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Coke & Pepsi: Industry Analysis and Firm Performance. Strategic Management. 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.
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Coke & Pepsi: Industry Analysis and Firm Performance Strategic Management
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 $30-50 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 $2-4 billion over 10 years (Coke brand valued at $70 billion in 2001; Pepsi brand valued at $6.5 billion). Bottling/franchise system: cost of national distribution (29-85 plants) is $1.5-2.5 billion. Must be niche player or be big. Limited shelf space, fountains, vending slots: cost of slotting allowances estimated at $1-5 million per chain for 3 linear feet (there are 300-400 major chains); fountains may be impossible due to long term contracts/vertical integration. Coke & Pepsi Summary
Relative to bottling, the concentrate industry also has: fewer substitutes (bottlers have aluminum, steel, plastic, glass) 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. Successful entry will likely require either: Highly differentiated products (new flavors) in niche markets; or Circumventing the barriers to entry through alliances (e.g., piggybacking on an existing distribution system; e.g., beer; or with an existing brand name; e.g., Virgin Cola). Acquisition of existing players (but you will likely pay a premium) Coke & Pepsi Summary
Firm Resources & Capabilities Sources of Superior Profitability Attractive Industry Superior Profitability
Threat of New Entrants Rivalry among Existing Competitors Bargaining Power of Suppliers Bargaining Power of Buyers Threat of Substitutes “Industry Structure” Perspective“Five Forces” Analysis of Competitive Strategy
Industry A D B C Barriers to EntryWhat factors keep potential competitors out? • Scale economies • e.g., aerospace industry • Scope economies • e.g., retailing • Capital requirements(combined with uncertainty) • e.g., aerospace industry • Switching costs(due to learning, prior investment, network effects) • e.g., Windows operating system • Access to scarce resources(e.g. inputs, distribution, locations) • e.g., DeBeers (diamonds), Coke (distribution) • Product Complexity • e.g., supercomputers, microprocessors • Learning Curve • e.g., Honda motorcycles (motors) • Entry deterring regulations • e.g., Tobacco
A C D B Customers Threat of SubstitutesWhat alternatives are available to customers Industry • Direct substitution with similar or the same functionality • diesel vs gas engines • DirecTV vs cable
A C B Nature and Focus of RivalryWhy industries are more or less “competitive”? • Factors • Number of direct competitors & substitutes • Ease of signaling, sharing the market • Industry growth rates • Fast versus slow 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 • How easy can customers switch? Industry Competitive rivalry can focus on many factors, including price, quality, technology, features, service, etc.
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 Supplier or Buyer PowerHow can my suppliers or customers extract value
How Industry Structure Influences Profitability Others (>10) (20%) Green Giant (4%%) Percent of Market Others (>1000) (90%) Campbell (17%) Others (>10,000) Swanson (25%) Stouffer (34%) American (2%) ConAgra (1%) Kroger(3%) Safeway (4%)
THREAT OF ENTRY • HIGH • entrants have cost advantages • moderate capital requirements • little product differentiation • deregulation of governmental barriers Example: Airlines • INDUSTRY RIVALRY • HIGH • many companies • little differentiation • excess capacity • high fixed/variable costs • cyclical demand BUYER POWER MEDIUM/HIGH Buyers extremely price sensitive Good access to information Low switching costs • SUPPLIER POWER • HIGH • strong labor unions • concentrated aircraft makers • THREAT OF SUBSTITUTES • MEDIUM • Autos/train for short distances Source: J. de la Torre
THREAT OF ENTRY • LOW • economies of scale • capital requirements for R&D and clinical trials (more than $300 million per drug). • product differentiation • control of distribution channels • patent protection Example: Pharmaceuticals • INDUSTRY RIVALRY • LOW-MED • high concentration • product differentiation • patent protection • steady demand growth • no cyclical fluctuations of demand BUYER POWER LOW Physician as buyer: Not price sensitive No bargaining power. (Changing with managed care.) SUPPLIER POWER LOW THREAT OF SUBSTITUTES LOW No substitutes. (Changing as managed care encourages generics.) Source: J. de la Torre
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) Successful Strategies Should:
