Evgeny Klochkov - Evolutionary Models in Business

© Evgeny Klochkov, 2022

ISBN 978-5-0051-9258-5

Created with Ridero smart publishing system

Special thanks to Oleg Evgenievich Klepikov and Aleksandr Lukich Gaponenko.

Our first meeting with Mr. Gaponenko took place in the lobby of Crowne Plaza hotel in Moscow World Trade Centre in 2017. I was considering enrolling in the Doctor of Business Administration course in IBBA at the Russian Presidential Academy of National Economy and Public Administration, at the moment. Surprisingly, the meeting turned out easy to arrange and proceeded very naturally, despite the fact that I had set very difficult tasks, i.e. to understand and structure the mechanisms of ideology creation and functioning. I was concerned with the realisation that there were really few experts of that profile or at least someone who would have a deep understanding of the area. A couple of days after the meeting, Aleksandr Lukich called and said that he knew a specialist who could help me understand the issue. A few weeks later, I found myself in the office of PSYCHEA, sitting in a meeting room with a glass wall that turned opaque at the press of a button, providing complete privacy. Although I can’t say that it was the only amazing event on that day. Acquaintance with Oleg and the first 1.5 hours of the conversation flew by like one minute. It was a sprint. He fended off all of my ideas and suggestions, explaining it to me that they were far from what I really needed. I got caught up in thought in the evening. For the next 1.5 years, we had regular meetings to discuss my future thesis paper, but even formulating the topic appeared to be a difficult task. Time went by. After each meeting, I took my time to think and came back whenever new ideas or questions would occur to me. Oleg told me not to worry, because as soon as we found the right topic that was really important for me, it would very quickly “pave its way” on paper. Amazingly, he turned out to be right. Suddenly there it was! And on the day that followed another meeting, I just got into the car and made it to the sea to write my paper. It was early spring and the awakening nature was a true inspiration. The entire year that followed passed in formulating the vision that I describe in this book. Well, let’s start!

As an introduction to the book, the author offers for analysis two typical cases from the world of Russian business, which reflect the idea of this book. The first case is fairly obvious and lies “on the surface” – the creation of the Sukhoi Business Jet aircraft line. In the early 2000s, the Sukhoi State Corporation decided to diversify its product line and release a civilian aircraft. The stake was placed on the development of a short- and medium-range narrow-body aircraft. In 2008, the first Sukhoi Super Jet made its maiden flight. The company’s management decided to go further and enter the business aviation market. As a result, the Sukhoi Business Jet project was launched. However, while the company faced a number of more or less solvable challenges while creating the Sukhoi Super Jet commercial aircraft, the full-fledged entry into the luxury goods market proved to be an impossible task for the Sukhoi State Corporation. The company has so far failed to go beyond the niche of a producer of goods for the public sector and governments of some friendly countries. It should be born in mind that the company has a significant financial and administrative resource, as well as a very high-quality engineering school of aircraft construction, laid down back in the USSR, which allows it to keep a very high bar in the world arms market. From the technical perspective, some of the modern military aircraft of Sukhoi Group are unsurpassed in terms of their flight qualities and technical solutions. Thus, it is neither financial nor technical components that form the source of the problems of the Sukhoi Business Jet project. From the point of view of the model proposed in this study, Sukhoi Group sticks to the strategies that actually prevent it from entering a new market. If we draw parallels with nature, then the company can be associated with representatives of an arid desert, where resources are scarce, the choice of strategies is very limited, and the toolkit is straightforward. In Sukhoi Group, financing comes from the public budget, and the consumers of the products are also state-financed entities, i.e. the Armed Forces of the Russian Federation or of other countries. The customers’ preferences can be described in a standard requirements specification, and the finished products acceptance is carried out in accordance with an agreed algorithm. Meanwhile, the market to be penetrated in conformance with Sukhoi Group’s plans is governed by completely different laws. Drawing parallels with the animal kingdom, business aviation market players (e.g., Bombardier, Gulfstream, and Embraer, as well as separate divisions of Boeing Business Jets and Airbus Corporate Jets) are prominent representatives of apex predators with complex behavior patterns. Each aircraft is a separate project, implemented for a specific client and customised based on their specific preferences and wishes, the requirements being more exacting, the strategies being more complex, and the product being non-standard. To achieve this level of service, a state corporation needs a completely different nature, structure, a different corporate culture, and a different set of strategies. Sukhoi Group simply does not fit into these rules of the game. The chances of squeezing into this difficult niche using the usual approach are minimum. The only way out would be to create an autonomous market-oriented enterprise operating beyond the rules typical of state corporations.

The second case describes a more subtle and complex situation regarding selection of a top manager for a large company. This story unfolded between 2016 and 2019 and involved X5 Retail Group (Alfa Group) and Magnit retail chain. The shareholders of the Magnit chain of stores decided to entice the top manager of X5 Retail Group (Alfa Group) to manage a newly acquired asset, but the new CEO not only failed to repeat the previous success, but also led Magnit to worse results than those with which the activities had been started. As a result, the CEO was removed from the position. The development of the situation looks paradoxical outwardly. In the mean time, it can be assumed that the key mistake must have been the lack of understanding by the new shareholders of Magnit retail chain of the identity of their asset. Let’s study this case in more detail and first define the characters.

Magnit (legal name JSC Tander) is a Russian retail company that owns a chain of food stores. As of the first half of 2019, the retail chain consisted of 19,223 retail outlets and 37 distribution centers. The company’s own fleet of vehicles comprises about 6,000 vehicles. The company’s stores are located in 3,077 settlements in Russia.

X5 Retail Group (X5) is one of the leading Russian multi-format food retailers. The company operates stores in several retail chains: proximity stores under the Pyaterochka brand, Perekrestok supermarkets, Karusel hypermarkets, and stores “within walking distance” under the Perekrestok Express brand. As of the first half of 2019, the total number of outlets was 14,779, and the retailer had 41 distribution centers. Geographical coverage was 7 out of 8 federal districts of the Russian Federation. The transport fleet owned by X5 Retail Group consists of 3,830 trucks.

Thus, both companies are in approximately the same “weight category”. Magnit’s problems became noticeable in 2016, when the chain started lagging behind its main competitor, X5 Retail Group, in terms of growth rate. At the end of 2017, Magnit cedes the leadership in revenue in the Russian market to X5 Retail Group, its net profit getting almost halved – from 54.4 to 35.5 billion rubles. The asset actively falling in price is then bought out by VTB Group in early 2018, Sergey Galitsky, the founder of Magnit, selling 29.1% of the shares. Just a few months later, the VTB financial group resells a part of its stake, about 12%, to Marathon Group, an investment company founded by Aleksandr Vinokurov and Sergey Zakharov from A1.