Ashley Springer Ice-Fili case analysis November 22, 2012 Through tough times in the Russian ice cream market; one company has one company has pulled their weight and maintained their position on top. Established in 1937; Ice-Fili has survived the change in government, financial hard times, and the ever growing competition from international companies. However, given these events their market share, which was once dominated by Ice-Fili, has been significantly reduced. In fact the Harvard Business School’s 2005 revision of the Ice-Fili case study states that in just a few years the market share decreased by a half billion dollars. This downfall has posed the CEO of Ice-Fili, Anatoliy Shamanov, with many questions. Included amongst Shamanov’s questions were the questions will we maintain our lead over Nestlé, should we find new retail avenues through cafes, how should we approach regional production without creating a price war, and how do we manage in the competitive market economy. Most if not all of Shamanov’s questions can be answered using Porter’s five force analysis. When doing the analysis, I focused on the high threat of new entrants, low power of ingredient suppliers and high power of equipment suppliers, high buyer power, high threat of substitutes, and a high degree of rivalry.
Threat of new entrants: In any industry the threat of new entrants is always in place, however, in the Russian ice cream industry the new entrant threat is high because the barriers to entry are low. Many companies find the market to be desirable because the profit margin is between 15% and 20%, and ingredient prices are approximately 42% of the cost incurred by manufacturers. The initial investment is low; because manufacturing equipment is easily acquired since it can be rented and can be used for other items as well. Supply side economies of scale are rather high because when producing the ice cream the unit cost decreases as the total units produced rises. Along with high supply-side economies of scale the access to distributing is high. The access to distribution channels is high because many companies are willing to sell ice cream. Many of the distributers carry multiple brands, therefore making an ease of access to these channels. Government is encouraging companies to enter the market even though some are foreign.
Lastly, there are incumbent advantages in place because the existing manufacturers have marketed their product and in this business marketing is a key factor to doing well.
Power of suppliers: In the industry two main supply powers have bargaining power. The power of ingredient suppliers is low because companies can easily switch brands for the lower price. The product that is being supplied is not differentiated or unique. While ingredient suppliers have a low power; equipment producers have the high power. The equipment used by Ice-Fili was out dated and inefficient. The production facilities manager even agreed that nobody else could make the machinery Ice-Fili was using work as well as they did. The new equipment purchased during the 1990s was comprised of 75% imported materials, and that increased to 90% by 1999. The Russian technology was low quality and lacked flexibility in production use. The threat of forward integration is also a problem faced by the Russian ice cream industry. The military started to enhance old machinery to sell in the Russian market. By 2001 ten private owned companies were selling equipment in Russia, Ukraine, and the Baltic countries.
Buyer Power: Without buyers a market simply does not exist. In this industry buyer power is high. The power of buyers starts in differentiation. The domestic product base is not highly differentiated, because the product is not made uniquely. The switching cost for buyers is very low, because the price is easily accessed. Only a high difference in price will deter a buyer from getting the product. The cost of manufacturing accounts for about 33% of the total retail price so a company will look at the percent markup by manufacturers. If the percent is too high the company will choose a new manufacturer. Quality also leads to the decision of where to purchase from. IceFili is a good choice for quality because it is one of their goals for service.
Substitution: As a choice for an easy and inexpensive snack ice cream can be easily substituted. Switching costs between alternatives are very low because the consumer can service many
products using what they already own. Also the end consumer can easily choose to purchase yogurt, soda, chocolates, or other candies.
Rivalry: Rivalry is high in the Russian ice cream industry. Many companies exist to sell a highly undifferentiated product. Imported brand are not only sold by the Russian market, but also welcomed by government. The Ice-Fili product is quickly perishable. These foreign companies produce the product differently by adding preservatives which in the long run lowers costs due to extended shelf life. Also the technology is more recent and more innovative in the foreign companies, which, lets them have the top of the line products that Ice-Fili is incapable of producing without putting more money into new equipment. The companies that compete with Ice-Fili have another advantage because they choose to produce and market for a wider customer base. They sell the ice cream at more places than just the kiosks that Ice-Fili sells at, because they produce more than ice cream. Lastly, the ice cream industry has no growth. In recent years they actually have a shrinking market.
In conclusion, the five force analysis can answer many questions. Ice-Fili needs to increase marketing and consider new technology to keep their market share above Nestlé. The new avenues found by opening cafes would be a choice that can broaden the market. When doing the analysis, I found that a high threat of new entrants, low power of ingredient suppliers and high power of equipment suppliers, high buyer power, high threat of substitutes, and a high degree of rivalry contribute to the Russian ice cream market.
