Ice-Fili Case Study

Strategy Recommendation
Strategic Management Final Exam
Environmental Analysis
National & Inter. Environment
• Fast changing and uncertain eco
landscape
•Significant Economic uncertainty
with Ruble depreciation, and
financial Crisis of 1998, unstable
prices. High Inflation.
• Significant decrease in imports as a
result
• Overall competition –domestic and
international expected to increase
Govt & Political Forces
• Uncertain govt. regime
• Changes in tax regulations
Economic and Political Stress lead to significant uncertainty,inflation in Russia…
Environmental Analysis
The Ice Cream Industry
Environment
• Lots of suppliers, low switching costs
• High fragmented competition. Divided
amongst two segments – Regional
Players and International companies
.
• Low price sensitivity of customers
2
Final Exam
The Natural Environment
• Cold Climate, Seasonality
• Vast Geographies, population
centered in cities towards the
west
Technology
• Outdated and Old technology
• Reliant on import of technology
Demographics
• More preference towards Beer,
soft drinks and confectioneries
• Preference towards ice-creams
with natural ingredients.
Industry Analysis..Porter’s Five Forces ofIce cream industry Final Exam

Bargaining Power of Suppliers - Low

• Numerous suppliers
• Mostly undifferentiated Raw
material , locally available (except
few imported).
• Low switching costs
Bargaining Power of Customers –
Low-Medium
• Low price sensitivity
• Comparatively lower consumption
per capita
Threat of Substitutes - High
• Preference towards Beer, Soft
Competitive Rivalry - High drinks, and confectioneries.
• Significantly fragmented market • Lead to declining industry size
(market leader with only 4% market
share)
• Low prices of Ice-cream
• Decreasing industry size (3.5%
decrease)
• Decreasing profit margins (down from
30-40% to 15-20%)
• Main competition to regional players
come from international players,
specifically Nestle. .
Threat of Entry – High
• Opening up of market led to
international competition.
•

“Industry shrinking in size and profitability. With significantly increasing competition from
international players… This leads to the end consumer capturing most of the economic
value created..”
3
Current Business Scenario.. Final Exam

• Ice-Fili, is one of the oldest Russian ice cream manufacturing companies, with a heritage brand, and currently the
biggest player in a fragmented market (though a market share of only 4.3%).
• Is competing in an industry characterized by decreasing size and profitability, while at the same time increasing
competition from international players), in an uncertain and volatile economic and political environment.
• The company is facing competition from newly established regional players on one end and from international
companies (Nestle) on the other.
• Provides quality product with original raw materials (raw materials 100% higher than dairy subsititutes). Despite
that is positioned at 6 rubles which is below Nestle (positioned as premium brand 10 rubles; despite dairy
substitutes).
• Sales, Margins and Returns have significantly dropped over the past years on the back of a depreciating Ruble.
• Excluding the impact of Ruble depreciation, though Revenues have grown significantly (422% over the past 5
years), but return on equity has decreased by 55% - from 34% per annum in 1996 to 16% pa in 2001. Thus company
has not been able to pass on the inflationary impact fully.
• Has significant spare capacity (Current Capacity utilization of 22%) and high level of Raw material costs & Fixed
Manufacturing Costs.
• Low control over the distribution system lead to low availability and shelf visibility.
• Moderately low marketing and advertising budgets (2% of annual revenue)
• Ageing workforce, and high labor costs, though have taken recent steps to restructure and reduce costs.

• Eroding profitability can be attributed to economic environment (inflation, volatility), industry environment
(shrinking industry size), and increasing competition (Nestle on the one hand, which has significantly altered the
competitive landscape and newly established regional players on the other). These problems have accentuated the
inherent high cost structure, complacency and inflexibility.

“ATTACK FROM ALL SIDES…IS THERE A WAY OUT??”

4
Changing Competitive Landscape… Final Exam

THE NESTLE PROBLEM….

• Entry of Nestle has weakened the competitive positioning of Ice-Fili. Before Nestle, Ice-Fili placed at a ‘medium-level’
national level category with maximum volume.
• Where other international players failed, Nestle managed to succeed in the Russian market by:
•Rolling products according to local taste (though with both milk and vegetable fats).
• Controlling the supply chain – distribution, storage, and marketing networks. This has an astounding effect of
Nestle being twice visible than Ice-Fili in retail outlets in such a short time.
• Sourcing production equity locally (in Rubles), to sustain the significant depreciation in the currency.
• Localizing, training and development of staff.
• Aggressive and strong marketing
• Optimally and to the full extent leveraging its international Brand and knowledge to localize it product
• This integrated approach has enable Nestle to position itself in a premium category, despite using much cheaper
raw materials (as compared to Ice-Fil).

INCREASED COMPETITION FROM LOCAL PLAYERS…

• Cropping up of newly established regional players which though do not have the heritage, brand and consistency of a
national player (like Ice-Fil), nevertheless had significant competitive advantages –
• New Manufacturing facilities which lead to significant cost advantage.
• Lower rents and labor costs
• More flexible in their distribution logistics due to proximity.

“STUCK IN THE MIDDLE..SIGNIFICANT LOSS OF COMPETITIVE ADVANTAGE, IN AN ALREADY

SHRINKING INDUSTRY..”
5
Firm’s Business Strategy & Sources of Competitive Advantages

Re-assessing the Firm’s Sources of Competitive Advantage and its Strategy.

Sources of Competitive Advantage..
• Enjoys and relies on a strong, legacy brand
• Market Leadership and National Presence
• Relatively strong balance-sheet (no debt)and returns, despite recent negative growth.
Thus despite economic turmoil, is in better position to raise capital.
Strategy…
• Positions itself as a ‘medium-level’ category ‘domestic’ ‘national’ brand.
• Focuses on High quality, natural ingredients, without any artificial preservatives or
colorants.
• Main distribution outlet through Kiosks (70%) and Minimarts. Minimal distribution in
restaurants & Supermarkets.
• External distribution chain, and modérate marketing.

‘MEDIUM-LEVEL’ ‘DOMESTIC’ ‘NATIONAL’ BRAND WITH HERITAGE AND QUALITY..ARE

THEY CONSISTENT AND ENOUGH?
Summary of Key Issues Facing Ice-Fili
▪ Uncertain economic and political environment – depreciation of Ruble, Tax increases, old technology of
machines available.
▪ Decreasing size & profitability of Ice-Cream Industry – Loss to substitutes – Confectioneries, Beer, Soft Drinks.
▪ Key threat -Nestle – Even though the company is still profitable with comfortable returns, it is most likely that
with the strong competitive advantage that Nestle has created, things will get worse.
▪ Secondary Threat – Regional Players – Though not as critical as the Nestle problem, and is easier to fix.
▪ Not able to fully capture the legacy of brand, and quality raw materials – still placed under ‘medium-level’
category.
▪ Low shelf life of products due to ‘original raw materials’, thus not able to expand geographic reach.
▪ Low control over distribution network and apparently weak logistics, thus losing product availability and
visibility to Nestle (2:1)
▪ Completely reliant on Kiosks and Minimarts, ignoring Restaurants & Supermarkets
▪ Low utilization capacity of machine (22%), resulting in higher costs per unit
▪ Old machineries leading to higher manufacturing costs.
▪ Complacent marketing (though recently recognizing the need)
▪ High labor costs due to ageing work force (40% beyond 20 years), and apparent legacy complacency and rigidity.
▪ Potential to raise Capital. But where and how do they invest and grow? – Geographic expansion into Eastern
Europe? Dry Ice? Ownership of Distribution Channel and Networks? New Machines? Aggressive Marketing?
Human Resources? A new Brand (to better compete directly with Nestle)?

“WITH THE CHANGING ENVIRONMENT, THE COMPANY CAN NO LONGER RELY ON PAST COMPETITIVE
ADVANTAGES..”
Realigning Strategies for Creating & Sustaining Competitive Advantage
KEY STRATEGY 1: OPTIMIZE OR CONTROL THE DISTRIBUTION NETWORKS & STORAGE
▪ Its simply unacceptable that Nestle has managed to gain twice the product visibility in such a short
period of time.
▪ Its apparent that just having ‘affiliate’ relationship with its Distributors.
▪ First identify whether the current distribution can be optimized through exclusivity and alignment
of incentives. If cannot, then own the distribution system.
Key Implications and Reactions of Implementing this Strategy
• Flexibility in the distribution system, thus combating the competitive advantage of regional players.
Regional players will have limited power to react - can reduce prices, but may not be sustainable in
the long run.
• Higher visibility of product will combat a key competitive advantage of Nestle.

KEY STRATEGY 2: FOCUS ON DIVERSIFYING THE DISTRIBUTION INTO SUPERMARKETS

• Supermarkets appear to be the strongest growth channel for the future.
• Improves brand visibility, even though market share is less

KEY STRATEGY 3: EXPAND INTO HIGH SHELF LIFE, PRESERVATIVES BASED RAW MATERIAL ICE-CREAM
THROUGH A NEW SUB-BRAND
• This coupled with the other strategies (stronger distribution, higher geographic reach), will enable
the company to improve it’s utilization rate, along with reducing raw-materials costs signficantly.
Realigning Strategies for Creating & Sustaining Competitive Advantage
KEY STRATEGY 3: EXPAND INTO NEW ICE CREAM LINE - HIGH SHELF LIFE, PRESERVATIVES BASED RAW
MATERIAL ICE-CREAM THROUGH A NEW SUB-BRAND
• This coupled with the other strategies (stronger distribution, higher geographic reach), will enable
the company to improve it’s utilization rate, along with reducing raw-materials costs significantly.
• Rolling this new line under a new sub-brand will retain the existing brand image of high quality ice-
cream.
• Have a long term strategy to gradually move towards this line as the main product line, with fresh-
ice cream converting into a niche product.
• Supplement this through optimal marketing.
• Expand into new geographies through alliances (after considering better-off and ownership tests)
to utilize capacity, and benefit from longer shelf life.

KEY STRATEGY 4: AGGRESSIVE MARKETING & REPOSITIONING

• Aggressive marketing at two levels – one at the industry level (though Association of Ice-Cream),
and the second at the Company level.
• At the industry level, aggressively market to promote ice-cream from declining growth.
• At the individual level - Have a long-term strategy to shift the brand as a ‘high-level high quality
product’. Extract consumer surplus by gradually increasing prices, exploiting low price elasticity of
demand.
Realigning Strategies for Creating & Sustaining Competitive Advantage
KEY STRATEGY 5: ALIGN THE SUPPORT FUNCTIONS IN LINE WITH THE KEY CHANGES & OTHER LONG TERM
STRATEGIES
• Train employees and restructure the work-force accordingly.
• Long term plan of on sourcing equipments and other raw materials entirely domestically, to
circumvent the risk of depreciating Ruble.
Implementation Risks/Key Considerations

▪ Raising Funds, Positive Value creation from funds.

▪ Managing/exiting from current distribution channels.

▪ Customer reluctance to change perception of brand to ‘mid-high’ level. Absorbing higher prices.

▪ Inflexibility of current workforce to align with the changing strategy.

▪ Cannibalization of existing Product line with the new low cost product line.
▪ Reaction of Nestle and Regional Players to New distribution channel, and Product Line. (ECONOMIC AS
WELL AS BEHAVOURAL ANALYSIS)

MUCH EASIER TO STRATEGIZE, MUCH MORE DIFFICULT TO IMPLEMENT..