2.1 - Political Factors Food and Drug Administration (FDA) RegulationThese regulations define which ingredients can and cannot be used in the product, how the product is produced, where it is produced, as well as other laws concerned with the quality and health effects of the product.There are potential fines set by the government if companies do not meet a standard of laws regarding manufacturing, production, and distribution. Waste Management RegulationWaste from firms' manufacturing plants must be taken care of in a responsible and legal manner. If any of the waste management laws change, companies must update their processes to abide by the law. Legal factors include consumer laws, discrimination laws, employment laws, & health/safety lawsFirms must provide nutritional information of their product to the customerEmployees must be provided with at least the required minimum wage and discrimination is not tolerated in the workplaceAll factories of the firms must abide by OSHA standards and regulations.]If any of these laws change, companies must change their operations and procedures to avoid being fined or even worse, shut down.2.2 - Economic FactorsRecessions:

The soft drink industry experiences market shocks in periods of recessionSince 2008, the industry has struggled to regain its previous market strengthThe industry is expected to take a positive turn with an expansion of 27% by 2015; the highest increase since 2008Consumers of soft drinks have continued to spend their money frugally over the past few years following the 2010 recessionRaw Materials:Cost of raw materials can be a factor if the economy for certain materials is weakSugar and carbonated water make up most of the content, but there are a lot of preservatives and flavoring such as ascorbic acid, gums, pectins, saponins, aspartame, etc.

2.3 - Socio-cultural FactorsConsumer Choice:Age is the most important characteristic when evaluating consumer choiceThe older generation is more health conscious and tends to consider nutritional factors between products (diet or zero-calorie options)The younger generation leans towards products that are fun, new, and hipCelebrity endorsements, attractive commercials, and sweepstakes become more important to the younger generation in their product decision.Diet Craze:About one-third of Americans are considered obese and studies have speculated a link between soft drink consumption and obesityDieting has become a very marketable, popular trend which forces the soft drink industry to create new products that meet consumer preferences Social Media:Social media outlets (i.e. Facebook, Twitter, Instagram) keep consumers directly connected to the brandFirms are able to obtain valuable information and suggestions from consumers about potential or current new products Low advertising costs with global outreach

2.4 - Technological Factors Automation:New tech advancement in manufacturing and quality improvement concepts are improving bottling operations efficiency.High product volume requires high levels of automation in manufacturing. Technological advances increase the utility of employees and capital, which increases productivity.High costs for new technology can be an entry barrier to new competitors. Marketing:Technological advancement helps create new brands and product lines to meet consumer preferences.Improved logistics help products move through distribution channels more effectively. This keeps distribution costs down while increasing sales information to consumers.Social media provides huge growth in consumer awareness, brand value/identity, promotions, and direct-to-consumer communication.

Economic FeatureAnalysis

Market Size and Growth Rate 60 billion dollar industry Current growth rate is .7% Maturation phase of the industry life cycle because the number of competitors is stable, market growth is low, profits are high, market size is the largest to date and investment in the industry is also stable

Number of Rivals/ Scope of Competitive Rivalry Three firms in the industry account for approximately 90% of the market share, yet there are over 100 firms total The geographical area over which companies in this industry compete is on a global scale but this report is focusing on only the United States portion of the industry

Number of Buyers Market demand is very fragmented among buyers as brand loyalty is very strong in the industry. Recently however, due to inflation and the rising cost of goods, brand loyalty has decreased somewhat and price is now the main factor in some buyers preference

Product Differentiation Products are becoming more and more differentiated as there are a number of new soft drinks hitting the market each and every day Differentiation is key for a firm to maximize their revenue due to customer trends and tastes always changing and the firms need to create new products and flavors to keep up with customers needs

Product Innovation The industry is not entirely characterized by rapid product innovation and short product life cycles but it is very common to see both occurring rather often The most profitable soft drinks do not have short product life cycles as they have been around for years Some new beverages however do experience short product life cycles as they can be introduced to the market and not be received well and need to be taken off the shelf Companies must use R&D to discover what products other firms are putting out as well as when opportunities for a product will arise New products must be developed to compliment the steady products, and also keep up with the always changing customer preferences Next generation soft drinks have begun to come out in forms such as energy drinks or energy shots These products have been gaining popularity since they were introduced but it is still difficult for them to be as profitable as the 3 dominate firms in the industry

Economic FeatureAnalysis

Demand Supply Conditions The amount of companies in the industry creates competition amongst members. Companies have to stay similar on product price in order to keep market share The industry is not overcrowded because all the competitors are still able to make profit

Pace of Technological Change The technology in this industry is always changing Companies are constantly coming up with new ways to manufacture, deliver, and sell their product The plants are now able to produce more products in less time which allows the companies to sell more and make more of a profit If a company falls behind and is no able to keep up with the demand from customers they will lose market share.

Vertical Integration Competitors operate in multiple stages of the industry. The majority of competitors all engage in manufacturing and distribution. The larger competitors also have bottling operations. Competitors sell to retailers. As a fully integrated firm, the product has higher quality assurance, quicker delivery, and more fluid distribution channels to lower costs. There is also more oversight and flexibility when fully integrated. Smaller firms may benefit from using competitors bottling or distributionchannels, but contracting out may have higher costs in the long run. The more independence a firm has, the more leverage it will have if exposed to exogenous shocks.

Economic FeatureAnalysis

Economies of Scale The entire industry is characterized by economies of scale in every aspect. Since soft drinks are sold in high volume, costs may only be kept down by manufacturing, shipping, etc. at the highest cost-efficient volume. Advertising may be on economies of scale since the industry leaders have maintained aggressive marketing campaigns since founded, and might have capitalized on long-term relationships and high volume incentive rates. Large-scale operations pass on cost savings to the customer and are able to retail their products at a significantly lower price. New, smaller start-ups will have to try to match large-scale ops pricing, which will lower their profit margin. Large-scale operations have the ability to produce and store more product, which will lead to higher revenue. Soft drinks are not a niche market so it is hard for smaller companies to differentiate their product from the large-scale firms.

Learning and Experience Curve Effects

Setting up distribution channels to retailers and developing strong relationships within these channels takes a long time. Firsthand experience in dealing with demand for substitute beverages and market shocks is an advantage. Advertising experience in the industry is crucial because of the long history and breakthrough marketing campaigns the soft drink industry maintains. Bottling has a learning curve because of political and economic standards to reduce costs, adhere to the law, and attract customers. The two industry leaders have been in the industry since it began, so they have the most experience in every activity. Competitors can try to imitate the leaders learned processes, but cannot gain the same level of experience.

Porter's Five Forces Analysis Soft Drink IndustryBargaining Power of Buyers The soft drink market is the largest group in the larger beverage industry. The soft drink industry is worth $60 billion dollars. Three firms control 89% of the United States soft drink sales. To say the least there is plenty of the pie to go around but it is hard to gain market share. There are a large number of customers with the average American consuming over 56 gallons of soda a year. The average soft drink costs under $2 which makes each individual purchase relatively insignificant. Because the soft drink industry is very competitive, switching suppliers is relatively easy and the price difference is rather small. Difference can occur based on geographic location and how far the products need to travel. There is no need for information on how to use the product it is a simple task. The buyer is not aware of the need for additional information because all the information that is needed is provided. There are no steps to using the product and all nutrition facts and ingredients are listed on the label. Because a soft drink is a hard thing to duplicate in your house and takes a considerable amount of time, manufacturing your own soft drink is inconvenient especially when you take into consideration how low of a cost the product is. Customers are highly sensitive to the price of soft drinks and are willing to change brands if one becomes much more expensive than the other.Soft drinks are not a need and people wont pay any price for it. Products are very unique in the soft drink industry and people are very brand loyal to the drink of their choose. Though many of the sodas are rather similar in type they have distinct tastes. Firms often provide incentives to customers on the buyer side. These incentivizes are often done in the form of contests such as win tickets to the super bowl or deals such as get 20% off admission to a local theme park. These deals can often sway customers to choose a particular brand. Bargaining Power of Suppliers The inputs specifically the materials are extremely differentiated as every firm is trying to create the best product. Each firm has a different formula, color, and flavor for their beverage. No two products are typically exactly alike. Product innovation is necessary to fill the buyers need for a variety of tastes. Firms can switch between suppliers very quickly and easily. Suppliers for the soft drink industry do not hold much competitive pressure. Suppliers to the industry are bottling equipment manufacturers and secondary packaging suppliers. In terms of equipment manufacturers, the suppliers are generally providing the same products.The number of equipment suppliers is not in short supply, so it is fairly easy for a company to switch suppliers.This takes away much of suppliers bargaining power. It is fairly easy to become a supplier within the industry and thus they would not find it difficult if they wanted to enter. The companies will choose the suppliers that do the best job and have the best price. If another supplier does the same job but is cheaper, the firm can switch without much issue. There are many current and potential suppliers in this industry. Soft drink companies own a portion of their own supply companies. For current and potential suppliers it is fairly easy to enter or succeed in the industry as supplying the soft drinks is not a difficult task. All about price and how efficient of a delivery job they do. Companies are willing to switch suppliers whenever is necessary. Business is extremely important to the suppliers as the soft drink industry is an enormously profitable market. The main revenue for these supply companies comes from delivering the soft drink beverages and equipment for the firms to the customers. Threat of New Entrants Existing firms have cost and performance advantage in this industry. This is because existing firms have already purchased large capital expenditures and have economies of scale. They also have direct supply and distribution channels setup Soft drinks are not proprietary products because anyone can make soft drinks. The only proprietorship is on patented flavors and brands. The majority of soft drinks have well-known brand identities, with the exception of generic brands. Brand identities define soft drink flavors (i.e. Sprite means lemon-lime, or Coke means cola) There are no significant costs in switching suppliers. The soft drink industry is very competitive, so prices only fluctuate slightly depending on geographical location (transportation) or short-run sale discounts. A lot of capital is needed to enter this industry because there are large capital costs needed for manufacturing. Bottling, distribution, and storage could be contracted out, but it would likely increase costs in the long run and weaken the supply chain. A new comer to the industry would face difficulty in assessing distribution channels. The major brands already control the main distribution channels, such as big supermarkets, gas stations, and restaurants. They have low costs, competitive pricing, and strong business relationships. Experience in this industry does help firms to lower costs and improve performance. The major brands run on economies of scale, and have experienced the highs and low of the industry and overcome them. New entrants can learn from the first entrants history but do not have first hand experience. There are licenses, insurances, and other difficult qualifications required in this industry. Companies must get FDA approval to sell their product, have licenses to produce and distribute internationally, and insurance to cover potential lawsuits, accidents, or faulty product. A new comer in this industry can expect retaliation from current companies. The soft drink industry is an oligopoly with existing firms having strong distribution channels, relationships with suppliers, retailers, and brand value to customers. The industry leaders have the tools necessary to force out new competitors. Threat of Substitutes Available substitutes do not have performance limitations or high prices that would justify their use over the products in the soft drink industry because substitutes are not priced at a high enough cost where it would affect their use as a mainland product. Customers would not incur costs in switching to substitutes. The choice of switching to a substitute for a customer would in most cases be the difference of cents. There are substitutes for carbonated beverages, like water, tea, sports drinks, etc. Customers are not likely to go for substitutes because brand name loyalty is a very strong competitive pressure in this industry. Rivalry Among Existing Players The industry is not growing rapidly. The growth rate for the industry is not rapid; it is in fact relatively small. This makes it very difficult for new entrants to compete with the already thriving firms in the industry. The industry does not necessarily have overcapacity at the moment. However, if a newcomer were to try and enter the industry, its current players would make it very challenging because of brand loyalty and recognition amongst customers. The fixed costs are a high proportion of total costs for a firm in the soft drink industry. Fixed costs act as a firm barrier to entry and can include costs for warehouses, trucks, labor, etc. There are significant brand identities among the firms in the industry, which is why brand names are an important competitive edge amongst new businesses. It actually would be difficult to get out of business because of money lost from fixed costs and advertisements, as well as binding contracts with set distribution channels. Customers would not incur high costs from switching from one player to another. Themost they may incur would be a few cents because the prices in the industry do not fluctuate much among the firms. Since the products in this industry are simple carbonated beverages, there is no need for significant customer-producer interaction because customers purchase the products mainly based on taste. Market shares in the industry are not more-or-less equally distributed among competitors. This is evident because there are three main firms that own approximately 90% of the industry, yet there are over 100 companies in the industry.The next section of the report will take a more in depth look at the two companies of Coke and Pepsi including their strategies as well as a performance analysis of the companies financials.

This section of the report analyzes the internal resources and capabilities of Coca-Cola and Pepsi, and compares their competitive advantages and disadvantages relative to each other.

DistributionResources & CapabilitiesValueRarityImitabilityOrganization

DistributionYesYesYesYesNoNoYesYes

*Coca-Cola*Pepsi

Value:Coca-Cola focuses its distribution more on the fountain market with restaurants. While retail distribution is important, there is bigger margin for fountain sales. Distribution through global markets has proved to be valuable in strengthening their distribution network.Pepsis distribution network is vital to compete with Coca-Cola. Through acquisitions of non-soft drink entities such as Tropicana bottled drinks and FritoLay snack foods, it has expanded its network tremendously. This expansion has allowed Pepsi to control large market share in supermarkets and other snack retailers.Rarity:The size of Coca-Colas distribution network is rare because they deliver their product to many different buyers on an international scale. Coca-Cola only produces the syrup concentrate which it then sends to it bottlers, who distribute to retailers. Coca-Cola has sustained competitive advantage by having a straightforward, efficient channel design.The business relationships necessary for such a demanding distribution network are rare to acquire and Pepsi has continuously expanded and maintained their relations.Imitability:The push and pull distribution strategy of Coca-Cola may be imitated in its basic essence, but size of their channels is unique.Pepsi spent billions in mergers to create its own distribution network, which would be hard for other firms to copy.Organization:Coca-Cola is able to exploit their distribution by entering foreign markets to dominate their market share. For example, in Mexico there is not much clean water to drink. Coca-Cola realizes this and heavily distributes and advertises in Mexico. Producing Coke in Mexico uses the clean water available, forcing Mexican citizens to buy Coca-Cola beverages to satisfy their thirst.Pepsi exploits their distribution network by working close with other reputable firms in separate industries. These relationships help Pepsi tie its products to other industries and distribute them efficiently. Pepsis acquisitions of fast food chains such as KFC and Taco Bell have increased its fountain market share.DifferentiationResources & CapabilitiesValueRarityImitabilityOrganization

DifferentiationYesYesYesYesYesYesYesYes

*Coca-Cola*PepsiValue:Coca-Colas product has value in its differentiation from competitors based on its taste. A common reason people say they drink Coke is because it tastes better than Pepsi. The recipe is the biggest secret Coca-Cola has to their success. This value is spread to Coca-Colas other product lines.Pepsi differentiation value is critical to their business model. It is important for Pepsi to set it self apart from Coca-Cola and generic colas in a market where the end product is essentially the same type of beverage.Rarity:Coca-Cola differentiation strategy is rare considering that when people thinking of drinking cola, Coca-Cola is typically the first soda that comes to mind. Indirectly engraining an idea that your product istheproduct to choose into consumers minds has allowed Coca-Cola to sustain a competitive advantage.Pepsi differentiates their product through brand value by pushing its products on the new generation. Although this strategy is not necessarily rare, it has defined the brand since the early 90s and the time investment makes the strategy more rare.Imitability:Coca-Cola experiences imitability, considering in essence it is a standard cola beverage. There are hundreds of generic colas on the market. While the type of product is easily imitated, the specific product of Coke is not imitable.Pepsi faces slightly more imitability because it does not have the same brand value as Coca-Cola, but its heavy capital spending in advertising make it difficult to imitate.Organization:Coca-Cola uses brand value to exploit its differentiation. Color plays a role in differentiation because red signifies Coke over the Pepsi blue. They also exploit their wholesome family brand image but advertising towards this segment (Santa/polar bear commercials.)Pepsi exploits the value of its product differentiation by performing taste tests around America to compare Coke versus Pepsi. Results have shown that more Americans choose Pepsi in a blind taste test. They also used this platform as a television commercial.Through an analysis of Pepsi and Coca-Colas resources and capabilities, there is a clear sustained competitive advantage for both firms. Brand value is the most important resource to the sustained competitive advantage. Pepsis differentiation strategy is dependent on its brand value and keeps Pepsi competitive because they target new generation segment. Coca-Cola is riding on the coattails of its psychological brand value towards a matured segment. Both strategies are successful and advantageous. Development of large distribution channels has kept Pepsi relevant in Coca-Colas shadow over the last thirty years. The resources mentioned have allowed Coca-Cola and Pepsi to create an oligopolistic marketplace where both firms learn from the mistakes of the other and strengthen operations in areas where one firm may be weak. In the next section, we will perform a performance analysis with both firms.

Coca-ColaA businesses corporate Strategy is aimed at the companiesoverall scope anddirection.Business strategy is a long term plan of action designed to achieve a set of company goals and objectives.An internationalization strategy is aimed atideas that will hwlp expand thebusinessabroad.Coca-Colas number one goal is to maximize growth and profitability to create value for their shareholders. They plan to achieve these goals by(1) Transforming their commercial models to focus on their customers value potential and using a value-based segmentation approach to capture the industrys value potential.(2) Implementing multi-segmentation strategies in their major markets to target distinct market clusters divided by consumption occasion, competitive intensity and socioeconomic levels(3) Implementing well-planned product, packaging and pricing strategies through different distribution channels.(4) Driving product innovation along there different product categories and achieving the full operating potential of our commercial models and processes to drive operational efficiencies throughout our company.You can find on Coca-Colas website what they plan to do to achieve their goals, its includes working with The Coca-Cola Company to develop a business model to continue exploring and participating in new lines of beverages, extending existing product lines and effectively advertising and marketing our products; developing and expanding our still beverage portfolio through innovation, strategic acquisitions and by entering into agreements to jointly acquire companies with The Coca-Cola Company; expanding our bottled water strategy, in conjunction with The Coca-Cola Company through innovation and selective acquisitions to maximize profitability across our market territories; strengthening our selling capabilities and go-to-market strategies, including pre-sale, conventional selling and hybrid routes, in order to get closer to our clients and help them satisfy the beverage needs of consumers; implementing selective packaging strategies designed to increase consumer demand for our products and to build a strong returnable base for the Coca-Cola brand; replicating our best practices throughout the value chain; rationalizing and adapting our organizational and asset structure in order to be in a better position to respond to a changing competitive environment; committing to building a multi-cultural collaborative team, from top to bottom; and broadening our geographic footprint through organic growth and strategic acquisitions.

PepsiCoFor PepsiCo, the benefits of global expansion include maximizing growth potential, gaining global scale, achieving geographic diversity. They plan to achieve this by Distributing global brands while ensuring local relevance Creating affordable products that meet consumer needs Strengthening advantaged local supply chain and go-to-market capabilities Encouraging people to live balanced and healthy livesThe following statement is from PepsiCos Website under the Management Approach tabWith its strong leadership team, PepsiCo maximizes shareholder value and invests in entities that ensure sustainable profitability. We have created the Performance Sustainability Leadership Team (PSLT), which informs our Sustainability Steering Committee (SSC) on financial performance, strategy and goals. Our performance goals focus on a series of long-term targets, which also are aligned with our short-term needs. To deliver superior, sustainable financial performance, we will continue to put emphasis on innovation and broaden our portfolio through mergers and acquisitions.These two firmshave goals of achieving higherprofitability and maximizing growth, yet differ in there approaches to do so. Coco-Cola plans to work towardsimprovingthe relationship with current customersand growing the brand in major markets.Pepsi-Co'sstrategysuggests thatthe company is focused on expandingglobally to new untouched markets. The company hopes to earn a higher market share by doing so.