Problems arising from the centrally commanded economy in soviet Union.

One of the issues faced by Pizza hut was heavy fluctuations in the currency exchange rates and volatility in the soviets markets caused due to these fluctuations. At the time the joint venture was negotiated the official currency exchange rate was 1.6 dollars per Ruble but by 1990 when the restaurants were opened there were two official exchange rates one was 2 rubles to a dollar and then a tourist rate of 6 rubles per dollar. At the same time, however in the black market the ruble was traded at 30 rubles to a dollar. To compound the problems faced by pizza hut not long after the opening of pizza hut the government, which was main source of supplies to the restaurant increased the prices of its supplies by an average of 300%. Making it very difficult for Pizza Hut to structure their pricing policy.

Analysis

Pizza Hut was used to working in much more stable environments in west. They had to adapt to the high volatile markets of Soviet Union. The main problems facing the Pizza Hut’s executives here can be analyzed by using Hofstede’s value dimension of Uncertainty avoidance ; “High uncertainty avoidance Vs low uncertainty Avoidance”. In 1990 soviet Union was a centrally commanded economy and in those economies the welfare of people is much more important than the actual market realities and hence the market is not allowed to settle and the whole economy is all centrally planned. So the prices are not governed by the market forces. As Russians were people with very high uncertainty avoidance values and hence depending on socioeconomic situation prevalent at a particular time, the governments could make an abrupt increase or decrease in the prices of various commodities including currency. These variations in the prices are done in order maintain the social stability in the society and the country without taking into consideration the market realities. This made it very difficult for the US company who have a low uncertainty avoidance culture and thrive on the competition and fair play in actual market conditions to do business there.

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The unrealistic price structures and controlled exchange rates also gave birth to the black markets in Soviet Union. This evolution of black market can be explained by the Tormpenaar’s and Hampden-Turner’s “inner directed Vs outer directed”. The centrally planned economy is an outer directed as everything is controlled and regulated by the state. But the human nature wants to be more independent and this is this need of the society for inner direction which leads to the black markets in the centrally controlled economies. So when the Pizza Hut had to purchase some of its supplies which were not otherwise available through the normal government supply chain, they had to pay much more than the normal government prices in the black markets. This was a total different working scenario for its executives who were used to working in the environments where the markets were governed by the market forces and not artificially controlled by the government.

So understanding of the functioning of the markets and the supply chain management in a centrally controlled economy before entering the markets of a communist country would have been much more helpful for American in conducting smooth operations of business. Pizza hut could have taken the following alternate courses of action :

They should have developed different sources of supply and not just depend on the supplies from one provincial government.
They could arrange for large warehousing facilities and store the inventory for the crisis periods.
They could have an arrangement with their parent company PepsiCo whereby could barter goods with the government for their supplies and hedge their purchase fluctuations.
They should concentrate more on their hard currency restaurants to have as much of hard currency as possible to safeguard themselves against the ruble fluctuations.

In our view keeping in view the practical problems of managing different aspects of business and also taking into consideration Pizza Hut’s core competency which is to manage efficiently a chain of fast food restaurants, we would suggest that the best course of action in this case for them would be to develop different sources of supply and maximise their earnings in hard currency.

Closure of Pizza Hut:

Only a few days after opening, the regional government temporarily closed both restaurants ostensibly for not having a sanitation permit. In reality however the closures resulted from the power struggle between the radical Moscow city council and the conservative district council.

Analysis

This particular problem of closure of Pizza hut can be best analysed by Trompenaar’s cultural dimension of “ Universalism Vs Particularism”. USA is having a universalistic culture where the focus is more on rules than relationship and legal framework is very strong. While as Soviet Union had a particularistic culture where focus was more on relationships than rules and there are several perspectives on reality relative to each participant. To operate business successfully in Soviet union one had to first fully understand the power structure of that country. Unlike in west the legal recourse may not be the best remedy for the company in case there is some obstruction to doing business by the government authorities in these countries. First the impartiality of legal system can be questionable and then the time taken to get the legal solution can be very long.

Another point to observe here is that various levels of governments can seriously impose blockades for the conduction of business if they are not taken in confidence before the opening of venture. In west , once a company manages to get all the necessary permissions and clearances by the government, and conducts the business ethically and legally, no one can stop them from conducting their business. Same was not be the case in the Soviet Union. So the best course of doing business in the Russia would have been to build informal networks and create private understandings at various levels of government ; city, district, provincial as well as federal. This building of relationship with various levels of government would have helped Pizza hut to pull levers privately and seek fairness from the government on the basis of special merits of the case and hence could have avoided any closure of their business as this type of practice is prevalent in a particularist society.

Hofstede G. (1984) Culture’s consequences: International relations in work related values

Fons Trompenaars and Charles Hampden-Turner (2001) , 21 leaders of 21st century

Fons Trompenaars and Charles Hampden-Turner (1997), Riding the waves of culture.