Discuss about the Essentials of Strategic Management.
The five competitive forces that shape strategy were developed and explained by Michael Porter in the 1980s. Michael porter explained and evaluated how the five forces affect the profitability levels of any particular industry in the long run. The five forces determine how the economic value created by players within a particular industry is divided among the industry players (Daft & Daft,2007). The five forces that shape strategy are:
The power of customers
Power of suppliers
Rivalry among existing competitors
Threat of substitutes
Threat of new entrants into the market
The objective of this task is to determine ways in which the five forces shaped the historical Cola wars. There are three very important aspects of value chain in the carbonated soft drinks industry. These aspects are; concentrate producers, bottlers and retailers. Both of these value chain participants are affected by the five competitive forces in one way or the other (Porter, 2008).
Qualitative research methods will be used to achieve the objective and goals of the study. This methodology will involve reviewing past research work on the subject and using the knowledge gained to analyze and resolve the study question.
Threat of new entrants into the market refers to the probability of new firms joining a particular industry hence increasing competition (Etro,2009). In this case, industries that seem profitable will attract new customers compared to those whose fortunes are dwindling. A look at the cola wars reveals that the threat of new entrant into the market had very minimal effect in shaping competition in this industry. This may have been influenced by one or more of the factors discussed above. One of the major reasons why threat of new entrants was very minimal is because of the initial capital requirements as well as the fact that the existing competitors enjoy economies of scale (Salonen,2010).
The customers also have very little bargaining power in relation to the producers of concentrate. This is because, the companies in this industry depend on a variety of distribution channels and they do not deal directly with the consumers. The number of customers in this case is high and they do not have associations hence have little bargaining power.
The bargaining power of suppliers is strong in relation to the concentrate producers. This force is strong because the number of suppliers in this industry is small. It therefore means they can come together and form associations through which they will use to influence price of raw material. The suppliers in this case supply the concentrate producers with the raw materials used in making the concentrate. The lack of substitute raw materials to be used in making the concentrate further strengthens the bargaining power of suppliers (Ganesan,2012).
The degree of rivalry between competitors in an industry is strong in relation to the concentrate producers. This is because, the level of competition in this industry is fiercely stiff and therefore every action taken by the competitor will require a reaction by the other industry players.
The market force of threat of substitute products is very strong impact on the producers of concentrate. This is because; this industry has products that are very close substitutes. It therefore means that if the producers of the concentrate do not stay on their toes especially on factors involving market research and promotion, they will be stifled by the competitor (Shankar & Carpenter, 2012).
The bottlers purchase the concentrate; add water and other necessary ingredients to make the drink. The bottlers then package the resulting carbonated soft drink in bottles or cans ready for sale to the dealers who sell on behalf of the company. Sales agents assist in distribution of the product. The bottlers being part of carbonated soft drinks value chain are also subject to the five competitive forces(Keillor,2007).
The power of suppliers is a very strong force for the bottlers. The suppliers of bottlers in this case are the concentrate producers. The power of suppliers is very huge because there are enjoy the power of monopoly. This means that the bottlers cannot change their suppliers. If a company bottles coca cola products, it cannot find the concentrate used to make coca cola anywhere else. The cost of changing supplier is also very high (Shankar & Carpenter, 2012).
The power of buyer in relation to the bottlers is not very significant. This is because; there are high levels of customer loyalty to the tastes and preferences of consumers. The consumers are many and are not concentrated in the same geographical region. This makes it difficult for them to negotiate prices and therefore they can’t affect the demand of products in this market.
The threat of new entrants in the industry is not high among the bottler. This threat is not high for the bottlers because, the concentrate producer gives permission and license to any company that wants to bottle its products. It therefore means that the concentrate producer regulates the number of bottlers in a particular market.
The force of threat of substitute products is strong on the part of the bottlers. This is due to the fact that if consumers decide to substitute the carbonated drink for example with bottled water, the business of the company which engages in bottling of carbonated drink will be affected.
The force of rivalry among existing competitors is weak in relation to the business of the bottlers; this is because the rivalry is very minimal since the industry is regulated by the concentrate producers (Meldrum & McDonald,2007).
This refers to the means and intermediaries involved in delivering the product to the final consumer. Distribution in the carbonated soft drinks industry takes pace mostly through supermarket, mass merchandisers and vending machines.
Power of suppliers has a very strong effect on the retailers. This is because, the market has few suppliers. The suppliers in this case are the bottlers of soft drinks. The prices of the products are also dictated to them by the bottlers depending on their costs of production and other factors (Keillor,2007).
The bargaining power of customers is weak on the part of retailers. The market has very many buyers who are distributed across wide geographical areas. The customers bargaining power is minimal because they cannot form associations which they can negotiate to influence prices or demand. Customers will then be forced to buy the products at the going market price.
The threat of new entrants in the retail business of carbonated soft drinks is high. This is because; there are no barriers to entry. There is no government policy regulating entry into the industry. The capital requirements for new firms to enter the market are also low. A combination of these factors makes the threat of new entrants very real (Marich,2013).
Retailers of CSDs are also highly affected by the threat of substitute products. The CSDs industry products have very many substitute products. This therefore means that, the retailers of the company’s products are bound to be affected by the competition from the substitute products. This affects demand and pricing.
The rivalry among existing competitors is has a huge impact on the retailers. This is because; the producers of the concentrate are involved in marketing and promotional activities of their products. It therefore means that aggressive advertising by the competitor may affect the demand of the products of the other companies. This will in turn have an impact on the profitability of the retailers. This will therefore affect the strategies to be employed by the competitors (Keillor, 2007).
The position of Coca Cola on the bargaining power of suppliers is weak. This is due to the fact that the suppliers are very few in the market and therefore it’s impossible to switch between suppliers. Coca Cola suppliers therefore have a lot of bargaining power.
On the bargaining power of customers, Coca Cola is in a strong competitive position. This is because, the market have many buyers and therefore one buyer or a small proportion of buyers cannot influence the prices of Coca Cola products or affect its level of demand.
Coca cola is in a strong position in respect to the threat of new entrants. The patent regulations make it difficult for new firms to enter the CSDs industry. The capital requirements are high for new entrants. The economies of scale enjoyed by Coca Cola scares away any firms intending to join the industry.
In respect to the competitive force of threat of substitute goods, Coca Cola Company is in a weak position. This is because; there are very many substitutes in the soft drink industry. It therefore means that the substitute products are a threat to Coca Cola market share.
The degree of rivalry between Coca Cola and its competitors is high. The position of Coca Cola in relation to this aspect is not very favorable. This is because intense competition means that the rival firms have to spend a lot on, marketing and promotion activities.
Coca Cola company should integrate backwards in order to improve its position on the bargaining power of suppliers. This will work by the company engaging in production of raw materials that are used to make the concentrate. This way, the company won’t have to deal with powerful few suppliers anymore.
The position of Coca cola in relation to the bargaining power of customers should be improved by implementing loyalty programs. This will work well for the company since the customers will feel a sense of connection with the companies` products. Due to this reason, the customers will continue to buy the company’s products.
To improve its position in relation to entry of new firms, Coca Cola should use retaliation. This involves using methods that will scare off new firms such as lowering the price of products (Derval, 2007)
Threat of substitute goods is a very strong force affecting Coca Cola competitive strategies. To improve its position, the company should diversify its products line. The company will make substitute products itself and hence retaining its market share.
To improve its position in respect to rivalry between existing competitors, Coca Cola should increase its investment in market research and innovation. Increasing its advertising expenses will also help the company improve its position.
Conclusion
The application of Michael Porters five competitive forces in analyzing the CSDs industry has provided a clear understanding and insight on how the forces shape the strategies of firms in this industry. The five forces influence the concentrate producer, the bottlers and the retailers in many different ways. The analysis of this effects helps in making decisions meant to improve the overall market position of the firm
References
Daft, R. L., & Daft, R. L. (2007). New era of management. Mason, Ohio: Thomson South-Western.
Porter, M. E. (2008). On competition. Boston MA: Business Harvard School
Hill, C. W. L., & Jones, G. R. (2009). Essentials of strategic management. Mason, OH: South-Western/Cengage Learning.
Salonen, T. (2010). Strategies, structures, and processes for network and resources management in industrial parks: The cases of Germany and China. Ko?ln: Eul.
Etro, F. (2009). Endogenous market structures and the macroeconomy. Berlin: Springer.
Derval, D. (2007). Wait marketing: Communicate at the right moment at the right place. Amsterdam: Derval Research.
Shankar, V., & Carpenter, G. S. (2012). Handbook of marketing strategy. Cheltenham, UK: Edward Elgar Pub.
Meldrum, M., & McDonald, M. (2007). Marketing in a nutshell: Key concepts for non-specialists. Amsterdam: Elsevier.
Keillor, B. D. (2007). Marketing in the 21st century. Westport, Conn: Praeger.
Tybout, A. M., Calder, B. J., & J.L. Kellogg Graduate School of Management. (2010). Kellogg on marketing. Hoboken, N.J: Wiley.
Marich, R. (2013). Marketing to moviegoers: A handbook of strategies and tactics. Carbondale: Southern Illinois University Press.
In Ganesan, S. (2012). Handbook of Marketing and Finance.
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