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Seminar Paper, 2006
19 Pages, Grade: 1,3
2. External Analysis
2.1 The Russian ice cream industry
2.2 Industry Analysis
2.4 Structural attractiveness of the Russian ice cream industry
3. Internal Examination
3.1 Ice-Fili’s resources and its financial performance
3.2 Strengths and weaknesses
3.3 The core competencies of Ice-Fili
4. Business Level Strategy
5. Corporate Level Strategy
6. Competitive Strategy
7. Global Strategy
Table 1: Theat of different suppliers
Figure 1: Summary of the threats that Ice-Fili faces
Figure 2: Ice-Fili’s value chain
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).
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.
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%), the minimarkets (29%), the traditional grocery stores called “gastronoms” (17%), the supermarkets (2%) and the restaurants and cafés (3%). 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.
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.
Now it will be look at the threat of rivalry for Ice-Fili coming from established competitors in the industry. Ice-Fili’s fiercest competitors were international firms who had higher technology standards and better know-how than the Russian companies. But after the economic crisis in 1998 many of them, such as Ben & Jerry’s, left the Russian market. Those who stayed invested in domestic production facilities and produced directly in Russia, as for example Unilever, Baskin-Robbins and Nestlé. By 2001 Unilever had almost withdrawn from the Russian ice cream market due to lack of experience to deal specially with ice cream and the poor distribution of its products. Baskin-Robbins is still present. It has focused on the restaurant and café segment and offers its brands at exceptionally high prices. As this is a segment with high possibility to grow, Baskin-Robbins could become one of Ice-Fili’s more dangerous competitors. The biggest international company in the ice cream industry is Nestlé. It has also the second largest market share after Ice-Fili and represents the biggest threat. Its success comes from its good distribution and marketing network. It has also adjusted the taste of its products to Russian conditions and sells its brands at average prices.
Another growing threat comes from the many new regional producers. Those are often established firms in related industry segments (i.e. frozen-meat industry) that started to produce ice cream after the economic crisis in 1998. The many small competitors make it difficult to address them all and attack them with a concerted marketing campaign.
Also Ice-Fili still holds the highest market share the threat of rivalry is high and it will have to make considerable moves to sustain its prior position especially against its big competitor Nestlé and Unilver and against the many small manufacturers that gain regional market shares.
The substitutes for ice cream can be seen in other sweets products. In Russia the purchasing power of consumers is not that high and so they will have to decide which food products to buy. The consumers have to weigh between several products such as sweets, candies, chocolate and yogurts. But also beverages such as beer or soda and all additional food not essential for the daily meals can be a substitute if the monthly wage is not high enough. Especially if ice cream will be advertised not any longer as just a product “to go” at local kiosks but as a dessert for families at home or in restaurants, the threat of those substitute products will increase.
To analyse the threat of suppliers, they can be roughly divided in suppliers of raw material for ice cream production and those suppliers that provide the necessary technological equipment. Those groups can be sorted into domestic and international companies (for Typology see Table 1). If we look at the assets, most of the technological equipment used by Ice-Fili is imported and needs high investments ($8 million from 2000 to 2002). The major suppliers are Danish and American firms. The international firms can achieve high prices for their quality products, but their bargaining power will decrease with the establishment of domestic suppliers. The threat of vertical integration is not acute. In recent years the domestic suppliers are evolving fast and their technological standard rises. They even develop totally new equipment which is partly financed by ice cream producers. This offers a possible opportunity for Ice-Fili to get cheaper access to expensive new equipment. The company can for example tie close bonds to the new domestic suppliers by establishing joint ventures. Also for the raw materials of ice cream, the local producers are getting more important. Ice-Fili has several different suppliers for each major ingredient. Imported is only the cream butter with a very high fat percentage, packaging material, stabilizers and coconut oil. The bargaining power of the raw material suppliers is low because there are not concentrated and Ice-Fili can choose between many companies. The threat of forward integration is also low.
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Table 1: Threat of different suppliers
The buyers of Ice-Fili’s products are distribution companies that deliver the products to the costumer. They can be separated into four groups. First there are those that have their own kiosks. Ice-Fili has contracts with dozens of such companies. The biggest one is Eskimo-Fili. The second group delivers to gastronoms and minimarkets. There are also many small distribution companies. The biggest customer in this segment is Service-Fili which delivers 15% of Ice-Fili’s total ice cream products and even carries the Ice-Fili logo on trucks and refrigerators. The third domestic buyers serve regional warehouses. Ice cream is only 10% of their overall distribution volume. Alter-West and Inka for example are two companies Ice-Fili deals with. The three groups of domestic buyers are numerous and have no real bargaining power, except maybe Service-Fili which delivers a considerable percentage of the Ice-Fili products and carries its logo. There is a greater threat of vertical integration as the example of Inmarko shows, a regional distributor that started to produce ice cream. The fourth and last group are the international buyers. There is no special information available about them, but they must be wide spread, numerous and with no big influence on the industry.
 The percentages show the total sales of ice cream according to each distribution channel.
 The 3% for the restaurants and cafés only show the sales in Moscow.
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