Q1. How structurally attractive is the Russian ice cream market?

Discuss how its

industry structure can be made more attractive? (663 words)

The political and financial instability had greatly impacted Russian ice cream industry. The
financial crisis in 1998 and the devaluation of the ruble had greatly reduced Russian
market’s consumption ability. It also increased the production cost of Russian ice cream
producers who relied on external market for raw materials. The shrinkage of frozen import
market heavily impacted by the financial crisis forced the wholesales entered the ice cream
market, which intensified the competition in the market. Russian government’s value-added
tax further decreased the profit of ice cream producers. Beside this, the market growth had
stagnated or even shrank. All these make Russian ice cream market less attractive.

Due to historical reason, Russian managers had little knowledge and experience on
channels. Therefore they had to heavily depend on distributors to reach the end customers.
Together with distributor’s strong ability to integrate upward, this endowed the distributor
strong bargaining power. Since the whole market’s revenue generated from spontaneous,
impulsive purchases, the end consumer had little switching cost between different brands.
As substitutes to ice cream, beer, soft drink and confectionary product was grabbing ice
cream’s market by heavily investing on advertisement. Their success lied on the continuous
shrinking of the ice cream market. The raw materials of ice creams are commodities.
Therefore the suppliers had a weak position in the profit pool. Since there was almost no
entry barriers, new regional producers rushed into the industry. With strong ambition to
gain market share, the regional producers leveraged their cost advantage to compete with
low price. In 2001, the producing capacity already exceeded the market demand, which
further intensified the competition. Besides these, the strong seasonality of ice cream
market further increased the cost of the producers. Through the five forces analysis, the
attractiveness of Russian ice market was quite low.

However, Russian ice cream market had a quite high potential. Compared with 16 Kg
consumed in the United States, 17Kg in France, and 18 Kg in Canada, Russian consumed only
2.5 kilograms of ice cream per capita. If Russian could consume 10kg per capita, the market
would three times larger. Besides this, 10 to 20% profit margins still make the market quite
lucrative. In 2001, Russian ice cream’s price was lowest in the world. Therefore if producers
could differentiated their selves and increased the ice cream’s price level, the market size
would increases substantially since the Russian consumer was not so price sensitive on ice
cream.

Currently, Due to relative slow growth of the market size, the whole industry invested little
in advertising comparing with beers Soda producers, which in turn further offset the
demand. To break this negative feedback loop, the producers need to increase the
investment on advertisement. By adapting pull strategy, the producers could also weaken
the bargaining power of distributors and increase the switching cost of end consumers. The
pull strategy could also educate the market and reduce the seasonality of the market
demand. Investing on new distribution like Café and restaurants would attract more
customers and reduce their dependency on the existing channels, which would further
weaken distributors’ position in the profit pool. The high investments on promotion and
distribution could also heighten the financial barrier, which would frighten the potential
entrees away. To stimulate the demand, producers could offer more flavours according to
the taste of customers. Compared to US market, the costumers in Russian had quite few
choices of flavour, which limited the growth of market. To develop the almost untapped
family ice cream market, producers should bring out new packages and add preservatives in
these new products to prolong to quality guarantee period, both of which would be more
suitable for family consuming.

In summary, although currently the Russian ice cream was not quite attractive due to the
shrinkage of market size and high competition, , it still had a strong potential to tap.
Through further structural adjust in the industry, the ice cream producer could expend the
market and strengthen their position in the profit pool.

Q2.Explain what industry participants need in order to compete successfully in the

Russian ice cream industry? (Hint: what are the market segments? What resources
and capabilities do on need for the more important segments?) (390 words)

According to Russian managers’ perception, an ice cream product line would qualify them to
succeed in the market. However, different segment of the market had its special key success
factors. Basically, according to different consumption behaviours, the whole market could
be divided into three segments: spontaneous, impulsive consumption segment; family
consumption segment; café, restaurant consumption segment.

Currently most Russian producers focused on the impulsive consumption segment. Two
competencies were crucial to survive in this segment. Firstly, strong distribution ability was
a must. Since the consumption was impulsive, the end customers were not loyal to any
brands. The coverage of distribution channel was playing an indispensible role in generating
revenue. Who could control the Kiosks and Minimarkets would control the whole segment.
Secondly, Low cost was the other necessary competency. Due to historical reasons,
distribution companies had a strong bargaining power, which engendered them a relative
favourable position in the profit pool. They would further squeeze the profit margin of
producers. Therefore a lower cost would guarantee better profit margin. Since consumption
in this segment had a strong seasonality, the ability to recoup the cost of extra producing
capacity would be necessary to reduce the cost.

Family consumption segment was relative small, but it was the most promising. Compared
with impulsive consumption segment, it had less seasonality since ice cream was eaten in
the warm houses in winter, which reduced the demand to producing capacity. Shelf space in
the super market was crucial to succeed in this segment. To get this valuable resource, two
measures should be adopted. Firstly, building a close relationship with supermarket was a
necessity. This cooperation would guarantee the shelf space. A strong brand with strong
customer preference would pull the demand and increase the bargaining power with
supermarket. Secondly, a special package and longer quality guarantee period was
necessary as well. If the products could be kept long, supermarket would have to discount
the product as the deadline approaching.

Café and restaurant consumption segment was the most lucrative and most demanding
segment. Alignment between the products and lifestyle was the basis in this segment. A
high quality product without a prestige brand could not survive in this segment. Therefore
heavy investment on adverting and promotion would be dispensable. The competency to
operate franchises would increase producers’ market share and further stabilize its position
in this segment.

Q3. Who are Ice-Fili’s competitors? What are their strategies, resource, and
capabilities? (314)

Ice-Fili’s competitors included regional producers and foreign companies. Targeting on

different segment, these competitors had different strategies.

The regional producers’ strategy was to acquire market share through low price and
probably low quality but flexible products. Together with lower rents and labour cost, less
product variety enabled regional to have a lower production cost. The high efficiency of new
manufacturing facilities further reduced the producing cost. With more advanced managing
system, the overhead of regional producers was considerably low, compared with Moscow-
based producers. The lower cost of inferior raw materials also contributed to the cost
leadership. With many regional producers starting from distributors, they had a stronger
control over distribution channels, which enabled them higher distribution efficiency and
stronger abilities to expand their market share. Stronger market sensibility endowed them
the flexibility to cater customs’ taste. All these capabilities were well aligned with the
intrinsic characters of the impulsive market segment which they mainly focused on.

Nestlé, as the second largest ice cream producer in Russian market, was the main
competitors of Ice-Fili. The modern production management was what Ice-fili lacked. With
plenty well trained managers Nestlé could leverage this advantage to produce relatively
high quality ice cream with a lower cost. Using locally supplied component further reduced
the cost of production. Its long presence in Russian ice cream market and strong marketing
ability generated a strong preference among Russian customers. Its abundant experience on
distributing enabled its strong control over the channels and massive coverage over the
whole market.

Baskin-Robbins would be a strong potential competitor as Ice-Fili tried to enter the

restaurant segment. As the first American franchise operation in russian, Baskin-Robbins
enjoyed high profitability in Russian premium segment. Well trained franchise managers
further strengthened Baskin-Robbins’s position as the premium brand. With its advanced
management in design, marketing, personnel training and advertising, Baskin-Robbins
enjoyed its monopoly in the premium ice cream segment.

Q4. Identify Ice-Fili’s strategy. Is it cost-leader based, differentiation based, and/or

focus based? Is Ice-Fili’s strategy a “good” one? Why/ why not? (272 words)

Ice-Filli tried to differentiate itself with high quality and Russian traditional flavour in the
already saturated Kiosks market segment.

Due to lack of marketing and distribution competency and experience, instead of trying to
create new distribution, Ice-Filli chose its most familiar channel - Kiosks. The distribution
channel decided the market segment Ice-Filli mainly focused on – the impulsive
consumption segment.

To differentiate itself from other competitors, Ice-Fili sticked to its traditional Russian all
natural milk based ice cream product. Since most of the raw material had to be imported,
the cost of production was significantly increased by the expenses on components.
As mentioned above, the key factor to succeed in Kiosks is the control of distribution
channel, low cost and flexibility. However Ice-fili possessed none of the three key factors. Its
lack of control over distribution channel was exemplified by the scenario that the trucks
with ice-Filli logos carried a half of competitors’ products. Its stickiness to all natural based
ice cream put itself under jeopardy within the competition with regional producers. The
lower efficiency of older-generation equipments which accounted for 25% overall
production capacity increased ice-Filli’s production cost and position ice-filli on further
disadvantage position in the competition. The lack of managing and marketing experience in
free market further weakened its position in competition. The long history and prestige of
Ice-filli did not generate much competition advantage in this market segment.
In summary, Ice-Filli’s strategy was not sound because of the misalignment between Ice-
Filli’s arenas and its differentiators. The resource and capabilities that could provide
competition advantages in other market segment became the disadvantage in the
competition within impulsive consumption market segment.

Q5. One the basis of your answers to the above four questions, what do you think
Ice-Fili should do? What options does Ice-Fili have? What strategy would you
recommend to the Ice-Fili board so that it can keep its market leadership position?
(670 words, in total 2309 words)

Based on the analysis above, there were two options for Ice-Fili. The first option was to give
up its differentiation strategy and try to acquire competencies that were necessary to
survive in kiosks segment. The other one was to diversify its product line and enter other
two market segments. According to the Ice-Fili’s status, transaction into cost leadership
would not be feasible. Competition with regional producers would be quite difficult and
based on price war, in which none of them could better off. Even if it succeeded in
transaction, it could not keep its leading position in Russian ice cream market because of
saturation of Kiosks segment. Since Ice-Fili qualified all that was needed to succeed in the
other two segments, the better choice would the latter recommendation.

As the only all natural milk-based ice cream producer, ice-Fili possessed the key success
factors to survive in the premium market segment. Through leveraging its long history and
the only ice cream silver medal winner, ice-Fili could easily align its product with traditional
Russian noble lifestyle. Its Russian traditional older production line which was a
disadvantage in kiosks segment would become a selling point in premium market. All ice
cream into premium market should be produced by these product lines. An exhibition of
these product lines to the public would generate a strong advertising effect and promote its
brand. To compete with Baskin-Robbins, the collaboration with premium restaurants was
inevitable. Ice-Fili should try to sign the exclusive contracts with these premium restaurants
to ensure its market penetration. At the same time, more money should be invested in
advertising to generate the pull effect and reduce the bargaining power of the restaurants.
A new premium brand should be promoted in the marketing company. If Ice-Fili could find
managers experienced with franchising operation, franchising system could also be
introduced to diversify its distribution channel. Beside these, more flavour products needed
to be develop to cater the taste of customers. The demand in this segment was less
seasonal, which could also reduce the cost of production.

Ice-fili should also enter the family at-home consumption segment with different products.
As mentioned above, longer guarantee period of ice cream and big package would be key
factors to enter the supermarket. Therefore Ice-fili tailored its products that were suitable
for supermarket. Preservative needed to be added into these products to prolong the
guarantee period. A new big package should be designed as well to fit the home
consumption. To ensure the shelf place which was treasurable resource in the supermarket,
Ice-fili needed closely to cooperate with supermarket and listened to their feedback to
modify the packaging and product flavours. With investment on advertising, Ice-Fili could
increase its revenue while reducing the bargaining power of supermarkets.

Ice-fili should use the existing Kiosks as cash cow to generate as much as profit as possible
while reducing the investment on it. To reduce the cost of production, Russian local raw
materials should be used for the product selling on the street. The investment to enter into
others market would be high and need to be pumped out from Ice-fili’s own pocket.
Therefore the current profit from Kiosks market would be necessary. So before the other
two segments could generate enough market, Ice-fili needed to still keep the product line.

To support this three product lines, internal organization need to be changed. First of all,
Ice-flli should continue its optimization of its organization structure. A marketing
department needed to be set up to focus on the promotion of Ice-fili’s production in
different segment. Secondly, a fair and reasonable appraising system was necessary to
provide incentive for works and managers to improve efficiency. Thirdly, young employees
with high potential should be sent to western countries to study their management system.
All these measures would streamline ice-fili’ process and increase its competency.

In summary, Ice-fili should entered the other two promising segment of market while
milking the exist market. Beside of this, Ice-fili should set up modern management system
and cultivate more competent managers.