The bargaining power of suppliers and buyers, and rivalry

The
five forces of completion model otherwise known as Porter’s five forces are essentially
used to express how profitable and attractive a specific industry is. An
industry is considered to be attractive when the threats of each force are
considered to be fairly low. The five forces include the threat of new
entrants, threat of substitute products, bargaining power of suppliers and
buyers, and rivalry among competitors. Throughout this essay, I will explain
each of the five forces and their attractiveness in regard to the Ice-Fili, a
Russian ice cream industry. Also, I will include recommendations to Ice-Fili on
how to lower threats within the industry.

 

New Entrants:

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The
threat of new entrants was a dominating issue for Ice-Fili due to weak barriers
to entry.

Weak
barriers to entry made it difficult for Ice-Fili to remain one of the top ice
cream producers in Russia. In 1991, Russia decided to institute an open market
economy. This policy allowed industries to access markets in a free manner.

Industries such as Ben & Jerry’s and Baskin & Robbins took advantage of
this open market concept in order to increase capitalization. In turn, this
created higher competition with local industries such as Ice-Fili who
experienced a significant drop in sales and production. Overall, the threat of
new entrants would be considered high due to its weak barriers to entry.

 

Substitutes:

The
threat of product substitutes becomes high when outside industries create
products at a lower cost with similar benefits. This threat increases the
amount of competition within industries. Available substitute products include
sodas, yogurts, chocolates and other sweet treats. These substitutes may serve
the same purpose to the consumer which is the indulgence and intake of a sugary
substance. In 2000, the production of ice cream declined 3.5% from the year
before compared to the 23-25% increase in competing products. Overall, the
threat of product substitutes is considered to be medium-high in regard to the
ice cream industry. The ability to purchase items at a lower price that
essentially provide the same amount of benefits is the reason for higher
competition.

 

Supplier power:

The
power of suppliers in the ice cream industry may be considered low. The
supplier power is low when referring to ingredients that compose the ice cream
itself. Ingredients such as milk, butter, and sugar are currently sold as a
commodity. These essential ingredients can be purchased for a lower price
through different suppliers at any given time. Having the ability to purchase lower
priced items from different sellers decreases the suppliers actual bargaining
power.

 

Buyer power:

As distributors, Ice-Fili has the power
to decide what products are available to the consumers which is an indicator of
possessing high bargaining power. As mentioned previously there are about 300
active ice cream industries in Russia. The domestic ice cream industries in
Russia have provided similar products that have little differences. Consumers
are then able to choose one product over there other without second-guessing.

Price sensitivity is also a factor in bargaining power. Small differences in
pricing of a product will not change consumer buying behavior so the price
sensitivity is low. 

 

Competitors:

 Rivalry amongst competitors is likely to be
high when there is a large number of similar functioning industries. In 2002, a
massive 300 ice cream industries were active in Russia. Many competitors relied
heavily on advertising and marketing to ensure consumers became familiar with
their products. The more familiar consumer became with these new brands the
more likely these industries would be able to convince distributors to sell
their products resulting in higher profits. Ice-Fili did not spend near as much
money advertising compared to its competitors. Because of Ice-Filis lack of
advertising, consumers were more prone to choose other options since they were
more well-known ice cream brands. The competition and rivalry amongst existing
industries would be considered high because of domestic and foreign
competition.

 

Final View:

Porter’s
five forces has helped my analysis in deciding whether or not this particular
industry is considered attractive. In my opinion, this industry would not be
considered attractive. The high threat of new entrants makes it possible for anyone
to easily enter the market which means smaller market share. Numerous ice cream
industries create higher competition which forces industries to diversify themselves
and their products. The volume of possible product substitutes makes it
difficult to attract consumers to choose your product over others. All of these
factors justify why I chose to label this industry as unattractive. 

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