Management and Organization Theory of Coca-Cola - Case Study Example

Understanding Orgаnisаtiоns: Theory and Practice Student Name: Student ID: 1. Description of Organization Coca-Cola is one of the world largest beverage companies with more than 500 brands of non alcoholic drinks. The company has four of the world top five non alcoholic drinks which are; Coca-Cola, diet coke, Fanta and Sprite. The company operations are in more than 200 countries. The company accounts for 1.9 billion of the 57 billion beverages that are served daily globally. The company was incorporated in 1919 in USA (Coca-Cola Company, 2014). Coca-Cola faces high competition in a non-alcoholic drinks market. Major competitors are; Nestle, DPSG, kraft Foods Group Inc. and Uniliver Group. Despite the high competition in the market, the company have done remarkably well becoming the market leader. As at 2013, Coca-Cola had 130,600 employees. In 2014, the company had 239,010 shareholders (Coca-Cola Company, 2014). The company goal has been to utilise their resources which include, brand, finances, strong distribution system, global presence, talent and management commitment to retain and strengthen their competitiveness (Coca-Cola Company, 2014). This is in a way that enhances their shareholders value. Justification Despite stiff competition in the non-alcoholic beverages market, Coca-Cola has been performing impressively. The company has maintained strong sales globally proving a high level of success. The company has faced strong competitors and have been able to change with trends such as pressure to have healthy drinks. This has triggered my interest to use Coca-Cola as my organisation of focus. The organisation has been able to strategically take over the non-alcoholic drink, market making it a great target organisation to analyse. 2. Selected Theories for Analysis of Coca-Cola Agency theory considers the relationship that exists where one person (principal) engages another person (Agent) in a contract. This involves the principal delegating some of their powers to the agent to perform a service on their behalf (Miles, 2012). This will help in analysing how stakeholders in Coca-Cola have given management decision making authority and the relationship that exists. The theory is based on the separation of ownership and control. In this case, Coca-Cola board of directors are the principals while managers are the agents. Agency theory will give insight on agent principal relationships that exist at Coca-Cola. Agency theory asserts that the interest of the principals and agents conflicts (Miles, 2012). The principal has a role to ensure that they minimise the divergent in the interest. This is through coming up with appropriate incentives. This theory will help in determining how Coca-Cola has been able to design incentives to reduce the agency costs. Sensemaking theory involves structuring for the unknown. This involves an event that helps an organisation to change its behaviour. According to Weick (1995), the theory involves trying to explain the unknown. In Coca-Cola perspective, Sensemaking will help to understand shifts in the market, change in technology and change in customer taste and how the organisation have learned from them. Once the event has happened, patterns are identified and changes effected (Weick, Sutcliffe & Obstfeld, 2005). This will help in identifying how Coca-Cola has been able to identify change through events and how their adaptation to these events has shaped the organisation behaviour. When the environment is changing very fast, organisations are presented with surprises that they are not prepared of. They have to come up with adaptive measures as a response. Sensemaking helps to determine how Coca-Cola has come up with plausible understanding and testing them through actions. This involves improving understanding after a new event and adapting to change as it occurs. Coca-Cola has been involved in a lot of events that have shaped their understanding and success. This will be well elaborated using Sensemaking theory. 3. Seminal Papers and Analysis of Coca-Cola Management and organisation theory by Miles (2012) provides a comprehensive understanding of agency theory. The author explains agency theory among other organisation theories. In agency theory, the paper explains the divergence that exists in the relationship between agent and principals (Miles, 2012). Miles clearly outlines the agency costs that the principal has to incur when trying to limit any opportunistic act by the agent. Coca-Cola has been able to maintain a strong agent principal relationship. This is through the use of appropriate incentives and bonding costs. Agency Costs and Ownership Structure by Ang, Cole & Lin (2000) looks critically at the equity agency costs on organisations with differing management structures. The paper refers to Meckling’s work, based on zero agency cost organisation. Zero agency cost can only occur when the manager acts as the sole shareholder. The paper analyses small corporations and comes to conclusion that agency costs can be reduced when the organisation is run by an insider among other factors. Due to fact that the organisation management is by insiders, there are agency costs (Ang, Cole & Lin, 2000). Coca-Cola is not run by an insider but has managed to keep its agency costs low. The organisation has been able to constantly monitor and come up with incentives that will enable agency costs to reduce. Sensemaking in Organizations, by Weick (1995) the author looks at how organisations make sense from within and around. He outlines the three stages of Sensemaking as perceptions, interpretations and actions. He defines Sensemaking as a process carried out with a general perspective (Weick, 1995). The paper will help to further analyse Sensemaking at Coca-Cola by determining how at basic level, institutions becomes part of Sensemaking. Coca-Cola has always played a role in Sensemaking as a supplier of those carrying out the process. The paper develops a comprehensive perspective of the institutional elements that are involved in Sensemaking (Weick, 1995). This will help in determining the institutional elements that have been involved in Sensemaking. Organising and the process of Sensemaking by Weick, Sutcliffe & Obstfeld (2005), the paper looks at Sensemaking as a situation which serves as a spring back for the organisation. The authors take a position that Sensemaking theory plays an important part in making organisation theory complete (Weick, Sutcliffe & Obstfeld, 2005). In this case, it helps the organisation to change its human behaviour. Several incidents have happened at Coca-Cola that has shaped organisation and human behaviour. There have been issues such as pressure from health activists and scandals that have shaped the organisation behaviour. The paper looks at Sensemaking as more future oriented concept and highly tied to organising. 4. Organizational Issues with the Lens of Selected Theories Agency theory Agency theory when used by an organisation helps a lot in establishing principal agent relationship in an organisation. It also helps a lot in identifying the divergence that exists in this relationship and how the organisation is working to reduce it (Ang, Cole & Lin, 2000). Agency costs exist and are reduced through incentives. While Coca-Cola has been successful in the non alcoholic drinks market, it has faced principal agents’ problems in the past. The way in which the organisation has dealt with principal agent problems have helped in maintaining profits over the years. To reduce agent costs, Coca-Cola has the best incentives in the soft drink industry. The industry has ensured that the costs of the contracts with the agents do not exceed the benefits (Miles, 2012). This is through the use of external monitoring firms such as PriceWaterhouseCoopers and KPMG to carry out audit as well as internal audit. This eliminates any form of opportunism among the agents and helps to steer away from agents scandals. This can be explained by the theory of incentives contained at agency theory (Ang, Cole & Lin, 2000). Employees at Coca-Cola are highly motivated through rewards and good remuneration making them loyal to the organisation. At Coca-Cola, the management may incur financial cost if they make an opportunistic decision. The organisation had been affected earlier by gray market. This led to disfranchising the offenders in the US market. There are still cases of parallel imports, especially in Japan which have affected the market. This opportunistic behaviour has been monitored and the company is working in ensuring that the principal is protected from opportunist agent. Sensemaking theory Sensemaking theory looks at events that serve as a spring back for the organisation. An occurrence acts as an experience which leads to new knowledge and change in behaviour (Weick, Sutcliffe & Obstfeld, 2005). Events have an impact on the systems and management on the way they respond to issues that arise. Coca-Cola has been involved in several events which have helped them in learning. With Pepsi gaining market share, Coca-Cola tried to replace their original coke drink with a new drink in 1990s (Kong & Ruggeri, 2012). The company failed to consult the consumers and came up with the new drink. The new product was met with backlash from the public and it failed terribly. The organisation was able to learn from the event and understand the need for using real world data when coming up with new products. The event acted as a turning point for Coca-Cola. This can be well looked at as Sensemaking. In 2004, the organisation started the launch of New Coke. The organisation had learned from the earlier event and was more careful this time. The event had taught them to consult widely and rely on real world data when launching a product. The second product was a major success. These shows how through Sensemaking Coca-Cola have changed their organisational behaviour. The first event acted as a springboard where the organisation was able to learn how to deal with changes (Kong & Ruggeri, 2012). The event brings new knowledge and the organisation is able to learn new tactics and eliminate habits that are outdated (Weick, 1995). 5. Limitation of Theories for Analysis of Coca-Cola Issues at Coca-Cola that can’t be discussed with the lens of Agency theory Agency theory has been criticised due to excessive risk taking and failure in corporate governance. The theory has been associated with eroding organisation ethics through increased risk taking. This makes it hard to use agency theory to justify risk taking at Coca-Cola. The primary objective of organisations is to maximise shareholders value. The theory supports risk taking to maximise shareholders value but does not look at the effect it has on ethics and morality. The manner in which risks are taken disregards social responsibility through focusing mostly on maximising shareholders returns. The assumptions made by the theory that maximisation of shareholders returns leads to enhanced social welfare are unrealistic and faulty (Miles, 2012). This may lead to management engaging in illegal activities to maximise shareholders value such as excessive use of water by Coca-Cola which affects communities around. Issues at Coca-Cola that can’t be discussed with the Sensemaking theory Sensemaking theory has been criticised by several researchers as a self fulfilling prophecy. The theory has been seen as unrealistic in some instances (Weick, 1995). This implies that people may create the meaning that they think is appropriate without considering the environment. This may lead to biased interpretations of events at Coca-Cola. People are more likely to act to the events that they have already predicted their outcome (Brown, 2000). The theory supports reacting after behaving. This inhibits changing outcomes if people had thought before they acted. It’s hard to use Sensemaking to determine the learning process at Coca-Cola. This is due to fact that action by the managers comes before they make sense. In this case, Coca-Cola management ought to have made sense before acting. Using the theory, it becomes hard to determine the organisation forward thinking (Miles, 2012). 6. Different Stakeholders’ Perspectives Coca-Cola has come under criticisms in some of their areas of operations. They have been accused by the communities of violating environmental laws in some cases due to the amount of water the company uses. This has forced the company to act and involve the communities in their operations to ensure they are more ethical (Bouissou, J. 2011). There is a section of consumers who see the company products to be unhealthy. This has led to the company reducing the amount of sugar in their drinks. The company has always claimed to operate in an ethical manner but criticism has persisted. This led to introduction of diet coke for the healthy conscious consumers. Competitors in several markets have looked at the company as a monopoly. Their dominance in the several markets has made it hard to have fair competition in some regions. This has led to criticism by competitors. Market division strategy has helped Coca-Cola to create these monopolies with an aim of maximising profits. The company have also come under criticism by authorities due to their aggressive marketing activities aimed at children. This was seen as a means of making profits at the expense of children health. Coca-Cola in this case was seen as unethical and had to ensure that their advertising does not lure kids. Most of the distributors have been forced to place non-alcoholic drinks which have more sugar and higher shelves and avoid advertising in kids’ areas. This is another case where agents have acted in violation of ethics to maximise shareholders value. 7. Understanding of Different Stakeholders’ Perspectives In order to understand community perspective, one has to understand that water which is the main raw material for Coca-Cola is also vital for the community. Any excessive usage of water will have negative impact on the community (Bouissou, J. 2011). Despite this, Coca-Cola management has a mandate to maximise shareholders value based on agency theory. This may lead to management acting unethically to maximise shareholders value (Miles, 2012). This brings the existing conflicts which can be resolved by the company working together with community to ensure operations are ethical. As long as there is not well strategized corporate social responsibility (CSR), Coca-Cola will continue having conflicts with the communities. Consumers have become more demanding making it more challenging to maximise profits. Consumers are demanding healthy products and ethical operations. Organisations are required to operate based on consumers’ expectations to avoid losing market share. Coca-Cola has to look for a common ground where it will be possible to maximise profits while at the same time operating ethically. It has been proved that being more consumers centred creates a long term shareholders value (Miles, 2012). Coca-Cola has to continue enhancing their market presence despite criticism by competitors. With the current price wars in the non-alcoholic drinks market, they have to ensure they dominate the market. For example, despite Coca-Cola dominance in Chinese market, areas such as Shanghai are very competitive with Pepsi selling at lower prices. This leads to Coca-Cola lowering their profits hence reducing profits for the region. By dominating the market, Coca-Cola enjoys economies of scale hence agents can fulfil their mandate to stakeholders by maximising the profits. References Ang, J. S., Cole, R. A., & Lin, J. W. 2000. “Agency costs and ownership structure.” The Journal of Finance, Vol.55, no.1, p.81-106. Bouissou, J. 2011. Campaign to Stop Killer Coke: Coca-Cola at the center of conflicts over water in India. Retrieved from http://killercoke.org/article_110306lecture_d-yves.php Brown, A. 2000. “Making sense of inquiry Sensemaking.” Journal of Management Studies, Vol.37, no.2, p. 45-75. Coca-Cola Company, 2014. Annual report, Delaware: Coca-Cola company, Retrieved 27th March 2015, http://assets.coca- colacompany.com/d0/c1/7afc6e6949c8adf1168a3328b2ad/2013-annual-report-on-form- 10-k.pdf Kong, C. & Ruggeri, G. 2012. “Stevens, Knowledge In Real World Situations: A Diagrammatic Funnel Model,” Journal of Knowledge Management Practice, Vol. 13, no. 2 (online). Miles, J. A. 2012. Management and organization theory: A Jossey-Bass reader. San Francisco, Calif: Jossey-Bass. Weick, K.E., Sutcliffe, K.M., & Obstfeld, D. 2005. “Organizing and the process of sensemaking,” Organization Science, Vol.16, p.409-421. Weick, K.E. 1995. Sensemaking in organizations. Thousand Oaks, CA: Sage. Read More