Coke vs. Pepsi
Case Discussion
James Oldroyd
Kellogg Graduate School of Management
Northwestern University
J-oldroyd@northwestern.edu
Sample Exam Question
Describe the history of the strategic management
field from its origin to the present day,
concentrating especially, but not exclusively, on its
social, political, economic, religious, and
philosophical impact on business organizations
and individuals in Europe, Asia, America, and
Africa. Be brief, concise, and specific.
Extra Credit: Discuss the major trends of the future
of strategy give specific examples. (preferably
days on which to buy and sell specific stocks)
1
Sample Exam Question
In this class we have discussed the “experience curve” as a strategy
concept.
A) Please describe and define what the experience curve is
(identify what information you would need to calculate an
experience curve (for a company or an industry).
B) Identify at least two ways that the experience curve is used by
companies to help them in making business decisions.
Please describe Porter’s diamond model and discuss how it helps
identify which countries are likely to produce companies that will
succeed in international competition.
2
Growth
How did the companies get us to double our
consumption of soda?
3
Entry Costs
Bottler
80 Plants Needed for National Distribution
$30,000,000.00 Cost Per Plant
$2,400,000,000.00 Total Entry Cost
Concentrate Producer
1 Plants Needed for National Distribution
$7,500,000.00 Cost Per Plant
$7,500,000.00 Total Entry Cost
Why are there more Bottlers than Concentrate Producers?
4
What are the other costs?
http://www.pepsi.com/current/music/britney
/video/pepx4296_nownthen_hi.asx
http://www.coca-cola.com/tvads/
5
Why buy the bottlers?
Concentrate
40% margin
Vs.
Bottlers 10%
margin
6
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.
7
Total Barrier to Entry
Brand equity
Bottling/franchise system
shelf space
Total
$20-25 billion over 10 years
4.3 billion
28 million +
(56,000 Stores X
$500 per store)
$30 Billion +
8
Coke and Pepsi today
9
Three Levels of Business Strategy
Industry
Choose
Your
Sandbox
Firm
Business
Unit
Business
Definition
Which Business
Units?
Firm Resources
Business Unit
Boundaries
Managing Cross
Business Synergies
Strategic
Advantage
10
Industry Analysis
Porter’s Five Forces Model
Threat of
New Entrants
Bargaining
Power of
Suppliers
Rivalry among
Existing
Competitors
Bargaining
Power of Buyers
Threat of
Substitutes
11
Barriers to Entry
Threat of
New Entrants
What factors keep potential competitors out?
Bargaining
Power of
Suppliers
Rivalry among
Existing
Competitors
Bargaining
Power of
Buyers
Threat of
Substitutes
Scale economies
•
Industry
e.g., aerospace industry
Scope economies
•
e.g., retailing
Capital requirements
A
•
e.g., aerospace industry
Switching costs
B
C
D
•
e.g., MSDOS operating system
Access to distribution
•
e.g., Campbell soup
Entry deterring regulations
•
e.g., Tobacco
Nature and Focus of Rivalry
Why industries are more or less “competitive”?
Threat of
New
Entrants
Bargaining
Power of
Suppliers
Rivalry among
Existing
Competitors
Bargaining
Power of
Buyers
Threat of
Substitutes
Factors
• Industry growth rates
Industry
A
B
•
Exit barriers
•
Fixed costs
•
Lack of product differentiation
•
Switching costs
C
Competitive rivalry can focus on
many factors, including price,
quality, technology, features, service,
etc.
– Where to secure growth
– e.g., specialized assets, emotional barriers
– e.g. capacity increments
– e.g. differences in functionality,
performance
Threat of Substitutes
What alternatives are available to customers
Threat of
New
Entrants
Bargaining
Power of
Suppliers
Rivalry among
Existing
Competitors
Threat of
Substitutes
Industry
Direct substitution with the
same functionality
• diesel vs gas engines
• DirecTV vs cable
A
B
C
Customers
D
Eliminating need for
product
• water meters vs flat rate
Bargaining
Power of
Buyers
Value Division
Customer
Willingness to Pay
Value Captured
by Customer
Price
Value Captured
by Firm
Firm
Cost
Value Captured
by Supplier
Supplier
Supplier opportunity cost
Added Value is the total value created with the firm in the game –
total value created without the firm in the game or the value that would
be lost to the world if the firm disappeared. A firm cannot capture more
than its added value.
15
Supplier or Buyer Power
How can my suppliers or customers extract value
Threat of
New Entrants
Bargaining
Power of
Suppliers
Rivalry among
Existing
Competitors
Bargaining
Power of
Buyers
Threat of
Substitutes
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
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
How Industry Structure Influences
Profitability
120
100
Others (>10)
(20%)
Percent
of
Market
80
60
Others
(>10,000)
0
Others
(>1000)
(90%)
Campbell
(17%)
Swanson
(25%)
40
20
Green Giant
(4%)
ConAgra
(1%)
Farmers
5-10% ROE
Stouffer
(34%)
Frozen Entree Makers
20-25% ROE
American (2%)
Kroger(3%)
Safeway (4%)
Food
Retailers
8-12% ROE
17
Successful Strategies Should:
Avoid excessive
rivalry
•(e.g., attack emerging vs
Raise barriers to entry
•(e.g., make preemptive investments)
entrenched segments)
Threat of
New Entrants
Offset supplier power
•(e.g., alternative source(s))
Bargaining
Power of
Suppliers
Rivalry among
Existing
Competitors
Minimize buyer
power
Bargaining
Power of
Buyers
Threat of
Substitutes
Reduce the threat of substitution
•
(e.g., incorporate their benefits)
•(e.g., build
customer loyalty)
Additional Industry Analysis Tools
SWOT Analysis:
Numerous Environmental
Opportunities
Critical
Internal
Weaknesses
Overcome
Weaknesses
Restructure
Grow
Substantial
Diversify
Internal
Strengths
Major Environmental
Threats
19