MGT 5794

Strategic Management Spring 2006

Ice-Fili: Winning Strategem in a Contemporary Venue

-Team 5900-22-7377 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 the transformation of the Russian closed economy into an open economy and the financial crisis in 1998. As Russia’s largest domestic ice cream producer, they had held onto their market leadership for many years. However, increasing competition from foreign companies, along with the emergence of regional producers of ice cream led to Ice-Fili’s market share erosion in the recent years. Porter’s five forces model was the primary method to analyze Ice-Fili’s industry and its competitiveness in the industry. Segmentation analysis was used for further study of the ice 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, various alternatives 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 efforts including marketing and raising of capital while focusing on its long history and brand recognition. Above all, availability of its product to the consumers is the key to Ice-Fili’s success.


and quality of the products. due to a vast number of similar products and the lack of protection for innovation leads to indifference between various domestic products. and the 3 . industry returns can transfer to buyers in the form of lower prices. Buyers are people or organizations who create demand in an industry. not the end consumers. An illustration of the model specific to Ice Fili is displayed in Exhibit 1. As such. Buyer power is determined by various factors such as switching costs. along with determination of the most appropriate strategy and associated milestone for the strategy. brand identity. If buyers have significant bargaining power. The analysis will lead to the identification of various opportunities for Ice Fili. the standardization of the product.Porters Five Forces In order to analyze the industry and environment of Ice Fili. Pricing information is also readily available to customers and only large differences in price will affect the customers’ buying behavior. It should be noted that the buyers of ice cream for Ice Fili or any other ice cream producers are the distribution channel members. the relative volume of purchases. Buyers are presented with many choices when selecting a product in the ice cream industry while distributors have the power to decide which products will be available to customers. Customers are able to substitute one brand of ice cream to another or from ice cream to other foods altogether at any point in time. However. Porter’s five forces model will be used to assess its competitiveness in the market. it could be inferred that the buyer power of the distribution channel members relative to the ice cream producers is high. elasticity of demand. Absence of preservatives and a high proportion of milk fat differentiate the domestic Russian ice cream from the foreign producers’.

switching costs for large capital equipments are high. the bargaining power of suppliers of ingredients is rather low. It could also be implied that through this chain relationship. Even though the development of new domestic equipment suppliers jointly financed by Russian ice cream producers such as those converted from military facilities may present opportunities for forward integration. most of the equipment used by domestic ice cream manufacturers were imported from other countries. The ingredients provided by each supplier are not unique or greatly differentiated. 4 . Furthermore. ice cream manufacturers are able to switch between suppliers quickly and cheaply. Therefore. and the Baltic countries.buyer power of the end consumers to the distribution channel members is also high. The main suppliers in the ice cream industry comprise suppliers of raw materials or ingredients and equipments. approximately 10 ice cream equipment suppliers exist in Russia. which is relatively low compared to the total number of ice cream manufactories at around 300. the end consumers also impose buyer power on the ice cream producers. In terms of the equipment. the bargaining power of the suppliers of equipment is relatively high compared to that of the material suppliers. There exist numerous potential suppliers of ingredients. Furthermore. The suppliers of equipment are concentrated in this industry and make it difficult for ice cream manufacturers to exercise leverage over the suppliers and obtain lower prices by inducing competition among them. Although the local supplier base has been developing rapidly. Ukraine. Factors affecting the bargaining power of suppliers include the threat of forward integration and the concentration of suppliers.

resulting in 5 . which had been impacted by the 1998 Russian economic crisis. The real threat originated from regional producers. while employees need not be highly experienced and trained. Regional producers accounted for 30% of the domestic ice cream market. Regarding the accessibility to channels of distribution. By 2002. In general. and competitors’ responses The ice cream industry has considerably low barriers to entry since most equipment can be rented. or utilized for multiple purposes. brand loyalty presents a problem for new entrants because existing firms have already marketed their products and possess a large number of loyal customers. They tended to cut costs by taking advantage of lower wages. government policy. these flexible and aggressive regional producers set up manufacturing factories and also penetrated the ice cream market in Moscow. there is low differentiation and demand elasticity. This was in part led by a shrinking of the frozen food imports market. initial capital requirements. Russian customers tend to be indifferent consumers of ice cream based on brand differentiation. There are several major barriers to entry which include economies of scale. due to Ice–Fili’s weak marketing and promotion. Therefore. Also. product differentiation. Many former frozen-meat and fish wholesalers found it easy to set up for ice cream production since they could utilize their cold storage and production capabilities. contributing to a lower barrier to entry. there are no unique ice cream manufacturing techniques or processes that are employed. purchased. many channel members carried different brands of several companies. these non-loyal customers tend to switch from one brand of ice cream to another rather easily.Barriers to entry deter new competitors from entering the market and creating more competition for established firms. However. A new entrant must spend considerable resources in order to get their name out and convince consumers to begin purchasing their products instead of what they previously used. access to distribution channels. cost disadvantages. In terms of the product.

chocolates and other confectionary candies are competing with ice cream products. As a result. 6 . Foreign companies such as Nestle had already set up two factories in Moscow since the beginning of the open economy. including foreign companies. Government policy encouraged the entry of new competitors.5% in 2000 from the previous year. some other substitutes like beer. new current trends. yogurts. or low switching costs. the ice cream industry production shrank to 3. soda. such products are backed by fierce advertising campaigns. A threat of substitutes exist when the demand for a product declines due to either lower prices of a better performing substitute product. The open market economy attracted more foreign companies into the Russian market to capitalize on new opportunities. There is low customer switching costs in the Russian ice cream industry. low brand loyalty. threatening the already declining ice cream market. while beer was up 23% and soft drinks 25%. Furthermore. In addition.easy access to various distribution networks for new entrants. When the threat of substitutes is low the outcome is favorable for the existing industry because fewer alternatives exist.

However. The strategic groups can be divided into: leaders. the distribution channel was already clearly defined by kiosks. regional. In other words. and boutique. and product characteristics such as price. a number of segmentation variables exist for the ice cream market in Russia. supermarkets. dairy.Segmentation Although several crucial segmentation variables exist for the ice cream market in Russia. which are all easily distinguishable. and human resources stemming from its legacy of being in the closed economy of Russia. yet broader market with higher market demand growth (+8% for confectionaries) as opposed to the declining demand in the ice cream market. For example. gastronoms. These variables were chosen based on the distinctiveness of each segment. confectionaries. Regional producers focus on local tailored 7 . there exists 3 distinct strategic groups that incorporate a unique mix of certain characteristics of the 4 segmentation variables. minimarts. marketing expertise. buying behavior. By dominating the ice cream market and developing it into a cash cow. it should be realized that a superior market exists that encompasses not just ice creams but frozen. and these strategic groups should be considered as market segments instead. and snacks such as candies. (-3. These include the distribution channel. it should be noted that these segmentation variables are not discrete and cannot be used by themselves.5%) As mentioned above. both competing for the leading position primarily through brand strength. The leaders are Ice Fili and Nestle. However. Ice Fili should initially focus on the ice cream market. due to its resource limitations including financial. and restaurants/cafes. geographic locations. various opportunities could arise for Ice Fili to extend into a similar.

household consumption 8 . The mix of the 4 segmentations variables that each of the 3 groups employ can be seen from the segmentation table (Exhibit 2) and graphs (Exhibit 3a and 3b). They usually have mid level prices and serve both the on-the-go and household consumption market. Ice-Fili and Nestle mainly distribute their products nation wide through all the distribution channels. In the closed economy. while meeting the specific demands of various buyers with differentiated products. The main reason for this growth potential is due to the transition from closed to open economy in Russia. and Russia is no exception. The regional producers concentrate on the kiosks and mini-marts. The most attractive segment in the ice cream market based on growth potential is the household consumption and the boutique restaurant and café segment. while boutique producers such as Baskin Robbins and Haagen-Dazs differentiate based on high price and high-end products. On-the-go consumption that take place outdoors might decrease significantly in the winter. but household consumption which takes place indoors could be less affected by cold weather. This is in fact supported by the over saturation of on-the-go consumption at kiosks and mini-marts. The key success factors would be the increased availability of ice cream products using the entire distribution channel.needs through low price. In general. the household consumption segment presents an advantage over other segments because it is less sensitive to fluctuations in seasonal demands. In addition. concentrated mostly in regional areas for low price on-the-go consumption. developing countries tend to adopt the lifestyle of a more developed open economy. In terms of segment attractiveness. opportunities for extending into niche markets were limited and exposure to the lifestyle in an open economy was limited. The boutique producers rely on their network of restaurants and cafes in cities to serve the dine-out demand with high-end products.

in general presents a higher sales figure per purchase due to the increased volume of ice cream. The problem was that such kind of product usage had not been developed in the consumers’ minds due to lack of marketing efforts. 9 . although ice cream in Russia was traditionally considered as an impulse. However. Ice Fili had not positioned itself as a premium brand differentiated by exquisite ingredients and high price. it had not been recognized as a product that could be stored at home and consumed at any desirable time and occasion. as with the case of Baskin Robbins and Haagen-Dazs. The boutique segment is attractive in terms of higher margins and might present an opportunity for Ice-Fili to capitalize on its long brand history and image of quality Russian ice cream. For the boutique segment. “onthe-go” product.

It faced intense competition from foreign companies like Nestle.Competitors Ice-Fili produces ice cream. chocolate. The competitor’s for Ice-fili can be divided into 2 categories: 1.3% in 1997 to 5. a part of the consumer desert and drinks industry. Ice-fili’s market share had reduced from approximately 50% to 10. and others. 2. Ice cream production in Russia has been growing at a very slow pace over the last 6 years. beer. Small regional producers. and Haagen-Dazs (a part of General Mills) as well as small regional producers. Foreign companies had several advantages over Ice-fili such as equipment and packaging technology used for ice cream production and strong financial support from its’ parent 10 .2% in 2001. Ice-fili production volume had decreased durting those 6 years and had resulted in significant erosion of its market share. The ice cream industry had lagged its competitors in positioning their products to be used under different situations. Ice cream had been a shrinking industry whereas the companies in other industries were experiencing high growth. Baskin & Robbins. Some of it could be attributed to more spending on marketing and advertising by the companies in other industries. Foreign companies like Nestle. Exhibit 4 shows the total ice cream production and Ice-fili’s ice cream production during the past 6 years. Baskin & Robbins. The ice cream industry competed with several products like soda. and other candies for a share of the consumer spending. yogurts.

Nestle produced a wide variety of other products like coffee. the distributors preferred the regional producers due to their flexibility to produce an in demand ice cream tailored to local needs. This led to a high penetration level of its product among the consumers. pet food. chocolate. these companies had lower transportation costs as they sold their products closer to the region where they produced. 11 . Also. Furthermore. These producers had significant cost advantages due to new equipment and manufacturing facilities. it could market its ice cream products through a large distribution network for all of its products. lower labor costs. and lower rent costs as they were located away from the metropolitan areas. Apart from ice cream. the image of foreign ice cream products was of higher value. The foreign producers used chemical preservatives which led to lower costs due to increased shelf life of the products and lower wastage.companies. justifying the higher cost paid by the consumers. Thus. confectionary. The other competition to Ice-fili emerged from small regional producers. One of the most significant advantages of a producer like Nestle was their strong distribution channel. In addition. bottled water and cereal.

which cost 8 million dollars to modify. there had been an strengthening of human resources resulting from a restructured organization and culture. there was an obvious weakness for Ice-Fili in the ice cream market. Moreover. There was one brand named “Leningradskoe”. In addition. the taste of consumers in other countries was unknown. However. “Lakomka”. Even though it was positive in that Ice-Fili would not suffer financial distress caused by long-term debt. In its financial statement from1996 to 2001. In order to 12 . Ice-Fili did not have any long-term debt. The restructured organization led to employees with greater responsibilities and reinforced rewards and punishments further than they were in the Soviet time. In addition. that is. Although most product lines already utilized imported equipment in Ice-Fili. Ice-Fili produced ice cream with a taste more fit for Russian consumers. accounting for 30% of sales volume. Ice-Fili still used high quality natural ingredients instead of artificial and preservatives to keep the tradition of the Russian ice cream. the lack of effective distribution networking was also one obstacle that hampered its rapid growth in the whole market. Employees were more satisfied because the company was run more like a family in which employees were cooperative with each other. the downside was the lack of an effective way to raise funds especially in the developing period where equity investors were highly skeptical of investments. On the other side. also used by many domestic companies. the absence of a specific trademark for its own brand. was produced by at least five companies at the same time.Resources Unlike its foreign rivals. these raw materials led to high costs because it was difficult to store and transport products that used such materials. 25% of overall volume was produced by oldgeneration equipments. By doing so.

13 .develop an intensive competition environment. Ice Fili also paid much more attention to recruit many young managers with strong abilities to work in an open market economy.

Since these kiosks are small booth like structures. Consolidation of products and creation of power brands (highly successful products). In order to improve its performance. Strengthen distribution channel. Also it will create a simplified production and packaging process for its products. Ice-fili should focus on three key areas in its core competency of ice cream production for Russian industry. 3.Alternatives and Recommendations Over the course of the analysis. alliance with other fast food restaurants. Based on the key operating financial ratios of Ice-Fili in Exhibit 7. 2. Ice-fili has one of the highest ratios of ice cream products to production capacity in the Russia. However due lack of information. Thus consolidation of products will not impact its sales revenues in a significant way. Also around 70% of Ice-fili’s products are sold through kiosks. a number of alternatives were identified for success of Ice-fili’s future. This will lead 14 . creation of trademarks and patents for its products and vertical integration with a distributor. these alternatives were not analyzed in detail. Some of the alternatives included exports to other USSR countries. it can be seen that operating profitability based on Return on Net Operating Assets (RNOA) and the profit margin has been decreasing over the past several years. 1. they have very little storage capacity and thus store only few products. Increased marketing and advertising of its brands.

The graph shows the decreasing trend in the last 5 years. Also the advertisements should help create a larger and growing market for the ice cream industry as a whole. 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. To tap the broader market Ice-fili needs to strengthen its distribution channel across the country. portray its advantage over the foreign players in terms of its quality. The company could enter into derivative contracts to hedge its currency risk. gastronoms and restaurants. where Ice-fili needs to increase its exposure. Exhibit 5 shows the Effective Value Added (EVA) to the company over the last 5 years. The advertisements should create brand awareness of Ice-fili’s products. The last important factor is to create an effective marketing strategy to advertise its products. Thus we recommend the company to raise capital from debt in foreign a reduction in the higher percentage of line expenses and thus cost savings for the company. Thus improving the relationships with this channel can increase its market share at these points of sale. easier method to raise capital. Raising market in developed financial markets like USA or Europe would give the company benefits like low interest rates. One of the reasons is due to the increased equity and thus the high cost of capital. Apart from a higher income margin. the company can focus its human and financial resources in its power brands and penetrate into the market. 15 .

Ice-Fili could be well on its way to higher profitability in the future. However. The combined effect of the three key factors of Ice-Fili’s strategy could result in a success for Ice-Fili due to the improvement of its core competency. and raising more capital to finance these initiatives. This is a result of bad debts or poor collection systems of the company. 16 . by strengthening its relationships with suppliers. building a better marketing campaign.Exhibit 6 shows that Accounts Receivables were approximately 20% of its total assets in 2001. Also the ratio had significantly increased from 1996. Ice-Fili’s weaknesses were in its inability to increase product availability and to market the products with additional capital. Thus the company needs to build up its internal controls over the financial systems.

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 Easy access to manufacturing equipment  Low skilled employees  Low sophistication of manufacturing techniques  Low brand loyalty  Easily extended from other frozen foods industry  Low governmental and legal barriers  Easy access to distribution channels   Industry Competitors Large number of producers including foreign and regional  Substitutes Existence of substitutes such as confectionaries and snacks  Increasing trend of shift towards and growth of other consumer goods  Low switching costs Bargaining Power of Buyers    Low product differentiation Low switching costs Low demand elasticity 17 .

Extensive Distribution Network Gastronom 17% Household City/Regional Storable Taste. Quality. High Quality. High Variety Baskin Robins. Variety Restaurant 3% Luxury/Impulse City Immediate Consumption Exquisite Flavor. Regional Producers Producers Producers 18 . Shelf Space Nestle’ Competitors Nestle’. HaagenDazs Supermarket 2% Household City Storable Taste. Extensive Distribution Network Minimart 29% Impulse City/Regional On-the-go Low Price. Regional Nestle’.Exhibit 2 Segmentation of the Ice Cream Market Distribution Channel Shares Purchase Behavior Geographic Area Product Characteristics Key Success Factors Kiosk 49% Impulse National On-the-go Low Price. Regional Nestle’. Variety. Quality.

Exhibit 3a Price and Location attributes Exhibit 3b Distribution Channel and Purchase Behavior Attributes 19 .

Exhibit 4 Production in '000 tons Production of Ice cream 400 350 300 250 200 150 100 50 0 96 97 98 19 99 20 00 20 01 19 19 19 Ice-fili's production volume Production Volume in Russia Year Exhibit 5 Economic Value Added (in rubbles) 30000 25000 20000 15000 10000 5000 0 -5000 -10000 -15000 Cost of Capital 10% 15% 20% 1996 1997 1998 1999 2000 2001 EVA Year 20 .

002 1998 18.147 10.Exhibit 6 Accounts Receivables / Assets % 25 Accounts Receivables / Assets % 20 15 10 5 0 1996 1997 1998 Year 1999 2000 2001 Exhibit 7 Ice-Fili financial ratio analysis (units: thousand dollars) 2001 Operating Assets(OA) Operating liabilities(OL) Operating income(OI) Sales Net operating assets(NOA=OA-OL) Return on NOA(RNOA=OI/NOA) Profit margin=OI/SALES Assets turn over=SALES/NOA 11.702 25.672 10.753 34.727 27.988 13.02% 33.737 6.27 7.41 19.40% 3.35% 2.083 19.606 1.080 2.77% 6.270 1997 26.194 1.350 5.50% 3.892 20.638 2000 10.645 2.643 2.996 16.88 6.77% 2.742 35.451 1999 12.70 21 .71 8.155 1.62% 2.733 4.66% 29.832 1.81% 1.860 6.27% 20.090 32.90% 20.680 5.00% 18.36 6.180 1996 24.206 9.856 68.

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