Industrial analysis of the cola industry-A coca cola perspective

Coca cola is the largest beverage producing company in the world. Whenever we hear the word Cola we instantly associate this carbonated soft drink with Coke which is the registered trademark name under the Coca Cola Company. Such strong is its brand association builds over decades.

Porters Five Forces:

Industrial analysis of the cola industry-A coca cola perspective

Coca cola is the largest beverage producing company in the world. Whenever we hear the word Cola we instantly associate this carbonated soft drink with Coke which is the registered trademark name under the Coca Cola Company. Such strong is its brand association build over decades. Assignment:02 Page 1

So what makes Coca Cola a market leader in its field? The industrial analysis of Coca Cola is described as follows:

Analysis of Coca Cola and its suppliers:

The raw materials generally used for producing Coca Cola are carbonated water, sugar, natural flavorings, caffeine, phosphoric acid and caramel color. These raw materials are easily available so this gives coca cola good bargaining power over suppliers. Coca cola enjoys a very high and stable gross margin of about 65% and this minimizes the risky effects of supplier bargaining power over their profitability.

Conclusion: Coca cola has good bargaining power over its suppliers, that is suppliers have low bargaining power.

Analysis of Coca Cola and its buyers:

The bargaining power of buyers have wide variations. Coca Cola manufactures concentrates and sales it to authorized bottlers. This is where it makes the highest profit margin. This happens because for many bottlers Coca Cola is often their largest customer. Very large restaurant chains have the highest amount of bargaining power over coca cola since they carry only one type of cola beverage(either a Pepsi or Coke).So Coca Colas profit margins are low in this case. Bargaining power of buyers has been high all in all allowing coca cola to realize a 28% ten year average operating margin. Conclusion: Buyers have high bargaining power over Coca Cola

Analysis of Coca Cola and its competitors:

Pepsi, the flagship product of PepsiCo. Is Coca colas closest competitor in the soft drink industry. However it comes second to coke in sales. The next competitor is RC

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cola owned by Dr Pepper Snapple group. Being the market leader in the cola industry coca cola has earned strong reputation for its brands. This helps to reduce competitive rivalry. Moreover the economic growth of developing countries would allow the companys penetration of many emerging markets to approach that of developed countries. As a result volume growth will likely exceed global GDP growth over the next several decades. This could help in keeping competitive rivalry under control as companies would be able to grow volume without gaining market share.

Conclusion: Competitive rivalry has been medium to high for Coca Cola but it has managed to hold its position as market leader

Categories

High

Moderate

Low

Bargaining power of suppliers

Bargaining power of buyers

Competitive rivalry

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Threats of New Entrants

The popularity of Coca-Cola in Bangladesh is significantly high. Currently, the brand is currently having some competitive advantages in Bangladesh:

Coca-Cola enjoys significant economies of scale. Coca-Cola has huge market share. Coca-Cola has tremendous brand loyalty.

These factors minimize the threat of new entrants into the soft drinks industry of Bangladesh.The several factors that make it very difficult for the competition to enter the soft drink market include:

Barriers to Entry:
Bottling Network:
Coke has franchisee agreements with their existing bottlers like Abdul Monem Ltd, who has rights in a certain geographic area in perpetuity. These agreements prohibit bottlers from taking on new competing brands for similar products. Also with the recent alliance among the bottlers and the backward integration with both Coke buying significant percent of bottling companies, it is very difficult for a firm entering to find bottlers willing to distribute their product.

Cost of Establishment:
Due to high capital intensive requirement to establish new bottling plant in Bangladesh, investors cannot entry into the market. This financial barrier can be a major barrier for new entrants.

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Advertising Expenses
Abdul Monem Limited spends about $51 million in five years to frequently advertise Coca Cola products through mass media. They choose standard banner and color to advertise.This makes it extremely difficult for an entrant to compete with the incumbents and gain any visibility.

Brand Image and Loyalty

Coca cola is another oldest brand in Bangladesh. From the last 50 year Coca cola hasbeen marketing its products through local representatives of Bangladesh. Coke has a long history of heavy advertising and this has earned them huge amount of brand equity and loyal customers all over the world. This makes it virtually impossible for a new entrant to match this scale in this market place.

Retailer Shelf Space and Retail Distribution Channel:

Abdul Monem Limited has a strong distribution channel to distribute their Coca Cola. They make Coca Cola easy to get and available to the customer everywhere through their expert distributors channel. Their transport facilities, channels of distribution, coverage area, etc. are maintained very securely. This makes it tough for the new entrants to convince retailers to carry and substitute their new products for Coke.

Fear of Retaliation
To enter into a market with entrenched rivals like Coca-Cola is not easy as it could lead to price wars which affect the new comer.

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Barriers to Entry Bottling Network Cost of Establishment: Advertising Expenses Brand Image and Loyalty of Coke Fear of Retaliation

High

Moderate

Low

Considering the bottling network, cost of establishment, advertising expenses, brand image and loyalty, retailer shelf space and retail distribution channel, fear of retaliation in the beverage industry of Bangladesh, we can say that due to the high barriers, the risk of new entrants in the industry is low for Coca-Cola.

Threats of Substitutes of Coke:

This measures the ease with which buyers can switch to another product that does the same thing. The industry is enriched with enormous statistics of substitutes such as: tea, coffee, water, beer, juice, energy drinks presented to the end-consumers. Reasons behind threats of substitutes

Aggressiveness of substitute products in promotion: Soft drinks industry companies spend huge amount of money to promote their
products, differentiate them and making a brand loyalty.

Switching cost:
Switching cost of the substitute products is very low. So customers can easily switch to substitute products. Assignment:02 Page 6

Perceived price value:

Perceived price value in this industry is very low because all products comparatively same and most of the times differentiated by promotional activities. To consider the possible threats of substitutes of Coke that may be rated as low. There are quite a few reasons why the threat of substitute is low particularly against Coca Cola. The foremost of them is brand loyalty. Coca Cola has an enviable track record and there are countless millions of costumers the world over, who would never abandon coke, same for Bangladesh. Coke has a loyal base of customer here in Bangladesh. Second, Coke has its own unique taste. Another reason that differentiate Coca Cola from other soft drinks. Coca Cola yet spend a huge amounts on promotional activities such as: television commercial, bill boards and on shop merchandise. There is no possible threat of technological development for Coca Cola

Positive Brand Loyality

Neutral

Negative

Product Differentiation

Promotion

Technological Threat

So customers attached to differentiating attributes reducing the threat of substitutes.

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Porter's Generic Strategies

If the primary determinant of a firm's profitability is the attractiveness of the industry in which it operates, an important secondary determinant is its position within that industry. Even though an industry may have below-average profitability, a firm that is optimally positioned can generate superior returns. A firm positions itself by leveraging its strengths. Michael Porter has argued that a firm's strengths ultimately fall into one of two headings: cost advantage and differentiation. By applying these strengths in either a broad or narrow scope, three generic strategies result: cost leadership, differentiation, and focus. These strategies are applied at the business unit level. They are called generic strategies because they are not firm or industry dependent. The following table illustrates Porter's generic strategies: Porter's Generic Strategies

Advantage Target Scope Low Cost Product Uniqueness

Broad (Industry Wide)

Cost Leadership Strategy

Differentiation Strategy

Narrow (Market Segment)

Focus Strategy (low cost)

Focus Strategy (differentiation)

(Knowledge to power your business, N.D.)

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Generic Strategies and Industry Forces

These generic strategies each have attributes that can serve to defend against competitive forces. The following table compares some characteristics of the generic strategies in the context of the Porter's five forces. Generic Strategies and Industry Forces

Generic Strategies
Industry Force

Cost Leadership

Differentiation

Focus Focusing develops core competencies that can act as an entry barrier.

Ability to cut price Customer loyalty can Entry in retaliation deters discourage potential Barriers potential entrants. entrants. Buyer Power Ability to offer lower price to powerful buyers.

Large buyers have less Large buyers have less power to power to negotiate because negotiate because of few of few close alternatives. alternatives. Suppliers have power because of Better able to pass on low volumes, but a differentiationsupplier price increases to focused firm is better able to pass customers. on supplier price increases. Customer's become attached to differentiating attributes, reducing threat of substitutes. Specialized products & core competency protect against substitutes.

Better insulated Supplier from powerful Power suppliers.

Can use low price Threat of to defend against Substitutes substitutes.

Rivalry

Better able to compete on price.

Brand loyalty to keep customers from rivals.

Rivals cannot meet differentiationfocused customer needs.

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Coca colas strategy analysis:

Researches shows that Coca cola consumers have strong customer loyalty the market was sufficiently large for some Coke drinkers to accept a different but cheaper Cola drink its strong customer loyalty discourage potential entrants. (differentiator) Coca cola hold 42% market share in US soft drink market ( Mike, 2011), According to industry estimates, Coca-Cola has close to a 58% share of the market,( BBC NEWs, 2012), Not only India or US soft drinks market, coca cola has huge market share in world market. (Cost leadership) Coca cola offer superior profit through lower cost, coca-cola has gained economic of scale, coca cola offered standard product at lower price coca cola gain market advantage as a consequence of selling high volumes at low margins as opposed to high margins. (cost leadership) Large buyers have less power to negotiate because coca cola has few close alternatives (differentiator) Coca cola offer mass marketing, Worldwide coca cola has over 20 million outlet in more 200 countries ( cost leader) The Coca Cola Company uses the differentiation strategy. Differentiation strategy involves making a unique product which features that are excellent value for its customer. This will make the customer become more loyal to the brand. Coca Cola has proven to have loyal customers buy the way they continue to be the worlds largest distributor. Coca Cola spends large a large amount of money in advertising to differentiate and create a unique image for their products which gives the company and advantage over competitors. ( Jeremiason, 2011)

Overall evaluation and conclusion:

Coca cola adopt both cost leadership and differentiator, it offers unique brand and consumer has strong brand loyalty on the other hand like cost leader strategy it offer economic of scale, high market share, low cost. So coca cola follow both strategy. Assignment:02 Page 10

Reference:
BBC NEWS, (2012,June27), Coca-Cola plans $5bn India investment to boost growth, Retrieved from: http://www.bbc.co.uk/news/business-18605454

Fayard, G,. (2012), Refreshing A Thirsty World, Retrieved from: http://www.thecoca-colacompany.com/investors/cagny2012.pdf

Jeremiason,J.,(2011,March3),International Strategic Management, Coca-cola Differentiation Strategy, Retrieved from: http://jeremiasonstrategicmanagement.blogspot.com/2011/03/coca-coladifferentiation-strategy.html

Porter, Michael E., Competitive Strategy: Techniques for Analyzing Industries and Competitors retrieved from: http://www.quickmba.com/strategy/generic.shtml

Michel, E., (2011, March11 ), Pepsi Thirsty for a Comeback, The Wall Street Journal, retrieved from: http://online.wsj.com/article/SB1000142405274870381820457620665325980 5970.html

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