12 MISTAKES OF RUSSIAN SME

ENTREPRENEURSHIP

learning practical mistakes with academic background

March, 2011

MARKET

St Petersburg & Moscow Construction Market

Procedural pecularities on how construction is done in Russia

Specifics of construction market segments &

competition in it

THE OUTCOME

*Criteria for highlighting a mistake: met in at least more than 3 companies within operation network

A number of "on the road" notes - currently being turned into a new research paper

The story of how it usually is, and what can be done about it:

12 frequent mistakes* with cases from various companies

MISTAKE 1. HIGH COMPLEXITY OF BUSINESS IDEAS

Examples: architectural & design institutes, construction

services

No place for "simple truth" on a piece of cloth

Cultural / educational aspect

Systematic outcomes

The limits of understanding

MISTAKE 2. LACK OF COMMERCIAL VISION

Supplier vs Customer No vision of competition, no desire to improve quality Short term orientation No place for marketing. Advertising = Marketing here.

Prevalence of informal tools to compete + Bertran oligopoly competition

Example: construction materials dealers, local producers of construction materials

MISTAKE 3. LACK OF FORMAL CONTRACT INFRASTRUCTURE

Poor quality of formal agreements between principals and agents

Informal relations instead of structuring business - yet informal contracts are also rarely formulated

 Poor trust to papers, since "insitutes do not work", hard to use papers This concerns both employees, customer/supplier relations, shareholders relations

Example: road construction workers, region cottage developers, construction material dealers

MISTAKE 4. MESS IN STRUCTURING

Inefficient structures: strange positions, double/triple responsibility schemes, poor understanding of "who, when, why & what" by employees. Necessity of "account managers" - who have high knowledge of what's going on - agency problem, due to information assimetry

Example: construction firms, architectural design firms, etc.

MISTAKE 5. TRADITION OF HAVING CORRUPTION RELATIONS

Any normal way to do business may be biased by having an already reached "behind the scene" agreement

Lower price is not an argument. Higher price too. The margin and cash rule the game.

It became a tradition.

Firm has to pay higher margin for similar results then it would get merely by competing with price/quality Examples: Moscow construction areas, architectural design agencies

MISTAKE 6. CHAOTIC SALES MANAGEMENT

Highest salaries

Poor moral standards

Informal budgets

Contact / sales database belongs to…?

Example: construction dealer key sales managers

MISTAKE 7. PAPERWORK CLUTTERING

Getting simple, yet necessary paper for accounting / contract purposes may take ages

Getting an archive paper may be endless

Orientation: last come, first served. First get the new money, operations next.

Increase of lead time, poor customer service

Example: all construction market, especially logistics & construction material dealers

MISTAKE 8. RESPONSIBILITIES VS ACTUAL POWERS

Unwillingness of top managers to share powers Not just strategic, but also operational issues  Necessity to negotiate with top managers all the time  Longer lead time, failures in delivering services

Examples: construction material productions,construction agencies

MISTAKE 9. ERRONEOUS COMPLEXITY OF FINANCIAL ISSUES

Most of value chains have their part of "hiding the money"

Forms of complexity: documentation insanity and artistic figures in final invoices

Incredible negotiations of what would be the final price, and how it should be in the books Lead time losses due to unproductive activities, specific assets, trust issues, fear of lawless officials

Examples: all segments of construction market

MISTAKE 10. ENDLESS BRIEFINGS

Poor briefings culture

Solve the very problems  on site, not beforehand Probably started in USSR

May take up to 3-5 hours / briefing. Can be up to 10 briefings/project/week

MISTAKE 11. AGREEING TO PERFORM WITHOUT ANY GROUNDS

Short term orientation of most SMEs comparing to large networks

Poor trust in smaller firms due to their irresponsibility of contracts The price client pays for a smaller price of SME

It becomes the problem of the client

Examples: archit. design agencies, construction agencies, construction material dealers

MISTAKE 12. IT PIRACY

Average poor IT knowledge

Lack of internal barriers to downloading pirated software

Lack of internal corporate software policies  Lack of knowledge regarding open-source software: Linux, OpenOffice, ServerSolutions, etc. Source of possible corruption  threats Examples:  Architectural design institute, geological surveying company