External Environment Analysis - Coca-Cola Company - Research Paper Example

? External Environment Analysis: Coca-Cola Company Insert Grade Insert 5 December External Environment Analysis: Coca-Cola Company Since its creation, the Coca-Cola Company has remained to be the largest beverage company in the world. The company has a product line that includes over 2,700 diverse items and operates in almost all the countries in the world (Deichert, 2006). The primary goal of the company is to develop soft drink concentrates and syrups to be sold to bottling companies that include the prime beverage distribution system in the world. Besides developing its products, the company is also responsible for marketing them. Their mission is to refresh people, provide inspiration to moments of optimism, create value, and make a difference (SlideShare, 2008). However, as the company strives to achieve its goals and maintain its status quo, it is faced with a number of challenges, which it must overcome to stay at the top of the beverage industry. For example, the company faces stiff competition from its rivals, and thus, to stay at the top of the game, it must evaluate and improve its business strategies. Therefore, this paper provides an external analysis of the factors that affect the coca-cola company. The analysis is provided with reference to Porter’s five Forces model and PEST analysis. Porter’s Five Forces Analysis of Market Structure This model is often used to analyze the competitive structure of an industry. It analyses the attractiveness of a company or the ability of a company to make profits by considering five forces or factors within a market (Tutor2u, 2011). The five factors include: Threat of New Entrants New entrants to an industry often increase competition level and thus lowering the attractiveness of the industry. The danger of new entrants marjory depends on the barriers to entry (Tutor2u, 2011). In the soft drink industry where the Coca-Cola Company operates, new entrants are not a strong competitive pressure because the industry is completely saturated and growth is little (Deichert, 2006). The only companies that dominate the industry are the Coca-Cola Company and the Pepsi Co, which have strong brand names and enormous distribution channels. In addition, the high fixed costs for warehouses, labor, transport, and economies of scale bar new entrants into the industry. Therefore, with the high capital requirement and operation costs involved, companies find it very difficult to enter the soft drink industry (Gaudet, 2008). Threat of Substitute Products The availability of substitute products lowers a company’s attractiveness and profitability by limiting its price levels. For coca-cola company, the substitute products are those products that are produced by competitors who are not in the soft drink industry, for example bottled water, coffee, juice, sports drinks and tea (Gaudet, 2008). Consequently, with the growing health concerns, the risk of substitute products has become a very strong challenge for the coca-cola company (Deichert, 2006). People have become health conscious and have started drinking less of the products that contain empty calories but instead consume juice, bottled water and sports drinks which have health benefits. Subsequently, this has threatened the market position of coca-cola company and although it has tried to address this risk by coming up with healthier drinks such as bottled water and juices, it is yet to maximize on it. Bargaining Power of Suppliers The suppliers are the people or businesses that provide the industry with raw materials and other products. A company’s profitability depends on the bargaining power of suppliers (Tutor2u, 2011). The raw materials required for the production of Coca-Cola products are sugar and packaging. Sugar is readily available; therefore, the company has good bargaining power and can easily switch the suppliers of the product. The company also has greater bargaining power on its packaging supplier as it is the largest shareholder of Coca-Cola Enterprises (it owns about 40 percent of the company) which is the largest coke bottler in the world. Bargaining Power of Buyers Large grocers, discount stores, and restaurants are the main buyers of coca-cola and other soft drinks. Soft drink companies such as Coca-Cola sell their products to these stores who in turn sell them to the consumers. The discount stores and the large grocers have greater bargaining power than the restaurants because they buy large volumes of the product. However, this bargaining power is likely to increase as the number of people consuming soft drinks is decreasing due to health concerns (Gaudet, 2008). Intensity of Rivalry The industry of soft drinks is very competitive. The Coca-Cola Company mainly faces stiff competition from its rival seller, Pepsi Co. Although it is the most established company, it has remained in constant power struggles with Pepsi Co. (Murray, 2006). Ever since it was established, the coca-cola company has always dominated the soft drink industry. However, in 2004 Pepsi Co. had sales worth $22 billion in North America, whereas the coca-cola company had about $6.7 billion. In addition, due to billion of dollars spent in advertising in 2005, Pepsi Co. for the first time registered higher sales than the Coca-Cola Company (Murray, 2006). Therefore, to outdo its competitors especially Pepsi Co., the Coca-Cola Company must carry on proper and responsible marketing. PEST Analysis Whereas the porter’s analysis looks at the conditions in a specific industry, the PEST analysis looks at the factors that affect the greater business environment. The sub-environments addressed by the model include political, economic, socio-cultural, and technical (Osborne and Brown, 2005). The Coca-Cola Company is also affected by these factors and this paper gives the analysis. Political The legal/political factors that are likely to create environmental risks to the Coca-Cola Company include new legislations on food and beverage regulations. In most parts of the world, governments have become more involved in advertising of the products more so since it was alleged that the Coca-Cola Company was enticing retailers from selling their competitor’s brands (SlideShare, 2008). Nevertheless, many laws have been passed in this regard and new ones seem to threaten the company’s market position, as they are likely to increase overhead expenses and thus reduce its profit margin. Economic Factors The Coca-Cola Company gives contracts to most bottling companies in the world to create and distribute its soft drinks, therefore if the economy weakens, the companies are likely to be affected and in turn threaten the stability of the Coca-Cola Company itself. Furthermore, developing countries also depend on large companies such as coca-cola to boost their economies, thus if the company is threatened then the countries are also threatened economically (SlideShare, 2008). Socio-Cultural Factors The social and cultural factors that affect businesses vary from one country to another. Therefore, it is very vital for such factors to be considered by large companies such as coca-cola company. In recognition of this fact, the Coca-Cola Company has really tried to develop products and carry out market plans that respect each consumer’s distinctive values, cultures and beliefs (SlideShare, 2008). For example, due to cultural preference the Coca-Cola Company was forced to develop a unique formulation for sprite that was to be sold in Japan. The company has also produced products such as coca-cola zero, sports drinks and bottled water that please the twenty first century health conscious consumers (SlideShare, 2008). However, although the company has tried to meet this need, it must continue to do so by producing and marketing products that have health benefits. Technological Factors With the high competition in soft drink industry, technology remains the key tool in realizing great profits and beating competitors. Therefore, to become more efficient and out do its competitors in the business, the Coca-Cola Company must invest in technological research (SlideShare, 2008). Conclusion The Coca-Cola Company remains the largest beverage company in the world. With its marketing efforts, the company has managed to sustain profitability for over 90 years. In fact, the conviction that it is the absolute best beverage company in the world is passionately accepted by many people in the world. However, as the company benefits from its brand name reputation, it is faced with some threats that it must strive to fight to stay at the top of the game. The company must design marketing strategies that can enable it eliminate threats from viable competitors, substitute products, cultural differences and legislations. References Deichert, M. et al. (2006). Industry Analysis: Soft Drinks, Strategic Management in a Global Context. Retrieved December 6, 2011 from http://www.csbsju.edu/Documents/libraries/zeigler_paper.pdf Gaudet B. (2008). Coca-Cola. Retrieved December 6, 2011 from http://web.me.com/briangaudet/ThePatientInvestor/Company_Analysis_Examples_files/KO.pdf Murray, B. (2006). Carbonated Beverages. Hoovers. Retrieved December 6, 2011, from http://premium.hoovers.com/subscribe/ind/overview.xhtml?HICID=1049. Osborne, S., & Brown, K. (2005). Managing Change and Innovation in Public Service Organizations. London: Routledge. SlideShare. (2008). The Coca Cola Company. Retrieved December 6, 2011 from http://www.slideshare.net/dgclip1981/the-coca-cola-company Tutor2u. (2011). Strategy: Porter's Five Forces Model: Analysing Industry structure. Retrieved December 6, 2011 from http://tutor2u.net/business/strategy/porter_five_forces.htm Read More