Analysis of Potential Entry into the Cola Market
September 22, 2009
Careful analysis, of Porter’s five forces of competition in the cola market suggest Ian Nelson wait to introduce his cola into the soft drink industry. Although Mr. Nelson’s cola may taste better than Coca-Cola, the value may be drained away through supply-side economies of scale, capital requirements, retaliation from existing competitors, and various substitutes. Porter’s five forces reveal a high level of entry barriers into the soft drink industry. Coca-Cola and Pepsi Cola have the world's most recognizable and widely used product lines: from New York to Nairobi. (Duff, 2006). Further, Coke and Pepsi have intimate relationships with their retail channels and would be able to defend their positions effectively through discounting and other tactics (Finnigan, 2002). For instance, ABC's broadcast of the ALMA Awards, honoring Hispanic performers sees “sponsors Coca-Cola expanding their show commitments with support not just through noblesse oblige diversity dollars but with in-store promotions and hard marketing money” (Finnigan, 2002 pg. 17). Moreover, Coke and Pepsi are established producers of soft drink syrup that produce at larger volumes and enjoy lower costs per unit because they spread fixed costs over more units (Duff 2006). This creates a cost disadvantage for Mr. Nelson.
Capital requirements are also a significant barrier to entry into the cola industry. The barrier is particularly high, due to Coke and Pepsi’s marketing muscle and market presence.
While barriers to entry are high, the bargaining power of suppliers is low, thereby increasing the profitability of participating in the cola industry. For example, the creation power of sugar suppliers is small. There is also an abundance of inexpensive aluminum suppliers (Cuneo 2008).
On the other hand,...