not only shows how managers perceive international markets but also how they attempt to work within them. It provides a particularly useful insight for firms with international aspirations or businesses threatened by foreign competition.

Interestingly, the authors note that quasi‐global players target all key countries with a relatively narrow segment scope, and their foreign commercial and manufacturing investments are significant. Their strategy tends to be homogeneous across key countries – marketing variations are marginal and global brands are promoted with heavy advertising and sponsoring expenses. Tight international co‐ordination leaves some room for local initiatives.

Quasi‐global players generally have a strong innovative concept that allows initial conquest of the home country. And they base their competitive advantage on differentiation. Transferring the concept to one or two foreign countries through organic growth, in a further stage of development, these firms tend to move into a number of key markets and set up a global brand. The internationalisation process is based on sustaining differentiation and improving efficiency. In contrast, global luxury niche players rely on strong differentiation, which gives them access to worldwide markets. Their competitive advantage is usually location‐specific, as is the case with Italian footwear and French cuisine. Continental leaders, which have a relatively large segment scope, obviously focus their international development on a single continent. Offering product lines that are adapted to conditions throughout the region, they achieve a high level of integration and co‐ordination across the continent. Competitive strategies are generally based on product innovation and manufacturing efficiency.

Country‐centered firms defend their local position against foreign intrusion. For these companies, access to local distribution networks is essential. With export activities directed to only a small number of other countries, they attempt to “skim” foreign markets, which they reach through agents.

Business strategies have become increasingly important for managers in the so‐called “transition economies”. As competition intensifies in Central and Eastern Europe, the newly‐independent states of the former Soviet Union and countries undergoing transition in East Asia (namely China, Mongolia and Vietnam), so too does the need for strategic choices from domestic firms and multinational corporations operating there. “Whether companies can successfully employ competitive strategies will, to a large degree, determine the success or failure of the transitions toward market economies in these countries”, writes Michael Peng, in Business Strategies in Transition Economies. Peng examines the rationale and context of business strategies adopted by different types of firms within the transition economies. He looks closely at the nature of classical state socialism, and analyses the characteristics of central economic planning and bureaucratic control, highlighting inherent weaknesses and failures in socialist systems, such as the lack of legal frameworks, the absence of property rights and inefficient production. Peng states that while demand from information about business strategies is strong in transition economies, strategic behaviour is seldom formal and intended. Rather, approaches are more informal and emergent, and in many cases far removed from those of Western firms due to inherent institutional constraints.

Many strategies in transition economies have occurred by default. The move from a planned economy to a market‐based one has meant that managers in some socialist state‐owned enterprises, who in the past had little notion of competitive strategy, have found themselves in a sink‐or‐swim situation. As chances of obtaining subsidies from increasingly reluctant governments become more remote, for example, most state‐owned enterprises are being pushed into following neo‐classical theory and becoming profit maximisers. Forced to downsize by cutting costs, reducing assets and laying off workers, state‐owned enterprises are generally employing a host of retrenchment measures directed towards survival.

It would be naïve to believe that newly‐privatised and reformed companies in transition economies suddenly behave like private firms as known in the West, says Peng. Their strategic responses vary considerably, he says, adding that changes are often only incremental, cosmetic and limited. Insider‐controlled firms, for example, tend to just muddle through.

While smaller businesses embark on corporate restructuring programmes (perhaps because they are headed by younger, more aggressive managers), larger organisations simply attempt to tap financial markets in order to raise more capital without serious restructuring.

Entrepreneurial start‐ups, a new phenomenon in most transition economies, adopt strategies that distinguish them from their larger, more established competitors. One such strategy, “guerrilla warfare tactics”, forces competitors to take a defensive or reactive stance. Speed and stealth of movement gives the entrepreneurial start‐up a substantial first‐mover advantage.

Multinationals employ a plethora of strategies in transition economies, ranging from the formation of alliances and joint ventures to the acquisition of local firms. Peng notes that foreign firms, which he says have effectively turned transition economies into “a new battleground of multinational competition”, may need to change some of their assumptions and routines when entering and operating in these new markets.

All companies operating in transition economies, if they are to be successful, must first unlearn some parts of the past, he advises. They will then be in a position to develop foresight about the competitive challenges of the future, set high (but attainable) goals, and use their resources and capabilities wisely.