Central & Eastern Europe’s Transformation:
Implications for the Marketing Sector
Dr. Nicos Rossides, Group CEO
Following the end of the Second World War, the countries of Central and Eastern Europe were ruled by communist governments and became part of the Soviet-bloc, with planned, state-run economies and totalitarian one-party rule, despite euphemistically being self declared as “people’s democracies”. The collapse of the Iron Curtain in 1989 has led, over the past two decades, into the dramatic transformation of the region from planned to liberal democracies, an event which has been described as one of the most significant in world history.
The intense and rapid changes that accompanied this transformation were both exhilarating and unsettling, with citizens from ex-communist states able to travel freely, express themselves openly, vote for their leaders, and own businesses and land for the first time. What is more, they could now have a bewildering range of choice from among tens of thousands of competing brands – provided they could afford them. However, the values, beliefs and norms that entire populations were accustomed to and used as a gauge as to the appropriateness of daily actions – their moral compass – became largely irrelevant, causing a great deal of anxiety and disorientation, particularly for those population groups who did not enjoy the same breadth of opportunities as the younger, more open and receptive people.
The new free market economies presented both tremendous opportunities and challenges for the service industry, among others, whose growth had been stunted by the rigid framework of the former command and control mechanisms of the communist economic system. Many of these challenges were of a human resource nature, including a lack of appropriately trained leaders, an education system that elevated technical ability above client facing skills, a shortage of linguists, marketers and financial professionals, and an inappropriate reward and remuneration system. Other opportunities (as well as their attendant challenges) had to do with the radical shift from the economics of scarcity (where you needed to wait years for a car, even after pre-paying for it) to the economics of plenty – a bewildering array of choices in every conceivable product category. From a world with few brands and relatively few or no commercial advertisements, to one where the average consumer is exposed to thousands of ads or brand messages daily.
Just as these economies began to mature and their populations became accustomed to the new market landscape, a fresh challenge has emerged. While the benefits and freedoms of the free market and democratic politics once appeared unassailable, the impact of the credit crunch and the global economic slowdown has hit Central and Eastern Europe particularly hard and is now calling into question many of the reforms of the past 20 years. The enduring strength of liberal democracies will no doubt prevail, although the foundations which have been established will be tested sorely in the years to come.
For the service industry, particularly those in the marketing disciplines, the key challenge will be to continually find ways to adapt so as to maintain relevance by demonstrating an ability to influence outcomes and support decisions.
The move to democracy
The transformation of the former Soviet-bloc countries of Central and Eastern Europe into the modern democracies of today has been variously described as a huge social experiment and a triumph for capitalist democracy. This momentous change was largely non-violent (with the notable exception of Romania), occurred with astonishing rapidity, and was largely unexpected – to the extent that the Russian logician, satirist and writer Aleksandr Zinovyev could recognise, as late as 1988, that the Soviet system possessed a “high degree of stability”.
The massive changes in the social, political and economic landscape of the region can also still be regarded as a work in progress. While one commentator, Francis Fukuyama, argued that the advent of liberal democracy in Central and Eastern Europe represented the “end of history” in that it marked the end point of humanity’s social-cultural evolution and the final form of human government, he also recognised a number of downsides associated with these sudden shifts. For many people, used to the boundaries, restrictions and contradictions of the old regime, the new era caused disorientation, anxiety and a sense of displacement. This was particularly pronounced among some population groups for whom change did not bring the same breadth of opportunity as it did for more nimble and less “indoctrinated” younger generation. Older people who had lived within the confines of the communist regimes for all their lives, found themselves in a world with no familiar anchors. New opportunities brought greater wealth for many but, at the same time, greater inequality and a wider disparity between the “haves” and the “have nots” where the huge array of choices was seen by many who could not afford them as a reminder of the stark inequalities of market economies.
The fact that the transformation occurred against a background of broader forces at play that may have been precipitated by the fall of communism exacerbated the dramatic impact on people’s lives of the new social, economic and political order. These forces were largely driven by globalisation, undoubtedly the most significant contemporary force in modern economics. Information, technology, capital, goods and services all move across borders as never before (which, arguably, because of the interlinked global financial system, has led to the export of the current credit crunch to all world markets).
It is therefore not surprising that there would be a measure of nostalgia at least among some segments of the population who look back to the more stable and predictable lifestyle of the communist era. Indeed, some old era brands are making a come-back (described as retro chic by some analysts) such as Zeha trainers (worn by East German athletes) which now command premium pricing, Tisza Cipo sneakers and Turo Rudi chocolates in Hungary, Krowka caramel fudge from Poland, and Botas shoes, Pedro chewing gum, Skoda cars and Bohemian glass in Czecholovakia. Indeed, the iconic Trabant car from East Germany, which has long been pulled from production lines, is now making a comeback as an ultra-modern electric car.
The award winning film “Good Bye Lenin”, set in the 1990’s, deals with the shock felt by many by the fall of the Iron Curtain. It tells the story of a son who is trying to protect his mother who fell into a coma just as the GDR collapsed. He strives to keep her from learning that her beloved country had disappeared, going to extraordinary lengths to shield her from the truth. He gets old clothes and furniture, chases down hard-to-find brands such as Spreewald pickles, even puts his baby daughter into plastic diapers used during communist times. He and his wife become producers of a fake world in an effort to avoid introducing a fatal shock to his mother’s system.
The Russian sociologist Aleksandr Zinovyev coined the term Homo Sovieticus to describe the impact of seven decades of totalitarianism which produced a mindset characterised by indifference to results of one’s labour, lack of initiative, as well as obedience or passive acceptance of government directives. The mindset is encapsulated in the Soviet era joke “they pretend to pay us and we pretend to work”.
One can, of course, argue whether such caricatures and generalities have any merit in a serious discussion of organisational cultures and sustainable high performance. Like all cultural stereotypes it may be an exaggeration suggesting that all or most of the people living in the ex-Soviet-bloc conformed to certain patterns of behaviour. However, at the same time, the traits attributed to ‘homo sovieticus’ may have been in evidence to some degree in a system that clearly disassociated initiative, innovation and productivity from merit and reward.
Challenges for the Service Industry
As one considers the implications of the transformation on businesses that operate largely in the service industry (although the lessons may equally well apply to other sectors), there are a number of profound implications for the way forward. Western management thinking – from the likes of Peter Drucker and Tom Peters, or insights into sustained success by celebrated CEOs such as Jack Welch – have followed a Darwinian pattern of experimentation and trial and error, with different business models tested, and re-tested, in the market place.
Business leaders in the newly emancipated economies did not have this background or culture of management and business thinking, and had to engage in a process of accelerated learning. This included grappling with the fact that command-and-control was not the best way to run businesses; that involving employees can be the key to enhancing productivity; that ideas and intellect rule over hierarchy and tradition; that market-leading businesses can ensure long-term growth through continual innovation and challenging the status quo; and finally, that developing a learning culture is the key to creating a superior performance over time.
At the same time, staff and potential recruits to the service industry in Central and Eastern Europe were not equipped with the right skill sets and attitudes. In large part, this was due to the educational system of the communist-era regimes which emphasized technical excellence, but placed little stress on the client facing skills required for today’s service industry – such as communication, marketing, collaboration and teamwork. The mismatch between the skills taught at all levels of the education system of the old regimes (particularly Universities) and what is required by capitalist democracies have created a huge gap that economies have struggled to bridge.
Language skills, in particular, were in short supply, especially English, and those who did speak the language tended to be associated with the security services of the former regimes, hardly the ideal training ground for consumer-orientated businesses. Ditto for the proficiencies required for most market related endeavors – be it marketing, advertising or finance and consulting.
Similarly, remuneration and reward systems needed to be restructured, away from seniority to more merit-based systems, with greater emphasis placed on quality of output, not just meeting sales or manufacturing quotas.
A consequence of globalisation, and the global war for human talent, has been the brain drain of talent away from domestic markets to Western Europe and the US, as membership of the EU and other international organisations has broadened the competitive set for many young, talented professionals beyond firms within their own country.
The Consulting and Information Industries
The newly emergent economies of Central and Eastern Europe provided a multitude of opportunities as well as challenges as the appetite for goods and services rose dramatically. Led by FMCG companies such as P&G, Unilever and Coca Cola, major marketers set up plants in the region and developed local markets and consumers. And, as “transition” economies have grown and become more market and marketing driven, marketing research has emerged as a fast growing industry.
The rise of marketing research as a vocation transformed academic institutions such as institutes of sociology and social research into commercially driven agencies, striving to provide advice and insights to brand owners. At the same time, business schools began to emerge within transition economies, and high school graduates began to study business and marketing related subjects in foreign universities. These provided the executives for the major market research agencies who all acquired a presence in the region, attracted by the opportunity represented by the “gap” between the level of marketing spend in the emerging economies and the more mature Western countries, and the double digit growth of the industry compared to the single figure increases which could be obtained in their traditional markets.
In addition, English has replaced Russian as the first foreign language studied in secondary education by the vast majority – especially those aiming to follow a business career.
Researchers have been playing an important role in helping marketers (and, for that matter, business leaders) make informed decisions by the creation of a marketing literacy. This has helped in defining marketing or broader business issues; identifying how facts and data can drive business strategy; and developing, researching, analysing and refining marketing concepts as part of a systematic process that both precedes and follows decision-making.
In a world where the consumer is exposed to a myriad of brand choices and advertising messages, the role of the researcher in distilling insights and providing decision support becomes critical.
The Road Ahead
The integration of former communist societies into the world of liberal democracies will no doubt continue, with those already in the EU standing the best chance of reaching levels of institutional as well as living standard parity in the decades ahead.
But the road is certainly not an easy one. The current economic crisis has had a particularly severe impact on these economies (even more extreme than in Western Europe, in some cases, such as Hungary, Ukraine and Latvia). As a consequence, local economies find themselves in the middle of a perfect storm, with the macroeconomic consequences of the evaporation of confidence in the banking sector and falling world commodity prices, combined with the bursting of bubbles in country property and equity markets, rising levels of debt and unemployment, national currency weakness and a reduction of remittances from foreign-based nationals. This, in turn, has led to social unrest, as evidenced by the riots which broke out in Latvia in January last year and which caused the ruling government to fall.
This huge dislocation in markets has led to a reassessment by many of the merits of capitalism and free markets, particularly among those who did not share in the benefits of the new era. A number of citizens of the region are becoming disillusioned with the capitalist model and are starting to yearn for the old certainties of the communist era. Perhaps the revival of old brands, regarded now as retro-chic, is illustrative of the inevitable nostalgia felt by many for the more predictable and “stable” years under communism.
However, while there will be major political and social consequences resulting from the current economic crisis, and threats to the stability of the newly established liberal democracies of Central and Eastern Europe, it will certainly not lead to a return to the past. There are still much greater opportunities for these countries under a free market system than there would have been in more stable but more controlled alternative. An example is the Polish city of Lodz to where Dell has announced its decision to relocate its European manufacturing base (away from Limerick in Ireland).
Russia, at least, has had prior experience of the type of economic crisis that the capitalist system produces, having lived through the crash of 1998 when the ruble devalued dramatically, government debt was restructured, foreign investment shrank, and the standard of living for many Russians fell. However, the response from marketers and the Russian people themselves was a resilient one, with businesses, particularly in the service sector, restructuring their product offerings to place the emphasis on value as opposed to quality. Restaurants began offering value meals, and FMCG producers and retailers introduced value packs while rationalising distribution as well as production. Even international marketers adopted a tailored approach to the straitened economic times, such as P&G, which introduced simplified and cheaper formulations for many of their products.
And while many foreign investors left Russia after the 1998 crisis, most major companies, such as Nestlé and P&G, saw it as an opportunity and stayed, cutting costs and adjusting all elements in the marketing mix as well as operations. One effect of this was a more rapid transition to local (as opposed to expat) management than might have happened under more favorable economic conditions. Maintaining their presence in expectation of better things to come did pay dividends as the economy eventually recovered.
This time around, the effects are deeper and truly global in scope, with the repercussions more far reaching as they shake the economic foundations of the protagonists of the global economy – US, Europe and Japan – and not just the so-called ‘BRIC”. However, it is to be hoped that a similar spirit of resilience and crisis economic management will prevail, and that marketers and retailers will adapt, survive, and eventually prosper once the world economy recovers.
Capitalism in the region is here to stay, despite the new challenge of the global slowdown, and the service industry needs to make the necessary adaptations to meet its demands and reap the attendant benefits. Marketers will continue to invest in the region, and they too face fresh challenges: not so much competing for the attention of new consumers, who by now have adapted to a wide range of brand choices, but in offering the best value proposition at a time of crisis and in getting the best return on their marketing spend. To succeed, marketers will increasingly need the market research industry to provide the strategic, operational and tactical insights to ensure better informed and more effective decision-making. In the course of doing this, there will be the inevitable balancing act of maintaining professionalism and quality standards in an age of budget cuts and cut-throat price competition. Marketers have shown resilience before and we can expect them to rise to the occasion yet again.
Tomislav Sunic “Zinoviev’s “Homo Sovieticus”; Communism as Social Entropy” “The World and I”, Washington Times Co, June 1989
Francis Fukuyama “The End of History and the Last Man”, New York, Free Press 1992
“Worsening economic crisis sparks riots in Latvia”, EurActiv.Com, 14 January 2009
Andreas Gergely and Gareth Jones “Tale of Two Cities in battle for jobs”, Sunday Mail, 22nd February 2009
A. Louzine “Enterprise Restructuring in the Russian Federation”, The Management Development Programme, unpublished paper, August 2000
Cliff Peale “P&G’s Russian Frontier: Booming market bears potential and challenge”, The Cincinnati Enquirer, October 5, 2003
BBC News “A Taste for the old East Germany”, November 5, 2009