coke vs. pepsi case discussion james oldroyd kellogg graduate school of management northwestern...

Coke vs. PepsiCase Discussion

James OldroydKellogg Graduate School of ManagementNorthwestern University

[email protected]

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Sample Exam Question

Describe the history of the strategic management Describe the history of the strategic management field from its origin to the present day, field from its origin to the present day, concentrating especially, but not exclusively, on its concentrating especially, but not exclusively, on its social, political, economic, religious, and social, political, economic, religious, and philosophical impact on business organizations philosophical impact on business organizations and individuals in Europe, Asia, America, and and individuals in Europe, Asia, America, and Africa. Be brief, concise, and specific.Africa. Be brief, concise, and specific.

Extra Credit: Discuss the major trends of the future Extra Credit: Discuss the major trends of the future of strategy give specific examples. (preferably of strategy give specific examples. (preferably days on which to buy and sell specific stocks)days on which to buy and sell specific stocks)

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Sample Exam Question

In this class we have discussed the “experience curve” as a strategy In this class we have discussed the “experience curve” as a strategy concept.concept.A) Please describe and define what the experience curve is A) Please describe and define what the experience curve is (identify what information you would need to calculate an (identify what information you would need to calculate an experience curve (for a company or an industry).experience curve (for a company or an industry).B) Identify at least two ways that the experience curve is used by B) Identify at least two ways that the experience curve is used by companies to help them in making business decisions.companies to help them in making business decisions.

Please describe Porter’s diamond model and discuss how it helps Please describe Porter’s diamond model and discuss how it helps identify which countries are likely to produce companies that will identify which countries are likely to produce companies that will succeed in international competition.succeed in international competition.

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Growth

How did the companies get us to double our consumption of soda?

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Entry Costs

80 Plants Needed for National Distribution$30,000,000.00 Cost Per Plant

$2,400,000,000.00 Total Entry Cost

Bottler

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?

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What are the other costs?

http://www.coca-cola.com/tvads/

http://www.pepsi.com/current/music/britney/video/pepx4296_nownthen_hi.asx

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Why buy the bottlers?

Concentrate 40% margin

Bottlers 10% margin

Vs.

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Coke & Pepsi SummaryThis 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.

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Total Barrier to Entry

Brand equity

Bottling/franchise system

shelf space

$20-25 billion over 10 years

4.3 billion

(56,000 Stores X $500 per store)

28 million +

Total $30 Billion +

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Coke and Pepsi today

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Three Levels of Business Strategy

FirmFirmBusiness

UnitBusiness

UnitIndustryIndustry

Strategic Advantage

Choose Your Sandbox

Business Definition

Firm Resources

Which Business Units?

Business Unit Boundaries

Managing Cross Business Synergies

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Bargaining Power of Suppliers


Threat ofNew Entrants


Rivalry amongExisting

Competitors


Competitors

Bargaining Power of Buyers


Threat of SubstitutesThreat of

Substitutes

Industry Analysis

Porter’s Five Forces Model

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

Bargaining Power

of Suppliers



Competitors

Bargaining Power

of Buyers

Threat of Substitutes

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.

Bargaining Power

of Suppliers

Threat ofNew

Entrants


Competitors

Bargaining Power

of Buyers


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

Bargaining Power

of Suppliers

Threat ofNew

Entrants


Competitors

Bargaining Power

of Buyers


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Value Division

Customer

Supplier

Firm

Willingness to Pay

Supplier opportunity cost

Cost

Price

Value Captured by Customer

Value Captured by Firm

Value Captured by Supplier

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.

Supplier or Buyer PowerHow can my suppliers or customers extract value

Buyer PowerBuyer PowerSupplier PowerSupplier Power

Supplier concentration•Few vs many suppliers

Supplier volume•Large vs small purchase

decisionsProduct differences

•Dependence on unique featuresThreat of forward integration•Ability to become competitor

Switching costs•Limitations on ability to change

suppliers

Buyer concentration•Few vs many customers

Volume of purchases•Large vs small purchase

decisionsAvailable alternative products

•Competitive productsThreat of backward integration

•Ability to become a competitor

Switching costs•Threat of switching

suppliers

Bargaining Power

of Suppliers



Competitors

Bargaining Power

of Buyers


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How Industry Structure Influences Profitability

0

20

40

60

80

100

120

Farmers5-10% ROE

Frozen Entree Makers 20-25% ROE

Food Retailers

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%)

8-12% ROE

Successful Strategies Should:

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




Competitors



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)

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SWOT Analysis:SWOT Analysis:

Additional Industry Analysis Tools

Numerous Environmental

Opportunities

SubstantialInternal

Strengths

Major Environmental

Threats

CriticalInternal

Weaknesses

OvercomeWeaknesses

Grow

DiversifyRestructure

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