Porter's Five Forces Analysis - Market Integration in Russia

Analysis, Pages 6 (1404 words)

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Question 1.

Political

From 1991-1998 No longer anti-alcohol campaign to boost ice-cream industry. Ice cream industry had to complete with substitute products. 2) Since 1998 Financial Crisis, Russian rubles devalued by two-thirds. Russians cannot afford foreign products and companies relied more on national suppliers. 3) 1999 VAT raise. Fruit-based ice-creams and popsicles raised to 20% VAT. Consumer buy less ice-cream because of elastic demand, revenue is less.

Economical

Privatized companies must overcome bad infrastructure, to create value in Primary and Support activities, and to extend the maximum market share.

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In ice-cream industry, Ice-Fili’s competitor, Nestlé, built Nestlé’s own infrastructure during the 1990’s and Russian faced an enormous challenge.

Society/ Culture

Lakomka. Older customers love “Lakomka”, 5 competitors compete Lakomka. However, in a long term, Lakomka needs to sustain its life if old generation dies. Russian likes Condensed Milk (less sweet) ice-cream generally. But Nestlé may change consumers’ behavior. Consumers took ice-cream during short summer but took beer throughout year.

Technological

Newly imported equipment. Ice-cream industries invested newly imported equipment to enhance infrastructure.

90% of new equipment used for freezing and packaging in Russian market, but only $1.5 to $2m per complete production line. Not really improving.

Substitutes (High Threat)

Soft drinks, beers, chocolate, confectionaries were rising but ice-cream declined by 3.5% in 2002. Rivalry (High Threat)
Nestlé established great infrastructure and wanted to be only brand in Russia in 2-3 years’ time! Entrants (High Threat)
Regional producers took 30% of domestic market and still growing. Supplier (High Threat)
Imported ingredients were more expensive; National suppliers had more supplier power, price of ingredient were more expensive Buyer (High Threat)

Customers had 240 different ice-cream products! Yet to count substitute goods.

2) Retailer cost 17.2% & distributors cost 30%, 47% of industries expenses!! From the PESTLE and Porter Five Forces shown above, Russian ice cream industry was struggling to evolve.

Question 2

Tangible resources

In Physical point of view, Russian ice-cream market contains different plants and fruits. This is also mention under point “rare” below in the same answer. Ice cream companies’ experiences long year’s industries, human resources of local and national knowledge such as culture, marketing, and human connections were under the competitive advantage.

Intangible resources

For firms in Russian market, long ice cream brands were already enjoying reputation because some reputable brands were household name such as Lakomka.

Under Capabilities

Valuable

Despite that is devaluation in Russian Rubles, which is a great opportunity to enter ice cream market in Russia in lower cost.

Rare

Tailor made Ingredients. Russia has a huge area, which may grow some specific type of plant that cannot find in other countries. Those local plant and fruit could turn into local ingredients to make a unique ice-cream that could be found in Russia only.

Inimitable

In the Russian market, there were more than 240 ice cream products alone. For a market entrant, the barrier of entry is low because customers were not sticking to a particular ice cream brand and reject the others. Entrants needn’t imitate other brand and enter to the market. That was why regional ice cream market enjoyed growth.

Organized to be exploited by the firm

Russian market used to have a weak organizational infrastructure, neither in vertical and horizontal integration during 2002. Nestlé had formed a well infrastructure already but Nestlé couldn’t take entire integration in Russia market, there are still some room for companies can take on this opportunity to integrate horizontally and/or vertically at the moment, to grow on company’s economies of scale at this moment, rather than years later that all the market big boys fill up the ice cream industry, which increase barrier of entries.

Question 3

Strategic Positioning Model – (refer to appendices on p.7) In appendices 1, Ice-Fili played board in Competitive Scope but played differentiation in Economic Logic. Despite Ice-Fili sold 6 Rubles and compete directly with some of Nestlé’s medium price products, for a medium size company with limited tangible resources, Ice-FIli unable to be a Cost Leader to compete with high economies of scale like Nestlé and local big companies. Ice-Fili had to prove its value.

Porter 5 Forces

Threat of Substitutes

Invest Eastern Europe and Germany Ice-Fili directors believed to take a ‘cash cow’ opportunity to produce dry ice and sell aboard. It was right as director aware substitute goods and lower switching cost of Buyers can threat ice-cream business. If dry ice aboard were Stars Market, of course it was worth to invest in; if dry ice was a Question Marks market, risk was much higher.; Furthermore, Ice-cream market and dry ice-market may not share the same technologies simply based on same freezing system, Ice-Fili needed to put more effort to control its business, plus taking care the tough ice-cream competition at the same time.

Threat of entry

Ice-Fili improved some sufficiency that raised the bar barriers of entry from below: 1) It was right to restructure 117 salary levels to one under Corporate Organization & Structure, more cost flexibility & got rid of high fixed cost rigid system. 2) Production Invested $8m on advanced machinery with 90% used for freezing and packaging! To tackle significant 5.7% packaging cost was reasonable. It may spend too much on improve lower cost Freezing system but spent less than 10 % on production, let “Older generation equipment” produced 25% production capacity was obviously insufficient. Ice-Fili did not tackle high repair & maintenance cost.

Buyers’ Power

Ice-Fili planned their Product range with 170 different ice cream plus 20 new products every year. That let buyer to have more choice was creating far less sufficiency on cost control. Under poor financial position in 2002, simply should focus traditional intangible brand Lakomka and other most profitable ice-cream!

Supplier Power

Ice-Fili kept 3-4 suppliers only. Kabuzenka stated Ice-Fili constantly received “new one” offers, but didn’t diversify more suppliers. High Suppliers Power remained. Ice-FIli never hedged foreign currencies that can cost less to buy foreign products.

Question 4

Arenas- Red Ocean (substitute products), Blue Ocean (Dry-Ice Market & theme park) Invest Foreign Dry Ice Market- Ice-Fili must ensure they were investing Star Market rather than Question Marks market. If not a Star Market, Ice-Fili should not invest. Invest Ice Cream theme park- Ice-Fili located nearby Moscow. It is inexpensive to set, and easy to attract some visitors to visit theme park. i) Introduce company’s history ii) watch brief production process, iii) let visitors taste and evaluate developing future product. iv) Visit “cute” graveyard of Ice-Fili’s “buried products” to create fun. Invest substitute products- E.g. beer, chocolate, soda, etc., as markets were expanding, in short term, to buy these companies shares and generate cash a.s.a.p. In longer term, get enough resources to develop its own brand, or fully takeover an existing substitute company.

Vehicles- Acquisition

Backward integration- To save storage cost of ingredients, could pay suppliers slightly more by delivering on time for production. This enhanced inbound logistics under Generic Value Chain, Porter 5 Forces’ Supplier Power, and decrease Operation cost. Forward Integration- Set up own small distribution warehouses across geographical market locations, hire few employees in each location. It runs several tasks:

Enhance Outbound

Logistics by distribute products on time to all retail channels, replace 47% Retailers and Distribution costs.

Use cheap operated SMS to communicate freely with local marketers, to gather 1st hand market demand and relevant information, to build up Services by developing relationships. Then e-mail this “fount line” information to headquarters on regular basis. Differentiation- Position medium price product and try to Re-register Lakomka Register Lakomka- to become Ice-Fili’s unique product in the market. Not bond with leading Russian producers for joint advertising- The bond favor more on Russian big players rather than medium Ice-Fili. Bond’s decision may constraint the future benefit of Ice-Fili. Eventually, Ice-Fili could be destroyed by the bond, not by Nestlé. It is not worth to save 0.44% cost by joining the bond. Staging- Based on priority of financial resources inflow and outflow of time sequence as follows: Invest substitute products 1st as market growing->register Lakomka->forward integration->backward integration->Dry Ice Market abroad->Ice Cream theme park Economic Logic

Gain cash from raising market (substitute goods); Save cash to run future business.

Conclusion

1st invest Horizon 2- certain growing substitute market; then enhance Horizon 1- register Lakomka and integration, finally invest Horizon 3-Dry Ice and theme park.