Porter’s Five Forces Model of Coca Cola
There are various forces, which define the attractiveness of the market for operating companies. In this framework, a business environment can be either attractive or unattractive. Attractiveness occurs when there is maximum profitability. On the other hand, pure competition in the market leads to it being unattractive, as players in the market make almost zero profit because of market constrain. Porter’s five forces model is important in understanding these forces. This essay discusses this model, with reference to Coca-Cola, leading beverage manufacturer, worldwide.
Threat of Competitors’ Entry: Soft drink industry is expensive, as it requires massive investing in advertising and marketing. Because of the billions that current players pump in the market, new entrants have a hard time to breakthrough. Coca Cola and Pepsi further enjoy high customer loyalty, because of their high brand equity. Thus, new competitors find it almost impossible to counterpart this loyalty. The industry further has important margins to retailers, ranging between 15 and 30%, which allow retailers to be comfortable with current players. New entrants also fear retaliation as Coca Cola and Pepsi will not allow them to enter.
Competition Rivalry: Coca Cola and Pepsi are the main players in the industry, making it a duopoly case. They command the highest market share all over the world. Thus, other competitors almost have no role. The two companies largely focus on advertising and market differentiation as opposed to pricing. As a result, Coca Cola enjoys high profits and hardly experiences a decline. The two companies have almost equal global market and pride in operating in more than 200 countries worldwide.
Threat of Substitute Products: The beverage industry is replete with substitutes. In other words, consumers have the option of buying other products. Common substitutes include water, tea, coffee, juices and beer among others. However, suppliers of these products need top-notch brand equity, brand loyalty, advertising muscles, so that their products reach target customers with a lot of ease. However, most of the companies offering substitutes cannot match the pace set by Coca Cola and Pepsi as market leaders.
Customers’ Bargaining Power: Leading buyers of soft drink products are food store, restaurants, college canteens, and fast food fountain among others. The gains from each of these market segments show how buyers have the power to bargain and pay for products at low products. However, fast food fountain are a source of lowest profits for Coca-Cola because they have the highest bargaining power as compared to other categories of buyers. Their bargaining power is anchored on their ability to buy products in bulk.
Bargaining Power of Suppliers: the manufacture of soft drinks depends on basic raw materials like sugar, caffeine, flavor and packaging. Here, suppliers lack bargaining power as compared to buyers, making them weak. Because of the availability of raw materials, they are cheap and do not make noticeable difference by any supplier. Additionally, there is low switching cost on raw materials, and manufacturers can easily shift to other materials with ease. However, these materials by suppliers have no substitutes and play a major role for the manufacturers.
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Online sources:
http://valuationacademy.com/porters-five-forces-in-action-sample-analysis-of-coca-cola/
https://www.inkling.com/read/strategic-management-cases-rothaermel-1st/chapter-3/competitive-forces-and-firm
http://mba-lectures.com/marketing/principles-of-marketing/1119/porters-five-forces-model-of-coca-cola.html