Problems arising from the centrally commanded economy in soviet Union.

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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.


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 ...

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