Ice-Fili, a midsized Russian ice cream producer, is still stock in the middle. Still, Ice-Fili is Russia’s top, but in terms of Bernard Koopman’s market share targets, IceFili’s market share is only 4.3%, which means that Ice-Fili doesn’t have stable dominant market share. According to the case, the number of competitors is growing from 100 companies in 1996 to 300 in 2002. Therefore, In order to keep the top share, Anatoliy Shamanov, Ice-Fili’s CEO has to fight in industry wide and he should choose “Overall cost leadership” strategy or “Differentiation” strategy.
Option 1. “Overall cost leadership” strategy
Now the average price of Ice-Fili’s ice creams is 6 rubles while Russian ice cream prices ranges from 2.5 rubles to 15 rubles. The price of Ice-Fili’s ice cream can be 2.5 rubles, keeping the margin and high quality. There are several ways to reduce costs.
First, Ice-Fili negotiates suppliers to reduce raw material costs. The raw materials of ice creams don’t have any differentiation because raw materials such as condensed milk and sugar are commodities. In terms of Porter’s five forces, supplier’s power is low, and Ice-Fili is easy to switch suppliers if they refuse to reduce costs. Therefore, Ice-Fili reduces raw material costs more.
Second, Ice-Fili reduces number of product lines to focus on several better ice creams. Compared with other competitors, Ice-Fili makes a variety of ice creams, and this variety makes the manufacturing process inefficient. Ice-Fili should concentrate on several strong brand ice creams and make more lean manufacturing process.
Finally, in order to utilize the economy of scale, Ice-Fili needs to expand its distribution network. According to the case, the costs of distributors are about 28% of wholesale price and this cost affects Ice-Fili’s high cost structure. Though about 50% of ice cream distributors are kiosks now, restaurants and supermarkets are growing. These distributors’ power is not strong yet. Therefore, it’s negotiable to choose them as distributors. Since some major restaurants and supermarkets have several branches, it’s easy to expand the regional areas to acquire more customers. Furthermore, In order to improve the distribution network, Ice-Fili had better build a regional factory to reduce manufacturing labor’s cost and the delivery fee. Once building these distribution networks, they block for competitors, especially a strong foreign competitor, Nestle, to enter the regional market.
If Ice-Fili has a chance, Ice-Fili should make an alliance or acquire smaller players to promote the cost-leadership strategy faster. As this alliance or acquisition is geographical market expansion, Ice-Fili consolidates the value chain, manufacturing and marketing division and reduces the corporate division.
Option 2. “Differentiation” strategy
One of the company’s resources is to make a high quality ice cream. Ice-Fili focuses on this resource to compete with Nestle. There are several steps to build the differentiation.
First, Ice-Fili should increase brand recognition. In terms of Porter’s five forces, entering ice cream industry is easy in the current situation. An ice cream industry is quite attractive because ice cream manufacturers make a profit by 15% to 20% operating margin. Also, new entrants don’t need specific equipments, which means that they don’t need the amount of capital. In addition, consumers don’t have any brand loyalty because current manufacturers make poor advertisement and promotion. Building strong brand help build an entry barrier and also take advantageous to rivalries.
In order to establish a strong brand, Ice-Fili promotes its products more. The priority purpose of promotion is to make consumers notice the Ice-Fili’s brand when they buy an ice cream. Ice-Fili should focus on its high-quality image and makes consumer desire Ice-Fili ice creams.
Second, Ice-Fili should reduce the production lines to make a promotion efficiently. As I described above, Ice-Fili makes a variety of ice creams, and makes it difficult to promote all products. Ice-Fili should choose several strong brands, and focus on its advertising.
Finally, the distribution network of Ice-Fili should focus on sophisticated restaurants and cutting edge supermarkets. Choosing a channel is crucial to build a good brand. Unlike kiosks, sensitive restaurants and supermarkets help build the Ice-Fili’s high quality image.
If Ice-Fili has a chance, Ice-Fili should make an alliance with foreign companies to help build the Ice-Fili ice cream brand. Foreign ice cream producers have knowledge to build a brand loyalty. This asset is more helpful than building by itself.
Compared with option 2, option 1 is appropriate to choose as the Ice-Fili strategy. Let me evaluate two options by following criteria.
First, in terms of the growth of ice cream market and competitive situation, Ice-Fili should take the market share quickly. Though an ice cream is a seasonal snack and fragmented demand, Russian consumers might eat ice creams more based on the trend of U.S. ice market history. In U.S., the ice cream market becomes less fragmented. In Russia, by entering foreign companies, the market becomes more competitive and manufacturers use many advertisements to inspire consumer’s demand. Therefore, the market will be less fragmented and grow the market.
Compared with option 2, option 1 strategy expands market quickly because of the economy of scale. While the price of ice cream decreases, Ice-Fili can contact a number of customers.
Second, in terms of the rivalry, main competitors of option 1 are less threat. Segmented by the price of products, while competitors of option 1 are regional producers, those of option2 are foreign companies, especially Nestle. Regional producers have less capital and less knowledge than Nestle. Especially, since the market of Russia is fluctuated after Russian crisis, Ice-Fili easily enters the regional domestic market, compared with competing with foreign companies.
Finally, building a distribution network is a key success factor of this market. Now Russian market changes its distribution network from kiosks to restaurants and supermarkets. As other developed companies illustrates, these new distribution will supply amounts of ice cream to consumers near future. The strategy of option 1 can build a strong relationship with these distributors and contact more consumers.In conclusion, as I described above, Ice-Fili should take cost-leadership strategy.