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Coke vs. Pepsi Case Discussion. James Oldroyd Kellogg Graduate School of Management Northwestern University J-oldroyd@northwestern.edu. Sample Exam Question.

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coke vs pepsi case discussion

Coke vs. PepsiCase Discussion

James Oldroyd

Kellogg Graduate School of Management

Northwestern University

J-oldroyd@northwestern.edu

sample exam question
Sample Exam Question
  • Describe the history of the strategic management field from its origin to the present day, concentrating especially, but not exclusively, on its social, political, economic, religious, and philosophical impact on business organizations and individuals in Europe, Asia, America, and Africa. Be brief, concise, and specific.
  • Extra Credit: Discuss the major trends of the future of strategy give specific examples. (preferably days on which to buy and sell specific stocks)
sample exam question3
Sample Exam Question
  • In this class we have discussed the “experience curve” as a strategy concept.
  • A) Please describe and define what the experience curve is (identify what information you would need to calculate an experience curve (for a company or an industry).
  • B) Identify at least two ways that the experience curve is used by companies to help them in making business decisions.
  • Please describe Porter’s diamond model and discuss how it helps identify which countries are likely to produce companies that will succeed in international competition.
growth
Growth
  • How did the companies get us to double our consumption of soda?
entry costs
Entry Costs

Bottler

Concentrate Producer

Why are there more Bottlers than Concentrate Producers?

what are the other costs
What are the other costs?

http://www.pepsi.com/current/music/britney/video/pepx4296_nownthen_hi.asx

http://www.coca-cola.com/tvads/

why buy the bottlers
Why buy the bottlers?

Concentrate 40% margin

Bottlers 10% margin

Vs.

coke pepsi summary
Coke & Pepsi Summary
  • This case provides an understanding of the underlying economics of an industry and its relationship to average industry profits. The concentrate industry is, on average, more attractive than bottling.
  • The reason there is not more entry into the concentrate industry (even though only $5-10 million plant investment to serve the U.S) is largely due to barriers to entry:
    • Brand equity: cost to keep up with Coke & Pepsi ad spending is roughly $20-25 billion over 10 years (Coke brand valued at $75 billion in 1999).
    • Bottling/franchise system: cost of national distribution (80-85 plants) is $1.6-4.3 billion. May keep niche players out.
    • Limited shelf space, fountains, vending slots: cost of slotting allowances could be $500 or more per store; fountains may be impossible due to long term contracts/vertical integration.
  • Relative to bottling, the concentrate industry also has fewer substitutes, greater bargaining power over suppliers (the raw materials for concentrate) and buyers (buyers are fragmented). This all adds up to a more attractive industry structure for concentrate.
total barrier to entry
Total Barrier to Entry

Brand equity

$20-25 billion over 10 years

Bottling/franchise system

4.3 billion

shelf space

28 million +

(56,000 Stores X $500 per store)

$30 Billion +

Total

three levels of business strategy
Three Levels of Business Strategy

Industry

Firm

Business Unit

  • Which Business Units?
  • Business Unit Boundaries
  • Managing Cross Business Synergies
  • Choose Your Sandbox
  • Business Definition
  • Firm Resources

Strategic Advantage

industry analysis
Industry Analysis

Porter’s Five Forces Model

Threat of

New Entrants

Bargaining Power of Suppliers

Rivalry among

Existing

Competitors

Bargaining Power of Buyers

Threat of

Substitutes

barriers to entry what factors keep potential competitors out

Industry

A

D

B

C

Barriers to EntryWhat factors keep potential competitors out?

Threat of

New Entrants

Bargaining Power of Suppliers

Rivalry among

Existing

Competitors

Bargaining Power of Buyers

Threat of

Substitutes

  • Scale economies
    • e.g., aerospace industry
  • Scope economies
    • e.g., retailing
  • Capital requirements
    • e.g., aerospace industry
  • Switching costs
    • e.g., MSDOS operating system
  • Access to distribution
    • e.g., Campbell soup
  • Entry deterring regulations
    • e.g., Tobacco
nature and focus of rivalry why industries are more or less competitive

A

C

B

Nature and Focus of RivalryWhy industries are more or less “competitive”?

Threat of

New Entrants

Bargaining Power of Suppliers

Rivalry among

Existing

Competitors

Bargaining Power of Buyers

Threat of

Substitutes

  • Factors
    • Industry growth rates
      • Where to secure growth
    • Exit barriers
      • e.g., specialized assets, emotional barriers
    • Fixed costs
      • e.g. capacity increments
    • Lack of product differentiation
      • e.g. differences in functionality, performance
    • Switching costs

Industry

Competitive rivalry can focus on many factors, including price,

quality, technology, features, service, etc.

threat of substitutes what alternatives are available to customers

A

C

D

B

Customers

Threat of SubstitutesWhat alternatives are available to customers

Threat of

New Entrants

Bargaining Power of Suppliers

Rivalry among

Existing

Competitors

Bargaining Power of Buyers

Threat of

Substitutes

  • Direct substitution with the same functionality
    • diesel vs gas engines
    • DirecTV vs cable
  • Eliminating need for product
    • water meters vs flat rate

Industry

value division

Willingness to Pay

Value Captured by Customer

Price

Value Captured by Firm

Cost

Value Captured by Supplier

Supplier opportunity cost

Value Division

Customer

Firm

Supplier

Added Value is the total value created with the firm in the game – total value created without the firm in the game or the value that would be lost to the world if the firm disappeared. A firm cannot capture more than its added value.

supplier or buyer power how can my suppliers or customers extract value
Buyer Power

Supplier Power

Supplier or Buyer PowerHow can my suppliers or customers extract value

Threat of

New Entrants

Bargaining Power of Suppliers

Rivalry among

Existing

Competitors

Bargaining Power of Buyers

Threat of

Substitutes

  • Supplier concentration
    • Few vs many suppliers
  • Supplier volume
    • Large vs small purchase decisions
  • Product differences
    • Dependence on unique features
  • Threat of forward integration
    • Ability to become competitor
  • Switching costs
    • Limitations on ability to change suppliers
  • Buyer concentration
    • Few vs many customers
  • Volume of purchases
    • Large vs small purchase decisions
  • Available alternative products
    • Competitive products
  • Threat of backward integration
    • Ability to become a competitor
  • Switching costs
    • Threat of switching suppliers
slide18

How Industry Structure Influences Profitability

120

100

Others (>10)

(20%)

80

Green Giant

(4%)

Percent

of

Market

Others

(>1000)

(90%)

Others

(>10,000)

Campbell

(17%)

60

Swanson

(25%)

40

20

ConAgra

(1%)

Stouffer

(34%)

American (2%)

Kroger(3%)

Safeway (4%)

0

Farmers

Frozen Entree Makers

Food

5-10% ROE

20-25% ROE

Retailers

8-12% ROE

successful strategies should

Threat of

New Entrants

Bargaining Power of Suppliers

Rivalry among

Existing

Competitors

Bargaining Power of Buyers

Threat of

Substitutes

Successful Strategies Should:
  • Avoid excessive rivalry
    • (e.g., attack emerging vs entrenched segments)
  • Raise barriers to entry
    • (e.g., make preemptive investments)
  • Reduce the threat of substitution
    • (e.g., incorporate their benefits)
  • Minimize buyer power
    • (e.g., build customer loyalty)
  • Offset supplier power
    • (e.g., alternative source(s))
additional industry analysis tools
Additional Industry Analysis Tools
  • SWOT Analysis:

Numerous Environmental

Opportunities

Overcome

Weaknesses

Grow

Substantial

Internal

Strengths

Critical

Internal

Weaknesses

Restructure

Diversify

Major Environmental

Threats