A Storied Market Leader Facing Competitive Pressures

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“A storied market leader facing competitive pressures”

To: Senior Management, Ice-Fili

February 12, 2012

Current Situation
Ice-Fili was able to maintain its leading position in the Russian ice cream industry during volatile times. However, it now faces even tougher challenges that threaten its future prospects: reduction in ice-cream consumption, emergence of cost-efficient regional players, and the lack of a quality distribution system. After analyzing the situation, we recommend a strategy that aims to grow sales through the earning of market share, and improving the distribution network. Porter’s Five Forces’ Model

Industry Rivalry
Industry rivalry is high. The ice-cream industry is fragmented; 300 producers compete in the market. Ice-Fili is an industry leader with 5% market share. Regional producers threaten Ice-Fili with their significant cost advantage and flexible production system. In addition, foreign companies such as Baskin-Robbins and Nestle are expanding through relatively untouched segments such as cafes and restaurants. Threat of Entry

Threat of entry is high. Numerous frozen imports companies have emerged as regional ice-cream producers with their cold-storage and production capabilities in pursuance of relatively high profitability in the ice cream industry. Economies of scale are not required for those small regional players. In addition, new entrants can enjoy significant cost advantages over Ice-Fili through more cost efficient equipment. Threat of Substitute Products or Services

Threat of substitute is high. Ice-cream is not perceived as a family product that people can enjoy at home as a dessert. Impulsive purchasing consists of a large portion of ice cream sales in Russia, mainly through kiosks or street stalls. In 2000, ice cream consumption declined 3.5 % from the previous year; in contrast, its substitutes such as beer, soft drink and confectionery products experienced strong market demand growth indicating a change in consumer behaviour on the back of strong advertising. Bargaining Power of Buyers

Bargaining power of buyers is high. Since Ice-Fili contracted with dozens of small distribution companies, no single firm has a significant bargaining power. However, there is a potential downside risk due to the absence of exclusive contracts. For example, Service Fili, an independent affiliate, can carry its competitors’ products without restriction. No binding provision exists to enforce Service Fili to carry Ice-Fili’s products. A potential risk arises when competition becomes severe. Ice-Fili could lose distribution volumes if competitors offer more favourable deals to its distributors. Lastly, when thinking about the end consumer as a consumer of ice-cream, we see low switching costs. Bargaining Power of Suppliers

Bargaining power of suppliers is low. For each of its major ingredients, Ice-Fili has 3~ 4 different suppliers and it is not hard to find new one. Thus, switching costs are low. Internal Environment

Ice-Fili highly value employees, as shown by its financial director quoting Stalin’s “Human resource capital decides everything”. Ice-Fili understands its struggle in establishing itself in the open-market economy, so it actively seeks young and talented managers to help revive the company. Strategy & Key Success Factors

Ice-Fili employs somewhat of a focus strategy as a few products make up a significant portion of revenues. However, they do have a very large product offering even though some products make up a very small portion of revenue. Thefore, Ice-Fili does not fully employ a focus strategy. Most of Ice-Fili’s ice cream products are priced at 6 rubles per portion, making it more expensive than products of regional producers and Nestle and at the same time a lot less than premium products which could be as much as 15 rubles per portion. Ice-Fili’s commitment to only using high-quality natural ingredients and eliminating the use of any artificial...
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