Strategic Management Coke & Pepsi: Industry Analysis and Firm Performance

BYU, Marriott School Coke & Pepsi Summary n 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. n 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 $ 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. n 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 “Industry Structure” “Firm Capability” -Analyze industry structure -Superior product positioning in an attractive industry -Analyze firm resources -Develop unique resources and capabilities HOW TO BUILD SUSTAINABLE COMPETITIVE ADVANTAGE

BYU, Marriott School “Industry Structure” Perspective “Five Forces” Analysis of Competitive Strategy Bargaining Power of Suppliers Threat of New Entrants Rivalry among Existing Competitors Bargaining Power of Buyers Threat of Substitutes

BYU, Marriott School Barriers to Entry What factors keep potential competitors out? n Scale economies – e.g., aerospace industry n Scope economies – e.g., retailing n Capital requirements – e.g., aerospace industry n Switching costs – e.g., MSDOS operating system n Access to distribution – e.g., Campbell soup n Entry deterring regulations – e.g., Tobacco D A BC Industry

BYU, Marriott School Nature and Focus of Rivalry Why industries are more or less “competitive”? n Factors – Industry growth rates n Where to secure growth – Exit barriers n e.g., specialized assets, emotional barriers – Fixed costs n e.g. capacity increments – Lack of product differentiation n 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 Substitutes What alternatives are available to customers n Direct substitution with the same functionality – diesel vs gas engines – DirecTV vs cable n Eliminating need for product – water meters vs flat rate A B C Industry Customers D

BYU, Marriott School Supplier or Buyer Power How can my suppliers or customers extract value Buyer Power n Buyer concentration – Few vs many customers n Volume of purchases – Large vs small purchase decisions n Available alternative products – Competitive products n Threat of backward integration – Ability to become a competitor n Switching costs – Threat of switching suppliers Supplier Power n Supplier concentration – Few vs many suppliers n Supplier volume – Large vs small purchase decisions n Product differences – Dependence on unique features n Threat of forward integration – Ability to become competitor n Switching costs – Limitations on ability to change suppliers

BYU, Marriott School How Industry Structure Influences Profitability Percent of Market 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: n Minimize buyer power – (e.g., build customer loyalty) n Offset supplier power – (e.g., alternative source(s)) n Avoid excessive rivalry – (e.g., attack emerging vs entrenched segments) n Raise barriers to entry – (e.g., make preemptive investments) n Reduce the threat of substitution – (e.g., incorporate their benefits)