2.

1 - Political Factors

Food and Drug Administration (FDA) Regulation

These regulations define which ingredients can and cannot be used in the product,
how the product is produced, where it is produced, as well as other laws concerned
with the quality and health effects of the product.
There are potential fines set by the government if companies do not meet a
standard of laws regarding manufacturing, production, and distribution.

Waste Management Regulation

Waste from firms' manufacturing plants must be taken care of in a responsible and
legal manner. If any of the waste management laws change, companies must
update their processes to abide by the law.

Legal factors include consumer laws, discrimination laws, employment laws, &
health/safety laws
Firms must provide nutritional information of their product to the customer
Employees must be provided with at least the required minimum wage and
discrimination is not tolerated in the workplace
All factories of the firms must abide by OSHA standards and regulations.]
If any of these laws change, companies must change their operations and
procedures to avoid being fined or even worse, shut down.

2.2 - Economic Factors

Recessions:

The soft drink industry experiences market shocks in periods of recession

Since 2008, the industry has struggled to regain its previous market strength
The industry is expected to take a positive turn with an expansion of 27% by 2015;
the highest increase since 2008
Consumers of soft drinks have continued to spend their money frugally over the
past few years following the 2010 recession
Raw Materials:
Cost of raw materials can be a factor if the economy for certain materials is weak

Sugar and carbonated water make up most of the content, but there are a lot of
preservatives and flavoring such as ascorbic acid, gums, pectins, saponins,
aspartame, etc.

2.3 - Socio-cultural Factors

Consumer Choice:
Age is the most important characteristic when evaluating consumer choice
The older generation is more health conscious and tends to consider nutritional
factors between products (diet or zero-calorie options)
The younger generation leans towards products that are fun, new, and hip
Celebrity endorsements, attractive commercials, and sweepstakes become more
important to the younger generation in their product decision.
Diet Craze:
About one-third of Americans are considered obese and studies have speculated a
link between soft drink consumption and obesity
Dieting has become a very marketable, popular trend which forces the soft drink
industry to create new products that meet consumer preferences
Social Media:
Social media outlets (i.e. Facebook, Twitter, Instagram) keep consumers directly
connected to the brand
Firms are able to obtain valuable information and suggestions from consumers
about potential or current new products
Low advertising costs with global outreach

2.4 - Technological Factors

Automation:

New tech advancement in manufacturing and quality improvement concepts are

improving bottling operations efficiency.

High product volume requires high levels of automation in manufacturing.

Technological advances increase the utility of employees and capital, which
increases productivity.
High costs for new technology can be an entry barrier to new competitors.

Marketing:

Technological advancement helps create new brands and product lines to meet
consumer preferences.
Improved logistics help products move through distribution channels more
effectively. This keeps distribution costs down while increasing sales information to
consumers.
Social media provides huge growth in consumer awareness, brand value/identity,
promotions, and direct-to-consumer communication.

Economic Feature

Analysis

Market Size and Growth Rate

60 billion dollar industry

Current growth rate is .7%

Maturation phase of the industry life cycle because the number

low, profits are high, market size is the largest to date and invest

o
Number of Rivals/ Scope of

Competitive
Rivalry

Three firms in the industry account for approximately 90% of th

total

The geographical area over which companies in this industry co

focusing on only the United States portion of the industry

Number of Buyers

Market demand is very fragmented among buyers as brand loya

Recently however, due to inflation and the rising cost of goods,

price is now the main factor in some buyers preference

Products are becoming more and more differentiated as there ar

market each and every day

Product Differentiation
o

Differentiation is key for a firm to maximize their revenue due

changing and the firms need to create new products and flavors

The industry is not entirely characterized by rapid product innov

very common to see both occurring rather often

Product Innovation

The most profitable soft drinks do not have short product life cy

Some new beverages however do experience short product life c

and not be received well and need to be taken off the shelf

Companies must use R&D to discover what products other firm

opportunities for a product will arise

New products must be developed to compliment the steady pro

changing customer preferences

Next generation soft drinks have begun to come out in forms su

These products have been gaining popularity since they were in

as profitable as the 3 dominate firms in the industry

Economic Feature

Demand Supply Conditions

Analysis
o

The amount of companies in the industry creates co

Companies have to stay similar on product price in

The industry is not overcrowded because all the com

The technology in this industry is always changing

Companies are constantly coming up with new way

product

Pace of Technological Change

o

The plants are now able to produce more products i

sell more and make more of a profit

If a company falls behind and is no able to keep up

lose market share.

Competitors operate in multiple stages of the indus

The majority of competitors all engage in manufact

The larger competitors also have bottling operation

Competitors sell to retailers.

As a fully integrated firm, the product has higher qu

Vertical Integration

fluid distribution channels to lower costs. There is a

integrated.
o

Smaller firms may benefit from using competitors b

contracting out may have higher costs in the long ru

o

The more independence a firm has, the more levera

shocks.

Economic Feature

Analysis

The entire industry is characterized by economies of scale in every aspe

Since soft drinks are sold in high volume, costs may only be kept down
cost-efficient volume.

Economies of Scale
o

Advertising may be on economies of scale since the industry leaders hav

since founded, and might have capitalized on long-term relationships an

o

Large-scale operations pass on cost savings to the customer and are able
price.

New, smaller start-ups will have to try to match large-scale ops pricing,

Large-scale operations have the ability to produce and store more produ

Soft drinks are not a niche market so it is hard for smaller companies to
firms.

Learning and Experience Curve Effects

Setting up distribution channels to retailers and developing strong relatio

Firsthand experience in dealing with demand for substitute beverages an

Advertising experience in the industry is crucial because of the long hist

soft drink industry maintains.

Bottling has a learning curve because of political and economic standard

customers.

The two industry leaders have been in the industry since it began, so the

Competitors can try to imitate the leaders learned processes, but cannot

Porter's Five Forces Analysis Soft Drink Industry

Bargaining Power of Buyers
o

The soft drink market is the largest group in the larger beverage industry. The
soft drink industry is worth $60 billion dollars. Three firms control 89% of the

United States soft drink sales. To say the least there is plenty of the pie to go
around but it is hard to gain market share.
o

There are a large number of customers with the average American consuming
over 56 gallons of soda a year. The average soft drink costs under $2 which
makes each individual purchase relatively insignificant.

Because the soft drink industry is very competitive, switching suppliers is

relatively easy and the price difference is rather small. Difference can occur
based on geographic location and how far the products need to travel.

There is no need for information on how to use the product it is a simple task.

The buyer is not aware of the need for additional information because all the
information that is needed is provided. There are no steps to using the product
and all nutrition facts and ingredients are listed on the label.

Because a soft drink is a hard thing to duplicate in your house and takes a
considerable amount of time, manufacturing your own soft drink is inconvenient
especially when you take into consideration how low of a cost the product is.

Customers are highly sensitive to the price of soft drinks and are willing to
change brands if one becomes much more expensive than the other. Soft drinks
are not a need and people wont pay any price for it.

Products are very unique in the soft drink industry and people are very brand loyal to the drink of
their choose. Though many of the sodas are rather similar in type they have distinct tastes.

Firms often provide incentives to customers on the buyer side. These incentivizes are often done
in the form of contests such as win tickets to the super bowl or deals such as get 20% off
admission to a local theme park. These deals can often sway customers to choose a particular
brand.

Bargaining Power of Suppliers

o

The inputs specifically the materials are extremely differentiated as every firm is trying to create
the best product. Each firm has a different formula, color, and flavor for their beverage. No two
products are typically exactly alike. Product innovation is necessary to fill the buyers need for a
variety of tastes.

Firms can switch between suppliers very quickly and easily. Suppliers for the soft drink industry
do not hold much competitive pressure. Suppliers to the industry are bottling equipment
manufacturers and secondary packaging suppliers. In terms of equipment manufacturers, the
suppliers are generally providing the same products. The number of equipment suppliers is not in

short supply, so it is fairly easy for a company to switch suppliers. This takes away much of
suppliers bargaining power.
o

It is fairly easy to become a supplier within the industry and thus they would not find it difficult if
they wanted to enter. The companies will choose the suppliers that do the best job and have the
best price. If another supplier does the same job but is cheaper, the firm can switch without much
issue.

There are many current and potential suppliers in this industry. Soft drink companies own a
portion of their own supply companies. For current and potential suppliers it is fairly easy to enter
or succeed in the industry as supplying the soft drinks is not a difficult task. All about price and
how efficient of a delivery job they do. Companies are willing to switch suppliers whenever is
necessary.

Business is extremely important to the suppliers as the soft drink industry is an enormously
profitable market. The main revenue for these supply companies comes from delivering the soft
drink beverages and equipment for the firms to the customers.

Threat of New Entrants

o

Existing firms have cost and performance advantage in this industry. This is because existing
firms have already purchased large capital expenditures and have economies of scale. They also
have direct supply and distribution channels setup

Soft drinks are not proprietary products because anyone can make soft drinks. The only
proprietorship is on patented flavors and brands.

The majority of soft drinks have well-known brand identities, with the exception of generic brands.
Brand identities define soft drink flavors (i.e. Sprite means lemon-lime, or Coke means cola)

There are no significant costs in switching suppliers. The soft drink industry is very competitive,
so prices only fluctuate slightly depending on geographical location (transportation) or short-run
sale discounts.

A lot of capital is needed to enter this industry because there are large capital costs needed for
manufacturing. Bottling, distribution, and storage could be contracted out, but it would likely
increase costs in the long run and weaken the supply chain.

A new comer to the industry would face difficulty in assessing distribution channels. The major
brands already control the main distribution channels, such as big supermarkets, gas stations,
and restaurants. They have low costs, competitive pricing, and strong business relationships.

Experience in this industry does help firms to lower costs and improve performance. The major
brands run on economies of scale, and have experienced the highs and low of the industry and
overcome them. New entrants can learn from the first entrants history but do not have first hand
experience.

There are licenses, insurances, and other difficult qualifications required in this industry.
Companies must get FDA approval to sell their product, have licenses to produce and distribute
internationally, and insurance to cover potential lawsuits, accidents, or faulty product.

A new comer in this industry can expect retaliation from current companies. The soft drink
industry is an oligopoly with existing firms having strong distribution channels, relationships with
suppliers, retailers, and brand value to customers. The industry leaders have the tools necessary
to force out new competitors.

Threat of Substitutes
o

Available substitutes do not have performance limitations or high prices that would justify their
use over the products in the soft drink industry because substitutes are not priced at a high
enough cost where it would affect their use as a mainland product.

Customers would not incur costs in switching to substitutes. The choice of switching to a
substitute for a customer would in most cases be the difference of cents.

There are substitutes for carbonated beverages, like water, tea, sports drinks, etc.

Customers are not likely to go for substitutes because brand name loyalty is a very strong
competitive pressure in this industry.

Rivalry Among Existing Players

o

The industry is not growing rapidly. The growth rate for the industry is not rapid; it
is in fact relatively small. This makes it very difficult for new entrants to compete
with the already thriving firms in the industry.

The industry does not necessarily have overcapacity at the moment. However, if
a newcomer were to try and enter the industry, its current players would make it
very challenging because of brand loyalty and recognition amongst customers.

The fixed costs are a high proportion of total costs for a firm in the soft drink
industry. Fixed costs act as a firm barrier to entry and can include costs for
warehouses, trucks, labor, etc.

There are significant brand identities among the firms in the industry, which is
why brand names are an important competitive edge amongst new businesses.

It actually would be difficult to get out of business because of money lost from
fixed costs and advertisements, as well as binding contracts with set distribution
channels.

Customers would not incur high costs from switching from one player to another.
The most they may incur would be a few cents because the prices in the industry
do not fluctuate much among the firms.

Since the products in this industry are simple carbonated beverages, there is no
need for significant customer-producer interaction because customers purchase
the products mainly based on taste.

Market shares in the industry are not more-or-less equally distributed among
competitors. This is evident because there are three main firms that own
approximately 90% of the industry, yet there are over 100 companies in the
industry.

The next section of the report will take a more in depth look at the two companies of Coke and Pepsi
including their strategies as well as a performance analysis of the companies financials.
This section of the report analyzes the internal resources and capabilities of Coca-Cola and
Pepsi, and compares their competitive advantages and disadvantages relative to each other.

Distribution
Resources &
Capabilities

Distribution
*Coca-Cola

Value:

Value

Rarity

Imitability

Organization

Yes

Yes

No

Yes

Yes

Yes

No

Yes

*Pepsi

Coca-Cola focuses its distribution more on the fountain market with restaurants. While

retail distribution is important, there is bigger margin for fountain sales. Distribution through
global markets has proved to be valuable in strengthening their distribution network.

Pepsis distribution network is vital to compete with Coca-Cola. Through acquisitions of

non-soft drink entities such as Tropicana bottled drinks and FritoLay snack foods, it has
expanded its network tremendously. This expansion has allowed Pepsi to control large
market share in supermarkets and other snack retailers.

Rarity:

The size of Coca-Colas distribution network is rare because they deliver their product to

many different buyers on an international scale. Coca-Cola only produces the syrup
concentrate which it then sends to it bottlers, who distribute to retailers. Coca-Cola has
sustained competitive advantage by having a straightforward, efficient channel design.

The business relationships necessary for such a demanding distribution network are rare

to acquire and Pepsi has continuously expanded and maintained their relations.

Imitability:

The push and pull distribution strategy of Coca-Cola may be imitated in its basic essence,

but size of their channels is unique.

Pepsi spent billions in mergers to create its own distribution network, which would be

hard for other firms to copy.

Organization:

Coca-Cola is able to exploit their distribution by entering foreign markets to dominate

their market share. For example, in Mexico there is not much clean water to drink. Coca-Cola
realizes this and heavily distributes and advertises in Mexico. Producing Coke in Mexico uses
the clean water available, forcing Mexican citizens to buy Coca-Cola beverages to satisfy
their thirst.

Pepsi exploits their distribution network by working close with other reputable firms in

separate industries. These relationships help Pepsi tie its products to other industries and

distribute them efficiently. Pepsis acquisitions of fast food chains such as KFC and Taco Bell
have increased its fountain market share.

Differentiation

Resources &
Capabilities

Differentiation
*Coca-Cola

Value

Rarity

Imitability

Organization

Yes

Yes

Yes

Yes

Yes

Yes

Yes

Yes

*Pepsi

Value:

Coca-Colas product has value in its differentiation from competitors based on its taste. A

common reason people say they drink Coke is because it tastes better than Pepsi. The
recipe is the biggest secret Coca-Cola has to their success. This value is spread to CocaColas other product lines.

Pepsi differentiation value is critical to their business model. It is important for Pepsi to

set it self apart from Coca-Cola and generic colas in a market where the end product is
essentially the same type of beverage.

Rarity:

Coca-Cola differentiation strategy is rare considering that when people thinking of

drinking cola, Coca-Cola is typically the first soda that comes to mind. Indirectly engraining
an idea that your product is the product to choose into consumers minds has allowed
Coca-Cola to sustain a competitive advantage.

Pepsi differentiates their product through brand value by pushing its products on the

new generation. Although this strategy is not necessarily rare, it has defined the brand
since the early 90s and the time investment makes the strategy more rare.

Imitability:

Coca-Cola experiences imitability, considering in essence it is a standard cola beverage.

There are hundreds of generic colas on the market. While the type of product is easily
imitated, the specific product of Coke is not imitable.

Pepsi faces slightly more imitability because it does not have the same brand value as

Coca-Cola, but its heavy capital spending in advertising make it difficult to imitate.

Organization:

Coca-Cola uses brand value to exploit its differentiation. Color plays a role in

differentiation because red signifies Coke over the Pepsi blue. They also exploit their
wholesome family brand image but advertising towards this segment (Santa/polar bear
commercials.)

Pepsi exploits the value of its product differentiation by performing taste tests around

America to compare Coke versus Pepsi. Results have shown that more Americans choose
Pepsi in a blind taste test. They also used this platform as a television commercial.

Through an analysis of Pepsi and Coca-Colas resources and capabilities, there is a clear
sustained competitive advantage for both firms. Brand value is the most important resource
to the sustained competitive advantage. Pepsis differentiation strategy is dependent on its
brand value and keeps Pepsi competitive because they target new generation segment.
Coca-Cola is riding on the coattails of its psychological brand value towards a matured
segment. Both strategies are successful and advantageous. Development of large
distribution channels has kept Pepsi relevant in Coca-Colas shadow over the last thirty
years. The resources mentioned have allowed Coca-Cola and Pepsi to create an oligopolistic
marketplace where both firms learn from the mistakes of the other and strengthen
operations in areas where one firm may be weak. In the next section, we will perform a
performance analysis with both firms.

Coca-Cola
A businesses corporate Strategy is aimed at the companies overall scope and direction. Business
strategy is a long term plan of action designed to achieve a set of company goals and objectives. An
internationalization strategy is aimed at ideas that will hwlp expand the business abroad.

Coca-Colas number one goal is to maximize growth and profitability to create value for their shareholders.
They plan to achieve these goals by
(1) Transforming their commercial models to focus on their customers value potential and using a valuebased segmentation approach to capture the industrys value potential.
(2) Implementing multi-segmentation strategies in their major markets to target distinct market clusters
divided by consumption occasion, competitive intensity and socioeconomic levels
(3) Implementing well-planned product, packaging and pricing strategies through different distribution
channels.
(4) Driving product innovation along there different product categories and achieving the full operating
potential of our commercial models and processes to drive operational efficiencies throughout our
company.
You can find on Coca-Colas website what they plan to do to achieve their goals, its includes
o

working with The Coca-Cola Company to develop a business model to continue exploring and
participating in new lines of beverages, extending existing product lines and effectively
advertising and marketing our products;

developing and expanding our still beverage portfolio through innovation, strategic acquisitions
and by entering into agreements to jointly acquire companies with The Coca-Cola Company;

expanding our bottled water strategy, in conjunction with The Coca-Cola Company through
innovation and selective acquisitions to maximize profitability across our market territories;

strengthening our selling capabilities and go-to-market strategies, including pre-sale, conventional
selling and hybrid routes, in order to get closer to our clients and help them satisfy the beverage
needs of consumers;

implementing selective packaging strategies designed to increase consumer demand for our
products and to build a strong returnable base for the Coca-Cola brand;

replicating our best practices throughout the value chain;

rationalizing and adapting our organizational and asset structure in order to be in a better position
to respond to a changing competitive environment;

committing to building a multi-cultural collaborative team, from top to bottom; and

broadening our geographic footprint through organic growth and strategic

acquisitions.

PepsiCo
For PepsiCo, the benefits of global expansion include maximizing growth potential, gaining global scale,
achieving geographic diversity. They plan to achieve this by
o

Distributing global brands while ensuring local relevance

Creating affordable products that meet consumer needs

Strengthening advantaged local supply chain and go-to-market capabilities

Encouraging people to live balanced and healthy lives

The following statement is from PepsiCos Website under the Management Approach tab
With its strong leadership team, PepsiCo maximizes shareholder value and invests in entities that ensure
sustainable profitability. We have created the Performance Sustainability Leadership Team (PSLT), which
informs our Sustainability Steering Committee (SSC) on financial performance, strategy and goals. Our
performance goals focus on a series of long-term targets, which also are aligned with our short-term
needs. To deliver superior, sustainable financial performance, we will continue to put emphasis on
innovation and broaden our portfolio through mergers and acquisitions.
These two firms have goals of achieving higher profitability and maximizing growth, yet differ in there
approaches to do so. Coco-Cola plans to work towards improvingthe relationship with current
customers and growing the brand in major markets. Pepsi-Co's strategy suggests that the company is

focused on expanding globally to new untouched markets. The company hopes to earn a higher market
share by doing so.