Cola Wars Continue: Coke and Pepsi

Strategic Issues: The strategic issues for Coke are: Could Coke boost flagging domestic CSD sales? Would
newly popular beverages provide Coke with new and profitable revenue streams? Was Coke era of
sustained growth and profitability coming to a close? Did the changes under way represent simply
another step forward in the evolution of Coke?

External Analysis

General Environmental Factors : Population growth in developing countries, baby boomers, technology
innovations, necessity to use specialized equipment, non-carbonated beverages, shift in consumer
trends towards healthier beverages, use of metal and plastic containers, marketing to international
markets, cultural differences in different market segment, current weak economic environment, anti-
trust legal suit against Coca-Cola by Pepsi, pressure from the scientific community for the FDA to
research the affects of caffeine consumption, obstacles in international operations, foreign exchange
controls and lack of infrastructure are some of the important general environmental factors.

Industry Analysis using Porter’s model

Industry attractiveness for current companies is still relatively high, while attractiveness for potential
entrants is low due to capital requirements and brand loyalty.

Internal Analysis

Financial Analysis : Debt to Equity ratios shows that Coke cost structure is based on owner’s however
cost structure of Pepsi is based on financial leverage. Pepsi is doing more sales compared to Coke;
however Coke is earning higher net income compared to Pepsi. Higher return on Sales ratio supports
this conclusion. Pepsi is having upper hand in terms of operational efficiency over Coke.

Identification and evaluation of capability: Brand value, customer responsiveness and quick adaptation
to customer’s taste are core competencies of Coke. Although, operational efficiency of both the firms is
way below industry standard, high profitability helps these firms to remain industry leader. Internal
analysis of Coke and Pepsi shows that Coke is using Differentiation strategy and Pepsi relies on cost
leadership.

SWOT Analysis:

Strengths: Strong distribution channel, established brand value, high customer responsiveness, variety
in product range, quick adaptation to customer taste are some of the strengths of Coke.

Weaknesses: Strong competition from Pepsi, inefficient operations and unexpected quality standards
are some of the weaknesses of Coke.

Opportunities : International market, high brand loyalty, possibility of backward and horizontal
integration, exclusive contracts, ability to adapt to changing consumer demands

Threats : Weakening consumer demand for carbonated soft drinks, economic downturn, politics

Identification and Evaluation of Strategies, Structure, and Control

Positioning Strategy: Coke employs a differentiation strategy to promote its products. As long as Coke is
somewhat competitive in price with its competitors (ie. Pepsi), they are satisfied. What Coke is
concerned with is brand image and the ability to differentiate itself from the competition. The way they
accomplish this is by infusing the market (especially internationally) with their products and by offering
several different brands of non-carbonated beverages. When a consumer thinks of soda, they should be
thinking of Coke. If Coke can make this a reality, it will bolster their other brands as well.

Creating Value : Coke creates value through its unique strategies, principally through international
marketing and bottler relationships.Coke has a strong presence overseas and is always actively seeking
to enhance that presence.Compared to Pepsi, they are much stronger internationally. As for bottler
relationships, Coke has a history of building close relationships with bottlers, even buying bottling
companies.Building strategic alliances is Coke’s path to the future.

Market Positioning : Domestically, Coke’s main products are a ‘cash cow’ for them.They need to work
on developing their other brands, however.Coke needs to be very vigilant about not regressing and
sliding back into the ‘dog’ category.Internationally is a different story.Coke has a fairly strong
international presence compared to its competitors, but there are markets that need to be tapped or
enhanced. Coke needs to be addressing this by moving from a position of high market growth and low
market share to high market growth and high market share.To be sure, international markets are where
the growth is at.

Recommendations : We recommend that Coke invest internationally where there is real growth in the
beverage products.China, India, and Russia offer the greatest prospects.Likely Pepsi will enact a similar
strategy, but as we have seen with US markets the cola wars can be beneficial to both companies.
Second, Coke needs to further diversify its North American product lines to include more non
carbonated drinks and snack foods.Pepsi has the advantage in diversification, already owning Frito Lay,
Quaker, Tropicana, and Quaker.Coke needs to be more aggressive in purchasing new companies as well
as developing their own non carbonated drinks. Coke has the advantage over Pepsi in Costs. Coke’s
gross profit margin is 65% while Pepsi is about 56%.Pepsi will likely try to consolidate there bottling
plants in order to cut costs as well as take on new initiatives to improve efficiency of the plants.

How are they doing now? :

Since 2006 Coke’s stock has been better performing than Pepsi.This performance is due to the fact that
Coke’s earnings growth has been stronger than Pepsi.Coke is ahead of Pepsi in China and India, seeing
double digit growth in both emerging markets.Coke has diversified their North American Product line to
include healthier choices.Still Coke is seeing 2% decline in North American beverages.Pepsi is seeing
larger declines as consumers choose less costly beverages, but their Frito Lay products are still growing
in volume and revenue.