Dealing with factors in the external environment is a crucial part of corporate survival, stability and growth. This is especially recognized when a firm is operating internationally where barriers to entry and liability of foreignness serve as aggravation to the challenging task of responding to external forces. The organization can remain indifferent despite environmental changes and still accumulate revenues.
But as soon as its mediocrity and irresponsibility achieved their tolerance limits, the previous competitive position of the organization will likely be unreachable and eventually will drown into demise. This issue is most alarming to Coca-Cola who is the current leader in carbonated drinks and one of the well-known brands in the soft drink industry. Even with its current position, external forces are skilled protagonists continuously testing its current strategy and asking, “Are you capable of retaining your position?”
Identification of External Forces
The European market is recently observed changes in taste and preference for drinks. The trend is less consumption of carbonated products and increasing demand for non-carbonated and still drinks. This is happening since 1998 and a handful of research institutions confirmed this phenomenon including Mintel and Canadean. Financial results of Coca-Cola also remained flat for its sugary product line while company report is expecting future based on the focusing expansion in its still drink.
The market becomes more health-conscious and concern towards tasty but unhealthy drinks is in progress. In addition to sugar, artificial additives and flavors are blacklisted characteristics of soft drinks for today’s consumers. The complexity of customers especially in developed countries is a key concern for Coca-Cola as this market is less sensitive to price and are willing to pay more for healthier products.
Environmental factors have a close relation to the shift in social attitudes against carbonated drinks. With longer hot weather lasting throughout the year as what happening in UK and other neighbouring countries, the shift to still and non-carbonated drinks will be minimal. This is because physiological issues are stronger than self-expression and more people are willing to risks adverse effect to long-term health in return of enjoying carbonated drinks.
Increased awareness of the effects of non-biodegradable products to global warming and pollution also affects the extent of the shift in preference. Ozone-friendly packaging is an additional feature that drink products must possess to lure the market such as the use of biodegradable plastics. With regards to bottled water manufacturers, their health advocacy and positive reception of the market is adverse affected by its adjustment to regulation of continuously decreasing of quality water in the UK. This means that they may not be able to supply the widening market demand for healthy drinks due to scarcity of resources.
With pressures from social and environmental factors, soft drink manufacturers find new ways to maintain and increase their market share. This caused motivation within the industry to conduct research and development to create soft drink products that possess hybrid features that addresses health, environmental and taste needs of the market. Hampered by the fact that the plant and facilities of manufacturers are fixed, the importance of serving the shift in market preference is concretized as they are willing to change the current design despite increase in costs and induce change.
In its website, Coca-Cola advertised its products as complete which means that drink aspects such as style, taste, innovation and health are realized. This can be obtained by introducing new products such as vegetable drinks, drinks that have anti-oxidant properties and exotic drinks. Innovative packaging is also an important source of product competence such as the use of biodegradable plastics for juices and dairy drinks while tetra-type of packaging has supply chain benefits with longer shelf life and efficient storage compatibility.
With all the efforts and financial loss shouldered by manufacturers to provide appropriate products in terms of demand, government regulation aggravates the difficulty manufacturers are facing. Strategic opportunities such as business combinations with local companies are filled with restrictive features while merging with larger companies are confronted with antitrust law. The contracting sales in carbonated products may force Coca-Cola to merge with competitors to save cost through elimination of repetitive processes and assets. The need to innovate newer products may also induce others to acquire local companies that have the knowledge of market characteristics.
These strategies are not easily available especially when the firm operates internationally. Stricter quality standards can protect market leaders such as Coca-Cola from the threat of new entrants. However, this depends on the structure and nature of political system in the host country. For example, unethical marketing conducted by some companies labelling their cola products as “less sugar” even if the laboratory tests showed that there is substantial amount of sugar in the product. With sound legal and political framework, market leaders such as Coca-Cola can survive the reduction in demand for carbonated products.
Assessment of Implications
Increased sophistication of customers will results in high product differentiation within the industry. Traditional benefits of economies of scale achieved in the production of carbonated drinks reached its zenith due to the shift in preference. With the lifestyle of people and technology going forward, it is unlikely that mass production of carbonated drinks will re-emerge as the industry’s business model. Technological advancement enabled manufacturers to compete based on innovation.
In contrast, only few are willing to invest heavily in research because of high risks associated with a new product in both corporate and market response. This triggers the lucrative strategy of buying companies that offer the facilities and technical know-how. Government regulation, on the other hand, will apply delays through litigation if not disapproval to business combinations that can impose strategic bottleneck in a company’s first mover aspiration and future profitability. Even if allowed, merger and acquisition has a historical proof that confirms problems in pre-, during and post-merger/ acquisition phases.
To further understand the implications of external forces on soft drink companies, it is necessary to study the industry’s strategic space and profit pool. Since 2006, Europe is receiving the bulk of product introduction to address the sophisticated demands of the region in terms of nutrition and lifestyle. A number of these products showed innovation by creating exotic and atypical flavours while packaging is made convenient for kids. The search of value by manufacturers is present in all parts of the value chain, that is, from formulation of the drink up to the distribution of the finished good.
Therefore, the usual cost-savings derived from volume-based strategy of carbonated drinks will be ineffective in present scenario. Marketing campaigns concerning the impact of soft drinks on the heart is the current consideration of manufacturers which concretize that issue of out-of-the-manufacturing activities to derive value from the products. As much as manufacturers want to excel in all the areas of the value chain, there are financial and structural constraints. For example, the bottler’s margin is adversely affected whenever a client-manufacturer introduced new drinks that require new bottle design.
As observed in Figure 1, innovation in the soft drink industry can maintain and attract market which is the basis of revenues. However, the manufacturing processes and forward/ backward suppliers are the areas where the bottom-line is dictated. Without innovation, the current structure of the industry can survive the impact of the change in consumer references. This is especially true for carbonated drink manufacturers like Coca-Cola.
Replacing the manufacturing process to introduce innovation such as non-carbonated or still drinks would require replacing also the machineries and perhaps the entire plant. Packaging would require less acid resistance, delivery schedule would change depending on package design or expiration date and distribution networks may hesitate to carry the product awaiting positive reception. As a result, a major source of margin of the company will be undermined due to high costs of manufacturing change. On the other hand, if Coca-Cola remains to focus on carbonated drink, it will confront a vulnerable future earnings and market share.
Differentiation strategy and innovation has a more long-run positive impact to Coca-Cola. It is also suited for a leader in carbonated drinks and perhaps one of the most reputable beverage brands in the world. The profit pool reveals that the carbonated products remain the highest margin and revenue contributor in the soft drink industry. However, forecasts threatens this position with the healthy/ sugar-free products pulling substantial value followed by the same impact from non-carbonated products such as sports-energy, juice, dillutable and bottled drinks.
In the long-run, those who will choose to retain a cost leadership strategy and keep large stocks of carbonated drink will face declining sales. On the contrary, there are also disadvantages in differentiation strategy and innovation that present in regulation, challenge to marketing and transformation of traditional plant. In an operating environment with ambiguous customer response, intense competition and restricted action, every action counts and one mistake can mean millions of investment lost. Therefore, consideration of important issues such as creation of sustainable value including financial matters is top priorities.
Consideration of Responses
Vertical integration is the recent solution of Coca-Cola to address changes of external factors. This is observed of its development of a bottling subsidiary to remain cost-effective and flexible. This is a major step for the firm not only as traditional set-up only allows efficient bottling operations by third party suppliers but also it will avoid hindering the innovation feats of Coca-Cola such as demand of new packaging. The fact-paced environment vulnerable to new innovation from competitors and suppliers, thus, is mitigated by this strategy. Further, government standards such as carbon dioxide emission can be addressed through a more integrated plan.
Formally, Coca-Cola has to put preference to bottling companies that are not only cheap and quality producer but also has an environmental compliance for manufacturing wastes. With the creation of its own bottling segment, it also solves the problem of increasing government intervention in social and environmental responsibility of manufacturing firms. Coca-Cola can spend less on environment-related and supplier search costs which impact can extend up to environmental-conscious customers.
Vertical integration is not only noticed in the manufacturing processes of the firm but also in management structure. Committees for marketing, strategy and innovation are considered one functioning body where the action of one has influence or can be influenced to/ by the results of other committees. The new structure would allow a cost-efficient and integrated recognition of problem and opportunities in the environment. Recently, the efforts of the consolidated committee are focused on the project of customer-retention to maintain leadership particularly in carbonated drinks as well as increase market share in non-carbonated drinks.
With their close collaboration, they easily identify that the issues of inactivity and obesity, low level of quality and quantity of water, change in market preference and intense rivalry have adverse effect to financial performance of the firm. Instead of spending glamorous but baseless advertisements, the valuable budget is invested on market research which rationalized the actions of each department. The difference in today’s environment for Coca-Cola is that its leadership is threatened and careful strategy is a must to optimize its resources amid innovation, expansion and research costs demanded by the unpredictability in the environment.
In its global operations, there are regions that exemplified performance growth but only a few to mention such as the Middle East and Latin American countries. For the European market, however, the reverse is true. This induced the firm to acquire a bottling company in Germany to provide the same cost-savings of vertical integration from its major manufacturing plants. The strategy is a smart tactic because the decrease in revenues can be mitigated by efficiency in production and distribution. Acquisition in foreign countries also indicated the intention of Coca-Cola to expand its product line in an international scale.
The German experience, however, incidentally indicated that the cost of doing business will rise because labour and technology in the country is relatively expensive. The good side is that quality of production and potential innovation necessary to compete in the current industry structure can magnify.
As early as 2004, Coca-Cola is in a mission to integrate host country facilities for better coordination, synergy in resources and manufacturing flexibility. In Japan, it developed a centralized value chain design to restructure the operations based on the business management and relationship traditions of companies. In this country, where linking for long-term partnership, it is easier to conduct business when the company is implementing a strategy as a whole and based on the request of its partners.
A decade from now, the soft drink industry will be dictated with high product differentiation and the company who can find valuable competency in its innovation would be the leader. This is a path that Coca-Cola is undertaking. Its financial depth and reputation enabled it to acquire important parts of the value chain to protect its carbonated products from significant decline and also to satisfy the innovative demand of non-carbonated and new-age drinks.
It used its historical leadership position to protect its market share even tough it partially lagged innovation feats for still drinks. Its biggest challenge, however, is to acquire a useful innovative product that can compete with new-age drinks. Its carbonated drink surely found complacency to have at least a constant growth by vertical integration but improving on non-carbonated drink demands more work. It is expected that in the future it is able to acquire a non-carbonated firm without intervention from government regulation. Otherwise, it would be force to develop innovation internally which is less clear.
Coca-Cola is on the right track when it comes in attacking the external forces head-to-head. It is diversifying its operations, integrating its resources and adopting to local needs in its quest in finding sustainable value. There are odds such as government regulation apparent in the hardship of acquiring a vendor-made innovation in the non-carbonated product that can pump-up the stagnant financial performance of the carbonated drink.
So far, however, the company is doing its share in solving the unpredictability and spontaneity of the external environment. It is able to decode that the external forces are sometimes like domino in relation to each other. That is, the change in one (e.g. climate change) can lead to another (e.g. change in consumer preference). As a result, it is one step away from assuring itself that its leadership position is out of threat.
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