To: Upper Management
From: Jimmy Blodgett
Subject: External Analysis of U.S. Cola Industry
Date: August 31, 2014
Purpose of the Report
Per your request, our team has spent the last month analyzing the competitive environment of the cola industry in the United States. Utilizing tools such as the Porter’s Five Forces Framework and PESTEL (political, economic, social, technological, ecological, legal factors) we were able to better create an external analysis of the industry. These tools are necessary in performing a successful external analysis. Throughout this memo we will apply these tools to the cola industry and we will highlight how these tools ...view middle of the document...
Entry into the industry would not be strategic for our firm.
Strong Rivalry within Cola Industry
Product differentiation within the cola industry is low. While Coke and Pepsi each have unique products and formulas, consumers do not find large differences in the taste of the colas. This has led to a high level of rivalry within the cola industry, forcing Coke and Pepsi to compete in areas such as pricing, promotion, and customer relations. This rivalry is not hidden by the two firms, exampled by former Pepsi CEO Alfred Steele mentioning that his main goal was to, “Beat Coke” (“Cola” pg. 6). With each new strategic initiative by Coke or Pepsi over the last century, the other competitor has responded with their own initiative. Examples include:
* Restructuring of bottling agreements and Customer Development Agreements (CDA) with retailers to gain more control of distribution
* Lowering pricing and increasing advertising and promotion spending
* Developing new product lines and expanding snack and food enterprises
Retailers Continue to Hold Power
In the past, the threat of supplier power was high in the cola industry. However, recent changes in the distribution strategies of Coke and Pepsi have brought the threat down to a medium level. Franchised bottlers have a lot of power as they can make decisions regarding where to test market the product, the amount of local advertising, packaging choices, and retail pricing (“Cola”, pg.3). Recognizing this threat, both Coke and Pepsi have acquired their largest bottle franchises and consolidated them in order to gain direct control over distribution. The consolidation of the bottle franchises has in turn limited the power of the concentrate producers, as these suppliers have limited options to sell their product.
Similar to the bottling industry, consolidation in retail has increased significantly which is a concern to the cola industry....