The Five Force Model Analysis - Coca-Cola Company - Case Study Example

Coca-Cola Company Name Professor Date PROJECT REPORT ON MULTINATIONAL ENTERPRISE THE COCA-COLA COMPANY Introduction Companies are increasingly becoming global. The domestic markets for these companies have many participants that there is pressure on sales and profits made by the company. The domestic market is smaller as compared to the international market where there are big companies. The slow growth of the domestic does not favor the growth of companies. The company would choose to venture into the international market to achieve a higher growth rate. For instance, the coca cola company has ventured into the international business through spreading its production functions all over the globe (Anon, 2015, 1). The multinational corporations have various areas of growth and stagnation in the form of strengths, weakness, opportunities, and threats. Use of technology is one way of marketing a company’s product globally. Most individuals use the Internet through smartphones and tablets. Therefore, there should be a relationship between the ICT industry in the company’s marketing sector so as to keep up the fast-paced lifestyle in the today’s world. Efficient data interpretation would help the company to have a loyal relationship with its global customers (Slideshare.net, 2015, 1). Demand for products are more localized and regionalized despite the globalization. The fact translates to customer convenience. Social media provides multinational industries with the ability to have instant feedback on the products and services that they offer. Coca-Cola operates globally in various communities on a local scale. Coca-cola has a strong coca cola system that consists of various bottling partners and the company itself. The company does not have a direct control over its bottling partners. The bottling partners work closely with the company customers in executing strategies in partnership developments. The legal and management system of the coca cola company is so complex that the bottling partners need to be formed to determine the feasibility. COMPARATIVE ADVANTAGE There are two types of competitive advantage. One, cost advantage is a competitive advantage that exists whereby a firm is capable of delivering same benefits as its competitors at a relatively lower price. Secondly, differentiation advantage is whereby a firm has something that is unique beyond just offering low prices to the customers. The coca cola company has used various methods to conquer the market to have an additional competitive advantage as compared to other beverage firms (Auernheimer, 2003, 34). International Agents and International Distributors Having oversea agents is one of the initial steps in getting into the international market. Agents are the contractors who are allowed to do business on behalf of a company in a particular country (Reeve, 2002, 67). The agents do not take ownership of the products but get a commission on any product sold. Distributors are a sort of agents, but the distributors take ownership of the products. Strategic Alliance Strategic alliance explains a series of an interrelationship between various companies in a global market. Some of the strategic alliances include research and development arrangements, marketing arrangements and distribution alliances among others (Parab, 2015, 34). The strategic alliance is non-equity agreements. The companies making the agreement remain separate and independent. Joint Venture Under the joint venture, there are equity-based agreements between the companies. The new company called the joint venture comprises of parties owning sections of the venture (Marketingteacher.com, 2015, 132). There are various reasons for a joint venture. First, technology access and managerial skills are one of the reasons for a joint venture. Second, the gain of entry to an oversea market may be a reason for a joint venture. The Five Force Model Analyses Threat of new entrants Coca-Cola Company faces an increasing threat from the number of new brands that appear on the market with the same price as the coca cola products. Coca-cola is a brand despite being a beverage. The coca cola company has a greater market share compared to other beverage, and the customers are not willing to try other bands. The two main beverage companies, Coke, and Pepsi has various methods of erecting barriers to the market. The two firms have created, and exploited economies of scale have an aggressive product difference and have high switching costs that would discourage other firms. Global Carbonated Market Share % value Coca-Cola 47 Pepsi Cola 21 Cadbury Schweppes 8 Cott 2 AmBev 1 Others 21 Total 100 Source: Adapted from www.foodlineweb.co.uk Threat of substitutes The coca cola products face a threat from other substitutes such as energy drinks and juice products. On the other hand, Coca-cola does not have a precise, unique flavor because one is unable to difference of Pepsi and Coca-cola on a blind taste test. Since the company faces a huge threat of substitutes by other products like water, tea, and coffee, the company has improved its effectiveness as compared to the other products. For instance, coca cola offers a better product service with a variety of features. Bargaining power of buyers Coca-cola does not face any pressure from individual buyers, but big retailers such as Wal-Mart have a bargaining power since they make an order in large quantities. The customer loyalty dissolves the retailer bargaining power. The company has reduced buyer uniqueness through differentiated products, forward integration, and new customers. The reduction in uniqueness helps the company to avoid pressure that would be caused by the customers. Rivalry among Existing Firms Pepsi is the main competitor that coca cola faces. Both Pepsi and Coke are the main beverages that are committed to sponsor outdoor activities. In neutralizing the existing rivalry between Pepsi and Coca-Cola products, the company competes through using the non-price dimensions such as cooperation with customers, retailer, and distributors, differentiation and cost leadership. The coca cola company leads in the soft drink market because it offers prices that are favorable among all its distributors and retailers. Pepsi and Coke dominate the beverage industry. The market is a duopoly since there are only two industries competing. Coke and Pepsi have the majority market share. There is a low competition in the market. The two companies compete in the modes of differentiation and advertisement. The beverage industry faces a numerous number of substitutes such s tea, water, juices among other drinks (Parab, 2015, 34). The substitute’s distributors need to have a comprehensive advertising system to ensure that customers can access the products with no effort. Food store, college canteens and restaurants are the main buyers of products from the soft drink companies. The generation of revenue determines the bargaining power of consumers. Moreover, suppliers of such as materials like color, sugar and flavor among other raw materials have a low bargaining power. Major areas of growth and stagnation of Coca-Cola Strengths Coca-Cola is the best global brand in terms of the value of its product. The coca cola company is a valued company in the world and also holds the largest beverage share globally. The marketing and advertisement of the company are strong. This strength is because of the increase in the company sales and brand recognition brought by the company advertising expenses. The company also enjoys an extensive beverage channel distribution and loyal customer groups (Coca-cla.com, 2015, 1). Moreover, since Coca-Cola Company is one of the largest global beverage producers, it has a significant influence on the price of the suppliers. Therefore, the company gets the lowest possible price that is available. Weakness The company provides its products in a short term strategy. For instance, it focuses much on carbonated drinks that work best in emerging economies but would be weak since the world is currently fighting obesity. The company has undiversified product portfolio since it exclusively deals with beverages. The overall soft drink consumption is becoming stagnant, and the company finds it difficult in penetrating the global market. There is an increase in the debt level of the company caused by the acquisition that the company makes. Also, the company faces critics for consuming much water in regions that face water shortage and the use of harmful ingredients in the production of the soft drinks. Opportunities There is an increasing demand for healthy beverages and food to fight obesity. The Coca-Cola Company would use this opportunity to expand its sales if I can produce products with low sugar and calorie level (Slideshare.net, 2015, 1). Bottled water consumption is also increasing globally and should encourage the coca cola company to venture into the production of bottled water. An increase in the consumption of beverages and soft drinks in the global emerging markets where the company would maintain or increase the market share of its beverages is a great opportunity for the company. The acquisition would also lead to a significant growth of the company and market penetration. Threats One of the threats that the coca cola company faces is changes in consumer tastes and preferences. Individuals around the world now prefer taking drinks with low sugar and calorie level. The scarcity of water also poses a threat to the company (Reeve, 2002, 67). The company requires lots of water in production and therefore, faces critics from regions with water shortage. Some carbonated drinks have significant health consequences, and the company needs to pass a legislation that prevents the disclosure of such information to the consumers. There might be a loss of customers if the information gets to the consumers. There is a stiff competition between the coca cola company and the PepsiCo over the market share. In solving the problem of the company impact on the environment, the company implements ways to have a reduction of water and energy used. Strategies and structures used by Coca-Cola Company Since credit constraints limit the extent to which exports are vulnerable to financial stress, companies face a reduction of exports of goods to other countries in times of financial crisis. Coca-cola Company being a multinational enterprise faces various challenges and need to have various strategies and structure to eliminate such difficulties. The company has developed a unique, market-tested formula with a unique recipe (Parab, 2015, 34). The company also uses of the timeless font in the logo print distinguishes the coca cola products from those products from the competitors. These strategies, among other strategies, have helped the coca cola company to withstand the harsh international business market environment. A unique, market-tested formula John Pemberton once wanted to develop a version of coca wines but due to the prohibition law, this was not achieved since it prohibits the production of alcoholic versions of soft drinks. After making trials on the new versions of sodas, Pemberton had a feedback on various soda concoctions. The feedback helped him to develop a unique recipe that connects to customer taste preferences (Investors, 2015, 154). Coca-Cola logo uses a timeless font The Coca-Cola logo is written in Spenserian script a Pemberton's bookkeeper, Frank Mason Robinson, decided that Coca-Cola's logo should be in the Spenserian script accountants since it would distinguish it from the competitors' logo. The company had a standardized logo in the year 1923. The company then decided that while packaging could adjust to the times, the core logo was to be untouched. The logo has become an imprint on individual minds of coca cola customers around the world (Google Books, 2015, 1). A proprietary bottle distribution After a business person called Asa Giggs the majority shareholder in 1888, he intended to popularize the cola drinks through regional partnership and marketing. In 1915, Asa lost a majority of market share to competitors and launched a new bottle contest on the bottle design. The contest was to prove that the company has a premium product that customers could confuse with the other drinks with similar bottling. The bottle design has acted as a defensive marketing tool (Heritage.org, 2015, 2). Fixed consumer price for 70 years It is common to find that various businesses start by offering products and services for free but charges higher prices when the business gets its roots (Legallyindia.com, 2011, 111). The coca cola company used this strategy but kept the prices fixed for a very long period. The Coca-Cola Company started the business at a lower price and had maintained this price for a very long time. Fixed product price has helped the customers to eliminate price speculation since there was no chance of a big change in price. Financial strategy of Coca-Cola Company Funding Strategy The funding strategy of the coca cola company bases its role on these main principles; • To raise finance through fully owned a Dutch financing subsidiary known as the Coca-Cola HBC. • To maintain company’s profile and the presence of the firm in the global capital market and to broaden the investor base wherever possible (Dfat.gov.au, 2015, 1). • Targeting specific investor segments through company diversification of currency and tenure. The company majorly uses the euro currency. To maintain a well-balanced redemption profile, and • Use the company’s European Medium Term Note Program together with the company’s Global Commercial Paper Program as the major sources of finance. Risk management policy The coca cola company activities experiences various financial risks such as the interest rate risk, liquidity risks, currency risk and credit risks. The group’s risk management section has to focus on the uncertainty of the financial market and need to reduce the effects on the company’s financial performance. Various multinational corporations invest in the foreign markets to take the advantage experienced in various economic conditions (Auernheimer, 2003, 34). Enterprises also venture into foreign markets if it speculates appreciation of the local currency compared to foreign currency. Enterprises receive credit from credit companies that use international financial markets to capitalize on foreign interest rates that are high (Marketingteacher.com, 2015, 132). The companies also expect foreign currencies to appreciate against their domestic currency. Borrowers, on the other hand, borrow from the international financial markets to invest on lower foreign interest rates and when they speculate the foreign currency to appreciate in comparison to the local currency. Multinational corporations may obtain funds from issuing stock in the international market. The coca cola company has sold various stocks in the international market that has enhanced the company brand recognition all over the world and has increased the shareholder base diversification. Location influences the decisions the company makes on where to place its stocks about the cash flow the company requires to cover payments of the dividend. The company also considers the market characteristics in the placement of its stocks (Coca-cola.com, 2015, 1). Foreign trade is the first corporate function where the company exports generate foreign cash flow while imports cause outflow. Second, the company direct foreign investment is whereby the company experiences a cash outflow due to the purchase of assets in the generation of future inflows. Multinational corporations may also involve in short-term investment in the Eurocurrency market. Finally, the MNC may have a long-term financing in the international stock market Google books, (2015, 1). The company uses financial derivatives such as options, swaps, and futures. These instruments functions are exclusively for hedging the exposures the company undergoes through foreign currency exchange. The financial instruments are not for trading purposes. Foreign exchange risk The company experiences a huge foreign currency risk that arises from the significant changes between the US dollar, the euro exchange rates, and currencies in the non-euro countries. The coca cola company also faces transaction exposes that comes about through the purchase of raw materials using the US dollar or the euro. The use of the two currencies may lead to higher cost of sales. Translation exposures arise as many of the company operations have functional currencies other than the euro. Any change in the company's functional currency against the euro has an impact on the company consolidated income statement and balance sheet when the company converts the results into the euro. The company has a treasury policy that needs a hedging that forecasts the transactional exposures with a calculated minimum and maximum percentage. A hedging above 12 months is subject to specific maximum levels of coverage so long as the forecasted transactions are highly probable. The company uses financial instruments whenever necessary to reduce the risk exposure to currency fluctuations (Investors et al., 2015, 234). Interest rate risk The coca cola group faces market risks that arise from changes in interest rates, commonly in the euro zones. The company periodically evaluates the mixture of floating and fixed rates that are desirable. The company also modifies the payment of interest based on the mixture of debt. The company then manages risks by making combinations of floating and fixed debt rates, options cap, and interest rate agreements. Credit risk The restrictive policy controls credit risk depending on the choice of treasury transactions by potential counterparties. The company manages its credit risk through the establishment of approved counterparty. The company also respects individual counterparty. The company reviews its limits on a frequent basis. Liquidity risk The company has a general policy that retains the minimum amount that it should hold as a liquidity reserve. The liquidity reserve should be in the form of cash. The company also maintains the liquidity reserve balances that include the daily funding of the company operations. The liquid reserve also includes financing models of the capital expenditure program. Between 2008 and 2009, there was a financial crisis and a great recession that brought with it a great collapse in trade activities (Dfat.gov.au, 2015, 1). The GDP fell by almost 30 percent in the two-year period. There are some explanations for the fall of the global GDP. The inventory adjustment rules for imports demand durable and nondurable goods and the role of the trade credit are some of the explanations of the change in the global GDP. There is evidence that supports the function of the credit constraints of a country’s imports and export. The credit constraint limits the extensive margins of exports in areas that are vulnerable to financial stress (Digitalcommons.liberty.edu, 2015, 1). These areas face a reduction of exports to other countries in times of financial crisis. The inventory adjustments lead to falling in the import since stocks adjust downwards. The combination of these factors explains the trade collapse. There was a fall of about 20 percent in the total exports of coca cola company products during 2008. The relative reduction in the manufacturers demand was the main cause of the decline of the manufacturing trade (Investors et al., 2015, 234). From the explanation above, we find out that supply chains were interrupted during the crisis. Countries differ in the probabilities of making mistakes making the equilibrium have a match between various production stages and countries. Intermediaries that provide services between sellers and buyers have a close relationship with the supply chain concept. The fragmentation of production across borders is also related to the supply chain. Production across borders in low-skilled tasks performs like a labor saving progress (Investors et al., 2015, 456). When there are unchanged prices of goods, the increase in offshoring will raise wages of laborers who are low skilled. Offshoring also has some effect on their volatility. The monopolistic competition model is one way to analyze the international trade. Trading patterns shows that firms that are more productive sell in more markets. For instance, Coke is one of the companies that have gained popularity in many countries globally thereby enjoying a wider market. Product quality and variety is one of the features of monopolistic competition model. Big firms are expected to be able to offer products and services at a lower price. In this case, Coke has favorable prices enabling it to sell even to the low-income countries (Fung and Tse, 2013, 56). REFERENCES Anon, (2015). [online] Available at: http://www.oecd.org/edu/imhe/Approaches%20to%20internationalisation%20-%20final%20-%20web. Pdf[Accessed 7 Oct. 2015].pg 1 Auernheimer, L. (2003). International financial markets.Chicago: University of Chicago Press.pg 34 Coca-cola.com, (2015). Coca-Cola Global: Soft Drinks & Beverage Products. 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