Table of content

1.0

Introduction

...2
2.0company

background.

.2-3
3.0

Introduction

of

Porter's

Five

Forces.4
3.1

Threat

of

New

Entrant
4
3.2

Bargaining

Power

of

Suppliers

4-5
3.3

Bargaining

Power

of

Buyers.5
3.4

Threat

of

Substitute
5
3.5

Rivalry

Among

Competitors
6

4.0

Porter's

Five

Forces

of

coca-

cola.6
4.1

Threat

of

New

Entrant
6-7
4.2

Rivalry

Among

Competitors..
7-8
4.3

Bargaining

Power

of

Buyers.

8-9
4.4

Bargaining

Power

of

Suppliers..9-10
4.5

Threat

of

Substitute
10-11
5.0
Conclusion
11
6.0

Reference

12

Introduction
Structural analysis of an industry is a valuable tool that can be used as a primary
determinant of a firm's long-term profitability. Understanding the dynamics of competitive forces
can provide insight into the attractiveness of an industry and the potential for returns on capital.
Michael Porter, a Harvard Business School professor, has developed a framework for
understanding an industry's structure. According to Porter, the five competitive forces affecting
an industry are: threat of entry, competitive rivalry, bargaining power of suppliers, threat of
substitutes, and the bargaining power of buyers. In this report we will try to highlight each of the
forces before using coca-cola industry as an example of how the competitive forces affect the
industry.
2- History and background
Coca-Cola began its existence in a three-legged brass pot in the backyard of John S. Pemberton
on May 8, 1886. Pemberton was a pharmacist trying to create a new headache tonic. Pemberton
took his creation to the now famous Jacob's Pharmacy, about 2 blocks from his home.
There the syrup was mixed with cold tap water and sold to ailing customers for 5 cents. As the
story goes, a customer in great pain came in and ordered the syrup and the soda jerk accidentally
mixed it with carbonated water instead of regular tap water. The customer loved the new drink,
declaring it "Delicious and Refreshing!"
Frank Robinson, Pemberton's partner and bookkeeper, suggested the name "Coca-Cola", taking
each part of the name from a key ingredient in the product and proclaiming that the two C's
would look well in advertising. Mr. Robinson penned "Coca-Cola" in the unique flowing script
that is now famous worldwide!
Today, Coca-Cola is available in nearly 200 countries around the globe and its trademark is
written in approximately 80 languages! It is one of the most recognizable logos in the world!

Date
1886

Historic
Sales of Coca-Cola averaged 9 drinks per day. That first year, Pemberton sold
only 25 gallons of syrup. For his efforts, Pemberton grossed $50.00 and spent
$73.96 on advertising.
As John Pemberton's health grew worse, he sold the company off. Asa Candler

1891

took sole ownership of the company for a mere $2,300.00!!! (that included all
rights, including his initial investment!)

1894

Coca-Cola was first bottled by Joseph Biedenharn, owner of the Biedenharn

Candy Company of Vicksburg, Mississippi. Candler believed that the bottling
idea was crazy and that people would never go for it! As the popularity of
Coca-Cola increased, many imitators came onto the scene, offering products
such as "Koca-Kola", so the company decided that they needed a bottle that

1919

would be easily recognizable so as not to be confused with any other.

In Asa Candler's merchandising flair helped expand the company to every state
and territory. In that year, Candler (who then went on to become mayor of
Atlanta, Georgia) sold the company to Ernest Woodruff and a group of investors
for $25 million and in 1923 Robert Woodruff (Ernest's eldest son) became

1943

president of the company

During World War II, Eisenhower sent a telegram requesting 10 additional
Coca-Cola bottling plants overseas for our troops. At the beginning of the war,
Coke was bottled in 44 countries. At the close of the war, 64 additional bottling

1985

plants had been established abroad.

The Coca-Cola Company introduced its new formula for Coke, calling the
product "New Coke" and then "Coke II". The public demanded their original
formula back and the company soon began producing "Coca-Cola Classic

3-

Porter's 5 forces analysis

The industry analysis can be performed by the company in order to further understand their
position. Porters five forces could be used. To increase the edge over rivals, firms can use the
five forces to get a better understanding of the industry context that they operate in. The supplier
power, threat of new entrants, threat of substitutes, and buyer power are the five forces that are
used in Porters analysis. This industry analysis would help strengthen the strategic management
process.
3-1

Threat of new entry

New entrants to an industry bring new capacity, the desire to gain market share, and often
substantial resources. Similarly, companies diversifying through acquisition into the industry
from other markets often leverage their resources to cause a shake-up.
The seriousness of the threat of new entrant depends on the barriers present and on the reaction
from existing competitors that the entrant can expect. If the barrier to entry are high and a
newcomer can expect sharp retaliation from entrenched competitors, he or she obviously will not
pose a serious threat of entering.
3-2

Bargaining power of Suppliers

Supplier can exert bargaining power of participants in an industry by rising price or reducing the
quality of purchased goods and services. Powerful suppliers, thereby, can squeeze profitability
out of an industry unable to recover cost increases in its own prices. By raising their price, soft
drink concentrate producers have contributed to the erosion of profitability of bottling companies
because the bottlers facing intense competition from powdered mixes, fruits drinks and other
beverages, having limited freedom to raise their prices accordingly.
The power of each important supplier (or buyer) group depends on a number of characteristics of
its market situation and on the relative importance of its sales or purchases to industry compare
with its overall business
A supplier group is powerful if:
1- It is dominated by a few companies and is more concentrated than the industry it sells
2- Its product s unique or at least differentiated, or if it has a built-up switching cost
3- It is not obliged to contend with other products for sale to the industry
5

For instance, the competition between the steel and the aluminum companies to sell to the
can industry checks the power of each supplier
4- It poses a credible threat of integrating forward into the industrys business
3-3

Bargaining power of buyer

Consumers likewise can force down prices, demand higher quality or more services, and play
competitors off against each other, all at the expense of industry profits
A buyer group is powerful if:
1- It is concentrated or purchases in large volumes.
2- The products it purchases from the industry are standard or undifferentiated
3- The products it purchases from the industry from a component of its product and
represent a significant fraction of its cost
4- It earn low profits, which create great incentive to lower its purchasing cost
5- The buyers pose a credible threat of integrating backward to make the industry product.
3-4

Substitute products

By placing a ceiling on the prices it can charge, substitute products or services limit the potential
of an industry. Unless it can upgrade the quality of the product or differentiate it somehow (as via
marketing), the industry will suffer in earnings and possibly in growth. Manifestly, the more
attractive the price performance trade-off offered by substitute products, the firmer the lid placed
on the industrys profit potential.
3-5

Rivalry among existing competitors

Rivalry among existing competitors takes the familiar form of jockeying for position using
tactics like price competition, product introduction, and advertising price cutting.
This type of intense rivalry is related to the presence of number of factors:
1- Competitors are numerous or are roughly equal in size and power
2- Industry growth is slow, precipitating fights for market share that involved expansionminded members
3- The product or service lacks differentiation or switching costs, which lock in buyers and
protect one combatant from raids on its customers by another
6

4- Fixed costs are high or the product is perishable, creating strong temptation to cut price.
5- Exit barriers are high. Exit barriers like very specialized assets or managements loyalty
to a particular business, keep companies competing even though they may be earning low
or even negative return on investment
4- Porter five force of Coca-Cola company
4-1

Threat of new entrance (low)

a) Advertising and Marketing

Soft drink industry needs huge amount of money to spend on advertisement and marketing. In
2000, Pepsi, Coke and their bottlers invested approximately $2.58 billion. In 2000, the average
advertisement expenditure per point of market share was $8.3 million. This makes it
exceptionally hard for a new competitor to struggle with the current market and expand visibility.
b) Customer Loyalty/ Brand Image
Pepsi and Coke have been investing huge amount on advertisement and marketing throughout
their existence. This has resulted in higher brand equity and strong loyal customers base all over
the globe. Therefore, it becomes nearly unfeasible for a new comer to counterpart this level in
soft drink industry.
c)

Retail Distribution

This industry provides significant margins to retailers. For example, some retailers get 15-20%
while others enjoy 20-30% margins. These margins are reasonably enough for retailers to
entertain the existing players. This makes it very difficult for new players to persuade retailers to
carry their new products or substitute products for Coke and Pepsi.
d) Fear of Retaliation
It is very difficult to enter into a market place where already well-established players are present
such as Coke and Pepsi in this industry. So these players will not allow any new entrants to
easily enter the market. They will give tough time to new entrants which could result into price
wars, new product line, etc in order to influences the new comers.

e)

Bottling Network

In this industry manufacturers have franchise contracts with their presented bottlers that have
privileges in a definite geographic area in eternity such as both Pepsi and Coke have contracts
with their presented bottlers. These contracts forbid bottlers from taking on new competing
brands for similar products. Latest consolidation between the bottlers and the backward
integration with Coke buying considerable numbers of bottling firms, it makes very difficult for
new player to contract with bottlers agreeable to distribute their brands.
According to all the points given above, we say that the threat of new entrant is low,
because it is very difficult for them to enter in the market
4-2

Intensity of competitive rivalry (low)

The industry is almost dominated by the Coke and Pepsi. This industry is well known as a
Duopoly with Coke and Pepsi as the companies competing. These both players have the majority
of the market share and rest of the players have very low market share. Otherwise; competition is
comparatively low to result any turmoil of industry structure. Coke and Pepsi primarily are
competing on advertising and differentiation rather than on pricing. This resulted in higher
profits and disallowed a decline in profits. Pricing war is nevertheless experienced in their global
expansion strategies.
a) Composition of Competitors
Except the Coke and Pepsi other competitors are of unequal size especially in local markets.
Coke and Pepsi both players have the majority of the market share and rest of the players have
very low market share.

b) Scope of Competition
Scope of competition in this industry is generally global; Coke and Pepsi are approximately
presents in 200 countries.
c) Market Growth Rate
8

The soft drinks business will not see growth in near future, with the smoothie and bottled water
sectors mainly hit by a decline in 2008, and across all sectors volume declined by 1.1 percent.
d) Fixed Storage Cost
This industry needs huge manufacturing plants and contracts with bottling network companies.
These contracts make sure that bottlers must have standard manufacturing plant; these plants
need huge capital and exertion.
e) Degree of differentiation
Marketing and Product differentiation have become more significant. Coke and Pepsi mainly are
competing on advertising and differentiation rather than on pricing. Coke has diverse
advertisement campaigns according to conditions. Coca-Cola is recognized as the best-known
brand name in the globe. More prominently, its consumers would not do without it, and have
established a loyalty.
f) Strategic Stake
Cokes core operation is the manufacturing and distribution both for itself and beneath franchise,
of non-alcoholic beverages and related products. Because of the strategic stake the main brand of
the Coke has been around for a lot of years.
4-3

Bargaining power of buyers (high)

The most important buyers for the Soft Drink industry are fast food fountain, vending,
convenience stores, food stores, restaurants, college canteens and others in the categorize of
market share. The profitability/revenue in each of these segments obviously demonstrates the
bargaining power of the buyers to pay different prices.
a) Fast Food Fountain
Pepsi and Coke mainly regard this segment as Paid Sampling due to small margins. This
division of buyers is the slightest profitable because of the high bargaining power of the buyers.
The bargaining power of the buyers is high because they purchase in bulks.
b) Vending Machines
9

Vending Machines provide products to the customers in a straight line with enormously no power
with the buyer.
c) Convenience Stores
This segment is tremendously fragmented and has no bargaining power due to which it has to
pay superior prices.
Food Stores
This segment of buyers is fairly merged with few local supermarkets and numerous chain stores.
Since this segment presents best shelf space it demands lower prices.
4-4

bargaining power of Suppliers (low)

Most of the raw materials desirable to manufacture soft drink are basic merchandise such as
flavor, color, caffeine, sugar, and packaging etc. The suppliers of these commodities have no
bargaining power over the pricing due to which the suppliers in soft drink industry are relatively
weak.
a) Number of important Suppliers
Raw materials for soft drink are basic commodities which are easily available to every producer
and have low cost which makes no difference for any supplier.
b) Switching cost
All the raw material ingredients are basic merchandize and easily accessible to manufacturers.
Switching cost to the suppliers is very low; manufactures can easily shift towards the other
suppliers.
c) Availability of substitutes
Soft drink products have standard raw material ingredients which could not have any alternatives
or used instead of the actual ingredients.
d) Threat of forward integration

10

Threat of forward integration is very low in this industry because manufacturers of the soft
drinks need huge manufacturing plants, bottling network, strong distribution network and best
shelf space. Suppliers could not afford such kind of well-established network.
e) Importance of buyer industry to suppliers
Soft drink industry is very important to the suppliers because buyers purchase larger amount of
raw material. This encourages suppliers to remain in good contact with buyers.
f) Suppliers product an important input to the buyers
Product of the suppliers is very important input for the manufacturers in this industry because
these products do not have any substitute.
4-5

Threat of substitute products (moderate)

This industry is enriched with enormous statistics of substitutes such as: water, tea, beer, juices,
coffee, etc presented to the end-consumers. But all the suppliers of these substitutes need
massive advertising, brand equity, brand loyalty and making sure that their brands are effortlessly
accessible to the consumers. Most of the substitutes cannot counterpart the existing players
offers or diversify business by offering new product lines of the substitute products to safeguard
themselves from rivalry.
a) Aggressiveness of substitute products in promotion
Soft drink industry companies spend huge amount of money on advertisement and marketing to
differentiate their products from others and also create brand equity, base of loyal customers and
increase visibility.
b) Switching Cost
Switching cost of the substitute products is very low so consumers can easily shift towards the
substitute products.
c) Perceived price/ value

11

Perceived price/value in this industry is very low because all products are comparatively same
and are only differentiated by promotional activities.

Conclusion

The argument that the brands or brand names along with its brand position and brand
management of a business like Coca-Cola, under which its goods or services are marketed,
embodies as much an asset as their tangible counterparts, is increasingly gaining momentum.
Realizing the requirement of implicating the value of brands in the accounts, some large
corporations have initiated the capitalization of the value of their brands in their documented
financial declarations. The issue logically crops up with regards to whether the implication of
this entity as an asset in the financial documents serves any real significant function or is merely
another effort by the brand accountants to create more opportunities for themselves.

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