Thefive forces of completion model otherwise known as Porter’s five forces are essentiallyused to express how profitable and attractive a specific industry is.
Anindustry is considered to be attractive when the threats of each force 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. Throughout this essay, I will explaineach of the five forces and their attractiveness in regard to the Ice-Fili, aRussian ice cream industry. Also, I will include recommendations to Ice-Fili onhow to lower threats 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 markets in a free manner.Industries such as Ben & Jerry’s and Baskin & Robbins took advantage ofthis open market concept in order to increase capitalization. In turn, thiscreated higher competition with local industries such as Ice-Fili whoexperienced a significant drop in sales and production. Overall, the threat ofnew entrants would be considered 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 within industries. Available substitute products includesodas, yogurts, chocolates and other sweet treats. These substitutes may servethe same purpose to the consumer which is the indulgence and intake of a sugarysubstance. In 2000, the production of ice cream declined 3.5% from the yearbefore compared to the 23-25% increase in competing products. Overall, thethreat of product substitutes is considered to be medium-high in regard to theice cream industry. The ability to purchase items at a lower price thatessentially provide the same amount of benefits is the reason for highercompetition. 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 currently sold as acommodity. These essential ingredients can be purchased for a lower pricethrough different suppliers at any given time. Having the ability to purchase lowerpriced items from different sellers decreases the suppliers actual bargainingpower.
Buyer power:As distributors, Ice-Fili has the powerto decide what products are available to the consumers which is an indicator ofpossessing high bargaining power. As mentioned previously there are about 300active ice cream industries in Russia. The domestic ice cream industries inRussia have provided similar products that have little differences. Consumersare then able to choose one product over there other without second-guessing.Price sensitivity is also a factor in bargaining power.
Small differences inpricing of a product will not change consumer buying behavior so the pricesensitivity 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 View:Porter’sfive forces has helped my analysis in deciding whether or not this particularindustry is considered attractive. In my opinion, this industry would not beconsidered attractive. The high threat of new entrants makes it possible for anyoneto easily enter the market which means smaller market share.
Numerous ice creamindustries create higher competition which forces industries to diversify themselvesand their products. The volume of possible product substitutes makes itdifficult to attract consumers to choose your product over others. All of thesefactors justify why I chose to label this industry as unattractive.