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  • 1. May. 15, 2013 Managing Across Borders -The penetration strategy of KAWAI to Russian market-
  • 2. #1 Kawai profile Main Products Grand Piano Electronic Organ Upright (Vertical)Piano Church Organ Digital Piano Education
  • 3. #1 Kawai profile Operation Head Quarter Sales Music School Seasonal Tuning - Effective control of sales with data - Gripping and growing consumers in Music School - Keeping connection with customers through quality control by Seasonal Tuning - Promotion by “Kawai Artists”
  • 4. #1 Kawai profile Other 0.2 IT 0% 4.1 7% FY2012 Piano & 22.8B JPY, areal distribution FY2012 Total Sales 58.1B JPY Other, 1.68, 7% Erectric Parts 9.5 16% [分類名] [値] Musical Instruments 26.5 46% Japan, 6.01, 26% China, 5.39, 24% North America, 5.94, 26 % Education 17.8 31% Japan 2011 2012 2013 expected North America 2011 2012 2013 expected Europe 2011 2012 2013 expected Piano Qty D.Piano Qty Compared with mature Japanese & American Market, potential market exists in Europe. (0.1B JPY)
  • 5. #2 An appropriate country in which to operate An appropriate country in which to operate Top-end Piano Since 2012 Grand Piano Upright Piano Digital Piano Mikhail Vasilievich Pletnev International Tchaikovsky Competition, Gold Medalist Top-end “SK-EX” user Empower the brand nationally & globally
  • 6. #2 An appropriate country in which to operate Buyer Power:Consumer segmentation in Russia Source: Himoto, Shingo and Nobuo Okubo. “Resurgence of Russia economy and boom of consumption” Creation of Intelligent asset March 2007: 16-17. Print Segmentation of customers Urban rich 28 million Attribution Population Poverty 57 million Semi-middle 57 million Monthly salary (USD) Below 120 120 to 500 500 to 1000 More than 10,000 Occupation No fixed income Farmer, civil servant Well paid worker Company owner, Asset holder Residence(Type) Barrack Panel house Urban condominium Car Food supplier Recreation Second hand Street vendor Neighborhood Home-made car Local retailer Domestic travel Expensive imported car Expensive food shop Travel expensive resort area Education of children Vocational training school National university than 1000 USD Imported car Super market Travel neighborhood countries National university till 4000 USD Internet N/A Internet cafe Access in office Access at home Top-end Piano Since 2012 Grand Piano Upright Piano Digital Piano less Super rich 7 million style Condominium & more than two resort villa Domestic top school or study abroad
  • 7. #3 Our planned entry strategy Entry Strategy Kawai’s business model requires well-trained business people with long-term perspective. Sales Music School Seasonal Tuning
  • 8. #4 The critical operational factors Environment Analysis Critical Issues in Macro Environment POLITICAL • Administrative barriers and Corruption • Excessive and ineffective tax burden ECONOMIC • Average income in Moscow: $1,500/m • GDP growth: +4%y/y (2010-13) SOCIAL • Lack of qualified workforce • Short-range plans LEGAL • Inefficient property rights’ protection • Import levy: 15% of customs cost
  • 9. #4 The critical operational factors Environment Analysis 3C to KSF in microenvironment CUSTOMER • Potential needs in Moscow, St. Petersburg: 100MUSD/yr • Demand of acoustic piano: 25,000-60,000/yr COMPETITOR • Used < Russian < Chinese < Japanese < Czech < German COMPANY KSF • Conservative business structure • Follower after YAMAHA with similar business model • Differentiation strategy against YAMAHA • Clear channel strategy in Moscow, St. Petersburg
  • 10. #5 Cultural profile of Russia Russia – History Brief 862: Viking Rurik came to Russia and founded 1917: Russian revolution -The fall of the Romanov dynasty and establishing Soviet union -Intellectuals and engineers are exiled out from Russia 1991: Failure of Soviet union -The establishment of Russian federation, and independence of the former Soviet countries -Transition of the socialist economy to market economy History of the fight against foreign enemies Peasant society Harsh climatic conditions and vast land
  • 11. #5 Cultural profile of Russia Russia – Hofstede 5-D Model
  • 12. #5 Cultural profile of Russia Russia – Hofstede 5-D Model Power Distance • Russia, scoring 93, is among the 10% of the most power distant societies in the world. • This is underlined by the fact that the largest country in the world is extremely centralized: 2/3 of all foreign investments go into Moscow where also 80% of all financial potential is concentrated. • The huge discrepancy between the less and the more powerful people leads to a great importance of status symbols. Behavior has to reflect and represent the status roles in all areas of business interactions: be it visits, negotiations or cooperation; the approach should be top-down and provide clear mandates for any task. Individu alism • If Russians plan to go out with their friends they would literally say “We with friends” instead of “I and my friends”, if they talk about brothers and sisters it may well be cousins, so a lower score of 39 even finds its manifestations in the language. • Family, friends and not seldom the neighborhood are extremely important to get along with everyday life’s challenges. Relationships are crucial in obtaining information, getting introduced or successful negotiations. • They need to be personal, authentic and trustful before one can focus on tasks and build on a careful to the recipient, rather implicit communication style.
  • 13. #5 Cultural profile of Russia Russia – Hofstede 5-D Model Masculinity Femininity • Russia’s relatively low score of 36 may surprise with regard to its preference for status symbols, but these are in Russia related to the high Power Distance. • At second glance one can see, that Russians at workplace as well as when meeting a stranger rather understate their personal achievements, contributions or capacities. • They talk modestly about themselves and scientists, researchers or doctors are most often expected to live on a very modest standard of living. • Dominant behaviour might be accepted when it comes from the boss, but is not appreciated among peers. Uncertainty Avoidance • Scoring 95 Russians feel very much threatened by ambiguous situations, as well as they have established one of the most complex bureaucracies in the world. • Presentations are either not prepared, e.g. when negotiations are being started and the focus is on the relationship building, or extremely detailed and well prepared. Also detailed planning and briefing is very common. • Russians prefer to have context and background information. • As long as Russians interact with people considered to be strangers they appear very formal and distant. At the same time formality is used as a sign of respect. Long term orientation • No score available for Russia
  • 14. #5 Cultural profile of Russia Environment + History => Russian culture / value Collectivism • Communal spirit - throughout its notable history, Russia has assumed a strong communal spirit that is still reflected in Russian business practices today. • Severe climatic conditions – cooperation and collaboration, rather than competition, have been vital for survival. • 'mirs' or 'obschina‘ - dates back to the peasant farmers, who lived in agricultural villages worked together in an organized and self-managed community. Egalitarianism • Social philosophy that supports the removal of inequity and promotes an equal distribution of benefits. • An important strategies of equality, reciprocity and mutual advantage • Status conscious and believe in co-equals • A "deal" is often thought of from the perspective of equally shared benefit. Dusha • The famous and enigmatic Russian 'dusha' or 'soul' remains central to everyday Russian behavior
  • 15. #5 Cultural profile of Russia Russian culture / value => Russian Business Practice Working practice in Russia • They may be late, but they will expect you to be punctual • Unsigned documents does not have faith Structure and hierarchy in Russian companies • Decision makers higher up have authority over their subordinates • Showing respect for seniority and recognizing the hierarchical structure Working relationships in Russia • Personal and informal contact is a central part in doing business in Russia • Physical contact like a simple hand on the arm is a positive sign. The notion of social space is much closer in Russia • In conflict, try to avoid taking an official stance and remember that Russians are 'people orientated' and will respond to a more personal approach • Presentations should be straightforward and comprehensible • Concerns are discussed in an informal environment • Final negotiations will be conducted in the office
  • 16. #6 Organization Chart KAWAI International -Division StructureFinance America Human Resource Chief Executive Officer Domestic Sales and Marketing* International division Australia UK Indonesia Production Shanghai *Assign the head of domestic marketing the role of international marketing and sales Russia
  • 17. #7 leadership/motivational system The concept for organization chart of KAWAI Localization A local manager should be assigned to Russian market and have the responsibility for entire of strategy. Assign the head of domestic marketing division to the role of international marketing and sales as a double-hat manager. Collaboration Limitation Market is limited at the first stage. Keep the factory in Japan before Russian market is matured.
  • 18. #7 leadership/motivational system Leadership and Motivation system High High Uncertainty avoidance Power distance 100 90 80 70 60 50 40 30 20 10 0 Russia Japan Individualis m Low Masculinity Hofstede’s five dimensions Low
  • 19. #7 leadership/motivational system Leadership and Motivation system America Domestic Sales and Marketing* Australia UK International division Indonesia Shanghai Russia Strong Boss-Subordinates system Set the clear short-term goals to groups (not to individuals)
  • 20. #8 Any special control issues Control Issues What issues? How to deal with Language & Culture • Russian - Based on Cyrillic and difficult to acquire • Different business customs - Not much trust on paper contracts, lack of long-term views, etc. • Authoritarian, relationship-oriented, avoid responsibility and risk, etc. • Take necessary time to Identify & establish relationship with local partners and make business alliances • Apply “Planning, Persistence, Patience” • Hire qualified local people Geographic Distance • Moscow is 7,500 km away from Tokyo => Not easy for its employees to come and go • Vast country to cover/manage • Dispatch qualified employees • Keep close communication (biz trip, video conferences) • Don’t rush Legal, Security, Currency • Property rights, tax regulations, legal systems are unclear • Corruption, bribery, political uncertainty • Currency fluctuations • Become sensitive and knowledgeable about local practice via local professionals/partners • Set different expectations • USD transactions
  • 21. #9 The concerns of the host country What are concerns? How to deal with Host Country Environmental Issues • Undeveloped legal/tax systems • Uncertainty of collecting receivables • Political instability • Set different expectations • local credit expert to avoid bad A/R • Good relationship with local lawyer in case of overdue receivable • Do not take too much risk at once, be cautious for investment • Always keep uncertainty in mind Local Community Long-term cooperative relationship • Hire, train, retain local employees and piano instructors • Local sales/business development • Establish local network • Introducing Kawai’s Education business model • Compete with YAMAHA Piano • Dispatch qualified employees to start the business • Instillation of Kawai’s mission and goals/values. • High quality, competitive classroom management • First manage to get into prestigious universities of music (make use of “authority”) => students from wealthy families => mid class (from top to bottom)
  • 22. Conclusion Sales Music School Seasonal Tuning
  • 23. Backup
  • 24. Basic economic facts-2012 Currency: Ruble(RUB);31Ruble=1USDollar (2012) GDP PPP: 2.4 US$ tn (2011) +4.3% growth (2011) Compare: Japan 4,4 US$ tn (2011) GDPpercapitaPPP: $16,735(2011) Compare: Japan 34,748 US$ (2011) Unemployment rate: 5.3%(Q32012) Inflation rate: 6.1%(2011), 6.5%(Oct12/Oct11)
  • 25. #2 Decide on an appropriate country in which to operate, and give your rationale for this choice. Degree of Rivalry: KAWAI Products have enough impact on quality/performance in Russia http://www.pianobuyer.com/fall12/44.html
  • 26. #2 Decide on an appropriate country in which to operate, and give your rationale for this choice. Degree of Rivalry: KAWAI Products have enough impact on quality/performance in Russia “Lia” and “Krasny Octiabr” & Second hands In Russia as entry models http://www.pianobuyer.com/fall12/44.html
  • 27. • • • • • • • • • • • • • Market of Piano in Russia After a serious decline the market of piano in Russia experiences a period of its revival. Due to the absence of government orders the majority of the Russian manufacturers of pianos have vanished. Only two manufacturers of pianos and grand pianos – piano factory “Lira” (Moscow) and “Krasny Oktiabr” (Saint-Petersburg) – has left out of 20 enterprises which manufactured 120 thous. pianos and grand pianos per year. In Russia, a half of the market of musical instrument – which, following some experts’ estimates, consists nearly two thousand instruments per year – is controlled by “Lira”. For comparison, in 1990 “Lira” alone manufactured 7000 items of piano assuming that the market had major manufacturers from Belarus and the Ukraine operating there that time. However, serious prerequisites for the situation to improve have appeared recently. The government pays greater attention to pitiable conditions of musical instruments in schools and boosts its orders. For instance, “Lira” plans to increase its pianos sales to 3000 items per year due to municipal order for Moscow music schools that haven’t purchased new instruments for many years. One more reason able to improve the situation on the piano market is presented by new developments for piano models such as “Mozart”, “Richter” and “Tchaikovsky”. For their output the production was profoundly updated. As early as in 1997 “Lira” factory produced a prosperous instrument – grand piano of “Moskva” – which obtained a sufficient amount of orders. For the present moment the factory prepared a new model of piano of “Mozart” that combines the best technical achievements and costs cheaper than its foreign counterparts. The piano uses the Czech mechanics of high quality of “DETOA” and the best Chinese keyboard of “ORIENT”. A body of “Mozart” is produced using new technologies; it has attractive appearance, good design decisions, magnificent acoustic engineering and concert sounding and its cost is half as much as the one of similar instruments of other manufacturers. The new model was worthily appreciated by foreign experts. The piano of “Mozart” created a furor at the exhibition in Frankfurt am Main. Due to this fact nearly 50% of the factory’s production is exported not only to traditional countries as Iraq, Israel, and Canada but also to Italy, Spain, Greece and Eastern Europe countries. The arrival of new models of the pianos of the Russian manufacturers will considerably challenge the Czech instruments which have traditionally occupied the leading positions on the European piano market. The main competitive advantage of the Russian manufacturers is their price. A good Czech piano has a price starting from 4500 euros, while the Russian one of the similar quality – from 2000 euros. According to experts estimate, nowadays, Russia sells 25-60 thous. of acoustic pianos per year. It makes nearly 60 mln. USD in terms of value. Only 1% of the market belongs to the Russian manufacturers. In 2007, Russian factories produced 1.7 thous. instruments, with almost a half of them being exported. The market has been steadily filled with the products of the world leading manufacturers made in China in recent years. Nowadays, a major part of pianos is acquired on the second hand market. The Russian manufacturers compete not only with the Chinese and the Europeans but also with the second hand market with its sufficiently large turnover. The main reasons for this are unwillingness of the Russians to pay large sums for an instrument of high quality and a diffused opinion that Russia doesn’t produce new instruments of high quality. However, instruments of the second hand market due to their age are of low quality. According to experts, only 2% of the instruments of the second hand market are properly functioning, without battered hitch-pins and cracked string-plates. The range of pianos in Russian stores is mainly presented by import products from Japan, the Czech Republic, Germany, China at rather high price. The simplest Japanese pianos cost from 3000 USD, the Czech ones of “Petrof” – from 4000 USD, the German pianos of “Seiler”, “Bechstein” and “Zimmerman” – from 7000 USD to 15000 USD, the Chinese ones – 1500-2000 USD. As average price for piano of the Russian manufacturers is 50-60 thous. RUB, a second hand one – 5-15 thous. RUB. Customs legislation of the Russian Federation protects local manufacturers. There are no restrictions for import of musical instruments, however, there exist import levy at the rate of 15% of customs cost. According to experts, a potential market capacity for pianos and grand pianos in Moscow and Saint-Petersburg alone makes more than 100 mln. USD per year. Regional needs of the population (private individuals, music schools) are satisfied by stores specializing in sales of musical equipment. Receiving an order and a 100% advanced payment a selling organization finds the manufacturers of instruments and delivers it to a final customer.
  • 28. #8 Explain any special control issues that concern you for this overseas operation. How do you plan to deal with them? Control Issues • Language & cultural differences – Russian language is based on Cyrillic and difficult to master. – Business practice is different from that of Western – Cultural characteristic is relationship-oriented, hierarchical, and avoiding responsibility ⇒ Business practice does not much with global standard. • Geographic distance between the subsidiary and the headquarters – The distance between Tokyo and Moscow is 7,500 Km. – National territory is vast and difficult to control. • Legal & Security – Property rights and rule of the game is not clear. • Currency exchange rate fluctuations – Russian Ruble has difficulty in terms of liquidity and overseas remittance.
  • 29. #9 Identify the concerns of the host country and the local community regarding your operations there. What plans do you have to deal with their concerns and to ensure a long-term cooperative relationship? Environmental Challenges (suggested by JETRO) • Undeveloped legal/tax systems • Uncertainty of collecting receivables • Political instability Operational Challenges • Hire, train, retain local instructors (*culture, language issues as well) • Local sales/business development (making local network, connections with government officials, politicians, influential people) • Introduction/expansion of “piano class” business model (What do middleclass Russians react to it?) • Competitors (e.g., YAMAHA Piano)
  • 30. Actions to Take in Their Entry Strategy To deal with the Control Issues: • Set up a representative office first => Local partnership establishment / Market analysis / Strategy Planning => Alliance / Joint Venture => Subsidiary • Stick with “3P” => Planning, Persistence, Patience! • Frequent communication with local staff (video conference system, Skype, etc.) and business trips are necessary to be on top of the ongoing issues. • Be sensitive with local practice, expect things to be delayed or pushed back by bureaucratic procedures • Make payment terms in USD or use settlement bank which has good relationship with Russian leading banks. To deal with Environmental Issues: To deal with the Operation Issues: • Hire local instructors • Train and dispatch Japanese instructors (Russian/English speaking) and have them work with local instructors • Set up a representative office and dispatch people and perform “3P” (for building partnerships and connections)

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