Pespi Business Case Hbs Essays

Coca-Cola / Pespi Business Case Hbs Essays Coca-Cola / Pespi Business Case Hbs Essay Coca-Cola / Pespi Business Case Hbs Essay Question 1 : Why has the soft drink business been so profitable ? An industry analysis through Porter’s Five Forces reveals that market forces are favourable for profitability. Both concentrate producers and bottlers are profitable. The industry is already vertically integrated to some extent ( § â€Å"Bottler consolidation and spin-off p8). That’s why we sometimes will not distinguish concentrate producers and bottlers. However, we have to keep in mind that relations between concentrate producer and bottlers were often strained. Moreover, in terms of operating profit/sales (exhibit 4 p18), during the period 1980-2004, we can notice that concentrate producer – Coca-Cola company – earned between 21% and 37,1% whereas its largest bottler – Coca Cola Enterprise – only earned between 4,3% and 8,6%. Rivalry : We could characterize the soft drink market as an oligopoly, or even a duopoly between Coke and Pepsi, resulting in positive economic profits. There was tough competition between Coke and Pepsi for market share, and this occasionally hampered profitability – especially for the bottlers. But on the whole, the carbonated soft drink industry remained very profitable. Moreover, nothing contributes as much to the present-day success of the Coca-Cola Company (respectively Pepsi) than Pepsi (respectively Coca-Cola Company). It’s a stimulating competition. But then, came the private label brands ! See question 2 below. Susbstitutes : Other beverages, from bottled water to teas, became more popular. Coke and Pepsi responded by expanding their offerings, through alliances (e. g. Coke and Nestea), acquisitions (e. . Coke and Minute Maid), and internal product innovation capturing the value of increasingly popular substitutes internally. ( § The Cola wars begin p7). Power of suppliers : If sugar became too expensive, the firms could easily switch to corn syrup, as they did in the early 1980s. There are generally a lot of cans companies who are competing for one contract with one bottler. Cans suppliers have very little power. ( § Suppliers to concentrate producer an d bottlers – p5). Power of buyer : Supermarkets, the principal customer for soft drink makers, were a highly fragmented industry. Wal-Mart, on the other hand, had much more bargaining Power. They want to bargain directly with the concentrate producers. This contributes to de degradation of the relation between the concentrate producers and the bottler. ( § Evolving structures and strategies p13)? Only buyers with dominant power were fast food outlets but fortunately, they accounted for less than 20% of total soft drink sales. Barriers to entry : New Concentrate producers would need to overcome the tremendous marketing muscle and market presence of Coke, Pepsi, and a few others although the concentrate producer industry is not very capital intensive, other barriers would prevent entry. Coke and Pepsi are Global Brand †¦ even if the products themselves are not all the time as global as we can think (e. g. Coca Cola’s local products in Japan, Dasani bottled water in USA). Question 2 : What has been the effect of the rivalry on profits ? During the 1960’s and 70’s Coke and Pepsi concentrated on a differentiation and advertising strategy. The â€Å"Pepsi Challenge† in 1974 was a prime example of this strategy. However during the early 1990’s bottler’s of Coke and Pepsi employed low priced strategies in the supermarket channel in order to compete with private label (store brands). In the late 90’s decided to abandon the price war, which was not doing industry any good by raising the prices. Indeed, price wars, even combined with low-cost strategies had driven soda price down to the point where bottlers couldn’t get a decent return on supermarket sales (also because the concentrate prices rose). Bottlers then shifted course (both CCE and PBG) and increased their retail price †¦ consumers balked, sales volume dipped and finally, concentrate makers saw their profits drop as a result ! ( § Evolving structures and strategies – p12). Question 3 : How can Pepsi and Coke sustain profits in the future ? Coke can Pepsi can sustain their profits in the industry because of the following reasons: No new threats from new competition : when there is a threat, as when the beverages from bottled water to teas became more popular, Coke and Pepsi diversified into non–carbonated drinks to counter the flattening demand in the carbonated drinks. This can moreover provide diversification options and an opportunity to grow. Coke and Pepsi have been in the business long enough to accumulate great amount of brand equity which can sustain them for a long time and allow them to use the brand equity when they diversify their business. Per capita consumption in the emerging economies is very small compared to the US market so there is huge potential for growth. However, internationalization strategies can be risky. During the 1960s, Coke focused primarily on overseas markets, apparently basing its strategy on the assumption that domestic CSD consumption was approaching a saturation point. Pepsi, meanwhile, battled Coke aggressively in the United States, and double its US share between 1950 and 1970. Diversification and vertical integration often make internationalisation possible. According to Levitt, we should however not focus on local needs but more on homogenous market needs above all. See discussion section below †¦ Discus sion about the globalization of markets The article of professor Levitt is â€Å"provocative†. He argues that modern communication technologies are creating homogeneous market needs, while manufacturing are increasing the benefits of scale. Accordingly, truly global strategies will be able to use low prices to sweep all competitors still focused on local needs †¦ for all that the quality remains. Coca-Cola seems to be really exemplar of the trend. We can read this in the case : â€Å"the bottling process involve high-speed production lines that are interchangeable only for products pf similar type and packages of similar size†. American academics (Gerry Wind and Susan Douglas) warn of the â€Å"Myth of Globalisation†. If we take Coco-Cola we shouldn’t forget to mention that they sometimes adapt to country needs : Coca-Cola is selling local product in Japan alongside its classic Coke. As far as the Dasani bottled water is concerned, if it’s a success in the USA, it’s a failure in Europe. Nevertheless, Prof. Levitt admits it can happen : Global corporation will accept and adjust to differences only reluctantly, only after testing their immutability, after trying in various ways to circumvent and reshape them. Some countries, not all, are becoming richer. Consumers of these countries become less price-sensitive and more ready to spend on indulging their local tastes. Finally, we should also mention that between the two poles of global and local, there is a third position : regional. What we often call global †¦ is just intra-regional. The holy grail is perhaps not to know one everything about only one great thing, but rather to isolate a few standardized markets, some region. We can see that prof. Levitt is sometimes more reserved : â€Å"I do not advocate the systemic disregard or national differences†. However, this way of thinking implies two great things : a breakthrough innovation and a matchless ambition : indeed, supposing that we can never suppose that the customer is a king who knows his own wishes implies to create and keep a customer †¦ what a project ! Based on â€Å"Key debate : Global, Local or Regional – Exploring Corporate strategy – G. Johnson, K. Scholes, R. Whittington – 8th Edition