Coke vs PepsiPepsi and Coke’s Uncivil Wars Essay

Chapter 9 in Competition Demystified Uncivil Cola Wars Coke and Pepsi dwell the Prisoners Dilemma What argon the sources of competitive advantages in the soda industry? First we should look at industry structure. The cola companies buy afflictive materials of sugar, sweeteners and flavorings from many suppliers so they turn the commodities into a branded product which consists of syrup/ distild combined with water and bottles. The companies are joined at the hip with their bottlers/distri unlessors who then sell to many retail outlets.Selling bulky and heavy beverages lends itself to regional economies of scale advantages. The soda companies cannot operate successfully unless their bottlers and distributors are profitable and content whether company-owned or franchised. The existence of barriers to entry indicates that the incumbents enjoy competitive advantages that potential entrants cannot match. In the soft drink world, the sources of these advantages are easy to identify. Fir st, on the demand side, there is the kind of client loyalty that network executives, beer brewers and car manufacturers only dream about.People who drink sodas drink them frequently (habit formation), and they relish a constancy of experience that keeps them ordering the resembling brand, no matter the circumstances. some(prenominal) Coke and Pepsi exhibit the presence of barriers to entry and competitive advantagestable *ROE can be influenced by whether bottlers assets are off or on the balance sheet Second, there are large economies of scale in the soda business both at the concentrate maker and bottler levels. Developing new products and advertising existing ones are fixed costs, unrelated to the number of cases sold.Equally important, the distribution of soda to the consumer benefits from regional scale economies. The to a greater extent customers there are in a given region, the more economical the distribution. A bottler of Coke, selling the product to 40% to 50% of the soda drinkers in the marketplace area, is going to have lower costs than someone peddling Dr. Pepper to 5% to 56% of the drinkers. During the statesmen era of Pepsi and Coke, what actions did each of the companies take? Why did they help put up profitability? Note the stability of market share and ROE.ROE dipped in 1980 and 1982 as Pepsi and Coke waged a price war. Yet, market shares did not transpose as a proceeds of the price warboth companies were worse off. Pepsi gained market share in the late 1970s versus Coke. Coke was slow and ill-chosen to respond. Price wars between two elephants in an industry with barriers to entry tend to flatten a lot of grass and make customers happy. They hardly ever result in a dead elephant. Still, there are better and worse ways of initiating a price contest. Coke chose the worst.Coke chose to lower concentrate prices on those regions where its share of the cola market was high (80%) and Pepsis low (20 percent). This tactic ensured that for every dollar of revenue Pepsi gave up, Coke would surrender four dollars. Coke luckily developed New Coke which allowed it to attack Pepsi in its dominant markets in a precise wayminimizing damage to Cokes profitsand root for a truce in the price wars. They made visible moves to signal the other side that they intended to cooperate. Coca-Cola initiated the new era with a major bodily reorganization.After buying up many of the bottlers and reorganizing the bottler network, it spun off 51% of the company owned bottlers to shareholders in a new entity, Coca-Cola Enterprises, and it loaded up on debt for this corporation. With so much debt to service, Coca-Cola Enterprises had to concentrate on the tangible requirements of cash flow rather than the chimera of gaining great hunks of market share from Pepsi. PepsiCo responded by dropping the Pepsi Challenge, toning down its fast-growing(a) advertising and thus signaling that it accepted the truce.Profit margins improved. Operating profit mar gins went from 10% to 20% for Coca-Cola. Pepsi gain was less dramatic but also substantial. Both companies focused on ROE rather than market share and sales growth. The urge to grow, to hammer competitors and drive them out of business, or at least trend their market share by a meaningful amount, had been a continual source of poor performance for companies that do have competitive advantages and a franchise, but are not content with it.