Evaluation of the Czech Republic for Marketing Watches and Clocks Report

For my report for assessment item MRKT 19037 on evaluating a foreign country for marketing watches and clocks, I have chosen the Czech Republic, a CEE country and EU member. The purpose of my report is to examine the political, economic, financial, cultural, legal & other factors which may impact the efforts for marketing watches and clocks in the Czech Republic, analyze the advantages and disadvantages for the same, conduct a market analysis based on varying the market mix elements, and recommend suitable market entry modes

As stated, the purpose of the report shall be to assess legal, political, economic, financial & other factors that impact future watch and clock marketing efforts in the Czech Republic. It shall also identify and analyze the factors in the market, which may impact marketing strategy in an alternative overseas market in place of the already saturated domestic watch and clock market in my own country, Australia. Additionally, the report will analyze the Czech market by using the market mix, segmentation, and targeting, and positioning details & recommend a suitable entry mode.

In preparing the report, I shall try to utilize online sources like the World Bank, the IMF, the OECD, the EU, and the official Czech websites, which may be regarded as the most reliable and authentic sources for research, and other online documents; more direct sources of research like sample surveys may be done later on.

Executive Summary

This report examines the Czech environment for assessing the factors affecting the marketing of watch and clock products in that overseas country, including cultural, political, legal, financial, economic, and other factors that characterize the region, makes an analysis of the market based on a market mix, segmentation, market targeting and positioning for watch and clock products, as also deciding on a suitable market entry mode for launching the foreign products in the Czech market.

In preparing the report, the nature of the products to be marketed, the advantages and disadvantages resulting from the various factors considered and which are specific to the Czech Republic, and the nature of the market is considered. The various elements of the product-specific marketing mix, segmentation, targeting, and positioning details are outlined and analyzed and a suitable entry mode is recommended based on the country and market analysis so performed. The key recommendations are

1. select a conventional market entry mode via a strategic partnership with a local Czech enterprise having an idea of local conditions, language, market characteristics, access to & control over local distribution channels, etc
2. select an e-commerce entry mode by creating and using a website in English and Czech language, which implies availing the services of a Czech website developer with bilingual expertise
3. Build relationships with key decision-makers in the local Czech watch and clock market through government websites, offices or trade links
4. A suitable product mix would be a combination of large volume economy models at lower prices to help penetrate the new market and some higher-end models to cater to the increasingly consumerist Czech people

Introduction

The domestic clock and watch market are fully saturated and opportunities in foreign countries for marketing the products need to be explored. In this circumstance, an assessment of a foreign country-the Czech Republic-and the market for the product line has been made based on market and country analysis and also to decide on a suitable market entry mode. This is an introduction to a report on the same and is as follows:

Scope of the Research & Analysis

1. Study of the legal, economic, political, financial, competitive, and other factors as part of country analysis for arriving at an assessment of the advantages and disadvantages of doing business in the Czech Republic
2. Analysis of the product market based on a market mix, segmentation, market targeting, and positioning
3. Analyzing the suitability of various market entry modes based on the country and market analysis and recommend a mode of entry

Format of the Report

The report contains four main sections, which are:

• Discussions (Country Analysis/Market Analysis/Selection of Market Entry Mode)
• Conclusions
• Recommendations

Discussions on Major Issues

Country Analysis

The Czech Republic is a CEE country located in the center of Europe. It is a member of the European Union (EU) since 2004. It is also a member of NATO, the UN, the IMF, the OECD, the ILO, the WTO, and the Council of Europe. It is a democracy, a highly industrialized and open market economy with stable political and economic situations. An analysis was made on the basis of relevant data sourced from the Internet by accessing public domain materials available on websites of the Czech government bodies, US government sites, IMF, the OECD, the Australian Trade Website, and other websites & sources. The various political, legal, cultural, economic, financial, technological, and other factors were studied and on this basis, the following details are provided:

Political Stability

The Czech Republic is politically stable. It is a multi-party democracy, led by a liberal democrat. It is also a member of NATO and an active participant in all NATO activities. It is one of the most stable and prosperous post-communist economies in the world. The country is administratively divided into 14 regions and the regions enjoy varying and increasing degrees of autonomy and self-regulation

Geographical Location

The location of the country in the central part of Europe and its strong transportation network and good roadways make it a good business destination. Also, based in Prague, a business can successfully expand throughout the country since the market size is relatively small and the spread of knowledge on good products and services is more by word of mouth than by other channels.

Legal, Taxation & Administrative System

The legal system leaves much to be desired and is one of the grey areas that hamper business in the country. Commercial law is based upon continental principles laying emphasis on written & codified laws. As an EU member since 2004, EU laws are also applicable here. Businesses in the Czech Republic may take one of the following forms:

1. Branch.
2. Limited Liability Company (LLC).
3. Joint Stock Company (JSC).
4. Limited Liability or Unlimited Partnerships.
5. Cooperative.

Of these, the most common forms are the LLC and the JSC. New entities need to be registered with Commercial Registers maintained by Regional Courts or the Prague Municipal Court. The Commercial Code regulates commercial contracts and sales and licensing agreements. The legal system also places no barriers to trade and the Czech government has harmonized existing laws with those of the EU as also effected many positive judicial reforms

There are of course some difficulties faced by business firms in the Czech market. There is difficulty in enforcing contractual rights, the courts are slow to pronounce judgment in cases, and in many cases, judgments are not uniform and the judges have poor knowledge of commercial & IPR laws. Intellectual property laws need to be more strictly protected and enforced, registration of new firms needs to be quicker, although, from 2005 onwards, the commercial registration process has been streamlined. Issues of insolvency, which are dealt with in the bankruptcy Act, need to be improved.

The limitation period extends to 4 years but better legal support for recovering creditor receivables, particularly by foreign businesses, needs to be provided. Another pressing issue is that of rampant corruption both within and near the country borders and needs to be better tackled consistently over time.

On the better side, labor laws do not unduly impact employer interests, and union memberships, in a recent study, are shown to be actually decreasing over the years. This may effectively offset any administrative hassles faced by prospective businesses/marketers. In addition, the country has also been able to substantially address the competition law for facilitating seamless trading across the European Union as also with non-EU countries

The tax system in the Czech Republic is an important area for consideration for any future business venture with or import to the Czech Republic. For marketing goods and services to the country market needs to gain knowledge on the following taxes and duties in place in the country:

VAT & Excise

The VAT for both external and internal goods sold inside the country is 19%. A much lower 5% is charged on selected goods. VAT on goods imported by the country is assessed on declared customs value-added with applicable duty & excise

Tax on Profit

A 15% Withholding Tax is applicable on profits repatriated from the Czech Republic. In cases of the existence of double taxation treaties, as existing in the case of Australia and the Czech Republic, a lower tax is charged.

Corporate Income Tax

Companies are taxed individually and no consolidated returns are permitted and non-residents are taxed on income sourced from the country. The current rate of corporate income tax is around 24%.

Other Taxes

There are many other taxes like road tax, real estate tax, etc which impact the business entity exploring entry to the Czech market through mergers & acquisitions, take-over of existing businesses, purchase of Czech industrial property, etc. These need to be considered with respect to the attendant problems and long-term liabilities entailed

Most imports from countries outside the EU, including Australia, are levied a tax rate of zero to 15% with the average rate being 5%. Imports from Australia entail MFN rates. Tax incentives given by the Czech Republic are gradually being phased out.

Economic Conditions

The Czech economy is a free market and growing economy with a strong local currency (the Czech Crown) against other leading currencies like the US Dollar. High fiscal deficits coupled with strain on the government purse due to increasing social security outgo on account of increasing life expectancy rates are cause for concern. In 2007, the government has evolved a plan for tackling these and other demographic pressures.

The government is hard put to maintain the fiscal deficit below 3% of GDP. Reform is particularly needed in the social benefits system. However, the high PPP of the Czech consumer signifies the tremendous potential for the entrepreneur looking to invest in the Czech market, which factor is buttressed in no small measure by the favorable Crown against most other currencies. The amount of FDI in the Czech Republic to date is one of the highest among growing economies worldwide. International risk rating agencies have given an A rating to the country and this only reinforces the country as a natural choice for new businesses and investors.

However, inflation is a dampener, which may restrict the growth of real GDP to below 4% (down from the three-year 6%), as per the latest (2008) estimate. Also, the prospective investor has to consider the significant impact of exchange rate fluctuations on the Czech consumer market.

Product Certification, Pricing, Packaging, and Labelling

Specific goods require specific certifications or not at all, depending on the nature of the goods, impact on health and environment, etc. The use of nickel in watches requires adherence to specific regulations because of health & environmental safety considerations. All instructions for use, product description, warranty, etc must be in the Czech language. As regards packaging requirements, no particular provisions are there except for the need to provide sales contract number and the country of origin of the goods on the packaging/containers. The prices must be in MRP in the Czech Crown (CZK) must be clearly shown. This must include the VAT.

Also, Czech law provides for a 2-year guarantee period on all products sold in the market. High domestic demand, dropping interest rates and proliferation of credit cards are impacting growth as per a recent study on the Czech economy.

Education & Labour

The average Czech citizen is highly educated and has proven to be a cost-effective technical expert. However, only a few Czech citizens hold formal academic degrees. Hence, tertiary education needs improvement although the average aptitude in mathematics and the sciences among Czech students is more than in other European countries.

As regards employment, the official figure for unemployment in Oct 2007 was 4.9 %. In spite of low unemployment rates, labor in the Czech market is readily available, can be availed at cheaper rates than the EU average, and comprises a skilled & disciplined workforce, which can be effectively and productively employed.

Social, Cultural and Language Issues

Socially, the average Czech is formal and dignified and does not prefer to rush things, particularly business issues. He also does not like to be push-sold and would prefer to make his own choice on purchase and in his own time. He only likes to be called by surnames till he gets really friendly and familiar with strangers. The older generation is more conservative. The normal Czech citizen is well dressed, formally, and not flashily. Czech people are very courteous and hospitable. It would only build relationships if one were to accept food and drinks offered by a Czech and the average Czech does not like to feel rushed.

An impediment to prospective business could be the Czech language, which is both difficult and extensively used by the Czech government and business people (often the only language) whether in advertisements or on the web. This writer, in the course of his research and analysis, could not access very many websites in English, whether government websites on Czech issues or private websites of the local watch and clock manufacturers & associations. This means that the entrepreneur looking to enter the Czech consumer goods market needs the help of a capable bi-linguist who knows both the Czech and the English spoken and written language very well. Notably, all labeling on products sold in the local market should be in Czech, although other languages like English and German are also in use in the region.

Business Customs

Prague, the country’s capital is small and close-knit and most information spreads quickly by word of mouth. Therefore, a good impression of Czech contacts and businesspersons needs to be cultivated and relations built over time. One should slowly settle in rather than rush things. Punctuality is essential in all business dealings as the Czech values his time and dislikes hastily arranged meetings & programs. In addition, the Czech are gracious hosts, welcome business talks over extended lunch, and invariably always prefer working out issues in a relaxed atmosphere.

Security

There are no reported or perceived terrorist/security threats in the Czech region and it is a perfectly peaceful and safe region to do business in.

Market Analysis

Market analysis has been done based on the nature of the product, viz., watches and clocks as also the characteristics of the target market, viz., the Czech consumer goods market. Local competition in the form of leading, quality-driven, capital-rich watch and clock manufacturers (often complementing jewelry which is their main product) catering to a high-end consumer target market having higher purchasing power as compared to the Australian and other competing markets is present.

Additionally, the Czech consumer exhibits marked preferences for value for money and rely on solid after-sales support & guarantee services. In this situation, a price penetrating option for entering the market may be advisable, while, at the same time, higher-end product lines, irrespective of the cost factor, maybe marketed successfully.

Marketing Mix

The 4P model is taken into consideration. Accordingly, four factors were considered as follows:

Product

Increasingly, the watch is taken to be a fashion statement, in contrast with the decreasing propensity for using the watch as a time-keeping instrument. In contrast, clocks do not add fashion value and mostly cater to clientele seeking antique or exquisite pieces as collector’s items. Ornamentation by using gold and jewellery in watches is a trend whose global supply is improving in order to satisfy growing demands of the affluent middle class and growing consumerism in developing as well as developed economies. In this backdrop, marketing of the watches and clocks need to consider the target market characteristics like consumer purchasing power, preferences, service demand, etc. Thus a primary requirement for the market under study is that:

1. Quality of product & service is to be assured to market to the discerning consumer with diverse product and brand options.
2. A suitably packaged and high-end tailor made product line irrespective of cost considerations can be an option in a high-end, consumerist market
3. Brand salience, appearance, and value for money may be a better option as compared to a basic functionality approach in a high-end market
4. In addition, support, service quality and realistic & often-honoured warranty clauses may help retain and nurture business & client relationships
5. Quartz watches are cheaper, digital watches having high obsolescence rates and pendulum clocks are outmoded, although, these last may still be a collector’s prized possession.

Price

When marketing to a high-end and highly competitive consumer market, prices may need to be marked higher to offer the demanding consumer some discounts and/or complementary add-ons and still bring in substantial profits from sale of tailor made, exclusive products. At the same time, economies of scale may dictate a more long-term strategy for also featuring some economy and lower range product lines for catering to the general consumer. Such products may be more functional than fashionable and may bring in profits from sales volumes. Another example may be the targeting of office workers as also factory workers in an industrialised country or region.

Place

The maxim is “at the right place, at the right time and in the right amounts”. This implies an adoption of changing business situations and can often require a paradigm shift in the very way business is done. This requires a change in technology, attitudes, distribution channel choices, and a lot of other things. In a highly educated and economically self-sufficient country, with the majority having some knowledge of the computer and the Internet, it may be more profitable to advertise on a dedicated company website, than otherwise.

This may be used to supplement a more conventional distribution channel, particularly in the Czech case, where the market is already well established with strong and well spread out distribution channels and where, being a small market, the marketing can be controlled from a central point or location (like Prague). Time is also important in any business transaction and a successful market entry requires sound planning in advance and effective correlation with stakeholders for the enterprise to succeed.

Promotion

Positioning of the product in the target market also assumes importance for a successful market entry in a foreign country. Advertising, selling, sales promotions, public relations, etc –all play a vital role in positioning the products in the new market and consolidating on the toehold gained thereat. In a closely–knit market, where the good or bad word spreads through human contacts and word of mouth, an excellent first impression may well set the way for a successful, long-term and profitable international market enterprise. Effective advertisements, preferably by utilizing well known and celebrity Czech persons and in the local dialect, may work wonders in launching the products into the market.

Segmentation

The target market may be segregated into multiple segments for marketing the products. In the case of watches and clocks, a relevant segmentation may be:

1. Watches made as gift items, with prices ranging from economical to the exclusive, even some may be made based on customer requirements
2. Watches may be sold in pairs, i.e. a piece each for man and wife, as a single bridal gift item.
3. Watches may also target the more sporting and adventurous persons in society who may prefer very functional and flashy large sets for use.

In all cases, the entire consumer market is seen as a whole of various small target segments driven factors like social occasions, utility, appearance, etc. The entire efforts only strengthen the marketing efforts undertaken

Targeting

This implies either planning entry into specific sectors, i.e., targeting various sectors for successful entry, or even creating a niche or target market for the products line

Positioning

The perception of the new product, brand and company entering a foreign market needs to be enhanced through superior positioning of the product lines based on product features, utility, usage categories and occasions, and comparison with competing products in the market.

Key Market Elements

In an attempt to analyse the market, and basing the same on the identified strengths, weaknesses, opportunities and threats in the given market situation, a few important factors considered have also been considered as follows:

Market Size

The Czech market is seen to be a small and close-knit one governed by local conditions, with marked consumer preferences for premium & quality goods well serviced by after-sales service and warranty considerations. This is the major consideration both as to the present situation as also for assessing prospect of future growth.

In this situation, research pointed out to the fact that first impressions and the good word spread by satisfied customers were major growth initiators. The actual size of the market as derived from government websites like the Czech official ones and the US Commerce website point out to this factors. However, these are purely considered from indirect sources and need further analysis based on direct research.

Market Growth Rate

Based on a study of the demographic factors, sales figures as at present, and on simple extrapolation of present sales data, some positive growth trends can be discerned. The analysis has been derived, again from indirect government sources, and need more verification through surveys, consumer polls, etc

Market Profitability

Using Porter’s 5 forces measure of profitability, an assessment of market profitability could be made as follows:

Buyer Power

The Czech economy is a free market and industrialized economy. The PPP is high among European countries, and the Czech Crown is both fully convertible and placed higher than other leading currencies as compared on exchange rates. The local populace is technically advanced and exhibit market consumer preferences for quality goods and services. The market is consumer driven and growing. All in all, the buyer has multiple choices and can exercise his choice from available competing products.

Supplier Power

The supplier has the advantage of a growing market and profit oriented businesses can hope to evolve in the long term along the growth curve depending on its position in the business life cycle.

Barriers to Entry

The Czech market has few trade barriers and is an open market with the Czech Crown fully convertible. Government is also a attuned to the need for relaxing all trade and economical barriers so that it can invite more FDI and entry of business into the country. Only the administrative and legal issues need to be addressed. However, as a part of the EU, the Czech government is committed to EU guidelines and directives and the reform process, although tardy, is continuing along the right path.

Threat of Substitute Products

If quality is maintained and a proper assessment of the consumer preferences is made, there is no reason not to maintain relative position in the nascent market, even in spite of existing competition from local and international players from the EU and outside, from Hong Kong, China, etc.

Rivalry among Firms in the Industry

While there maybe intense rivalry among the firms, the market nature permits of a new entry of a foreign firm in so far as the market potential and cursory analysis that can be performed on the Czech market

Industry Cost Structure

This needs further study and this requires the help (often via paid subscription) of the global and local watch and clock industry.

Distribution Channels

The strong network of distribution and supply channels already present in the market can be effectively tapped for a successful new business venture.

Market Trends

This needs further research and analysis with respect to the local market for watches and clocks. However, available data from the Czech Statistical Office may be an indicator that there is further potential for growth in the industry (Fig. 2)

Selection of Market Entry Mode

A suitable entry mode is based on considerations like cost (manufacturing, transporting, distribution, etc), the favourable or unfavourable legal, economic, political, cultural, financial etc conditions in the target country, an analysis of the target market as to the consumer preferences, segmentation, purchasing power, etc. A qualitative decision may be made on the basis of results of country and market analysis. Other factors to consider are the particular characteristics of the product to be marketed, the degree of commitment with respect to time, labour and money in the venture, etc. The most appropriate market entry mode is arrived at for the particular product and to the selected country and market.

In the above respect, a study of the primary sources, viz. interview with the target market consumers, an analysis of the results of direct market surveys, interactions with prospective partners, country government heads, etc may be more accurate in arriving at a correct analysis. However, this report has had to rely on secondary sources, all web based, although some sources are governmental and more reliable than others. Also, a more quantitative research and study may be called for by considering the cost, and other factors peculiar to the enterprise company may actually be required to arrive at a final decision on the correct source of market entry.

Conclusions & Recommendations

The various country parameters like legal, social, cultural, economic, financial, tax, etc studied & highlighted in the foregoing pages provide material for analysing the suitability of doing business in the Czech Republic. In the most part, factors are favourable for entering the watch and clock marker in the Czech Republic. Analysis of the market based on secondary sources have also pointed to the fact that the market is profitable and needs a successful combination of product promotions and advertising and campaigns, as also suitable product pricing and market segmentation for catering to the highly consumerist and cash rich average Czech citizen.

The Czech market is a small and close-knit market, and word of mouth and simple person-to-person recommendations of a satisfied client itself may suffice to make inroad in the new market. Basing operations at Prague, most of the Czech countryside as adjoining parts of Eastern and central Europe may be successfully targeted for building a global marketing base. The high purchasing power parity, the economic factors, the growing consumerism, the existing consumer preference statistics, all point to certain decisive points for selecting a suitable market entry mode.

Thus, the key recommendations are select a conventional market entry mode via strategic partnership with a local Czech enterprise having idea of local conditions, language, market characteristics, access to & control over local distribution channels, etc. This will save costs, be a more initial viable option and be more suitable in the complex legal and administrative framework extant in the country at present.

Select an e-commerce entry mode by creating and using a website in English and Czech language, which implies availing the services of a Czech website developer with bilingual expertise. This is a primary requirement since the Czech people are increasingly using the new age tools like credit cards, and the Internet, as per latest available statistics.

Also, most websites and other agencies still use Czech as the only medium of communication and a local partner who already knows the local market intricacies, distribution channels, consumer preferences and consumer pulse and existing social and cultural conditions may be the only option to enter the market. (Other modes like franchising, licensing, LLC, JV, mergers and acquisitions are too time consuming, costly, cumbersome and risky in the present situation. Build relationships with key decision makers in the local Czech watch and clock market through government websites, offices or trade links

A suitable product mix would be a combination of large volume economy models at lower prices to help penetrate the new market and some higher-end models to cater exclusively to the increasingly consumerist Czech people (Manufacturing was a substantial 25.6% as per a CSO study, 2006)(Fig.3) This also means establishing a robust service and warranty structure. Regular interaction with the foreign partner(s) is essential in this regard.

Further research, both on cost requirements, and on the market based on primary research via market surveys, local interviews, etc is also recommended before a further plan is developed and adopted in the venture.

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Appendices & Illustrations