Economic Analysis, Business Strategies and Risk Analysis of Coca-Cola Company - Case Study Example

Economic Analysis, Business Strategies and Risk Analysis of Coca-Cola Company Name Institution Table of Contents Table of Contents 2 Economic Analysis, Business Strategies and Risk Analysis of Coca-Cola Company 3 Introduction 3 Business Objectives 3 Product Marketing 4 Product 5 Market Growth 5 Market Characteristics 5 Coca-cola marketing strategy 6 Product Packaging Innovation 6 Pricing strategy 7 Discount Pricing 8 Coca-cola Promotional Strategy 8 Personalized Selling 8 Place of Distribution 9 Total cost 10 Microeconomic Theory 11 Non-price Strategies 13 Risk Analysis 14 Power of Suppliers 14 Power of Buyers 15 Conclusion 16 References 17 Economic Analysis, Business Strategies and Risk Analysis of Coca-Cola Company Introduction Coca-cola Company has grown to be the world’s largest leading manufacturer, retailer and marketer of non-alcoholic beverage concentrates. It essentially operates internationally in more than 200 nations. The firm has its head office in Atlanta in US. The firm is reported to produce over 300 beverage brands and estimated sales of 1.06 billion unit products are consumed on a daily basis across the globe. However our report is based on coca-cola product profitability strategy in the U.S market. The firm has witnessed constant operating success in over a century. The coca-cola product has a large share of the cola segment holding an estimated 85%, with the firm possessing sufficient capital to propel its business expansion. The coca-cola products objectives are driven in increasing consumption by a 4% point among 13-24 year old target market, increase brand health by a 3% in US market. Business Objectives Coca-cola company objectives are to supply every customer their favorite drink aimed at satisfying consumer needs. Company management strives to generate profit importantly for their shareholders, and it fights to increase market share within the US market. Product Marketing Product marketing is the role assumed by coca-cola business plan, pricing strategy, promotional activities and product-service distribution to individuals. The key benefits defined by coca-cola classic and valuable gateway was the concept ‘Coke side of life ’. This was an essential recognized brand in 2006 which triggered increased consumption as the product sales rose by a 3% the strategy was employed successfully yet the secret formula has not changed, the consumer test is shifting (Kaplan, 2000, pp.47-51). The marketing team strategy remains creative aimed at reaching consumer changing dynamics this is aimed at countering consumer changing preferences. The business strategy applied remains sensitive in reaching younger consumers avoiding the bans restricting the company’s ability in some given demographics outside to reach their target market and observe health concerns. However the product faces a steady decline in carbonated product category, with the key drivers of this decline being health smart consumers (Ball, 1998, pp. 78). The targeted consumers are educating themselves when it concerns product consumption and their health implications on their consumption choices. This causes a shift in the market demand for the product from regular to a diet soft drink as consumer focus on adopting a healthy lifestyle. The health smart trend achieves a steady market share of diet sodas. In addition, coca-cola product be positioned in a monopolistic market the brand seeks to differentiate itself from the rest of her competitors. Product Basically the company’s product include beverage, although it has over 300 beverages brands with its main brands identified to be coke, fanta, fruit juice and PowerAde. The company’s products are packaged into plastic bottles of different sizes. It also provides attractive packages by use of aluminum cans. Coca-cola is the most established and known trademark, recognized by an estimated 94% of the world’s population. The business remains very successful holding very good reputation among the customers (Timothy and Fisher, 2010). Market Growth The carbonated has started looking for greater variety in their drinks and have recently develop strategies of designing health conscious products. This can be explained by a growing segment in the market, owing to increased health concerns. The market for the carbonated beverage within the US market generated over $63 billion for the 2006 fiscal year, which is estimated to grow at a rate of 0.2% from 2004. Market consumption volumes were expected to be 30 billion in 2008, however the market is estimated to reach $62.9.3 billion by the end of 2012. A forecast that reveals a declining rate estimated to be -0.3% for a period of five years. Market Characteristics The coca-cola company is in a market that can be identified by three main features: a) Existence of many sellers b) Each company produces a slightly different product c) Firms can enter or make an exit in the market freely Coca-cola marketing strategy Marketing strategy is applied to differentiate her product from the main competitors in gaining a competitive advantage. For instance expansion to be place in an imperfect competitive market, in 2002 the company extended the product by developing new products coke lemon with and vanilla coke. This extension responded to consumer demands generating sales and profit. It should be understood that the firm operates in an imperfect competition market which can be identified by free entry of other market players, existence of other many firms doing same business and the fact that firms use product differentiation marketing strategy to win over customers. Product differentiation in a monopolistic market competition is the most outstanding feature in this form of market, considering that it resembles monopoly market competition (Froeb, 2009 p.34). The difference among the two is that products are never identical as goods produced under monopolistic are deliberately differentiated. Most market players under imperfect competition, in our case Coca-cola set this brand to appear superior compared to other market providers. Product Packaging Innovation Packaging is one area that is well perfected by soft drink firm providers. Coca Co Company. This can be explained in the packaging system adopted to drop traditional way of packing that was available in glass bottles. The newly adopted packaging model system packaging in cans and self-service vending machines boosted sales. However, currently these services are found almost every place within the U.S city. Looking at products offered in the market for instance Coca-cola and Pepsi-cola which are both offered in the US market, it is evident that the two brands are close substitutes. The firms strategy to increase its product sales involves re-branding, a strategy that influences customer by creating ideas that present the product to be superior compared to the market rivals. In monopolistic markets, imaginary or real differentiation is felt by buyers. This often affects product demand (Laury, 1999). Pricing strategy The company product pricing strategy adopts a competition based pricing strategy. Coca-cola products are occasionally priced below; above or equal to its market rivals prices (Niven, 2002). For instance, during Easter season of 2003, coca-cola verses Pepsi, the coca-cola soft drinks of two liters quantity was sold at $1.68 while her rival Pepsi-cola sold the two liter units at $1.87. In this for of completion market, the coca-cola pricing strategy is developed in an effort to win over more customers compared to her rivals. If coca-cola base on this form of pricing strategies, a slight price drop or climb in products of one firm’s products in the market considerably decrease or increase to a given extent the customer share (Goodwin & Ackerman, 2009). How much the sale increase or drop, depends with competitor’s action in either lowering or increasing price. This will certainly depend upon product differentiation of the other market competitors. For instance, if coca-cola products prices are revised down by 3% on the current rate, it may possibly influence consuming pattern in the market with a possible increase in sales and a commanding market share. While a possible increment trigger the opposite reaction. This effect is driven to other market player such as Cadbury Schweppes will have to possibly adjust their product selling price in an effort to retain their market share. Discount Pricing Coca-cola products are more often reduced to lower price during sale periods and identified special occasion. These strategies are aimed at increasing sales volume and ultimately increase product profits. Basically the pricing strategy is designed to meet the competition pricing. Coca-cola products pricing are set almost the same level as those of its rivals. The firm too adopts a psychological pricing, for instance a pack of coca-cola 375ml can be priced at $ 9.8 considering that the pack was initially suppose to be sold at $ 10. This strategy makes consumers pensive the product offered is cheaper, and influences product demand hence boosting the overall sales and profit. Coca-cola Promotional Strategy The company uses advertising as its main source of improved market awareness. Coca-cola advertisement target mainly television audience, the firm management believes this source of advertising is the best strategy used to reach a larger number of audience. Personalized Selling The coca-cola company has a highly trained ales team who act as firm’s representative to the retailers. This strategy helps in maintaining business services and developing customer company loyalty. Over the years this strategy has demonstrated to be a highly effective in achieving business objectives. Place of Distribution The company sells its product to bottling and canning operations, fountain wholesalers and distributors. This group is then responsible in distributing products to retail outlets. The coca-cola products short term production decisions in the market can be explained by comparing the total cost and revenue curve as displayed in the graph below. The total curved indicates the total revenue and cost of coca-cola production in the market. (Niven, 2002) Total revenue, depicted by a slight curve in green line, revealing total revenue generated from the coca-cola product. The curve indicates the lowered price for products sale at a larger quantity. Figure 1: Source Total cost The predominantly curvy red line indicates the total cost incurred during production of the coca-cola brands, the shape of the curve is based on the increasing and decrease of the marginal returns (Niven, 2002, pp. 128). Understanding that the firm product is placed in a free entry market other firms realizing that the substitute products are doing well in this market they will introduce their products to the market with an intention earn a market share. This reduces the customer share that coca-cola already has. Coca-cola resort extensive marketing a strategy with intentions of improving sales revenue. However, the process is extremely expensive, this increases the total cost limiting profits generation from the collected marginal revenue at long run. Microeconomic Theory The coca-cola management adopts the microeconomic managerial concept in formulate logical managerial strategies of pricing, product differentiation among other models in an effort directed towards business success. The microeconomic theory of a firm identifies the gap between economic theory concepts and practice. The concept of microeconomics provides business managers with clear models seeking to deal with scarce resources in succeeding. The theory provides models dealing with effective use of scarce resources (Laury, S. K 1999 p. 617). The concept provides statistical and analytical tools in assessing economic theories in solving practical business problems. Management business practice uses both economic theory and the econometrics for rational managerial decisions. Econometrics is the use of statistical tools in assessing economic theories through empirical measures determining the economic relationships between economic variables. This decision depends on the achieved business informational data in solving economic problems (Saraswathi, 2000, pp. 66). Although the coca-cola brand is more likely to earn the economic benefit when it comes to profit on investment returns, this is not guaranteed. Figure 2: source In the diagram above, it can be seen that the long-run equilibrium is in imperfectly competitive market. The coca-cola supply revenue generated exceeds marginal cost (MC) and the firm output indicates that it does not produce at the least possible point of the estimated average total cost (ATC). Under this circumstance coca-cola promotional events create reduced markets competitiveness as it serves to influence consumers’ tastes rather than serving the purpose indented that is giving information on the product. Product advertising develops consumer perception that there is a greater dissimilarity between two or more products than it really exists. Thus demand curve for product becomes more inelastic as firms charge higher mark-up over the incurred marginal cost (Hall, 1993, pp. 120). Non-price Strategies Firms trading under imperfect competition market make every effort to succeed over the customer share in the market. Other than in a perfect competition markets where price increment is eminent, price cutting is characterized by this kind of market competition with firms embracing after sales service and gift scheme or discount on products that part of the elements that are not declared in the price list (Pindyck, 2001). With this kind of diversity, the firm’s products is no longer taken for granted, this is because product sale will majorly depend upon sale efforts. Since each firm in an imperfect competitive market produces a product that is slightly different from other products, this kind of market setting creates the possibility having introduction of many product (Maheshwari, 2005, pp. 19). Whether the number is optimal or not it depends on two externalities. a) The business product variety externality is often looked at as an encouraging externality to consumers while introducing new product. b) Business stealing externality is an unhelpful externality, since other firms lose customers and profits by addition of a new product. Since the competitor does not use these externalities into account in deciding whether or not to go into the market, it is never clear to whether the real number of products will be most favorable, or even below optimal(Lehman, 2007, pp. 48). Part 3: Risk Analysis Based on the company analysis, there are five forces revealing favorable market and a profitable investment for investors. Based on the facts that the concentrate producers and bottlers are both profitable, the two parts in the soft drink business are interdependent on sharing costs in distribution, production and marketing. Many of the company’s functions overlap. For instance coca-cola company relies heavily on the bottling partners. Due to increased customer educational messages on health lifestyle, company’s carbonated beverage faces a slow growth in the US market and beyond (Kaplan, 2000, pp. 122). In addition, presence of other substitute products in the market potentially affects the company’s business activities. Product pricing is of great importance if the firm has to remain competitive in the market. For instance a slight increase in Coca-cola brand potentially invites reduced profits. This can be explained in the shift of demand as Pepsi-cola a main rival in the market takes over as customer’s consumption shits to the ideal substitute in the market. it the pricing strategy is not observed can lead to increase total cost of production above the marginal revenue a situation that could lead to ultimate losses in the long run. Power of Suppliers The input for coke product was primarily sugar and packaging. Sugar could be easily accessed from many sources within the market, when sugar become expensive the firm could easily switch to corn syrup. Suppliers of nutritive sweeteners have little bargaining power against Coca-cola’s brand coke or either to its bottlers. However, with time entry of other providers in the market providing NutraSweet products as the soft drink market gained other suppliers this influenced the bargaining power against coke lowering their price (Luke & Froeb, 2009, pp. 64). Power of Buyers The soft drink industry sold to customers through several principal channels as earlier mention. Use of store for instance creates a highly fragmented industry, most of this used store counted on the soft drinks to generate consumer traffic hence they needed to involve either of the providers’ products. However, due to their higher degree of fragmentation, most of them benefited from this as the chains are reported to control up to 25% of the region produced products. However, the did not have bargaining power over profits made by the producing firms and consumers expected to pay less through h these channels hence lowered prices and further ended up in reduced profitability for the distributors as mach of the profits were made by the producing company (Niven, 2002) . The fountain equipment was the least profitable channel (Kuiper, 2009, pp. 44). However, the firm management identified this strategy of worked as sampling as most of these fast food chains only needed to stock product of only one producer to fully negotiate for an optimal pricing. This channel too served as an avenue for building brand recognition and loyalty among her customers. The firm only made an estimated 5% margins of the generated profit while the fast food chains made 75% gross margins on the fountain drinks. Conclusion In general the firm’s soft drink business remains successful and favorable for generating positive economic profitability. This is a rived due to close economics link between coca-cola business and bottling business (Pindyck, 2001, pp. 83). The two businesses are dependent on the same customers. Take for example in the case of materials such as aspartame they are directly incorporated to the coca-cola concentrates division. However, the coca-cola concentrate passes along any negotiated saving to their bottlers. More importantly, the management adopts a competitive pricing strategy which is based on the competitor’s price offer, this is of great significance considering that the company products have potential substitute within the market. In this case any price increase could result to customer shift towards other substitutes that sell cheaper hence losing out on increased marginal revenue. References Ball, S. B 1998 Research, Teaching, and Practice in Experimental Economics, Review Article, Southern Economic Journal , Vol, 64:(3), pp.772-779. Hall, G. J. (1993). How to Make Reengineering Really Work. Harvard Business Review , pp. 119-131 Kaplan, R. S 2000 The Strategy-Focused Organization: How Balanced Scorecard Companies Thrive in the New Business Environment, Harvard Business School Press, London. Goodwin, N. N & Ackerman, F 2009, Microeconomics in Context 2d, Sharpe, London. Niven, P 2002 Balanced Scorecard Step-by-Step: Maximizing Performance and Maintaining Results, John Wiley & Sons, New York. Perloff, J. 2008, Microeconomics Theory & Applications with Calculus. Pearson, London. Pindyck, R 2001, Microeconomics 5th ed, Prentice-Hall, London. Kuiper, S 2009, Contemporary Business Report Writing, Cengage Learning, London. Lehman, I. P 2007, Managerial Economic, Wiley Blackwell, New York. Luke M. Froeb, B. T 2009, Managerial Economics: A Problem Solving Approach, Cengage Learning, London. Maheshwari, Y 2005, Managerial Economics 2Nd Ed, PHI Learning Pvt. Ltd, New York. Saraswathi, R 2000, Managerial Economics And Financial Accounting, PHI Learning Pvt. Ltd, New York. Timothy C. G and Fisher, R. W 2010, Managerial Economics: A Strategic Approach, Taylor & Francis, New York. Laury, S. K 1999 Multi-market equilibrium, trade, and the law of one price. Southern Economic Journal , 65(3): 611-622. Read More