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Running head: PEPSI VS. COKE CASE STUDY 0

Pepsi vs. Coke Case Study

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Pepsi vs. Coke Case Study

Part A

The Worldwide Socioeconomic and Political Environment

Understanding the external environment in which a company operates is crucial for any top management. For instance, the global socio economic and political environment presents many challenges and opportunities for many companies (Wetherly, & Otter, 2014). The demographic and culture of the worldwide market varies. For this reason, the importance of determining what to sell, where, how much, and how to market is increasing. For example, the worldwide market is currently more focused on healthy products. Therefore, companies have to respond to these needs in all aspects. In addition, it has also been noted that social responsibility of a company affects the worldwide image of a brand. The global economic challenges might also affect the liquidity and financial performance of companies, for instance, soft drink and beverage manufacturers such as Coca-Cola Co. and Pepsi Co. In addition, the price of imports, exports, and exchange rates might also affect many industries such as soft drink manufacturers (Wetherly, & Otter, 2014). Finally, the economic environment affects how consumers spending powers, thereby, having an impact in many sectors of the economy. It is also important to note that global political environment presents various risk to many companies. For instance, political instabilities in some parts of the globe and changes in established laws and regulations might prevent companies such as Coca Cola and Pepsi from distributing drinks.

The Domestic Environment

The domestic environment in which Coca Cola Co. and operates presents many challenges and opportunities at the same time. For instance, the strong democratic setup in the US and effective rule of law is considered fair and transparent by most companies. However, the US is also under continuous threat because of the interventionist policies regarding war on terror. In addition, the domestic environment of Pepsi and Coca Cola companies has a well-developed economic system that is supported by many service and manufacturing companies. Like some developed countries, the US is faced with the problem of the aging population. This can contribute to major labor shortage more so for companies operating in the US market. However, with a superior education system, the US has one of most highly trained and skilled employees (Wetherly, & Otter, 2014). However, rising racial bigotry is not only a concern for the government but also for major corporations such as Coca Cola and Pepsi that rely on political stability to sell products. Finally, innovation and technology are considered by many as the cornerstone of the US economy. The domestic businesses have been at the forefront when it comes to applying and developing technology, which opens up massive opportunities for companies in various sectors.

The Industry Situation

The beverage and soft drink industry is very competitive with many companies competing to acquire a portion of the market share. However, majority of the market share is controlled by industry titans, for instance, Coca Cola Co. and Pepsi Co (Chan, 2017). Major players boost their results by acquiring smaller companies and making promising distribution strategies. One of the trends being experienced in the industry is that most consumers prefer and favor most prominent brands. However, a reduction in disposable income has seen some consumers turning to less expensive less known brands. Sales in the industry are mostly seasonal, and are high during summer months. In addition, changes and variations in consumer preferences are driving product diversification. The demand for soft drinks such as diet options has also been sluggish. This has prompted major players such as Pepsi Co. and Coca Cola Co. to initiate intensive marketing strategies to win the market back (Chan, 2017). In addition, major players have also rushed to position themselves in vital fast growing market segments. Finally, product diversification has been mainly achieved through internal and external means. This has enabled major industry players to compete better and gain market share.

The Companies’ History, Current Conditions and Future

Pepsi Co.

Pepsi Co. is beverage and food processing company that was founded in 1898 by Caleb Bradham in New Bern, North Carolina, U.S ("PepsiCo", 2017). Since then, the company has grown through mergers and acquisitions to become the leading food and beverage company in the world. Currently, the company’s product mix consists of about 54% food, with the rest being beverages. Pepsi Co. has currently increased its marketing initiatives and experienced steady growth. The company’s growth earnings are expected to increase in the future at an annual rate of approximately 6% ("PepsiCo", 2017). It is expected that this will be achieved through increased diversification.

Coca Cola Co.

The company was established in Georgia U.S. in 1886 by Asa Griggs Candler as a retailer and marketer of nonalcoholic beverage drinks ("The Coca-Cola Company", 2017). Since 1889, Coca Cola Co. has achieved growth and operated mainly through franchised distribution system. Like Pepsi Co., the company has a long history of acquisitions. Coca Cola Co. has since sold beverage drinks for all countries in the world. The company has experienced steady growth lately and currently listed in the NYSE. The future is still bright for the company, as Coca Cola Co. has constantly adapted to changes in the market. Therefore, increased growth is expected in the future.

Part B: Solving the Problem Facing Coca Cola Co.

Problem

According to the case study, Pepsi Co. announced a merger with Quaker Oats Company. The merger is expected to affect Pepsi Co. and Coca Cola Co. prospects of value creation. For instance, the merger would mean that Pepsi would control Gatorade, a company that held 83% share in the sports drink market. At the same time, the merger would strengthen the already wide lead Pepsi Co. has over Coca Cola Co in the noncarbonated drinks segment. This is a major problem for Coca Cola Co. because Pepsi would threaten its lead in the domestic beverage company.

Defining the Alternatives

First alternative

Coca Cola Co. could also respond to Pepsi move through strategic mergers and acquisitions. This involves the full or partial purchase of controlling interest in one or more soft drink companies that offer the best leverage in terms of market share. The adoption of this strategy would offer the company many benefits such as increased management expertise, stock exchange quotation, increased profits, desire to growth, and more importantly increased market share (Chui, 2011).

Second alternative

Coca Cola Co. could also consider diversifying its product portfolio to remain competitive and counter Pepsi’s increased market share. This move involves expanding business opportunities through increased market potential of a current product (Lamb, Hair, & McDaniel, 2009). Coca Cola can adopt this strategy by entering new markets. This strategy will provide Coca Cola Company with opportunities to grow the business through increased sales or entering new market. For instance, entering new markets would reduce Pepsi’s dominance in the domestic beverage category.

Third alternative

Coca Cola Company could also adopt product differentiation strategy as a defensive approach. This strategy could be used by the Coca Cola Company to distinguish a product from the same offerings in the market. This approach must target a section of the market and convey a message that the offering is completely different from all other comparable products that are available to consumers (Dirisu, Iyiola, & Ibidunni, 2013). This strategy will be crucial in generating a perceived value among users and prospective consumers.

Gathering Information about Alternatives

A number of studies reveal that mergers and acquisitions have the potential of increasing competitive advantage through increased market share (Chui, 2011). Pepsi Co. had just acquired another firm that controlled 83% of the soft drink market. Therefore, one possible way that Coca Cola could use to reduce the threat from Pepsi is to either merge or acquire a firm that would provide a quickest entry into new markets. In addition, a strategic merger or acquisition can result in synergies that provide real value for Coca Cola Co. On the other hand, product diversification is an approach that is normally adopted by companies that face strong competition like in this case. Coca Cola faces a declining market share because of the merger between Pepsi and Quaker Oats Company. Therefore, by adopting a diversification strategy, the company can exploit a strong market opportunity by creating related products within the soft and non-carbonated drink category (Lamb, Hair, & McDaniel, 2009). Finally, to combat the loss of advantage that has been caused by Pepsi’s merger with another company, Coca Cola Co. needed to differentiate its offerings by continually developing new values and benefits within its existing product portfolio. This approach might also involve developing new products to ensure that Coca Cola Co. remain in the market leader position.

Analysis of the Risk and Return of the Options

As much as the alternatives are associated with significant benefits, they might also present risk to companies. For instance, the two important risk associated with mergers and acquisition are financial and operational (Chui, 2011). When it comes to mergers and acquisitions, a company, for instance, Coca Cola might end up creating synergies that does not generate actual cash flows. In addition, the company risks inheriting certain risks and being exposed to contingent liabilities. Operational risks might include management and distribution channel conflicts. However, this approach is associated with cost synergies and increased market share if carried out accordingly (Chui, 2011). On the other hand, product diversification is associated with increased market share, sales and revenue. Other important benefit of product diversification is reduced dependency on existing products. This ensures a steady income generation. However, by adopting this approach, a company risks stressing its operations and damaging brand. Finally, differentiation carries risks that are caused by consumer displeasure, capital misallocation, and distributor resistance (Dirisu, Iyiola, & Ibidunni, 2013). This occurs when products are differentiated based on deceptive promises or on unimportant attributes such as color. However, by differentiation, a company stands to gain from enhanced perceived value among consumers.

Making the Decision and Developing a Plan of Action

To respond to Pepsi’s merger with Quaker Oats Company, Coca Cola Co. ought to adopt a product diversification approach. The actions plans involved in this response might include modifying existing products to appeal to different group of users (Lamb, Hair, & McDaniel, 2009). For example, Coca Cola can consider developing a version of drink that appeal to sport market or other versions of non-carbonated beverages as a response of Pepsi’s lead in those markets. An alternative plan involves offering new products to existing markets (Lamb, Hair, & McDaniel, 2009). For example, introducing a range of soft drinks and non-carbonated beverages that appeal to the same customer group. Another plan of actions involves adding a new product to the company’s range to appeal to new group of users.

Chan, J. (2017). Coke vs. Pepsi, 2001. Graduate School Of Business Administration, University Of Virginia. Retrieved from http://pruss.narod.ru/Coke_vs_Pepsi.pdf

Chui, B. (2011). A Risk Management Model for Merger and Acquisition. International Journal of Engineering Business Management, 3(2), 37-44.

Dirisu, J., Iyiola, O., & Ibidunni, O. (2013). Product Differentiation: A Tool of Competitive Advantage and Optimal Organizational PERFORMANCE. European Scientific Journal 9(34), 258-279. Retrieved from http://eujournal.org/index.php/esj/article/viewFile/2174/2059

Lamb, C., Hair, J., & McDaniel, C. (2009). Essentials of marketing (1st Ed.). Mason, Ohio: South-Western.

PepsiCo. (2017). Pepsico.com. Retrieved 18 April 2017, from http://www.pepsico.com/Company/Our-History

The Coca-Cola Company. (2017). the Coca-Cola Company. Retrieved 18 April 2017, from http://www.coca-colacompany.com/our-company

Wetherly, P., & Otter, D. (2014). The business environment (1st Ed.). Oxford: Oxford University Press.