Modes of Market Entry of Coca-Cola Company - Case Study Example

Modes of Market Entry Introduction Companies that are desirous of seeking international exposure have to perform many marketing activities that will enhance their reputation and reach in foreign markets. A company may choose specific activities or select a combination of activities in order to capture overseas market of its choice. Often the encouragement to adopt a particular strategy will depend on several factors and the company may choose a strategy that if deems appropriate, according to prevailing market conditions or other factors that could affect its operations and profitability in the long run. With the globalisation of world businesses, many western companies are flocking into new markets to sell their goods and establish a market presence that will provide them with sustained business returns. Hence many companies have selected appropriate measures and devised strategies to penetrate new markets where their presence was not so far known. For example, many third world countries are opening their markets to foreign companies that are desirous of setting up shop in the country. The products of such companies are often new to the area and the companies too spend a lot of money and resources in order to make the product popular with the local population. The tactics that the company employ will help it to capture the market and make inroads into new territories. This paper would examine the case of the beverage company, Coca Cola. Background of the Company The Coca-Cola Company was founded in 1886 and is headquartered in Atlanta, Georgia. The Company manufactures and distributes non-alcoholic beverage concentrates and syrups. The company markets these products globally and has a strong market presence in many parts of the world. The product range of the company includes principally carbonated soft drinks, but it also produces noncarbonated beverages. In addition, Coca Cola also produces beverage concentrates such as flavouring agents and sweeteners, syrups etc. Diversification of the company’s product range has led it to the creation of products that are supplied to fountain retailers and restaurants. The Coca-Cola Company also produces waters and flavoured waters, juice and juice drinks, energy and sports drinks, teas and coffees. Many different types of brands of soft drinks such as Coca-Cola, Diet Coke, Fanta, and Sprite are produced by the company. Coca Cola, by establishing their presence there, has gained access to market share of many developing and developed countries and is the choice of millions of customers all over the world. Research and market analysis has shown that Coca Cola uses various techniques to enter into new markets. “The most commonly used strategies of the company are Licensing and Franchising and direct exports.” 1 Licensing and Franchising In the recent days, licensing has been the most common type of market entry strategy of Coca Cola of late. The company has been able to enter new markets and increase its worth mainly because of its licensing activities. Coca Cola uses a manufacturer-sponsored wholesaler franchise system through which the company has tied up with various other firms all through the world. The main tactics in this technique is to provide bottling licences for local companies and then providing the concentrated syrup of the drink. The licensee will use the syrup to create the product and the finished product will be sold in the market either through the marketing efforts of the franchisee or through the marketing network of Coca Cola. In a way it may be said that Coca Cola uses brand name licensing to market its product world wide. “The licensee will have the right to market the brand as long as they create and distribute the product according to the norms of the parent company.” 2 Direct exports Coca Cola also uses direct export to various countries. The company has diversified over the years and have created many products that are sold across various markets in the world. These products are directly exported by the company to its destinations. This enables the company to market its products over a wider geographical area globally while ensuring that the products retain their original quality as prescribes by the company. Strategy of the company According to Cunningham (1986) there are many strategies that are used by companies to enter and diversify into a new market and diversify its business. This is the primary strategy from which the mode of market entry can be decided. For example, according to Cunningham (1986) companies can choose any of the following five strategies to decide on a mode of entry into new markets. 3 Technical innovation strategy Product adaptation strategy Availability and security strategy Low price strategy Total adaptation and conformity strategy In the case of Coca Cola, the company has selected availability and security strategy in order to enter a new market. “As per this strategy, the company will make efforts to reduce its risks when it enters a new market. This is possible through creating franchisees and licensees locally who would be more adept at handling local problems than the company.”4 There are many wa ys in which a company can try its hand in a new market. The selection of various forms of marketing in a new area will depend on many factors. For example, companies may select a specific marketing strategy according to various factors in the market such as competition, environmental factors, local laws etc. In addition, the selection of the strategy will also depend in the brand image of the company as well as the reputation that it enjoys the world over. In any case, the company has to ensure that the strategy that it selects will add to the bottom line of the firm and will not destroy the reputation of the firm. With regard to Coca Cola, two major type of market penetration strategy that the company has used is licensing & franchising and direct exports. Licensing & Franchising is an activity that helps the company to decentralise its operations. There are many firms that refuse to allow decentralisation while there are others who decentralise their operations so that other companies can perform some of the activities that encompass the overall production of the product. Companies that have identified their core competence sooner or later opt for licensing and franchising in order to expand their market. Such companies concentrate on their core competence and try to enhance it while allowing other firms, with which they enter into an agreement, to perform actions that are more routine in nature. For example, in the case of Coca Cola, the core competence of the company is the concentrate that it uses to render the flavour to its products. However, all other associated activities such as water acquisition, bottling process etc can be performed by other firms. Hence the company has appointed a lot of franchisees and licensees all over the world who can manufacture the company products in exactly the same way that Coca Cola wants them to be produced. This gives the company ample freedom to develop its core competence while its franchisees are entrusted with the work of creating products according to the prescribed manner of the company. Appointing franchisees in a new market is also beneficial because of many other reasons. Franchisees or licensees pay Coco Cola for rights and privileges, including the right to sell a product that already enjoy tremendous appeal of the consumers. In addition, franchisees can also use the franchisor's business practices and receive initial training and support to know how to run the business. The licensee will also guarantee ongoing support in case the need arises. The franchisee in return has to ensure that various mandatory requirements prescribed by the company are met with. Requirements may vary from quality controls to how a product has to be marketed. Franchisees usually have an advantage over their non-franchisee competitors because they have exclusive rights over the brand names and trademarks, apart from support of the franchisor company in terms of training, marketing and other technical advice. This solidifies the franchisees position in the market, which, in turn, benefits the franchisor ultimately. Coca also resorts to direct exports in such markets where it has not been able to establish a franchisee network. Whilst no direct manufacturing is required in this case, the company may have to expend significant investments in marketing and logistics. For example, in countries such as China and India, where regulation were very strict and bureaucracy was very strong, the company could not set up franchisees and the only method available was to export the finished products to the market. Although this added up to the cost of the company by way of transportation and logistics cost, it helped the company to establish a market base in these foreign nations. The advantages of exporting are that it is less risky than overseas based firms because all the products are manufactured at home. “Similarly an exporting strategy helps the company to assess the new market first hand and tackle situations that could jeopardise its future interests.” 5 Environmental factors Coca Cola has to consider many environmental factors when it enters a new market. The environmental factors determine the strategy that the company uses to gain access to the markets into which it tries to expand. Some of the environmental factors that affect the company when it tries to set up its base in a new market are: Political/Legal Environment The political and legal environment decides on how the company sets up its mode of entry into the new market. For example, Coca Cola had to withdraw from the Indian market in the late seventies because the government wanted to have access to its secret formula. The company could gain entry into the Indian markets in the nineties only when the government withdrew its demands. This is an example as to how legal complications can prevent a company from setting up its franchises in a new market. In this case the company could not set up a franchisee base in India because it had to part with its success formula. The trade-off would have been too critical for the interests of the firm. Similar is the case of exports. Coca Cola exports its products into those countries that do not have restrictions for imports but have a significant amount of barriers for setting up multinational franchises. Economic environment The economic environment of country also has a significant say in the modes of entry that Coca Cola practices when trying to penetrate a new market. For example, Coca Cola would be making a wrong assumption if it is planning to sell its products in a big way in a country whose people cannot afford to buy the product. Similarly, Coca Cola would be ill-advised to setup shop in a country where the cultural aspects are against the consumption of non-carbonated drinks. In such countries where the market is tentative, the company exports small quantities of its products so that a true assessment of the markets conditions can be elicited. Competitive Environment The competitive environment also plays a significant role in the modes of entry of the product. For example, in a country that has a large area to be covered as in India, the company has set up a dedicated franchisee base in order to distribute the product to all nook and corners of the country. Similarly, setting up licensed units will help the company to utilise natural resources that are available locally at a very low rate. Exporting products will also help because the company will be able to test the market before planning to setup a full-fledged licensed centre in the new market. The new barriers may also pose hindrances such as cultural and economic issues that could affect the viability of the new product in the market. For example, Coca Cola has had to modify its products to suit cultural demands of its consumers. For example the diet coke is being marketed to suit the requirement of the health-conscious consumers. “However, the same product may not be easily marketable in other parts of the world where consumers’ requirements would be drastically different.” 6 Conclusion There are many modes of market entries that companies plan in order to get access into a new market. Some of these techniques require the company to make detailed assessments of the markets and devise strategies that suit its overall business mission and vision. In the case of Coca Cola, the company has chosen mostly to deliver their products through licensed operations and a franchisee network. These two strategies have allowed the company to develop new markets and focus on the maximum reach of its products in different parts of the world. A combination of different modes of market entry is essential for Coca Cola because it will help the company to concentrate on its core competence and try to enhance it while allowing other firms, with which they enter into an agreement, to perform actions that are more routine in nature. This will, in turn, enable the company to seize significant market positions. Moreover, direct exports helps to achieve maximum profits and long term growth from exportation. Anomalies As coke was mainly a franchisee driven operation, with the company supplying its concentrate to its bottlers all over the world, its competitors like Pepsi had an advantage because they followed a more capital intensive route of owning and running their own bottling units. Though direct export helps to achieve maximum profit it has many risks associated with it. They are: Commercial risk The risk that the other party will not fulfil its obligations Transport risk The risk of goods becoming damaged or destroyed during transit. Exchange risk Sometimes currency fluctuations can affect the value of the transactions Political risks Change in government policies, embargoes etc will also effect the value of the transactions These risks can be mitigated by adopting the following methods: Direct credit, Guarantees, Insurance, Export finance Changing Business environment - macro In the changing business environment Coca Cola has made a substantial progress in moving from just compliance to commitment, and making diversity a competitive advantage for the organisation. Their aim is to become leaders in the global economy. Coca Cola brands are the most inclusive in the world. “They are consumed by billions of consumers a day and sold to millions of customers world wide.” 7 SWOT analysis is one of the most common strategic management tools used to evaluate the strength, weakness, opportunities and threats involved in a business venture. Internal Analysis-SWOT Analysis of Coca Cola Strength Coca Cola has a strong brand name and is recognised all over the world. It is used by millions of people worldwide. Some of their images are also displayed on T-shirts, caps and other consumer items. The bottling system that is followed here allows them to conduct business on a global scale which at the same time maintaining a global approach. They bring innovations in the product and customers are given an opportunity to try their new products. Weakness Although their domestic business and international markets are doing well there has been a decline in their sales in states like Thailand, Indonesia, and Japan where profits are expected to be three times more. This is because of reduced purchasing power. America, South East Asia and Japan account for 35% of coke’s volume and of late these markets are not performing well. Moreover their advertisements are not clear and sometimes misleading. Opportunities As they have a good brand recognition there has always been a growing demand for the products. Changes in their packing have also affected their sales and industry positioning. Majority of the consumers have always welcomed the change and this has helped in market expansion. Threats The threat of substitutes is posing a great problem for the industry. Many drinks like fruit juices, hot chocolate, milk shakes, tea, and coffee are preferred to coke as people have become more health conscious. Sometimes the consumer goes for a drink that is less expensive than coke. The cost factor also poses a threat to the industry. Industrial expansion strategy Coco Cola has adopted the Licensing & Franchising strategy for global expansion and has been very successful in various countries, though in certain countries like India the Company could not get a foothold. Now, the company has captured a large share of the market in food & beverages market only by focusing on its strategies. In spite of the severe competition it faces in various parts of the world it operates, the company has emerged as a leader. Further the company’s strategies in the following areas have led to their successful expansion plans: Sales of soda in international markets, which has been growing exponentially Expansion in non – carbonated beverages Acquiring specialty brands that appeal the younger and trendier customers Giving adequate autonomy for their international business units by decentralizing decision making, closer to the markets where those decisions are to be taken. Embrace local culture and blend their corporate identity with it rather than impose it on the customer. The local partners have been vital in helping the company to grow. Bibliography Mok V., Dai X., and Yeung G. 2002. An Internalization Approach to Joint Ventures. Coca-Cola in China: Asia Pacific Business Review. Autumn 2002. Vol 9. No. 1. pp. 39-58(20). Cunningham, M. T. 1986. Strategies for International Industrial Marketing. In D.W. Turnbull and J. P. Valla (eds.) Croom Helm. p 9. Korey, G. 1986. Multilateral Perspectives in International Marketing Dynamics. European Journal of Marketing. Vol. 20. No. 7. pp 34-42. Keegan, W. J. 1989. Global Marketing Management. 4th ed. Prentice Hall International Editions. Jaffee S. 1993. Exporting High Value Food Commodities. World Bank Discussion Paper. Pp. 198. Ikechi Ekeledo, K. Sivakumar. 2004. International market entry mode strategies of manufacturing firms and service. International Marketing Review ISSN: 0265-1335. Vol 21. Issue 1. pp. 68 – 101. Isdell, Neville E. (2005). Speeches. Remarks at the Executive Leadership Council Dinner. The Coca Cola Company. http://www.thecoca-colacompany.com/presscenter/viewpoints_isdell_executive_leadership_council.html (accessed July 25, 2007). Read More