Coke and Pepsi War - Article Example

EXECUTIVE SUMMARY The case study ‘Cola Wars Continue: Coke and Pepsi in the Twenty-First Century’ explains the situation and development of both the companies internal and external strategies that has engaged both the companies to battle on for almost a century. The main problem discussed in the case study is the future prospects of Pepsi and Coke and how it is linked to its distribution channel and changing consumer preferences. The bone of content between both the companies has been the market share. In order to gain the upper hand over each other, Coke and Pepsi have used diversification strategies to take advantage of the changing demands of consumers by boosting the domestic market drink consumption and penetrating in the international market. The analysis of the case study brings to light the problems both the companies has had with their concentrate producers, bottlers and retailers while also highlighting the throat cut competition between Coke and Pepsi. The strategies deployed by the companies are the same: cost leadership and differentiation strategies. The strategic management model also reveals that the problems with the company were related to the supply chain and the diversification strategies into other non-cola drinks. The solution to the problems later discussed in detail is about stabilizing the growth and sales while at the same time re-branding its products to better appeal to the consumers. INTRODUCTION Coke and Pepsi are the two main competitors in the beverage industry globally. Both the companies have been at war since their inception. The situation is such that both companies, Coke and Pepsi, are at each other’s throats in order to gain most market share in the world especially United States. Coke and Pepsi, each are trying to come up with innovative products and ideas in pursuit to increase the market share. The effectiveness and creativity of Pepsi and Coke’s strategic advantage will determine the ultimate winner in respect to sales, profits, market share and customer loyalty. The case study ‘Cola Wars Continue: Coke and Pepsi in the Twenty-First Century’ presents the scenario of both the companies internal and external strategies that has caused each company to battle on for such a long period. PROBLEM STATEMENT Strategic Issues Over the years since the inception of both the companies, Pepsi and Coke have faced many issues and challenges that have led them to change their strategies. The main strategic issue for both the company has always lied in their quest for achieving the greater market share. Due to this point, the firms have constantly modified their bottling, pricing and branding strategies as new competition increased and gaining more market share became a life source for the Pepsi and Coke (Yoffie, 2004). Over the years, during the growth phase, Pepsi and Coke have extended themselves globally by offering the major products and broadened portfolios that include tea, juice, water and sports drinks (Yoffie, 2004). Major Problems The problem statement that has been discussed in the case study relates to Pepsi and Coke’s long-term future and the war between the two companies. As the new century dawns, it is seen that both the companies have reached their maturity stage and are now trying to stabilize themselves on the top of the cola sales given the increase in non-carbonated and other types of drinks in the market. The questions that are faced by the company is related to finding new revenue sources, boosting the domestic cola sales and avoiding to lose the profits and better their performance (Yoffie, 2004). Another major problem is that both the companies rely heavily on their bottlers and retailers that have caused them problems in the past and can do so in the future. STRATEGIC MANAGEMENT MODEL The strategic management model offers one way to analyze the Cola Wars case study by evaluating the case study as an application of its components (Pearson & Robinson, 2007). The following is the analysis of the case study: Company’s’ Mission, Social Responsibility and Ethics The mission of both Coke and Pepsi is to establish itself as the world’s leading carbonated soft drink but given the changing environment and competition, the mission has expanded to include non-carbonated drinks, tea, juice and water and so on. Coke and Pepsi have both diversified themselves in non-carbonated beverages and boosting domestic market while moving towards the international market. The tactics and strategies used by both the companies were in the limits of business ethics according to the case study. External Environment The external environment has played a major role in shaping both the companies mission and strategies. In 1970, it is estimated that 23 gallons of carbonated soft drinks (CSD) had been consumed by the Americans which grew by 3% annually over the next 30 years (Yoffie, 2004). Before the introduction of Pepsi, Coke was the leader in the carbonated market. But after the introduction of Pepsi, price wars started between the two companies in order to gain the market share. As the years passed, other CSDs were introduced in the market by different companies such as Cadbury and so on. The consumer taste also began to change as they were more inclined towards the purchase of alternatives to carbonated drinks such as milk, juices, tea, bottled water and sport drinks and so on. Sales of the non-carbonated drinks rose by 18% in 1995 and 5% in 2000 as compared to the sales increase in carbonated drinks of 3% in 1995 and 0.2% in 2000 (Yoffie, 2004). Coke and Pepsi upon analyzing the customer need and demand expanded their product lines to include water, sports drinks and juices. Another fact that led to the change of strategies in both companies was the competition to gain the shelf space. For this reason, both the companies came up with different packaging and sizing options in order to gain more shelf space than the other local brand competitors. Internal Analysis The success of both the companies, Pepsi and Coke, is much owed to the internal strengths that they possess as well as competition from each other. According a Pepsi spokesperson “Without Coke, Pepsi would have a tough time being an original and lively competitor. The more successful they are, the sharper we have to be. If the Coca-Cola company didn’t exist, we’d pray for someone to invent them. And on the other side of the fence, I’m sure the folks at Coke would say that nothing contributes as much to the present-day success of the Coca-Cola company than Pepsi” (Yoffie, 2004). Both the companies have focused greatly on the strategic marketing side as well as research and development. The market share of both the companies has increased significantly owing to the brand awareness of the flagship products as well as other product lines. The highest world market share was held by Coke in 1999 of 53% followed by Pepsi’s 21% (Yoffie, 2004). This market share is related to the carbonated drinks but in the non-carbonated drinks Pepsi held the major portion of market share around 31% as compared to Coke’s 19% (Yoffie, 2004). Strategic Analysis and Choice In order to reach the market both domestic and international, the value chain of Pepsi and Coke is of significant importance. Pepsi and Coke both have their own concentrate producers, bottlers and retailers. The strategy of both the companies was almost same, reach the market in whatever way u can. For this reason, Coke and Pepsi offered franchising contracts to the bottlers but on the terms of the company. The bottlers would then distribute the products to their locations. As the retail supermarkets were the main distribution channel for the carbonated drinks, Pepsi focused on retail outlets such supermarkets. On the other hand Coke’s distribution channel was through fountain sales. As the fountain sales were highly profitable for the restaurants, both the companies started to bid for the space in different restaurants. It was of strategic important because if big restaurants placed either company’s fountain, Pepsi and Coke could reach the customers not only nationally but internationally as well (Yoffie, 2004). Increasing market competition in the non-carbonated market gave rise to changing strategic choices in Pepsi and Coke. Both the companies diversified into other drinks but the core focus was still its flagship product. Long-Term Objectives The long-term objective of Pepsi is to have business success as well as financial success while leaving a positive imprint on the consumers and world. For this purpose, Pepsi has taken many initiatives such as acquiring latest technology and business tactics in the manufacturing and distribution channels. The company has also increased its marketing and advertising expenditures. In comparison, Coke’s long-term objective is to be the market leader in the carbonated soft drinks while maintaining a competitive position in the non-carbonated drinks market as it also impacts the business success and growth of the company. Generic and Grand Strategies The generic strategy of Coke has always been a low-cost strategy while earning high profit margins than its competitors. This kind of strategy allows the company to penetrate through any market and channels in which it’s entering. The strategies focused by the company are mostly based on local market demand and supply. For example Coke faced many obstacles in Japan regarding the distribution channel; therefore, the company built its own system and introduced the vending machines in the country which accounted for more than half of Japan’s sales (Yoffie, 2004). The grand strategies of Coke included vertical integration and strategic alliances with its suppliers, bottlers and retailers. The bottlers and suppliers were given as franchises to other companies but as years passed the bottlers and concentrate producers were re-franchised by Coke because the cost to operate the sites became expensive. Following the lead of Coke, Pepsi also follows a low-cost strategy but the profit margins are less than that of Coke. Pepsi acquired its bottlers but later adopted the anchor bottler model and sold its Pepsi Bottling Group (Yoffie, 2004). Short-Term Objectives Over the years many short-term objectives have been undertaken by the two companies. These objectives can be related to marketing activity or sales objectives and so on (Pearce & Robinson, 2007). In order to increase annual profits and market share, both the companies increased their advertising expenditure as the two of them were competing head-on with each other in national and international markets. Coke increased advertising expenditure between 1981 and 1984 from $74 million to $181 million while Pepsi elevated its expenditure from $66 million to $125 million over the same period (Yoffie, 2004). Coke and Pepsi have also been changing its price annually in response to Consumer Price Index (CPI). By doing so, the companies can offer better prices to the consumers although it would lower the profit margins of the bottlers and retailers. To gain market share in certain areas, Pepsi deployed niche strategy in certain geographic territories where per capita were low and markets were full of high volume and profit opportunities (Yoffie, 2004). Functional Tactics According to Pearce & Robinson (2007), functional tactics are short-term, limited scope plans that can help the company achieve competitive advantage. Many tactics have been applied by Pepsi and Coke since their inception to outrun each other in local and international markets. For instance, according to the case study, the marketing campaign of Pepsi ‘Pepsi Challenge’ was to a blind taste test to prove that the drink was better than Coke. Surprisingly, people liked the taste of Pepsi over Coke which eroded the sales of Coke nation-wide. In response, Coke offered rebates, retail price cuts and promoted a series of advertisement questioning the validity of the tests’ undertaken in the Pepsi Challenge (Yoffie, 2004). Another way of boosting sales was marketing agreements by Pepsi with Britney Spears and Coke with Harry Potter. According to the case, Yoffie (2004) mentioned that in later years, when the consumption of carbonated drinks fell, Pepsi reintroduced the ‘Pepsi Challenge’ to boost the cola sales as well as establish itself over brands including Coke. Policies The policies of both the companies have been mainly established in their bottling contracts. This is because the bottlers are the ones to whom the concentrated products are sold and it is through them that they are delivered to the retail outlets. In case of Coke, the franchise contract was a fixed price contract that was amended in the later years to adjust to price changes. Under this contract, Coke was authorized to determine the concentrate price and similar terms of sales. Coke did not share any expenditures related to marketing and advertising with the bottlers but the company did contribute to the expenditures in order to ensure the quality and proper distribution of marketing and also to support the infrastructure to its top bottler (Yoffie, 2004). In case of Pepsi, the bottler has the perpetual rights to the distribution of the products but was required to purchase the raw materials from the Pepsi Company itself on its terms and conditions. Organizational Structure, Leadership and Culture The organization structure of the Coke and Pepsi has not been highly discussed in the case study, but as far as it is known, both the companies have a decentralized structure that varies from one country to another in hope to meet the demands of the different countries better. The leadership transition in Coke has faced many difficulties, after a steady era of the CEO Roberto Goizueta. This was because the new CEO had rocky two years as Coke faced high profile racial discrimination suit and a European public scandal as hundreds of people became sick from contaminated soft drinks (Yoffie, 2004). The leadership transition of Pepsi has remained steady and no such suits or scandals have been observed in the company’s given history in the case study. Strategic Control and Innovation According to Pearce and Robinson (2007) strategic control and innovation is concerned with the company’s ability to track the implementation of its strategy and making any necessary adjustments. In case of Coke and Pepsi, both the companies have had to change their short-term strategies due to rapidly changing external environment. Some of these strategies included revision of contracts with bottlers, acquisition of the bottling companies and raw material suppliers, change in strategies of marketing and advertising, expansion in new product lines as the customer needs and demands changed, revising strategies to enter into international markets and gaining market share and so on (Yoffie, 2004). SWOT ANALYSIS OF PEPSI-COLA Strengths Pepsi has at its disposal numerous strengths that can be used to the company’s benefits. Pepsi has an outstanding reputation and brand loyalty than any other soft drink company in the world besides Coke. It has a long product line that covers not only carbonated soft drinks but also extends to non-carbonated drinks, tea, juices and now chips after the merger with Frito Lays (Yoffie, 2004). The market share and revenues of the company are very high which are increasing yearly. The distribution channel of Pepsi is very strong that includes concentrate producers, bottlers and retailers. The contracts with its distribution channel are highly flexible and take into accounts the economic shifts in prices keeping the channel satisfied and content with their work (Yoffie, 2004). Due to this, Pepsi has a strong distribution channel combined with the great brands it offers. Weakness The weaknesses of Pepsi are few but they are of great importance as the company is one of the top multinational carbonated soft drink brand. Pepsi has diversified itself in many drinks but not all the products bear the company name which makes it difficult to associate it with the brand name of Pepsi Cola. In addition, it is still lagging behind the sales of Coca Cola in carbonated drink which is its flagship product. Opportunities Pepsi has although expanded in the food division through its Frito-Lays chips, it can take advantage of other foods in the category as a trend is increasing towards healthier foods. As the non-carbonated drinks line growing at a rapid pace in the drinks industry, it is a good opportunity for Pepsi to focus on this line but it should not to lose core focus on its main brand of carbonated drinks. Threats The market for carbonated drinks as well as non-carbonated drinks has introduced many new competitors such as Cadbury Schweppes and Kraft Foods which are well-run and financially sound. Growth of sales has stagnated and is falling short of the investor’s expectations. The consumer demands are changing continuously as they are becoming more health conscious and there is a risk that they can switch to other beverages with little or no cost causing the company to lose market share (Yoffie, 2004). SWOT ANALYSIS OF COCA-COLA Strengths Coke has been a part of US culture for over a century. The branding of Coke is one of its strengths as the company has built its image in a way that the consumers can associate it with as been part of the company. Other strength of the company that can be used in strategic planning is the bottling system. The company although had problems with its bottlers in the past, it has now sought past it and turned it into its strengths. Due to this, the company has an impressive global scale bottling and distribution network that also allows it to maintain a local approach at the same time. In addition to the aforementioned strengths, another fact that is Coke’s strengths are the market share in US and globally. It is ranked as the leader in the beverage industry not just in carbonated soft drink but also in non-carbonated drinks. Weakness Coke has heavily invested in the overseas market which is at present operating at a 50% capacity (Yoffie, 2004). The company is more focused on the non-carbonated drinks line due to which the growth in carbonated soft drinks sales is failing to reach up to the mark of investor’s expectations (Yoffie, 2004). Another weakness of Coke is the management of the company. The top management is concerned with their own brands of Coke and not as the company as whole. Also the company had leadership transition troubles in 1997 and as a result 20% of the worldwide staff was laid off (Yoffie, 2004). Opportunities The fact that the consumers are able to recognize the Coke brand is one of the factors affecting its competitive position. Coke is known by almost 94% of the world today. The expected future growth in international consumption is viewed as one of the greatest opportunity by the company as the international per capita soft drink consumption is expected to be low (Yoffie, 2004). In response, company is acquiring bottlers and distribution channels as well as rival brands to take advantage of the growth (Yoffie, 2004). In order to increase sales, the company is using different packaging materials such as refundable glass and 6.5 ounce bottles (Yoffie, 2004). Even the non-carbonated drinks, non-cola and convenience foods are presenting itself as a diversification and growth potential (Yoffie, 2004). Threats The greatest threat the company faces is from the substitutes and not from the carbonated drinks. The consumers’ choice is changing very fast as they are becoming more health conscious and are switching towards juices, tea, coffee, milk and so on (Yoffie, 2004). Although Coke has diversified into these markets but it still has to tackle with many rivals who are the leaders in this category. In addition, the consumers can switch to other drinks whether they are non-carbonated or carbonated, with little cost (Yoffie, 2004). MICHAEL PORTER’S GENERIC STRATEGIES There are four strategies that have been given by Michael Porter in order to explain the competitive advantage of the companies. According to Campbell et al. (2002) the selection of the generic strategies give the competitive advantage as these strategies as chosen to best fit the organization’s competitive environment. The strategies are cost leadership strategy, differentiation strategy, focus strategy and focus differentiation. Cost Leadership Strategy If the generic strategies model is applied on the companies Pepsi and Coke, it would be seen that both the companies are using the cost leadership strategy. In this strategy, Pepsi and Coke are targeting the broad segment of consumers while offering them low-priced carbonated drinks. Although the margins of profit are small in this kind of strategy, Pepsi and Coke earn high profits because of mass sales not just nationally but internationally as well. Differentiation Strategy Owing to high demand of non-carbonated drinks and other beverages both the companies has diversified into juices, tea, coffee and water by acquiring different brands in the categories. In addition to this, Pepsi and Coke have added different attributes to their flagship products such as new labeling, packaging and advertising them based on these attributes. IMPLICATIONS FOR MIDDLE MANAGERS The middle managers should become more aware of the top management decisions and devise tactics that can help Pepsi and Coke achieve increase in sales and through it gain the highest market share. The implication of the case study for the middle managers is that it is important to know the distribution channel whether backward or forward of the company and try to give suggestions in order to improve it. This case study gives an excellent lesson that even the big giants have problems and troubles but it does not hinder its path in becoming the leaders. Therefore, managers should apply themselves to the success of the organization no matter where the organization is going. ALTERNATIVES The problems with both the companies have been mentioned earlier. The solution to the problems for both the companies is simple one that can be drawn from the companies strengths and the given market opportunities. According to Yoffie (2004) “the cola wars are going to be played now across a lot of different battlefields” means that Pepsi and Coke are not only going to be the players in the carbonated soft drink industry but will also be part of the whole beverage industry. Pepsi and Coke should not diversify into any more product lines but should build on the existing product lines giving them the recognition that the flagship products are given. The acquisition of the bottlers and retailers in the pursuit to become the own suppliers and distributors should be reconsidered and the franchises should be given as in the past but the contracts should be made flexible so that everyone can get their share in the profits given the costs at the time. The heavy investment of both the companies in overseas market should be reduced and should be focused on reviving the existing the investments and technology to reduce the costs of production which can help reduce the final price and attract customers. IMPLEMENTATION The implementation of the above mentioned alternatives can be done in various ways. Pepsi can focus on establishing its brand name with its other products such as Tropicana, Gatorade, Aquafina and so on. Coke on the other hand can use its brand recognition and its other products to create brand awareness among its customers so that they cannot switch easily to other products. Coke can try and acquire other small brands so that the rivalry can be lessened. Coke and Pepsi should revise their contracts with the bottlers as they are the vital joint in the supply channel. Coke and Pepsi also should offer franchises to those businessmen who have a proven track record of success and will only work of the company and not its direct or indirect competitors. CONCLUSION In conclusion to the case study analysis, it can be said that the both Pepsi and Coke will have to do much better in order to keep its main products the main source of its revenues rather than relying on its diversified line. Also the companies should try to win back the consumers to the carbonated side if it wants to sustain the growth in that part. As the case study implies that the revenue growth of both the companies has stagnated, it is vital for them to start gaining market share in the cola industry and then rival against each. But, being the top most competitors, both the companies will battle not just to win market share in cola industry but they will do so to gain the beverage industry. REFERENCES Campbell, D., Stonehouse, G. & Houston, B. (2002). Business Strategy: An Introduction. Butterworth-Heinemann Pearce & Robinson (2007). Strategic Management: Formulation, Implementation and Control. Mc-Graw Hill Companies Yoffie, D. (2004). Cola Wars Continue: Coke and Pepsi in the Twenty-First Century. Harvard Business School Read More