Clash of the Titans: Coca Cola vs.

Pepsi
nder BARLAS Executive MBA Student Boazii University, Istanbul
Abstract: This position paper aims to evaluate Cola Wars Continue: Coca Cola and Pepsi in the Twenty-First Century case study by the Harvard Business School. First a short introduction followed by Porters Five Forces Model, PEST, Resource Based View, Economic Time analysis will be given to enlighten the facts about the competition between Coca Cola and Pepsi. Also recommendations about future strategies will be given for both brands.

1. INTRODUCTION The soft drink industry is an oligopoly mainly ruled by two companies: Coca Cola and Pepsi, who were among the first to launch carbonated soft drinks. In this industry the concentrate business is focused around the production of concentrate of the soft drinks and then selling this with franchise agreements to bottling firms. The production facilities for concentrate require low capital investment and input prices are low relative to sales price as branding leads to the ability of increasing margins. At the beginning there were lots of companies trying to compete but the natural selection allowed Pepsi and Coca Cola a survival and success.

relatively low, barriers to entry are relatively high, because large advertising budgets and competitive brand loyalty to big players like Coca-Cola and Pepsi The Bargaining Power of Suppliers: Concentrate producers (CPs) negotiate directly with bottlers major suppliers sweetener and packaging suppliers to encourage reliable supply, faster delivery, and lower prices Metal cans make up the majority of the bottlers packaged product (60%), followed by plastic bottles (38%) and glass bottles (2%)Coca-Cola and Pepsi are among the metal can industrys largest customers and maintain relationships with more than one supplier, giving these suppliers less bargaining power due to the availability of alternative suppliers The Bargaining Power of Buyers: Bottlers own a manufacturing and sales operation in an exclusive geographic territory with rights granted by the franchiser, which could be terminated only in the event of default by the bottler The 1980 Soft Drink Interbrand Competition Act preserved the right of CPs to grant exclusive territories to their bottlers, giving less bargaining power to

2. ANALYSIS 2.1 PORTERS FIVE FORCES Threat of new Entrants: Companies have a door to door distribution channel in place, which is a costly logistic policy Switching costs are low for consumers who risk very little by trying new brands or beverages Although manufacturing plant cost for Concentrate producers (CPs) are

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Clash of the Titans: Coca Cola vs. Pepsi

Bottlers buyers because there will be no alternative supplier in that are anymore Bottlers have to accept into contracts that grant CPs the right to set prices and other terms of sale Bottlers are allowed to handle the noncola brands of other Cps, if the CP sees the other not as direct competitor. They can also choose about carrying new beverages introduced by the CPs but cannot carry directly competitive brands Competition for brand shelf space in retail channels gives some bargaining power back to buyers

Threat of Substitute Products: Threat from substitute products exposes no direct threat as cola is an established product around the world. Fruit Juice and ice tea are some substitute products with less convincing power. Rivalry among Established Companies Industry is largely consolidated with two major players and a few smaller competitors like Cadbury Schweppes, making the companies interdependent International demand for carbonated soft drinks is growing, but domestic demand is slowing down Exit barriers are high for bottlers with expensive equipment, moderate for concentrate producers Advertising budgets are high, customers are influenced by brand perceptions
Force Rivalry among Existing Firms Bargaining Power of Buyers Threat of New Entrants Threat of Substitute Products Bargaining Power of Suppliers Level Very High Low Low Very Low Moderate

Social and demographic Environment: Consumer trends shifting away from original product lines for health reasons from diet soda, to lemon-line, to teabased drinks, to other popular noncarbonated beverages An increasing trend in consumption of CSDs Metal and Plastic containers commonly used by bottlers are recyclable are viewed as environmentally friendly Cultural differences across international markets are challenging when it comes to daily operations and marketing cola industry products Rapid population growth in foreign countries like China means high growth potential for those markets Political and Legal Environment: Soft Drink Interbrand Competition Act of 1980 secured the right of Concentrate Producers (CPs) to grant exclusive territories to bottlers Anti-trust legal suit against Coca-Cola by Pepsi over fountain drink monopolization in the domestic market was dismissed in 2000 Pressure from the scientific community to the FDA to research the effects of caffeine consumption and to enforce caffeine labels warning of the dangers of caffeine consumption 2.3 ECONOMIC TIME Both firms operate in fast economic time. They imitate each other in terms of product development and logistics. Buying-up bottlers was a strategy initiated by Pepsi and adopted by Coca Cola Unsuccessful products like the New Coke vanish from the market quickly, new products such as the Vanilla Coke emerge
Clash of the Titans: Coca Cola vs. Pepsi

2.2 PEST Technological Environment: No specific technology is required to produce and bottle the carbon soft drinks (CSDs)
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price to charge in response to the price its rival charges. 2.4 RESOURCE BASED VIEW 3 Following table shows the resource based view approach for Coca Cola and Pepsi:
Resource Taste Marketing Brand Image Distribution
Rare Valuable Imitable Substitute

MANAGERIAL IMPLICATION

Yes Yes Yes No

Yes Yes Yes Yes

No No No Yes

No Yes No No

Taste is the most important resource. The formula of the concentrate is one of the biggest secrets in modern business environment. The Coca-Cola formula is The Coca-Cola Company's secret recipe for Coca-Cola. As publicity, marketing, and intellectual property protection strategy the company presents the formula as a closely held trade secret known only to a few employees, mostly executives. The Pepsi challenge takes the form of a taste test. At malls, shopping centers and other public locations, a Pepsi representative sets up a table with two blank cups: one containing Pepsi and one with Coca-Cola. Shoppers are encouraged to taste both colas, and then select which drink they prefer. Then the representative reveals the two bottles so the taster can see whether they preferred Coke or Pepsi. The results of the test showed that Pepsi was preferred by more Americans 2.5 COMPETITIVE VIEW In this industry there is Bertrand oligopoly in prices with a differentiated product (taste). Therefore Pepsis prices do affect Coca Colas demand function, but because products are differentiated a lower price does not steal the entire market. Each firm has a Bertrand profitmaximizing best response function for the

Higher level of geographical expansion, with special focus on fast growing markets in Asia could be a viable strategy. Consumption of CSD in China is 22, India 6 and USA 874 (8 oz per capita). These figures tell us that there is a lot of potential in these markets. To achieve that Cola/Pepsi would have to invest more in marketing activities and increase production in these countries. Especially Pepsi should penetrate to markets where Coca Cola is weak in sales by using domestic marketing campaign with local celebrities. The world is becoming much healthier conscious, and consumers are tending to getting away from carbonated drinks. Therefore noncarbonated with cola taste could be developed. Nobody would deny an energy drink such as PowerAde or Gatorade with cola taste. Proofs for that recommendation are Haribo sweets with cola flavor in cola bottle form, which have considerable revenue share in Haribos product line. To engage in a new cola war is actually beneficial for both companies because cola wars have been successful for Pepsi and Coca-Cola in the past because they draw attention to the products and they'll likely do so again.

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Clash of the Titans: Coca Cola vs. Pepsi