Cola Wars Analysis - BIZ3147 PDF

Plan for Today Case Discussion: Cola Wars – Industry profitability analysis using five forces model...

Plan for Today Case Discussion: Cola Wars – Industry profitability analysis using five forces model – Rivalry of CPs: Who is winning the cola war? – Can the war continue? Cola Wars Continue As this lecture material is produced and published for the purpose of teaching for Yonsei University students, it cannot be used for purposes Prof. Bo Kyung Kim other than educational purposes, and cannot be shared with others. The legal responsibility for the violation lies with the student themselves. Industry Structure: Five Forces Model Power of Five Forces Strength of Competition Value - Large number and relatively Threat of Entry similar size of competitors - Lack of economies of scale - Price competition (high capital requirements) - Lack of product differentiation - Lack of product differentiation - Lack of mutual familiarity / - Low customer switching costs repeated interaction - Government regulation Price - High supplier concentration - Low percentage volume sold to the industry - High buyer concentration - Distinctiveness of suppliers’ products - Slow market growth - Strategic importance of the suppliers’ Cost products - High percent of product sold to buyer - Lack of differentiation in products sold to - Threat of forward integration buyers A key point in using the framework is to know that we are taking - Closeness (from consumers’ perspective) - Lack of strategic importance of product to between substitutes and industry’s product/service the buyer incumbents’ perspective to analyze the industry structure - Low switching costs - Threat of backward integration by buyers Industry Chain of the Cola Industry Profitability Across Industry Chain Exhibit 4 suppliers buyers average profitabiity Inputs concentrate operating income -> concentrate producer 32% / bottlers 8% why different? apply five forces model can show producers Customers Distributors (Ingredients- sugar) Coke, Pepsi, Bottlers Cadbury, etc 1) Supermarket 1) CP owned, / Club stores 2) independents, (e.g. Wal-Mart, Costco) 3) private label 2) Fountain / Vending 3) Convenience stores Packaging (can, plastic) Sweeteners water, coffee, juice = substitute of concentrate producers no contatiner, dispenser.. = substitute of bottlers very attractive industry!!!!! (Gross Margin 78%) Profitability of Soft Drink Industry Industry Analysis: Concentrate Production market share 72% (top 2 cocacola, pepsi) 90%(top 3) *tab 2, tab 3, tab 4 참고 Not significant scale(relatively) price competition (CPI) 2.9% price of average products increase *exhibit 5 New Entrants *is there any buyers if you enter this industry? 1. How can companies that sell “colored, sugar concentrate price 3.6% retail price of cocacola decline every year -> affecting bottlers Exclusive deal with bottlers *bottlers already have exclusive deal = even if enter, water” be so profitable for so long? no price competition going on! bottlers can’t switch easily *가격 경쟁-> 가격을 낮춰야함.. **already dominated.. product differentiation -> ‘perceived’ product differentiation very big Product differentiated *they are very unlike to engage price differentiation! top 2 dominating, no making other rivalry company -> very difficult to come in! *hard to run the business.. 2. Why are most of the profits in this industry LOW Competitive LOW Suppliers Buyers earned in the concentrate business as opposed Rivalry to the bottling business? LOW exclusive deal. commodities -> not differentiated, only one buyers(bottlers) only one suppliers(cocacola) suppliers X have bargaining power.. concentrate producers이 결정함.. it’s LOW bottlers은 thousands 인데 concentrate producers은 소수임 it’s LOW Analysis of Industry Structure can give insights Substitutes coffee, water, milk.. -> high threats?….과연? -> 얘네가 갑자기 생산라인을 바꿔서 코카콜라로 할 수 있나? -> still bottlers need to change the pipeline.. -> 결정해야됨 bottlers can change their factory easily? -> 이럴 가능성 거의 없음 substitutes의 존재 => X high substitutes.. *like 맥주랑 와인이 서로의 대체재지만 찐으로 대체재가 될 수 없음 LOW  Industry Analysis: Bottling Cola Industry Chain - Dominance of ______ New Entrants cf. Exhibit 5 Competitive Suppliers Buyers Rivalry Substitutes Who has been Winning the Cola War? Who has been Winning the Cola War? Exhibits 2, 3 & 8 Who has been winning? Who has been losing? Changes in Industry Structure Firms’ Activities and Industry Structure Dynamics of the Industry Structure Firms may be able to affect industry structure – Relatively stable and persistent over time in practice – Firms which are advantageously positioned in an – Undergoing modest adjustment industry can create market power – Sometimes abrupt changes to any of the five forces – Example M&A within the same industry Examples of major changes Increase scale economies – Pharmaceuticals: Expiration of a patent and the threat of new entry Increase size/clout vis-à-vis – Household appliance manufacturers: Consolidation of buyers/suppliers retail channels and the bargaining power of buyer Starve smaller players – PC manufacturers: Emergence and popularity of tablets and the threat of substitutes Respond faster to new product and innovations Can the War Continue? In the Water Bottle Segment? Exhibits 1 & 2 Will Coke and Pepsi be able to repeat their success with CSD in the water segment, or will a new competitive dynamic emerge? CPs in the Water Segment Key Points to Remember New Entrants Understand the underlying economics (structure) of the industry – Industry chain – Understand industry structure and how it affects average profitability Suppliers Competitors Buyers Understand how firms who are advantageously positioned in an industry can create (and then exercise) market power Substitutes – Coke/Pepsi is a clear example Next Class Reading: Walker & Madsen, Chap. 4, “Strategy Over Time” – Describe the three stages of industry evolution. – What are the three major types of industry disruption? – Explain how the maturity stage affects competition within a given industry.