1. Coke vs. Pepsi Case Discussion James Oldroyd Kellogg Graduate School of Management Northwestern University J-oldroyd@northwestern.edu

2. 1 Sample Exam Question Describe the history of the strategic management field from its origin to the present day, concentrating especially, but not exclusively, on its social, political, economic, religious, and philosophical impact on business organizations and individuals in Europe, Asia, America, and Africa. Be brief, concise, and specific. Extra Credit: Discuss the major trends of the future of strategy give specific examples. (preferably days on which to buy and sell specific stocks)

3. 2 Sample Exam Question In this class we have discussed the “experience curve” as a strategy concept. A) Please describe and define what the experience curve is (identify what information you would need to calculate an experience curve (for a company or an industry). B) Identify at least two ways that the experience curve is used by companies to help them in making business decisions. Please describe Porter’s diamond model and discuss how it helps identify which countries are likely to produce companies that will succeed in international competition.

4. 3 Growth How did the companies get us to double our consumption of soda?

5. 4 Entry Costs Bottler Concentrate Producer Why are there more Bottlers than Concentrate Producers?

6. 5 What are the other costs? http://www.coca-cola.com/tvads/ http://www.pepsi.com/current/music/britney /video/pepx4296_nownthen_hi.asx

7. 6 Why buy the bottlers? Concentrate 40% margin Bottlers 10% margin Vs.

8. 7 Coke & Pepsi Summary This case provides an understanding of the underlying economics of an industry and its relationship to average industry profits. The concentrate industry is, on average, more attractive than bottling. The reason there is not more entry into the concentrate industry (even though only $5-10 million plant investment to serve the U.S) is largely due to barriers to entry: Brand equity: cost to keep up with Coke & Pepsi ad spending is roughly $20-25 billion over 10 years (Coke brand valued at $75 billion in 1999). Bottling/franchise system: cost of national distribution (80-85 plants) is $1.6-4.3 billion. May keep niche players out. Limited shelf space, fountains, vending slots: cost of slotting allowances could be $500 or more per store; fountains may be impossible due to long term contracts/vertical integration. Relative to bottling, the concentrate industry also has fewer substitutes, greater bargaining power over suppliers (the raw materials for concentrate) and buyers (buyers are fragmented). This all adds up to a more attractive industry structure for concentrate.

9. 8 Total Barrier to Entry Brand equity Bottling/franchise system shelf space $20-25 billion over 10 years 4.3 billion (56,000 Stores X $500 per store) 28 million + Total $30 Billion +

10. 9 Coke and Pepsi today

11. 10 Three Levels of Business Strategy Firm Business Unit Industry Strategic Advantage  Choose Your Sandbox  Business Definition  Firm Resources  Which Business Units?  Business Unit Boundaries  Managing Cross Business Synergies

12. 11 Bargaining Power of Suppliers Threat of New Entrants Threat of New Entrants Rivalry among Existing Competitors Rivalry among Existing Competitors Bargaining Power of Buyers Threat of Substitutes Threat of Substitutes Industry Analysis Porter’s Five Forces Model

13. Barriers to Entry What factors keep potential competitors out? Scale economies e.g., aerospace industry Scope economies e.g., retailing Capital requirements e.g., aerospace industry Switching costs e.g., MSDOS operating system Access to distribution e.g., Campbell soup Entry deterring regulations e.g., Tobacco D A BC Industry Bargaining Power of Suppliers Threat of New Entrants Rivalry among Existing Competitors Bargaining Power of Buyers Threat of Substitutes

14. Nature and Focus of Rivalry Why industries are more or less “competitive”? Factors Industry growth rates –Where to secure growth Exit barriers –e.g., specialized assets, emotional barriers Fixed costs –e.g. capacity increments Lack of product differentiation –e.g. differences in functionality, performance Switching costs A B C Industry Competitive rivalry can focus on many factors, including price, quality, technology, features, service, etc. Bargaining Power of Suppliers Threat of New Entrants Rivalry among Existing Competitors Bargaining Power of Buyers Threat of Substitutes

15. Threat of Substitutes What alternatives are available to customers Direct substitution with the same functionality diesel vs gas engines DirecTV vs cable Eliminating need for product water meters vs flat rate A B C Industry Customers D Bargaining Power of Suppliers Threat of New Entrants Rivalry among Existing Competitors Bargaining Power of Buyers Threat of Substitutes

16. 15 Value Division Customer Supplier Firm Willingness to Pay Supplier opportunity cost Cost Price Value Captured by Customer Value Captured by Firm Value Captured by Supplier Added Value is the total value created with the firm in the game – total value created without the firm in the game or the value that would be lost to the world if the firm disappeared. A firm cannot capture more than its added value.

17. Supplier or Buyer Power How can my suppliers or customers extract value Buyer Power Supplier Power Supplier concentration Few vs many suppliers Supplier volume Large vs small purchase decisions Product differences Dependence on unique features Threat of forward integration Ability to become competitor Switching costs Limitations on ability to change suppliers Buyer concentration Few vs many customers Volume of purchases Large vs small purchase decisions Available alternative products Competitive products Threat of backward integration Ability to become a competitor Switching costs Threat of switching suppliers Bargaining Power of Suppliers Threat of New Entrants Rivalry among Existing Competitors Bargaining Power of Buyers Threat of Substitutes

18. 17 How Industry Structure Influences Profitability 0 20 40 60 80 100 120 Farmers 5-10% ROE Frozen Entree Makers 20-25% ROE Food Retailers Percent of Market Others (>10,000) ConAgra (1%) Stouffer (34%) Swanson (25%) Campbell (17%) Green Giant (4%) Others (>10) (20%) Safeway (4%) Kroger(3%) American (2%) Others (>1000) (90%) 8-12% ROE

19. Successful Strategies Should: Reduce the threat of substitution (e.g., incorporate their benefits) Bargaining Power of Suppliers Threat of New Entrants Rivalry among Existing Competitors Bargaining Power of Buyers Threat of Substitutes Minimize buyer power (e.g., build customer loyalty) Offset supplier power (e.g., alternative source(s)) Avoid excessive rivalry (e.g., attack emerging vs entrenched segments) Raise barriers to entry (e.g., make preemptive investments)

20. 19 SWOT Analysis: Additional Industry Analysis Tools Numerous Environmental O pportunities S ubstantial Internal Strengths Major Environmental T hreats Critical Internal W eaknesses Overcome Weaknesses Grow DiversifyRestructure