Ice Fili Analysis

Table of Contents I- Introduction 2 II- Analysis 3 1- External Analysis 3 i) Porter’s 5 Force 3 ii) Key Success Factors 4 2- Internal Analysis 5 i) Value Chain Analysis 5 ii) Financial Analysis 6 III- Decision Opinions with Evaluation 6 IV- Recommendation and Implementation 8 1- Short Term Activities 8 2- Long Term Activities 9 V- Exhibits 10 i) Exhibit A: Financial Ratio Analysis and Calculations 10 ii) Exhibit B: Decision Matrix 11 Introduction First time winner of the “Product of the Year” category, Ice-Fili, is the top ice cream producer in Russia. Recently, the company is experiencing tough competition by Nestlé and regional ice cream producers. Ice-Fili’s current problem is its loss in market share due to their poor quality decision-making after Russia became an open-market in 1992. Nestlé took advantage of Ice-Fili’s low reaction adjustment and is taking over their market. What should be Ice-Fili’s next move? To offer proper advice, an external and internal analysis should be conducted to analyze their environment. Analysis EXTERNAL ANALYSIS An external analysis allows us to understand the ice cream industry. It includes analyzing Porter’s 5 forces and Ice-Fili’s key success factors in comparison to its competitors. Porter’s 5 Forces 1- Threat of New Entrants High The ice cream market is attractive due to its 15% to 20% profit margin and low initial capital investment. Ingredients are acquired at low cost because of their commodity nature. Also, the final product and production process are similar among producers. Products may be easily copied making differentiation difficult to obtain. It is easy to get through customers and retailers as numerous distribution channels available. 2- Bargaining Power of Suppliers Ingredients: Low & Equipment: High Identical ingredients may be purchased from numerous suppliers. Changing supplier may be done easily with a low switching cost. However, only 10 companies can provide the necessary equipment in Russia and some equipment is highly specialized making suppliers’ bargaining power high. 3- Bargaining Power of Buyer’s High Customers may be indifferent when buying ice cream due to the low switching cost. Also, since ice cream is an impulse purchase; consumers may just opt for another snack instead. As for retailers, ice cream is easily produced giving rise to the opportunity for a generic brand. 4- Threat of Substitute Products High In Russia, ice cream is considered an inexpensive snack to consume “on-the-go” and may be replaced by other snacks such as soda, beer, yogurt, chocolate and confectionary candies. 5- Intensity of Rivalry Among Competitors High Russia is Ice-Fili’s only target market. Therefore, there will be high rivalry against new entrants. Also, there are

300 ice cream producers and the industry has been experiencing a decrease of 3.5% in production increasing competition for market share. Key Success Factors Ice-Fili has a competitive advantage due to their high quality products. They only use high-quality natural ingredients and no preservatives. Their production capacity is significantly bigger than other ice cream producers. Products are priced in the middle-level category and customers may choose from a wide range of products. Also, Ice-Fili has a good work environment and open and cooperative corporate culture. Referring to table 1, it is accurate to say that, if Ice-Fili does not step up their game, Nestlé will be the only brand in Russia in a couple of years. Table 1 | Ice-Fili | Nestlé | Price | + | - | Advertising | - | + | Quality | + | - | Variety | + | - | Distribution Network | +/- | + | Availability | - | + | INTERNAL ANALYSIS Focusing on Ice-Fili’s core competencies with the use of the value chain and its financial position will allow us to have a better knowledge of the company’s capabilities. Value Chain Analysis Ice-Fili’s core competencies are the quality of its products and the large selection (170 types), their production capacity (200 tons) and their good corporate culture. Nevertheless, Ice-Fili has three main weaknesses. First, their marketing is poor and competitors are taking this opportunity to use their strong marketing experience. Second, 80% of Ice-Fili’s distribution is through kiosks and mini-markets. The issue is that the market is saturated with street kiosks and mini-markets carry limited range of food products. Third, customers have twice the likelihood of finding a Nestlé product rather than an Ice-Fili one which illustrates their low product availability. Focusing on their core competency is the solution to gain market share. Financial Analysis With the use of financial ratios the following conclusions were deducted (see exhibit A for calculations). Ice-Fili is in good financial position since they are profitable given their positive working capital and no long-term debt. Their current ratio has increased over the past 4 years which is a good indicator of liquidity but also illustrates an inefficient use in cash. Their cash flow position is weak in 2001 since the cash conversion cycle is at its highest point compared to previous years. Customers pay within 31 days whereas Ice-Fili pays their suppliers in 21 days. Ice-Fili is not using their customer's funds to pay suppliers, but rather their own funds. Also, inventory is turning at a lesser rate than prior years which indicate that their inventory level may be too high which ties up cash flow that could be used for investments or to pay suppliers. Decision Opinions with Evaluation To compensate for their low quality decision-making from 1992 to 2001, Ice-Fili must choose any of the three alternatives presented below to regain market share. Option 1: Focus on Differentiation Ice cream companies must differentiate themselves from substitutes and competitors. In fact, the ice cream industry was comprised of 300 companies in 2002. As the threat of new entrants is high, Ice-Fili should demonstrate their uniqueness. Ice-Fili’s tangible difference is quality given it is one of their main core competencies and their intangible is their Russian identity due to their long history. Ice-Fili also differentiates itself by being the first food company to win the “Product of the Year” award. The company must invest a considerable amount in marketing to build brand awareness. It is a smart investment in the long-run. Option 2: Focus on Distribution Availability is key leverage. Ice-Fili mentioned that they did not participate in the distribution process because of the huge capital investment and economies of scale required to develop these networks. They have valid arguments but distribution should be seriously considered especially when there is twice the likelihood of finding

a Nestlé product versus an Ice-Fili one in Russia. Kiosks and mini-markets represent 80% of their distribution channels. The issues are 1) kiosks carry a narrow range of ice cream types, 2) street markets are saturated, 3) mini-markets hold a limited range of food and 4) each channel holds competitors’ products. Option 3: Acquisition of Local Producers Local producers represent 30% of the domestic market. They are small and newly established companies which make them attractive and easy to acquire. Ice-Fili should adjust their cash flow problem which will free up capital and with no long-term debt it will be able to make such an investment. This will in turn reduce competition and inadvertently obtain access to the local producers’ markets increasing their presence in Russia. Another advantage of acquiring local producers is that these producers can supply popular and inexpensive flavors that Ice-Fili does not have access to. Recommendation and Implementation Based on the decision matrix found in exhibit B, differentiation is currently a better alternative for the company given their business life cycle and core competencies. When a brand is well established, consumers will be aware of the product and will remember the brand when purchasing ice cream. Short Term Activities At first, Ice-Fili should clearly demonstrate their uniqueness by focusing on the use of all natural ingredients which emphasizes superior quality. Since 1992, good marketing has been lacking which created a big opportunity for abroad producers to use their marketing experience. Therefore, marketing should be the focus of their short-term activities by working on. Ice-Fili estimates marketing and advertising costs to be $500,000 per year. In order to allocate more capital to marketing, Ice-Fili can negotiate with its suppliers to reduce costs. Suppliers will generally accept since they do not want to loose a client and they are aware that a new supplier can easily be found. Ice-Fili should follow the following: Advertising 1- End the agreement with Advice due to their poor performance. 2- Hire an experienced Western advertising agency that is specialized in the food industry and knowledgeable about foreign marketing. Meet with the agency to discuss the different aspects of the company and establish detailed expectations. The agency will be responsibility for television advertising and developing a new packaging concept. 3- Choose few products to focus on, preferably top sellers such as Lakomka and Batonchik Fili. 4- Ensure that advertisements clearly mention the brand and the featured product’s name and portray the company’s core competencies. 5- Launch the advertising campaign and keep track of the agency’s work and future advertising ideas/projects. Packaging 1- Develop a modern and easy to recognize packaging. 2- Inform customers of the packaging change before launching it either by featuring the new packing on current products or mentioning it in advertisements. 3- Distribute the products with the new packaging after the old ones have been sold. Long Term Activities In the long run, Ice-Fili’s management must keep track of the agency’s work. New products may be created based on new trends (home consumption). Ensure to patent every new product to avoid being immitated. Since proper marketing is implemented, Ice-Fili could now concentrate on improving their distribution. Ice-Fili should increase their availability by focusing on supermarkets which is the fastest-growing channel currently. By doing the following, Ice-Fili will be able to increase its market share and remain #1. Exhibit A Financial Ratios Calculations

(in thousand dollars) | 2001 | 2000 | 1999 | 1998 | Meaning | Short-term | Current Ratio | 5.12(6,338/1,194) | 4.52(6,373/1,155) | 2.8(7,812/2,643) | 2.15(11,611/6,680) | +/- | Days Sales Outstanding (DSO) | 31.0 days((2211+2055)/2)/25147*365 | 17.9 days((2055+620)/2)/27206*365 | 23.4 days((620+3570)/2)/32672*365 | 29.6 days((3570+2275)/2)/35988*365 | - | Days Payables Outstanding (DPO) | 21.4 days((1161+1124)/2)/19512*365 | 28.6 days((1124+2642)/2)/24004*365 | 35.9 days((2642+3016)/2)/28798*365 | 34.7 days((3016+2945)/2)/31307*365 | +/- | Inventory Days | 71.1 days(3801/19512*365) | 60.4 days( 3971/24004*365) | 82.7 days( 6521/28798*365) | 80.4 days( 6896/31307*365) | - | Cash Conversion Cycle | 80.7 days(31-21.4+71.1) | 49.7 days(17.9-28.6+60.4) | 70.2 days(23.4-35.9+82.7) | 75.3 days(29.6-34.7+80.4) | - | Long-term | Total Debt Ratio | 10.09%(11832-10638)/11832 | 10.89%(10606-9451)/10606 | 20.9%(12645-10002)/12645 | 27.68%(18350-13270)/18350 | + | Profitability | Profit Margin | 6.77%(1,702/25,147) | 6.35%(1,727/27,206) | 6.40%(2,090/32,672) | 7.62%(2,742/35,988) | + | Gross Margin | 22%(5635/25147) | 12%(3202/27206) | 9%(2874/32672) | 13%(4681/35988) | + | Return on Equity | 16%(1,702/10,638) | 18.3%(1,727/9,451) | 20.9%(2,090/10,002) | 20.7%(2,742/13270) | - | Return on Assets | 14.4%(1,702/11,832) | 16.3%(1,727/10,606) | 16.5%(2,090/12,645) | 14.9%(2,742/18,350) | +/- | Exhibit B Decision Matrix Decision Criteria | #1 Differentiation | #2 Distribution | #3 Acquisition | Cost | High | Medium | High | Difficulty | Medium | Medium | High | Feasibility | High | High | High | Ability to improve customer service | Low | High | Low | Return on Investment | High | High | High | Priority | 1 | 2 | 3 | Leverages core competencies | High | N/A | Low |