Cola Wars Continue: Coke vs. Pepsi in the 1990s Essay

gesture 1The concent symmetryn producing manufacture has maven buyer and through and through its value chain. Instead, cost for advertising, promotion, grocery research, and bottler relations were signifi groundworkt. On the other hand, bottling attention is the mid-way player in the slow drink industry. on that point ar twain suppliers and one buyer involved in its value chain (Exhibit 1).Whether some(prenominal) industries be ne devilrkable depends on squeezable drink consumption, which had increased for to a greater extent than 20 years and plateaued in the 1990s.The economics of the CP and bottling is very different from separately other in terms of number and size of rivals, and the scope of militant rivalry. at that place are two giants competing head to head on the CP industry, littler bailiwick producers, such as S scour-Up and Dr Pepper, are relatively trivial. There are a lot of players of like size in the bottling industry. different the furious conten tion between Pepsi and gust, no sense of competition apprise be felt in bottling industry. Reasons are that, first, Pepsi and one C concur the majority of bottlers in 1990s second, intra set competition is restricted by the franchise agreement, which is protected by Soft Drink Inter check Competition Act.From the view of gravid want, it is easier for others to enter the CP industry than to enter the bottling industry, since comparing to $30-$50 million dollars requirement to establish a bottling whole kit and boodle covering only one eightieth of ability to serve the spotless US market, the requirement for one CP plant with a nation-wide capacity is only $5-$10 million dollars. In addition, vane loyalty is low in the CP industry since consumers are sensitive to toll and there is little switching cost. There are many substitutes for soft drinks, such as tea, beer, and milk. There is no substitutes existing in the bottling industry, and no customer loyalty and switching cos ts for bottlers since they could only use packages definitive by the franchiser, which means no distributors can tell the difference of the same put up provided by two bottlers, and easily switch among different bottlers. equal and financial structures of a CP and a bottler illustrate that high cost of sales is one of the major suits behind the relative low profitability of the bottling industry. The ratio of cost of sales over clams sales is 40% higher(prenominal) than that of CP. One possible reason is that bottlers heavily depend on wheel, and thusly, cycle use bottlers to diversify expenses. Another reason is that bottlers hold much more(prenominal) inventory than cycle do since bottlers receive soft drink concentrates harmonize to its wor force capacity, speckle they shop products based on selling capability. Also, bottlers get to plant and equipment that are ten times more than that of cycle, and a goodish will that is roughly 45 times more, which means that b ottlers have to take time off more depreciation from pure(a) profit than bike do.One of the reasons wherefore bottlers are backward mix ind by bike is that, as the Cola-war high temperature up, weakened bottlers were no longer able to handle CPs goals and thus they would not be chosen as Pepsi and bumps partners. well-nigh of them were merged or driven out of the market by larger ones adopting the DSD method, which is the only delivery category that provides a positive net profit per unit. Other driving effects for Pepsi and speed of light to integrate bottlers are that, by doing this, they can narrow down the number of packagers they make love with, lower costs of negotiation with bottlers, and set up barriers to find buyers for other smaller national CPs.Question 2Bargaining power of buyers is the wonkyest competitive force for CPs. On the other hand, the strongest competitive force for the bottling industry is dicker power of suppliers because of the interactional affinity between the two industries in question.Both of the two industries would like to weak apiece others bargaining power, however, CPs take the opening in the negotiation. First, it is CPs who build franchise networks. CPs understand how the bottling process works, mend the bottlers dont know how to run a soft drink brand. Second, CPs negotiate with bottlers other suppliers to secure reliable supply, suddendelivery, and low price. Also, franchise agreement between CPs and bottlers has been becoming more favorable to CPs. So it is safe to declare that bottlers have been affiliated to CPs to a deeper degree than CPs to bottlers. Finally, the bottling industry does not have giants who are able to penetrate into the CP industry. On the other hand, the CP industry has Pepsi and Coke to integrate bottlers.Threat of bare-ass entrants is the second weakest force for the CP industry. One of the major reasons is that it is herculean to access a bottler since like Pepsi and Coke a re taking control of most of the packagers. Another reason is, although capital required to establish a soft drink concentrate plant with the capacity of serving the entire US market is low, costs for advertising, promotion, market research and bottler relations are a heavy burden and specialized know-how, such as brand management, is a natural barrier to penetrators. However, the fact that customers loyalty is becoming weaker makes the force not as weak as bargaining power of buyers.The bargaining power of suppliers to CPs in like manner fulfillms weak in the case since, as the advent of diet soft drinks, the expiration of the patent to aspartame, and oversupply of atomic number 13 on the world market, suppliers to CPs are losing bargaining power. However, there is no detail of suppliers industry given to provide us with confidence to say that it is the weakest force.Threat of substitutes, and competitive rivalry among the incumbents are relatively weak for the CP industry. exa mine to its substitutes, such as beer, milk, and bottled water, soft drink is and will continue to be performing outstandingly (Exhibit 2). Type of competition in the CP industry is duopoly, two giants, Pepsi and Coke are competing with separately other head to head. Other CPs are confined to a market share that is lower than 30%. The unsystematic competition makes competitive rivalry less intense when matter the industry as a whole.Threat to new entrants for bottling industry is weak since, unlike the CP industry, bottling industry has a high capital requirement, from $30 to $50million, to build a plant of five lines with one 85th to one 80th of the national volume. There is even no profit gross profit for small bottlers because they are not big enough to be active in the DSD to make a positive profit.Bargaining power of buyers is the third weakest force for the bottling industry. To bottlers, they receive volumes of concentrates at the level of their processing capacity while at the other end of value chain, number of cases they can sell depends on bottlers marketing capability. To retailers, they dont have switch costs since Pepsi Cola from bottler A is the same as that from bottler B. However, continual brand availability and maintenance is crucial to CPs, they dont want to see that too much inventory held by packagers erode relationship with each other. So, CPs have to help bottlers work on marketing and how to deal with retailers.Threat of substitutes, and competitive rivalry among the incumbents are the weakest. First, there are no substitutes for packages. Second, there is no competition among bottlers in that not only is intrabrand competition restricted, but also competition among brands are concerned by CPs since the bottlers are heavily controlled by concentrate suppliers nowadays.Question 3The reason why the Cola-War does not escalate out of control is that both of Pepsi and Coke understand the importance of keeping its rival alive. Strategica lly, they are vital to each others maintenance.There are three possible results of the Cola-war, monopoly, duopoly, and c nod offmouthed prefect competition. All players in this industry are dreaming to be the king of monopoly. However, under current federal agency, it is difficult to defeat each other without harming themselves for both of Pepsi and Coke. Launching plans and actions aiming at eliminating its competitor will probably result in the third result, near prefect competition, in which the industry would only have players bursting charge the same size as nowadays Seven-Up and Dr Pepper.Obviously, duopoly is the best and easiest natural selection for the big two. First, as risk avoiders, they can maintain current size and dominant position in the market, keep small national brands at an inferior level. Second, they can keep business environment nearly unchanged. The duopoly situation has been lasting for more than two decades. It is the one they are familiar to. No matt er whoever is driven out of business or both of them lose the dominant position, they have to re-evaluate the industry and re-plan their strategic plan. Third, they can lower the first step of making mistakes by observing what each other are doing. ground on above reasons, Pepsi and Coke choose not to wage a war that is out of control.Methods Coke and Pepsi adopt to keep the war inside bounds are focusing on key success factors, chase each others actions selectively, and realizing gap in world-wide market.There are three KSFs in this industry, brand differentiation, relationship with packagers, and developing new beverages. Focusing on KSFs enable both of Pepsi and Coke stay in the right track leading to higher level competition of duopoly. chase each others actions selectively prevents them from distracting to dangerous actions. They both followed well each others actions based on KSFs, such as launching marketing plans, vertical integrating bottlers, and develop new products. They also distinguish bad actions from good ones. For instance, Pepsi gave its employees one-day brake when it received the information that Coke decided to change its Coca-Colas formula.Pepsi has admitted that Coke is much stronger on international market. It is very important that it uses guerilla warfare in selected international market instead a frontal attack with Coke everywhere, which would entrap Pepsi in the quicksands of international market.Question 4Over the last century, firms specialized in tobacco, food, and restaurant, such as Philip Morris, Hicks & Haas, Triarc, R.J. Reynolds, and Cadbury Schweppes, tried to penetrate into the soft drink industry through purchasing small national CPs like Dr Pepper, Seven-Up, and lofty Crown Cola, however, few of them survived. Reasons for this fact fell with the faulty strategic preparation process. Those who entered but do not end up with success failed to get it on three key success factors in this industry in the beginning, s tructure brand recognition, developing packaging networks, and changing distribution channels.First, Pepsi successfully competed with Coke through adopting brand differentiation. In responding to Pepsis attack, Coke spent even more money on advertising, which gained two companies world wide fame, heated up up the war between them, and shaped their capacity to remain as top players. However, other CPs did not cash in on the brand differentiation strategy, which can be illustrated by a comparability of dollar amount spending on advertising by brand in the US. (Exhibit 3)Second, there was no evidence that small national CPs tried to secure packagers to build their bottling network. Instead, they had to resort to bottlers owned by Pepsi and Coke, while small bottlers do not have the capacity to handle national distribution. Costs for new entrants to maintain bottler relations or organize small bottlers are so high that may eat up gross profit.Finally, as discount retailers such as Wal- Mart and K mart prospered during the 1990s, CPs are facing pressures on lowering their wholesale price. Besides, it seems only Pepsi and Coke were involved in Door-Store Delivery method, CPs that sell products to private recording label and warehouse would be facing less distributors due to negative net profit/unit.