1. If vertical integration and consolidation happened between the concentrate producers and bottlers:
benefits of Vertical Integration:
· negotiate directly with retailers
· distribution method
· new brands to the market
· cut costs
Vertical integration is where the supply chain of a company is owned by that company. its also described , management styles that bring large portions of the supply chain not only under common ownership , but also into one cooperation
Possible Reasons for Vertical Integration:
· With the decrease in the number of bottler’s from 2000 in 1970 to less than 300 in 2000, the concentrate producers were concerned about the bottler’s clout and started acquiring stakes in the bottling business.
· They could offer attractive packaging to the end consumer.
· To preempt new competition from entering business if they control the bottling.
A. how would that change the industry attractiveness (5 forces)
in this question A) its all about positioning:
– To identify an attractive industry (with a favorable configuration of the five forces)
– To identify an attractive position within a given industry (a position with a favorable configuration of the five forces compared to other position within that industry)
CSD industry :
Barry to entry Brand Equity: High
$234 million spent on advertising This makes it extremely difficult for an entrant to compete with the incumbents and gain any visibility,
Retailer Shelf Space (Retail Distribution): Retailers enjoy significant margins of 15-20% on these soft drinks for the shelf space they offer. These margins are quite significant for their bottom-line. This makes it tough for the new entrants to convince retailers to carry/substitute their new products for Coke and Pepsi.
bottling and canning lines cost from $4m to $10m each , the cost of large plant with multiple lines and automated warehousing , could reach hundred of millions of Dollar , To enter into a market with entrenched rival behemoths like Pepsi and Coke is not easy as it could lead to price wars which affect the newcomer, Government regulation
Threat from substitute products are probably second in importance to the cola industry only to the rivalry among established firms: coffee cafes, tap water, milkshakes, fruit juice, hot tea, hot chocolate, chocolate milk and so on
Rivalry: high (VERY IMPORTANT: IF THERE IS NO PRICE WAR, THEN RIVALRY SHOULD BE LOW OR MODERATE NOT HIGH)
Industry is largely consolidated with two major players dominate 72% of market share and a few smaller competitors like Cadbury Schweppes, making the companies interdependent , Pepsi and Coke mainly over the years competed on differentiation and advertising rather than on pricing except for a period in the 1990’s.
Bargaining Power of Buyers:Low
Bottlers own a manufacturing and sales operation in an exclusive geographic territory, with rights granted in perpetuity by the franchiser, subject to termination only in the event of default by the bottler, Bottlers are locked into contracts that grant CPs the right to set prices and other terms of sale ,
Bargaining Power of Suppliers:low
Concentrate producers (CPs) negotiate directly with bottlers’ major suppliers – particularly sweetener and packaging suppliers – to encourage reliable supply, faster delivery, and lower prices ƒ Coca-Cola and Pepsi are among the metal can industry’s largest customers and maintain relationships with more than one supplier, giving these suppliers less bargaining power due to the availability of alternative suppliers ƒ Metal cans make up the majority of the bottlers’ packaged product (60%), followed by plastic bottles (38%) and glass bottles (2%) Commodity Ingredients: Most of the raw materials needed to produce concentrate are basic commodities like Color, flavor, caffeine or additives, sugar, packaging. Essentially these are basic commodities. The producers of these products have no power over the pricing hence the suppliers in this industry are weak.
This has changed in the 1990s and after as we see now about 400 bottling companies in the market, too many companies exited the market due to the high fixed cost required to start this business, this led to a high entry barrier in the current time.
Due to the high fixed cost related to the machinery used for bottling the exit barriers also was high which led to high rivalry between bottlers.
Unlike CPs, bottlers face a high bargaining power of buyers as the retailers require incentives and promotions to display the soft drinks in the appropriate premium shelves. The bottlers have a good relationship with the CPs as their suppliers, sometimes the CPs pay part of the advertising and promotion costs, and CPs work closely to improve and develop the bottlers.
The substitute products wasn’t a threat to bottling companies as basically there was no substitute to the bottlers to bring the soft drinks to the market. To compare the economics of CPs and bottlers, we could say that bottlers incur higher fixed cost than the CPs as the machinery required is much expensive, the major cost for the CPs is for advertising and promotion activities.
B. what are the weaknesses in the 5 forces *** Its in week 2 slides in BB 33-38
in b) we need to talk about Weaknesses: Complementors, Industry Life Cycle Analysis, Macro Analysis, Firm Distinctive competitiveness.
(1) Industry Life Cycle Analysis→ The configuration of the five forces may change over time as an industry evolves
(2) The Macro-environment Analysis → Changes from the macroenvironment may change the configuration of the five forces
Keep in mind: these two affect competition through their influences on the five forces
Limitations of Five Forces
One of the first criticisms is the fact that Porter has no justification for the choice of the five environmental forces
the Five Forces model of Porter is static and does not take account of time. Thus it is much more difficult to determine markets with higher competition dynamic because they can change very quickly.
This demands a steady creation of new models.
managers are better able to consider market trends and changing environment. Furthermore making use of the Five Forces framework does not guarantee a competitive advantage that is inviolable and sustained The reason for this lies in the fact that Five Forces framework is a static model, which does not include consistently changes of the competitive environment Industry factors are able to justify business performance variations.\. Today’s goal is not only to protect against the Five Forces, it becomes more and more important to start collaboration and maintain innovation due to the increasing power of the Internet and other information technologies criticise Porter’s model because of the missing attention to ‘Digitalization’, ‘Globalization’, and ‘Deregulation’. Those three factors are one reason why the industry structures changed during the last decades. factors or to the ‘dynamics of growth’ for a certain industry or market. The Five Forces model does not assess the resources and capabilities of a company, which are also relevant for analysing the overall profitability
the model is based on the idea of competition , it doesn’t really take in consideration strategy like strategy alliance and vertical enterprise
C. what are some changes that could be made to the (5 forces)
According to Mutlaq: what if we get a question about the changes of the industry for soda ?
Porter’s six forces provide a method for industry analysis. The presence of the sixth force of Porter, complementors, can benefit or hurt the firms competing in an industry, depending on the circumstances. If business is booming for the complementors, this could positively affect the business of the firms in the given industry. On the other hand, if business is slow for the complementors, this could adversely affect the business of the firms in the given industry. So, complementors and complementary goods do not necessarily increase or decrease the competitiveness of an industry, they merely add another layer to the structural complexity of the competitive environment.
Sixth force of Porter’s- Example
According to Porters six forces, complementary goods offer more value to the consumer together than apart. When one product or service complements another, there exists a condition called complementarity. For illustrative purposes, please consider the following complement examples.
A very simple example of complementary goods, the sixth force of Porter’s framework, is the hotdog and the hotdog bun. A normal consumer prefers to eat a hotdog in a hotdog bun. Rarely would a consumer purchase hotdogs without also purchasing hotdog buns, and rarely would a consumer purchase hotdog buns without also purchasing hotdogs. Under the six forces model Porter coined, these two products are complementary.
According to Porter the5 forces model is intended for an industry level analysis and it is not intended to be used for an analysis of an industry sector.