Philips plans to dominate the Russian mass market without sacrificing quality

Philips came from Europe to sell Russians all kind of home electronics and appliances. Since 1994, a Russian-based company, Philips Consumer Electronics, has been in charge of this venture. Initially, everything went beautifully. Getting to the Russian market right before the major electronics boom, Philips confidently rose to third place in terms of popularity, after Russian favorites Sony and Panasonic. That was, until the Koreans became seriously interested in the Russian consumer electronics market. Samsung and LG muscled their way in and drove the Japanese down to third and forth place, with Philips at a pitiful fifth.

The Europeans might have just shrugged their shoulders and forgotten about the Russian market, if it hadn't been for the rapid, post-crisis growth in consumer demand in 2000-2001. The rate of market growth increased tenfold, making it illogical for Europe's biggest electronics company to turn away from a growing European market. At Philips headquarters, it was decided to move the company from fifth to third place by putting pressure on the overly intellectual Japanese brands. In order to accomplish this ambitious goal, Philips decided to hire Dmitri Strashnov as the head of Philips Consumer Electronics.

To those unfamiliar with the ins and outs of the electronics market, the name Dmitri Strashnov doesn't say much. But in electronics, he is famous. His fame stems from his leadership at Electrolux in Russia and his amazing ability to win the hearts of Russians over to the company's brands, which took second and third place in the home appliance market, along side the popular Siemens and Bosch.

Basically, Philips has called in a professional.

- Dmitri, you have a very challenging task before you: to bring Philip's products from fifth to third place on the consumer electronics market. Let's start from the beginning. How and why did a Western company decide they needed to improve their position on the Russian market?

- The first reason is quite mundane. They began to forget about the economic crisis of 1998. Their fear of words like "Russia" and "Russian market" has gradually faded. The second reason lies in actual figures. After the crisis, the Russian consumer electronics market has been growing at rates unheard of in Europe: 20-25% a year.

The market fell by two and a half times after the crisis but began to bounce back quickly. It's hard to ignore that Russia is the only market right now growing at that rate. So, it's easy to see why Philips is looking at Russia when the European market is stagnating.

It may seem minor, but it's a major step that the Russian division of Philips is now independent, when it used to be part of the Eastern European division. This means that the people in the main office understand that you can't use the same methods on the Russian market as you can in Poland or Hungary.

- What's the difference? Size?

- The amount of potential.

- How has Philip's relationship to the Russian market changed since the mid-90's, when there was also an electronics boom?

- Everyone is being much more careful. 1995-1997 was the peak of market development. Companies invested quite a lot and got decent results. When the crisis slammed us, the reaction was swift: reduce operations and personnel. Yet it was extremely interesting to follow the growth after the crisis. The main office and development management tightened operations. If someone was hired, then they were the best. If money was spent, it was spent as efficiently as possible, because the market had shrunk and returns on investments had decreased significantly.

- What do you see in the future of the Russian market?

- The situation has become very favorable because of several factors. Firstly, delayed demand-after the crisis people were very careful about how they spent their money. Also, people are replacing the things they bought during the first boom in the mid-90s and getting more interesting products. At the same time, however, things are headed downward and next year's growth will be less than this year's, and the following year will be even harder.

- So, you are basically expecting a slowdown in the market by 2004?

- We are expecting by that time the market will be saturated and level out. That's when the real battle for market share will start.

- What does having a place on the Russian market mean for a company like Philips? Is the Russian market capable of balancing out losses in Europe?

- Definitely. Russia is Philip's most profitable market. In Europe, a five percent profit is excellent. Not everyone achieves it. But in Russia, profits run between five and ten percent.

High quality for masses

- Let's talk about your methods for becoming number three. You want to dominate the market, but how? What elements make up your strategy?

- Okay. If you look at the Russian electronics market, you see two camps: the Japanese-Sony and Panasonic-and the Koreans-Samsung and LG. Samsung and LG are fighting for the mass market, meaning large volumes of sales with low returns. Sony and Panasonic hold to a different approach. Having lost a lot in the crisis and elsewhere in Europe, they are sticking to high-tech products, not bothering with mass market and looking only at profits.

These competitors mean we have to choose a strategy which will combine elements of both camps. As we have a very strong European brand, it would be foolish to try to beat LG in terms of sales. We can make much more per unit. At the same time, we can't ignore the rapid growth of the mass market. Our goal is twofold. On one hand, we need to be a good brand and earn good money, and at the same time, be an innovative technological force on the market. On the other hand, we should also sell a lot of straightforward televisions.

- All in one brand name?

- Yes. That's the hard part. The real subtlety lies in the fact that the consumer's impression of our image will not always correspond to the full range of products we have on the market. Meaning, our product line is more diverse than what we want to emphasize to consumers. We advertise plasma televisions, but at the same time sell a lot of less expensive electronics.

- What's the problem then? Someone knows that this cool company makes high-quality electronics. He doesn't have enough money for the top of the line, but will buy something just as cool, but more affordable.

- People who are shopping for cheap electronics usually cross more expensive brands off their list. Though there are advantages, such as when a customer comes and sees that a good brand has some less expensive product and buys it. But there's a long-term danger hidden here. A cheap product will always be of lower quality. That could limit Philip's growth potential and we don't want that.

What we need to do is a) make quality items cost less and b) invest a lot of money in positioning the products as well as possible. If balance is maintained, there will be few problems.

- But you don't determine the products' quality.

- Not directly, no. But we keep records of returns and defects. We let them know what doesn't work for us. That information is transmitted via the service division to production, which in turn corrects problems. Nowadays, the Russian market is completely integrated into the European one. We sell the exact same products here as in Western Europe, if there is a demand for them.

- Does Philips plan on setting up any kind of production in Russia?

- We plan to, but not because of the battle for quality, but in order to keep prices competitive and avoid tariffs. However, establishing production in Russia would not be very profitable. Philips already has enough production capacity to supply all of Europe including Russia. We Russians missed the boat by about seven or eight years. The Polish factory which today supplies practically all of Europe was build six years ago.

Where the money is

- What other elements are there to the "number three" strategy?

- The second aspect is changing supply geography. If we want to be on both the high-tech and the mass markets, we need to have a greater presence outside of Moscow and Petersburg. We know that the mass market segment is growing, and that market is in provincial Russia. Philips has been working with the largest Russian importers without leaving Moscow and because of that, it seems, has lost a colossal amount of potential markets in the rest of the country.

How does the electronics market work? We have three levels of market players: importers, wholesalers, and retailers. If we start from the moment the product enters the country, we see naturally that one hundred percent of the product passes through the hands of the importers. At the wholesale level, 65% of wholesale goes through these same companies, but 35% is purchased by secondary wholesalers. When we get to the level of the retail market, only 30% of the product is sold by the importers. Another 30% is sold by major wholesalers but 40% is sold by "independent retailers." Having a large proportion of independent dealers is common in provincial areas.

What did Philips do in 2000? We were only working with Moscow importers without the slightest clue about secondary wholesale or local retailers outside of Moscow. We didn't take a lot of risks, but we only controlled about 30% of the market. When we decided to improve our position in the market, we looked at this flow of products and focused on controlling independent retail outside of Moscow. We have to understand how the product gets out there and how to make the product sell there. Without powerful local representation, this will be next to impossible.

- What percentage of electronics is sold outside of Moscow and St. Petersburg?

- 60%. 7% is sold in Petersburg and 33% in Moscow.

- What does powerful representation entail?

- First and foremost, it means people. People who understand how trade works in their areas, who have good connections and a lot of initiative. They should have a clear plan. Some of them may not have offices, but they have a telephone and a good car. Minimal expenses and maximum efficiency. Those people are really hard to find.

- But there's one large dealer, Eldorado. Isn't it easier to work with them?

- Yes, the markets outside of Moscow are structured very simply: 50%--Eldorado and 50%--everyone else. Eldorado is one of those primary importers I mentioned and is a strong company that's great to work with. But let's say suddenly Eldorado decides to do something else. Then we will be in limbo because we don't control the situation on the ground.

If we move away, however, from wholesale to independent retail, we will learn who is in the business, from the level of little shops to large regional networks. We see what they are selling. We see, say, that Philips products are not selling well and try to figure out why. If they don't have a direct connection to Moscow importers, we help them get one. If they have limited resources and can't support our product line, we help with that. We are working on a plan to accomplish this. We are starting to operate more effectively on this local level, with local representatives who see how much things cost and what sells where.

- How are you protecting yourself should Sony, for example, change its strategy and try for the mass market? How would you and your local representatives deal with this?

- If Sony were to make such a decision, things would be harder, that's for sure. But a new position outside of Moscow would help us react quickly. We would control the process from the bottom up. If we see, for example, that one of our wholesalers has gone over to another brand, we will be able to divert our products to other channels. To do this, you have to have people on the ground.

Adapting to changing conditions

- In a rapidly changing business environment, what organizations work best: those built on a strict hierarchy or those made of independent, free agents?

- I can't really judge things in those terms. I think that in Russia we haven't gotten to that point yet. For our plan to work, we simply need an effective structure.

- Okay, what's an effective structure?

- Two things are important. The human factor. And the structure itself should, on one hand, be efficient in terms of cost and, on the other hand, should develop with the market. This last part is very difficult today. The market is growing so quickly that company structures can't keep up. You can't fall asleep at the wheel. You have to expand at the right time. But any company finds it's under cost pressures. That's why you have to find a delicate balance.

- How do you do that?

- Any structure has to correspond to business volume. Meaning that a tiny step in the direction of higher costs, and we no longer turn a profit. A tiny step in the direction of limiting our size, and we lose market share. We need to be flexible in today's instability.

First of all, this involves financial control. Secondly, human resource management.

Even in Europe where the market only varies by five percent, strategy is still constantly reconsidered. But in Russia, the bottom falls out of the market, and then the market grows by 25%. With this kind of market, it's hard to even get a good team together. That's why I think that there needs to be a tight group of about 25% of the staff to ensure continuity and stability. The rest of the personnel can be built around this group.

- Do you have a concrete plan or is this an instinctive move?

- Of course, ideally, we should look one or two steps ahead. We look at the situation and try to predict how things will look half a year down the road, and then prepare to deal with that. It would be impossible to manage a company without looking ahead. The labor pool is limited, and good people are hard to find. We also need to be able to explain to the main office why we need to hire.

- Let's get back to the question. In a changing market, on one hand, you need people to be flexible and take the initiative, not just wait for decisions to come down from above. On the other hand, we are new to all this and there aren't a lot of experienced people, so a company needs clear policies and directives? What do you do?

- I use both approaches. I set up procedures and rules and hire active employees. That is the second factor I was talking about, the human element. The backbone of a company is the people who think in the same way as the company's directors and who are professionally and personally reliable. There aren't enough people with business qualifications to hire more than a core group of operations managers. Furthermore, each of them is given a decent amount of authority, and they practically answer for all the successes and failures of their division. These people have to be more than just strong and ambitious; they also have to be compatible.

- What does that accomplish?

- There needs to be good personal chemistry. You think the same way. You may not know something or may know less than your colleagues, but subconsciously, you feel whether a decision is right or wrong just like they do.

- Are you talking about a kind of corporate culture?

- Yes. But not in quite the same way as people write about it. Not the way people talk about in the typical Western "business bibles:" "You should follow these rules your whole life." In practice, corporate culture is formed at the company unit level of five to ten people. How they interact, how they relate to the business, what they demand from themselves and the people who work with them. If these expectations are high, then a team will be formed that can't work badly.

- One last question. Why did you decide to join Philips? You had your own business, but you became a manager.

- It's a rather personal issue. I always wanted to be number one and do something that no one had done before or something that no one else could. I more or less succeeded in doing this at Electrolux and now I want to try and do the same thing at Philips.

- As a hired employee, are you able to think about Philips the way you thought about your own company?

- That is the only way to be. If you know that in a particular situation, you could have done better, but didn't, and that makes you loose sleep, than you know that everything is going the way it should.

Interview by Tatiana Gurova