The Cola Wars Continue: Coke and Pepsi in the 2006 Case

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Strategy – NCC 5090

Cola Wars Continue: Coke and Pepsi in 2006 Case

Part 1: Why was concentrate manufacturing profitable until the late ‘90s? Porter’s Five Forces provides an in-depth understanding as to how the interconnected relationship between Entrants, Buyers, Suppliers, Substitutes, and Rivals allowed concentrate producers to increase profitability. Entrants: Existing Concentrate Producers create high barriers to entry Despite low capital requirements to enter the market, dominant concentrate producers successfully restricted new entrants, capitalized on growing demand, and increased gross profits. 1) Dominant concentrate producers created strong brand equity and loyalty by spending heavily on advertising, which created high barriers to entry and kept entrants on the fringe. 2) Major concentrate producers established exclusive distribution agreements with bottlers, which were reinforced by government policies such as the 1980 Soft Drink Competition Act. These agreements prevented bottlers from carrying competitor brands and allowed existing concentrate producers to dominate the market. 3) Through economies of scope, dominant concentrate producers were able to efficiently introduce brand extensions by minimizing costs per unit manufactured. These successful brand extensions resulted in reduced shelf space for new soft drink entrants. Buyers: Concentrate producers’ influence constrain the bottler industry By reducing the threat of backward integration and substitute inputs, and by implementing favorable contracts, concentrate producers exercised control over buyers and increased profits. 1) Franchise agreements between bottlers (buyers) and concentrate producers locked bottlers into exclusive deals and made switching costs high, compelling bottlers to accept pricing and promotion schema. 2) As performance pressures increased for bottlers, concentrate producers began merging and acquiring bottlers. This consolidation...
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