C Dr Aya S. Chacar 2015 External & Industry Analysis.

C Dr Aya S. Chacar 2015

External & Industry Analysis


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


Strategic Audit: An Audit of the Strategic Health of a Company

STRATEGIC OPTIONS

Strategy Analysis:

*At the BU level

*At the Corporate Level

External/Environmt’l Analysis

Internal/Resources Analysis.

Performance Analysis

Winning Strategy

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Strategic Audit: An Audit of the Strategic Health of a Company

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

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..

Winning Strategy

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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?

• Step 2: Strategy Analysis Test/CritiqueIs 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

https://www.youtube.com/watch?v=UZrTl16hZdk

https://www.youtube.com/watch?v=UZrTl16hZdk


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

• 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


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.


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.

• 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.


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

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


What is External Environment Analysis?


The Environment: General (PEST or GDPest) & Competitive

Source: Ireland, Hitt & Hoskisson 2006 – Copyright Thompson Business & Professional Publishing

Q


BUYERS

Threat ofnew entrants

MARKET

COMPETITORS

Bargaining powerof customers

SUPPLIERS

SUBSTITUTES

Rivalry amongexisting firms

Bargaining powerof suppliers

Threat of substituteproducts or services

Source: Porter (1980)

POTENTIALENTRANTS

The 5-Forces Framework

P, Q


Step 1 - What Industry is Ice-Fili in?

Industry Analysis


Step 1 – Define the industry the firm is inStep 2 - Identify the players:

Competitors, substitutes, suppliers, buyers, and potential entrants

Industry Analysis


BUYERS

MARKET

COMPETITORS

SUPPLIERS

SUBSTITUTES



POTENTIALENTRANTS



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


BUYERS


MARKET

COMPETITORS


SUPPLIERS

SUBSTITUTES





POTENTIALENTRANTS



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


THREAT OF ENTRY• economies of scale• 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

INDUSTRYCOMPETITIVENESS• concentration• product differentiation• excess capacity• ratio of fixed to

variable costs• demand growth• cyclical fluctuations of

demand• exit barriers

BUYER POWERPrice 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 POWERFactors 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


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– . . .


Improve product’s attractiveness relative to substitutes:• Lower Prices• Product differentiation• Move into new businesses

INDUSTRYCOMPETITIVENESS

• 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• Backward Vertical Integration• Use Multiple Suppliers

Source: Barney (1997)

Generic Responses to

Industry Forces


External Environment Analysis


The Environment: General (PEST or GDPest) & Competitive

Source: Ireland, Hitt & Hoskisson 2006 – Copyright Thompson Business & Professional Publishing

Q


BUYERS


MARKET

COMPETITORS


SUPPLIERS

SUBSTITUTES





POTENTIALENTRANTS


P, Q


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, and renewal and erosion factors• Evaluate potential strategies that the company can

follow• Try and determine the implementation issues• Recommend a strategy


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


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 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 • …

We generally do not need a full blown industry analysis to determine if an industry is attractive or not


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?


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.


Step 1 - What Industry is Ice-Fili in?

Industry Analysis


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


Defining the Competitors and Industry is Crucial

Determineswhat you

do

How youframe

the situation

Determineswhat yousee, thinkand hear

Determines whoyou “see” as

your customers, competitors,

and so on

How you defineyour business

Determines what you do

(your strategy)

Coke Pepsi

C Dr Aya S. Chacar 2015• By Pullitzer Prize Winning Political Cartoonist David Horsey


How we define our industry or business is often the biggest

constraining factor to our decision process

Apple


What are cows and chicken?


• Looks like President Clinton and Vice President Gore, right?

• It's Clinton's face twice, with two different haircuts.

Whom Do You See?


No, they're both the same size

Is the Left Center Circle Bigger?


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


Step 1 – Define the industry the firm is inStep 2 - Identify the players:

Competitors, substitutes, suppliers, buyers, and potential entrants

Industry Analysis


BUYERS

MARKET

COMPETITORS

SUPPLIERS

SUBSTITUTES



POTENTIALENTRANTS



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


BUYERS


MARKET

COMPETITORS


SUPPLIERS

SUBSTITUTES





POTENTIALENTRANTS



What do we look for to determine whether rivalry is high?


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


Is rivalry high in the Russian Ice Cream industry?


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:

– 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)

– ..


What do we look for to determine how high the threat of substitutability is?


The threat of substitutes is high when:

• Buyers have a high propensity to substitute• The relative price and performance of

substitutes is high


Is the threat of substitutes high in the Russian Ice Cream industry?


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


What do we look for to determine whether buyers have a high or low power?


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


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


Is Buyer power high in the Russian Ice Cream industry?


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:– 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


What do we look for to determine whether suppliers have a high or low power?


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


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


Is supplier power high in the Russian Ice Cream industry?


What do we look for to determine how low the threat of entry is?


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


Is the threat of entry high in the Russian Ice Cream industry?


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• No apparent government or legal barriers• No apparent retaliation by incumbents to new

entrants


BUYERS

There are noBarriers to Entry

MARKET

COMPETITORS

Customers have a High Bargaining Power

SUPPLIERS

SUBSTITUTES

Rivalry is high

Bargaining powerof suppliers is Low

Threat of substituteproducts is high


POTENTIALENTRANTS

Conclusion: The Russian Ice Cream Industry is unattractive


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


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• …


THREAT OF ENTRY• economies of scale• absolute cost

advantages• capital requirements• product differentiation • access to distribution

channels• governmental and

legal barriers• retaliation by

established producers


• buyer propensity to substitute

• relative price performance of substitutes

INDUSTRYCOMPETITIVENESS• concentration• product differentiation• excess capacity• ratio of fixed to

variable costs• demand growth• cyclical fluctuations of

demand• exit barriers

BUYER POWERPrice 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 POWERFactors 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













advantage . . .

BUYER POWER


SUPPLIER POWER



Generic Responses to

Industry Forces


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


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


Reduce buyer power

• Develop differentiated brands (increase the focus on marketing)

• Integrate forward into distribution• Integrate forward into retailing (kiosks or

cafes)


Mitigate threat of substitutes

• Make ice cream snacks better value for money:– Increase their desirability through differentiation,

or– Lower prices


So many options! How to chose?Let’s first get to know Ice-Fili


What do we know about Ice-Fili?

• Its performance?

• Its strategy?

• Its resources and capabilities (its leadership)?


Ice-Fili may have the highest market share but it is definitely losing ground


Ice-Fili’s Strategy/ Aspirations

• Beat Nestle• Dominate the market


What strategy did/will Nestle pursue?


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


What strategy did Unilever pursue?


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!.– Since prices probably were about Nestles (13

roubles=$0.40 advertising to sales ratio = 125%)• Deep pockets and expertise and still retreated


Industry is not destiny

Strength at home does not translate to strength abroad


What are the different competitor groups/segments within the Russian Ice

Cream market?


What Market Positions Do Rivals Occupy?

• One technique to reveal different competitive positions of industry rivals is strategic group mapping

• A strategic group is a cluster of firms in an industry with similar competitive approaches and market positions


What would it take to reach Ice-Fili’s goals: dominate the ice-cream industry and beat

Nestle?


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 even in

the near future• Retreating from the impulse segments will make branding

even more costly and the likelihood of success lower


What drives the success in the impulse market?


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 Must haves are preferred products, strong brands, right price

points, superior distribution, and lowered delivered cost


Are Russian Consumers ready to pay extra for quality ice-cream?


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!!


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?


What is the Ice Cream Cost Structure in Russia?

Ingredients % of Ingredient CostsCondensed MilkMilk PowderButterOilsSugarFlavoringsTotal Ingredients 100%



Ingredients % of Ingredient CostsCondensed Milk 30%Milk Powder 12%Butter 13%Oils 3%Sugar 12%Flavorings 30%Total Ingredients 100%



Ingredients % of % of % of % of % of Retail Price Ingredients Mfg Wholesale Retail inc VATCosts Price Price Price

Condensed Milk 30%Milk Powder 12%Butter 13%Oils 3%Sugar 12%Flavorings 30%Total Ingredients 100%PackagingLaborOther ExpensesManufacturing MarginsManufacturing Price 100%Distributors CostsDistributors MarginsWholesale Price 100%Retails CostsRetail MarginRetail net of VAT 100%VATRetail price including VAT 100%

Use Exhibit 9



Ingredients % of % of % of % of % of Retail Price Ingredients Mfg Wholesale Retail inc VATCosts Price Price Price

Condensed Milk 30% 12.6 9.0 6.0 5.0Milk Powder 12% 5.0 3.6 2.4 2.0Butter 13% 5.5 3.9 2.6 2.2Oils 3% 1.3 0.9 0.6 0.5Sugar 12% 5.0 3.6 2.4 2.0Flavorings 30% 12.6 9.0 6.0 5.0Total Ingredients 100% 42.0 30.0 20.2 16.8Packaging 13.0 9.3 6.2 5.2Labor 13.0 9.3 6.2 5.2Other Expenses 17.0 12.1 8.2 6.8Manufacturing Margins 15.0 10.7 7.2 6.0Manufacturing Price 100% 71.4 48.0 40.0Distributors Costs 22.6 15.2 12.7Distributors Margins 6.0 4.0 3.3Wholesale Price 100% 67.2 56.0Retails Costs 29.0 24.0Retail Margin 4.0 3.3Retail net of VAT 100% 83.3VAT 16.7Retail price including VAT 100%


What is the Impact of halving the cost of dairy & oils?

Ingredients % of % of % of % of % of Ing. Mfg Whl Retail RP w/Costs Price Price Price VAT

Condensed Milk 30% 12.6 9.0 6.0 5.0Milk Powder 12% 5.0 3.6 2.4 2.0Butter 13% 5.5 3.9 2.6 2.2Oils 3% 1.3 0.9 0.6 0.5Subtotal 58.0% 24.4 17.4 11.7 9.7Sugar 12% 5.0 3.6 2.4 2.0Flavorings 30% 12.6 9.0 6.0 5.0Total Ingredients 100% 42.0 30.0 20.2 16.8

Impact of halving the costs 29% 12.2 8.7 5.8 4.9


How about Costs by Activity?


Costs by Activity?

Activity % of Manufacturing PriceLabor and Overhead

Labor 13%Other Expenses 17%

Total 30%

Breakdown of Costs by ActivityMfg 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%



Activity % of Manufacturing PriceIngredients % of % of % of % of % of Retail Price

Ingredients Mfg Wholesale Retail inc VATCosts Price Price Price

Condensed Milk 30%Milk Powder 12%Butter 13%Oils 3%Sugar 12%Flavorings 30%Total Ingredients Costs 100%PackagingManufacturing LaborManufacturing OverheadTotal Manufacturing CostsSG&ALaborSG&A OverheadMarketingTotal Manufacturers costManufacturer’s marginManufacturing Price 100%Distribution CostsDistributors marginsWholesale Price 100%Retail CostsRetail MarginRetail net of VAT 100%VATRetail price including VAT 100%



% of % of % of % of % of Retail Price Ingredients Mfg Wholesale Retail inc VATCosts Price Price Price

IngredientsCondensed Milk 30% 12.6 9.0 6.0 5.0Milk Powder 12% 5.0 3.6 2.4 2.0Butter 13% 5.5 3.9 2.6 2.2Oils 3% 1.3 0.9 0.6 0.5Sugar 12% 5.0 3.6 2.4 2.0Flavorings (cocoa, berries, etc.) 30% 12.6 9.0 6.0 5.0

Total Ingredients Costs 100% 42.0 30.0 20.2 16.8Packaging 13.0 9.3 6.2 5.2Manufacturing Labor 11.7 8.4 5.6 4.7Manufacturing Overhead 10.2 7.3 4.9 4.1Total Manufacturing Costs 76.9 54.9 36.9 30.8SG&ALabor 1.3 0.9 0.6 0.5SG&A Overhead 5.8 4.1 2.8 2.3Marketing 1.0 0.7 0.5 0.4Total Manufacturers cost 85.0 60.7 40.8 34.0 Manufacturer’s margin 15.0 10.7 7.2 6.0Manufacturing Price 100% 71.4 48.0 40.0Distribution Costs 22.6 15.2 12.7Distributors margins 6.0 4.0 3.3Wholesale Price 100% 67.2 56.0Retail Costs 29% 24.0Retail Margin 4.0 3.3Retail net of VAT 100% 83.3VAT 16.7Retail price including VAT 100%


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 PortionIngredients

Condensed Milk 5.0Milk Powder 2.0Butter 2.2Oils 0.5Sugar 2.0Flavorings (cocoa, berries, etc.) 5.0

Total Ingredients Costs 16.8Packaging 5.2Manufacturing Labor 4.7Manufacturing Overhead 4.1Total Manufacturing Costs 30.8SG&ALabor 0.5SG&A Overhead 2.3Marketing 0.4Total Manufacturers cost 34.0 Manufacturer’s margin 6.0Manufacturing Price 40.0Distribution Costs 12.7Distributors margins 3.3Wholesale Price 56.0Retail Costs 24.0Retail Margin 3.3Retail net of VAT 83.3VAT 16.7Retail price including VAT 100%


What are your assumptions on cost differences?

Item Ice-Fili Nestle Regional Producers

Assumptions

Fats & Oils High Q Low Q Low Q Oil & fats at 50% of price

Labor Cost Moscow 50% regional

Regional Regional Labor is 50% of Moscow

Overhead High High Low (50%) Small players have low overhead

Packaging High High Low (50%) Small players use cheap or no packaging

Marketing 2% 12 times Ice-Fili

0 Nestle spends $6 million

Price per portion 6-8 roubles 6-8 roubles

Derived


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 PortionIngredients

Condensed Milk 5.0 0.35 0.18 0.18Milk Powder 2.0 0.14 0.07 0.07Butter 2.2 0.15 0.08 0.08Oils 0.5 0.04 0.02 0.02Sugar 2.0 0.14 0.14 0.14Flavorings (cocoa, berries, etc.) 5.0 0.35 0.35 0.35

Total Ingredients Costs 16.8 1.18 0.83 0.83Packaging 5.2 0.36 0.36 0.18Manufacturing Labor 4.7 0.33 0.25 0.16Manufacturing Overhead 4.1 0.29 0.29 0.14Total Manufacturing Costs 30.8 2.15 1.73 1.32SG&ALabor 0.5 0.04 0.04 0.02SG&A Overhead 2.3 0.16 0.16 0.08Marketing 0.4 0.03 0.34 0.00Total Manufacturers cost 34.0 2.38 2.27 1.42Manufacturer’s margin 6.0 0.42 1.93 0.25Manufacturing Price 40.0 2.80 4.20 1.67Distribution Costs 12.7 0.89 1.33 0.53Distributors margins 3.3 0.23 0.35 0.14Wholesale Price 56.0 3.92 5.68 2.34Retail Costs 24.0 1.68 2.52 1.00Retail Margin 3.3 0.23 0.35 0.14Retail net of VAT 83.3 5.83 8.75 3.49VAT 16.7 1.17 1.75 0.70Retail price including VAT 100% 7.00 10.50 4.19


What are your assumptions on cost differences of Ice-Fili versus regional producers?

Regional Nestle (as a % of wholesale price)

Assumption

Savings on Dairy Ingredients (Fats & Oils)

50% Lesser quality

Savings on Labor Cost 50% All regional 50% less

Savings on Manufacturing Overhead 50% Regional costs, smaller

Savings on SG&A Overhead 50% Regional costs, smaller

Savings on Packaging 50% Little to no packaging

Marketing spent compared to Ice-Fili 0% more Almost no marketing

Manufacturers margin 10% lower


Nestle vs. Regional Producers

Ice-Fili Ice-Fili Ice-Fili Regional RegionalRegional

% of % of Roubles % of % of Roubles

Ice-Fili Retail Per portion Co. Retail Per Portion

Sales Sales Sales SalesIngredients

Dairy/Oils 24.4% 9.7 0.68 21.6 8.6 0.34Sugar 5.0% 2.0 0.14 8.9 3.6 0.14Flavorings (cocoa, berries, etc.) 12.6% 5.0 0.35 22.3 8.9 0.35

Total Ingredients Costs 42.0% 16.8 1.18 52.8 21.1 0.83Packaging 13.0% 5.2 0.36 11.5 4.6 0.18Total Materials Costs 55.0% 22.0 1.54 64.3 25.7 1.02Manufacturing Labor 11.7% 4.7 0.33 10.4 4.1 0.16Manufacturing Overhead 10.2% 4.1 0.29 9.0 3.6 0.14Total Manufactured Cost 76.9% 30.8 2.15 83.7 33.5 1.32SG&A 1.0% 0.4 0.03 0.0 0.0 0.00Marketing 7.1% 2.8 0.20 6.3 2.5 0.10Total cost 85.0% 34.0 2.38 90.0 36.0 1.42 Manufacturer’s margin 15.0% 6.0 0.42 10.0 4.0 0.16Manufacturing Price 100% 40.0 2.80 100 40.0 1.58Distributors gross 16.0 1.12 16.0 0.63Wholesale Price 56.0 3.92 56.0 2.21Retail Gross Margin 27.3 1.91 27.3 1.08Retail price net of VAT 83.3 5.83 83.3 3.29VAT 16.7 1.17 16.7 0.66Retail price including VAT 100% 7.00 100% 3.95


What are your assumptions on cost differences of Ice-Fili versus Nestle?

Item Nestle (as a % of manufacturing)

Assumption

Savings on Dairy Ingredients (Fats & Oils)

50% Lesser quality

Savings on Labor Cost 25% 50% regional

Savings on Manufacturing Overhead

0% Same

Savings on SG&A Overhead 0% Same

Savings on Packaging 0% Same

Marketing compared to Ice-Fili 1200% more $6 vs. $500k on the same volume

Manufacturers margin 10% lower

Price per portion 10.5% lo Nestle 8-13


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. Retail Per

PortionSales Sales Sales Sales

IngredientsDairy/Oils 24.4% 9.7 0.68 81 3.2 0.34Sugar 5.0% 2.0 0.14 3.4 1.3 0.14Flavorings (cocoa, berries, etc.) 12.6% 5.0 0.35 8.4 3.4 0.35

Total Ingredients Costs 42.0% 16.8 1.18 19.9 8.0 0.83Packaging 13.0% 5.2 0.36 8.7 3.5 0.36Total Materials Costs 55.0% 22.0 1.54 28.5 11.4 1.20Manufacturing Labor 11.7% 4.7 0.33 5.9 2.3 0.25Manufacturing Overhead 10.2% 4.1 0.29 6.8 2.7 0.29Total Manufactured Cost 76.9% 30.8 2.15 41.2 16.5 1.73SG&A 1.0% 0.4 0.03 8.0 3.2 0.34Marketing 7.1% 2.8 0.20 4.7 1.9 0.20Total cost 85.0% 34.0 2.38 53.9 21.6 2.27 Manufacturer’s margin 15.0% 6.0 0.42 46.1 18.4 1.93Manufacturing Price 100% 40.0 2.80 100 40.0 4.20Distributors gross 16.0 1.12 16.0 1.68Wholesale Price 56.0 3.92 56.0 5.88Retail Gross Margin 27.3 1.91 27.3 2.87Retail price net of VAT 83.3 5.83 83.3 8.75VAT 16.7 1.17 16.7 1.75Retail price including VAT 100% 7.00 100% 10.5


Impact of cost changes

• Halfing the cost of all dairy products (50% of ingredients costs) leads to a decrease in 11.6% in manufacturer’s price. the 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


Can Ice-Fili differentiate its products?


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?


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 feasible

Base

$Millions

Volume Up 25% $Millions

Price Up 10% $Millions

Difference

$Millions

Revenues 500 625 687.5 187.5

Variable Costs

333.3 416.7 416.7 83.3

Contribution 166.7 208.3 270.8 104.2


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


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 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


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


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


What about Complementors?


Complements to Competitive Interaction

• Complementors– The network of companies that sell products or services

that are 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.


Value Creation in an Industry

SOURCE: Adapted from A. Brandenburger & B. Nalebuff, 1996, Co-opetition, New York: Currency Doubleday, 17.


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.


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


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 instantaneous identifications of possible options.


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


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 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

Profitability of US industries, 1985 - 1997


Industry is important, but it’s not everything!

Percentage of total profit varianceattributable to:

Source: “How Much Does Industry Matter, Really?,” Anita McGahan and Michael Porter, Strategic Mgmt Jnl, Vol. 18

4

19

43

100

2

32Business unit

effects

Corporate parent effects

Industry effects

Year effects

Not explained by model

TOTAL

Estimates by McGahan & Porter 15

45

n/a

100

2

Estimates by Rumelt

38


Lesson #4: Industry is not Destiny

Industries indeed differYou need to figure out how to change the

forces in your favor


Lesson #5: We do not have strategic solutions but a Chinese Menu

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













advantage . . .

BUYER POWER


SUPPLIER POWER




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.

C Dr Aya S. Chacar 2015 External & Industry Analysis.

Documents

internal analysis

forces analysis

strategy analysis testcritique

markides strategy analysis

firms performance

firms strategy

success data analysis

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