Gone Flat

Topics: Coca-Cola, Soft drink, Pepsi Pages: 12 (4593 words) Published: October 17, 2010
When former Coca-Cola Co. (KO ) executive E. Neville Isdell agreed last May to come out of retirement and become chief executive of the beleaguered soda giant, he brimmed with confidence. No Coke newcomer, Isdell had spent 35 years inside the vast Coke system as the Atlanta company built itself into the world's most recognized global brand, retiring in 2001 after a three-year stint as head of a large European Coke bottler. "The system isn't broken," Isdell told a BusinessWeek reporter at the time. "There's still opportunity for both Coca-Cola and the other brands." All it took was a tour of Coke's operations in India, China, and 14 other key markets this summer for Isdell to see a different reality: Coca-Cola was a troubled company. Things looked so bad that just 100 days into his new job the 61-year-old Irishman interrupted his fact-finding mission to deliver a surprise warning to Wall Street. Coke, which had been struggling since the death in 1997 of its revered CEO, Roberto C. Goizueta, had made little progress in its efforts to meet the rising challenges of noncarbonated drinks. The soda giant would fall short of the meager 3% growth in earnings that analysts were resigned to for the third and fourth quarters. Moreover, Isdell was clearly prepping Wall Street for perhaps another year -- or longer -- of underperformance. "We've got a long way to go," a chastened Isdell told analysts. "The last time I checked, there was no silver bullet. That's not the way this business works." Coke later announced that third-quarter earnings had fallen 24%, the worst quarterly drop at Coke in recent history.

As late as the 1990s, Coca-Cola Co. was one of the most respected companies in America, a master of brand-building and management in the dawning global era. Now the Coke machine is badly out of order. The spectacle of Coke's struggles has become almost painful to watch: the battles with its own bottlers; the aged, overbearing board; the failed CEOs and failed attempts to recruit a successor; the dearth of new products; the lackluster marketing. "They've been their own worst enemy, a casualty of their own success," says Emanuel Goldman, who has followed Coke as an analyst since the 1970s.

Yet as grave as those problems are, they only hint at the real dimensions of Coke's woes. The Coca-Cola organization is stuck in a mind-set formed during its heyday in the 1980s and '90s, when Goizueta made Coke into a growth story that captivated the world. An unwillingness to tamper with the structures and beliefs formed during those glory years has left the company unable to adapt to consumer demands for new kinds of beverages, from New Age teas to gourmet coffees, that have eaten into the cola king's market share. "The whole Coke model needs to be rethought," says Tom Pirko, president of BevMark LLC, a Santa Barbara (Calif.) consulting firm. "The carbonated soft-drink model is 30 years old and out of date."

Of all the problems that can beset a corporation, a dysfunctional culture has to be one of the toughest to fix. How do you get thousands of employees suddenly to change their most basic assumptions about their company? After all, the beliefs and attitudes that make up a culture filter into everything else: decisions on basic strategy, management style, staffing, performance expectations, product development. That's why the problems at Coke have proven so intractable. A succession of managers has focused on trying to do what Coke has always done, only better. Meanwhile, rival PepsiCo Inc. (PEP ) has a much different view of its mission (hint: it's not just about soda pop) -- one that has helped it adapt far more successfully to a changing marketplace. Until Coke can lay the ghost of Goizueta to rest and let go of some long-cherished beliefs, it's unlikely to fix its problems.

Frozen in Time
Is the latest Coke CEO capable of leading Coke out of the valley? It's too early in Isdell's tenure to say for sure, but the early signs are...
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