Coca-Cola and Pepsi Cola's Coexistence - Case Study Example

Cola Table of Contents Cola 1 Table of Contents 1 Introduction 3 The Strategic Issue 3 Components of the Strategic Management Model 3 Company Mission 3 Internal Analysis 3 External Environment 4 Strategic Analysis and Choice 5 Long term objectives 6 Generic and Grand Strategies 7 Short Term Objectives 8 Functional Tactics 9 Policies that Empower Action 10 Restructuring, Reengineering and Refocusing the Organisation 10 Strategic Control and Continuous Improvement 11 Analysis from a Theoretical Framework from two articles from the course 11 Implication of the case for Middle Managers 12 Conclusion 12 References 12 Introduction Coca Cola and Pepsi Cola have been ruling the “world’s beverage market” for more than a century. Both industries have complemented each other during their growth process, until a cold war began and they became each other’s competitors. The battle is still going on. The Strategic Issue The strategic issue in this case has been represented in 11 steps with the help of the Pearce and Robinson Strategic Management Model. Each step is explained in length in this project. This model attempts to make an analysis of the case and develop strategy formulation skills. Components of the Strategic Management Model Company Mission Both these companies, Coca Cola and Pepsi Cola, have had a common mission of meeting the long term objectives of business and winning it together. Later on, their mission changed when they started to compete against each other. Alfred Steele even went to the extent of making “beat coke” his company’s theme. Internal Analysis Internal analysis comprises the strengths and weaknesses of the company’s management and organizational structure. It also measures the quantity and quality of human, physical and financial resources. In this case, it is seen that the world’s demand for soft drinks has been ever increasing. Each company is posing a threat for the other. Financial investments, in the form of advertising and promotions have been huge. Huge manpower has also contributed to the growth of these companies. External Environment The external environment includes the conditions and situations based on which a company decides its strategies. It also endows on the company its competitive status. The Cola industry was flourishing in US at a very fast rate. The Americans were consuming “23 gallons of” carbonated soft drinks (CSD) in the 1970 and the consumption grew at the rate of 3% per year for the next 30 years. A number of alternatives to CSDs did exist like beer, wine, coffee, milk, bottled water, juice, sports drink, powdered drink, but the Americans preferred this beverage over others. “The cola segment of the CSD industry” dominated the beverage industry “throughout the 1990s”. There were four major components which contributed to the production and distribution of the CSDs. These were the concentrate producers, the bottlers, the retail channels and the suppliers. The concentrate producer’s costs include that of advertizing, market research, bottle relations and promotions. Bottlers play a major role in the development of trade and are also responsible for consumer promotion. They are paid more than 50% of the promotion and advertising costs. The bottler’s jobs is to purchase the concentrates, add carbonated water and “high fructose corn cyrup”, bottle or can the CSDs and deliver it to the customer accounts. Bottling cost and canning cost can be as high as $4 million and $10 million respectively which depend on the volume and the type of package. The minimum expense to build a bottling plant, including a “warehouse and office space” is $25 million to $35 million. About 80 to 85 such plants are required for complete distribution across the country. Retail channels comprise food stores, fountain outlets, vending machines, convenience stores and other outlets. Both Pepsi and Coke focus on sales through these retail outlets. Supermarkets form the main channel of distribution of soft drinks. They account for 3 to4 percent of the revenues from food stores and yield a gross margin of 15 to 20 percent. Cost also depends on the method of delivery, drop size, marketing and advertizing. Lastly there are suppliers to “concentrate producers” and the bottlers. A major portion of the cost goes into packaging cans, plastic bottles and glasses and also in making products like sweetener, artificial sweeteners, high concentrate fructose syrup and sugar. All these factors account for the external environment of the cola industry. Strategic Analysis and Choice The strategies that these companies have taken are the direct result of the competitions they have faced from each other. Competitions began when Alfred Steele, an ex-employee of Coca Cola became the CEO of Pepsi in the year 1950. His primary motive was to beat the Coca Cola industry. He encouraged the “take home sales” through supermarkets. The company strategically introduced the 26 ounce bottles to increase family consumption while Pepsi kept producing 6.5 ounce bottles. The obvious move by the Pepsi industry was to track the growth of supermarket sales. Thus it can be inferred that strategy taken by a company is actually determined by the moves taken by its competitor. The next successful move was taken by the new CEO of Pepsi, Donald Kendall. He launched the “Pepsi Generation” which was mainly targeted at the young generation. Pepsi’s advertising agencies created commercials using motorcycles, sports cars, helicopters accompanied with an attractive slogan in order to generate an impulse which would attract the young generation. Coke had 800 independent bottlers spread across 50,000 US cities, whereas the sum was much larger for Pepsi. At the same time, Pepsi supplied concentrates to the bottlers at a price 20% lower than Coke. In the 1970s, Pepsi increased the price of its concentrates to the same price as Coke’s. A number of various other strategies were taken up by the two companies, like introduction of different flavors in the market to attract customers and mergers with other companies. Other tools like giving rebates, price cuts and advertisements were also used to counter each other’s measures. Long term objectives The long term objectives of a firm would include profitability, return on investment, productivity, employee relations and development, social responsibilities etc. Coca Cola acquired different franchise bottlers and sold them to Coca Cola Enterprises (CCEs). The objective was to become an “investment banking firm” which specialized in deals with bottlers. In the year 1997, Coke’s dealing with bottlers had reached more than $7 billion. By the year 2000, CCE had become the largest bottler of Coke. Its annual sales exceeded $14.7 billion. It was handling more than 70% of Coke’s industry in North America. This even gave raise to questions from different industrialists about Coke’s accounting practices, but Coke managed to retain its managerial position in the industry. By the end of 1980, Pepsi too had successfully met a number of objectives. It had successfully acquired a number of bottling operations, like MEI bottling worth $591 million, “Grand Metropolitan’s Bottling Operations” worth $705 million, “General Cinema’s bottling operations” worth $1.8 billion. Pepsi bottlers decreased from 400 to 200 between the years 1980 to 1990. Half of the bottling operations were owned by Pepsi and the remaining half was held by equity positions. The bottling business by Pepsi was further complemented by the company’s experience in snacks and restaurant business. In 1999, “Pepsi bottling Group” became public and therefore could retain an equity stake of 35%. By the year 2000, “55% of PepsiCo Beverages” was produced by the PBG in North America and 32% by other centers of the world. Craig Weatherup declared that its success has been the result of the combined effort of PepsiCo, which is the brand keeper, and PBG, which takes care of the marketing. Generic and Grand Strategies Generic and grand strategies are developed keeping in mind the competitive position of the company in the market. This includes three options- low cost, focus strategies and product differentiation. Managers look for ways to create both low cost and competitive advantage in the market. One of the biggest strategies that Coke took was when it announced the change of the 99 years old formula in the year 1985. The idea was to improve the existing marketing condition but this led to a sharp decline in the value of Coca Cola brand. It is said that the new Coke tasted a lot like Pepsi. There was a huge outcry from the loyal customers of Coke and it was compelled to change its formula once again. Few months later the original formula was brought back and named as Coca Cola Classic; however the new formula was also retained and was named as New Coke. Few months later it was announced that the original formula named as Coca Cola Classic would be considered as the flagship brand. Other grand strategies like introduction of new products in the market were taken up later. In the 1980, Coke introduced 11 new products. Some of them were “Cherry Coke”, “Caffeine-Free Coke”, and “Minute-Maid Orange”. Consequently Pepsi introduced 13 new products and named them as “Caffeine-Free Pepsi Cola”, “Lemon-Lime Slice” and “Cherry Pepsi”. The packaging types and sizes increased significantly, and the competition to attain shelf space in supermarkets and food stores also increased considerably. By the end of 1980, both Pepsi and Coke offered 10 new different brands, using a variety of containers and packaging options. The struggle for market share continued and intensified with time. As a result discount on retail prices also increased sharply. Consumers were constantly being exposed to discounts and other promotional offers. These are some of the grand strategies taken by the two companies to evade competition from each other. Short Term Objectives A firm sets a number of short term objectives in order to secure the desired result within a short span of time. These short term objectives are meant to provide guidance to operational and functional activities. Short term strategies would include certain marketing activities, guidelines regarding use of raw material, employee turnover, short term sales objectives etc. One such short term objective was taken up by Robert Woodruff, who was then the CEO of Coke Cola in the year 1923. His objective was to make Coke available whenever and wherever as per the demands of the consumers. He made the bottlers place the drink “in arms reach of desire”. The concept was that if the beverage was not available when the consumer required it, Coke would lose out its sales. Coke was the first to introduce vending machines, “automatic fountain dispensers” and “open top coolers”. Woodruff also started the “lifestyle” advertising, emphasizing on the influence of Coke in the consumer’s life. Both Coke and Pepsi began to experiment with new flavors and packaging styles. They were both selling by the name of their flagship brands. Coke started producing Fanta, Sprite and low calorie Tab, whereas Pepsi produces Diet-Pepsi, Mountain Dew and Teem. Both produced in glass bottles that were non returnable and 12 ounce cans made of metal available in different packaging styles. Both these companies then extended themselves to the “non soft drink industry”. They diversified into tea, coffee, fruit juices, hot chocolates and other similar products. Pepsi even merged itself with Frito-Lay which was then the most dominant among the snack food industry. It was renamed as PepsiCo. In 1950, under the leadership of Woodruff novel advertising statements like “American’s Preferred Taste” and “No wonder coke Refreshes Best” were introduced. This was the consequence of the fierce competition that it was facing from Pepsi and other competitors. During the year 1960, Coke concentrated on overseas market as its domestic market had already became saturated. On the other hand Pepsi fought aggressively in U.S. and consequently doubled its production between 1950 and 1970. Functional Tactics Above mentioned are some of the short term tactics that a business undertakes to achieve competitive advantage over its competitors. One such measure was taken up by Coke where it gave a significant amount of rebate to the “Burger King franchisees” that were paying “$6.2 per gallon of Coke syrup”. One of the franchisees called “Midwestern Burger King” received a rebate which amounted to “$1.45 per gallon”. Another tactic introduced by Pepsi was the launching of the “Pepsi Generation”. This was mainly targeted at the young generation. This launch helped Pepsi to lead against Coke by a “2 to 1” margin. Thus, it can be inferred that a small functional tactic can lead to a significant change in the sales and revenue of a company. Policies that Empower Action The four major elements that contribute to the production and the supply of the CSDs are concentrate producers, bottlers, retail channels and suppliers. The concentrate producers were responsible for advertising, promoting, market research and bottler relations. Marketing activities are not only implemented but are also financed by the concentrate producers. Bottlers are directly responsible for the sale of soft drinks. Bottlers account for the distribution of the product across the country. Bottling is a process which is capital intensive and involves specialized techniques. Retail channels serve as the most important means of distribution of the CSDs. Pepsi has concentrated its sell through retail channels whereas Coke has emphasized on fountain sales. Restructuring, Reengineering and Refocusing the Organisation An organization should constantly change its structure and policies to meet the growing needs of the market. Managers always try to maintain a market oriented approach. They formulate and implement strategies for functional tactics and action plans. At times they have changed their product composition and at times they have introduced new brand names. Both Pepsi and Coke have tried to diversify themselves into snacks items from the conventional beverage ones. Often they have tied up with the leading snacks and beverage restaurants. With the market growing more competitive, they have changed their strategies to suit the varied needs. This includes giving price cuts, rebates, increasing costs on advertising, etc. More often one move taken by a company has resulted in the counter action taken by the competing firm. Strategic Control and Continuous Improvement It is said that the success of one company is dependent on the existence of the other. Coke would not have flourished in the way it has, had Pepsi not existed. Initially the CSD industry used to function as a single body, but the cold war began when their products began to advertise for themselves independently. Analysis from a Theoretical Framework from two articles from the course In the year 1950, Coke took up a very aggressive approach of building its brand name with innovative quotations like “American’s Preferred Taste” and “No Wonder Coke Refreshes Best”. This strategy was taken as a measure to compete with the strong competitors in the market. This kind of an aggressive policy is not considered as legal. Firstly, questions may come up like “what is the proof that Coke refreshes best?” If such a statement is used it should be complemented with proper statistics and proof. Secondly, such an approach compels other competitor to counter it with a more aggressive policy. This might result in the company losing many of its loyal customers. It is always advisable to advertise the positive side of the company’s own products. This automatically improves the sales and broadens the customer base. Another common approach that firms take is following the steps of its competitors. As soon as Coke introduced new brands like Cherry Coke and Caffeine Free Coke, Pepsi also did the same. Companies must realize that taking such a step will not prove beneficial for either firm in the long run. Instead of taking the same approach a unique and different mode of action should be chosen. Implication of the case for Middle Managers Middle managers are the ones who head specific departments. In this case, most of the activities are taken care of by the middle managers, especially the sales and revenue managers. Sales and marketing comprises the most important activity in a retail sales structure. Another department which accounts for the maximum revenue in such companies is advertising. Coke and Pepsi generate the maximum revenue through advertising. Middle managers always need to modify their advertising campaigns according to the growing needs of the customers. Thus, for companies like Coke and Pepsi, it can be inferred that the functions of the middle managers are the most important. Conclusion The above case analyses the strategies taken by the two companies Coke and Pepsi in order to survive in the market. It attempts to study the manner in which each one has survived competition from its counterpart and has emerged successfully. It concludes with the realization that success of one can be attributed to the existence of the other. References Yoffie, D. B. (January 27, 2004), Cola Wars Continue: Coke and Pepsi in the 21st century, Harvard Business School. Read More