Novikov Group: Internationalization of the Russian Restaurant Business

Introduction

Internationalization has become exceedingly important for entrepreneurs as it helps them gain new markets and ground to expand their business. Many high-end restaurants, such as that of Alan Yau and Gordon Ramsay, are no longer confined to the domestic vicinities of their home country and spread their wings in international location.

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Internationalization has been defined as the process of business development globally. Internationalization strategy and organizational structure are closely related. Internationalization is a process of expansion of business to foreign geographical locations with the aim of growth. Internationalization in other words is the process of seeking new market avenues. However, these new markets are sought when the domestic market starts saturating. However, the researchers believe that different organizations, with varying structure of the organization follow different internationalization strategy. The reason this research is to understand how a firm undertakes internationalization process. Further, research on internationalization of restaurants is scant. The research will help to fill the gap in international literature to understand how a high-end speciality restaurant undertakes industrialisation strategy.

The present research adopts a cases study methodology to understand the internationalisation strategy of a speciality restaurant. For this purpose, the case studies the restaurants of Novikov Group from Russia. We choose a Russian restaurant for the research for Russia faces a concentration of fine dining experience in Moscow. Such concentration has resulted in high degree of competition. Intense competition has forced many players to look for geographical diversification. Further, the Russian fine dining restaurant industry has shown a negative growth rate of 1% in 2012. This has induced the top firms to move beyond the domestic boundaries. However, many small entrepreneurial operations that hold a niche market, have also tried to expand their horizons, and often it is observed that they have undertaken unconventional, unplanned steps to expand. Planned strategies have often been ignored by such ventures. This essay delineates one such form of internationalization. This paper is a case study analysis of the internationalization of Novikov Group. Novikov Group is one of the most important and successful restaurant chains catering to a high-end target, and operates in novelty fine doing restaurant industry in Russia. Recently they have started expanding their operations. This paper delineates the factors that are important for fine dining firms to consider while expanding internationally. Further, it also provides the areas that may cause problem for the expansion process. The paper will first discuss the literature on internationalisation and delineate a difference between internationalization of product and services. Then the paper will discuss the case of Novikov Group based on primary (interview) and secondary data (magazine and newspaper articles). In the end, the paper will discuss the differences in strategy undertaken for internationalization by Novikov Group and other services as demonstrated from the literature.

Process of Internationalization

Internationalization definition and motives

Internationalization is the process of expanding businesses to international locations. Vignali (2001) points out that internationalization is a process of “customizing marketing strategies” in order to serve to various markets of the world with different cultures and national differences. Acclimatization with local market is important for companies. This is so because due to cultural differences, the marketing mix as well as the consumers’ requirements also changes considerably (Czinkota & Ronnenken 1995). Taylor (1991) points out those firms should be careful that they have a structure in place that fits the international environment as well as has flexibility within the culture and climate of the organization in order to accept implementation of new strategic goals.

Tsai and Eisingerich (2010) points out that business from emerging markets like India, Taiwan, and Korea, have already begun to expand in international markets in sectors related to technology, value chain, and R&D market. Melin (1992) indicates that main strategies employed by organizations when they aim to internationalize their business are through acquisition, franchising or joint venture, and solo expansion.

The larger the company becomes, it becomes necessary for companies to become global in order to compete with the other companies. Further, it is important that companies localize a few of their strategies in order to carter to the local market demands. This is so because due to cultural differences, the marketing mix as well as the consumers’ requirements also changes considerably (Czinkota & Ronnenken 1995).

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Internationalization is a process of changing perspective or position wherein firms increase their participation and involvement in international operations across borders. Mintzberg (1987) points out that marketing strategy is about increasing international operations. This requires the company to change both its position and perspective. Internationalization has also been dubbed as the process of inculcating in global competition, which is believed to be the most important area of strategic international competition (Mintzberg 1987).

Internationalization process can be viewed as a sequence of processes. The first process is the product cycle process while the second is the internationalization process model. The product cycle model developed by Vernon (1966) pointed out that the cost-comparative-advantage theory is not realistic, and therefore, emphasizes on the role of product innovation and the effect of scale economies and the role of uncertainty in influencing trade patterns. The introduction stage is domestic, having its orientation in the country where the product was developed with an expanding demand in the country where the product was developed. When the products marketing is growing in the new locations, export activities increase and foreign direct investments in manufacturing plants are made in countries with an expanding demand for the product. In maturity stage, when major markets are saturated and the product standardized, the manufacture is relocated to countries with low labor costs. Finally, in the stage of decline, manufacture, and in some cases also the demand definitely leaves the industrial country, which was home to the original innovation (Vernon 1966).

Motives for Internationalization

Literature points out various motives for internationalization. For services organizations, top management plays a key role in the process of internationalization (Oviatt & McDougall 2005). However, research has stated that for US restaurant business internationalization is a not an effective growth strategy vis-à-vis their large counterparts (Park & Jang 2010). Increasing the profit opportunity may be one of the motivators for internationalization while others may be keen to be present in a leading market to convey the image of a global player (Abdul-Aziz et al. 2013). Larger companies tend to expand more towards regions where resources are in surplus as has been detected through a case of Danish architectural firms entering Germany in the 1990s (Skaates, Tikkanen & Alajoutsijärvi 2002). Further, research also shows that services are more likely to be demanded in international clientele and pulled to international locations than their manufacturing counterparts (Abdul-Aziz et al. 2013). Many firms also internationalize due to their target aim to follow their competitors; this trend is more apparent among financial services firms (Abdul-Aziz et al. 2013). In another case, some firms internationalize so that they do not miss on to some extremely lucrative opportunity (Abdul-Aziz et al. 2013). Hence, the motives for internationalisation for firms can be summed as follows:

  • Profit is a strong consideration for firms to adopt internationalization, as many firms seek profiteering opportunity in international markets.
  • Many firms moved to international markets in order to take advantage of regional resources.
  • Often, service sector firms have to move to international locations in order to meet their client’s demands.
  • Firms tend to internationalize their business in order to follow their competitors.
  • Many firms internationalize in order not to miss a profitable opportunity.

Models of Internationalization

One of the most important strategic decisions of a firm was to plan the mode of entry into a foreign market. The most common modes of entry into foreign market undertaken by firms are exporting, licensing, joint venture, and sole venture (Blomstermo, Sharma & Sallis 2006). As there is a difference in the degree of commitment of all the parties, and hence one particular mode is difficult to change into other due to the opportunity cost involved in such a change (Blomstermo, Sharma & Sallis 2006). Therefore, firms must be careful while selecting the right mode of entry. According to internationalization literature, the decision to internationalize begins with the selection of the foreign country where the company will enter. The foreign country where the company will enter is strategically decided. An entry mode can be defined as an institutional arrangement chosen by the parent company in the foreign market. Foreign entry mode strategy is the most critical decision as it influences all the future decisions (Blomstermo, Sharma & Sallis 2006).

Usually the entry mode is through an institutionalized agreement that ensures the entry of the firm’s products, services, technology, human resources, or all in the foreign market (Hollensen, Boyd & Ulrich 2011). The choice of entering a foreign market entails various decisions such as the choice of location of opening the business, and the level of control the mother firm will have on the offices in foreign countries. In such a case, either full control or partial control of the parent firm is acceptable, depending on the strategy of the company. Here control may be defined as the ability of the parent firm to have the power to influence the system, decision-making processes and methods used of the overall organization (Blomstermo, Sharma & Sallis 2006). According to research, a high control of the parent firm may enhance risk and increase profitability while a low control may lower commitment of resources and reducing profitability (Hollensen, Boyd & Ulrich 2011). Hence three mode of entry for a firm is possible – FDI through wholly owned subsidiaries or original equipment manufacturing (Hollensen, Boyd & Ulrich 2011). The latter, obviously, relates to a manufacturing plant, and may not be application to hospitality sector.

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The degree of control has a serious implication on each mode of entry chosen by a firm as their foreign market entry mode. Hence, choosing the right mode of entry is a complex task for the management, as this would enable companies to help or deter the momentum of sustained expansion (Hollensen, Boyd & Ulrich 2011). Hence choosing different levels of control for international expansion is essential for management of an expanding firm.

Though high commitment firms imply higher control and thus, higher risks, however moderate commitment may also be used to keep a balance between control and risk (Hollensen, Boyd & Ulrich 2011). For opening of intermediaries, high control may also be advisable, as this would ensure tight control over the subsidiaries run by franchisors.

The Uppsala internationalization model states that the current knowledge of the market influences them to take the decision to internationalize (Johanson & Vahlne 2009). According to the research conducted in 1977, it was found that companies started to export their products at an ad hoc basis. Formalization of the internationalization process was done later on. Further, the model also demonstrated that the tendency of the entrepreneurs was to begin their foreign operations at a location closest to home operation (Johanson & Vahlne 2009). The aim was to limit the psychic distance that inhibited businesses to move far off, thereby reducing the liability of foreignness. The primary reason for internationalization, according to the model is to strengthen the firm’s position in its current environment. According to the model, there are certain criterions that dictate a firm’s choices of internationalization:

The position of the firm in the network determines its internationalization process. Hence, the main firm will approach foreign markets and try to globalize their brand internationally with the aid of their partners. The focal firm, at times, follows the partner into a foreign market of the latter has a stronger hold in it.

Further, importance is given to the presence of a strong network in the internationalisation strategy of firms. The availability of market knowledge, trust, and commitment among partners may be uneven and hence, the process is found to be a desirable outcome.

However, many critics believe the scope of the model in the era of globalization is limited. However, one must understand that the enterprises usually undertake these considerations before entering the internal market.

Internationalization Strategy of Restaurants

Restaurants are unique as they provide a mix of product and services and both are essentially important in defining their performance. Most of the restaurant chains that have internationalized their business have employed franchising as a strategy to internationalize their business. Franchising, therefore, it is believed, will become the most used mode of entry into international markets for restaurant chains (Zeidman 2003). Even with the global meltdown, franchising is believed to be the most effective market entering strategy (Zeidman 2003).

Dunning and Kundu (1995) points out the increasing importance of internationalization of service sector with special emphasis put on the hotel industry. Their research was conducted on 110 multinational hotels through a questionnaire survey. The hotel executives were asked to scale their perception of the significance of the group’s operations abroad. According to the research, the greater is the imperfection in the market, the greater will the cost of entering the new international market. Further, their research also showed that a company derives its competitiveness through control of the quality of services in foreign operations.

Vignali (2001) provides a case study of the internationalization effort and internationalization marketing mix of McDonalds. The fast food chain involves in adopting a unified global strategy that remains same throughout all their operations. They sell standardized products, in standard ambience and prices. Their strategy is easiest to employ as product branding, packaging, labelling, and marketing mix remains the same throughout all locations. However, this may not be feasible for a high-end full-service restaurant.

Khan (2005) also studied the franchising strategy of American food chains and restaurants for internationalization. The restaurant business is the fastest growing sector of the hospitality industry and franchising corporations often expand their geographic locations abroad. Even though, the mode of entry may demonstrate certain initial hiccups and problems due to the global economic downturn, franchising is still believed to be one of the most accepted modes of entry (Khan 2005).

A case study of a specialty restaurant by Gordon Ramsay, a celebrity chef, provides great insight into the process of globalization that can be adopted by other specialty restaurants. Jones (2009) provided a detailed case study of the globalization process of Gordon Ramsay’s restaurants. The aim of the paper is to understand how small, informally organized firms, centred on the skill and brand name of one celebrity chef, to expand their international chain. Jones (2009) adopted a case study methodology. The study used various secondary sources like newspaper, magazines, and trade journals for collection of secondary data. The aim of the paper was to understand how the charismatic brand name and persona of Gordon Ramsay was internationalized. The paper analysed the Gordon Ramsay hotels through a theoretical framework called relationships and strategic capabilities (Jones 2009).

The overall findings of the case study are as follows:

  • The findings of the case study showed the restaurants run by Gordon Ramsay effectively leveraged the brand name and reputation in foreign markets in similar ways as it did in the domestic market.
  • The main problem that the company faced was maintaining the same high quality of service and product in all its establishments.
  • The case shows that with increasing number of restaurants and in greater geographical distance, Ramsay has less and less time to devote to each of his restaurants.
  • It also shows that it is important to develop strategic capabilities and leverage network relationships to help international expansion.

Internationalization strategy can also be observed from the expansion of the Buddha Bar, a Paris based high-end specialty restaurant, which has spread its operations in many cities in Europe and Asia (Buddha-Bar 2014). In 2009, Alan Yau internationalised his restaurants by opening a Hakkasan in Florida, USA, then in China (a joint venture with Swire Hotels) in 2013 (Vines 2008). The specialty restaurant provides flavours of various areas such as their specialty creative Pacific Rim cuisine with Asian, Hawaiian, Indian and Californian influences, combines fresh products, different cooking methods, a subtle blend of spices, exotic flavours and an enjoyable tasting principle, based on abundance and sharing.

In another study on the management of quality of an expanding chain of luxury restaurant, Meng and Elliott (2008) studied the relationship quality in luxury restaurants. The study revealed that relationship quality is increasingly emerging as a strategy for organizations that strive to retain loyal and satisfied customers in today’s highly competitive environment.

Lee and Hwang (2011) examined the influences of psychological characteristics (materialism, uniqueness, hedonism, and perfectionism), and demographic characteristics (gender, age, and income) on attitudes toward luxury restaurants. The results of the research indicated that consumers with high desire for materialistic and hedonic pleasure were more inclined to visit luxury restaurants.

The literature review of the restaurant internationalization resulted in further understanding the strategies the companies may have taken in order to internationalize their businesses.

Firms may enter foreign markets in many different ways, including exporting, licensing, and direct investment (Chang & Rosenzweig 2001). Our interest is limited to the choice of entry mode in foreign direct investment (FDI), defined as investment that involves ownership and confers effective management control. Other forms of international expansion, including exporting, licensing, and non-equity alliances, do not constitute FDI and are beyond the scope of this study. When undertaking foreign investment, firms face two basic decisions: whether to own all or part of the investment, and whether to set up a new investment from scratch or acquire an existing entity. Full ownership may be achieved either through greenfield investment, which denotes setting up a new plant or other establishment from scratch, or through acquisition, which denotes the purchase of a controlling interest in a local firm. Joint venture or partial ownership allows to pool in their capital and resources and work jointly in the operations. Joint ventures may at times be the only entry mode allowed by the host government, but in many instances are also the preferred modes as they allow a firm to limit initial risk, and later expand or terminate the investment depending on the joint venture’s performance or some other strategic consideration. This feature of joint ventures has been likened to a real option (Kogut, 1991).

According to research, the most important factor influencing the choice of FDI for entering a foreign market is based on three significant variables: product type (services vs. other), the immigrant effect and firm’s experience with the host country (Chung & Enderwick 2001). According to research, suggest that product type (services vs. other) is the most significant variable in the choice of FDI modes (Chung & Enderwick 2001).

Ni and Alon (2010 ) studied the fast food industry in the US. They showed that franchising has been a successful model adopted by the US based fast food industry. They studied the factors that affected the success of international franchising. They found that some of the US food chains focused on environmental factor while others on firm-level characteristics. The agency costs are affected to become higher with the expansion of international franchising. Thus, when a franchisor matures in the domestic market, the business will seek franchisors in international market.

Table 1: Consideration for Internationalization according to the Literature Review

Product Services Hospitality
Reason for Internationalization Profit
Regional Resources
Clientele demand
Competition
Opportunity
Mode of Entry Franchising
Full ownership
Joint venture
FDI
Entry Strategy Brand Name Important Important Highly Important
Partnership
Degree of Control Moderate Moderately high High

The literature review demonstrates the various strategies undertaken by firms depending on the product type. This information is assimilated in table 1. The tables show the reasons for internationalization for firms. The table segregates product type into three categories – product, services, and hospitality. Hospitality is taken as a third group as it is an amalgam of the first two. The table clearly defines the differences in the internationalization strategy of firms due to the difference in the product they offer and is further used to aid in understanding the primary requirements of internationalization for a hospitality firm.

Hotel and Restaurant Industry in Russia

The Soviet communism had a long lasting effect on restaurant business in Russia. However, with the fall of the communist regime, the Russian full service restaurant industry has a few big players such as Novikov Group, Ginza Porject, De Loss, and Kirill Gusev. These big players monopolize the full-service luxury restaurants. However, other smaller players operate with one or two restaurants. This section will review the external condition and state of Russian fine dining industry.

Presently, Russia mostly has upscale restaurants in its urban areas (Mack & Surina 2005). There were different types of restaurants found in post-Soviet Russia, namely exclusive restaurants or clubs, luxurious international food chains, fast food chains, and cafes (Mack & Surina 2005). The restaurant industry in Russia underwent a boom period with ever increasing middle class and demand for fast food chains. Entrepreneurs and businessmen found this sector an attractive area to invest. According to a report by Ernst & Young, the full-service restaurant industry faced a declining growth rate in 2012. This was opposed to an increasing growth of 1% in 2011. The reason that the report suggests is due to restructuring of one of the giant restaurant houses in Russia, the Rosinter Restaurants Holding (Ernst & Young 2011).

The success of the high-end restaurants in Russia is mostly due to the extreme income inequality that exists in the Russian economy. Extreme inequality is shown with the country’s 110 billionaires who hold 35% of the wealth of the country (Taylor 2013). The top 10% of the population in Russia held 31.68% of population in 2009 (Pasquali 2014). Russia had a total population of 143 million people in 2013. According to Forbes, out of this, 110 are billionaires (Adomanis 2012). With the increasing inequality of income, it has become apparent that the Russian economy is a booming place for high-end luxury products and services. Luxury fine-dining services, therefore, have found a potent ground in expanding their offerings in the country.

The hotel and restaurant industry in Russia has shown a growth of 12.2% in 2012, which was almost at par with the growth rate before the financial crisis of 2005 through 2008. However, in Russia the highest increase in the growth rate was in the fast food segment. Report suggests that the Russian fast food market dominated mostly by US-based fast food chains like McDonalds and KFC has increased by 18% in 2012 (Putiy & Hansen 2013). The overall restaurant sector in Russia grew by 12% in 2012.

Revenue and Growth of Russian Restaurant Industry (Putiy & Hansen 2013)
Figure 1: Revenue and Growth of Russian Restaurant Industry (Putiy & Hansen 2013)

Most of the food chains and restaurants have their outlets in prominent cities like Moscow and St. Petersburg. However, many of them are planning to expand their business regionally. One of the problems that restaurant chains are facing in Moscow and St. Petersburg is that both the markets are saturated and highly competitive, and operational costs are very high in these two cities (Putiy & Hansen 2013).

The Russian food chain market may be segregated into four categories of restaurants:

  • Fine Dining/Full Service restaurants. These restaurants have high prices and exclusive outlets. Some of the players in this sector are Novikov Group, Ginza Project, etc.
  • Casual Dining restaurants, which are affordable to the middle, class and provide family dining outlets.
  • Quick and Casual restaurants which mostly includes coffee shops like Costa Coffee run by Rosinter restaurant Holding.
  • Fast Food/Quick Service restaurant are subcategorized into two more categories including stationary and mobile fast food.

Among these, three segments clearly stood out. The first being the fine dining restaurants that cater to the high-end market, the second is medium priced casual dining restaurants, and the low prices fast food segment. Full service restaurants comprise 8% of the total number of restaurants in Russia.

According to the report, in the fine dining segment, the closest competitor of Novikov Group is Ginza Project (Putiy & Hansen 2013). The former owns 90 restaurants in all over Russia of which 84 are in Moscow. While Ginza Project has 94 restaurants of which 65 are in Moscow (Putiy & Hansen 2013). Novikov Group posed a growth of 18.4% in 2012 and Ginza Project 16% (Putiy & Hansen 2013).

The fine dining market in Russia is made its debut in the 1990s when there was a sudden opening of the economy when people were willing to spend but a dire shortage of high-end restaurants. The Russian fine dining is associated with names like Arkady Novikov, Andrey Deloss, and Ginza Project (Putiy & Hansen 2013).

Methodology

The study will be a qualitative case study analysis of the Russian restaurant. Case study is an ideal methodology to capture a rounded view of the problem in hand (Yin 2009). Various forms of case studies have been undertaken, especially, in social studies research. Yin (2009), Stake (2013), and others who have expressed wide range of theories and views regarding the utility and feasibility of using case study methodology in social science and business research. Case study allows the researchers to use a qualitative combined with quantitative methodology. It also helps in understanding a holistic view of the field of study. If a solely quantitative or mixed method is used, there is always a chance of concealing some of the details, however, a case study method helps in revealing the various viewpoints of a multiple source data (Stake 2013).

Yin (2011) demarcates three types of case studies, which are: descriptive, exploratory, and explanatory. Stake (2013) added a few other distinctions of case studies, which included:

  • Intrinsic – researchers usually have fundamental interest in the case;
  • Instrumental – when researcher’s target is to assess more than what is apparently observable;
  • Collective – when two or more cases are studied simultaneously.

Exploratory research is often considered as the initiation point of social research. They are usually used to do a casual investigation into the problem at hand. Before the project starts, it is important to have a descriptive theory that can delineate the method at hand (Stake 2013).

Cases study is not merely sampling of the mere facts that are available from the researched subjects. The data or information assimilated is not subjected to any form of sampling, which may exclude minor but vital information. Yin, Stake, and others have suggested that a case study is not based on singular sampling method, but is also based on multiple mode of data collection (Yin 2011; Stake 2013). The method approaches the case from the point of view of selecting all that can be achieved from the available study.

Qualitative research is a method of conducting research that helps in assimilating data rom various sources, in various methods. This helps the researcher to look at the problem holding different lenses, which helps in revealing multiple facets of the problem. Both the pioneers of case study methodology – Yin (1993) and Stake (1995) – seek to guarantee proper exploration of the topic of interest, revealing the phenomenon that underlies the research aim.

Why case study approach is the right method of analysis for this study? The reason is that it helps to ascertain the different aspects of the internationalization strategy of a particular company, which can be generalized in similar situations. While studying Novikov Group, it is important to understand the different operational aspects of the company. In order to do so, it is necessary to create a case study of the company’s operations that will help to look into the minute details of the operation to understand the process of internationalization adopted by the company.

According to Yin (2011) a case study methodology should be employed when:

  1. It is necessary to answer the “how” and “why” questions;
  2. To handle the behaviour of the people involved in the study;
  3. Utilize the conditions that can be contextualised in case of the case study; and
  4. Rebuild the boundaries associated with the phenomenon and the concept of the case.

Data Collection

The data for the case study was collected through sources on the Internet for secondary research. An interview with Arkadiy Novikov formed the primary source of information for the study. The interview was open ended, with seventeen questions. Questions were segregated into six sections – marketing and operational strategy, diversification, industry, performance, entry and exit strategy, and country specific and general questions. In total, there were thirty questions, of which only seventeen were answered. The interview with Arkadiy Novikov presents insights into the plans and considerations that the company undertakes while planning to internationalize their restaurants. The interview was conducted on February 17th 2014.

Case Study – Novikov Group

The case study of Novikov group concentrates on understanding the strategy undertaken by the group for international expansion. Novikov group had started their international operation with one restaurant in London. The case shows how the company has grown in the local markets and has expanded its operations in the international market.

Company Background

In 1991, Mr Novikov set up his first restaurant with a $50,000 loan from a wealthy Russian who ate in the Hard Rock-inspired restaurant Mr Novikov then managed. He has gone on to shape dining trends, start new fads and open establishments ranging from the cheap and cheerful Russian buffet chain Yolki Palki through to Bolshoi, a light, airy restaurant just a stone’s throw from the eponymous theatre, where the walls are hung with his business partner’s collection of fine art (Morarjee 2011).

The restaurant chain is a highly profitable unit, with the company making $30 million annually. The revenue earned by the Novikov Restaurant Group in 2006 was $180 million (Groskop 2008).

Novikov started his life with a cookery degree from the Novikov’s Cookery School Number 174. However, his initial training in cookery was from his grandmother and mother. He hailed from a modest middle class background. His father worked in an engineering company. After leaving cookery school, he worked two years in military services.

After returning from his army services, Mr Novikov joined a finance firm. It is there that he met his wife, Nadezhda, who runs one of the posh and exquisite flower bouquets in Moscow. He has two children who study abroad.

Until his late twenties, Novikov worked in restaurants, handling the business side of the restaurants to gain experience (Groskop 2008). From his previous experience, Novikov researched that connections were more important for fine-dining restaurant business than pre-planned strategies. He therefore states, “I soon discovered that it was not about how good you were but how good your connections were. Then, thankfully, perestroika started.” (Groskop 2008) Mr Novikov worked with the government cooperative in erstwhile Russia, where he acquainted a businessman who lent him a sum of $50,000 to begin his new business (Groskop 2008).

Sirene, the first restaurant of the Novikov Restaurant Group, was started in Moscow. However, due to the perestroika years, running a restaurant was impossible during those days. There were vegetables, eggs, or meat available in the market. Therefore, Novikov devised a means to counter problem by opening a seafood restaurant. This was a risky affair for during the time the scope of private businesses to flourish with all the logistical and supply chain problems was a difficult task. However, Novikov was successful in making a restaurant that flourished as a seafood restaurant.

The second restaurant opened by the group was Club T. This club quickly gained popularity in the Moscow circuit for its French delicacies. This restaurant was built in an old furniture shop. The restaurant soon gained immense popularity. After that, the group opened one of their most popular restaurants, in a renovated hunting lodge called the Tsarskaya Okhota (Tsar’s Hunt) in 1996 (Groskop 2008). However, it had to shut down its operations because it was impossible for the management to cater to its high standard due to overwhelming demand. However, after some time it was re-opened as a high-end buffet-type restaurant that served Russian food.

The reason of success of Novikov Group was its owner’s ability to understand the pulse of the Russian elites. After the fall of the communist party, there was an immense flow of liquidity, and people with money were willing to spend and have good time. The wealthy Russians were drawn towards the elitist, glamorous lifestyle. The success of the first restaurant was due to its décor, which had a glass floor, and underneath it, there was a huge aquarium. The guests sat on chairs on the glass floor and had their meals.

Some of the other popular restaurants and clubs in Moscow that are owned by Novikov are GQ Bar, Vogue Café, Vesna, Galereya, Nedalny Vostok, Cantineta Antinori, and Uzbekistan. Each of these restaurants has a different ambience and services. They cater to s specific group of people. For instance, GQ Bar is a huge, opulent restaurant, which gives an ambience of “gentleman’s club” and on the other hand is Uzbekistan, which serves traditional Uzbek food and entertainment. Even though Novikov Group is almost a monopolist in the Moscow circuit of restaurants, it has some strong competition in the category from other restaurants. Novikov Restaurant Group is almost a monopolist in the Russian high-end restaurant industry with 45 restaurants under its aegis (Ernst & Young 2011).

Mr Novikov’s interview shows that he is an extremely focused person and believes in what he does. He a man of spontaneity, and does not believe in revealing much about his business strategy. Most of the success of his company, he rests on situational opportunity, right timing, and perseverance. However, his determination is unmistakable and one can deduce a pattern, which he follows. The three rules, which he follows, are:

  • The first rule that he follows is to take substantive risk to expand his operations; however, he does not invest on his own, but attracts investors to become his business partners. In a way, he takes risks in venturing into new avenues, but minimizes it by taking in partners.
  • The second rule that he follows is to retain maximum control even when he is expanding (Ernst & Young 2011). Mr Novikov does not like expanding his projects at a pace that would force him to give away control of the restaurants to other managers. Instead, he likes to expand but retain control with himself.
  • Putting attention to details of restaurant business in important to Mr Novikov (Ernst & Young 2011). The third rule that he vehemently follows is attention to details. He has a keen eye for details and stresses on maintaining it in all his restaurants.

Competitive Landscape

The competition in the Russian restaurant industry is intense. Novikov Group faces strong competition from its direct competitors like Ginza Project and De Loss, and Kirill Gusev. A few of the new entrants in the fine dining segment in Russia are Restaurant Syndicate owned by Kirill Gusev. Some of the restaurants, which have gained popularity in Moscow, are Bistrot Moscow, Beefbar, Oblomov restaurant, Osteria Montiroli (Trendy Moscow 2013). Novikov Group also faces stiff competition from the Ginza Project, which started in 2003 at St. Petersburg. Presently, the company owns almost 100 restaurants in various cities in Russia. The group focuses on serving international cuisines like Japanese food. Some restaurants that have gained popularity are Balcon, Prado Café, and Elargi (Trendy Moscow 2013). Some other players in the fine dining market are restaurants operated by Andrey Dellos who owns 10 restaurants called Pushkin, Shinok, and Turandont restaurant. Another small chain with just three restaurants called El Gaucho have also started to climb the stair of popularity steadily. Another group that poses serious competition to Novikov group is Anatoly Komm runs 3 restaurants that found its place in world’s 50 best restaurants in 2011 (Trendy Moscow 2013).

Fine dining as a whole faces competition from the ever-growing Russian fast food market. Even though in 2012 food was the fastest growing segment, fine dining full service restaurants’ growth fell by 1%. However, the Russian fast food market has posted a growth of 19% in 2012 (Euromonitor 2013). Fast food is a substitute for fine dining and not a direct competitor. However, they pose a strong competition to the fine dining industry.

On the supply side, the industry does not face too much constraint, as there are many suppliers for raw ingredients. However, as many of the restaurants serve international cuisine, importing these ingredients from their inception land becomes a key success factor for fine dining experience. International suppliers are less and stronger and hence has certain power over the service sector’s operations.

Novikov Group faces strong competition from the rival company – Ginza Project, owned by Dmitry Sergeev and Vadim Lapin. They specialize in Japanese food and they democratized the process of Russian food chains that offered food at a low cost. Two of the main characteristics of Ginza Project restaurants are their locations and quality of food. Their restaurant was called Yaposha. They mainly served sushi in their menu; however, they had a few Russian dishes available for customers who did not eat the raw fish. The company presently owns more than 100 restaurants in Russia and around 50 restaurants in Moscow and St Petersburg.

The group’s first concept restaurant, Ginza was opened in 2003. The restaurant served traditional Japanese cuisine. The company presently has 45-46 concept restaurants and they open 15-16 restaurants every year. Ginza coordinates with the local celebrities to begin new projects. Some of these projects are restaurants in association with Ksenya Sobchak (former reality TV personality), Vasiliy Tseretli (a famous artist), and other TV personalities like Ivan Urgant. Ginza and Novikov Group has recently opened a restaurant in joint venture called Francesco.

Internationalization of Novikov Group

The first international operation of the company is two years old. The company opened its first international venture in London. Mr Novikov explains that the he had intended to open a restaurant in London, but did not undertake a formal plan to open the chain. He explains that he often visited London for personal reasons, and wanted to utilize his time while in the city. There was no formal plan or strategy devised before opening the first restaurant in London. According to Mr Novikov he had planned the opening of a restaurant in London almost a decade before it was actually opened: “Ideas were initially different, we wanted to open the Uzbek restaurant like Uzbekistan, Vogue café, it was long ago, about 8-10 years ago. In addition, I wanted to open Sirena restaurant. All this was so, at level “I want”, but I didn’t do anything.” (Quote from the interview)

The restaurant in London is a 540-seater establishment takes more than £100,000 in sales everyday (Riley-Smith 2013). The restaurant has a turnover of £35 million per annum.

The lack of initial planning or strategizing for entering the market is apparent in case of Novikov group as has been stated by Mr Novikov in the interview. He states that the impetus to open the restaurant actually appeared when the retail place was found vacant, and he just applied for the place. Mr Novikov also mentions that he initially lost the bid, which was given over to the Alan Yau’s Hakassan, but later he was called by the realty agency because the other group did not take up the place. However, from the interview it is clear that Mr Novikov did not undertake any market research to identify the location of the London restaurant as the strategically correct place, which is unlike the literature reviewed earlier that states for market expansion strategic planning is essential (Blomstermo, Sharma & Sallis 2006; Hollensen, Boyd & Ulrich 2011). Rather, it was a place chosen out of convenience rather than planned intent. In a way, the need to enter the foreign market was more of a convenience option for Novikov Group rather than a planned strategy. In this way, the reason for it entering a foreign market is closer to the last reason presented by Abdul-Aziz et al. (2013).

The choice of the services and food that would be served in the restaurant was not decided after a market research but was based on the food preferences of the local customers. The preference was judged through general understanding rather than analysis of primary market research data. Instead, it was decided arbitrarily. The restaurant served two foods – Asian seafood and Mediterranean food wit a bar themed on Far East. Apparently, none of the restaurants adopted Russian theme or served Russian food.

The lack of market research in market entry is apparent. While opening the store in London Mr Novikov confesses of not having done any market research: “I never conduct any researches.” The primary knowledge of the taste and preference of the customers’ choices dictated Mr Novikov’s decision to serve Asian food. Mr Novikov mentions: “I understood that I should make Italian, Asian restaurant and bar as it is the most three demanded categories in London.” The case study of Gordon Ramsay demonstrates that the reason for fine dining restaurants to expand is to counter risk in the domestic market of increasing competition (Jones 2009). Gordon Ramasay’s status as a celebrity chef of a popular television show helped him to leverage his entry into foreign market. Similar advantage is missing in case of Novikov group.

Mr Novikov’s strategy of finding a good partner in a foreign market before entering it is similar to that presented by Dev, Brown and Zhou (2007). Dev et al. points out that the method adopted to enter the foreign market, “depends on aligning the firm’s advantages (and shortcomings) with the market’s resources and business conditions.” (2007, p. 14). If Mr. Novikov’s strategy of entering foreign market is reviewed under this light, he adopted the right strategy, best suited to his advantage.

Considerations while Opening a New Restaurant

Availability of Retail Space

Discrepancy in the theory and the practice of entrepreneurs is apparent. Academic literature premises that businesses plan thoroughly while entering new and/or international markets. According to the interview with Mr Novikov, it was clear that most of the restaurateurs entered new markets without any initial preparation. They took the option of entering a new market the moment, they found an empty retail space. Mr Novikov has given the example of Krispy Kreme, which took up the franchise in 2008 to enter Russian market. They entered the market when there was an availability of the retail space. Choosing a proper location to open the restaurant in a foreign land has been stressed as an important consideration by restaurant internationalization literature (Dev et al. 2007).

Cost Consideration

Cost is an important problem for small businesses. Literature shows that cost for small entrepreneurs entering global market is mostly entailed due to the training cost of acquiring and exporting firm know-how (Blomstermo, Sharma & Sallis 2006). In case of restaurant industry the cost is higher as there are two fold considerations – 1) maintaining the quality of food, and hence sustaining the flow of raw material, and 2) cost of training the local partners (Dev et al. 2007). However, the cost that Mr. Novikov presents is separate from that presented in the literature. While expanding into new markets, they are usually not aware of the ground realities. Getting a retail space in a prime location is difficult, especially for the rising prices of retail spaces. In case of Novikov Group, the company could not acquire retail space in London as the prices were too high, and was not feasible for the company to enter the market at such high cost. However, with the increase in the retail prices it has become extremely difficult for the smaller businesses acquiring prime locations.

Importance of Time

Time is of essence, said Mr Novikov. There is a great deal of change in the economic slowdown. Many operations had closed and many new one opened. For instance, Alan Yau opened many new operations and again closed many at the right time. His timing has been impeccable and understanding of the financial condition of the industry correct, which helped the company expand its business. That is why Hakassan has an outlet in all major cities around the world.

Partner and Connection

Knowing the right people in the location is important. For instance, the restaurants of Mr Novikov in St. Petersburg are always swarming with celebrities and the well-known personalities. Their presence instantly increases the brand value of the restaurant and helps placing the restaurant in the luxury restaurant category. The presence of the right people associated with the restaurant helps increase the credit of the place. Further, connections help in setting up the restaurant and in marketing of the place.

A new restaurant usually has an inverted bell shaped curve with a flat top. A restaurant business has a rising growth curve when it begins its operations, and then gradually the growth curve flattens, however, usually it starts falling down. According to Mr Novikov, in the initial years of the operation the business is always successful, if it is opened in the right way. The initial year of operation is usually enough to break even. However, when the brand starts depleting after some year, operations are hampered. However, some restaurant businesses are exception, such as Zuma, which has been in business for more than 10 years, and yet has kept on reaping profit. The three things that Mr Novikov feels is important for beginning of the operation – the apt time to begin the operation, the right location where to open the restaurant, and to understand who are the important people in the location.

Mode of Entry

Mode of entry is an important consideration for businesses. How to enter a market is an important decision for many of the companies who enter the new markets. Mode of entry is an important decision for firms entering a new market. Usually, companies adopt joint ventures, franchising, or FDI options for entering the market. In case of Novikov group the CEO mentions in his interview, that he is more comfortable with opening fully owned restaurants. The restaurant the company opened in London was a fully owned subsidiary of the group. However, in Dubai the company undertook the franchise option. Franchise option is a new idea to the CEO and he is sceptical about the way the restaurant will operate when he is not in complete control of the operations. Though he mentions that the chain that took the license for the operation was experienced in running nightclubs and Japanese restaurant, Mr Novikov was not confident until he saw the operations himself. There are many operations in the restaurant business, which has to be operated in the working of the restaurant. He feels understanding the operations of the franchise are important before he undertakes other operations. He states, “A lot of companies asked me for license, Qatar, India, Geneva. But I want to open this one, look how it goes, and look what will happen when I won’t be in charge of everything.”

It is important to understand in case of small entrepreneurs the desire to control all the operations is an impediment for the expansion of the business. The desire to retain control of the operations prevents many restaurateurs to give franchise to other foreign operators. As quality is an important consideration for the operations of services, it is imperative while expansion maintaining the quality of service of the restaurants (Jones 2009). Internationalization is an important option for the expansion of businesses in the age of globalization. Luxury restaurant businesses usually run at the behest of the chef who is the owner. The chef becomes the brand and the restaurant quality is important (Jones 2009). For any services, maintaining quality of the products and services is important.

Mr Novikov mentions in the interview that he is not very comfortable in operating a franchise for he has not done it before. Further, his scepticism to start a franchise in Dubai was apparent during the interview. Though he says, that he had given out license to a group in Dubai but he is sceptical with this option as he may loose control over the operations of the restaurants. In all the restaurants, he owns in Moscow and London he has the highest stake in them, and holds operational control. However, with licensing, he has to leave a part of the operation to the license holders. Mr Novikov appears not very comfortable with this option.

Managing Businesses Abroad

The problems of ownership and control decisions are primary for all restaurant and hotel expansions in international locations (Dev et al. 2007). The wisest decision is to separate management operations in domestic and international market. There are two primary concerns regarding the ownership and the management stature – 1) whether the international concern will be owned by the main company and 2) whether the property will be owned by the company, managed by the company or the local management. One of the important factors in expansion process is the expansion of firm’s knowledge in the expansion process in hospitality industry (Dev et al. 2007). Every organization has some tacit and codified knowledge, which become the factors in success of the companies. Codified knowledge is the knowledge, which are easily identified and can be transferred. These include design and structure of offering services. The tacit knowledge is abstract knowledge and cannot be transferred. These include the firm’s culture, business routines, and processes. In case of Novikov Group, the problem of transfer of this knowledge to their international businesses seems to be a problem.

Novikov group appoints local staff for running of their international operations. Hence, not all the tacit knowledge can be transferred to the international restaurants. Further, the interview with Mr Novikov shows that there are cultural differences in the Russian and English settings. In terms of human resource problems, Mr Novikov points out that in Russia it is possible to solve issues without the mediation of the lawyers and in England, for any issue, one has to take legal help. Further, employees in Russia can be cajoled to do some work. The use of “whip” is possible in Russia while in England; no such thing can be done. Further, language is a problem with Mr Novikov and speaking in English in England becomes a problem.

Expansion Plans of Novikov Group

Expansion plans of Novikov Group evolve constantly. Mr Novikov mentions that that company is already opened four more restaurants in London. Another restaurant is about to open as a franchise in Dubai. The company has even opened an exclusive premier club in London.

Table 2: Comparison of Internationalization of Novikov Group and Literature Review

Literature Novikov Group
Issues of Internationalization Cost Cost of training of foreign employees Cost of retail space
Opportunity Also mentions other opportunities like demand for the food type, etc. Availability Retail Space
Profit Expansion of business Expansion for convenience
Competition
Brand Name Leverage brand name Leverage the celebrity status of the restaurants
Degree of Control Higher control increases risk Tries to retain full control
Quality Quality is a concern for hospitality sector Mainlining quality is essential for success of restaurants
Mode of Entry Joint Venture Often advocated No
Full Ownership More comfortable with full ownership
Franchising Fast food chains One restaurant in Dubai franchised out as an experiment

Recommendation and Conclusion

Theories on internationalization states that initially firms acquire experience by operating in the domestic market before plunging into the process of going global. The Uppsala model of internationalization presents the structure that usually forms follow to internationalize their business. The process of internationalization of the Novikov Group followed the initial trends as predicted by the Uppsala Model (Johanson & Vahlne 2009) wherein firms first try to enter the foreign market closest to the domestic market. The areas of difference between the internationalization processes of Novikov group and that derived from the literature on internationalization is demonstrated in table 2. Firms usually try their experience and skills in the domestic market and once they gain enough confidence, they venture out to foreign locations (Khan 2005; Abdul-Aziz et al. 2013). Novikov Group initially operated in their domestic location. On the contrary, Novikov Group had most of their operations in Moscow where Arkady Novikov lives.

Table 3: Number of Fine dining restaurant operators in Russia

Number of restaurants in Novikov Group Restaurant Syndicate Andrei Dellos Ginza Project
Moscow 48 21 10 45
Other cities in Russia 0 31
Total Russia 48 76
International Location 4 0 7
Total Number 52 21 10 83

Table 3 shows that Novikov group has the highest number fine-dining concept restaurants in Russia. It is the market leader in terms of number of restaurants. However, most of the restaurants owned by the group are located in Moscow. 100% of the restaurants that the group owns are in Moscow, creating a locational barrier to growth for the company. As these restaurants are located in one city, there is a problem of cannibalization of their own customers. On the other hand, Ginza Project has spread its restaurants across Russia with only 66% of the total number of restaurants owned by the group in Moscow. This spreads their risks and helps in geographical diversification.

This figure also validates Mr Novikov’s tendency to keep all the operations close to where he can monitor them personally. As he is based in Moscow, he prefers to have all the restaurants close to where he can personally monitor their operations. That is why he has shown immense scepticism at the franchising his restaurants, which he has tried as an experiment in Dubai. However, he is not sure if that will be successful. He instead wants to wait and watch how one of the franchising option works. This approach demonstrates a lack of planning and risk aversion. Proper planning for internationalization is essential. Erratic and spontaneous decision to expand may become successful in a few cases, but for consistent and sustained success, firms must ensure established strategy. Hence, the recommendation to the company is to establish a proper strategy for internalization.

One of the important aspects of internationalization according to the Uppsala Internationalization model is that the focal firm must have an established network through which it can spread its operations to different geographical locations and there must be trust in the network. The trust factor is depleted with Mr Novikov plainly stating his anxiousness about franchising his brand. The lack of trust may become an impediment to internationalization of the group. Working with collaborates, whether through franchising or FDI, it is important to have trust and commitment toward others. Without network trust, internationalization becomes a problem. Therefore, Novikov group has to establish trust on its partners in order to ensure smooth internationalization process.

Cultural difference is a big impediment for proper adjustment in foreign land. Mr Novikov states that one of the biggest differences between the restaurants in Russia and the one in London is that there they have to speak in English. Further, the people who visit the restaurants are different. This, obviously, is due to the difference in culture of the two countries. Further, handling of the employees also becomes different as the cultural mores are different and people act and behave differently. Therefore Novikov group should try to enforce one organizational culture. Instead of adapting the company’s culture to that of the national culture, the company has to have similar culture within the organization irrespective of the location.

The Russian market for fine dining restaurants is almost saturated with many players coming up in the Moscow area, which is the prime location for such novelty restaurants. Though Mr Novikov confidently mentions that the competitive advantage that the company holds are the locations of their restaurants, their experience which they have gained as pioneers of fine-dining restaurants in Russia, and their brand name. In case of service sector, if these are maintained a company may become successful, but expansion of the geographical location is a different issue. In expansion plan, one has to consider the impediments to expansion maintaining service quality, service offerings, and ambience. The service quality is an essential part of the restaurant business and offering high-end service quality is an essential consideration for fine dining restaurants.

The mode of entry of a firm as discussed in the literature review shows that in case of foreign entry high control may provide greater profit but enhances the risk of doing business in a foreign land. However, in case of wholly owned subsidiaries, as in case of Novikov Group, the control if put at a moderately high level it is better, as that will dissipate the risk as well as maintain a high degree of profitability.

The above-discussed issues are the two main problems that plague Novikov Group and may become an impediment to its diversification and internationalization plans. Therefore, a certain amount of planning is necessary for sustained success of restaurants.

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Appendix: Questionnaire

This is a set of questions for the interview.

Internationalization

  1. Why did you make the decision to enter foreign market? When do you think it is a right moment for an entry into the new markets for companies in restaurant industry? Do you think that it is really important to enter the foreign markets?
  2. Why after Russia Great Britain became the first market abroad?
  3. Arkady Novikov group of companies already successfully opened 3 restaurants in London and more projects are in progress now. Where else do you plan to start business? How do you choose the new country, whether there are certain criteria?
  4. What strategy do you use entering new market? (FDI, franchising)
  5. What are the main features of doing business in London in comparison with Moscow?
  6. How you propagandize experience of high cuisine for foreign public? Whether there are any global tendencies in high cuisine which need to correspond?
  7. What about your plans to increase the presence in the Russian and foreign markets?
  8. For projects abroad do you select local staff? Is knowledge of Russian language important?
  9. Who are the top managers in London, local or Russian specialists? The management team is centered in London or control is accomplished from Russia?
  10. With which suppliers do you prefer to work abroad, local or export from Russia?

Industry

  1. In your opinion does the industry is rather developed, is the competition high and whether is there a potential for further development in Russia and abroad?
  2. How can you characterize the industry? Is there a large number of large players and proceeding processes of enlargement or small players prevail?
  3. Who do you see as your competitors? What is your competitive advantage?
  4. How the group copes with the competition from other restaurants of your segment? Which are the main features of your positioning in comparison with competitors?
  5. What are the main differences of activities of your restaurants in Russia and in London? Are there any standard approaches or any special features are used?
  6. How competitive is the market at the international level and how the group plans to succeed among competitors?
  7. Does the group feel strong pressure from the competitors in the foreign market?

Entrance and exit strategy

  1. What requirements do you impose to the partners? On what conditions restaurants in London are created?
  2. What are the distinctions in strategy of expansion in Russia and abroad?
  3. In one of the interviews you mentioned that you gave the license for Novikov restaurant opening in Dubai. Is it your first experience of franchising? Are there plans of further expansion through franchising? Why in Dubai you have decided to go through the licensing, instead of opening restaurant independently?
  4. Are the restaurants same in London and in Russia? To which extent the Russian consumers differ from English and Arab?
  5. Which obstacles the group faced while entering the international market? How they are overcomed?

Diversification

  1. Now the group of companies in addition to restaurants also include: greenhouse complex JSC Agronom, network of floristic salons “Studio of Colours 55”, Novikov Catering, the restaurant and entertaining project “October”, luxury-segment real estate Mainstreet and the company on production and delivery of diets and healthy food Just For You. Why such versatile range of activities?
  2. Do you plan opening all these projects abroad or only some of them?
  3. Is diversification important for success?

Activities indicators

  1. What are the financial results for 2013 in the foreign market and the Russian market?
  2. What are the growth rates in Russia and abroad?
  3. What is your market share abroad? What is market share in Russia?
  4. How many restaurants were opened in 2013 in Russia and abroad? How many projects are planned in 2014?
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