STRATEGIC MANAGEMENT COHESION CASE: THE COCA-COLA COMPANY Source: Excerpted from Pearce, J.A. and Robinson, R.B.

(1994). "Strategic Management: Formulation, Implementation, and Control". Irwing. Adapted by Diego Medina. Las Palmas de Gran Canaria University I. COMPANY MISSION AT THE COCA-COLA COMPANY At the heart of Coca-Cola, especially in its first 100 years, there has been a commitment to intense marketing and to the preservation of its patented formulas and processes to make its special syrup. The intense secrecy that always has surrounded Coke's formula has long fostered an organizational obsession with secrecy pertaining to other information about Coke and its operations. In the early 1990s, Roberto Goizueta shared the following mission statement in a booklet entitled 'Coca-Cola, a Business System toward 2000: Our Mission in the 1990s'. "Bringing refreshment to a thirsty world is a unique OPPORTUNITY for our Company... and for all of our Coca-Cola associates... to create shareholder value. Ours is the only production and distribution system capable of realizing that opportunity on a global scale. And we are committed to realizing. With Coca-Cola as the enterprise, ours is a worldwide system of superior brands and services through which we, our franchises, and other business partners deliver satisfaction and value to customers and consumers. By doing so, we enhance brand equity on a global basis. As a result, we increase shareholder wealth over time. Our GOAL for the 1990s sounds deceptively simple: It's to expand our global business system, reaching increasing numbers of consumers who will enjoy our brands and products more and more often. To succeed we will make effective use of our fundamental RESOURCES: brands, systems, capital, and, most important, people. Because these resources are already available, one might assume we need only to draw on them for achieving our goal. Nothing could be more wrong. The CHALLENGE of the 1990s will be not only to use these resources but to expand them... to adapt them... to reconfigure them in constantly changing ways in order to bring about an ever renewed relationship between the Coca-Cola system and the consumers of the world .to make the best even better. About brands … Increasing globalisation of the communication industry means we can more effectively expose our advertising and other image-building programs through a worldwide brand framework. This places a premium on maintaining our traditional excellence as a premier brand advertiser. Yet we must remember that it is our franchisee network around the world, which will distribute and locally market our brands. To appropriately leverage these brands, we must recognize that our franchisees and we are fundamentally in the business of servicing our customers and meeting the needs, real o perceived, or our customers.

Coca-Cola, in every form... classic, diet, caffeine free, cherry, light... is the most widely recognized and esteemed brand in the world. Sprite and Fanta are worldwide brands; they must play a role in our brand strategy. We will continually strive to develop new brands where the opportunity presents itself. About systems... Moving closer to the customer both in our own organizational structure and in timely decision-making will be mandated by the global, yet diverse, marketplace of the 1990s. Structurally, a flatter organization of our Company will be required. Ours is a multilocal business. Its relative state of development varies dramatically from the soft drink frontiers of Asia to the sophisticated markets of North America... -At present, our main product, 'Coca-Cola', is now sold in over 135 countries, and is the leading soft-drink product in most of these countries. About capital... Shaping business systems which are close to consumers will require not only the investment of our capital for new assets but more sophisticated management of existing ones Existing assets will be evaluated as potential resources for meeting our goal. About people... We need the right people for the 21st century... We must have people who use facts and knowledge to add something... to add value to our customers' businesses. In an age where everyone has basically the same information at the same time, the advantage goes to people who can take information and quickly put it to effective and profitable use... It means having people who can create a competitive advantage". II. FORMULATING LONG-TERM OBJECTIVES AT THE COCA-COLA COMPANY The four key REWARDS the Coca-Cola Company seeks are: Satisfied consumers who return again and again to our brands for refreshment. Profitable customers who rely on our worldwide brands and services. Communities around the world where we are an economic contributor and welcomed guest. Successful business partners. Shareholders who are building value through the power of the Coca-Cola system. The Company identifies several long-term objectives that support these reward intentions. Management's primary objective is to maximize shareowner value over time. The Company then indicates that the following objectives help accomplish this overarching objective: "Maximize long-term cash flow by increasing gallon sales, optimising profit margins, expanding global business systems through investment in areas offering attractive returns. The principle objective of bottling investments is to ensure the strongest and most efficient production, distribution, and marketing systems possible, in order to maximize long-term growth in volume, cash flow, and shareowner value of the bottler and the Company". The Company pursues several inherent objectives as follows: Profitability: Double-digit levels annually equal to or exceeding historical levels. Productivity: Each Coca-Cola facility has as its objective maintenance or improvements of its operating profit margin.

Competitive position: Coca-Cola seeks to be the market leader in markets in which it competes. Technological leadership: Coca-Cola seeks to be the leader in the production and marketing technologies used in the markets in which it competes. Coke officials indicate a preference for stating objectives publicly in broad terms. They prefer to retain key results and timetables for internal consumption only. While this may be quite appropriate, you should nonetheless be able to recognize that objectives without measurable results or measurable timetables within which to accomplish them lose a lot of their value in focusing and directing strategic activities. III. ASSESSING THE EXTERNAL ENVIRONMENT AT THE COCA-COLA COMPANY ECONOMIC. Coca-Cola's products are consumer products, and as such are somewhat sensitive to consumer's disposable income. Coca-Cola's management report two trends that serve to shape its planning related to this factor. First, Coke consumers view soft drinks as inexpensive pleasure. As such, even in a temporary environment of steady or slightly declining disposable income, Coca-Cola's research suggests that consumers are unlikely to forgo soft drinks. Second, Coca-Cola monitors disposable income in over 200 countries where it sells soft drinks. In 1993, this information suggests that disposable income is generally rising around the world. Coca-Cola interprets this to mean more purchases of consumer products, particularly in countries where consumer product purchasing has been minimal. Inflation is another economic factor that influences Coca-Cola's success. Asked about this recently, Coca-Cola's management offered this comment: "Inflation is a factor in many markets around the world and consequently impacts the way the company operates. In general, we believe that we are able to adjust prices to counteract the effects of increasing costs and generate sufficient cash flow to maintain our productive capacity". DEMOGRAPHIC/SOCIAL. Consumption of soft drinks has long been inversely correlated with a person's age. In other words, as you age you drink fewer soft drinks, while younger people drink most soft drinks. The average age of the populations in the United States and most European countries is increasing. Outside the United States and Europe, Coke management observes: "The world is getting younger and young people are the most enthusiastic purchasers of consumer products". TECHNOLOGICAL. The world is getting smaller and smaller. Ease of travel and increasingly sophisticated, instantaneous worldwide communication capabilities drive this phenomenon. Coca-Cola's management views this as favourable: "As the world has gotten smaller, a 'global teenager' has emerged. In Germany and around the world, these teenagers share similar tastes in music, clothing, and consumer brands. With its global scope and the power of the world's most ubiquitous trademark, the Coca-Cola system is uniquely equipped to market to this group" These are a few of the remote environmental factors that influence Coca-Cola's future and how Coke management views them. Let's now look at some factors within their more immediate 'industry environment' and see how Coca-Cola's management views these, too.

RIVALRY. The Coca-Cola Company is rather vague on how it assesses rivals. Recent comments are both brief and generic, such as: "The commercial beverages industry, of which the soft-drink business is a part, is competitive. The soft-drink business itself is highly competitive. In any part of the world in which Coca-Cola does business, demand for soft drinks is growing at the expense of other commercial beverages. Advertising and sales promotional programs, product innovation, increased efficiency in production techniques, the introduction of new packaging, new vending and dispensing equipment, and brand and trademark developments and protection are important competitive factors". In general, Coke's intense rivalry with Pepsi results in a 'rivalry ante' that virtually eliminates other, lesser rivals. That intense rivalry (known as the 'cola wars'), unceasing for 20 years, has resulted in an ever-increasing share of a growing market for both Pepsi and Coke at the expense of other players. In this 'war', advertising and sales promotional programs are becoming crucial. SUPPLIERS. The principal raw material used by the soft-drink industry in the United States is high fructose corn syrup, a form of sugar, which is available from numerous domestic sources. The principal raw material used by the soft-drink industry outside the United States is sucrose. It likewise is available from numerous sources. Another raw material increasingly used by the soft-drink industry is aspartame, a sweetening agent used in low-calorie soft-drink products. Until January 1993, aspartame was available from just one source -the NutraSweet Company, a subsidiary of the Monsanto Company- in the United States due to its patent, which expired at the end of 1992. Coke managers have long held 'power' over sugar suppliers. They view the recently expired aspartame patents as only enhancing their power relative to suppliers. BUYERS. Individual consumers are the ultimate buyers of soft drinks. However, Coke and Pepsi's real 'buyers' have been local bottlers who are franchised -or are owned, specially in the case of Coke- to bottle the companies' products and to whom each company sells its patented syrups or concentrates. While Coke and Pepsi issue their franchise, these bottlers are in effect the 'conduit' through which these international cola brands get to local consumers Through the early 1980's, Coke's domestic bottlers were typically independent family businesses deriving from franchises issued early in the century. Pepsi had a collection of similar franchises, plus a few large franchisees that owned many locations. Until 1980, Coke and Pepsi were somewhat restricted in owning bottling facilities, which was viewed as a restraint of free trade. Jimmy Carter, a Coke fan, changed that by signing legislation to allow soft-drink companies to own bottling companies or territories, plus upholding the territorial integrity of soft-drink franchises, shortly before he left office. Also, the three most important channels for soft drinks are supermarkets, fountain sales, and vending. In 1987, supermarkets accounted for about 40% of total U.S. soft drink industry sales, fountain sales represented about 25%, and vending accounted for approximately 13%. Other retailers represent the remaining percentage. While both Coca-Cola and Pepsi distribute their bottled soft drinks through a network of bottling companies, Coca-Cola uses its own network of wholesalers for their fountain syrup distribution, and Pepsi distributes its fountain syrup through its bottlers.

THREAT OF SUBSTITUTES. Numerous beverages are available as substitutes for soft drinks. Citrus beverages and fruit juices are the more popular substitutes. Availability of shelf space in retail stores as well as advertising and promotion traditionally have had a significant effect on beverage purchasing behaviour. Overall total liquid consumption in the United States in 1991 included Coca-Cola's 10% share of all liquid consumption. THREAT OF POTENTIAL ENTRANTS. Finally, capital requirements for producing, promoting, and establishing a new soft drink traditionally have been viewed as extremely high. According to industry experts, this makes the likelihood of potential entry by new players quite low, except perhaps in very localized situations that matter little to Coke or Pepsi. Yet, while this view may reflect conventional wisdom, some industry observers question whether a new time is coming, with 'new age' beverages selling to well-informed and health-informed and health-conscious consumers. This issue was beginning to grab the attention of both Coke and Pepsi in the summer of 1992, when they both were not able to explain a drop in their June 1992 sales. IV. INTERNAL ANALYSIS AT THE COCA-COLA COMPANY A key perspective from which to gauge the strengths and weaknesses at Coca-Cola is via a comparison of key indicators with PepsiCo. Listed below are the net sales and operating incomes for 1989 through 1991. KEY INDICATORS (in billions) ____________________________________________________________________________ Coca-Cola PesiCo ___________________________________________________________________ U.S. Int.'I Total U.S. Int.'I Total ____________________________________________________________________________ Net sales 1991 2,6$ 7,2$ 6,1 9,8$ 8,6 5,1$ 1,7$ 6,9$ 1990 2,5 4,8 7,0 5,0 4,6 1,5 6,5 1989 2,2 1,2 5,8 ____________________________________________________________________________ Operating income 1991 1990 1989 0,469 0,358 0,391 2,1 1,8 1,5 2,6 2,2 1,9 0,746 0,674 0,578 0,117 0,094 0,099 0,863 0,768 0,676

OPERATIONS. Over the last 10 years, Coca-Cola has moved to a regional operating strategy with centralized concentrate production facilities that reduce manufacturing costs. Coke's main manufacturing activities relate to elaboration of syrup, which is then distributed to bottling companies.

SALES AND MARKETING. Overall, Coca-Cola has sustained an overall domestic market share lead versus Pepsi, with 41% versus 31%. Internationally, Coke is always ahead of Pepsi Pepsi's main strength is in the supermarket area, but Coke maintains a virtually equal portion of this market. Pepsi has strong sales through the restaurant chains it owns (Pizza Hut, Kentucky Fried Chicken, Taco Bell) although a recent decision by Burger King to leave Pepsi for Coke, plus McDonald's continued relationship with Coke, seem to confirm Goizueta's long-held policy that Coke will not compete with its customers, such as restaurants, by entering their industry. Brand loyalty is another major strength for Coca-Cola. In the United States, Coke's mid198O's debacle -withdrawing regular Coke in favour of New Coke only to have consumers react so negatively that regular Coke, the "Coke Classic", was brought back to head off consumer law suits and other demands- showed Coke the depth of brand loyalty it had engendered. The net result was greater market share and profitability for Coke as it realized the depth of its brand loyalty. DISTRIBUTION. As we mentioned above, while both Coca-Cola and Pepsi distribute their bottled soft drinks through a network of bottling companies, Coca-Cola uses its own network of wholesalers for their fountain syrup distribution, and Pepsi distributes its fountain syrup through its bottlers. In general, Coke seeks total automation of distribution activities. Consider Coca-Cola Enterprises (CCE), the U.S. bottling company in which Coca-Cola holds a 49% interest. It has 1.800 salespeople selling over 150 products to 560.000 outlets along 6.500 routes, delivering over 2,5 million cases daily. Those sales people now carry handheld computer terminals, which unload orders to a central dispatch computer, which decodes addresses and allows CCE dispatchers to experiment with alternate routes, and, in one third the time previously spent, create routes for the next day that have dropped distance travelled by 8%, total hours spent on delivery by 13%, and the number of vehicles and delivery people needed by 14%. PROCUREMENT. Coca-Cola has followed a strategy of increased ownership of bottling operations worldwide as a way to make its operations more efficient and also to improve product availability as well as marketing focus. In some cases, investments represent minority shares in the bottling company, wherein Coca-Cola is able to help focus and improve sales and marketing programs, assist in the development of effective business and information systems, and lend operating expertise. Situations where the current bottler is not competitive with current competition or system wide sales standards, Coke frequently moves in to acquire the franchise and quickly turn the situation around. Coke was weak relative to Pepsi in the early 1980s in terms of the strength of franchisee bottlers. Coke's bottlers were second- and third-generation family businesses that had been with Coke from its very early days. Pepsi's franchises, led by what was then world's largest soft-drink bottler -General Cinema Corporation- had better capitalized and more sophisticated bottlers in many key urban areas in the United States. But Coke recognized this and, over the 1980's, became more aggressively involved with its bottlers, including over $2 billion in investment, which makes its bottling network, particularly abroad, a relative advantage in the 1990s.

HUMAN RESOURCES. Regarding with human resource management, Coca-Cola Company has a very loyal workforce, minimal turnover, and a strong tendency to promote from within. Overall, Coke provides attractive compensation; places a major emphasis on employee training and indoctrination into "the Coke way" so that employees worldwide share a similar understanding of and appreciation for what the product stands for and seeks to be in the consumer's mind. Coke places a lot of emphasis on having its people "think globally, but act locally; respond daily to competitive situations; serve customers and consumers with a passion".