Managerial Economics at Coca Cola - Case Study Example

Managerial economics at Coca Cola Insert Insert Insert Insert Introduction Coca Cola is the largest soft-drink manufacturer in the world. The company only manufactures the concentrate and ships it to its various bottlers in other parts of the world. It is the role of the bottlers to mix the concentrate with sweetener and water in order to produce the final product. Bottlers also distribute the final products to retailers, food providers and other consumers. However, for Coca-Cola to remain the world’s largest manufacturer of soft drinks there are questions Coca Cola has to answer. If Coca-Cola raises the price of its products, what would happen to its competitors? How would such a price increase affect the demand of its products? What is the relationship between advertising and pricing? How do changes in the market affect Coca Cola? Only managerial economics can answer these questions. Managerial economics involves directing scarce resources to manage cost effectively. When resources are scarce, managers need to make effective decisions using knowledge from managerial economics (Hirschey, 2008). The decisions may involve customers, suppliers, competitors, or the internal environment of the business. Coca-Cola has limited financial, human and physical resources. Coca-Cola managers need to maximize financial returns for the company from these scarce resources. Therefore, managers apply managerial skills and approaches to run different functional areas of the company. This paper evaluates the application of managerial concepts at Coca-Cola Company. Five managerial concepts mark the scope of this paper. These include competitive strategies, pricing strategies, Marginal analysis, shareholder maximization and Market structure decisions. Competitive strategies Successful companies develop strategies that focus on weaknesses of their competitors. Competition-oriented companies are successful in conquering markets. Such companies then develop approaches that strike weak point of their competitors. In such form of competition, the company that earns competitive advantage always emerge a winner. Differentiation, differentiation focus, cost focus and cost leadership are some of the common strategies companies use (Mirow, 2005). Coca-Cola gains competitive advantage by using some of these strategies in the soft drink industry. Differentiation strategy occurs when a company manufactures products that are unique and different from other companies. For instance, Coca-Cola produces products that are different from companies such as Pepsi. The difference arises from the fact that Coca-Cola can modify some of its ingredients. It is also possible for Coca-cola to increase the quality of its products. Higher quality products may allow the company to increase its prices. In addition, the company would earn customer loyalty and confidence. The higher premium charges for high quality products cover certain costs of production ensuring the company gets profits. Differentiated focus allows companies to produce different products within market ranges that are very narrow. Products like Coke Zero targeted the unique needs of a narrow market need and special needs of consumers. Coca-Cola also uses cost leadership strategy to gain competitive advantage over other companies. The company focuses at producing its products at the lowest possible costs. The fact that the firm can minimize its production costs allows Coca-Cola to products at prices that bring profits. If the selling price for the product is equal or close to the market price Coca-Cola will continue enjoying profits. The profits result from economies of scale for the company. In cost focus, Coca-Cola usually charges low prices on the same products for certain sections of the soft drink market. This strategy usually works for large scale production companies such as Coca-Cola that have many products but at the same time majority of consumers accept the products. Sometimes the company may decide to produce the same product differently and lower the prices. The low price tags are to benefit particular consumers in the market. This strategy usually leads to more sales than other competing companies in the soft drink industry. Manufacturing industries can use these strategies to gain competitive advantage in different markets (Amoako-Gyampah & Acquaah, 2008). Coca-Cola also implements a multi-segmentation strategy in its market. This includes implementation of different product/price/package portfolios according to market clusters. Coca-Cola defines these structure based on consumption occasion, competitive intensity and socio-economic levels. Pricing strategies Managers of big firms understand that to remain top in the market, firms develop various pricing strategies (Knorr and Zigova, 2004).Coca Cola pricing strategy is such that it sets its pricing at about the same level as its competitors. Therefore, consumers perceive Coca-Cola to be different but still affordable. Maintaining fluency and consistency in their pricing strategy is the secret for the success of Coca-Cola in the world beverage industry. Through competition from other companies, Coca-Cola is becoming smarter, faster and better in its development. Managers at Coca-Cola make pricing decisions that aim at maximizing shareholder value for the company. In order to get market share, competitors such as Pepsi start to drop prices. Knowing this, Coca-Cola decides to decrease their prices slightly but not for all its products. For example, in India or Pakistan, Coca Cola decided to reduce prices of their 200ml cans. Coca Cola uses lower price point as a strategy to penetrate new markets that are price-sensitive. Coca Cola uses its pricing strategy to face the competition and create brand awareness among consumers in the market. Once managers implement the pricing strategy the company repositions itself as a “premium” brand unlike its competitors. Coca Cola also uses cost plus pricing to earn profits. In this strategy the firm first estimates the average cost of producing, marketing or purchasing a product then adds an average charge to get an estimated fully allocated average cost. Successful pricing strategy includes additional approaches that do not necessarily rely on lowering prices (Cascio, 2006). Coca-Cola then adds a markup cost for profits. This is one of the best methods the company uses to remain top in the market. Coca-Cola also prices multiple products in a manner that ensures profitability of the company. In pricing of many products Coca-Cola produces interrelated products for instance substitutes or complements. For profit maximization Coca-Cola jointly determines the output levels and prices of various products not independently. The Company produces more than one product to maximize its plant and production capacities. Marginal analysis Through marginal analysis, managers can have a baseline for optimal resource allocation in the firm. Relationship between total and marginal plays a crucial role in facilitating marginal analysis in managerial decision making. Marginal analysis allows managers at Coca-Cola to make important decisions regarding resource allocation in the firm. Most importantly, they use marginal analysis to maximize profits or revenue (Hirschey, 2008). Marginal analysis deals with marginal value. The concept compares changes on the marginal unit with various other alternatives and adjusts depending on the proceeding decisions on resource allocation. Coca-Cola uses marginal analysis to make decisions on where to invest their capital. The use of Marginal analysis was evident at Coca-Cola in the 1980s when the company was under CEO Roberto Goizueta. The company was investing in a variety of drinks besides soft drinks for example coffee, tea and aquaculture. According to Wessels (1997), the investments were random with no intention of maximizing value for the company’s investments. The CEO noticed that the company could earn 16 percent more by making its investments out of the company. In this case, 16 percent was the marginal returns the investments could make. It was also clear that the other subsidiary businesses on the company were earning less that 16 percent. Marginal analysis enabled the CEO to stop funding any company’s business that was earning less than the marginal return. Through the approach, Coca-Cola was able to increase its stocks value (p. 11) Shareholder value maximization Companies that are successful in their markets use the first principle of shareholder value maximization (Rappaport, 2006). Unfortunately, many public companies prefer to depend on earning to earn market. Coca-Cola uses its powerful brand name to manufacture an enjoyable product for its consumers thus maintain a high shareholder value in the soft drink industry. The company maximizes its shareholder value based on its product and brand name strategy. Shareholder value maximization requires a company to develop a clear and effective strategy to conquer the market. To maximize shareholder value the firm needs to win customer satisfaction first. Today, customer satisfaction is one of the most important components of a successful business. Consumers are stakeholders who contribute to the success of the company. Satisfying consumers will indirectly create additional value for the firm. The Business strategy at Coca-Cola focuses on developing products that customers want. The reason is to develop products that satisfy customers. Coca-Cola uses the enormous company resources to invest in customer satisfaction. This strategy aims at increasing the shareholder’s value. Success of the strategy will occur when economic returns for the company over time exceed capital costs. Coca-Cola managers set prices of each product or service lower the price customers perceive but lower than the cost of capital. The company also uses many advertisements and promotional forums such as buy one give one to increase in customer satisfaction. The strategy is such that the price of the product favors both customers and suppliers while at the same time fits the market situation. Importantly the customer satisfaction strategy through using price variations can increase shareholder value for the company. Such a strategy ensures there is no conflict between maximizing shareholder value and customer satisfaction. This paper recommends Coca-Cola to make strategic decisions that maximize expected value of the company even if the decisions may lower near-term earnings. It is evident that most companies evaluate and compare strategic decisions in terms of impact on earnings. Instead, they should be concentrating increasing the value of future cash flows. Coca-Cola should conduct thorough strategic analysis in order to evaluate its expected value from a range of possible scenarios. Managers should also choose between short-term and long-term goals for the company when planning for shareholder value maximization. Because maximizing shareholder wealth maximization is a long term goal but achieving the goal may require many short-term decisions that contradict the expected value of shareholders (Joerg, Loderer, Roth, & Waelchli, 2006). Market structure decisions Understanding the market structure is essential for the success of a firm conducting business. However, Research and development can be very crucial for oligopoly markets (Tishler & Milstein, 2009). Managers make certain decisions depending on the market structure for the firm. The idea of market structure is important for managers and administrators in large companies. Managers need to understand the market structure for strategic decision making. During the decision-making process market structure can have much impacts on the manner in which managers and other company leaders make the decision. Competition determines and relates to the decision making process. A market’s structure has various stable features that influence buyers and sellers. These features are the main components that help in decision-making. Market structures can either be perfect competition, monopoly and oligopoly. Perfect competition is where buyers and sellers lack the power to determine prices. In monopolistic markets, many companies produce the same goods or services. Companies in this market structure set prices depending on the competition. For the case of an oligopoly market, there are few competitors in the market. The decision of one company may affect the decision of other companies. The number of sellers and buyers in an oligopoly market is small. In such markets therefore, consumers have the power to influence the decision of the sellers. In turn, the actions of companies such as Coca-Cola and other large firms are dependent on the market structure particularly market competitiveness and performance (Ciliberto & Tamer, 2009). Coca-Cola Company operates in an oligopoly market where the market has with few very large firms that compete. Typically, such a market has about four companies that dominate the industry. Though, other smaller firms may be present in such markets, the bigger firms such as Coca-Cola get more than 50 percent of the market’s revenue. An oligopoly such as Coca-Cola depends on product differentiation to remain in the market. This paper recommends managers at Coca-Cola to assess various market forces and understand the market structure before making important decision for the company. This is important because market forces drive the process of decision making in most companies. Major market forces include buyers, suppliers, competition and consumers. Conclusion Managerial economics is an important component for managers since it helps direct scarce resources in making decisions. Coca-Cola Company has limited financial, human and physical resources. In this regard, its managers need to understand managerial economics in order to maximize financial returns for the company. Differentiations, cost focus and cost leadership are some of the common strategies Coca-Cola uses to gain competitive advantage over other companies. Coca Cola also uses its pricing strategy to face the competition and create brand awareness among consumers in the market. Most pricing decisions at Coca-Cola aim at maximizing shareholder value for the company. Consumers are important stakeholders who contribute to the success Coca-Cola. Satisfying consumers will increase shareholder value for the firm. Coca-Cola focuses on developing products satisfy customers. The firm uses its enormous resources to invest in customer satisfaction. Through marginal analysis is another important managerial concept that helps managers in optimal resource allocation at Coca-Cola. Marginal analysis allows managers at Coca-Cola to make important decisions regarding resource allocation in the firm. In such decision-making process the market structure plays a crucial role through its impact on the decision-making environment. References Amoako-Gyampah, K., & Acquaah, M. (2008). Manufacturing strategy, competitive strategy and firm performance: An empirical study in a developing economy environment. International Journal of Production Economics,11(2), 575-592. Cascio, W. (2006). Decency Means More than "Always Low Prices": A Comparison of Costco to Wal-Marts Sams Club. Academy of Management Perspectives , 26-37. Ciliberto, F., & Tamer, E. (2009). Market structure and Multiple Equilibria in Airline Markets. Economrtrica, 77(6) , 1791-1828. Hirschey, M. (2008). Fundamentals of Managerial Economics. Cengage Learning. Joerg, P., Loderer, C., Roth, L., & Waelchli. (2006). The purpose of the corporation: Shareholder-value Maximization. ECGI Working Paper. Knorr, A., & Zigova, S. (2004). Competitive Advantage Thruogh Innovative Pricing Strategies: The Case of the Airline Industry. Institute for World Economics and International Management. Mirow, M. (2005). Strategies to Achieve MArket Leadership: The Example of Amazon. Rappaport, A. (2006). Ten Ways to Create Shareholder Value. Harvard Business Review , 1-13. Tishler, A., & Milstein, I. (2009). R&D wars and the effects of innovation on the success and survivability of firms in oligopoly markets. International Journal of Industrial Organization, 24(4), 519-531. Wessels, W. (1997). Microeconomics the Easy Way. Barrons Educational Series. Read More