Strategy 101: The 5 Forces that Drive Competition

 

 

In order to craft a strategic vision, companies must first conduct an examination of their external environment.  During this process, company management gauges their own position within the market by analyzing the competitive forces that are placing pressure on their ability to achieve a strategic competitive advantag (SCA) including: (1) rivalry among competing sellers, (2) potential new market entrants, (3) firms in other industries offering substitute products, (4) supplier bargaining power, and (5) buyer bargaining power.  For each of component of this Five-Forces Model of Competiton, the 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 the beverage giant 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 utilize the Five-Forces Model of Competition to assess the nature and the strength of each of the five competitive forces as it relates to the Coke’s Vision for 2020. 

 

Rivalry Among Competitors

Seller related competition in the soft drink industry is 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 dominates the entire beverage market with its 25 brands in 133 varieties worldwide.  The rivalry among the sellers in their industry would be seen as weak in that 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 simply, “Beat Coke”.

 

New Market Entrants

In the case of the Coca-Cola Company, the competitive pressures coming from the threat of new market entrants are weak.  Even though the soft drinks themselves cannot be patented (as opposed to the flavors 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.

 

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 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.  For Coke, pressure from substitute products is weak as brand loyalty provides a significant advantage over alternative beverage brands.

 

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.

 

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” by 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.

 

Sources

Fry, E. (2013). 50 Greatest Business Rivalries of All Time. CNN Money. Retrieved from

http://money.cnn.com/gallery/news/companies/2013/03/21/greatest-business-rivalries.fortune/2.html.

 

Howard, P.H. (2010). The illusion of diversity: visualizing ownership in the soft drink industry.

Retrieved from https://www.msu.edu/~howardp//softdrinks.html.

 

Patrick Lucas, Patrick Haley, Jackie Daigneault, Connor Scofield

https://sites.google.com/site/softdrinkindustrysaranalysis/porter-s-five-forces

 

Thompson, Jr., A. A., Peteraf, M.A., Strickland III, A. J. & Gamble, J.E. (2012). Crafting &

Executing Strategy (18th Ed.) New York: McGraw Hill/Irwin.

 

Thompson, Jr., A. A., Strickland III, A. J. & Gamble, J.E. (2010). Evaluating a company’s

external environment. In Crafting & Executing Strategy 17th Ed. (Chapter 3). Retrieved fromhttp://w3.salemstate.edu/~edesmarais/courses/470general/semesters/Fall%202010/3.%20Evaluating%20a%20Company%27s%20External%20Environment.pdf

 

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