Wednesday, April 1, 2015

How Porter's Five Forces Have Shaped Coke's Strategy

For this post, I am going to examine how Porter’s five forces have shaped Coca-Cola’s strategy. The five forces consist of bargaining power of suppliers and buyers, threat of new entrants and substitutes, and rivalry among competitors.  The strength of these forces creates the basis for which Coke develops its strategy.

The threat of new entrants in the soft drink market is low. The leaders in the industry have supply-side economies of scale because they produce large volumes of their product; therefore, they can spread their fixed costs over more units. However, a new entrant would not be able to produce such high volumes of product right away so each additional unit of the product will cost new entrants much more than it would for the leaders to produce it. Also, the soft drink industry has high capital requirements for starting operations, and it is difficult to gain access to distribution channels because one must convince retailers to sell their product over other products that the retailer already sells.

The power of suppliers and buyers, such as grocery stores and retailers, is also low. Suppliers for Coca-Cola do not offer differentiated products, there are substitute ingredients available, and supplier groups are unlikely to enter the market. Also, buyers of soft drinks are buying differentiated products and cannot produce the products themselves. In addition, the price of soft drinks has been established and does not fluctuate much.

However, the threat of substitutes is high. As seen in the Cola Wars case, energy drinks, water, and healthy, all natural drinks have already begun to cut into Coca-Cola’s market share of the entire beverage market. This is due to changing consumer tastes based on relatively new knowledge that soft drinks are very unhealthy. In addition, buyer’s experience no cost from switching between drinks.

In addition, rivalry among existing competitors, such as Pepsi, is strong, as well. Both companies are fiercely competing for market share in an industry that is declining in size, rather than growing in size. Although their products are differentiated in their marketing campaigns, most soft drinks of the same flavor do not differ in taste by much.

Clearly, the strategies of Coke and Pepsi that were outlined in the Cola Wars can be explained by Porter’s five forces. Coke is not worried about new entrants because of the high cost of entering the soft drink market and the difficulty of gaining widespread distribution. The company’s suppliers and buyers do not factor in to its strategic planning much because they do not have much bargaining power over price and cannot enter the market themselves. However, Coke has begun acquiring other types of drinks, such as Vitamin Water and Dasani, in order to maintain its leadership as a beverage producer and fight off new brands of drinks. Also, Coke ferociously advertises, criticizes, and sometimes even copies its main competitor, Pepsi, in an effort to gain market share in an industry that is shrinking in size.

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