Ice-Fili Strategic Analysis Firm Overview Company Objectives

Ice-Fili Strategic Analysis Prepared by: Tim Maxwell (200903176) Date issued: April 19, 2013 Firm Overview Company Objectives Ice-Fili is a company that is looking to diversify its product offerings from that of its primary market of ice cream. Because the Russian ice-cream market is saturated and subject to the same seasonal trends as markets elsewhere, Ice-Fili hopes to expand in other areas to offset the income decline during non-seasonal months. Ice-Fili is constantly looking for young and talented managers to hire that will excel in an open-market environment. Two avenues that Ice-Fili are exploring are expansion efforts in Eastern Europe as well as into Germany, and to begin production of dry ice for sale abroad for medical, construction, and beverage uses. Current Strategy Ice-Fili currently employs a strategy of focus differentiation and capacity expansion. By producing over 170 types of ice-cream with speciality types such as diabetic ice-cream available, IceFili is in a strongly differentiated position from its competitors who offer more traditional varieties of ice-cream products. In addition to this Ice-Fili adds twenty new products to their line every year. Strengths Ice-Fili has been incredibly successful creating products that consumers see as high quality as is evident from their longstanding sales with Lakomka, which still maintains 30% of the company's sales despite being introduced in 1964. Ice-Fili is a member of a group of Moscow ice cream producers formed an association to pool resources and improve consumer demand. Weaknesses Ice-Fili has many inefficiencies in its operational structure that have hindered growth initiatives by consuming capital that could otherwise be put towards further expansion efforts. Ice-Fili has also experienced a tumultuous history with management changes, this works against Ice-Fili's corporate ulture of ei g ope a d ooperative . Opportunities and Threats There are opportunities for Ice-Fili to expand into areas other than the ice cream industry, such as producing dry ice. Additionally, Ice-Fili can expand their influence to more geographic regions and introduce more flavours to the industry. Some threats to Ice-Fili would be the unstable Russian economy that is discouraging to foreign investment, as well as being a possible takeover target given Ice-Fili's slipping performance in the market. 2 Appendix 2: External Analysis Five Forces Analysis Supplier Power Low Low switching costs + Buyer Power High Low switching costs - Threat of Substitutes High Low switching costs + Threat of new entrants High High start-up costs - High exit costs - Rivalry High Direct competitors + Indirect competitors + Suppliers in the Russian confectionary market have relatively low power. This is due to the various ingredients that each producer requires and their widespread availability. In addition to this, there are a number of substitutes that producers would be able to turn to in the event that a supplier try and leverage themselves. The ice cream confectionary market in Russia is saturated and producers are vying for market share by differentiating their products, pushing price point, as well as through promotional efforts. This leaves the consumers in this market a lot of autonomy given the vast amount of selection they have available to them. The concentration of the consumers contributes to high buyer power. Moscow alone accounted for 20% of Ice-Fili's total sales while being a region where over 400 tons of product is produced and distributed. With the industry growing to over 300 producers in 2002, there is a high availability of substitutes available to consumers. There are various types of ice cream confectionaries that are produced by a multitude of brands both foreign and domestic. Ice cream is not a necessity so it can be easily substituted with other types of ready serve snacks. Based upon the rapid growth of new producers in the industry it is evident that there are not many barriers to entry in the ice cream confectionaries market. Despite this number, it is not easy for these new entrants to compete against established brands, especially the speciality brands that have the associated prestige to go with their product. There is a high degree of rivalry in the market between the brands such as Ice-Fili, Nestle, Baskin-Robbins as well as the multitude of regional producers who have captured 30% of the market. 3 Strategic Group Maps There has been an explosion of competitors in the Russian ice cream market over the previous years. The ice cream industry is very much a uyer’s arket so it is important to understand how the consumer evaluates the products in the market. This can be done by examining price and product range. Illustration 1: Bubble size is equal to production level within Russia Given the limited amount of information available, a relative group made was created to depict the approximate location that Ice-Fili hold in the market. This was achieved by identifying Nestle as the largest direct competitor and acknowledging the the strong presence of regional producers. However, to give scope to this limited data set, the parameters of Product Range and Price Range were selected. Nestle is positioned as a high price producer with a medium amount of ice cream products available for consumption in the Russian market. Based on the bubble size it is evident that the bulk of their product is produced outside of the country and imported, which would explain the higher selling prices that they set, as this would offset selling costs. Ice-Fili is currently positioned as a medium priced producer with a high product range. The bubble size indicates that they have a high degree of domestic production. From their one factory, IceFili produces 200 tons of product daily which is by far the largest amount domestically produced in the industry. 4 Appendix 3: Internal Analysis Financial Statement Analysis Ice-Fili's income statement is a story of steady decline from 1999-2001. However, Ice-Fili's attempts at modernizing their company for efficiency is a highlight of their financials. Costs of goods sold was significantly reduced between 2000-2001 which helped contribute to an impressive 163.44% increase in gross profit. 2001 % Change 2000 % Change 1999 $25,147.00 -7.57% $27,206.00 -16.73% $32,672.00 Cost of Goods Sold 19512 -18.71 24004 -16.65 28798 Gross Profit 5635 163.44% 2139 -26.32 2903 -1.45% 1727 -17.37 2090 Sales Net Income 1702 *In thousands of US dollars The Russian ice cream industry is in a state of recovery after the country defaulted on its debt payments causing the value of the ruble to fall to one third of its previous value. This tightened margins for producers who had to import ingredients and equipment from abroad, while at the same time reduced demand for ice cream given that consumers had less disposable income. To counteract this trend, Ice-Fili has concentrated on modernizing its equipment and processes to reduce inefficiencies and improve their bottom line. Vertical Analysis of the Income Statement 2001 % of Sales 2000 % of Sales 1999 % of Sales 100 100 100 Cost of goods sold 77.59 88.23 88.14 Gross Profit 22.41 7.86 8.89 Income before taxes 7.76 7.8 8.62 Income tax 0.99 1.45 3.27 Net income 6.77 6.35 6.4 Sales 5 Value Chain Analysis Primary Activity Source of Differentiation Cost Reduction Inbound Logistics Operations Yes Outbound Logistics Yes Yes Marketing and Sales Yes Service Appendix 4: Strategic Alternatives Excluding Ice-Fili's current strategy of Focus Differentiation and Capacity Expansion, three strategic alternatives have been identified that would provide a distinctive route for Ice-Fili to achieve further profitability and reclaim their lost market share. These alternatives have been evaluated for both their benefits as well as their shortcomings; however, each strategy is a perfectly viable direction for Ice-Fili to pursue. Vertical Integration x Focus Differentiation - Operatio Red O to er Distribution is an up and coming area of competition. Ice-Fili would do well to focus their efforts on more extensive distribution efforts that would supply Moscow as well as other regions of Russia. Producing 170 different ice-cream products simply is not efficient for one factory to do, so rather than expand capacity even further, Ice-Fili should concentrate on differentiating their products and processes even further. Focus Differentiation x Cost Leadership - Easter Pro ises Continue to introduce new products to the market and phase out unsuccessful launches. Cut costs by using a dairy fat substitute (estimated 50% savings). The current quality of Ice-Fili's products is high but due to the ingredients, their products have a very short shelf life which causes higher wastage if it is not sold. By using substitutes, Ice-Fili can become more cost efficient with regards to both the costs of raw materials and well and production. This strategy will also allow Ice-Fili to produce more effectively through the non-seasonal months reducing the need for seasonal workers. Capacity Expansion x Cost Leadership- E e y at the Gates Ice-Fili would expand to other areas of production, such as dry ice and other frozen foods, to offset the seasonality of the ice cream industry. First, operating costs would have to be reduced in order find capital to fund this expansion. This can be done through further modernization of their current factory, as well as through turning to low cost ingredient substitutes. From this point Ice-Fili 6 can decide to reduce their prices to be more attractive than their largest competitors who charge more for their product in a very price sensitive industry as well as increasing promotional efforts to differentiate themselves from the competition. Appendix 5: Strategic Decisioning List and explanation of Decision Criteria Criteria Definition Weight Explanation How likely is this 30.00% strategy to be profitable for Ice-Fili? Ice-Fili's slipping financial statements indicate that the firm is in dire need of improved profitability. 2. Likelihood of Success How feasible is this 20.00% strategy to implement? After the most recent financial crisis, Ice-Fili does not have excess capital to survive a failed strategic move. The firm must be exceptionally judicious in their future decisions. 1. Profitability 3. Cost to Implement What expenses will be incurred with this strategy? 10.00% Ice-Fili is still in a commanding market position; however, their market share is slipping so they need to be able to fund growth without the risk of being a takeover target. 4. Time to Implement How much time is required for this strategy to be successfully implemented? 20.00% Time is of the essence for Ice-Fili, who is conceding market share quickly to regional competitors. Quick growth is key to curbing this downward trend. 5. Future Growth What is the potential for 10.00% this strategy to propagate sustained growth? Once Ice-Fili begins their upward trend they will need to continue their growth to put more room between them and upcoming regional competitors, as well as to remain competitive with foreign producers such as Nestle. 6. Market Dominance How much power does this strategy exert over the industry? Ice-Fili should pursue a strategy that cements their position as a market leader. 10.00% 7 Weighted Decision Criteria Strategic Alternative Operation Red October Eastern Promises Enemy at the Gates Strategic Archetype VI*FD FD*CL CE*CL Criteria Relative Weight Nominal Score Weighted Score Nominal Score Weighted Score Nominal Score Weighted Score 1 30.00% 7 2.1 6 1.8 9 2.7 2 20.00% 5 1 7 1.4 6 1.2 3 10.00% 4 0.4 7 0.7 3 0.3 4 20.00% 2 0.4 5 1 4 0.8 5 10.00% 4 0.4 6 0.6 8 0.8 6 10.00% 6 0.6 5 0.5 8 0.8 Total 4.9 6 Third Best Alternative Second Best Alternative 6.6 Best Alternative *Nominal scores were assigned on a relative scale of 1-10. Low scores of 1-3 are viewed as having a negative impact on Ice-Fili. Medium scores of 4-6 have neutral impact. High scores of 7-10, have a positive impact. Appendix 6: Recommendations After assessing the micro and macro environments surrounding the Russian ice cream industry, a preferred strategy has been identified that will place Ice-Fili in a more competitive position than it is currently. The selected strategy is that of Capacity Expansion x Cost Leadership. Ice-Fili is a slipping market leader in the ice cream confectionaries market as was revealed through the horizontal and vertical analysis of the income statement. The firm has already begun streamlining their production efforts by modernizing their equipment as well as through seeking out young managerial talent that can help Ice-Fili adapt to the open-market. Due to the perceived fragility of the Russian economy, it will be difficult for Ice-Fili to attract foreign investment towards their expansion efforts. This two part strategy addresses both of Ice-Fili's most daunting issues. The first part would see Ice-Fili pursue immediate cost leadership by increasing margins through streamlining the production side of their business. The added revenue would allow Ice-Fili to both reduce prices on their products to compete more directly with the insurgence of regional competitors, while using the extra capital for promotional efforts and to fund growth efforts into new product lines such as dry ice as well as supporting geographic expansion efforts into other parts of Eastern Europe and Germany. 8 Appendix 7: Implementation Plan Task Responsibility Cost Driver Estimated Cost Timeline Evaluate Logistics Operations, Executive team Time spent, evaluating, savings and efficiencies $30,000.00 One month Purchase new Operations, CL machinery and contract Executive team Phase with new suppliers. Time spent, salaries and purchases $15,000,000.00 Three months (ongoing) Up to $10,000,000 (depending on availability of capital) Six months Develop promotional plan Sales/Marketing, Time spent, Executive team market research Evaluate potential Operations, products for production Executive team, CFO CE Phase Time spent, $80,000.00 salaries, travel Two months Seek buyers and suppliers for new products BOD, Executive Time spent, team, CFO, Sales travel, brokerage $30,000.00 Two months (ongoing) Purchase equipment and facility if required Operations, Executive team $30,000,000.00 One year Hiring/Training employees Human resources Salaries, training, materials $2,000,000.00 Three months (ongoing) Time spent, salaries and purchases This two phase strategy involves six key tasks. First, the logistics of the strategy need to be considered. This task will increase efficiencies in the long run. Following this task is the purchase of new equipment and the procurement of new suppliers. Ice-Fili has already begun the process of modernizing their facilities, which will greatly reduce future costs as well as implementation time. Despite these reductions, this step may still run costs as high as $15,000,000, depending on the equipment needed and the shipping/installation costs associated. The promotional plan is subject to the availability of capital. Ice-Fili is already a brand leader in the industry, and has a long standing history as being a high quality producer of ice cream. However, if Ice-Fili chooses to reduce prices, to compete more competitively with regional producers, they will need to have a promotional plan to communicate these changes to the consumer. This will also serve to differentiate Ice-Fili from the multitude of new products emerging in a market where buyers hold a high degree of power. 9 The second phase of this strategy targets capacity expansion. Firstly, new products will have to be considered and evaluated for production. Ice-Fili has already identified dry ice and various other frozen food products as possible avenues for new production. Once the product(s) has been identified, the logistics of obtaining suppliers and buyers needs to be worked out. From this point it is just a matter of purchasing equipment and facilities as needed, which will form the bulk of the expenses of this strategy, along with the hiring and training of new employees to operate the the new equipment. This outlined implementation plan for the proposed cost leadership x capacity expansion strategy will allow Ice-Fili to stave-off their current downward trend while at the same time place themselves in a commanding position to become a dominant force in the market once again. As with any implementation plan there are significant risks associated due to both foreseeable and unforeseeable occurrences. Some of these events have been addressed and prepared for in the contingency plan section of this report (Appendix 8). 10 Appendix 8: Contingency Plan Trigger Event Further tax regulations Changes in Customer Preferences Another Recession Further Loss of Market Share Likelihood of Occurrence Low Given that the Russian government just recently repealed new tax laws it is unlikely that this issue would arise again soon. Medium It is a buyer’s market that does not experience a great degree of advertising so preferences are subject to change. Impact Medium Would slow growth efforts by cutting margins gained from the CL strategy. Medium Would require more research into customer product preferences, would slow growth temporarily. Low High The Russian economy is Would place Ice-Fili in a in a state of recovery. precarious position by leaving them exposed as a takeover target by foreign producers looking to enter the Russian market. Medium High With so many More time spent on competitors entering market research. the industry this is a Would reduce sales real possibility volume even further 11 Response Produce and distribute products that are not part of the tax law to circumvent the issue of diminishing returns. Ice-Fili currently produces the greatest variety of product on the market. They should increase production of existing product that meets customer needs. Look to cut as many costs as possible to survive the effects of lower consumption and reduced profitability. Slow expansion efforts in favour of an increased promotional budget.