Thefive forces of completion model otherwise known as Porter’s five forces areused to determine how profitable and attractive an overall industry is. Anindustry is considered attractive if the threats of the five forces areconsidered to be fairly low.
The five forces include the threat of newentrants, threat of substitute products, bargaining power of suppliers andbuyers, and rivalry among competitors. Within this report, I will explain eachof the five forces and their ratings in regard to the Ice-Fili, a Russian icecream industry. Also, I will include suggestions to Ice-Fili on how to lowerthreats within the industry.
New Entrants:Thethreat of new entrants was a dominating issue for Ice-Fili due to weak barriersto entry.Weakbarriers to entry made it difficult for Ice-Fili to remain one of the top icecream producers in Russia. In 1991, Russia decided to institute an open marketeconomy. This policy allowed industries to access any market freely. Industriessuch as Ben & Jerry’s and Baskin & Robbins took advantage of this openmarket policy in order to increase capitalization.
In turn, this created highercompetition with local industries such as Ice-Fili who experienced a heavy dropin ice cream sales and production. Overall, the threat of new entrants would beconsidered high due to its weak barriers to entry. Substitutes:Thethreat of product substitutes becomes high when outside industries createproducts at a lower cost with similar benefits. This threat increases theamount of competition from industry to industry. Available substitute productsinclude sodas, yogurts, chocolates and other confectionary candies. Theproducts mentioned above have been competing with the ice cream industry forsome time. These substitutes may serve the same purpose to the consumer whichis the indulgence and intake of a sugary substance. In 2000, the production of icecream declined 3.
5% from the year before compared to the 23-25% increase incompeting products. Overall the threat of product substitutes is considered tobe medium-high in regard to the ice cream industry. The ability to purchaseitems at a lower price that essentially provide the same amount of benefits isthe reason for higher competition.
Supplier power:Thepower of suppliers in the ice cream industry may be considered low. Thesupplier power is low when referring to ingredients that compose the ice creamitself. Ingredients such as milk, butter, and sugar are sold as a commodity.
This means these essential ingredients can be purchased for a lower pricethrough different suppliers at any time. Having the ability to purchase fromdifferent suppliers who may offer lower prices than others decrease thesuppliers actual bargaining power. Buyer power:Asdistributors, Ice-Fili has the power to decide what products are available tothe consumers which is an indicator of possessing high bargaining power.
Asmentioned previously there are about 300 active ice cream industries in Russia.The domestic ice cream industries in Russia have provided similar products thathave little differences. Consumers are then able to choose one product overthere other without second-guessing. Price sensitivity is also a factor inbargaining power. Small differences in pricing of a product will not changeconsumer buying behavior so the price sensitivity is low. Competitors: Rivalry amongst competitors is likely to behigh when there is a large number of similar functioning industries. In 2002, amassive 300 ice cream industries were active in Russia.
Many competitors reliedheavily on advertising and marketing to ensure consumers became familiar withtheir products. The more familiar consumer became with these new brands themore likely these industries would be able to convince distributors to selltheir products resulting in higher profits. Ice-Fili did not spend near as muchmoney advertising compared to its competitors. Because of Ice-Filis lack ofadvertising, consumers were more prone to choose other options since they weremore well-known ice cream brands.
The competition and rivalry amongst existingindustries would be considered high because of domestic and foreigncompetition. Final Thoughts:Throughanalysis of Porter five forces, the overall attractiveness of the ice creamindustry is moderately low. This industry has a high threat of entrants, highbuyer power, high product substitutes, and high rivalry between competitors.The only advantage this industry seems to have is low supplier power.
The riskswithin this industry outweigh the benefits making it unattractive.