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Cola industry leaders, Coca-Cola and Pepsi, should practice game theory to better

understand their competitive market environment (See Exhibit 3)

Exhibit One – An Analysis of the Cola Industry Using Porter’s Five Forces Model (p 80)

Potential Competitors:

?? Companies that have a door to door distribution channel in place like snack companies

could choose to diversify into soda industry

?? Switching costs are low for consumers who risk very little by trying new brands or

beverages

?? Barriers to entry are relatively high, though, with large advertising budgets and

competitive brand loyalty to big players like Coca-Cola and Pepsi

?? The drinks with high growth and high hype are non-carbonated beverages such as juice

drinks, sports drinks, tea-based drinks, dairy-based drinks, and especially bottled water

The Bargaining Power of Suppliers:

?? Concentrate producers (CPs) negotiate directly with bottlers’ major suppliers –

particularly sweetener and packaging suppliers – to encourage reliable supply, faster

delivery, and lower prices

?? Coca-Cola and Pepsi are among the metal can industry’s largest customers and

maintain relationships with more than one supplier, giving these suppliers less

bargaining power due to the availability of alternative suppliers

?? Metal cans make up the majority of the bottlers’ packaged product (60%), followed by

plastic bottles (38%) and glass bottles (2%)

The Bargaining Power of Buyers:

?? Bottlers own a manufacturing and sales operation in an exclusive geographic territory,

with rights granted in perpetuity by the franchiser, subject to termination only in the event

of default by the bottler

?? 1980 Soft Drink Interbrand Competition Act preserved the right of CPs to grant exclusive

territories to their bottlers, giving less bargaining power to Bottler’s buyers because there

is no alternative supplier

?? Bottlers are locked into contracts that grant CPs the right to set prices and other terms of

sale

?? Bottlers are allowed to handle the non-cola brands of other Cps at their discretion

?? Bottlers are also given freedom in choosing whether or not to carry new beverages

introduced by the CPs but cannot carry directly competitive brands

?? Competition for brand shelf space in retail channels gives some bargaining power back

to buyers

Threat of Substitute Products:

?? Threat from substitute products are probably second in importance to the cola industry

only to the rivalry among established firms: coffee cafes, tap water, milkshakes, fruit

juice, hot tea, hot chocolate, chocolate milk and so on

Rivalry Among Established Companies:

?? Industry is largely consolidated with two major players and a few smaller competitors like

Cadbury Schweppes, making the companies interdependent

?? International demand for carbonated soft drinks is growing, but domestic demand is

slowing down substantially

?? Exit barriers are high for bottlers with expensive equipment, moderate for concentrate

producers

?? Advertising budgets are high, customers are influenced by brand perceptions

Source: Hill, Charles W...

and Gareth R. Jones. Strategic Management Theory. Boston:

Houghton Mifflin Company, 2001

“Cola Wars Continue: Coke and Pepsi in the Twenty-First Century.” Harvard Business School,

July 30, 2002

Exhibit Two – Macroenvironment Analysis (p 92)

Technological Environment:

?? Innovations in computerized technology could affect the bottling process, which involves

specialized, high-speed lines

?? Hot-fill, reverse-osmosis, or other specialized equipment is necessary to bottle the noncarbonated

beverages that have higher profit margins than the carbonated soft drinks

(CSD)

Social Environment:

?? Consumer trends shifting away from original product lines for health reasons– from diet

soda, to lemon-line, to tea-based drinks, to other popular non-carbonated beverages

?? An increasing trend in teen consumption of CSDs

?? Metal and Plastic containers commonly used by bottlers are recyclable are viewed as

environmentally friendly

?? Cultural differences across international markets are challenging when it comes to daily

operations and marketing cola industry products

Demographic Environment:

?? Explosive population growth in foreign countries like China translates into explosive

growth potential for those markets

?? Aging baby boomer population in United States may lead to a decrease in cola product

demand

Political and Legal Environment:

?? Soft Drink Interbrand Competition Act of 1980 secured the right of Concentrate

Producers (CPs) to grant exclusive territories to bottlers

?? Anti-trust legal suit against Coca-Cola by Pepsi over fountain drink monopolization in the

domestic market was dismissed in 2000

?? Pressure from the scientific community for the FDA to research the affects of caffeine

consumption and to enforce caffeine labels warning of the dangers of caffeine

consumption

?? Obstacles in international operations included political instability, regulations, price

controls, advertising restrictions, foreign exchange controls and lack of infrastructure

“Cola Wars Continue: Coke and Pepsi in the Twenty-First Century...

General points of the essay

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