Who is the major part of the value chain in Coca-wars case? Why? - An insight into the cola wars case!

A value chain is a chain of activities that a firm operating in a specific industry performs in order to deliver a valuable product or service for the market. Value chain for the Cola industry is largely producer dominated which gives them paramount importance.

The role of concentrate producers of the Carbonated Soft Drinks is discussed below.

Concentrate Producers: These producers would blend the raw material ingredients, package it in plastic canisters and ship it to the bottler. Their major costs would be for advertising, promotion, market research and bottler relations. They invest heavily in their trademarks over time, with innovative and sophisticated marketing campaigns. They negotiate with the bottler’s major suppliers to encourage reliable supply, faster delivery and lower prices.

The powers of input suppliers which supply the main ingredients in cola concentrate are weak. The bargaining position of the concentrate producer is extremely strong since most of the inputs required to manufacture concentrate is relatively easy to purchase and the concentrate industry has abundant suppliers to offer the inputs. The producers are the price – takers here, as they dictate the prices to which the bottlers should succumb and the decision regarding what items the bottlers can bottle and distribute is also taken by the producer. Between the cola concentrate producers and the bottlers, the bottlers have little to no option in switching concentrate because of contractual agreements. Therefore, this makes the threat of substituting concentrate producers impossible. Entering this industry would be extremely difficult because of the high cost of marketing the new product, creating a brand image, getting slotting place etc. High competition between the industry leaders brings benefit to the customers in terms of quality, taste and economical prices.

Contributed By:
R. Sandhya
Section A
Strategic Management
Class of 2013-15 

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