Porter Analysis MGMT 4P90

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Industry:

Assuming that alcoholic beverages are in a separate market altogether, Coca-Cola

competes in the thirst quenching industry. Consumers want to reconcile thirst with some

kind of beverage, the choices of which are can be appropriately segmented into 5

categories: soft drinks, slush/frozen carbonated beverage, juices, coffee/tea, and

energy/fortified vitamin drinks. Over time we will see various hybrids conceived of these

categories, the best of which may be adopted into the environment – but most will not

survive. What was once a proprietary formula that dominated the soft drink market with

cult-like loyalty, is substituted for vitamin infused, ginseng fortified, sex enhancing thirst

quenchers. The evolution of consumer tastes has launched Coca-Cola into an entirely

different competitive world than originally anticipated. Using Porter’s 5 Forces model,

the disparity in Coca-Cola’s current strategy becomes clear given the concentration of

competitors eroding the giant’s market share, exposing the inert nature of the company.

Risk of Entry – High

Private label branding has driven the price down by offering a substitute from the more

expensive brand leaders. Manufacturers can match the tastes of competitor’s products,

thereby conditioning the consumer to believe that the proprietary nature of Coca-Cola’s

formula may not be the core driver of the business. The marketing costs incurred by the

company alone (over X billion) are evidence that perhaps advertising is fabricating

demand for the drink. Coca-Cola is unable to levy price increases on distributors, and

consumers will scream highway robbery at $2.99/L, reflecting very low switching costs
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for the consumer. However, it cannot be ignored that Cola-Cola has a loyal following,

and one of the most powerful, if not the most powerful brand in the world. New entrants

would have high starting costs if they were developing a new beverage, and would risk

having their product reverse engineered by large firms with vast resources. Large

incumbent firms like Coca-Cola have advantages independent of size, like premiere

locations, which facilitate a smoother distribution of the beverage. If new entrants were

to attempt penetrating this market, the expected retaliation would involve ramped up

marketing initiatives highlighting a substitute, or a proposition to purchase the

competitor. Because of these factors, the risk to new entrants should be perceived as

high.

Power of Buyers - High:

Customers in this industry are price sensitive, as the product is very elastic. Despite the

proprietary formula that has kept them in the game for so long, the products in direct

relationship to Coca-Cola’s flagship product are negligibly differentiated. From a

distributor standpoint, that is, the grocery stores, convenience stores, and other vendors a

price increase too, is unacceptable considering the availability of substitutes. The

consumer’s life isn’t impacted in any way if they don’t drink Coca-Cola, they may just be

saving themselves money and calories. As such there really is no performance benefit to

be perceived. It should also be noted that private label branding had paved the way for

consumers at the business level to backward integrate. These are the same grocery stores

that carry Coke and Pepsi taking a little piece of the market share. These low cost leaders

produce a similar taste for a fraction of the cost, thus cutting into Coca-Cola’s profits. As
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such it fairly self evident that this market is consumer driven: the buyers have significant

power.

Power of Suppliers – High:

Those who supply the ingredients and bottling facilities to the company have significant

influence on its operations. Coca-Cola’s bottlers threatened to stop bottling Coke after

management attempted to levy a price increase on the distributors, which sent them back

to the drawing board strategically. Flavor companies are large and not entirely dependent

on the soda segment of the thirst quenching industry to prosper. They create flavors that

are applicable in slush and FCB applications, as well as confectionary items going well

beyond the realm of cola. Increasing energy costs cut deeper into margins, which are tight

for the company. This puts the company in a precarious position where neither suppliers,

nor buyers will tolerate sudden price increases. As such the suppliers to Coca-cola have a

certain position of power over the company.

Threat of Substitutes - High:

Coca-Cola and its associated products have infinitely many immediate substitutes: Sprite

vs. 7UP vs. Lime Up vs. Spritz UP. Since the industry has already been defined as the

heavily concentrated thirst quenching industry, ultimately all beverages are a substitute

for Coca-Cola. That is to say Coke must directly compete with all substitute colas, and

indirectly compete with water, juices, and the like. Jones Soda, for example, offers a

premium priced, trendy “underdog” cola that is growing in popularity. The broad

spectrum of products offered by these two competitors is a testament to how companies

attempt to quantify, and classify the consumers’ drink preferences by introducing

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formulas that complement these tastes. This threat only increases with time, as Coca-

Cola fails to recognize opportunities like Red Bull and Gatorade: two now popular

substitutes to Coca-Cola, owned by Pepsi. In lieu of tapping into these emerging markets,

Coca-Cola uses their age old strategy of taking the original formula and modifying it to

capture the consumers interest: Zero (calories), Blak, Vanilla, Lime, Black Cherry are

some of the latest, with mediocre success at best. The cost to switch for the customer, so

long as they perceive greater or equal status utility from the alternative, is negligible. This

is regardless of if they have paid more for a beverage with perceived bonus benefits:

more energy/alertness, vitamin supplemented, etc.

Industry Rivalry - Intense:

There are many competitors in the same competitive environment as Coca-Cola, but they

are not necessarily the same size. Jones Soda is a much smaller company but offers a

variety of flavors still unmatched by Coca-Cola, thus giving them a competitive edge

with hipster audiences. Price cutting is commonplace between Pepsi and Coke, and is

often shadowed by in-house grocery store brands like President’s Choice or NoName.

This makes it increasingly difficult to realize historic profits, as price-cutting becomes

increasingly ineffective when competitors can beat it every time. Exit barriers for the

large companies are enormous. With thousands of employees worldwide, both Coke and

Pepsi would find it extremely difficult to exit the industry. Besides, with a safeguarded

formula that has grown the most prolific brand in history, there will always be a market

for the original product.