Strategic Management

Coke & Pepsi: Industry Analysis and Firm Performance

BYU, Marriott School

Coke & Pepsi Summary This case provides an understanding of the underlying economics of an industry

and its relationship to average industry profits. The concentrate industry is, on average, more attractive than bottling.

The reason there is not more entry into the concentrate industry (even though only $5-10 million plant investment to serve the U.S) is largely due to barriers to entry:

– Brand equity: cost to keep up with Coke & Pepsi ad spending is roughly $20-25 billion over 10 years (Coke brand valued at $75 billion in 1999).

– Bottling/franchise system: cost of national distribution (80-85 plants) is $1.6-4.3 billion. May keep niche players out.

– Limited shelf space, fountains, vending slots: cost of slotting allowances could be $500 or more per store; fountains may be impossible due to long term contracts/vertical integration.

Relative to bottling, the concentrate industry also has fewer substitutes, greater bargaining power over suppliers (the raw materials for concentrate) and buyers (buyers are fragmented). This all adds up to a more attractive industry structure for concentrate.

BYU, Marriott School

Perspectives on Strategic Management

Industry Opportunities

STRATEGY

Firm Resources and Capabilities

“IndustryStructure”

“FirmCapability”

-Analyze industry structure-Superior product positioning in an attractive industry

-Analyze firm resources-Develop unique resources and capabilities

HOW TO BUILDSUSTAINABLECOMPETITIVEADVANTAGE

BYU, Marriott School

“Industry Structure” Perspective “Five Forces” Analysis of Competitive Strategy

Bargaining Power of Suppliers

Threat ofNew Entrants

Rivalry amongExisting

Competitors

Bargaining Power of Buyers

Threat of Substitutes

BYU, Marriott School

Barriers to EntryWhat factors keep potential competitors out?

Scale economies– e.g., aerospace industry

Scope economies– e.g., retailing

Capital requirements– e.g., aerospace industry

Switching costs– e.g., MSDOS operating system

Access to distribution– e.g., Campbell soup

Entry deterring regulations

– e.g., Tobacco

D

A

B C

Industry

BYU, Marriott School

Nature and Focus of RivalryWhy industries are more or less “competitive”?

Factors– Industry growth rates

Where to secure growth

– Exit barriers e.g., specialized assets, emotional barriers

– Fixed costs e.g. capacity increments

– Lack of product differentiation e.g. differences in functionality, performance

– Switching costs

A

B C

Industry

Competitive rivalry can focus on many factors, including price,

quality, technology, features, service, etc.

BYU, Marriott School

Threat of SubstitutesWhat alternatives are available to customers

Direct substitution with the same functionality

– diesel vs gas engines– DirecTV vs cable

Eliminating need for product

– water meters vs flat rate

A

B C

Industry

Customers

D

BYU, Marriott School

Supplier or Buyer PowerHow can my suppliers or customers extract value

Buyer Power Buyer concentration

– Few vs many customers Volume of purchases

– Large vs small purchase decisions

Available alternative products– Competitive products

Threat of backward integration– Ability to become a competitor

Switching costs– Threat of switching suppliers

Supplier Power Supplier concentration

– Few vs many suppliers Supplier volume

– Large vs small purchase decisions

Product differences– Dependence on unique features

Threat of forward integration– Ability to become competitor

Switching costs– Limitations on ability to change

suppliers

BYU, Marriott School

How Industry Structure Influences Profitability

0

10

20

30

40

50

60

70

80

90

100

Farmers5-10% ROE

Frozen Entree Makers 20-25% ROE

Food Retailers 8-12% ROE

Percent ofMarket

Others(>10,000)

ConAgra(1%)

Stouffer(34%)

Swanson(25%)

Campbell(17%)

Green Giant(4%%)

Others (>10)(20%)

Safeway (4%)Kroger(3%)American (2%)

Others (>1000)(90%)

BYU, Marriott School

Successful Strategies Should:

Minimize buyer power– (e.g., build customer loyalty)

Offset supplier power– (e.g., alternative source(s))

Avoid excessive rivalry– (e.g., attack emerging vs entrenched segments)

Raise barriers to entry– (e.g., make preemptive investments)

Reduce the threat of substitution– (e.g., incorporate their benefits)