Notes on The Shakedown HBR Case Study

The Shakedown by Phil Bodrock

Initial Crisis: Extortion Attempt

  • Pavlo Zhuk, a software entrepreneur in California, receives a call from Kostya Hnatyuk in Kiev about a potential shakedown by the Ukraine Tax Authority (UTA).
  • UTA agent Laryssa Ossipivna Simonenko claims Zhuk's company owes $16,000 in tax arrears and wants to meet.
  • Hnatyuk suspects extortion and arranges security for the Kiev office.
  • Zhuk feels powerless and books a flight to Kiev to address the issue.

Background: Zhuk's Ukrainian Venture

  • Six months prior, Zhuk was enthusiastic about establishing a software development center in Kiev, driven by a desire to contribute to Ukraine's development.
  • Zhuk's parents fled Kiev during World War II, and he feels a connection to the country.
  • Hnatyuk, with experience in Ukraine, joined Zhuk to set up the center.
  • They aimed to create opportunities and build a modern society, defying concerns about political turmoil and corruption.

Initial Optimism and Challenges

  • Upon arrival in Kiev, Zhuk notes the increasing presence of Western fast-food chains, but remains preoccupied with the extortion threat.
  • Hnatyuk mentions the growth of Ukraine's IT sector, with over 25 medium-sized IT companies and increasing exports of IT services.
  • Zhuk's business model leverages Ukraine's skilled and affordable programmers, a legacy of the Soviet Union's strong technical education.
  • The company pays its programmers 66,00066,000 hryvnia, or 12,00012,000, which is double the typical Ukrainian programmer's salary.
  • Zhuk aims to provide a comfortable standard of living for his employees.

Early Lessons in Ukrainian Business Practices

  • Zhuk and Hnatyuk encounter difficulties obtaining telephone lines from Dnipro Telecom.
  • Manager Vasyl Feodorovych Mylofienko quotes reasonable official fees but mentions a three-year installation delay.
  • Mylofienko then offers to