Analysis of the Indian Soft Drink Industry through Porters National Diamond Model - Case Study Example

Heading: Indian Soft Drink Industry Your name: Course name: Professors’ name: Date Table of contents Introduction 4 Part A: 4 Analysis of the Indian soft drink industry 4 Porter’s National Diamond Model 4 PEST analysis 9 Porter’s Five Forces Model 11 Considerations 13 Conclusions and Recommendations 13 Part B: 14 Critical Evaluation of the PND Model 14 References 15 Introduction Today, there are many industries coming up in various parts of the world. The success of these businesses is determined by certain factors in a specific country. Particular industries succeed in some locations or countries, depending on the prevailing conditions and factors. Porter’s National Diamond Model attempts to examine this difference in business performance by employing some factors. In this paper, the model is discussed in relation to the analysis of the Indian Soft Drink industry. Moreover, the paper seeks to illuminate on some of the factors that an organization should consider before entering the Indian soft drink industry. Besides, the paper evaluates Porter’s National Diamond model in terms of its advantages and disadvantages, and its uses with respect to any country specific analysis. Part A: Analysis of the Indian soft drink industry Porter’s National Diamond Model The Porter’s diamond model refers to an economical model that was discovered by Michael Porter in order to explain why some industries are more competitive than others in specific locations (Morschett, Schramm-Klein, Zentes 2010, pp. 416-420). The model was later extended by some scholars. This model examines groups of industry’s industries in which one company’s competitiveness is associated with the other companies’ performance, and other factors intertwined in a value-added chain; regional or local; or in customer-client relation contexts (Ahlstrom & Bruton 2010, pp. 76-80). The analysis of Porter’s model took place in two steps. In the first step, groups of prosperous industries were mapped in 10 vital trading countries. In the second step, there was an examination of competition history in specific industries in order to clarify the active process involved in the creation of a competitive advantage (Rugman & Verbeke 2005, pp. 195-200). In these studies, the primary method applied is the historical analysis. Besides, Morschett, Schramm-Klein, Zentes (2010, pp. 416-420) maintain that in the analysis, the phenomena were categorized into six wide factors that are incorporated into the diamond model, and has since become the major competitiveness analysis tool. These factors include factor conditions that entail physical resources, human resources capital resources, knowledge resources, and infrastructure. According to Porter, specialized resources are normally particular for an industry and significant for its competiveness. In order to compensate for some factor disadvantages, specific resources may be created (Grant 2004, pp. 416-420). An industry’s competiveness can be brought about by demand conditions in a domestic market. This is possible when sophisticated local market purchasers put pressure on companies to quickly innovate and create more improved products than their business rivals. Supporting and related industries also play a major role in creation of internalization and innovation. These industries are instrumental in the provision of cost-effective inputs, yet they take part in the upgrading; hence, motivating other firms to innovate. Besides, Horn (2010, pp. 2-8) says that the company’s structure, strategy and rivalry is crucial in the determining an industry’s competitive advantage. This implies that the manner in which a company its goals, and management are essential for success. Nonetheless, the prevalence intense competition in domestic base is critical, for it pressurizes companies to innovation and upgrading of competitiveness. Another determinant of competiveness in a company is the government, which can affect the aforementioned factors in the local market (Morschett, Schramm-Klein, Zentes 2010, pp. 416-420). Clearly, government interventions may take place in regional, national local or supranational levels. The last determinant of competitiveness is an external factor; namely chance. This involves events or incidences that happen outside a company’s control. These events are crucial in the creation of discontinuities that cause some companies gain competiveness, and others to lose it (Horn 2010, pp. 2-8). In the extended version of the diamond model, Porter investigates why some countries succeed, whereas others fail in global competition. He asserts that countries are likely to prosper in industries in which the diamond is the most suitable. This diamond is sub-divided into factor conditions, demand conditions; supporting and related industries; firm structure, strategy, and rivalry; government; and chance (Horn 2010, pp. 2-8). Nevertheless, Porter failed to incorporate multinational activities; a factor that was integrated by Dunning so as to make the diamond model, a double diamond model. In the double model, a country’s competitiveness is brought about by both domestic and foreign companies. This also requires a geographical design spanning several nations, in which a company particular and location merits available in many countries are complementary. For many decades, there has been a stiff competition in the Indian soft-drink sector between the Pepsi and Coke for cola market. Nevertheless, the industry’s big players have started to rely on new product flavors and focus on non-carbonated drinks for their growth, because of the changing consumer concerns and preferences (Fernando 2009, pp. 54-56). Internationally, the industry’s market size has been undergoing gradual transformation. In fact, the non-alcoholic beverage consumption has a global market share of 46.8%. Besides, studies indicate that the total market of the soft-drink industry was $307.2 billion in 2004, and increased to 367.1 billion in 2009 (Langford 2001, pp. 139-143). Notably, the current non-alcoholic drinks industry was established by Dr. Johns Pemberton in 1886, an Atlanta pharmacist. He concocted the Cola in a brass kettle at his backyard. The New Coke concept was started in 1985 and henceforth, the drink’s sales have been drastically increased. In 1998, Caleb Bradham invented the Pepsi cola drink that competes with the Coca Cola. Therefore, in 1977, the major competing soft drink companies (Coca Cola and Pepsi Cola) entered the Indian market (Haezendonck 2001, pp. 121-125). However, by then, the Indian market was that favorable for foreign companies. This was due to certain factors that included political situation in India by then. The Indian political status was not friendly for any foreign investors, and that discouraged many companies. Later, in 1990, Pepsi Cola sold in India for the first time in about three decades after a six-year battle to sell soft-drinks in the Indian market. In 1997, Coca-Cola Company had to pay $40 million, so as to ensure fast-entry, to buy the Indian’s biggest brands, such as, Thumps-up, which was owned by a family. Nevertheless, the Indian soft-drink industry has been worse hit by environmental and health issues. Basing on the Porter’s National Diamond Model, the Indian soft drink industry is affected by some factors. The Indian soft drink industry is influenced by factor conditions, which entail infrastructure, human resources, knowledge resources, physical resources, and capital resources (Haezendonck 2001, pp. 121-125). In terms of the human resources, the industry has adequate affordable, committed and skilled labor to utilize in its operations. It also has enough physical resources that include space and natural resources essential for the industrial operations in the country. The country also has good infrastructural network that enhances the competitiveness of the soft-drink companies as compared to other those industries in other countries. These factor conditions in Indian are also greatly shaped by technological, political, socio-cultural, and environmental factors. Secondly, the Indian soft drink industry‘s competitiveness is largely determined by the country’s local demand conditions. This concerns the domestic demand for the locally produced services and products in the country (Langford 2001, pp. 139-143). India’s international advantage is reinforced by the high demand for global and local market. This has an effect on factor conditions as well as the industry’s direction and pace in the product and innovation development. Moreover, is also determined by a mixture of consumer needs, growth rate and scope, and mechanisms that communicate local preferences to overseas markets. Therefore, the Indian market influences the industry’s ability to recognize and satisfy its clients’ needs than the foreign companies. The third factor that determines the Indian soft drink industry is the supporting and related industries. The country has competitive supporting and supplying industries. Here, some of the global successful industries are influential in the success of the supporting or related industries. This is because the competitive supplying companies facilitate reinforcement of the other companies in terms of internationalization and innovation. Some of the soft drink industries in India include the Coca-Cola, Pepsi-cola, Frooti, Minute Maid, Nestea, and Maaza (Fernando 2009, pp. 54-56). Therefore, the country is not only successful in soft drink business, but also in related services and products. The firm’s structure, strategy and rivalry are also instrumental in the profitability of the soft-drink industry in India. These are conditions in India that determine how ways in which the industry’s establishment, organization and management. These conditions also determine the features of the local competition of the industry. According to Porter, local rivalry and search for competitiveness in a country may provide firms with bases for the attainment of such competitive advantage in a more international perspective. In India, the major competitive soft drink companies are the Pepsi-Cola and Coca-Cola companies (Kamdar 2007, pp. 170-175). Their rivalry is instrumental in further innovation and internationalization of their business. The government also plays a crucial role in determining the competitive advantage of the Indian soft drink industry. Here, the government plays the role of a challenger and catalyst so as to encourage and stimulate the competing companies to raise their ambitions and aspirations to higher levels than those in other countries. The Indian government plays this part very well so as to alert the soft drink companies to engage in serious and healthy innovation, in order to better their performance both locally and internationally. The government does through the enforcement of the anti-trust laws and restriction of their direct cooperation so as to cultivate domestic rivalry. In addition, chance is another factor that impacts the Indian soft drink industry’s competiveness. This entails certain events that are beyond the companies’ control, and they help in stimulating their competitiveness. Lastly, the industry is influenced by multinational activities, in that several foreign companies have established their investments in India. As a result, the Indian soft drink industry is reinforced and stimulated to raise its performance standards by the competition offered by the multinational activities in the country specific analysis. PEST analysis Other than the Porter’s National Diamond Model, an industry’s competitiveness can be analyzed by use of other factors and theories. One of them is the PEST framework that entails analysis of the industry in terms of political, economical, social, and technological factors. To start with, the Indian soft drink industry is a largely affected by political factors in the country. Up to 1990s, the Indian political environment broadly restricted any investments by foreign soft drink companies (Hitt & Hoskisson 2008, pp. 79-80). Then the only operational soft drink companies in India were the domestic ones, such as, the Thumps Up Company. Later, the country opened its markets to foreign companies like Coca-Cola and Pepsi-Cola companies. Currently, there is political stability in the country, which creates a favorable environment for foreign companies in the region. This was made possible by the liberalization of policies that the government initiated in 1990s (Appelrouth 2011, pp. 22-26). Secondly, Pangare (2006, pp. 220-225) says that the country’s soft-drink industry is profitable because of the suitable economical conditions. Recession, for instance, affects the industry’s performance, but increases activity at the product prices differences lower borders. The companies are also affected when the rates of interests are raised since they depress business and cause redundancies while lowering consumers’ spending powers. Currently, the Indian industry is favored by the economic factors that imply string and steady economic growth, and low interest rates and increased people’s spending powers (Kuil 2008, pp. 19-25). This has also enabled the companies, like Coca-Cola and Pepsi-Cola to open numerous branches in the country so as to maximize its sales volume. In terms of the social factors, the industry is affected by the consumers’ lifestyles and attitudes. In India, Buchli (2002, pp, 254-257) asserts that there is a high demand for soft drinks by a majority of the population. Many people are turning away from the alcoholic drinks to the soft drinks, such as, diet colas and bottled water. However, there are developing attitudes towards the Coca-Cola and Pepsi cola drinks with respect to health (Ayyar 2009, pp. 280-287). People, especially the elderly, believe that the drinks are not healthy in terms of calories. Therefore, the demand for the soft drinks is high children and young adults. The elderly ones were more concerned with maintaining their health statuses so as to lengthen their life spans by eating and drinking healthy (Gaur 2005, pp. 274-278). As a result, the Indian soft drink industry is affected by the continuous increase in demand of healthy beverages by consumers. In terms of the technological factors, the industry is affected by the technological innovations, such as, e-commerce and internet (Chopra & Peter 2005, pp. 151-156). Coca Cola Company has effectively employed technology in its promotional, advertising and marketing activities. This modern technology employs special effects for advertisement through media. Yan and Luo (2001, pp. 286-289) argue that products are made to look appealing in order to attract and retain as many clients as possible. In other incidences, the company utilizes technology in selling the products and offering its services to customers. Moreover technology has also enabled the introduction of new and sophisticated machinery that is vital in the production of the drinks. As a result, company has increased its productions, quality, and efficiency tremendously (Lamb & Mckee, 2009, pp. 233-236). Porter’s Five Forces Model The paper also examines the Indian soft drink industry by basing on the five forces of Michael Porter. This model entails the defining industry, substitutes, rivalry, power of suppliers and power of buyers. Firstly, the Indian soft drink industry is profitable because of the defining industry. This market force demonstrates that both bottlers and concentrate producers (CP) are profitable (Kwapong 2005, pp. 281-285). The two parts of the industry are absolutely interdependent, sharing costs distribution, procurement and marketing. In fact, a majority of their activities overlap, and the industry is vertically incorporated to a certain extent. The companies also deal with the same suppliers and purchasers. The industry is also affected by the kind competition that in the country. Explicitly, there are large revenues collected from this industry. Apart from the domestic non-alcohol drinks companies, Coca Cola and Pepsi-Cola companies are in stiff competition for a large market share. This affects the standards of performance and prices by various competing companies. Consequently, consumers benefit a great deal due to quality and efficient services and products offered by the companies. Thirdly, substitutes also play a major role in the determination of the industry’s success. In the past, clients enjoyed synonymous colas in the country, but with time, teas and bottled water gained popularity (Kwapong 2005, pp. 281-285). Apart from the key players in the industry, there are other numerous substitutes that reinforce the industry’s profitability and efficiency. Fourthly, the power of suppliers also influences the performance of the industry. Some of the main inputs of Pepsi and Coke are packaging and sugar. Sugars are readily available in the country, an in case of its shortage; the companies can opt for corn syrup (Morschett, Schramm-Klein, Zentes 2010, pp. 416-420). Lastly, the buyers’ power is also influential in the prosperity of the industry in India. The drinks are sold to the clients through vending, food stores, mass merchandisers, fountain, and convenience and gas (Gaur 2005, pp. 274-278). The industry’s profitability is caused by the high power of the purchasers that are available in the country. Considerations For any organization that aspires to enter the Indian soft drink industry, it is important to consider the following factors so as to succeed: Demand factors, legal, factors, political stability, environmental conditions, economical factors, and technological factors. It is also worth noting to consider the suppliers and buyers’ power as well as the amount of competition created by the already existing, similar companies. Conclusions and Recommendations The Indian soft drink industry’s competitiveness is largely influenced by a number of factors. The PEST, Porter’s Five Forces, and Porter’s National Diamond models are vital in the analysis of the industry. In the PEST model, the industry’s success is determined by the country’s political, economic, social and technological factors. On the other hand, the Diamond Model addresses the factor conditions; domestic demand conditions; supporting and related industries; government; chances; and multinational activities. Contrastingly, the Porter’s forces entail defining industry, substitutes, rivalry, suppliers’ power, and the purchasers’ power. In terms of the recommendations, those strategists that wish to operate in the Indian soft drink industry ought to consider many prevailing factors in the country. It is highly indispensable to consider the country’s political environment; whether it allows more foreign investment in the industry. It is also important to conduct market research in order to identify the demand conditions, and the faults or limitations of the existing companies so as to use in the creation of competitive advantage. Factor conditions and socio-economic factors should also be considered before entering the Indian soft drink industry. Besides, strategists should also put in consideration technological factors as they help in marketing, advertisement and promotional strategies. What is more, it is crucial to consider governmental factors as well as come up with an appropriate strategy, structure and competition in the country. Multinational activities and chance must also be considered in order to successfully operate in the Indian soft drinks industry. Part B: Critical Evaluation of the PND Model Porter’s National Diamond Model was initiated by Michael Porter as an economical model of analyzing international business management. According to the model, there are various reasons why certain countries and their industries, are more competitive as compared to other companies. In this argument, the national domestic base of a firm offers companies with particular factors that will create competitiveness on international scales. The model is based in terms of the following factors: factor conditions that involve skilled, unskilled labor, labor costs, physical resources, infrastructure, capital resources, and knowledge resources. It also concerns home demand factors; supporting and related firms; company’s strategy, structure and competition; government, multinational activities; and chance. The model is useful in the analysis of the determinants of a company’s competiveness. Some of its advantages include the model’s ability to integrate significant variable in the determination of a country’s competitiveness. It also explains why some nations and their industries are more prosperous in business than others. moreover, the model’s development was done in two steps; clusters of prosperous industries that are mapped in 10 significant trading countries, and competition history in specific industries is discussed so as to clarify the changing processes of creating competitive advantage. Nevertheless, the model has certain drawbacks that include over emphasis on the local or home-based conditions in the analysis of country’s competitiveness and innovation. This implies that the model does not give adequate focus to multinational activities, which are also crucial in the determination, a country’s or industry’s competitiveness and innovation. In his model, Porter does not consider all organizational complexities of an actual international business by multinational companies. In the employment of the model in analysis of countries’ and industries’ innovation and competitive advantages, there are certain issues that are likely to be experienced. One of them is the underestimation of some nation’s performance and success due to little emphasis on multinational activities. Therefore, this might produce the unrealistic results and perceptions about the countries or industries that are being analyzed. References Ahlstrom, D & Bruton, G 2010, International Management, South-Western Cengage Learning, Mason, Ohio. pp. 76-80. Appelrouth, S 2011, Sociological theory in the contemporary era : text and readings, Pine Forge Press/SAGE, . Thousand Oaks, Calif. pp. 22-26. Ayyar, A 2009, Public Policymaking in India, Pearson Education India, Delhi. pp. 280-287. Buchli, V 2002, The Material Culture Reader, Berg, Oxford. pp. 254-257. Chopra, V L& Peter, K V 2005, Handbook of Industrial Crops, Food Products Press, New York. pp. 151-156. 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