The industry structure between the concentrate & bottling business as analyzed with Michael Porter’s Five Force Model reveals that price differentiation leads to increased profitability. The fourth force, ‘Supplier Power’ (Quick MBA), arguably within any industry, is the driver toward maintaining low manufacturing costs relative to price point profit margin. The concentrate business has less supply inputs before market than the bottling industry. Porter refers to the aforementioned as “vertical integration” (Quick MBA) inclusive of all supply chain components. The concentrate business is an example of Porter’s use of vertical integration.
The bottling industry is representative of Porter’s ‘rivalry’ characterization of market competition. Competition amongst bottlers is fierce as many bottling entities are in the business of producing bottles of various sizes; bottles which must have a destination upstream. Rivalry will cause price wars and lower the markup for the manufacturer making bottles, as bottlers may be considered to contracts that are a function of lowest cost to highest quality relative to margin of error in compliance to materials & specifications, which creates a higher variance, or difference in the profitability between the bottling and concentrate industry.
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The concentrate producers have historically greater profitability primarily for two reasons. Porter references the first reason as the ‘threat of substitutes’ (Quick MBA), which is a measure of the price inelasticity of demand. The second reason is ‘buying power’ which is the ability of the concentrate manufacturer to sell product not only to the everyday end consumer, but to businesses as well. Many bars and bar/restaurants use concentrate in drink mixing, etc., to which the buying power remains strong for concentrate and not bottles.
The profit margin per unit sold is higher for the concentrate producers simply because the product is including in the packaging. Porter’s Five Forces explains this as Supplier Power, Threat of Substitutes, and Buyer Power (Quick MBA). Concentrates have higher profit per unit over economies of scale. The process of producing the concentrate and the container inputs create a higher profit margin given the potential monopsony that exists between cola producer and the bottler of choice.
According to the data contained in the case study, Coca Cola have won the cola wars. Coca Cola prevailed in terms of global brand recognition while Pepsico has lost the cola wars to Coca Cola due to continued troubles with market penetration in India. Pepsi, however, has shown to be the more profitable as a food and beverage conglomerate among the cola drinking population and sales have remained strong relative to Coke sales. The cola wars do not escalate out of control because game theory of economics allow price point competition and various degrees of price discrimination, such as 1st and 3rd degree discrimination.
According to the case study, Coke and Pepsi are very capable of sustaining profitability as market share for each company in cola sales has remained above 70% for each market segment. Pepsi has chosen to acquire ‘core’ brands and sell off non-core brands to enhance profitability. The Pepsi brand itself will only maintain profits by increasing the price point of their brand in markets that show an inelastic demand curve at higher prices. Coke exhibits a similar demand price curve for each market segment. Suggested changes include rebrand the product in each market segment internationally and market to the audience.
Wells Fargo creates and sustains its competitive advantage by recognizing banking and financial strengths and understanding and marketing to a specific market segment. Other competitors cannot penetrate the Midwest, which is where Wells Fargo has a stronghold. This advantage is unique among our competitors and enables a profit structure relative to our market share. The human element is what drives innovation and product differentiation. Human element is often overlooked at the lower levels in the organization but recognized at the executive management level. A small contributor at the bottom of the organization may innovate and yield a new profit niche’ to which the CEO will realize an increased million dollar salary.
- Bloomberg Markets. http://www.bloomberg.com/
- “Porter’s Five Forces: A Model for Industry Analysis.” QuickMBA: Knowledge to Power Your Business. QuickMBA.com, 2007. Web. 9 Mar. 2013.
