We can‘t really talk about the 5 forces that drive competition in business without at least touching on the forces that drive human behavior in general.
In fact, human functioning can be compared to a sailboat on our individual life journeys in that there are 8 forces that affect the speed, direction, and distance of our individual boats. And the other boats are the competition.
8 Forces that Drive Human Behavior
Human functioning is like a sailboat.
Internally, things like the boat’s steering wheel, destination, leaks, sails and compass represent our values, goals, weaknesses, strengths and feelings, respectively.
Similarly, external forces like the water (our current reality or environment), the weather (uncontrollable circumstances), and other boats (or other people) can affect us both positively and negatively.
In this same sense, leaders must understand how to deal with the forces that affect their business “boats” so that they not only stay afloat, but also enjoy long, prosperous voyages.
In order for companies to craft their strategic vision, they must examine both their internal and external environments.
Here we focus on the external competitive forces.
5 Competitive Forces that Drive Competition (the other boats)
In order to achieve a strategic competitive advantage to reach your business destination, it‘s important to gauge your own position within the market by taking a look at the external competitive forces that are placing pressure on your organization.
These five forces of competition include:
Rivalry among competing sellers
Potential new market entrants
Firms in other industries offering substitute products or services
Supplier bargaining power
Buyer bargaining power
For each component of this Five-Forces Model of Competiton, your team must determine
Which competitive pressures are active
How strong the pressures are
and whether the combined strength of all five competitive forces will be beneficial to earning a profit
In 2009, the Coca-Cola Company crafted their “Vision 2020”. In a statement to shareholders they stated,
Our growth algorithm is working. In 2009, we came together with our bottling partners to craft our 2020 VISION – a collaborative roadmap to double our system revenues this decade. Over the past three years, we have sold 3.3 billion incremental unit cases, added more than $30 billion to our market capitalization, boosted our daily servings by more than 200 million and met or exceeded our long-term volume, revenue and profit targets every year – all during one of the most challenging macroeconomic periods in recent history. Our brands are stronger than ever, we are gaining share around the world and our global bottling system is healthier than ever.
Here, we take a look at the Five-Forces Model of Competition to assess the nature and strength of each of the five competitive forces, as it related to Coke’s Vision for 2020.
1. Rivalry Among Competitors
Seller related competition in the soft drink industry was strong. In fact, 89 percent of all soft drink sales in the United States are controlled by three companies: The Coca-Cola Company, Pepsico, and the Dr. Pepper Snapple Group. One of the greatest business rivalries of all time has been between Coca-Cola and Pepsi and although Pepsi did enjoy a few years of outselling Coke in supermarkets, Coke has been the leader in drink sales for more than 100 years.
Not only does the Coca-Cola Company dominate the cola market, but it dominatethe entire beverage market with its (now) more than 200 brands in more than 200 countries worldwide. The rivalry among the sellers in the beverage industry can be seen as weak because, for the most part, sales are concentrated among a few large sellers. However, the strength of the rivalry between the top three, Coke, Pepsi and Dr. Pepper Snapple, would certainly be viewed as strong. In fact, at one time the motto of the Pepsi organization was literally, “Beat Coke”.
2. New Market Entrants
In the case of the Coca-Cola Company, the competitive pressures coming from the threat of new market entrants is weak. Even though the soft drinks themselves cannot be patented (as opposed to the flavor formulas and brands), and barriers to entry into the marketplace are low, existing firms in the industry have the tools to force newcomers out of the industry. Since Coca-Cola has strong distribution channels, relationships with suppliers and retailers, brand value and over 42 percent of the market share, they have the power to limit the pressure imposed by new market entrants.
3. Substitute Products
When consumers view the products in two similar industries as good substitutes for each other, then companies in one industry can experience pressure from companies in the adjoining industry. The Coke brand has long been known for what they refer to as their “secret formula” and while many try to duplicate their flagship beverage, none have been able to effectively copy it.
Similarly, companies like Red Bull, that produce substitutes for carbonated beverages such as water, sports drinks, and fruit drinks, also find themselves up against the Coke organization because they have so many competing brands in those market segments as well.
Even long-time Coke rival, PepsiCo, has recently replaced their Sierra Mist product with a new drink called Starry that appears to be another attempt at competing with Coke’s popular lemon-lime soft drink, Sprite. For Coke, pressure from substitute products is weak as brand loyalty often provides a significant advantage over alternative beverage brands.
4. Supplier Bargaining Power
The strength of a supplier – seller relationship depends on the supplier’s power to influence the terms and conditions of the supply within the market. In the soft drink industry, suppliers do not have strong bargaining power. Therefore, the competitive pressures that The Coca-Cola Company feels is weak. There are numerous equipment manufacturers in the industry, all of which are able to provide the company with the same types of products. Additionally, Coke owns many of its own supply companies so bargaining power is very limited.
5. Buyer Bargaining Power
Since the soft drink industry is large and extremely competitive, buyers can easily switch suppliers for little to no change in price. Soft drink buyers are also loyal to their preferred brands as many soft drinks have their own distinct taste. As a result, the competitive pressures stemming from buyer bargaining power are strong.
Coca-Cola likely crafted its “Vision 2020” while considering the competitive forces that place pressure on their potential for growth. Their position in the marketplace has produced competitive pressures such as strong rivalries, and strong buyer bargaining power. However, minimal pressure from new market entrants, substitute products, and supplier bargaining power, keeps The Coca-Cola Company on track in their pursuit of an even stronger brand.
And then there was a worldwide pandemic. Remember how we talked about 3 external elements that can affect our boats? The water (our current reality or environment), the weather (uncontrollable circumstances), and other boats (or other people or competition). The pandemic is a prime example of an uncontrollable, unforseen circumstance that completely shifted the speed and direction of boats, all boats, everywhere...something Coca-Cola could have never imagined in 2009 when they crafted their Vision for 2020.
Post originally published January, 2016
Updated May, 2023
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I’m Melanie Gallo, Ph.D., a WorkLife Psychology coach and writer specializing in personality and thinking habits. Through my fun and innovative app called Coach2GO, I help busy-minded people define, get and keep their WorkLifeJoy. Like to be notified of my future posts? Simply subscribe to Coach2GO today.