Porters Five Forces In Action: Sample Analysis of Coca-Cola

Since its introduction in 1979, Michael Porters Five Forces has become the de facto framework for industry analysis. The five forces measure the competitiveness of the market deriving its attractiveness. The analyst uses conclusions derived from the analysis to determine the companys risk from in its industry (current or potential). The five forces are (1) Threat of New Entrants, (2) Threat of Substitute Products or Services, (3) Bargaining Power of Buyers, (4) Bargaining Power of Suppliers, (5) Competitive Rivalry Among Existing Firms. The following is a Five Forces analysis of The Coca-Cola Company in relationship to its Coca-Cola brand. Threat of New Entrants/Potential Competitors: Median Pressure

Entry barriers are relatively low for beverage industry: there is almost 0 consumer switching cost and very low capital requirement. There are more and more new brands appearing in the market with usually lower price than Coke products However Coca-Cola is seen not only as a beverage but also as a brand. It has a very significant market share for a long time and loyal customers are not very likely to try a new brand beverage.

Threat of Substitute Products: Median to high pressure\

There are many kinds of energy drink and soda products in the market. Coca-cola doesnt really have a special flavor. In a blind taste test, people couldnt tell the difference between Coca-Cola coke and Pepsi coke.

The Bargaining Power of Buyers: Low pressure

The individual buyer has little to no pressure on Coca-Cola The main competitor, Pepsi is priced almost the same as Coca-Cola. Consumer could buy those new and less popular beverages with lower price but the flavor is different and the quality is not guaranteed. Large retailers, like Wal-Mart, have bargaining power because of the large order quantity, but the bargaining power is lessened because of the end consumer brand loyalty. There are many kinds of energy drink and soda products in the market. Coca-cola doesnt really have a special flavor. In a blind taste test, people couldnt tell the difference between Coca-Cola coke and Pepsi coke. People are getting concerns of negative effects of carbonated beverages. Increasing number of consumers begin to drink fruit juice, lemonade and tea instead of soda products.

The Bargaining Power of Suppliers: Low pressure

The main ingredients for soft drink include carbonated water, phosphoric acid, sweetener, and caffeine. The suppliers are not concentrated or differentiated. Any supplier would not want to lose a huge customer like Coca-Cola.

Rivalry Among Existing Firms: High Pressure

Currently, the main competitor is Pepsi which also has a wide range of beverage products under its brand. Both Coca-Cola and Pepsi are the predominant carbonated beverages and commit heavily to sponsoring outdoor festivals and activities. As Coca-Cola has a longer history, it is advertised in a more classical approach while Pepsi tried to attract younger generation by using pop stars as brand ambassadors. Currently Coca-Cola slightly topped Pepsi as the possessor of the most U.S market share. There are other soda brands in the market that become popular, like Dr. Pepper, because of their unique flavors.

Coca Cola has an enviable track record and there are countless millions of costumers the world over and with its five forces strategy it has succeeded remarkably in differentiating its products. Learn more about Coke's Porter's Five Force Model right here on Bright Hub.

It Started as a Proposal

In the year 1979, Michael Porter belonging to the Harvard Business School, proposed a business plan based on the five industry forces to do a SWOT analysis. The aim was to help business enterprises enlarge their market share and augment their profit. Michael Porter's plan was to make organizations understand their competition strengths and weaknesses and then devise suitable mechanisms to overcome competition. The plan studies the combined strength of five different market forces to achieve profitability goals. Coke, based on the above model, designed its own strategies for product differentiation. This is how Coke's Porter's Five Forces Model

came into execution.

Why is it Required?

The five forces plan is to assess the status of the industry in the open marketplace. It goes into the nature of competition, examines the external threats and identifies the opportunities to achieve competitive advantage.
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Generally, business competition negates profits if the organization has no competitive advantage over its business rivals. When a competitor acts in a particular fashion and others respond to counter-balance it, the rivalry only gets keener.

Coke's Porter's Five Force Model - Need of Standardized Strategies

Coke recognized that designing products, manufacturing processes and marketing strategies are to be internationally standardized. These factors are dictated by the scales of economy of different countries and the imperative need for cheaper means of production. Thus, Coke studied the five industry forces to evolve its competitive advantage over Pepsi. As per Porters formula, Cokes Porter's Five Force Model plan was to differentiate its frontline Cola product from its chief rival Pepsi by adopting certain operational methods. To heighten its competitive advantage, Coca Cola applied the Porter's formula

Business Rivalry

The first aspect was the low business rivalry. The market was essentially shared by Pepsi and Coca Cola, with a combined market share of 80 percent. The fact is Coca Cola owns two of the three soft beverages in the market, has few competitors and constantly striving for international presence. The second was to consider the bargaining power with suppliers that can be rated as low. The role of Coca Cola was to primarily supply either sucrose or fructose and undertake the bottling work. Sugar is commonly available and can be bought in the open market. If sugar became overly costly, the company could buy corn syrup instead. They even bought this substitute earlier during the early 1980s. As a matter of fact, Coca Cola buys high fructose corn syrup as its ingredient inside U.S. and sucrose only in countries other than US.

Bargaining Power

The third pertained to the bargaining power that can be rated as medium. The main distribution channels are supermarkets, large scale retail chains, fountain sales, sales through vending machines and convenience stores attached to gas stations. The fact is vending machines, convenience stores and super markets have low bargaining power as there are not many alternates.

Sales and Brand Loyalty

Other channels like large scale retail chains and fountain sales which are situated in fast-food outlets have a marginally higher bargaining power. They buy in large quantities and thus expect lower prices. However, in real terms, this segment hardly contributes to meaningful profits for

Coca Cola. Likewise, the fountain sales are also in the nature of paid sampling with negligible profits. They more serve to promote brand loyalty among clients and not increased profits. Finally, to consider the possible threats of substitutes that may again be rated as low. There are quite a few reasons why the threat of substitute is low particularly against Coca Cola. The foremost of them is brand loyalty. Coca Cola has an enviable track record and there are countless millions of costumers the world over, who would never abandon the brand and other Coca Cola products. There is no denying that Coca Cola has succeeded remarkably in differentiating its products.