Paper #1: Summary
Length: 1 ½ - 2 pages typed, double-spaced, one inch margins, 12 pt Times New Roman or similar font.
Citations: MLA in-text citation method
Outside Sources: None, use only the assigned reading and class discussion.
Be sure to review the guidelines for writing a summary in “Summary, Paraphrase and Quotation” in your Writing and Reading Across the Curriculum textbook.
The first paper this semester is a summary of Jib Fowles’ “Advertising’s Fifteen Basic Appeals” (textbook pgs. 551-68). As an analytical summary, the goal of this assignment is to construct a thorough account of Fowles’ argument that identifies its most important features and explains the logical connection of these features to each other and the larger thesis/argument of the piece As summary, your paper will describe, explain, paraphrase and quote significant elements of the text at hand. (Important: the assignment does not call upon you to produce your own original critique on the topic, nor does it call for you to directly evaluate or cast judgment upon the text).
There are four basic writing skills fundamental to the assignment:
1.) Your ability to locate a thesis and its chief supporting evidence and arguments.
2.) Your ability to explain the logical connections between the different parts of the original you deem important and how they fit into the essay’s overarching argument.
3.) Your technical ability to accurately and effectively introduce and incorporate
quotations and paraphrasing. You must be careful not to let any direct language—phrases or sentences—slip into your summary without being quoted.
Along those lines, your summary should remind your reader from time to time, that these are not your ideas or arguments, but those of the author of whatever essay you summarize. Use attributive tags).
4.) Your summary should represent, in miniature, the general shape and argumentative logic of the original and should be readable as a coherent and rationally structured essay itself (with an introduction/first sentence that introduces the essay you summarize and its central thesis, a body that explains the supporting evidence, and a conclusion. AVOID THE “LAUNDRY LIST” error. A summary is much more than a random listing of things taken from the original source.
· Be sure you begin the summary with a topic sentence that states the author’s main thesis.
· Be sure to be as objective as you can be when you restate or describe the author’s argument. There should be no statements or indications of your opinion in the summary.
· Be accurate and fair – make sure you are not distorting the author’s argument.
· Be complete – make sure you mention all of the author’s main points. Give the article balanced coverage.
As with all our papers in this class, a Works Cited page is required. It will have only one source cited – the one you are summarizing. We will work on correct citation format in class before the paper is due.
External & Industry Analysis
.
Food processing presentation for bsc agriculture hons
Analyzing Ice Fili's External Environment
1. Paper #1: Summary
Length: 1 ½ - 2 pages typed, double-spaced, one inch margins,
12 pt Times New Roman or similar font.
Citations: MLA in-text citation method
Outside Sources: None, use only the assigned reading and class
discussion.
Be sure to review the guidelines for writing a summary in
“Summary, Paraphrase and Quotation” in your Writing and
Reading Across the Curriculum textbook.
The first paper this semester is a summary of Jib Fowles’
“Advertising’s Fifteen Basic Appeals” (textbook pgs. 551-68).
As an analytical summary, the goal of this assignment is to
construct a thorough account of Fowles’ argument that
identifies its most important features and explains the logical
connection of these features to each other and the larger
thesis/argument of the piece As summary, your paper will
describe, explain, paraphrase and quote significant elements of
the text at hand. (Important: the assignment does not call upon
you to produce your own original critique on the topic, nor does
it call for you to directly evaluate or cast judgment upon the
text).
There are four basic writing skills fundamental to the
assignment:
1.) Your ability to locate a thesis and its chief supporting
evidence and arguments.
2.) Your ability to explain the logical connections between the
different parts of the original you deem important and how they
fit into the essay’s overarching argument.
3.) Your technical ability to accurately and effectively introduce
and incorporate
2. quotations and paraphrasing. You must be careful not to let any
direct language—phrases or sentences—slip into your summary
without being quoted.
Along those lines, your summary should remind your reader
from time to time, that these are not your ideas or arguments,
but those of the author of whatever essay you summarize. Use
attributive tags).
4.) Your summary should represent, in miniature, the general
shape and argumentative logic of the original and should be
readable as a coherent and rationally structured essay itself
(with an introduction/first sentence that introduces the essay
you summarize and its central thesis, a body that explains the
supporting evidence, and a conclusion. AVOID THE
“LAUNDRY LIST” error. A summary is much more than a
random listing of things taken from the original source.
· Be sure you begin the summary with a topic sentence that
states the author’s main thesis.
· Be sure to be as objective as you can be when you restate or
describe the author’s argument. There should be no statements
or indications of your opinion in the summary.
· Be accurate and fair – make sure you are not distorting the
author’s argument.
· Be complete – make sure you mention all of the author’s main
points. Give the article balanced coverage.
As with all our papers in this class, a Works Cited page is
required. It will have only one source cited – the one you are
summarizing. We will work on correct citation format in class
before the paper is due.
External & Industry Analysis
3. Welcome
C Dr Aya S. Chacar 2015
1
Today’s Plan of Action
Brief Review
Performance Analysis Presentations
Strategic Audit of Ice Fili (External Analysis)
What is Internal Analysis [In book and here]?
Next Week’s Assignment
C Dr Aya S. Chacar 2015
2
Strategic Audit: An Audit of the Strategic Health of a Company
Winning Strategy
Diagnostics
4. C Dr Aya S. Chacar 2015
STRATEGIC OPTIONS
Strategy Analysis:
*At the BU level
*At the Corporate Level
External/Environmt’l Analysis
Internal/Resources Analysis.
Performance Analysis
5. Strategic Audit: An Audit of the Strategic Health of a Company
Winning Strategy
Diagnostics
C Dr Aya S. Chacar 2015
Strategic Options for Value Creation and Appropriation
Strategy Analysis:
What is this firm’s strategy? How effective and sound?
Markides Strategy Analysis Inspired Tool at the BU level:
What is this company’s Who/What/How?
Are these Who/What/How consistent?
Are they well communicated and in use?
At the Corporate Level:
The 4 Poles Analysis
External/Environmental Analysis:
What does this firm’s external environment looks like? How is
it changing? What opportunities or threats is there out there?
How can this firm shape its environment and take advantage of
it?
GDPest Tool: To Examine the General Environment
Porter’s Five Forces Analysis: To examine the Competitive
Environment
6. Internal/Resources Analysis:
What does this firms’ internal environment look like? How is it
changing? How can the firm take advantage of it or change it to
create and maintain a sustainable competitive advantage?
Barney’s VRIO Tool: To examine the firm’s resources and
capabilities.
Performance Analysis:
How is this firm’s performance? How it this company doing?
Chacar’s Performance Analysis Tool:
-Examine Performance from all angles (Financial, Functional-
Mfg, Mktg, Fin., Op., HR…, Cultural..)
-Benchmark performance to Past, Goals, ‘Competitors’, ‘Best in
Class’, Expectations, Potential..
Strategy Analysis: Your First Tool/GSA
Step 1: Description (What is this firm’s Theory on How to Get
C.A.)
What is A (Who/What/How)?
What is B (Who/What/How)?
How does the company plan to go from A to B?
7. Step 2: Strategy Analysis Test/Critique
Is this a good theory of Competitive Advantage (or of how to
create value)? A cool lecture to help you think about this
Is the strategy clear to all and well communicated?
Are the who what how consistent?
Is this a unique value proposition? ..
Ikea, Enterprise
C Dr Aya S. Chacar 2015
5
Bad strategy is typically all goals, a laundry list, one that does
not understand where the company is. Need to have all A/B
component and plan to get there in place in addition to value
creation. International Harvester went bankrupt when it had a
lofty goal and a plan- but biggest problem was labor and they
never addressed that issue – i.e. they did not know what their A
is- where they were at the time.
Performance Analysis: Assess performance from all angles to
assess Strategic Health
Go beyond the financials
Balanced indicators
Linked to profit drivers and financial impact
Compare against multiple benchmarks
Own past performance
Competitors and others (industry definition matters)
Run the numbers
Quantify the sources of value
8. Use Analysis to identify the best next Steps to make/Consider
the potential that might be tapped from
New markets or bigger shares of existing ones
Recombining and redeploying the firm’s resources
C Dr Aya S. Chacar 2015
6
Always need to combine financial skills with Strategic and
Operational Flair for success
Data analysis in combination with Strategic Flair and
Operational Know-How is used to generate hypotheses
You will often need further investigation to determine which
hypotheses are true.
The ‘fix’ to the problem will depend on which hypotheses are
correct.
C Dr Aya S. Chacar 2015
7
Strategy is a who/what/how combination (aka resource/market
positioning) that creates value.
Strategy is about making choices. Choosing a ‘who, what, how’
is also choosing not to do other things.
9. A sound/consistent value creating combination may not be
always so.
Good strategists revisit their strategies often.
Performance reflects the choices we make and fail to make.
There are no right answers, only good questions and sound ways
of approaching them.
C Dr Aya S. Chacar 2015
HIGH BARRIERS TO ENTRY
-Reputation (65% of new business
through word of mouth)
-High capital requirements ($25 million
to build a 600 bed club)
-Economies of scale
THREAT OF SUBSTITUTES
-Alternative leisure options
non-inclusive vacations,
stay at home vacations
SUPPLIERS SQUEEZED
$22 million from low wages
$20 million in tax & interest
concessions from host
governments
$8 million from airline
discounts
LIMITED BUYER POWER
-Private individuals purchase
-High perceived risk if vacation bad
-Buyers cannot backward integrate
-Buyers relatively price insensitive
10. INTENSE COMPETITION
-Identified competitors together
have 65% as many beds as Club Med in the Caribbean
-May not be price-based competition
- Perillo tours charges $1,099-1,399 for
a week in resort or on cruise ship
-
+
+
+
A Seemingly Great Industry Position is not enough.
The more the profit potential the bigger ‘legs’ potential will
have to overcome barriers to entry
C Dr Aya S. Chacar 2015
What is External Environment Analysis?
C Dr Aya S. Chacar 2015
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11. The Environment:
General (PEST or GDPest) & Competitive
Source: Ireland, Hitt & Hoskisson 2006 – Copyright Thompson
Business & Professional Publishing
Q
C Dr Aya S. Chacar 2015
11
General Environment
The trends in the broader society that influence an industry and
the firms in it
Types of Trends
Demographic
Economic
Political/legal
Sociocultural
Technological
Global trends
Demographic Trends
Changes in population size, age structure, geographic
distribution, ethnic mix, and income distribution
Economic Trends
The direction of the economy in which a firm competes or may
choose to compete
Political/Legal Trends
The changes in organizations and interest groups that compete
for a voice in developing and overseeing the body of laws and
regulations that guide interactions among firms and nations
Sociocultural Trends
Changes in a society’s attitudes and cultural values
Technological Trends
12. Changes in the activities involved with creating new knowledge
and translating that knowledge into new products, processes,
and materials
Global Trends
Changes in relevant emerging and developed country global
markets, important international political events, and critical
changes in cultural and institutional characteristics of global
markets.
BUYERS
Threat of
new entrants
MARKET
COMPETITORS
Bargaining power
of customers
SUPPLIERS
SUBSTITUTES
Rivalry among
existing firms
Bargaining power
of suppliers
Threat of substitute
13. products or services
Source: Porter (1980)
POTENTIAL
ENTRANTS
The 5-Forces Framework
P, Q
C Dr Aya S. Chacar 2015
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Step 1 - What Industry is Ice-Fili in?
Industry Analysis
C Dr Aya S. Chacar 2015
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14. Step 1 – Define the industry the firm is in
Step 2 - Identify the players:
Competitors, substitutes, suppliers, buyers, and potential
entrants
Industry Analysis
C Dr Aya S. Chacar 2015
14
BUYERS
MARKET
COMPETITORS
SUPPLIERS
SUBSTITUTES
Rivalry among
existing firms
15. Source: Porter (1980)
POTENTIAL
ENTRANTS
The 5-Forces Framework
C Dr Aya S. Chacar 2015
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Step 3 - Evaluate the 5-forces:
Their intensity, the underlying conditions that drive this
intensity, and the implication for the performance of companies
in this industry
Industry Analysis
C Dr Aya S. Chacar 2015
16
17. Source: Porter (1980)
POTENTIAL
ENTRANTS
The 5-Forces Framework
C Dr Aya S. Chacar 2015
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Step 4 - What would it take for any company to be successful in
this industry; or how can we change the industry forces in our
favor; aka industry key success factors
Industry Analysis
C Dr Aya S. Chacar 2015
18
THREAT OF ENTRY
economies of scale
18. absolute cost advantages
capital requirements
product differentiation
access to distribution channels
governmental and legal barriers
retaliation by established producers
THREAT OF SUBSTITUTES
buyer propensity to substitute
relative price performance of substitutes
INDUSTRY
COMPETITIVENESS
concentration
product differentiation
excess capacity
ratio of fixed to variable costs
demand growth
cyclical fluctuations of demand
exit barriers
BUYER POWER
Price sensitivity
cost of purchases
profitability of buyers
importance of the product to quality of buyers’ product
Bargaining power
size and concentration of buyers relative to suppliers
buyers’ switching costs
buyers’ information
buyers’ ability to backward integrate
SUPPLIER POWER
Factors determining power of suppliers relative to producers
same as those determining power of producers relative to
buyers--see “Buyer Power” box.
19. Generic Drivers of Industry Forces
C Dr Aya S. Chacar 2015
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Forces Siphon II
If forces weak > attractive ind. (if already in it. Entrants must
pay large $ to get over business)
Forces (+resources) define how firm can best compete.
Forces change over time.
THREAT OF ENTRY
Erect barriers to entry by building:
economies of scale
absolute cost advantages
Influence govt. policy requirements . . .
Overcome barriers to entry through:
product differentiation
. . .
THREAT OF SUBSTITUTES
Improve product’s attractiveness relative to substitutes:
Lower Prices
Product differentiation
Move into new businesses
INDUSTRY
COMPETITIVENESS
Compete on dimensions besides price
20. Consolidate ownership
Build a first-mover advantage . . .
BUYER POWER
Reduce Buyers’ Uniqueness
Forward Vertical Integration
Product Differentiation
Target New Market Segments
SUPPLIER POWER
Reduce Suppliers’ Uniqueness
Backward Vertical Integration
Use Multiple Suppliers
Source: Barney (1997)
Generic Responses to Industry Forces
C Dr Aya S. Chacar 2015
20
Forces Siphon II
If forces weak > attractive ind. (if already in it. Entrants must
pay large $ to get over business)
Forces (+resources) define how firm can best compete.
Forces change over time.
External Environment Analysis
C Dr Aya S. Chacar 2015
21. 21
The Environment:
General (PEST or GDPest) & Competitive
Source: Ireland, Hitt & Hoskisson 2006 – Copyright Thompson
Business & Professional Publishing
Q
C Dr Aya S. Chacar 2015
22
General Environment
The trends in the broader society that influence an industry and
the firms in it
Types of Trends
Demographic
Economic
Political/legal
Sociocultural
Technological
Global trends
Demographic Trends
Changes in population size, age structure, geographic
distribution, ethnic mix, and income distribution
Economic Trends
The direction of the economy in which a firm competes or may
choose to compete
Political/Legal Trends
The changes in organizations and interest groups that compete
22. for a voice in developing and overseeing the body of laws and
regulations that guide interactions among firms and nations
Sociocultural Trends
Changes in a society’s attitudes and cultural values
Technological Trends
Changes in the activities involved with creating new knowledge
and translating that knowledge into new products, processes,
and materials
Global Trends
Changes in relevant emerging and developed country global
markets, important international political events, and critical
changes in cultural and institutional characteristics of global
markets.
BUYERS
Threat of
new entrants
MARKET
COMPETITORS
Bargaining power
of customers
SUPPLIERS
SUBSTITUTES
Rivalry among
23. existing firms
Bargaining power
of suppliers
Threat of substitute
products or services
Source: Porter (1980)
POTENTIAL
ENTRANTS
The 5-Forces Framework
P, Q
C Dr Aya S. Chacar 2015
23
Where we are today:
(The Key Steps in a Strategic Audit)
Understand the company’s goal and strategy
Assess the company’s performance
Analyze the company’s environment and its industry
Evaluate the company’s resources (inc. leaders), capabilities,
24. and renewal and erosion factors
Evaluate potential strategies that the company can follow
Try and determine the implementation issues
Recommend a strategy
C Dr Aya S. Chacar 2015
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What can we say about the ice cream industry’s attractiveness
without doing a five forces analysis?
Process: Try and support each conclusion with data from the
case
P
C Dr Aya S. Chacar 2015
25
The Russian Ice Cream Industry is Unattractive
even if one or several companies are successful
Undifferentiated products with many companies using the same
brand names (p.4)
Declining demand when other industries are growing:
Down 3.5% between ’99 and ’00. (p.2)
Increased competition:
87 companies in 1996 vs. 150 in 1998 vs. 300 in 2002 (new
25. entrants from alcohol industry, meat and fish packers, and from
abroad) (p.2 and 10)
Several foreign companies pulled out of the market inc. Ben &
Jerry & Unilever (p.1)
Decreased Prices in Real Terms
Using the dollar term as an approximation of real terms
In 1997 average price is $2.66 per kilo: Revenues of $69.1
Million (Exh. 7a) / Production of 26,000 tonnes (Exh. 9)
In 2001 average price is $1.35 per kilo: Revenues of $25.7
Million (Exh. 7a) / Production of 19,000 tonnes (Exh. 9)
Decreased Performance:
Industry margins 15%-20% in 2000 vs. 30%-40% in 1998 (p. 5)
Most competitors are diversifying out of the business
…
full blown industry analysis to
determine if an industry is attractive or not
C Dr Aya S. Chacar 2015
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If we generally do not need a full blown industry analysis to
determine if an industry is attractive or not:
Why is the 5-forces framework one of the most famous strategy
tools?
26. C Dr Aya S. Chacar 2015
27
Why is Porter Framework so Popular?
Great Insight: Anyone who can force you to lower your price or
your volumes or can raise your costs is your competitor. These
include all those companies . . .
Who sell similar products or services (i.e., makers of
substitutes)
Who could begin selling what you sell (i.e., potential entrants)
Whom you purchase from (i.e., your suppliers)
Who you sell to (i.e., your buyers)
As well as your direct rivals.
C Dr Aya S. Chacar 2015
28
Step 1 - What Industry is Ice-Fili in?
Industry Analysis
C Dr Aya S. Chacar 2015
27. 29
Ice-Fili’s Industry
‘Confectionary industry’; ‘Indulgence industry’
Too broad to be useful
‘Moscow ice cream industry’
Too narrow, misses too many competitors.
‘Russian ice cream industry”
Probably best
C Dr Aya S. Chacar 2015
30
Defining the Competitors and Industry is Crucial
Determines
what you
do
How you
frame
the situation
Determines
what you
see, think
and hear
Determines who
28. you “see” as
your customers,
competitors,
and so on
How you define
your business
Determines what
you do
(your strategy)
Coke Pepsi
C Dr Aya S. Chacar 2015
31
By Pullitzer Prize Winning Political Cartoonist David Horsey
C Dr Aya S. Chacar 2015
32
“.. no one succeeded in capturing the organizing principle
behind the president's consciousness the way Horsey did here.
While many critics were busy vilifying Reagan as a reckless
cowboy hell-bent upon launching nuclear weapons or ridiculing
his growing mental incapacities, Horsey instead chose to
contemplate Reagan's interior self. Recreating the world as it
29. might appear to a simple-minded, second-tier actor who had lost
his way after the death of the studio system, he depicts a
transcontinental high noon taking place over a crude world map.
Reagan, in the role of town sheriff, stands tall across the
geographical expanse of North America, drawing six-guns from
his holster to defend the free world. Staring back at him across
Europe and the Atlantic Ocean is Gorbachev — portrayed as a
missile-wielding, fur-clad Cossack. He holds sway over the
place we knew then as the Soviet Union but referred to here as
"Evil Empire." The complete picture of Reagan's world-view is
formed by other designated names of new or grossly modified
political entities, separated on the map, Saul Steinberg-like, by
dotted lines of his own making. In a United States that presages
the 'Blue' and 'Red' Americas of the 2000 Presidential election,
New York and New England are marked "Democrats and
Welfare Bums," the Pacific Northwest as "Ecotopians and
Hippies," while the city of San Francisco is indicated with the
descriptive term "Homos." The South and Midwest, on the other
hand, are labeled "Republicans and other Real Americans" while
the rest of the country is simply called "California." Across the
pond, Reagan's Europe bears a striking resemblance to today's
'Old' Europe of Donald Rumsfeld, contemptuously dismissed as
"Socialists and Pacifist Wimps." The Middle East, of course, is
designated "Our Oil."
.. What makes The World According to Reagan so
powerful is Horsey's ability to capture the essential riddle of
Ronald Reagan, presenting us with the man's odd charisma and
goofy charm and juxtaposing it with his myopic vision and the
potential danger it posed to the human race. “
The Expanding Genius Of David Horsey, by Jim Demetre,
Artdish 2003?
How we define our industry or business is often the biggest
constraining factor to our decision process
30. Apple
C Dr Aya S. Chacar 2015
33
What are cows and chicken?
C Dr Aya S. Chacar 2015
34
Looks like President Clinton and Vice President Gore, right?
It's Clinton's face twice, with two different haircuts.
Whom Do You See?
C Dr Aya S. Chacar 2015
35
No, they're both the same size
31. Is the Left Center Circle Bigger?
C Dr Aya S. Chacar 2015
36
There’s no one “right way” to define the industry.
Business Definition
Merits
Dangers
Narrow
Broad
Focuses resources and attention on clear purpose
Potential to miss opportunities, threats, emerging competitors
Unclear focus
Wasted resources
Missed opportunities/threats
Big picture
C Dr Aya S. Chacar 2015
32. 37
Step 1 – Define the industry the firm is in
Step 2 - Identify the players:
Competitors, substitutes, suppliers, buyers, and potential
entrants
Industry Analysis
C Dr Aya S. Chacar 2015
38
BUYERS
MARKET
COMPETITORS
SUPPLIERS
SUBSTITUTES
Rivalry among
existing firms
33. Source: Porter (1980)
POTENTIAL
ENTRANTS
The 5-Forces Framework
C Dr Aya S. Chacar 2015
39
Step 3 - Evaluate the 5-forces:
Their intensity, the underlying conditions that drive this
intensity, and the implication for the performance of companies
in this industry
Industry Analysis
C Dr Aya S. Chacar 2015
35. Source: Porter (1980)
POTENTIAL
ENTRANTS
The 5-Forces Framework
C Dr Aya S. Chacar 2015
41
What do we look for to determine whether rivalry is high?
C Dr Aya S. Chacar 2015
42
Rivalry is high when:
Industry concentration is low
Competitors are very homogeneous
Little product differentiation exists
Excess capacity and exit barriers are present
Scale economies are high and the ratio of fixed to variable costs
is high
36. C Dr Aya S. Chacar 2015
43
Exit barriers:
Specialized assets
High fixed costs of exit
Strategic interrelationships
Emotional barriers
Government and social restrictions
Is rivalry high in the Russian Ice Cream industry?
C Dr Aya S. Chacar 2015
44
Undifferentiated products and Low concentration and rising
capacity leads to high rivalry
- Industry Concentration definitely very low:
Largest domestic producer has only 5% market share in 2002
and it has been decreasing (p.10 and Exhibit 1b), second
largest’ share less than 4% (p14)
Number of companies in the industry is rising from 87
companies in 1996 vs. 150 in 1998 vs. 300 in 2002 (p.2 and 10)
-/+ Excluding a couple of companies (Haagen-Daz, Baskin
Robins) most companies produce very similar products (p.1)
- Products with greatest sales volumes are not differentiated:
37. Brand names have become generic and cannot be protected by
trademarks: Lakomka (?30%) and Leningradskoe (p.4)
- Overcapacity:
Sales at 376 tonnes in 2002 vs. likely capacity greater than 470
tonnes (1991 peak) (Exhibits 1a and 1b)
Overcapacity exacerbated as product becomes less seasonal
? High economies of scale in ?purchasing, ?distribution,
?advertising
+ But no apparent barriers to exit
+ Some cooperation between Russian producers (Association
of Russian Ice Cream Producers)
..
C Dr Aya S. Chacar 2015
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What do we look for to determine how high the threat of
substitutability is?
C Dr Aya S. Chacar 2015
46
The threat of substitutes is high when:
38. Buyers have a high propensity to substitute
The relative price and performance of substitutes is high
C Dr Aya S. Chacar 2015
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Is the threat of substitutes high in the Russian Ice Cream
industry?
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Numerous products seem to compete for consumers’ ruble
- Buyers seem to have a high propensity to substitute
‘Nowadays students prefer beer to ice cream’ (p.2)
- Substitute products numerous:
Beer (Baltica and dozens of other domestic brands)
Soft drinks (primarily Coke and Pepsi)
Chocolate (Mars, Nestle, and numerous domestic players)
Yogurts
- Substitutes aggressive advertisers and growing much faster
than ice cream (p.2)
No information on ‘relative price performance’ of substitute but
seems high if consumers are substituting
S
39. C Dr Aya S. Chacar 2015
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What do we look for to determine whether buyers have a high or
low power?
C Dr Aya S. Chacar 2015
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When is buyer power high? I
When price sensitivity of focal industry is high:
Cost of supplier product relative to total costs of focal industry
products high
Product differentiation of supplies low
Competition between focal industry players is high
C Dr Aya S. Chacar 2015
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40. When is buyer power high? II
Relative bargaining power of focal firms is high:
Size and concentration of focal industry firms relatives to
suppliers is high
Focal industry firms face little if no switching costs
Focal industry firms know and understand well the cost
structure of suppliers
Focal industry firms can easily integrate backward
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Is Buyer power high in the Russian Ice Cream industry?
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Distributors run the show and retailers are likely to become
more powerful as they grow and strengthen
End consumers and distributors are extremely price sensitive:
Actual Product costs has a significant impact on distributors’
profits
Producers undifferentiated (although some brand
differentiation)
? Distribution industry competitive
Relative bargaining power of focal firms is very high:
41. The number of distributors seems to be smaller than the number
of ice cream producers and they seem to be much larger
Distributors have no switching costs
Retailers will be more likely to switch as they grow in strength
and size
Cafes and restaurants can switch customers to other brands (like
Coke and Pepsi) so they will be powerful
? Customers have no switching costs
Distributors serve the largest channels (kiosks and convenience
stores) and shop around to get the products they want
Costs seem to be well known since ingredients are very basic
and manufacturing processes generic although varying
Retailers and Distributors could potentially make or source their
own ice cream using well known brand names
+ Forward vertical integration (into kiosks: e.g. Russkii
Holod, and into distribution: franchising name for restaurants
and cafes
C Dr Aya S. Chacar 2015
54
What do we look for to determine whether suppliers have a high
or low power?
C Dr Aya S. Chacar 2015
55
42. When is supplier power low? I
When price sensitivity of focal industry is high:
Cost of supplier product relative to total costs of focal industry
products high
Product differentiation of supplies low
Competition between focal industry players is high
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56
When is supplier power low? II
Relative bargaining power of focal firms is high:
Size and concentration of focal industry firms relatives to
suppliers is high
Focal industry firms face little if no switching costs
Focal industry firms know and understand well the cost
structure of suppliers
Focal industry firms can easily integrate backward
C Dr Aya S. Chacar 2015
57
Is supplier power high in the Russian Ice Cream industry?
43. C Dr Aya S. Chacar 2015
58
No evidence of supplier power
- Supplies mostly commodities (milk, sugar, packaging, ..)
although prices vary seasonally
- Many suppliers for most supplies
+ Limited local supply of high quality butter and specialist
equipment
C Dr Aya S. Chacar 2015
59
What do we look for to determine how low the threat of entry
is?
C Dr Aya S. Chacar 2015
60
44. The threat of entry is low when:
Economies of scale are present
Incumbents have an absolute cost advantage
High capital is needed to start
Existing products are highly differentiated
Channels of distribution are preempted or difficult to access
Government and legal barriers exist
Retaliation by established competitors is likely
C Dr Aya S. Chacar 2015
61
Is the threat of entry high in the Russian Ice Cream industry?
C Dr Aya S. Chacar 2015
62
No evident barriers to entry
Entry relatively easy as evidenced by the large numbers of new
entrants
New entrants seem to have lower costs than incumbents rather
than the other way around
Existing products are not highly differentiated
Several channels of distribution are available although
distributors are able to exert power
45. No apparent government or legal barriers
No apparent retaliation by incumbents to new entrants
C Dr Aya S. Chacar 2015
63
BUYERS
There are no
Barriers to
Entry
MARKET
COMPETITORS
Customers have a
High Bargaining
Power
SUPPLIERS
SUBSTITUTES
Rivalry is high
46. Bargaining power
of suppliers is Low
Threat of substitute
products is high
Source: Porter (1980)
POTENTIAL
ENTRANTS
Conclusion: The Russian Ice Cream Industry is unattractive
C Dr Aya S. Chacar 2015
64
Step 4 - What would it take for any company to be successful in
this industry; or how can we change the industry forces in our
favor; aka industry key success factors
Industry Analysis
C Dr Aya S. Chacar 2015
47. 65
What can a generic ice cream producer do to change the
industry forces in its favor?
Reduce capacity
Cut costs
Differentiate its products
Focus on the new ‘supermarket’ retail channel and home
consumption of ice cream
Merge with some of the efficient regional producers to form a
national company
Consolidate the industry
Forward vertically integrate into cafes
Forward vertically integrate into distribution
Forward vertically integrate into kiosks
…
C Dr Aya S. Chacar 2015
66
THREAT OF ENTRY
economies of scale
absolute cost advantages
48. capital requirements
product differentiation
access to distribution channels
governmental and legal barriers
retaliation by established producers
THREAT OF SUBSTITUTES
buyer propensity to substitute
relative price performance of substitutes
INDUSTRY
COMPETITIVENESS
concentration
product differentiation
excess capacity
ratio of fixed to variable costs
demand growth
cyclical fluctuations of demand
exit barriers
BUYER POWER
Price sensitivity
cost of purchases
profitability of buyers
importance of the product to quality of buyers’ product
Bargaining power
size and concentration of buyers relative to suppliers
buyers’ switching costs
buyers’ information
buyers’ ability to backward integrate
SUPPLIER POWER
Factors determining power of suppliers relative to producers
same as those determining power of producers relative to
buyers--see “Buyer Power” box.
Generic Drivers of Industry Forces
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67
Forces Siphon II
If forces weak > attractive ind. (if already in it. Entrants must
pay large $ to get over business)
Forces (+resources) define how firm can best compete.
Forces change over time.
THREAT OF ENTRY
Erect barriers to entry by building:
economies of scale
absolute cost advantages
Influence govt. policy requirements . . .
Overcome barriers to entry through:
product differentiation
. . .
THREAT OF SUBSTITUTES
Improve product’s attractiveness relative to substitutes:
Lower Prices
Product differentiation
Move into new businesses
INDUSTRY
COMPETITIVENESS
Compete on dimensions besides price
Consolidate ownership
50. Build a first-mover advantage . . .
BUYER POWER
Reduce Buyers’ Uniqueness
Forward Vertical Integration
Product Differentiation
Target New Market Segments
SUPPLIER POWER
Reduce Suppliers’ Uniqueness
Backward Vertical Integration
Use Multiple Suppliers
Source: Barney (1997)
Generic Responses to Industry Forces
C Dr Aya S. Chacar 2015
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Forces Siphon II
If forces weak > attractive ind. (if already in it. Entrants must
pay large $ to get over business)
Forces (+resources) define how firm can best compete.
Forces change over time.
Build up barriers to entry
Develop preferred/differentiated brands
Control distribution/block distribution with a full product line
Integrate vertically into distribution, retailing (kiosks)
Push for increased regulation to limit entrants
51. C Dr Aya S. Chacar 2015
69
Reduce rivalry
Buy up small regional players (as Nestle is doing)
Increase product differentiation which will put pressure on
some of the weaker producers who will then likely exit
Increase demand for ice cream/per capita consumption which
will ease competitive pressures
C Dr Aya S. Chacar 2015
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Reduce buyer power
Develop differentiated brands (increase the focus on marketing)
Integrate forward into distribution
Integrate forward into retailing (kiosks or cafes)
C Dr Aya S. Chacar 2015
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52. Mitigate threat of substitutes
Make ice cream snacks better value for money:
Increase their desirability through differentiation, or
Lower prices
C Dr Aya S. Chacar 2015
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So many options! How to chose?
Let’s first get to know Ice-Fili
C Dr Aya S. Chacar 2015
73
What do we know about Ice-Fili?
Its performance?
Its strategy?
Its resources and capabilities (its leadership)?
C Dr Aya S. Chacar 2015
53. 74
Ice-Fili may have the highest market share but it is definitely
losing ground
C Dr Aya S. Chacar 2015
75
Ice-Fili’s Strategy/ Aspirations
Beat Nestle
Dominate the market
C Dr Aya S. Chacar 2015
76
What strategy did/will Nestle pursue?
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54. Try and dominate the market
Produce locally to maintain low costs
Develop own distribution system, kiosks, and refrigerated
displays
Buy up small producers (instant market access and less
competition)
Deep pockets and expertise
C Dr Aya S. Chacar 2015
78
What strategy did Unilever pursue?
C Dr Aya S. Chacar 2015
79
Forward vertical integration and differentiation
Purchased 3000 kiosks in Moscow
Invested $6.2 Million in advertising to support Algida brand :
with sales = 1000 tonnes, the advertising was $0.62 per
portion!.
advertising to sales ratio = 125%)
55. Deep pockets and expertise and still retreated
C Dr Aya S. Chacar 2015
80
Industry is not destiny
Strength at home does not translate to strength abroad
C Dr Aya S. Chacar 2015
81
What are the different competitor groups/segments within the
Russian Ice Cream market?
C Dr Aya S. Chacar 2015
82
What Market Positions Do Rivals Occupy?
One technique to reveal different competitive positions of
industry rivals is strategic group mapping
56. A strategic group is a cluster of firms in an industry with
similar competitive approaches and market positions
C Dr Aya S. Chacar 2015
83
What would it take to reach Ice-Fili’s goals: dominate the ice-
cream industry and beat Nestle?
C Dr Aya S. Chacar 2015
84
Dominating the market requires dominating the impulse
segment
Impulse market is the most important segment in the industry:
78% of volume goes through kiosks and convenience stores
(Exhibit 8)
17% of volume goes to gastronoms but even these outlets load it
into mobile ice cream carts to sell it sound the streets
Only 5% is consumed in restaurants (3%) or at home (2%)
The non-impulse markets are likely to develop eventually but:
Eat at home tubs often have lower margins
Café sales also likely to be low margins since switching costs
are low
on premise and at home consumption are likely to be too small
57. even in the near future
Retreating from the impulse segments will make branding even
more costly and the likelihood of success lower
C Dr Aya S. Chacar 2015
85
What drives the success in the impulse market?
C Dr Aya S. Chacar 2015
86
What drives the success in the impulse market?
Profit = revenues - costs
High sales:
Availability
Affordability (compared to pocket money)
Relative affordability (compares to other snacks)
Desirability: quality and brand strength (will lead to a premium
price)
Variety
Weather
Per capita consumption
Controlled costs
points, superior distribution, and lowered delivered cost
58. C Dr Aya S. Chacar 2015
87
Are Russian Consumers ready to pay extra for quality ice-
cream?
C Dr Aya S. Chacar 2015
88
Are Russian Consumers ready to pay extra for quality ice-
cream?
Ice-Fili’s management seems to believe that Russians want only
high quality Russian Ice Cream
But there is no other data in the case that supports this
statement. In fact quite the opposite:
Regional producers must be using lesser quality products if they
are able to sell it at 3 roubles a portion and making significant
inroads
Nestle with an inferior ice-cream is catching up to Ice-Fili’s
market share although it is selling at a price premium!!
C Dr Aya S. Chacar 2015
59. 89
Could the company increase the appeal of its products by
lowering the quality of its ingredients?
Exercise: What is the Impact of halving the cost of dairy &
oils?
C Dr Aya S. Chacar 2015
90
What is the Ice Cream Cost Structure in Russia?
Ingredients % of Ingredient Costs
Condensed Milk
Milk Powder
Butter
Oils
Sugar
Flavorings
Total Ingredients 100%
C Dr Aya S. Chacar 2015
91
60. What is the Ice Cream Cost Structure in Russia?
Ingredients % of Ingredient Costs
Condensed Milk 30%
Milk Powder 12%
Butter 13%
Oils 3%
Sugar 12%
Flavorings 30%
Total Ingredients 100%
C Dr Aya S. Chacar 2015
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What is the Ice Cream Cost Structure in Russia?
Ingredients % of % of % of % of % of Retail
Price
Ingredients Mfg Wholesale Retail
inc VAT
Costs PricePricePrice
Condensed Milk 30%
Milk Powder 12%
Butter 13%
Oils 3%
Sugar 12%
Flavorings 30%
Total Ingredients 100%
Packaging
Labor
Other Expenses
Manufacturing Margins
Manufacturing Price 100%
61. Distributors Costs
Distributors Margins
Wholesale Price 100%
Retails Costs
Retail Margin
Retail net of VAT 100%
VAT
Retail price including VAT 100%
Use Exhibit 9
C Dr Aya S. Chacar 2015
93
What is the Ice Cream Cost Structure in Russia?
Ingredients % of % of % of % of % of Retail
Price
Ingredients Mfg Wholesale Retail
inc VAT
Costs PricePricePrice
Condensed Milk 30% 12.6 9.0 6.0 5.0
Milk Powder 12% 5.0 3.6 2.4 2.0
Butter 13% 5.5 3.9 2.6 2.2
Oils 3% 1.3 0.9 0.6 0.5
Sugar 12% 5.0 3.6 2.4 2.0
Flavorings 30% 12.6 9.0 6.0 5.0
Total Ingredients 100% 42.0 30.0 20.2 16.8
Packaging 13.0 9.3 6.2 5.2
Labor 13.0 9.3 6.2 5.2
Other Expenses 17.0 12.1 8.2 6.8
62. Manufacturing Margins 15.0 10.7 7.2 6.0
Manufacturing Price 100% 71.4 48.0 40.0
Distributors Costs 22.6 15.2 12.7
Distributors Margins 6.0 4.0 3.3
Wholesale Price 100% 67.2 56.0
Retails Costs 29.0 24.0
Retail Margin 4.0 3.3
Retail net of VAT 100% 83.3
VAT 16.7
Retail price including VAT 100%
C Dr Aya S. Chacar 2015
94
What is the Impact of halving the cost of dairy & oils?
Ingredients % of % of % of % of % of
Ing. Mfg Whl Retail RP w/
Costs PricePricePriceVAT
Condensed Milk 30% 12.6 9.0 6.0 5.0
Milk Powder 12% 5.0 3.6 2.4 2.0
Butter 13% 5.5 3.9 2.6 2.2
Oils 3% 1.3 0.9 0.6 0.5
Subtotal 58.0% 24.4 17.4 11.7 9.7
Sugar 12% 5.0 3.6 2.4 2.0
Flavorings 30% 12.6 9.0 6.0 5.0
Total Ingredients 100% 42.0 30.0 20.2 16.8
Impact of halving
the costs 29% 12.2 8.7 5.8 4.9
63. C Dr Aya S. Chacar 2015
95
How about Costs by Activity?
C Dr Aya S. Chacar 2015
96
Costs by Activity?
Activity % of Manufacturing Price
Labor and Overhead
Labor 13%
Other Expenses 17%
Total 30%
Breakdown of Costs by Activity
Mfg Labor (90% of total labor) 11.7%
SG&A Labor (10% of total) 1.3%
Manufacturing Overhead (60% of total) 10.2%
SG&A overhead (40% of total) 6.8%
Marketing (1% of sales) 1.0%
Balance of SG&A Overhead 5.8%
64. C Dr Aya S. Chacar 2015
97
What is the Ice Cream Cost Structure in Russia?
Activity % of Manufacturing Price
Ingredients % of % of % of % of % of Retail
Price
Ingredients Mfg Wholesale Retail
inc VAT
Costs PricePricePrice
Condensed Milk 30%
Milk Powder 12%
Butter 13%
Oils 3%
Sugar 12%
Flavorings 30%
Total Ingredients Costs 100%
Packaging
Manufacturing Labor
Manufacturing Overhead
Total Manufacturing Costs
SG&ALabor
SG&A Overhead
Marketing
Total Manufacturers cost
Manufacturer’s margin
Manufacturing Price 100%
Distribution Costs
Distributors margins
Wholesale Price 100%
65. Retail Costs
Retail Margin
Retail net of VAT 100%
VAT
Retail price including VAT 100%
C Dr Aya S. Chacar 2015
98
What is the Ice Cream Cost Structure in Russia?
% of % of % of % of % of Retail Price
Ingredients Mfg Wholesale Retail
inc VAT
Costs PricePricePrice
Ingredients
Condensed Milk 30% 12.6 9.0 6.0 5.0
Milk Powder 12% 5.0 3.6 2.4 2.0
Butter 13% 5.5 3.9 2.6 2.2
Oils 3% 1.3 0.9 0.6 0.5
Sugar 12% 5.0 3.6 2.4 2.0
Flavorings (cocoa, berries, etc.) 30% 12.6 9.0
6.0 5.0
Total Ingredients Costs 100% 42.0 30.0 20.2
16.8
Packaging 13.0 9.3 6.2 5.2
Manufacturing Labor 11.7 8.4 5.6 4.7
Manufacturing Overhead 10.2 7.3 4.9 4.1
Total Manufacturing Costs 76.9 54.9 36.9 30.8
SG&ALabor 1.3 0.9 0.6 0.5
SG&A Overhead 5.8 4.1 2.8 2.3
Marketing 1.0 0.7 0.5 0.4
66. Total Manufacturers cost 85.060.7 40.8 34.0
Manufacturer’s margin 15.0 10.7 7.2 6.0
Manufacturing Price 100% 71.4 48.0 40.0
Distribution Costs 22.6 15.2 12.7
Distributors margins 6.0 4.0 3.3
Wholesale Price 100% 67.2 56.0
Retail Costs 29% 24.0
Retail Margin 4.0 3.3
Retail net of VAT 100% 83.3
VAT 16.7
Retail price including VAT 100%
C Dr Aya S. Chacar 2015
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What are the relative economics by Activity?
% of Retail Price Ice-Fili Nestle
Regional Producers
inc VAT Roubles Roubles
Roubles
Per portion Per Portin Per
Portion
Ingredients
Condensed Milk 5.0
Milk Powder 2.0
Butter 2.2
Oils 0.5
Sugar 2.0
Flavorings (cocoa, berries, etc.) 5.0
Total Ingredients Costs 16.8
Packaging 5.2
67. Manufacturing Labor 4.7
Manufacturing Overhead 4.1
Total Manufacturing Costs 30.8
SG&ALabor 0.5
SG&A Overhead 2.3
Marketing 0.4
Total Manufacturers cost 34.0
Manufacturer’s margin 6.0
Manufacturing Price 40.0
Distribution Costs 12.7
Distributors margins 3.3
Wholesale Price 56.0
Retail Costs 24.0
Retail Margin 3.3
Retail net of VAT 83.3
VAT 16.7
Retail price including VAT 100%
C Dr Aya S. Chacar 2015
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What are your assumptions on cost differences?ItemIce-
FiliNestleRegional ProducersAssumptionsFats & OilsHigh
QLow QLow QOil & fats at 50% of priceLabor
CostMoscow50% regionalRegionalRegional Labor is 50% of
MoscowOverheadHighHighLow (50%)Small players have low
overheadPackagingHighHighLow (50%)Small players use cheap
or no packagingMarketing2%12 times Ice-Fili0Nestle spends $6
millionPrice per portion6-8 roubles6-8 roublesDerived
68. C Dr Aya S. Chacar 2015
101
What are the relative economics by Activity?
% of Retail Price Ice-Fili Nestle
Regional Producers
inc VAT Roubles Roubles
Roubles
Per portion Per Portin Per
Portion
Ingredients
Condensed Milk 5.0 0.35 0.18 0.18
Milk Powder 2.0 0.14 0.07 0.07
Butter 2.2 0.15 0.08 0.08
Oils 0.5 0.04 0.02 0.02
Sugar 2.0 0.14 0.14 0.14
Flavorings (cocoa, berries, etc.) 5.0 0.35
0.35 0.35
Total Ingredients Costs 16.8 1.18 0.83 0.83
Packaging 5.2 0.36 0.36 0.18
Manufacturing Labor 4.7 0.33 0.25 0.16
Manufacturing Overhead 4.1 0.29 0.29 0.14
Total Manufacturing Costs 30.8 2.15 1.73 1.32
SG&ALabor 0.5 0.04 0.04 0.02
SG&A Overhead 2.3 0.16 0.16 0.08
Marketing 0.4 0.03 0.34 0.00
Total Manufacturers cost 34.0 2.38 2.27 1.42
Manufacturer’s margin 6.0 0.42 1.93 0.25
Manufacturing Price 40.0 2.80 4.20 1.67
Distribution Costs 12.7 0.89 1.33 0.53
Distributors margins 3.3 0.23 0.35 0.14
Wholesale Price 56.0 3.92 5.68 2.34
69. Retail Costs 24.0 1.68 2.52 1.00
Retail Margin 3.3 0.23 0.35 0.14
Retail net of VAT 83.3 5.83 8.75 3.49
VAT 16.7 1.17 1.75 0.70
Retail price including VAT 100% 7.00 10.50
4.19
C Dr Aya S. Chacar 2015
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What are your assumptions on cost differences of Ice-Fili versus
regional producers?RegionalNestle (as a % of wholesale
price)AssumptionSavings on Dairy Ingredients (Fats &
Oils)50%Lesser qualitySavings on Labor Cost50% All regional
50% lessSavings on Manufacturing Overhead50%Regional
costs, smallerSavings on SG&A Overhead50%Regional costs,
smallerSavings on Packaging50%Little to no
packagingMarketing spent compared to Ice-Fili0% moreAlmost
no marketingManufacturers margin10% lower
C Dr Aya S. Chacar 2015
103
Nestle vs. Regional Producers
Ice-Fili Ice-Fili Ice-Fili Regional
Regional Regional
71. 3.29
VAT 16.7 1.17 16.7 0.66
Retail price including VAT 100% 7.00
100% 3.95
C Dr Aya S. Chacar 2015
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What are your assumptions on cost differences of Ice-Fili versus
Nestle?ItemNestle (as a % of manufacturing)AssumptionSavings
on Dairy Ingredients (Fats & Oils)50%Lesser qualitySavings on
Labor Cost25% 50% regionalSavings on Manufacturing
Overhead0%SameSavings on SG&A Overhead0%SameSavings
on Packaging0%SameMarketing compared to Ice-Fili1200%
more$6 vs. $500k on the same volumeManufacturers margin10%
lowerPrice per portion10.5% loNestle 8-13
C Dr Aya S. Chacar 2015
105
Nestle vs. Ice-Fili
Ice-Fili Ice-Fili Ice-Fili Nestle
Nestle Nestle
% of % of Roubles % of % of
Roubles
Ice-Fili Retail Per portion Co.
73. C Dr Aya S. Chacar 2015
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Impact of cost changes
Halfing the cost of all dairy products (50% of ingredients costs)
consumers may be willing to pay for that extra quality
If only the butter costs can be halved (13% of ingredients costs)
overall manufacturer’s price decreases only by 2.7%
ATTN: Higher quality will not lead to CA, still subject to
imitation
C Dr Aya S. Chacar 2015
107
Can Ice-Fili differentiate its products?
C Dr Aya S. Chacar 2015
108
74. Evaluating differentiation
Snack category behavior and Nestle’s sales seems to indicate
that branding could be effective
If Ice-Fili truly has a superior product failing to advertise it is
not optimal
Comparing to Unilever & Nestle, a minimum level of
advertising irrespective of sales seems $6 million a year so
spend 10x current budget of $500k?
C Dr Aya S. Chacar 2015
109
How much is advertising worth?
A combination of a 10% price increase with a 25% sales
increase in ice cream would increase annual contributions by
over $100 Million for investment in advertising. Since the beer
and soft drink categories are growing at about 25% annually
this seems feasibleBase
$MillionsVolume Up 25%
$MillionsPrice
Up 10%
$MillionsDifference
$MillionsRevenues500625687.5187.5Variable
Costs333.3416.7416.783.3Contribution166.7208.3270.8104.2
75. C Dr Aya S. Chacar 2015
110
What should Ice-Fili not do?
Do not buy kiosks – a cash retail busines – if it can be avoided
(did not provide Unilever with an advantage)
Do not run ice cream parlors –also a retail business- requires
huge cash outlays and very different management skills
Do not pack meat, vegetables, other frozen foods, or dry ice
export: A distraction from the core business. If Ice-Fili focuses
it might grow 5-10 times its size in the next 5 years.
Do not expand internationally: until it has a significant share of
the Russian market
C Dr Aya S. Chacar 2015
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What Happened?
The fate of Anatoly Shamanov, the largest shareholder and
president of OAO Ice-Fili, the country's oldest ice-cream
manufacturer, is similar in many respects to the fate of Anatoly
Daursky. In 2001, he successfully fended off an attack by his
former partner Viktor Lutovinov, who had bought up 30% of
Ice-Fili's shares and tried to gain control over the company. At
the end of 2002, Lutovinov sold his shareholdings to Guta,
which immediately launched an attack on Ice-Fili. After some
76. resistance, Shamanov had to sell his share block, although the
buyer was not Guta but Russian General Bank and NIKoil (now
Uralsib). Last year, Guta tried by various means to take control
of the ice cream manufacturer, but the new owners fought to the
bitter end. At the end of June, the parties signed a memorandum
to end the corporate dispute. However, the events at Ice-Fili no
longer concerned Shamanov. Company employees confirmed
that after selling his shares, the former head of the refrigeration
complex showed up at the premises only a few times. (By
August 2005 owned 99.45% then sold it to Britain's Fleming
Family & Partners investment fund who consolidated it with
another company
C Dr Aya S. Chacar 2015
When assessing the structural attractiveness of and industry . . .
First, define the industry
Then map out who the main actors are
Direct rivals
Potential entrants
Sellers of substitute products or services
Suppliers
Buyers
Assess where the power is now / shifting to in future and why
Quantify the impact these forces have on the viability of the
business model.
Finally figure out how to reverse the forces or capitalize on
them in your favor
C Dr Aya S. Chacar 2015
77. 113
Issues with the 5 Forces
Different for different firms
Framework is relatively static.. Moreover it does not take into
account structural changes
Political Economic Social Technological is forgotten
Industry does not predetermine profitability need to also
examine the resource base of the firm
Ignores complementary products
Industry definition is key can completely change the analysis
C Dr Aya S. Chacar 2015
114
What about Complementors?
C Dr Aya S. Chacar 2015
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Complements to Competitive Interaction
Complementors
The network of companies that sell products or services that are
78. complementary to another firm’s product or service
If a complementor’s product or service adds value to the sale of
a firm’s product or service, it is likely to also create value for
that firm.
A firm can increase its chances of achieving value creation by
paying attention to customers, suppliers, competitors, and
complementors.
C Dr Aya S. Chacar 2015
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Value Creation in an Industry
SOURCE: Adapted from A. Brandenburger & B. Nalebuff,
1996, Co-opetition, New York: Currency Doubleday, 17.
C Dr Aya S. Chacar 2015
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Lesson #1: Defining the industry is half the battle
Many different industry definitions
Initial industry definition sets the terms of the discussion for
industry analysis.
Industry definition may change over time, it is not etched in
stone.
79. C Dr Aya S. Chacar 2015
118
Lesson #2: There is no “right” industry definition
“Impulse Indulgence industry”
Candy, yogurt, beer, .. are all competitors
Few substitutes
Too broad to be useful
“Moscow ice cream industry”
A large segment of the market currently served by Ice-Fili
Reflects current strategic positioning
Too narrow because misses potential threats and opportunities
“Russian Ice-Cream Industry”
Fits just right
Based on what the company currently produces
C Dr Aya S. Chacar 2015
119
Lesson #3: Check lists are written in blood
The five forces framework is a checklist to ensure that you
consider all the components of the industry.
Check all forces initially to ensure completeness, then hone in
on key issues.
Examining forces components in a generic fashion allows
80. instantaneous identifications of possible options.
C Dr Aya S. Chacar 2015
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Lesson #4: Industry is not Destiny
You can make money in a lousy industry and lose money in
what seems to be a very attractive industry or never manage to
enter it
C Dr Aya S. Chacar 2015
121
Profitability of US industries, 1985 - 1997
C Dr Aya S. Chacar 2015
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81. Industry is important, but it’s not everything!
Percentage of total profit variance
attributable to:
Source: “How Much Does Industry Matter, Really?,” Anita
McGahan and Michael Porter, Strategic Mgmt Jnl, Vol. 18
4
19
43
100
2
32
Business unit effects
Corporate parent effects
Industry effects
Year effects
Not explained by model
TOTAL
Estimates by McGahan & Porter
15
45
n/a
100
2
82. Estimates by Rumelt
38
C Dr Aya S. Chacar 2015
123
Lesson #4: Industry is not Destiny
Industries indeed differ
You need to figure out how to change the forces in your favor
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Lesson #5: We do not have strategic solutions but a Chinese
There is no one solution to one industry problem but there are
sets of potential generic solutions that can be used as a starting
point
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THREAT OF ENTRY
Erect barriers to entry by building:
economies of scale
absolute cost advantages
Influence govt. policy requirements . . .
Overcome barriers to entry through:
product differentiation
. . .
THREAT OF SUBSTITUTES
Improve product’s attractiveness relative to substitutes:
Lower Prices
Product differentiation
Move into new businesses
INDUSTRY
COMPETITIVENESS
Compete on dimensions besides price
Consolidate ownership
Build a first-mover advantage . . .
BUYER POWER
Reduce Buyers’ Uniqueness
Forward Vertical Integration
Product Differentiation
Target New Market Segments
SUPPLIER POWER
Reduce Suppliers’ Uniqueness
84. Backward Vertical Integration
Use Multiple Suppliers
Source: Barney (1997)
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Forces Siphon II
If forces weak > attractive ind. (if already in it. Entrants must
pay large $ to get over business)
Forces (+resources) define how firm can best compete.
Forces change over time.
Next Time
Case Prep: Use the Generic Case questions and Specific
Questions on syllabus and board.
Case Prep: Harlequin
Individual Presentations of an External Analysis
Read Assigned Chapters and if you can play with the quizzes.
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85. INDUSTRY
RETURN ON
EQUITY
Drugs
20.3
Food and kindred products
14.8
-
of which tobacco products
19.6
Instruments and related products
11.2
Electrical, and electronic equipment
11.1
R
ubber
and misc. plastics products
10.7
Printing and publishing
10.6
86. Fabricated metal products
9.9
Aircraft, guided missiles, and parts
9.7
Petroleum and coal products
9.6
Retail trade corporations
8.9
Paper and allied products
8.5
Textile
m
ill p
roducts
7.6
Wholesale trade corporations
6.8
Stone, glass and clay products
6.5
Machinery, exc.
87. E
lectrical
6.0
Nonferrous met
als
5.6
Motor vehicles and equipment
5.5
Iron and steel
2.6
Mining corporations
2.7
Airlines
1.1
INDUSTRYRETURN ON EQUITY
Drugs
20.3
Food and kindred products
14.8
- of which tobacco products
19.6
Instruments and related products
11.2
88. Electrical, and electronic equipment
11.1
Rubber and misc. plastics products
10.7
Printing and publishing
10.6
Fabricated metal products
9.9
Aircraft, guided missiles, and parts
9.7
Petroleum and coal products
9.6
Retail trade corporations
8.9
Paper and allied products
8.5
Textile mill products
7.6
Wholesale trade corporations
6.8
Stone, glass and clay products
6.5
Machinery, exc. Electrical
6.0
Nonferrous metals
5.6
Motor vehicles and equipment
5.5
Iron and steel
2.6
Mining corporations
2.7
Airlines
1.1