External Environment Analysis of Ice-Fili - Russian-Based Ice Cream Company - Case Study Example

Ice-Fili Case Study Issue Ice-Fili is a Russian based ice cream company which was established by the Soviet government in 1937 in the name Moshladokombinat N 8. The company had been successful in the past and it could survive a series of troublesome situations including the Russian economy’s shift from a closed economy to an open economy and 1998 financial crisis. However, currently the company is striving to regain its market leadership, which they had held for many years in the past. From the case analysis, it is evident that transformation of Russian closed economy to open economy greatly assisted foreign firms to enter the country and this situation raised potential challenges to the market leadership of the Ice-Fili. In addition, emergence of a large number of domestic producers also contributed to the market share erosion of the firm in the recent years. Russian ice cream market has also declined over the last decade. The company gave primary focus to product quality and therefore it continued to use natural ingredients while foreign manufacturers widely used chemical preservatives to increase the durability of their ice cream products. This approach not only assisted the foreign players to make their products durable, but also aided them to reduce the costs. Thus they obtained competitive advantages over the traditional players like Ice-Fili. In total, the company’s traditional product policies also played a crucial role in reducing its dominance in the Russian ice cream market. External Environment Analysis The case study indicates that Russian ice cream market exhibits strong seasonal fluctuations. The country’s ice cream consumption normally reaches at its peak during the summer season. The Russian ice cream consumption has notably declined by the early 21st century as compared to other developed economies like the United States, France, and Canada. Regional Russian producers do not give much emphasis to the promotion of ice cream products and this adverse situation keeps the country’s ice cream industry down despite the high level affordability of ice cream products in Russia. As Rukstad Wells and Yin, point out, beer, soft drink, and confectionary industries take advantages of this favorable situation (To illustrate, the production of beer was up 23%, soft drinks 25%, and confectionaries 8% in 2000 whereas the production of ice cream was down 3.5% in the same period as compared to the previous year) which in turn worsen the growth of Russian ice cream industry. Porter’s Five Forces Model 1. Intensity of rivalry Degree of competitive rivalry is very high in Russian ice cream industry. The exhibit 1b shows that “the industry grew from almost 100 companies in 1996, to 150 companies in 1998, to 300 producers in 2002” (Rukstad, Wells and Yin). Nestle, the world’s largest food and nutrition company also operates in Russian ice cream market and raises potential challenges to Ice-Fili. 2. Threat of Substitutes While analyzing the case study, beer, soft drinks, and confectionery items seem to be close substitutes to ice cream. According to an industry analyst, “nowadays, students prefer beer to ice cream” (Rukstad et al). Such industries are strongly backed up by powerful advertising campaigns, which assist them to make their products substitutable to ice cream. Finally, there exists a fairly low switching cost in Russian ice cream industry. 3. Buyer power The Russian ice cream industry comprises of a large number of domestic as well as international players and therefore customers are presented with a wide variety of ice cream products. In addition, customers of ice cream industry are considered as distribution channel members, but not end consumers. Hence, ice cream producers extremely value their each customer. 4. Supplier power There are copious potential suppliers of ingredients in the Russian ice cream industry and therefore the producers are able to freely select their vendors. The low switching costs also assist the producers to easily change their suppliers. 5. Threat of new entrants The ice cream industry has relatively low barriers to entry as it allows new entrants to commence their venture without huge investment. In addition, the ice cream production process does not require highly trained and experienced employees and hence producers can hire workers at cheaper wages. Opportunities and Threats It is identified that foreign people are very interested in Russian ice cream products, especially Ice-Fili products containing only natural ingredients. In addition, technological improvements in Russian market may largely benefit the company in the long run. Furthermore, a stable political and economic landscape of the Russia would add to the operational efficiency of Ice-Fili. Similarly, declining profit margins for ice cream products and adverse tax impositions are found to be the most potential threats to Ice-Fili. The worsened domestic market demand in Russian ice cream industry is also a threat to the firm. In total, the external environment analysis does not promise a prosperous future for the company. From the Porter’s five forces study, it is clear that the firm does not obtain any competitive advantage from its external environment except some degree of bargaining power over its suppliers. It can be concluded that effective application of promotion tools and modernized production strategies could have improved the market position of Ice-Fili in the Russian ice cream industry. Internal Environment Analysis From a critical evaluation of the case study, it is clear that the Ice-Fili still has a well reputation in the Russian ice cream market simply because of its well accepted recipe containing only natural ingredients. Similarly, the company offers ice cream products at cheapest rates as compared to other domestic ice cream producers. Ice-Fili’s increasing export rates can be identified to be one of the potential strengths of the organization because people across the globe are very much interested in Russian ice cream products. To illustrate, the company’s exports increased to 12 tons of ice cream in 2001. The company has acquired a range of improved equipments and technologies over time through imports so as to make its supply chain activities more effective. In the words of Rukstad, Wells and Yin, Ice-Fili possesses a famous brand called ‘Lakoma’, which is still one of the three most recognized ice cream brands in Russia. At the same time, Ice-Fili has also some weaknesses related to its internal environment. As a result of similar products and lack of patent policies, the company cannot effectively diversify its product offerings from that of its domestic competitors. In addition, poor promotional strategy seems to be the most threatening weakness of the company. Referring to these identified strengths and weaknesses, it can be stated that the Ice-Fili’s internal environment is still powerful and capable of promoting growth. It also seems that the company possesses a range of competitive advantages such as improved technology, cheaper rates, and goodwill over its rivals. Current Strategy Evaluation Business level strategy While analyzing the case scenario, it is clear that Ice-Fili follows it traditional business approach. The case writer clearly indicates that the company is not ready to change its conventional ingredient parameters and use additives even though such a strategy may assist the company to reduce costs and thereby improve profitability. Ice-Fili also holds the belief that the product quality factor alone would position the firm at the top of the Russian ice cream market and there is no need of increased promotional activities. Similarly, the case study reveals that the Ice-Fili gives greater emphasis on operational efficiency. The organization tries to maintain better processes that would spread out costs over greater volume. Rukstad et al indicate that the firm’s newly introduced base salary plus bonus compensation system is characterized with smaller premiums and larger penalties. Moreover, Ice-Fili pays specific attention to establishing right objectives as the management believes this process is essential to Russian market success. Corporate level strategy is not applicable in case of Ice-Fili as the company has not expanded its business beyond the territories of Russian market. Recommendations Ice-Fili must do something immediately to regain its market leadership in the Russian ice cream industry. As discussed earlier, the company has a better export rate and hence it is advisable for Ice-Fili to take maximum advantages of this strength. It is advisable for the company to export its products to other countries where good demand for ice cream products exists. The company may reduce its operational costs by forming alliance with kiosks and minimarts, creating trademarks and patents, and integrating vertically with a distributor. Kiosks and minimarts are the major ice cream distribution channels in Russia. Therefore such alliances would assist the company to reduce its operational costs and get wider market coverage. Likewise, trademarks may aid the company to keep its product innovations secure (see figure 1). In order to strengthen its financial performance, it is recommendable for the company to consolidate its existing product lines and create powerful brands. In addition, the organization has to improve its distribution channels and give more focus on promotion activities. It is clear that promotion is the major marketing element determining the sustainability of modern businesses. Such policies would probably assist the organization to improve its customer base and thereby sales revenues. The company may need huge funds to restructure its market operations and therefore it is advisable for the company to raise additional funds through debt financing policy. While analyzing the financial statements of the company, it is clear that the company takes long time to recover its debts or it has a poor debt collection system. This condition may result in the deficiency of working capital. Hence, the company has to design an improved debt collection system. Mergers and acquisition policies are also recommendable for the firm as those policies would prevent the entry of new players to some extent. Works Cited Rukstad, Michael., Wells, John and Yin, Pai-Ling. “Ice Fili Case Study”. Harvard Business School, 2007. Appendix Figure 1 Ice cream distribution channels in Russia (Rukstad et al, 2007) Read More