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. Last Updated: 07/27/2016

Don't Judge a Business By Its Horizontal Ways

"Ladies and gentlemen - you are welcome! " Thus begins what, until only recently, was the standard boilerplate advertising copy for Russian firms seeking foreign customers. Then: "We specialize in. . ". followed by a long and frequently quite bizarre laundry list of offerings, from representational services to deer antlers.


Two observations. First, this kind of advertising is quickly fading away. Slick is in. Domestic business is discovering marketing and several new local advertising agencies are promoting international standards.


The second observation is that clever advertising notwithstanding, the underlying structure of many major and minor Russian businesses remains the same. They often do specialize in, well, everything.


This is called vertical and horizontal integration. When IBM, concerned about the stability of its microcircuitry supplies from third parties, buys into one of them, it is vertical integration. When a breakfast cereal manufacturer decides to start making chocolate bars, it is horizontal integration. Sometimes it's a good move, sometimes not.


Companies expand beyond their core business either because of external pressures - to secure supplies or to eliminate competition - or because they see a new business opportunity.


These are normal impulses. But in post-Soviet Russia, the forces "and pressures at play in business are at hurricane levels. and there are some long-established habits to contend with. Moscow's ZIL factory produces trucks, limousines and refrigerators. It is also in the real-estate development business, to ensure housing for its thousands of non-Muscovite employees, and runs its own bus service for its "city within a city". Clear signs of a firm nailing down otherwise unreliable sources of those things it believes it needs. For newer enterprises, especially beyond the comfortable networks created by the Communist Party and the economic ministries, securing supplies is an even keener problem. The civil courts are so overcrowded as to be ineffective, rendering contractual arrangements worrisome at best. and who knows whether the supplier you line up today will still be operating a month from now?


The almost inescapable conclusion is that Russian enterprises must expand - usually downward into the supplier arena.


At the same time, in a largely barren marketplace, the opportunities to do other things are extraordinarily compelling, so much so that even Western-backed businesses often find themselves doing things here they would never consider anywhere else. Competition, in a developed economy, is a useful discipline because it discourages businesses from overex-tending beyond their abilities. Here, that discipline is absent.


Together, these impulses keep driving Russian businesses outward, downward and upward from their principal activities. Newspapers spin off retailing arms, newsprint brokers and even advertising agencies. One of the big dailies in Moscow has already launched itself into import-export operations, in partnership with a French firm.


The ever-present danger in this kind of expansion is that the core business, the one in which managers gained their expertise, gets neglected. and where experience is thin and capital thinner, this has become one of the critical development problems facing domestic entrepreneurs.


However - do not assume they are handling it badly just because they offer rep services and deer antlers. This may be, depending on the company, an ideal business mix. After all, General Electric runs a television network. and ZIL's refrigerators are the best in Russia.