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Strategic Management

Strategic Management

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    Ice fili done Ice fili done Document Transcript

    • MGT 5794 Strategic Management Spring 2006Ice-Fili: Winning Strategem in a Contemporary Venue -Team 5- 900-22-7377 904-46-8228 904-47-4673 904-50-0701 904-50-7922 904-52-3718 February 13, 2006
    • Executive Summary Ice-Fili had been successful in the past, surviving various tumultuous times including thetransformation of the Russian closed economy into an open economy and the financial crisis in1998. As Russia’s largest domestic ice cream producer, they had held onto their marketleadership for many years. However, increasing competition from foreign companies, along withthe emergence of regional producers of ice cream led to Ice-Fili’s market share erosion in therecent years. Porter’s five forces model was the primary method to analyze Ice-Fili’s industryand its competitiveness in the industry. Segmentation analysis was used for further study of theice cream industry in Russia. The analysis was carried on key variables like distribution channel,buying behavior, geographic locations, and product characteristics. Based on this model, variousalternatives were considered. From these alternatives, it was possible to form a recommendation:Ice-Fili will need to focus on the strengthening of its distribution channel through various effortsincluding marketing and raising of capital while focusing on its long history and brandrecognition. Above all, availability of its product to the consumers is the key to Ice-Fili’ssuccess. 2
    • Porters Five Forces In order to analyze the industry and environment of Ice Fili, Porter’s five forces modelwill be used to assess its competitiveness in the market. An illustration of the model specific toIce Fili is displayed in Exhibit 1. The analysis will lead to the identification of variousopportunities for Ice Fili, along with determination of the most appropriate strategy andassociated milestone for the strategy. Buyers are people or organizations who create demand in an industry. If buyers havesignificant bargaining power, industry returns can transfer to buyers in the form of lower prices.Buyer power is determined by various factors such as switching costs, the relative volume ofpurchases, the standardization of the product, elasticity of demand, brand identity, and quality ofthe products. Buyers are presented with many choices when selecting a product in the ice creamindustry while distributors have the power to decide which products will be available tocustomers. Absence of preservatives and a high proportion of milk fat differentiate the domesticRussian ice cream from the foreign producers’. However, due to a vast number of similarproducts and the lack of protection for innovation leads to indifference between various domesticproducts. Customers are able to substitute one brand of ice cream to another or from ice cream toother foods altogether at any point in time. Pricing information is also readily available tocustomers and only large differences in price will affect the customers’ buying behavior. Itshould be noted that the buyers of ice cream for Ice Fili or any other ice cream producers are thedistribution channel members, not the end consumers. As such, it could be inferred that the buyerpower of the distribution channel members relative to the ice cream producers is high, and the 3
    • buyer power of the end consumers to the distribution channel members is also high. It could alsobe implied that through this chain relationship, the end consumers also impose buyer power onthe ice cream producers. The main suppliers in the ice cream industry comprise suppliers of raw materials oringredients and equipments. Factors affecting the bargaining power of suppliers include thethreat of forward integration and the concentration of suppliers. There exist numerous potentialsuppliers of ingredients. The ingredients provided by each supplier are not unique or greatlydifferentiated. Furthermore, ice cream manufacturers are able to switch between suppliersquickly and cheaply. Therefore, the bargaining power of suppliers of ingredients is rather low. Interms of the equipment, most of the equipment used by domestic ice cream manufacturers wereimported from other countries. Although the local supplier base has been developing rapidly,approximately 10 ice cream equipment suppliers exist in Russia, Ukraine, and the Balticcountries, which is relatively low compared to the total number of ice cream manufactories ataround 300. The suppliers of equipment are concentrated in this industry and make it difficult forice cream manufacturers to exercise leverage over the suppliers and obtain lower prices byinducing competition among them. Furthermore, switching costs for large capital equipments arehigh. Even though the development of new domestic equipment suppliers jointly financed byRussian ice cream producers such as those converted from military facilities may presentopportunities for forward integration, the bargaining power of the suppliers of equipment isrelatively high compared to that of the material suppliers. 4
    • Barriers to entry deter new competitors from entering the market and creating morecompetition for established firms. There are several major barriers to entry which includeeconomies of scale, initial capital requirements, product differentiation, cost disadvantages,access to distribution channels, government policy, and competitors’ responses The ice creamindustry has considerably low barriers to entry since most equipment can be rented, purchased,or utilized for multiple purposes, while employees need not be highly experienced and trained.Also, there are no unique ice cream manufacturing techniques or processes that are employed. Ingeneral, brand loyalty presents a problem for new entrants because existing firms have alreadymarketed their products and possess a large number of loyal customers. A new entrant mustspend considerable resources in order to get their name out and convince consumers to beginpurchasing their products instead of what they previously used. However, due to Ice–Fili’s weakmarketing and promotion, Russian customers tend to be indifferent consumers of ice creambased on brand differentiation. Therefore, these non-loyal customers tend to switch from onebrand of ice cream to another rather easily. In terms of the product, there is low differentiationand demand elasticity, contributing to a lower barrier to entry. The real threat originated fromregional producers. They tended to cut costs by taking advantage of lower wages. Regionalproducers accounted for 30% of the domestic ice cream market. This was in part led by ashrinking of the frozen food imports market, which had been impacted by the 1998 Russianeconomic crisis. Many former frozen-meat and fish wholesalers found it easy to set up for icecream production since they could utilize their cold storage and production capabilities. By 2002,these flexible and aggressive regional producers set up manufacturing factories and alsopenetrated the ice cream market in Moscow. Regarding the accessibility to channels ofdistribution, many channel members carried different brands of several companies, resulting in 5
    • easy access to various distribution networks for new entrants. Government policy encouraged theentry of new competitors, including foreign companies. The open market economy attractedmore foreign companies into the Russian market to capitalize on new opportunities. Foreigncompanies such as Nestle had already set up two factories in Moscow since the beginning of theopen economy. A threat of substitutes exist when the demand for a product declines due to either lowerprices of a better performing substitute product, low brand loyalty, new current trends, or lowswitching costs. When the threat of substitutes is low the outcome is favorable for the existingindustry because fewer alternatives exist. There is low customer switching costs in the Russianice cream industry. Furthermore, some other substitutes like beer, soda, yogurts, chocolates andother confectionary candies are competing with ice cream products, threatening the alreadydeclining ice cream market. In addition, such products are backed by fierce advertisingcampaigns. As a result, the ice cream industry production shrank to 3.5% in 2000 from theprevious year, while beer was up 23% and soft drinks 25%. 6
    • Segmentation Although several crucial segmentation variables exist for the ice cream market in Russia,it should be realized that a superior market exists that encompasses not just ice creams butfrozen, dairy, confectionaries, and snacks such as candies. However, due to its resourcelimitations including financial, marketing expertise, and human resources stemming from itslegacy of being in the closed economy of Russia, Ice Fili should initially focus on the ice creammarket. By dominating the ice cream market and developing it into a cash cow, variousopportunities could arise for Ice Fili to extend into a similar, yet broader market with highermarket demand growth (+8% for confectionaries) as opposed to the declining demand in the icecream market. (-3.5%) As mentioned above, a number of segmentation variables exist for the ice cream marketin Russia. These include the distribution channel, buying behavior, geographic locations, andproduct characteristics such as price. These variables were chosen based on the distinctiveness ofeach segment. For example, the distribution channel was already clearly defined by kiosks, mini-marts, gastronoms, supermarkets, and restaurants/cafes, which are all easily distinguishable.However, it should be noted that these segmentation variables are not discrete and cannot beused by themselves. In other words, there exists 3 distinct strategic groups that incorporate aunique mix of certain characteristics of the 4 segmentation variables, and these strategic groupsshould be considered as market segments instead. The strategic groups can be divided into:leaders, regional, and boutique. The leaders are Ice Fili and Nestle, both competing for theleading position primarily through brand strength. Regional producers focus on local tailored 7
    • needs through low price, while boutique producers such as Baskin Robbins and Haagen-Dazsdifferentiate based on high price and high-end products. The mix of the 4 segmentationsvariables that each of the 3 groups employ can be seen from the segmentation table (Exhibit 2)and graphs (Exhibit 3a and 3b). Ice-Fili and Nestle mainly distribute their products nationwide through all the distribution channels. They usually have mid level prices and serve both theon-the-go and household consumption market. The regional producers concentrate on the kiosksand mini-marts, concentrated mostly in regional areas for low price on-the-go consumption. Theboutique producers rely on their network of restaurants and cafes in cities to serve the dine-outdemand with high-end products. The key success factors would be the increased availability ofice cream products using the entire distribution channel, while meeting the specific demands ofvarious buyers with differentiated products. The most attractive segment in the ice cream market based on growth potential is thehousehold consumption and the boutique restaurant and café segment. This is in fact supportedby the over saturation of on-the-go consumption at kiosks and mini-marts. The main reason forthis growth potential is due to the transition from closed to open economy in Russia. In theclosed economy, opportunities for extending into niche markets were limited and exposure to thelifestyle in an open economy was limited. In general, developing countries tend to adopt thelifestyle of a more developed open economy, and Russia is no exception. In terms of segmentattractiveness, the household consumption segment presents an advantage over other segmentsbecause it is less sensitive to fluctuations in seasonal demands. On-the-go consumption that takeplace outdoors might decrease significantly in the winter, but household consumption whichtakes place indoors could be less affected by cold weather. In addition, household consumption 8
    • in general presents a higher sales figure per purchase due to the increased volume of ice cream.The boutique segment is attractive in terms of higher margins and might present an opportunityfor Ice-Fili to capitalize on its long brand history and image of quality Russian ice cream. However, although ice cream in Russia was traditionally considered as an impulse, “on-the-go” product, it had not been recognized as a product that could be stored at home andconsumed at any desirable time and occasion. The problem was that such kind of product usagehad not been developed in the consumers’ minds due to lack of marketing efforts. For theboutique segment, Ice Fili had not positioned itself as a premium brand differentiated byexquisite ingredients and high price, as with the case of Baskin Robbins and Haagen-Dazs. 9
    • Competitors Ice-Fili produces ice cream, a part of the consumer desert and drinks industry. The icecream industry competed with several products like soda, beer, yogurts, chocolate, and othercandies for a share of the consumer spending. Ice cream had been a shrinking industry whereasthe companies in other industries were experiencing high growth. Some of it could be attributedto more spending on marketing and advertising by the companies in other industries. The icecream industry had lagged its competitors in positioning their products to be used under differentsituations. Exhibit 4 shows the total ice cream production and Ice-fili’s ice cream production duringthe past 6 years. Ice cream production in Russia has been growing at a very slow pace over thelast 6 years. Ice-fili production volume had decreased durting those 6 years and had resulted insignificant erosion of its market share. It faced intense competition from foreign companies likeNestle, Baskin & Robbins, and Haagen-Dazs (a part of General Mills) as well as small regionalproducers. Ice-fili’s market share had reduced from approximately 50% to 10.3% in 1997 to5.2% in 2001. The competitor’s for Ice-fili can be divided into 2 categories: 1. Foreign companies like Nestle, Baskin & Robbins, and others. 2. Small regional producers. Foreign companies had several advantages over Ice-fili such as equipment and packagingtechnology used for ice cream production and strong financial support from its’ parent 10
    • companies. Furthermore, the image of foreign ice cream products was of higher value, justifyingthe higher cost paid by the consumers. The foreign producers used chemical preservatives whichled to lower costs due to increased shelf life of the products and lower wastage. One of the mostsignificant advantages of a producer like Nestle was their strong distribution channel. Apart fromice cream, Nestle produced a wide variety of other products like coffee, confectionary, chocolate,pet food, bottled water and cereal. Thus, it could market its ice cream products through a largedistribution network for all of its products. This led to a high penetration level of its productamong the consumers. The other competition to Ice-fili emerged from small regional producers. These producershad significant cost advantages due to new equipment and manufacturing facilities, lower laborcosts, and lower rent costs as they were located away from the metropolitan areas. Also, thesecompanies had lower transportation costs as they sold their products closer to the region wherethey produced. In addition, the distributors preferred the regional producers due to theirflexibility to produce an in demand ice cream tailored to local needs. 11
    • Resources Unlike its foreign rivals, Ice-Fili still used high quality natural ingredients instead ofartificial and preservatives to keep the tradition of the Russian ice cream. By doing so, Ice-Filiproduced ice cream with a taste more fit for Russian consumers. However, these raw materialsled to high costs because it was difficult to store and transport products that used such materials.In addition, the taste of consumers in other countries was unknown. Although most product linesalready utilized imported equipment in Ice-Fili, 25% of overall volume was produced by old-generation equipments, which cost 8 million dollars to modify. In its financial statementfrom1996 to 2001, Ice-Fili did not have any long-term debt. Even though it was positive in thatIce-Fili would not suffer financial distress caused by long-term debt, the downside was the lackof an effective way to raise funds especially in the developing period where equity investorswere highly skeptical of investments. In addition, there was an obvious weakness for Ice-Fili inthe ice cream market, that is, the absence of a specific trademark for its own brand. “Lakomka”,accounting for 30% of sales volume, was produced by at least five companies at the same time.There was one brand named “Leningradskoe”, also used by many domestic companies.Moreover, the lack of effective distribution networking was also one obstacle that hampered itsrapid growth in the whole market. On the other side, there had been an strengthening of humanresources resulting from a restructured organization and culture. Employees were more satisfiedbecause the company was run more like a family in which employees were cooperative witheach other. The restructured organization led to employees with greater responsibilities andreinforced rewards and punishments further than they were in the Soviet time. In order to 12
    • develop an intensive competition environment, Ice Fili also paid much more attention to recruitmany young managers with strong abilities to work in an open market economy. 13
    • Alternatives and Recommendations Over the course of the analysis, a number of alternatives were identified for success ofIce-fili’s future. Some of the alternatives included exports to other USSR countries, alliance withother fast food restaurants, creation of trademarks and patents for its products and verticalintegration with a distributor. However due lack of information, these alternatives were notanalyzed in detail. Based on the key operating financial ratios of Ice-Fili in Exhibit 7, it can be seen thatoperating profitability based on Return on Net Operating Assets (RNOA) and the profit marginhas been decreasing over the past several years. In order to improve its performance, Ice-filishould focus on three key areas in its core competency of ice cream production for Russianindustry. 1. Consolidation of products and creation of power brands (highly successful products). 2. Strengthen distribution channel. 3. Increased marketing and advertising of its brands. Ice-fili has one of the highest ratios of ice cream products to production capacity in theRussia. Also around 70% of Ice-fili’s products are sold through kiosks. Since these kiosks aresmall booth like structures, they have very little storage capacity and thus store only fewproducts. Thus consolidation of products will not impact its sales revenues in a significant way.Also it will create a simplified production and packaging process for its products. This will lead 14
    • to a reduction in the higher percentage of line expenses and thus cost savings for the company.Apart from a higher income margin, the company can focus its human and financial resources inits power brands and penetrate into the market. To tap the broader market Ice-fili needs to strengthen its distribution channel across thecountry. It distributes only 15% of its through Service-fili and its distributors compared to 41%of competitors. This channel primarily distributes its products to mini markets, gastronoms andrestaurants, where Ice-fili needs to increase its exposure. Thus improving the relationships withthis channel can increase its market share at these points of sale. The last important factor is to create an effective marketing strategy to advertise itsproducts. The advertisements should create brand awareness of Ice-fili’s products; portray itsadvantage over the foreign players in terms of its quality. Also the advertisements should helpcreate a larger and growing market for the ice cream industry as a whole. Exhibit 5 shows the Effective Value Added (EVA) to the company over the last 5 years.The graph shows the decreasing trend in the last 5 years. One of the reasons is due to theincreased equity and thus the high cost of capital. Thus we recommend the company to raisecapital from debt in foreign markets. Raising market in developed financial markets like USA orEurope would give the company benefits like low interest rates, easier method to raise capital.The company could enter into derivative contracts to hedge its currency risk. 15
    • Exhibit 6 shows that Accounts Receivables were approximately 20% of its total assets in2001. Also the ratio had significantly increased from 1996. This is a result of bad debts or poorcollection systems of the company. Thus the company needs to build up its internal controls overthe financial systems. The combined effect of the three key factors of Ice-Fili’s strategy could result in asuccess for Ice-Fili due to the improvement of its core competency. Ice-Fili’s weaknesses werein its inability to increase product availability and to market the products with additional capital.However, by strengthening its relationships with suppliers, building a better marketingcampaign, and raising more capital to finance these initiatives, Ice-Fili could be well on its wayto higher profitability in the future. 16
    • Exhibit 1 Porter’s Five Force analysis for Ice-Fili Bargaining Power of Suppliers  Low concentration of suppliers of ingredients and higher concentration of suppliers of equipment relative to producers  Low switching costs among ingredients but high among equipment Threat of entry Industry Competitors Substitutes Easy access to  Large number of  Existence ofmanufacturing equipment producers including foreign substitutes such as Low skilled and regional confectionaries and snacksemployees  Increasing trend of Low sophistication shift towards and growthof manufacturing techniques of other consumer goods Low brand loyalty  Low switching Easily extended costsfrom other frozen foodsindustry Low governmentaland legal barriers Easy access todistribution channels Bargaining Power of Buyers  Low product differentiation  Low switching costs  Low demand elasticity 17
    • Exhibit 2 Segmentation of the Ice Cream Market Distribution Channel Kiosk Minimart Gastronom Restaurant Supermarket Shares 49% 29% 17% 3% 2% Purchase Behavior Impulse Impulse Household Luxury/Impulse Household Geographic Area National City/Regional City/Regional City CityProduct Characteristics On-the-go On-the-go Storable Immediate Consumption Storable Low Price, Low Price, Taste, Quality, Extensive Extensive Taste, Quality, Exquisite Flavor, High Key Success Factors Variety, Shelf Distribution Distribution Variety Quality, High Variety Space Network Network Nestle’, Regional Nestle’, Regional Nestle’, Regional Baskin Robins, Haagen- Competitors Nestle’ Producers Producers Producers Dazs 18
    • Exhibit 3a Price and Location attributes Exhibit 3bDistribution Channel and Purchase Behavior Attributes 19
    • Exhibit 4 Production in 000 tons Production of Ice cream 400 350 Ice-filis 300 production 250 volume 200 150 Production 100 Volume in 50 Russia 0 96 97 98 99 00 01 19 19 19 19 20 20 Year Exhibit 5 Economic Value Added (in rubbles) 30000 25000 Cost of Capital 20000 15000 10% 10000 15%EVA 5000 20% 0 -5000 1996 1997 1998 1999 2000 2001 -10000 -15000 Year 20
    • Exhibit 6 Accounts Receivables / Assets % 25 Accounts Receivables / 20 Assets % 15 10 5 0 1996 1997 1998 1999 2000 2001 Year Exhibit 7 Ice-Fili financial ratio analysis (units: thousand dollars) 2001 2000 1999 1998 1997 1996 Operating Assets(OA) 11,832 10,606 12,645 18,350 26,860 24,733Operating liabilities(OL) 1,194 1,155 2,643 5,080 6,680 4,737 Operating income(OI) 1,702 1,727 2,090 2,742 5,856 6,753 Sales 25,147 27,206 32,672 35,988 68,892 34,083 Net operating assets(NOA=OA-OL) 10,638 9,451 10,002 13,270 20,180 19,996 Return onNOA(RNOA=OI/NOA) 16.00% 18.27% 20.90% 20.66% 29.02% 33.77% Profit margin=OI/SALES 6.77% 6.35% 6.40% 7.62% 8.50% 19.81% Assets turn over=SALES/NOA 2.36 2.88 3.27 2.71 3.41 1.70 21