Coca-Cola in 2011 - in Search of a New Model

...

has competition between Coke and Pepsi affected the industry and industry profitability?

Coke and Pepsi operate within an oligopolistic industry, showcasing differentiated products with high barriers to entry and some degree of pricing power. The competition between Coke and Pepsi presents a double edged sword. On one side, it has forced both companies to be constantly improving and innovating, creating an environment where the consumer wins. Both companies have wins and loses detailed in the article (acquisitions, new products, etc.), but the constant competition undoubtedly pushes both companies to perform at their best.

The flip side to the never-ending battle for market supremacy is the inevitable diminishing of margins as the competition remains intense. Given the landscape of the soft drink industry as a whole, this effects are magnified. As mentioned in Chapter 3 of the text, in the early years of the soft drink industry, whenever Pepsi would lower prices, Coca-Cola would simply follow suit. The result was reduced profitability for both competitors. Having learned the lesson “non-price competition” is the preferred mode of competition in an oligopoly, and the focus has shifted to unique products and acquisitions rather than competing on price.

Interestingly enough, it is this same shift into non-price competition that has encouraged both Pepsi and Coke to identify market trends and diversify their companies. Bottled water, sports drinks, and other non-carbonating products show a mostly inverse relationship to carbonated soda, and has been a critical component to maintaining market share (exhibit 6A). With both companies jockeying for the same opportunities, the “cola wars” is as competitive as ever, and if anything, will only increase in the near future.

How should Coke and Pepsi react to changes in the soft drink market and to changes in consumer behavior?

To maintain market share, both Coke and Pepsi need to continue to find creative ways to maintain sustainability in the soft drink market. Ideas like the 8-ounce cans versus the standard 12-ounce size bolstered earnings through realizing more price per ounce. There is not much opportunity to expand on core carbonated product consumption (Coke, Pepsi) given the environment, and most customer are loyal to their cola. However, in order to realize overall increased profitability creativity become crucial in maintaining a foothold.

This needs to be coupled with the continued effort to identify market trends quickly, and expand on opportunities focusing on existing trends including natural ingredients, health benefits, and the ever-growing energy drink market. To create a sustainable strategy, perhaps the best approach would be a focus on the three dimensions that make up the triple bottom line highlighted in the text. Taking a more integrative and holistic view in assessing performance through a focus on social, ecological, and economic dimensions will allow for not only a sustainable company, but also focus on existing trends as well as identifying new ones.