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How Competative Advantage Allows Coca-Cola to Make Profits

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How Competative Advantage Allows Coca-Cola to Make Profits
Hypothesis:

This core competence, which gives coca cola its competitive advantage,
would be its strong marketing and brand name.

What is competitive advantage?

Companies are constantly trying to maximize profits, minimize losses,
and restrict the other company from gaining more market share.
Competitive advantage is the distinctive feature that makes coca-cola
stand out from its ferocious competitors such as Pepsi. Coca-Cola
makes use of its core competence i.e its main strengh in order to
achieve competitive advantage and stand out. In order for Coca-cola to
have higher demands than its competitors it needs to do something,
which makes that product better than the rest. If not demand would
fall and cause a disaster for coca-cola since revenue will fall
causing profits (page 2 of appendix) to fall aswell. This means costs
will have to be cut, which would mean having to fire many wokers
causing unemployment.

Having competitive advantage also allows coca cola to get bigger and
bigger through increasing sales or market shares. Getting big is an
advantage for coca cola and its costumers because when a business is
big enough and has high output economies of scale (page 1 of appendix)
can be achieved. This is where as output increases avareage cost per
unit falls. If costs are low it means that prices can be lower which
means contumers are attracted and as a result demand increases. This
increase in demand will cause an increase in total revenue (page 2 of
appendix) and as a result profit will increase. Not only this but
having economies of scale means that more can be produced at a lower
cost and more efficiently, which will reduce costs even more.

Although the industry's overall bargaining power of buyers is high,
Coca Cola is an exception to the rule. Coca Cola has amassed extreme
customer loyalty, reducing consumer price sensitivity over the years.
Thus, although Coca Cola's users can switch brands at anytime due to
the number of brands available to them, 'Coca Cola loyalists' prefer
the company's products over its competitors, irrespective of price,
significantly reducing buying power for other products. This is mainly
due to competitive advantage.

How is it achieved?

There are many ways in which a company such as coca-cola may get its
competitive advantage. The three main ways are through innovation,
relations or reputation.

First of all innovation can be used. This may certainly give coca cola
competitive advantage because it introduces a new product, which many
people will want to try. The advantages of this are that there would
be no subsitutes. This may mean monopoly power for a small period of
time. This will obviously push up sales by a lot increasing revenue
and therefore increasing total profit. Not only demand (page 3 of
appendix) will increase but also the monopoly is likely to erect
barriers to prevent competition. The fact that it has no substitute
would give coca cola inelastic demand (page of appendix). This is when
demand is less sensitive to a change in price. People will like to
purchase the good even though price is high because no substitutes are
available. It may also give coca cola brand loyalty which means
custumers will stay loyal to them no matter what happends. This may
mean that coca cola has a certain quantity of guaranteed sales which
means coca cola would know that there is a certain number of products
that will be sold for sure. Innovation also keeps the company dynamic.
In Japan, for instance, where the market is extremely dynamic, coca
cola introduces more than 200 new products each year. This will keep
the company changing and not stanked. This will prevent demotivation
and may motivate some workers. This motivation means that workers are
more willing to do their job better and therefore productivity will
increase.

However there are also some disadvantages, which mainly are the costs.
These costs come in the form of research costs to know what people
want and what they are looking for. The surveys and sending people out
will make short-term costs rise. This will cause a short-term fall of
profits. Another disadvantage is the reasearch and development of the
product itself. Maybe the innovated good requires new machinery that
has to be purchased. It may also mean introducing a new production
process. This will surely raise costs causing a short-term fall in
profit. Opportunity cost will be another disadvantage of using
innovation. This is the benefit of the next best option foregone when
making a choice between a number of alternatives. It may mean spending
money on a new product instead of spendind money on advertisment. The
risk of failure is quite big. It may be that the procuct is a complete
flock and would make the company lose large sums of money may make its
reputaion go down amongst its costumers.

Another technique that coca cola can use is reputaion. This is the
image that costumers and stakeholdres have from the company.
Reputation can be gained in a number of ways. Coca cola has chosen to
be “environmentally friendly”. Nowadays there are many people who are
said to be “green” and which would therfore praise cocacola for being
environmentally friendly. Being green can be done thorugh recycling.
Coca cola can use recycled raw materials or recycle them. Many of coca
colas plastic bottles are recyled and as a result less resources are
lost and costs decrese. This makes profits increse. For example in
2003 the recycling rate was 76%. This means that 76% of the products
were recycled or reused. Coca cola is also using methane processing
in its beverage industry. This process reduces the production of waste
and CO2 emissions. By making clean-burning bio-fuel from their
garbage, the Coke company will save about U.S. $577,000 per year on
waste disposal fees and about U.S. $78,000 on light and fuel costs.

The advantages of this are that there would be a good reputation
between the consumers. Being “green” will make people “back up” the
company and they may become brand loyal. If this happens then coca
cola can have guaranteed sales beacuse people will always be
encouraged to buy products from an “environmentally friendly” company.
It attracts a new market segment. It may also give coca cola price
inelasticity. Since it may be one of the few companies using this
method it can put prices up without the fear of losing demand. This
will mean they will have a higher revenue increasing long term
profitability. Recomendation may also be achieved by being “green”.
This recomendation may make coca colas sales increase beacsue people
will want to buy their product. This will increase revenue increasing
profits making coca cola able to expand.

This method will also have its disadvantages. Again it the costs of
this are high. Trying to be environmentally friendly may mean having
to invest in non-pollutant machinery which generally is much more
expensive. It also means having limited choice of suppliers beacuse it
has to look for ones which respect the environment. This will mean
they might have to put up with high prices since they have no other
choice. It may also mean introducing new production methods which will
make costs increase and a possible slow down in the process. This will
generally mean a short term reducement of profits and may result in a
slight increase of price which is risky if the product isnt price
inelastic enough, i.e if there is a cheaper alternative from a
competitor or if being “green” isnt the most important factor for
cosumers.

Another factor is marketing. This is a very important factor for coca
cola. In order for the comapany to maintain its strong market
position, Coca Cola needs to continuously strengthen its brand to
maintain brand loyalty and positive responses and differentiate itself
from its competitors. If coca cola used strong marketing it may raise
barriers to entry, thus decreasing the threat of new entrants to the
industry. Potential rivals within Coca Cola's target segments will
experience difficulties in entering the market, due to difficulties in
winning the 'Coca Cola loyalists' as well the company's large capital,
value-chain efficiencies and skilled resources. Coca Cola's brand
represents quality, taste and excitement to the market, qualities that
remain unmatched by the company's competitors, thus severely reducing
any threat of being substituted. Increased brand awareness and
publicity will reinforce Coca Cola's product s' benefits to its
customers, which will make it more difficult for rivals to compete on
the same level. . This is due to the fact that no matter what the
people in the advertisement are doing, the advert portrays them
enjoying themselves. This message that is conveyed through Coco Cola's
advertisements implies that no matter what personality or what ever
kind of lifestyle someone has drinking cola boosts their confidence as
well as allowing them to get pleasure from every day activities that
are considered as being dull. This makes marketing very essential for
coca cola because it is what it gives it this effect on people. All
the adverts are dominated by the colour red. This gives a bright,
bubbly, lot of energy, loving and not to mention lively atmosphere.
The white meaning a loyal, pure and trustworthy company and.

The disadvantages of this are obviously the high costs of
adevertisment. It takes lots of money to employ specialists who know
how to catch peoples attention and make advertisments succeful. It is
a.,,,,,,. As an example the first year's gross sales were $50 which
was not enough to cover the $73.96 advertising costs. However it is
vary rare for this to apeen now since there are things which can be
used to predict if it is going to be good or not. Advertising
elasticity of demand (page of index) is and example. It shows the
responsivness of demand to a change in advertising expenditure. With
this coca cola could predict how much to spend on advertising and if
it would be worth it or not.

Furthermore another technique that can be used is to have good
realtionships with stakeholders. These are groups of people affected
by any decision of the company. I will use consumers as an example.

APENDIX:

* Overview about coca cola company.

* Economies of scale.

* Monopoly Power.

* Motivation.

* Costs, Revenue and Profits.

* Demand curve to show a rise in demand.

* Price elasticity of demand.

* Advertising Elasticity of Demand.

The Coca-Cola company started up in 1883. It is truly global, and its
main product is recognised and consumed worldwide. The Coca-Cola
Company is the world's largest beverage company and is the leading
producer and marketer of soft drinks. The Company markets four of the
world's top five soft drinks brands: Coca-Cola, Diet Coke, Fanta and
Sprite.

Economies of scale are the factors that allow unit costs to fall as
the size of the firm grows. Internal economies of scale occur as a
result of factors within the firm. There are six types of internal
economies of scale.

[IMAGE]

The first one is Financial economies. Fims such as Coca cola have
several financial advantages beacuse they are large and so it becomes
a more credit-worthy borrower than a smaller firm. This means that a
large firms have more assets than a small firm, like machinery, deeds
to factories and offices, that they can offer to the lenders in case
of the unlikely event that they cannot repay the loan. Because this
event is so unlikely financial institutions are wiling to lend money
to these firms. Because of this low risk borrowing, financial
institutions may not charge them so much for giving them a loan and
large firms have more power to negociate lower interest rates and
lower administration charges.

Marketing Economies is another type. This is divided in two. The fisrt
thing is that large companiescan afford to advertise and as one advert
covers many units of products, the avarage costs of advertising is
low. For example coca cola inversts large sums of manoey on the
advertisment of “diet coke”. Although it is for diet coke it is
representing all the types of tastes of coca cola, so with one
advertisment it advertises many of its products. Altough large firms
spend huge amounts of money on advertising their products to create a
want for them, their advertising costs are spread over a very large
output. The other aspect of marketing economies is purchasing. This is
were large firms can buy “in bulk”. This means they get large
discounts to reduce costs and as a result avarage cost per unit falls.

Managerial economies is where large companies can afford to employ
skilled managers and specialist workers. This means that less mistaked
and waste is made which makes costs fall. Also coca cola is able to
afford to emply specialist buyers who have the knowledge and the
skills necessary to buy the best quality materials at the best
possible prices. This makes costs decrease.

Large companies such as cocacola can buy new capital. This means that
they save labour costs and repair/manteinance costs which makes
production faster. Output is higher and avarage costs falls. This is
called technical economies of scale.

Production economies. This is where large companies are able to
organise production and distribution in a way that reduces costs. For
example they divide up the production process into specialized tasks
so that production becomes faster as each owrker becomes and expert in
their particular job. For example in coca cola some workers can
specialise in creating the packaging material and another of the
bottling and canning the finished drink In small firms however there
are simply not enough workers or specialized machinery to make this
profitable. This specialisation makes production more efficient so
costs fall. Another example is tht coca cola can use transport to
reduce cost. By using big lorries it means they can carry more and do
all the things at once. This reduces costs such as petrol.

Finally there is risk-bearing economies. This is where in order for a
firm such as coca cola to reduce the risk of a fall in consumer demand
damaging the firm, large enterprises often produce a whole variety of
goods and servicves,so that if demand for one falls they still have
others they can make and sell. This is known as deversification which
means producing a diversity or whole variety of products.

External economies of scale occur as a result of the firm being part
of the market. An example of this is creating a common pool of labour.
The concentration of firms in the same place may lead to the build up
of a labour force equipped with the skills required by the industry.
This will reduce the training cost and again average cost per unit
falls.

Monopoly power is when one supplier controls the market. It is defined
by law that any firm that has more than 25 per cent share of the
market is a monopoly. Coca cola may gain this by introducing a new
product since there would be no substitutes and it would therefore
become the only supplier of that particular good. This may give it
monopoly power. As a result monopolist is able to permanently earn
high profits, way above the profits the firm could earn producing
another product in a different market. It is often refered to as
abnormal profits. This will also exert a strong influence on the
price, which they will charge for their product. It may mean having
price inelasticity demand goods, where price can be high without
affecting demand. This is calculated by dividing the percentage change
in quantity demanded over the percentage change in price. If the
figure is less than one then this shows that the product is price
inelastic.

Motivation is anything that causes people to achieve more than they
would otherwise do. There are many motivation techniques firms can use
in order to make their workers more motivated and therefore more
productive. This motivation may come in form of money, as Taylor
suggests, or in social needs, as Maslows hierarchy of needs suggests.
Motivated workers are verey significant for a company such as coca
cola. A motivated worker will be more happy to work and therefore
productivity increases and output per worker increases as well.
Reputation will increase thourgh improved quality and a friendly
service. Also waste errors decrease through high productivity and
costs fall. There are better industrial relations and therefore there
are few strikes which means production can carry on without any
failures. Another advantage of having motivated workers is that the
firm gets low labour turn-over which means less people leave the
company. This means less recruitment and training costs. Also there is
a low resistance to change. Poeple are happy and more willing to
change with the company to keep it flixible.

Profit is the money the company makes from sales after its costs have
been paid. Reward for enterprenures for taking risks of settting a
business. It is calculated by taking total costs from total revenue.
Coca cola made $1.72bn by the end of june of this year compared to
$1.58bn in the same period a year ago.

Total revenue is the money that is made when you multiply the quantity
sold by the price of your product. Coca colas revenue was $6.3bn, up
7% from the $5.91bn recorded in the same quarter in 2004.

Costs are dived into two. There are fixed costs which dont change as
output increases and variable casts which do change. Fixed costs have
to be paid even if zero is produced. For example coca colas insurance
or the rent it pays. Variable costs vary with outpu, if zero is
produced nothing is paid. Examples include raw materials or taxes.

These two are the divided into direct and indirect which help us have
a clearre idea of the types of costs. Direct costs are those involved
in the production process such as electricity. Indirect costs are
those which are not involved in production but help sales or
disribution. Things like marketing or transport are included.

Demand Curve:

[IMAGE]

In this diagram we can see what happens when demand increases. The
demand curve shifts to the right to “new demand”. As this happens
prices begin to rise slowly in order to prevent excess demand. More is
selled even at a higher price and equilibrium point moves from EQ 1 to
EQ 2. This is where demand equals supply.
Price elasticity of demand:

This is price sensity i.e how far demand reacts to a change in price.
If coca cola achieves price inelasticity it means she can play with
prices withtou having a big impact on the demand. It is calculated by
the percetage change in quantity divided over the percentage change in
price. If the value is less than one then it means it is price
inelastic. Possible things which might affet the elasticity of demand
is that its an essential product, its addictive of habit forming and
no substitutes or the company uses strong brand advertising such as
coca cola.

In this diagram we can see that when price is increased by a lot from
P1 to P2 the quantity change is very small. It goes from Q1 to Q2.
This shows that demand isnt very sensitive to a change in price. This
is what coca cola may achive through innovation, reputation or
relations.

To understand this better we can use a curve.[IMAGE]

Advertising elasticity of demand:

The calculation for this is the percentage change in demand over the
percentage change in advertising. If the answer is greater than one
then it is advertising elastic. This will mean that an increase in
advertising leads to a greater increase in demand. However if the
figure is positive it is inelastic which means advertising has little
impact on demand. This is a good way for business such as coca cola
for not wasting money.



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