Universität Konstanz

Course: Strategic Management: Concepts and Cases

“Ice-Fili”
A Strategic Case Analysis

Christian Vögtlin

2006

Table of Contents

1. Introduction - 1 -

2. External Analysis - 1 -
2.1 The Russian ice cream industry - 1 -
2.2 Industry Analysis - 2 -
2.3 Structural attractiveness of the Russian ice cream industry - 5 -

3. Internal Examination - 6 -
3.1 Ice-Fili’s resources and its financial performance - 6 -
3.2 Strengths and weaknesses - 7 -
3.3 The core competencies of Ice-Fili - 8 -

4. Business Level Strategy - 9 -

5. Corporate Level Strategy - 11 -

6. Competitive Strategy - 12 -

7. Global Strategy - 13 -

8. Conclusion - 14 -

Literature - 16 -

1. Introduction

This paper analyses the performance of the company Ice-Fili at the end of fiscal year 2002. It’s the oldest Russian ice cream producer. It originated from the former state-run Soviet company Moshladokombinat N 8. In 1992 it was privatised and registered as a private joint-stock company under the name Ice-Fili. Its CEO is Anatoliy Vladimirovich Shamanov. He transitioned the company to a privatized for-profit firm after the dissolution of the Soviet Union in 1991. The transition was successful; it could hold its good market position and remains the largest Russian ice cream producer in the year 2002.

All information about the company, the competitive environment and the political situation used in the following article are derived from the Harvard Business School Case Ice-Fili (Rukstad, Mattu, & Petinova, 2003).

2. External Analysis

In this part it will be looked at the Russian ice cream industry. Therefore, an industry definition will be given. Its structure will be highlighted and from there on, the threats for Ice-Fili will be examined.

2.1 The Russian ice cream industry

In the case of Ice-Fili we deal with the Russian ice cream industry. It concerns the production of frozen ice cream products from the raw material to the selling of the different sorts of ice. The original Russian ice cream consists only of natural ingredients. The people love its unique flavour that comes mainly from the high percentage of milk fat which makes it less sweet and more aerated than the western products.

The Russian ice cream industry had to suffer from two economic shocks in the late 20th century. The first was after the dissolution of the Soviet Union in 1991, when the state-run economy had to shift to an open-market economy. This meant for the Russian companies big structural changes. The companies had to invest significantly if they wanted to compete with the foreign firms who entered the Russian market now. The second economic crash was in 1998. Russia slithered into a financial crisis when the country was not able to comply with its debt payments. The ruble was devaluated by two-thirds and left the people with almost no money. The low purchasing power of the consumers forced many foreign companies to reduce their imports dramatically and the domestic competitors to rely on the Russian ice cream products with their natural ingredients. But as the imports started to drop, the export of ice cream increased. Already one year after the crisis, in 1999, the exports exceeded the imports by 3,200 tons compared to 13,000 tons of import surplus in 1998.

The capacity of the Russian ice cream market is growing. During the Soviet time, the ice cream production increased steadily to 468,000 tons in 1990. After the dissolution the production fell to a minimum of 223,000 tons in 1996 due to the privatization with its transition to market-based production conditions and the imports of foreign firms. After the financial crisis in 1998 foreign imports got too expensive. The competitors from other countries left Russia or, as Nestlé for example, produced the cheaper Russian ice cream in their own Russian factories. This led to a steady increase of domestic ice cream products and the production volume rose again to 376,000 tons in 2002.

During the 1990s the Russian ice cream manufacturer imported more than 50% of all raw materials from other countries. This changed after the economic crisis in 1998 when it got too expensive and they had to rely much more on local suppliers. Most ice cream is distributed by small distribution companies. They deliver the products to the five retail channels: the kiosks (49%¹), the minimarkets (29%), the traditional grocery stores called “gastronoms” (17%), the supermarkets (2%) and the restaurants and cafés (3%²). The distribution through kiosks and minimarkets account for 78% of the total sales and are the two most important distribution channels. But they are almost saturated and attract mostly impulse purchasers. Growing segments are the supermarkets and the restaurant and cafés.

2.2 Industry Analysis

In this part we will analyse Porter’s five forces (Barney, 2002; Porter, 1980) to describe the competitive structure of the Russian ice cream industry. Starting from that, we will evolve opportunities for Ice-Fili and show possible future threats.

To examine the threat of entry the barriers to entry must be analysed. High barriers lower the threat of new entrants. The Russian ice cream industry has high economies of scale and new competitors will face high initial costs for the production facilities. The product differentiation is high and the brands are well established.

Despite those relatively high barriers the threat of new entrants is high, especially from regional producers. After the financial crisis in 1998 and the decrease of imported ice cream, the market offered good opportunities for new domestic entrants. They often already owned the facilities where they produced for example frozen food and so it was relatively easy to change to ice cream production. With the needed assets they already possessed they did not face economies of scale and high initial costs as barrier to entry. And the new regional producers try to compete with the product differentiation by selling cheaper “no name” brands. The threat of entry from international producers could also rise again, if the Russian economy seems to be stable again.

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¹ The percentages show the total sales of ice cream according to each distribution channel.

² The 3% for the restaurants and cafés only show the sales in Moscow.