Why are the bottlers at the mercy of concentrate producers - An insight into the cola wars case!

Carbonated Soft Drinks (CSD) was preferred to any other beverage in America. The consumption grew from 23 gallons in 1970 to 53 gallons in 2000(growing at a rate of 3% every year).Although many substitutes existed in the market, Americans preferred CSD’s to any other beverage.
CSD typically consisted of a flavour base and artificial sweetener provided by Concentrate Producers, carbonated water and sugar syrup added by the bottlers. Retail channels and suppliers were also part of production and distribution activities.

The Concentrate Providers had a secret formula each for Pepsi and Coke (CSD). The concentrate produced by them served as an input for bottlers who added carbonated water and sugar syrup into the final product. Thus, the bottlers are dependent on the Concentrate producers to complete their drink.

Since CSD is the most preferred beverage, bottlers have no choice but to cater to concentrate producers’ needs, else they would lose out on their clients (the concentrate producers for CSD).This would increase their costs (because of loss in business) especially their fixed costs.

Bottling is capital Intensive unlike Concentrate Production. They cannot afford to displease the concentrate producers who provide them business. Apart from the concentrate that was obtained from the concentrate producers, bottlers needed other raw materials like carbonated water and sugar. It is the concentrate producers who negotiate with the suppliers of these raw materials to encourage reliable supply, faster delivery and lower prices. This played a major role in increasing the revenues of the bottlers.

Moreover, concentrate producers are actively involved in product planning, market research and advertising. This helps in estimation of demand for existing product and possible creation of demand, which meant more business for CSD manufacturers including bottlers.
Bottlers for CSD were the major clients for either Pepsi or Coke. They followed a franchised bottling network system. Coca Cola and Pepsi priced their concentrates (an input for the bottlers) almost equal. Thus any change in the prices would affect the cost structure of the bottlers and hence their profits.

The concentrate producers have an option of forward integration; they can foray into bottling business as well. Thus in order to keep themselves up and running, bottlers had to work in line with the concentrate producers’ demands.

Based on the above mentioned facts, we can conclude that the bottlers were at the mercy of concentrate producers so as to maintain their business.

Contributed By:

Aparna Shankar

How and on what basis do carbonated soft drink producers differentiate themselves from their competitors? - An insight into the cola wars case!

Product differentiation is a business strategy whereby firms attempt to gain a competitive advantage by increasing the willingness of customers to pay for the products or services they sell. They do this by altering the objective properties of those products or services they sell each and every day. However, product differentiation is not a strategy in the case if the carbonated soft drink, as it is very difficult to differentiate the core product in context. For example, when blind tests were being conducted for the two brands, consumers could not make out the difference between the two products. The carbonated soft drink producers have competed across every possible means of distribution such as food stores, fountain outlets, vending machines, convenience stores and other outlets such as the mass merchandisers, warehouse clubs, drug stores etc. to emerge as the market leaders.

Another strategy adopted by the two carbonated soft drink producers was to move away from their single product strategy (selling only their flagship brands) and experimenting with new cola and non-cola flavours and offering a variety of packaging options.  Such as Coke introduced Fanta, Sprite and Diet Coke, purchased minute maid and Duncan foods, whereas, Pepsi introduced Mountain dew, Teem, Diet Pepsi and acquired Tropicana.

Moreover, these differentiate from each other by means such as different promotional & advertising strategies or collaboration with fast food restaurant outlets which would in turn help them build brand loyalty. For example, Coke dominates the McDonalds fast food restaurants, whereas Pepsi co products dominate KFC.

 

Contributed By:

Sindhura Akella

Section A

Strategic Management

Class of 2013-15

 

What is Strategy?

The term Strategy was introduced into the business paradigm after 1960. Primarily it dealt with military strategy only. The four decades initiating from 1960 marked a distinctive evolution of “strategy” across the globe. It all started with the Sloan School of Thought affirming the philosophy of profit maximization, Alfred Chandler’s perspective of organization structure and Ansoff’s planning framework. The 1970s and early 1980s experienced two major oil shocks and de-industrialization in major economies, making the future look too bleak. However, in this decade the Boston Consulting Group (BCG) lead the way with strategic optimism with a notion to shape the future at times of crisis. Michael Porter during the 80s opined on external environment of a business, but the major failures in businesses during this period led to the perusal of the internal environment of a business in the 1990s and the resource based views of competitive advantages became omnipresent. The period after Y2K dealt with chaos approach that outlined a strategic and holistic approach to crisis management.

Strategy is being circumscribed by two boundary marks: What to do? & What not to do? The strategy formulation is based on Where do we compete? & How do we compete? Finally the mode of How do we execute form the fundamental questions in strategy.

Talking about strategy leads to market opportunities. Some principles of market opportunity are:

·         It is the opportunity for any particular firm, but not for others

·         It is not a differentiator

·         Newly identified need or a demand trend that can be exploited by a firm

·         Not always dealing with competitors and the market competition

It can happen sometimes that one individual wants to revive a dead opportunity. To excel in this scenario one must focus on turning the non-buyers to buyers or identify the segment of citizenry who are willing to pay. However, thinking about an opportunity should not be linked with the constraints that can arise while creating the opportunity. Here one might inject in the concept of resource, which is nothing but the constraint based on market opportunity.

In conclusion, Strategy can be defined by the following loop:

Market Opportunity -----> Resources -----> Execution (Role)

Contributed By:
Bitan Banerjee

Section A
Strategic Management
Class of 2013-15

 

 

The Cola Wars Continue: Coke and Pepsi in the Twenty First Century - Industry Analysis

Market structure (Industry): Duopoly

Purpose: Beverages (Carbonated soft drinks)

Problems:

·         Flattening .falling Domestic sales

·         Revenue streams

·         External Environment (competition)

Competition: Milk, Coffee, Bottled water, Juices, Tea, Powdered drinks, Sports Drinks

To understand the problem in an industry, we first need to understand the value chain of this industry, which is as given below:

Concentrate producersàBottlersàRetail ChannelsàSuppliers (Restaurant, Offices, Fountain-machines)àConsumers

We then use The Porter's Five Forces tool for understanding where power lies in this value chain in the industry.Five Forces Analysis assumes that there are five important forces that determine competitive power in a business situation. They are:

1.      Barrier to entries

2.      Substitutes

3.      Bargaining power of buyer

4.      Bargaining power  of suppliers

5.      Rivalry

We will now analyze each element in the value chain of this industry through Porters Five Forces.

With respect to Concentrated producers(CP):

1.      Barriers to entry: Very high, as these players are deeply rooted, difficult to start a new cola company and high on investment.

2.      Substitutes: Substitutability in terms of economics and use is almost perfect.

3.      Bargaining Power of supplier: Very high, as they are the producers of major ingredients , directly deals with Bottlers and control the supply chain. They also carry out major chunk of advertising , promotion and market research

4.      Bargaining power of buyer: Low because Tied closely to CP’s, Consolidation of bottlers.

5.      Rivalry: Low as there is no scope for REAL differentiation. Only Fancy/apparent differentiation happens.

With respect to Bottlers:

1.      Barriers to entry: High, as high investment is involved(specialized plants for specific CP, Major CP being COKE), only few independent bottlers left.

2.      Substitutes: Moderate, Direct concentrate delivery, fountain sales don’t influence bottlers sales

3.      Bargaining Power of supplier: Low, as the bottlers are geographically scattered and pressure from CP’s forced them to cater only to the respective surrounding

4.      Bargaining power of buyer: Low as Coke bound them with long term contracts and gave better technology, which didn’t allow bottlers to cater to competition

5.      Rivalry: Among bottlers competition was high.

Contributed by:

Ayushi Thakur

Section A

Strategic Management

Class of 2013-15

Economic Viability of Small States

For:

 

Should India be broken up into smaller states? Keeping in mind the vast population of majority of the states in India and their lack of effective development, it seems feasible to break up big states which are not doing well economically and socially. India has five states each with populations larger than Europe's largest nation, Germany, which has 80 million citizens. The western state of Maharashtra has almost twice as many people as Europe's second largest nation, France. Even the country's sixteenth largest state, Haryana, has more people than Australia. The large size of some of India's 28 states makes them difficult to manage and has prompted movements to divide them. There is no denying that India needs smaller states. Some states are simply too unwieldy, due to large populations spread over huge areas, to be effective administratively. Smaller states have proven to be more viable from a governance standpoint, and economically they have done very well if you look at the last 10 years.

 

And in the era of coalition governments, regional or state parties have become partners in central governance. The establishment of a market economy, too, has opened the floodgates to private capital that has led to increasing regional inequalities and, thus, contributed to the rising demands for smaller states.

 

History is evidence that smaller states have been advantageous for India’s growth. Comparatively smaller but compact geographical entities tend to ensure that there is better democratic governance, as there is greater awareness among the policy makers about the local needs. Homogenous smaller states would always be better poised to provide wider range of policies in response to local conditions. Smaller spatial units having linguistic compatibility and cultural homogeneity also allow for better management, implementation and allocation of public resources in provisioning basic social and economic infrastructure services. A relatively homogeneous smaller state allows for easy communicability, enabling marginal social groups to articulate and raise their voices.

 

Division of states would reduce distances between the state capital and peripheral areas and hence improve the quality of administrative responsiveness and accountability. Smaller states would also help India stay integrated.

 

Factual analysis shows the development and efficiency argument does work in favour of the new states when compared with the parent states. In the year 2000, Chattisgarh, Jharkhand and Uttrakhand emerged as separate entities from their parent states of Madhya Pradesh, Bihar and Uttar Pradesh, respectively. During the tenth five-year plan period, Chhattisgarh averaged 9.2 percent growth annually compared with 4.3 percent by Madhya Pradesh; Jharkhand averaged 11.1 per cent annually compared with 4.7 percent by Bihar; and Uttarakhand achieved 8.8 percent growth annually compared with 4.6 percent by Uttar Pradesh. Arguably, getting a territory of their own unleashes the untapped/suppressed growth potentials of the hitherto peripheral regions.

 

Against:

 

Size may matter; Big could be bold and beautiful too. Bigger states like Maharashtra, Gujarat and Tamil Nadu do better by leveraging the state’s output and budgets for intervention and investment. So let’s forget formulaic solutions and worry about formats. In a democracy, every vote is sacrosanct. Voters vote for change, not to be presented with fait accompli. And delivery of governance is dictated by devolution, not dialects. India turns 66 this year. Let not petty political cartography obfuscate the real reasons for failure. Let not India get lost in transmogrification.

 

India’s strength is in its unity. Today concept of small state is dividing India. Creating small states gives rise to regionalism and adds to the already existing adverse inter-state relations. Small or new states depend on central government, continue to get special grants and outright transfers for extended periods which increases the government expenditure. Small states like mineral rich Chhattisgarh and Jharkhand are often viewed as being much more vulnerable to the pressures of the corporations and multi-nationals due to their small scale of economies and the greed of the newly emergent regional elite.

 

Small states suffer from three major handicaps:

- Diseconomies of scale in production, marketing, distribution, and public administration;

- Exposure to high levels of risk because of small populations and limited physical space and

- Limited scope and capacity for negotiating with larger states and private sector entities.

 

 

Small states experience similar burdens linked to a combination of indivisible fixed costs and diseconomies of scale. In the public sector, this results in higher costs and reduced volumes of services provided; in the private sector, in concentrated market structure and a lack of diversification; and in trade, in high transport costs which are exacerbated for the most remote small states. Small size also influences the financial sector and how small states manage their exposure to natural disasters. These characteristics translate into a number of common macroeconomic features, such as high trade openness, high government wage bills, high levels of state intervention, a heavy reliance on trade tax revenues, and the frequent use of fixed exchange rates. A second broad challenge lies in small state financial sectors, which have not yet developed adequately to play their full role in managing volatility and fostering growth.

 

World over poverty reduction is an accepted indicator of growth and governance. Poverty in Andhra Pradesh dropped from 29.6% to 9.2% from 2004 to 2011.And in Tamil Nadu it decreased by 18.1%. But in small states like Chhattisgarh it decreased by only 9.4% and in Jharkhand by only 8.3%.According to the National Sample Survey Organization Jharkhand and Chhattisgarh is the worst performers when it comes to poverty levels and per capita expenditure. Greater economic freedom is positively associated with growth at the state level. If we see the economic freedom ratings 2011, we find that Gujarat has shown a remarkable increase from 0.46 to 0.64 and has moved from 5th position in 2005 to become India’s top state in economic freedom today. Among top ten states there are seven big states and the worst performer is Jharkhand which has come down from rank 8 to rank18. It shows the growth and governance of small states.

 

 

When India desperately needs her people to think globally, small states make them think regionally, even sub regionally. With 28 states alone India has so many regional parties that fractured verdicts and consequent instability have become an integral part of politics, both at the center and states. A dozen more going by the demands including those made by letterhead organization with no ground support, would mean scores of regional parties and there by more black mail, more fractured mandates and a more fragmented politics. It will ultimately lead to the balkanization of India.