Strategic Management

Session – 5
Prof. Dr. Shubhabrata Basu
 What you may expect to learn???
• Which industry is RELATIVELY more LUCRATIVE for
INVESTMENT PURPOSE
– Upstream or
– Downstream & WHY???
• Within the same industry – which firm is more lucrative
to attract investment
– And WHY?

Name ONE UPSTREAM LUCRATIVE & 2 DOWNSTREAM LUCRATIVE Industries

 Theory that Simplifies – 5 Forces
New Entrants Substitutes
Each Incumbent has DISTINCT
vis-à-vis (non-overlapping vis-à-vis
Incumbents Create incumbents) FIRM SPECIFIC
Entry Barriers ASSETS/Resources

Transacting Partners are

Behave Industry Lucrativeness for BOUNDEDLY RATIONAL
Opportunistically Investment Purpose (Ignorant) about Firm’s Strategic
Decisions
Incumbents Possess
Each Incumbent has
High Bargaining Power
FREQUENCY Advantage – i.e.
vis-à-vis more Concentrated (higher
market share) than buyer/supplier
Suppliers Buyers
 Examples of…
Specific Assets
Secret Formula
Halo around secret formula
Huge investments in BRAND building
Distribution Channel
Firm Culture
Size of Firm
Trust in the mind of customer
Dedicated Employees
Relationship with Government
Relationship with common stockholders
… and the list goes on …
Bounded Rationality
Means – another decision
maker is taking a decision
without having necessary
and sufficient information –
shot in complete darkness
No leakage of information
Random Unpredictable
Decisions – without a
pattern – like Mr. TR**P
Information overloading
Equifinal Information
… and the list goes on …
Frequency
Bigger the better
More concentrated
Larger market share vis-
à-vis buyer/supplier
Has Scale Economies –
during production and a
ready market for
distribution
Can keep Buyers &
Suppliers – fragmented
Long Term Contract –
but delivery in small lots
– less inventory holding
cost
… and the list goes on …
Who are the Buyers and Suppliers of
COKE and Pepsi
 Competitiveness of Concentrate Manufacturers (CM)
– Coke & Pepsi
NEW ENTRANTS X X SUBSTITUTES

Power is HIGH – Profit High

Coke/Pepsi’s Bargaining
Sugar, Water, Cumulative GI Joe Culture, Availability,
Caffeine, etc Exp. on Brand Bottle/Can Size, Acquire
Freely tradable
Commodities
Limited No. of
Sellers (INPUT) Technological Process Buyers (OUTPUT)
Bottlers

Machines,
Concentrate’s Formula
Mixer/Agitators

• Specific Asset of Sellers – LOW • Specific Asset of CM – HIGH

• Bounded Rationality of CM – LOW
• Choice of CM (Frequency) – HIGH
• Opportunistic Behavior of Sellers – LOW
• Coke/Pepsi’s Information Searching Cost –
ALREADY INCURRED – Information
Available – Hence Bargaining Power of
Sellers - LOW
• Bounded Rationality of Bottlers – HIGH
• Choice of Bottlers – LOW
• Opportunistic Behavior of CM – HIGH
• Bottler’s Information Searching Cost – HIGH – Don’t know
whether CMs are exploring new Packaging (Bottling) &
Distribution Channel to their exclusion – Hence Bargaining
Power of CM - HIGH
 Summary for Concentrate Manufacturers

• Constrained Competition
• High Barriers to Entry
• Locked Up Buyers
• Secret Ingredients
– Low Cost to make
– Hard to Imitate
• Adv. & Wide Spread Distribution – limit scope for
substitutes
 Analyzing - Concentrate Manufacturers

Barriers to Entry – First Mover Advantage

• Brand Equity – Cumulative Adv. Spending, American Culture

• Limited Shelf Space, Vending Slots, Fountains – the first mover had to be
“displaced”

• Franchise System – Capital Intensive – national distribution – 100 plants x

$40 million = $4 Billion

• Scale economies in advertising – Coke & Pepsi get more bangs (impact)
per buck (due to brand image) than smaller players
 Concentrate Manufacturers
Available Substitutions:

• Water, Coffee, Fruit Juice, Tea etc. – Less Costly but:

– Substitutes are not always readily available

– Carbonated Soft Drinks are an Impulse Buy

– Lifestyle Choices – how you live rather than how you quench thirst

– Addiction - Caffaine and cocoa

– Habit of Americans to drink more CSD while Status Symbol for others
 Concentrate Manufacturers
Supplier’s Power:

• What really goes into the Concentrate

– Not Sugar (Added by Bottler)

– Not Water (Bottler)

– It’s the Secret Formula

– No one Knows

– Cost of the Ingredient – Not much!!!

 Concentrate Manufacturers
Buyer’s Power:
• Bottler’s had very little power in past 25 years
– High Switching Cost
– Exclusive Franchise agreements
– Concentrates CoGS = 40 – 45% (for bottlers) but Concentrate Manufacturers offer
significant benefits – bargaining for cans, sugar, marketing, brand & product
development
– Sellers are concentrated and large relative to the Bottlers
• Final Consumers:
– Fragmented – A billion customers world wide
– Price sensitive – but susceptible to advertising
– No Switching cost – substitutes not always available
 Concentrate Manufacturers
Incumbent Rivalry:
• Structural Characteristics:
– Number of players – 2 major players
– Degree of differentiation – high degree of perceived differentiation
– Concentration and balance of Competitors
• Rivalry on:
– Shelf Space
– Life Style based Advertising and Brand name
– Selective discounting to downstream products
– NOT on Concentrate Price
• Controlled Rivalry:
– Short Term Advantage
– Quick Imitation
 Concentrate Manufacturers
Incumbent Rivalry:
• Coke’s Strategy
– Extensive Bottling Franchise
– Brand Name
– Govt. Support during War Time
– International Expansion
• Pepsi’s Strategy
– Selective discount in distribution outlets
– Positioning:
• Targeted – growing take home market
• Targeted – Young Consumers (Pepsi Generation)
• Targeted – Grocery Channel
– Motivated its Bottlers
– Competed on Package Size, Advertisement
• Both Coke and Pepsi benefited from Pepsi Challenge – Increased share in
CSD market, Market Pie Expanded – Small Brands Lost Out
 Competitiveness of Bottler’s
SUBSTITUTE
Y
NEW BOTTLERS Y Channel
CM directly selling to
Fountains/Supermarkets

Bottler’s have Moderate

Concentrate’s Bottler’s Guild?
Formula (e.g. McD, Wal-Mart)
Patented Product Fountains,

Profits
Limited Options Vending,
CM - (INPUT) Technological Process
Supermarkets
(OUTPUT)
Cumulative Scale of Operations - Cost↓ - but
Reputation more franchise/Competition from Rival
Brand in same area - Cost↑
• Specific Asset of CM – HIGH • Specific Investment – HIGH (Sunk Cost) - Bad
• Bounded Rationality of Bottlers – HIGH • Bounded Rationality of Bottlers – HIGH - Bad
• Choice of Bottlers – LOW • Choice of F-V-S – LOW – Moderate to Good
• Opportunistic Behavior of CM – HIGH • Opportunistic Behavior of Bottlers – LOW
• Bottler’s Information Searching Cost – HIGH – Don’t • Bottler’s Information Searching Cost – Irrelevant
know whether CMs are exploring new Packaging either with Coke or Pepsi – changing one – does
(Bottling) & Distribution Channel to their exclusion – not necessarily means better deal from the other!!!
Hence Bargaining Power of Bottlers - LOW
 Summary for Bottlers
• High Barriers to Entry
• Limited Substitutes
• Rivalry – Fierce in certain markets where Coke &
Pepsi are Fighting
• Suppliers – Coke & Pepsi appropriate most of
returns
• Buyers – Vary with Distribution Channel
 Analyzing - Bottlers
Barriers to Entry
• Exclusive Franchise
• High CAPEX in Bottling & Canning Lines
• High Investments in Truck, Distribution Centres
• Limited Shelf Space
Bargaining Power of Buyers
• Fountain – Fountain Account like McDonalds have significant power
• Vending – Profitable for Bottlers – M/Cs in hard to reach place – high retail
prices – share profit with owner of real estate
• Supermarkets – high bargaining power of supermarkets
 Analyzing - Bottlers
Bargaining Power of Supplier
• Concentrate manufacturers have significant Bargaining Power
• Suppliers like Can Makers are weak – Coke/Pepsi negotiate with them
• Suppliers like Searle (NutraSweet) – Coke/Pepsi Negotiate
Threat of Substitute
• Direct Delivery to Fountain by C/P
• Warehouse delivery reduces some of the functions of Bottlers
Rivalry
• Rival Brand – Share the Rivalry with Coke/Pepsi
• Geographically Exclusive – Bottler can grow only if it saturates the given
Geographical Location
 Summary of Rivalry of Coke & Pepsi
• C&P exercise immense Market Power
• No Vertical Integration – but C&P dominate its buyers &
Suppliers
• C&P created the industry. Their successes depend on:
– How they structure their own Business
– How they structure the Industry
• C&P are SMART Competitors – if they go for WAR, they
kill Others
Questions