Mabe Case Analysis

Thesis Statement

Deciding what strategic actions to take next with MABE and Fagor’s joint venture (JV) in Russia requires Ramiro Perez, MABE’s international Vice President, to consider many factors such as cultural differences, economies of scale, the political environment and which markets to serve. Similar to the organization’s experience in entering the Brazilian market, entering the Russian market has been very complex. Despite MABE’s efforts to adapt the Russian JV is just now expecting to turn a small profit for the first time in 2012. After a thorough analysis of the industry, MABE’s operations and an evaluation and comparison of possible actions, we’ve concluded that Perez should take a new approach and focus on connecting with employees by enriching the corporate culture with an aim to build trust, decrease the organizations foreignness, achieve localization and capitalize on Russia’s market opportunities.

Key Issues

The first main issue of conducting business in Russia is the hostile business environment for foreign investors. The main concerns are weak legislative enforcement and regimes as well as high incidents of corruption and bribery throughout all levels of state bureaucracy. Based on a study published by the Asia Pacific Journal of Management, Russia has the worst informal institutions of the four BRIC countries. Their informal institutions of networks between leading shareholders, the business groups and the state compete with formal arrangements making it difficult to establish reliable business operations.

Through MABEs prior expansion into Brazil, Perez learned the importance of instilling the firm’s corporate culture into locals who know the industry and allowing them to manage the day to day operations. In Russia this tactic posed a challenge as the workforce is characterized by low trust of outsiders, inhibiting communication with the foreign managers and undermining organizational initiatives. As a result, a short-term view is often taken by local managers and little emphasis is placed on competitive strategy or financial planning.

The second key issue is the potential short to medium term growth in the medium-end segment of the appliance market. While Russia’s 2010 per capita income and discretionary income was higher than Brazil’s, its population has been decreasing at an alarming rate since the end of the Second World War due to an extraordinary rate of mortality. And while Russia is the country with the largest landmass in the world, it is one of the least densely populated. It only contains five cities with the population and income necessary to draw in global brands.

There’s also been a dietary shift toward fresh foods and ready to eat meals that don’t require cooking or refrigeration in recent years and the growth of Russia’s appliance market has been stagnant since 2007, falling behind that of India in 2010. Further complicating the competition is the state’s 56% share of the economy.

The third key issue is the viability of manufacturing locally. This is key to achieving cost advantages over key competitors and while the Russian government has recently established new initiatives to attract foreign investment, political interference in business, arbitrariness in the application of laws, a complex tax system and an unskilled workforce make it extremely difficult to establish reliable business operations, much less a manufacturing plant.

In addition, Russia lacks human capital. Its population is characterized by high levels of education but low levels of knowledge and health. Poor protection of private property rights is also a major concern. Not to mention training U.S. suppliers to export components to Russia will involve more complexity than it did when training them to export to Mexico as Russia is not a member of the North American Free Trade Agreement. All of which would make it very difficult and risky for MABE to invest in a local manufacturing plant.

External Analysis

Porter’s Five Forces of the Appliance Industry in Russia

Threat of New Entrants: Moderate to High. The appliance market in Russia is attractive due to its size of $3 billion USD as well as its profitability. At the same time, in order to remain competitive, a firm entering the market will need access to local manufacturing. This could be difficult for some firms to obtain. The Russian government has established a fund of $10 billion to attract foreign investment and introduced an innovation program with an innovation centre. However, Russia can be hostile environment for foreign investors as they have a corrupt government system and they have low trust for outsiders. As stated in the case "many multinationals consider an entry into Russia to be of strategic importance in their efforts to truly achieve global competitiveness". Economies of scale are also a key success driver within the industry. With many Russian citizens looking for work opportunities and being a BRIC country, it is an attractive place to enter.

Threat of Substitute: Low to Moderate. This is because in these times, there is not an effective substitute to modern appliances. However, the growth in the consumption of ready to eat meals and fresh foods in Russia reduce the need for freezers. MABE offering high quality products establishes themselves in the market.

Bargaining Power of Buyer: Moderate to High. Buyer power in the appliance industry in Russia is relatively high. This is because there are numerous companies that are competing to gain customers. The customers therefore have many different choices when it comes to choosing appliances. The consumer can select products based on their preferences such us cost, quality, design, etc. from many of the different competing brands.

Bargaining Power of Supplier: Low to Moderate. For MABE, there is a low supplier power as most of the production is conducted through their JV partner. However, if outsourcing their manufacturing to Russia, the supplier power will rise as they will have less control.

Intensity of Rivalry: Moderate to High: In the appliance industry in Russia, the market share is mainly shared among Indesit, Electrolux, Samsung and Bosch. MABE only takes a very small portion so its market share is not even really seen in the eyes of its competitors at this point. Since there are many competitors, they are all competing for market share. This means firms need to stay innovative in order to compete. Also as mentioned earlier, to remain competitive, companies need access to local manufacturing.

After analyzing the trends in the market, Russia demonstrates much growth potential. However, firms will need to be constantly aware of their