Managing Across BordersMay. 15, 2013

-The penetration strategy of KAWAI to Russian market-

#1 Kawai profile

Main Products Grand Piano Upright (Vertical)Piano Digital Piano

Electronic Organ Church Organ Education

- 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”

Head Quarter

Sales

Music School Seasonal　Tuning

Operation

#1 Kawai profile

Musical Instruments; 26.5; 46%

Education; 17.8; 31%

Erectric Parts; 9.5; 16%

IT; 4.1; 7% Other; 0.2; 0%

FY2012 Total Sales 58.1B JPY

Japan, 6.01, 26%

North America, 5.94, 26%

China, 5.39, 24%

Europe 3.78

Other, 1.68, 7%

FY2012 Piano & 22.8B JPY, areal distribution

Japan North America Europe (0.1B JPY)

2011 2012 2013 expected

2011 2012 2013 expected

2011 2012 2013 expected

Piano Qty D.Piano Qty

Compared with mature Japanese & American Market, potential market exists in Europe.

#1 Kawai profile

An appropriate country in which to operate

Grand Piano

Upright Piano

Digital Piano

Top-end PianoSince 2012 Mikhail Vasilievich Pletnev

International Tchaikovsky Competition, Gold MedalistTop-end “SK-EX” user

Empower the brand nationally & globally

#2 An appropriate country in which to operate

Segmentation of customersAttribution Poverty Semi-middle Urban rich Super rich Population 57 million 57 million 28 million 7 millionMonthly 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 style condominium

Condominium & more than two resort villa

Car Second hand Home-made car Imported car Expensive imported carFood supplier Street vendor Local retailer Super market Expensive food shopRecreation Neighborhood Domestic travel Travel neighborhood

countriesTravel expensive resort area

Education of children Vocational training school National university less than 1000 USD

National university till 4000 USD

Domestic top school or study abroad

Internet N/A Internet cafe Access in office Access at home

Buyer Power ： Consumer segmentation in RussiaSource: Himoto, Shingo and Nobuo Okubo. “Resurgence of Russia economy and boom of consumption” Creation of Intelligent asset March 2007: 16-17. Print

Grand Piano

Upright Piano

Digital Piano

Top-end PianoSince 2012

#2 An appropriate country in which to operate

Entry Strategy

#3 Our planned entry strategy

Kawai’s business model requires well-trained business people with long-term perspective.

Sales

Music School Seasonal　Tuning

#4 The critical operational factors

Environment Analysis Critical Issues in Macro Environment

• Administrative barriers and Corruption• Excessive and ineffective tax burdenPOLITICAL

• Average income in Moscow: $1,500/m• GDP growth: +4%y/y (2010-13)ECONOMIC

• Lack of qualified workforce• Short-range plansSOCIAL

• Inefficient property rights’ protection• Import levy: 15% of customs costLEGAL

#4 The critical operational factors

Environment Analysis 3C to KSF in microenvironment

• Potential needs in Moscow, St. Petersburg: 100MUSD/yr• Demand of acoustic piano: 25,000-60,000/yrCUSTOMER

• Used < Russian < Chinese < Japanese < Czech < GermanCOMPETITOR

• Conservative business structure• Follower after YAMAHA with similar business modelCOMPANY

• Differentiation strategy against YAMAHA• Clear channel strategy in Moscow, St. PetersburgKSF

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 enemiesPeasant societyHarsh climatic conditions and vast land

Russia – History Brief

#5 Cultural profile of Russia

Russia – Hofstede 5-D Model

#5 Cultural profile of Russia

Russia – Hofstede 5-D Model• 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.

Power Distance

• 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.

Individualism

#5 Cultural profile of Russia

Russia – Hofstede 5-D Model• 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.

Masculinity Femininity

• 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.

Uncertainty Avoidance

• No score available for RussiaLong term orientation

#5 Cultural profile of Russia

Environment + History => Russian culture / value

• 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.

Collectivism

• 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.

Egalitarianism

• The famous and enigmatic Russian 'dusha' or 'soul' remains central to everyday Russian behavior

Dusha

#5 Cultural profile of Russia

Russian culture / value => Russian Business Practice

• They may be late, but they will expect you to be punctual• Unsigned documents does not have faith

Working practice in Russia

• Decision makers higher up have authority over their subordinates• Showing respect for seniority and recognizing the hierarchical structure

Structure and hierarchy in Russian companies

• 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

Working relationships in Russia

#5 Cultural profile of Russia

KAWAI International -Division Structure-

Chief Executive Officer

Finance

Human Resource

Domestic Sales and Marketing*

International division

America

Australia

UK

Indonesia

Shanghai

Russia

Production

*Assign the head of domestic marketing the role of international marketing and sales

#6 Organization Chart

Localization

LimitationCollaboration

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.

Market is limited at the first stage. Keep the factory in Japan before Russian market is matured.

The concept for organization chart of KAWAI

#7 leadership/motivational system

Power distance

Individualism

Masculinity

Uncertainty avoidance 0

50

100

Russia Japan

Hofstede’s five dimensions

Low

Low

High

High

Leadership and Motivation system

#7 leadership/motivational system

Domestic Sales and Marketing*

International division

America

Australia

UK

Indonesia

Shanghai

RussiaStrong Boss-Subordinates

systemSet the clear short-term goals to groups (not to individuals)

Leadership and Motivation system

#7 leadership/motivational system

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

#8 Any special control issues

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)

#9 The concerns of the host country

Conclusion

Sales

Music School Seasonal　Tuning

Backup

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)

#2 Decide on an appropriate country in which to operate, and give your rationale for this choice.

http://www.pianobuyer.com/fall12/44.html

Degree of Rivalry: KAWAI Products have enough impact on quality/performance in Russia

#2 Decide on an appropriate country in which to operate, and give your rationale for this choice.

http://www.pianobuyer.com/fall12/44.html

Degree of Rivalry: KAWAI Products have enough impact on quality/performance in Russia

“Lia” and “Krasny Octiabr” & Second hands In Russia as

entry models

• 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.

#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.

#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 middle-

class Russians react to it?)• Competitors (e.g., YAMAHA Piano)

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)

Actions to Take in Their Entry Strategy