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Coca-Cola was discovered as a result of an accident. In 1886 a pharmacist named John Pemberton cooked up medicinal syrup. When he was done, he figured he had created a fine tonic for people who were tired, nervous, or plagued with sore teeth. He and his assistant mixed it with ice water, sipped it, and proclaimed it tasty. They wanted some more, and the assistant accidentally used carbonated water to mix the second batch. Instead of medicine, these men had created a fizzy beverage - one that is now consumed around the world. Today people guzzle 1 billion drinks a day from the Coca-Cola Company. But this new beverage was not an instant success. In the first year, Pemberton spent $73.96 promoting his new product but managed to sell only $50 worth.
"The Coca-Cola Company" is now the largest soft drink company in the world. Every year 800,000,000 servings of just "Coca-Cola" are sold in the United States alone. The company takes pride in being a worldwide business that is always local. Bottling plants with some exceptions are locally owned and operated by independent business people who are native to the nations in which they are located. The company manufactures, distributes and markets non-alcoholic beverage concentrates and syrups, including fountain syrups. The product includes primarily carbonated soft drinks, a variety of non-carbonated beverages, juices and juice drinks, and certain water products, such as Dasani. The company supplies the concentrates and beverage bases used to make the products and it provides management assistance to help it's bottler's ensure the profitable growth of their business.
Coca-Cola competes in the nonalcoholic beverages segment of the commercial beverages industry. Based on available data and a variety of industry sources, the estimate is that in 2004, worldwide sales of Company products comprised approximately 10 percent of total worldwide sales of nonalcoholic beverage products. The nonalcoholic beverages segment of the commercial beverages industry is highly competitive, consisting of numerous firms. These include firms that, like Coca-Cola, compete in multiple geographical areas as well as firms that are primarily local in operation. Competitive products include carbonated soft drinks, packaged water, juices and nectars, fruit drinks and dilutables (including syrups and powdered drinks), sports and energy drinks, coffee and tea, still drinks and other beverages. Nonalcoholic beverages are sold to consumers in both ready-to-drink and not-ready-to-drink form. In many of the countries in which Coca-Cola does business, including the United States, the primary competitor is PepsiCo, Inc.
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Coca-Cola’s Profit and Market Share Position
The financial results for the company performance will be presented in the table that will provide benchmark comparison with the appropriate financial data from the main Coca-Cola competitors as PepsiCo, Inc. (PEP) and Cadbury Schweppes (CSG):
KO CSG PEP
Market Cap: 106.90B 21.28B 94.26B
50,000 58,442 153,000
Share Price Estimated Gain
Current $44.40 $56.29 $41.08
FY End $47.44 $58.27 $44.16
% Change 6.85% 3.53% 7.49%
Next Fiscal Yr $51.76 $64.35 $47.64
% Change 16.57% 14.32% 15.97%
Sales and Income
Sales Growth: 4.40% 12.50% 8.50%
Total Sales: 22.15B 12.36B 29.72B
Income Growth: -11.10% 10.50% 13.40%
Total Income: 4.72B 1.27B 4.26B
Share Price Cost per Earnings and Strength
PE Ratio: 22.77 23.62 22.62
Net Profit Margin 21.30% 14.50% 9.80%
Debt/Equity Ratio 0.07 0.17 1.25
The head-to-head comparison clearly highlights that, having the biggest market share in the soft drinks industry, Coca-Cola is closely followed by its competitors. In 2000, Coca-Cola had a market cap of 111.10B and total sales of 20.5B, and Pepsi, respectively, market cap of 64.0B and total sales of 20.4B (Richey, 2001). Today, five years later, Pepsi almost got even with Coca-Cola from the Market Cap point of view, and left it behind from the total sales point of view.
Coca-Cola’s Resources, Capabilities, and Core Competencies
The currently dominant view of business strategy – resource-based theory or resource-based view (RBV) of firms – is grounded on the view of the company as a collection of capabilities. This view of strategy has a coherence and integrative role that places it well ahead of other mechanisms of strategic decision making. Traditional strategy models such as Michael Porter's five forces model focus on the company's external competitive environment. Most of them do not attempt to look inside the company. In contrast, the resource-based perspective highlights the need for a fit between the external market context in which a company operates and its internal capabilities. The resource-based view supports the perspective that a firm's internal environment, in terms of its resources and capabilities, is more critical to the determination of strategic action than is the external environment (Kotelnikov).
Each organization is a collection of unique resources and capabilities that provides the basis for its strategy and the primary source of its returns. In the 21st-century hyper-competitive landscape, a firm is a collection of evolving capabilities that is managed dynamically in pursuit of above-average returns. Thus, differences in firm's performances across time are driven primarily by their unique resources and capabilities rather than by an industry's structural characteristics.
Resources are inputs into a firm's production process, such as capital, equipment, skills of individual employees, patents, finance, and talented managers. Resources are either tangible or intangible in nature. With increasing effectiveness, the set of resources available to the firm tends to become larger. Individual resources may not yield to a competitive advantage. It is through the synergistic combination and integration of sets of resources that competitive advantages are formed.
Coca-Cola Company resources might be divided into five categories: (1) Financial Capital; (2) Physical Capital; (3) Human Capital; (4) Organizational Capital; (5) Brand Capital. Net operating revenues, gross profit, operating income, income before income taxes, and net income per share are key measurements of the key operating performance of the company. In 2004, net operating revenues totaled approximately $22B, a 4% increase from 2003. Gross profit totaled approximately $14.3B in 2004, an 8% increase from 2003. Operating income was approximately $5.7B, a 9% increase from 2003. Net income per share was $2 for 2004, a 13% increase from 2003. (SEC, 2005). Based on the financial results of the first quarter of 2005, cash from operations was $1.4B, compared with $1.2B in the prior year period, an increase of 18 percent. The Company intends to repurchase at least $2 billion of its stock this year. In February, the Company approved its 43rd consecutive annual dividend increase, a 12 percent increase over 2004.
Physical Capital is the stuff the Coca-Cola Company owns - manufacturing sites, distribution centres, telecommunications infrastructure and so on. Company headquarters is located is located on a 350-acre office complex in Atlanta, GA. The complex includes abot 2,000,000 square foot buildings including office, manufacturing, technical, and engineering facilities. The company also owns and leases multiple facilities for administrative operations, manufacturing, processing, packaging, packing, storage, and warehousing throughout the United States. As of December 2004. company owned and operated 33 principle beverage concentrate and/or syrup manufacturing plants throughout the world. In addition, it owns 83 principle beverage bottling and canning plants located outside of United States.
Human capital includes all the people who work for Coca-Cola Company, their skills, experience, expertise and credibility. As of December, 2004, company employed approximately 50,000 employees, compared to 49,000 at the end of 2003. Approximately 9,600 company employees are located in United States.
Organization Capital presnets the effectiveness of a company's organizational functioning derived from the complex interplay between a company's processes, structure, information technology and culture. The Coca-Cola Company is organized into five geographic operating segments (North America, Africa, Asia, Eurasia and Middle East, and Latin America) as well as a corporate segment.
Brand Capital of Coca-Cola Company includes the product itself (as the first wave of branding), the aspirational lifestyle associated with the product (as the second wave of branding), and the set of values, experiences, and ideas that the product represents (as the third wave of branding). "Our flagship Coca-Cola brand empowers us, without a doubt, with a tremendous competitive advantage and a solid foundation for success. But it is just one of many elements that enable Coca-Cola to create increasing levels of value in an ever changing market environment," said Hector Gorosabel, vice president, North Latin America Division, The Coca-Cola Company. (Michaels, 2002).
Coca-Cola capabilities are the capacities for a set of resources to perform a stretch task or an activity. Through continued use, those capabilities become stronger and more difficult for competitors to understand and imitate. As a source of competitive advantage, Coca-Cola Company capabilities are neither so simple that they are highly imitable, nor so complex that they defy internal steering and control.
Core Competencies are those features that a company has that either can't be matched, or that will be difficult to be matched by other firms. Core Coca-Cola competencies include company brand, its distribution system, and its human assets. Coca-Cola is the most popular and biggest-selling soft drink in history, and is recognized as the most valuable brand in the world. Company owns and licenses nearly 400 brands – included carbonated soft drinks, juices and juice drinks, sport drinks, water products, teas, coffees, and other beverages – of which approximately 1.3B servings a day are consumed worldwide. Coca-Cola distribution system covers certified bottlers, selling company branded products in over 200 countries on six continents to businesses and institutions including retail chains, supermarkets, restaurants, small neighborhood grocers, sports and entertainment venues, schools and colleges. Company employees contribute greatly to the business model success. To meet its long-term objectives, company actively cultivate a diverse workforce and establishes the business culture that fosters learning, innovation, and value creation on a daily basis.
Coca-Cola’s VRIO Framework
VRIO framework provides the evaluation structure to determine which company’s resources and capabilities result in which strengths and weaknesses. All the company resources and capabilities should be (1) Valuable; (2) Rare; (3) Inimitable; (4) Organization should effectively exploit them:
1. Coca-Cola Company resources and capabilities are valuable, since they contribute to fulfillment of customer’s needs at a price customer is willing to pay. This price is determined by customer preferences to use Coca-Cola products over the alternative products on the soft drinks market, including available substitutes.
2. Company’s resources and capabilities are in a short supply, creating competitive advantage and going beyond competitive parity. Since rarity of the company’s capabilities and resources persists over long time period, the sustained competitive advantage is generated.
3. Coca-Cola Company resources and capabilities are not easy to imitate due to cost asymmetries on this market. Company without resources and capabilities faces a significant cost disadvantage in obtaining them compared to company that already possesses them. Sources of cost disadvantages are in impediments to imitation and early-mover advantages. By moving on the soft drinks market long time ago, Coca-Cola set in motion a dynamic that increases the magnitude of the early-mover advantage relative to the other competitors over the time.
4. Coca-Cola Company organizational structure is optimized to exploit competitive potential of its resources and capabilities. It includes company’s management and control systems, compensation policies, and business processes.
Valuable? Rare? Costly to Imitate ? Exploitable by the Organization? Competitive implications Economic performance Strengths or Weaknesses
No - - No Competitive Disadvantage Below normal Weakness
Yes No - No Competitive Parity Normal Strength
Yes Yes No Temporary competitive advantage Above normal Strength and distinctive competence
Yes Yes Yes Yes Sustained competitive advantage Above normal Strength and sustainable distinctive competence
Based on the VRIO framework (Jaquier, 2003), Coca-Cola Company has sustained competitive advantage and above-normal economic performance.
Coca-Cola’s Competitive Advantage
Company's competitive advantage derives from its ability to assemble and exploit an appropriate combination of resources. Sustainable competitive advantage is achieved by continuously developing existing and creating new resources and capabilities in response to rapidly changing market conditions. The cola market has been characterized in recent years by greatly increased trade and consumer promotional campaigns by the market share leaders. Constantly changing advertising campaigns that are tightly coordinated with complex promotional calendars Coca-Cola Company stands in contrast to the smaller firms who have engaged in far fewer campaigns and less complex promotional calendars. Coca-Cola Company is positioned as heavily promoted brand. Indeed, although its list prices typically exceed the list prices of the smaller share brands, its promotional efforts ensure that its products are available at a promoted price at virtually any given time in a store (Ghosh & John).
Coca-Cola has a unique position in the drink business. It has created soft-drink flavors that promote consumption by having very little aftertaste while being extremely refreshing. However, based on the current economic and social trends, the Coca-Cola competitive advantage might significantly erode in the future due to the changes in the non-alcoholic beverages business environment. These include changes in consumer preferences, including changes based on health and nutrition consideration and obesity concerns, shifting consumer developments and needs, changes in consumer lifestyles and increased consumer information, and aggressive growth of the competitor’s market share.
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