Docstoc

20

Document Sample
20 Powered By Docstoc
					                                 97sbi109




        RECOMMENDATIONS FOR SUCCESSFUL CONSULTING AND DEVELOPMENT
                   OF BUSINESS OPPORTUNITIES IN RUSSIA

                             Jeffrey C. Dilts
                             Stephen F. Hallam
                          The University of Akron

                                 ABSTRACT

The nature of entrepreneurship and doing business in Russia is
examined. Attention is given to the economic development of
small and medium-sized enterprises and the role that international
development programs and support organizations, such as the
Citizens Democracy Corps, plays in this process. Based on the
authors' recent experiences in Russia, the paper concludes with
recommendations for those that would consult or do business in
the former Soviet Union.

                               INTRODUCTION

With the collapse of the Soviet command economy, Russia has
undergone sweeping changes--changes that represent both
opportunities and concerns for the budding entrepreneurial spirit
and those that would invest and do business there. Many formally
state-run enterprises have been privatized and thousands of new
independent firms have been created. As a result, a new breed of
Russian entrepreneurs have been laying the foundation for a
private, market-based economy.

This paper examines the nature of entrepreneurship and doing
business in Russia. Particular attention is given to the
economic development of small and medium-sized enterprises
(SME's) and the role that international support organizations,
such as the Citizens Democracy Corps (CDC), plays in this
process. The paper concludes with specific recommendations for
successful business consulting and doing business in Russia based
upon the concepts presented within the paper plus the authors'
recent experiences in Russia, involving a CDC consulting
assignment.

                         THE RUSSIAN ENTREPRENEUR

The private sector represents the engine of future growth in
Russia, as it has elsewhere. In many countries, independent
small and medium-sized enterprises (SME's) have made significant
entrepreneurial contributions to their economies (Acs 1992).
Recent debate has served to revise the conventional wisdom
surrounding small enterprises and focus attention on their
increasing critical economic role in the creation of new jobs,



                                  Page 1
                                 97sbi109




income, innovations and markets. The formation of new
entrepreneurial enterprises represent the seed of future growth:
new jobs, income, innovations and markets (Merrifield 1987).

In Russia, the emerging entrepreneur has been profiled as a
middle-aged male (between the ages of 20 to 50) with an
engineering or technical background. A large number have been
former managers of state-run institutions. Relying on an
informal personal network, consisting of other managers, school
buddies and acquaintances in banks and governmental agencies,
they have been able to mobilize the resources to develop and grow
their business ventures (Radaev 1993).

Operational Characteristics

The Russian entrepreneur may consider a wide variety of
opportunities, not all of which are feasible or consistent with
their background or their primary line of business. Many have
been criticized for being short sighted and focusing only on
those activities that are likely to generate good money now.
Because of the high returns, banking, foreign trade and mediating
activities have been particularly attractive. However, while the
Russian entrepreneur may have a high level of self-confidence,
believing that they can manage any area of business, they do lack
basic business skills (Radaev 1993; Hisrich and Grachev 1995).

As many Russian entrepreneurs attempt to establish their own
enterprises, they do so with little comprehension of what that
involves. In the past, the state decided who would produce what,
how much and when. Central planning from Moscow was much more
than a Washington D.C. style economic plan. The Soviets detailed
their plans down to specific production schedules for specific
plants. As a consequence, an understanding of basic business
practices is very limited and problem-solving capabilities are
not well developed (Hamilton 1993). According to a study of
Russian entrepreneurs by Hisrich and Grachev (1995, p. 8):

    The country's new wave of entrepreneurs is not well versed
    in Western business techniques and the necessary information;
    neither are the country's present-day managers who are
    primarily from state-owned enterprises. The result of the
    study indicates that few entrepreneurs can actually read a
    balance sheet, understand the usual sharing of financial
    results with shareholders or implement the process of
    obtaining financing and controlling cash flow. The entire
    area of marketing, the selection and monitoring of promotion
    and the company's sales and profits is also an enigma to most.

Fundamental market principles obvious to us are not so to
Russians. The need for a customer orientation, where products



                                  Page 2
                                 97sbi109




are created to provide meaningful benefits for a defined market
need, is not well understood or accepted. Because of a short-
sighted concern for the quick profits, some have expressed
reluctance to accept responsibility for defective products. This
would appear to be a carry over from a Soviet mindset where the
state was responsible for disposing of whatever was produced and
where consumers had no alternatives (Hamilton 1993).

According to a Russian consultant in the service industry, the
idea that "a complaint is a gift" is not well understood. By
listening and acting on customer complaints, businesses may be
able in the long-run to keep the customer and create a favorable
reputation. Entrepreneurs would be more successful, according to
the consultant, if they could replace the cold, calculated manner
in which they do business with the warmth that so characterizes
Russian family life.

Strategically, many Russian businesses lack focus, attempting to
be many things. It is not unusual to see an entrepreneur
pursuing opportunities that are unrelated to their primary line
of business. For example, a chemical firm is also involved in
the marketing of automobile parts and the retailing of food and
clothing. An application for a business license may list the
planned activities of the new business to be everything under the sun.

This broad diversification of activities may be due to a variety
of reasons. Some entrepreneurs are focusing on highly
speculative opportunities that require little creativity or
commitment and promise quick cash returns (Radaev 1993). And
while the primary business may promise long-term returns, the
need for more immediate cash flow often motivates some
entrepreneurs to pursue other activities as well. Furthermore,
some new entrepreneurs, fueled by an initial success, now think
they have the expertise to run any business, regardless of the
field. However, this lack of focus is likely to prove short-
sighted; it does not permit the entrepreneur to concentrate on
what the firm does best.

External Situation

Externally, Russian entrepreneurs face contradictory and unstable
political, economic and social circumstances. Corruption,
bribery, gangland activities and stiff taxes all have had their
impact. Taxes have been as high as ninety percent of profits
(Galuszka, Kranz and Reed 1994).

Due to the emergence of a strong criminal element and a
historically strong presence of an egalitarian philosophy, the
idea of private ownership and making a profit is viewed as
suspect. Contrary to the "success ethic" in the West, many



                                  Page 3
                                 97sbi109




Russians believe it is morally wrong to exceed, particularly at
the expense of others (Richmond 1992, p. 34). Consequently, many
Russian citizens equate a successful business with illegal
activities (Hamilton 1994).

Because of criminal activities and corruption, legitimate
businesses often seek out a kryshe (a roof) by making regular
payments to the Russian Mafia. The roof provides a shelter or
protection from criminals even worse than the Mafia. One
estimate suggests that up to eighty percent of the commercial
banks and private enterprises pay for this security (Nadler 1996).
These costs have been estimated at fifteen percent of sales.

During one consulting session where we presented some Western-
style business practices, one Russian businessman remarked, "Such
practices may work in America but you have to realize, business
in Russia today is like working inside a tornado. Everything is
changing wildly."

Despite the difficulties encountered, entrepreneurship is
gradually becoming a real economic force and a catalyst for
change in Russia. As the pace of economic reform quickens, old
practices and norms may give way to the pressures of change
(Radaev 1994). Russians, denied access to the West for so long,
now watch CNN and old American movies on TBS, read American news-
papers, magazines, and books and freely travel throughout Europe
and America. The pent up demand for Western style products is so
strong, such change is inevitable.

                         DOING BUSINESS IN RUSSIA

As Russia makes the transition from a command to market-based
economy, the resulting changes represent both opportunities and
concerns for those that would invest and do business in the
former Soviet Union. For those willing to take the risks,
exciting opportunities abound. However, cultural differences may
require a go-between to explain one side to the other (Hamilton 1994).

Cultural Differences

Despite similarities with the West, Russians do place different
priorities on the same basic values. While European on the
surface, Russia also has significant Asian cultural roots. For
example, the "group ethic" has long been emphasized, even before
communism; with individual rights being subordinated to the
greater communal good (Richmond 1992, p. 14, 84). Adding to this
cultural diversity is a growing national consciousness.
Consequently, one must also keep in mind that Russia is a multi-
national community of different nations and ethnic groups.
(Richmond 1992, p. 25). For instance, a Georgian or Ukrainian



                                  Page 4
                                 97sbi109




will likely take offense when referred to as a Russian. For a
valuable perspective on Russian culture and habits, the reader
should refer to Yale Richmond's (1992) book, From Nyet to Da.

Americans generally regard compromise as desirable and
inevitable, a logical way of doing business--meet them halfway
and make a deal. As a consequence we regard any inability to
reach agreement easily and quickly as failure. Russians,
however, regard compromise as a sign of weakness. To compromise
is to retreat from a correct and morally justified position. The
Russian business executive is perfectly content to just sit and
wait out the impatient American. Negotiations are often
lengthily, tedious and demanding (Richmond 1992, pp. 140-141).

Further, Russians have a different view of what a contract means.
We view a contract as legally binding. We have a litigation
approach. If one party violates a contract we often settle the
matter in court. According to Zbigniew Brzezinski (Richmond
1992, p. 149), Russians have a historical approach, i.e., a
contract is binding only as long as the conditions in place at
the time of signing continue in place during implementation. A
contract needs to be self-enforcing or still mutually advantageous.
If the agreement ceases to be self-enforcing or still mutually
advantageous, it obviously has lapsed. Russian courts are not
viewed as the place to settle such matters.

This is all the more reason to know who you are dealing with in
Russia. Trust must be developed over time. Russians will want
to know all about you as a person and you must do likewise.
There is no such thing as flying to Moscow on Monday and
returning on Friday with a contract that means anything.
Further, any agreement must contain a provision for verification
of implementation at frequent intervals. As Ronald Regan,
recalling an old Russian proverb, repeatedly reminded Mikhail
Gorbachev during their summit meetings, "Trust, but verify"
(Richmond 1992, p. 149).

Importance of Informal Relationship

When conducting business in Russia, be aware that Russians are
people-oriented, rather than deal oriented (Lewis 1995).
Friendships and personal connections do play an important part in
getting things accomplished, both in private life and business
(Richmond 1992, p. 107). This is particularly important given
the weak and underdeveloped legal infrastructure in Russia; where
many entrepreneurs depend upon the trust they place in their
partners to fulfill the terms of their contract. As one Russian
businessman explained, "We can't depend on the laws and the
courts to enforce the terms of a business contract, but a Russian
will die to defend a friend."



                                  Page 5
                                 97sbi109




Consequently, one will find that the quality of the informal
relationship with trading partners will be much more important
than the formal business relationship (Hamilton 1994). However,
this will take time, patience and repeated visits to accomplish.

Business Practices

In formal meetings, Russians tend to be very serious and highly
conscious of protocol. Yet, in informal settings they can be
very warm (Richmond 1992, p. 123). When agreements are made,
even in principle, there is much fanfare and celebration.
However, the results have often been meager when budding
entrepreneurs have hastily entered a promising market without
totally considering the situation.

There is a story about two Russian businessmen that argue for
days over the sale of a truck load of oranges. After several
near fist fights and much fiery debate, they finally agree to a
price. A contract is signed amidst many toasts, a large meal,
and friendly chatter that lasts far into the night. The next
morning the one Russian awakes and goes in search of a truckload
of oranges while the other goes to search for the cash.

This story illustrates the Russian tradition that a contract only
represents an initialization of a possible future business
transaction; whereas the Western culture assumes a contract
represents a solid commitment to actually deliver. A lack of
understanding and appreciation of such cultural differences often
leads to disappointments and failed business deals.

Although many Russians may be relatively inexperienced in terms
of business skills, they are often very skilled at negotiating
agreements. According to Lewis (1995, p. 92): "They negotiate
as they play chess and plan several moves ahead-opponents are
advised to consider carefully the consequences of each move."
Often, Russians may enter negotiations with an outrageous initial
position or criticism to test the character of their opponent
(Richmond 1992, p. 143). To the frustration of the latter,
issues may be approached in a round-about, rather than a direct
manner.

Despite the obstacles, healthy doses of friendship, networking,
plus doing your homework regarding Russian business practices are
ingredients for a successful American-Russian business venture.
Such ventures are not for the timid. But for those brave enough
to try, and patient enough to work years to build the needed
trust and friendship, the result can be very rewarding.

              ENTERPRISE AND ECONOMIC DEVELOPMENT PROGRAMS



                                  Page 6
                                 97sbi109




Both Russian entrepreneurs and American businesses can benefit
from an economic assistance program that is designed to bridge
the cultural differences and build commercial bridges. While
nurturing new and existing Russian enterprises, American
interests would profit from the increased trade and investment
opportunities that result from such a program. Russians now have
the need and want, but lack the means to acquire our products.
By helping free enterprise succeed in Russia, we would be
creating new buyers, suppliers and distributors for American
firms

Accordingly, the U. S. Agency for International Development
(USAID) has placed a high priority on providing economic
assistance. Of particular interest is the promotion of small and
medium-sized enterprises (SME's) in Russia, which have the
potential to generate much of the economic growth and create new
jobs. It is here, at the grass roots level, that management and
technical assistance may be more effective and have a more
immediate impact (Business Watch 1995).

Citizens Democracy Corps (CDC)

The CDC is one of a number of developmental programs that is
designed to aid Russian firms and facilitate trade and investment
opportunities for American interests. CDC is an American, non-
profit organization, founded in 1990, whose purpose is to promote
the development of a free enterprise system in Russia and former
Eastern bloc countries. Funding is provided by the American
business sector, in-kind donations of individual business
volunteers and expenses paid by participating client
organizations (Russia Business Watch 1995).

Volunteer American business people and specialists are matched
with Russian SME's and business support organizations (e.g.,
Russian business schools, government developmental agencies) that
have requested assistance. Participating client organizations
are screened by an in-country staff regarding their needs,
openness of management, potential for success and willingness and
capability to make recommended changes.

Management and technical assistance is tailored to the needs of
each Russian enterprise. This may involve assistance in
specialized areas, such as accounting, production or management.
Given the newness of the concept of marketing, assistance in
developing domestic and international marketing strategies
represents one of the largest areas of activity (CDC Russia 1996).

Long after the assignment has been completed advisors may
continue to aid the Russian client organization by seeking out



                                  Page 7
                                 97sbi109




financial sources and potential customers and suppliers; thereby
creating new commercial links with firms in the U.S. (This is
what the authors are currently attempting to do.) By building on
the personal commitment of volunteers and the partnership with
other business development programs (e.g., Deloine Touche, Center
for Citizens Initiative, the Morozov Project, the Peace Corps),
CDC is able to leverage these resources and skills into tangible
results that benefits both the Russian client and the region, as
well as the interests of American firms (CDC Russia 1996).

                              RECOMMENDATIONS

Recommendations are offered for those that would consult or do
business with business enterprises in Russia. The following
recommendations are based on the concepts discussed within this
paper plus our recent consulting experiences with the Citizens
Democracy Corps (CDC) in the former Soviet Union:

1.   Be aware that many of the new Russian entrepreneurs are
     former Communists who have used their connections to obtain
     important licenses and other advantages. Who you know
     is still very important in Russia.

2.   Many new Russian business ventures lack focus and seem to be
     doing a multitude of unrelated activities. Our concept of
     'sticking to your netting' is not widely accepted in Russia.
     Be prepared for -highly unusual combinations of business
     activities.

3.   The customer-orientation is a new concept in Russia and rubs
     against the grain of 70 years of the communist philosophy of
     the worker state.

4.   Be prepared to encounter Mafia-like activities. In many
     areas the regular police are so short of funds, people, and
     know-how that they are overwhelmed. Into this vacuum you
     will find a variety of legitimate and illegitimate groups
     receiving cash in return for protection. Many elements of
     today's Russia resemble the U.S. in the 1930's.

5.   Contracts in Russia do not mean the same as contracts in
     America. The courts are not an effective agency for
     enforcement of contracts or even the determination of
     ownership of property. People have to develop trust and
     this takes time and much patience.

6.   Demand for American products is very strong. Travel, CNN,
     TBS have taught Russians that Americans have many things
     Russians now desire. Because this demand is so strong, many
     of the above mentioned obstacles are worth overcoming.



                                  Page 8
                                  97sbi109




7.    Thoroughly prepare in advance for any meeting with Russians.
      Be prepared for tough negotiations and long periods of just
      sitting. Russians are very patient and will take advantage
      of our willingness to compromise and our strong desire to
      reach agreement quickly.

8.    Try to get to know Russians in their homes. Be prepared for
      elaborate meals, toasts and lavish gifts, especially given
      their dire financial straights.

9.    Find out how various U.S. government agencies and financial
      institutions can assist. Often risks that seem too great
      can be mitigated by the U.S. government's desire to promote
      commerce with Russia.

10.   Develop good relationships with one or more Russian
      universities, especially those with new business schools or
      academies. They can provide valuable contacts with
      estabished Russian business firms and information on how to
      overcome many barriers to successful joint projects.

                                   SUMMARY

As Russia makes the transition from a command to a market-based
economy, the resulting changes represent both opportunities and
concerns for those that would invest and do business and provide
management assistance to enterprises in Russia. If consulting is
to be effective and successful commercial bridges are to be
established, an understanding of the changing business situation
and cultural differences is a necessity. This paper has
attempted to focus on a number of related issues and to provide
the reader with a set of recommendations.

For American business leaders brave enough to accept the
challenges, fortunes will be made. American business professors
and volunteers from the business community are currently making a
profound impact in Russia; working with international assistance
programs, such as the Citizens Democracy Corps. Russian people
need our expertise more than they need our charity.

While it is better to teach a man to fish than to give a man a
fish, it is even more nobel to teach a man or woman how to start
a fishing business. If done well, the new business will feed
many families, provide tax revenue that will build schools,
roads, hospitals, and governmental agencies needed to support
other economic and social development in Russia. And by helping
free enterprise succeed in Russia, we are also helping ourselves
by creating potential new buyers, distributors and suppliers for
our products and firms.



                                   Page 9
                                  97sbi109




                                 REFERENCES

Acs, Zoltan J. (1992). Small Business Economics:    A Global
Perspective. Challenge, 35 (6), 38-44.

CDC Russia (1996). Enterprise and Economic Development Programs.
www.ebi.co.ru/partners/cdc/eedp.htm.

Galuszka, Peter, Patricia Kranz and Stanley Reed (1994).
Russia's New Capitalism. Business Week, October 10, 68-80.

Gimpel'son, V. (1994). New Russian Entrepreneurship.    Problems
of Economic Transition, 36 (12), 24-41.

Hamilton, Patricia W. (1994).   Doing Business in Russia.   D&B
Reports, 43 (2), 38-39, 59.

______(1993).   Russia's Revolution.   D&B Reports, 42 (4), 34-37.

Hisrich, Robert D. and Mikhail V. Grachev (1995). The Russian
Entrepreneur: Characteristics and Prescriptions for Success.
Journal of Managerial Psychology, 10 (2), 3-9.

Lewis, Richard D. (1995). How To Handle The Russian Bear.
Management Today, September, 90, 92.

Merrifield, D. Bruce (1987). New Business Incubators.    Journal
of Business Venturing, 2 (4), 277-284.

Nadler, John (1996). Married (Often Happily) To The Mob.
Canadian Business, 69 (4), 30-33.

Radaev, Vadim (1994). On Some Features Of The Normative Behavior
Of The New Russian Entrepreneurs. Problems of Economic
Transition, 37 (8), 17-28.

______(1993). Emerging Russian Entrepreneurship: As Viewed By
The Experts. Economic and Industrial Democracy, 14, 55-77.

Richmond, Yale (1992). From Nyet to Da: Understanding The
Russians. Yarmouth, Maine: Intercultural Press, Inc.

Russia Business Watch (1995). CDC Business Advisors:    Growing
Companies and Economies. 3 (1), 43-44.




                                  Page 10

				
DOCUMENT INFO
Shared By:
Categories:
Tags:
Stats:
views:0
posted:2/13/2012
language:
pages:10