Introduction
Porter Five Forces model is used to measure the accessibility and competitiveness of the industry in the market. It is an analytical tool for analyzing the profitability and competitiveness of the industry in financial markets. Carbonated Soft Drink (CSD) industry has shown a rapid growth during the last decade due to the increasing demand and effective strategies to capture wide global markets. The major competitors within the industry are Pepsi and Coca-Cola that contributed an average growth of ten percent to the overall growth of the industry. Five forces model is effective in analyzing the competitiveness within the CSD industry.
Porter Five Forces Model
The five forces analysis of the industry includes five different elements shown in the figure below:
Risk of New Entry
The risk of new entrants depends upon the competitive environment in the industry. If the industry has large barriers or there is monopolistic competition, the new entrants will not attract to the industry. Hence, the existing companies can get a high share of the profitability of the overall industry and strengthen their position in the global market (Hill and Jones). The threat of new entrants is low because it requires a large number of resources and distribution channels to offer the products in highly competitive markets. There is high brand recognition of the carbonated soft drinks such as Pepsi and Coca-Cola and they also have an absolute cost advantage to manufacturing a large number of products at relatively low cost. However, customers can switch easily switch to the substitutes (differentiated products) as they do not have to bear extra cost for switching. The new entrants will face new challenges caused due to the monopoly of big firms in the industry that are on number 57 (Coca-Cola) and 42 (Pepsi)in the fortune, lowers the pool of competition through pricing and cost effectiveness strategies.
Bargaining Power of Suppliers
It refers to the influential power of suppliers within the industry. If the suppliers have high bargaining power, they can use their power by increasing the prices of the raw materials or lowering the quality of products and services. The supplier power is low in CSD industry due to the long-term contracts and relationships with the manufacturers. Also, there are many suppliers that have made Coca-Cola as the third best and worth 79.2 billion value brand. It also explains that switching cost of the suppliers is low, and the suppliers do not have other companies for increasing the supply of the raw materials (Hill and Jones). Suppliers’ involvement in the manufacturing business is low due to the strong relationships with the companies in the focal industry. Also, the companies in the CSD industry are not interested in the suppliers business. It indicates that the suppliers are not in the position to exercise their power for encouraging companies to fulfill their desires. They need to continue their operation in the existing direction and supply raw materials to the companies that increase the profitability of the suppliers itself.
Bargaining Power of Buyers
It refers to the power of buyer that can encourage or force companies to lower the price or produce high-quality product. It is high when the buyers have option to switch from the product of the company to other. It also depends upon the cost of switching from one product to the other. It is high in the competitive market where large numbers of sellers are offering homogenous products to the global customers. The bargaining power of buyer is strong in CSD industry because of the availability of buyers who purchase a bulk quantity of the products. The potential buyers of the industry products include discount stores, restaurants, and large grocers who resale the finished goods to the final consumers. They contribute substantial part that is 1.4 percent in the sales growth of Coca-Cola. They can purchase a large quantity of products at low prices due to high competition in the market. The switching cost of the buyers is low, and they can easily move towards the competitors.
Substitutes
Availability of a large number of Substitutes is the reason for the high competition in the market. Threats of substitutes decrease the profitability of the business as customers can switch to other products that are relatively cheaper (Hill and Jones). There is no close substitute for the product manufactured by CSD industry, but there are few substitutes that can threaten the business of the overall industry. It includes bottled water, tea, and coffee products that health conscious people prefer and the observation shows that there was a decline of sales of CSD products from 80 to 64 percent in the year 2009. In 2000-2009, water consumption increased to 20 percent that is considered as the necessity of life. As people moves towards it, for the reason of being healthy, will ultimately increase the threats of substitutes for the industry. Also, it is comfortable for the consumers to switch to these substitutes because there is no cost of switching. The threat of substitutes is expected to be high in future due to the health priorities concerned by the people living in different countries. The substitutes can decrease the sales of the company, and there would be no competitive advantage within the industry.
Rivalry
Rivalry refers to the intensity of competition in the industry. Coca-Cola and Pepsi claimed that they had contributed more than 70 percent of the total sales of the CSD industry. There are some other rivals in the industry who compete with each other by increasing sales, reducing cost, and improving quality to gain a competitive advantage over others. The main competition in the industry is due to the two largest producers Pepsi and Coca-Cola that produce differentiated products within the industry. Pepsi generated more than 38 percent of the total revenue as compared to Coca-Cola in 2011 but they both are strong competitors to each other. The portfolio of Pepsi Co indicates that it revenue is generated from mix product that include 37 percent of the beverage and 63 percent of the food products. In contrast, Coca-Cola has more than 500 non-alcoholic brands that can generate high revenues for the company. It is observed that decline in the sales of either of a company results in the increasing sales of the other. It shows that there are two major and potential competitors in the industry. The high competition between the two companies allows consumers to gain an advantage in the competition. Also, there is high demand for these products of the company in Food and Beverages (F&B) industry. There are other competitors that supply similar products to the consumers, but the high competition between Pepsi and Coca-Cola contributes substantially in the industry (Hill and Jones).
Summary
The above five forces analysis indicates that there is high competitiveness within the CSD industry. The positive factors such as low bargaining power of suppliers, high rivalry competitiveness, and low threats of new entrants show that the industry is growing rapidly to generate high profits. However, there is high bargaining power of buyers and high availability of substitutes that can slow slower the growth of the industry in future. The increasing substitutes and customer’s demand can reduce the profitability of the business in future. The CDS industry has many companies that compete with each other by reducing prices of quality products and improving the offered products and services to the final consumers. The continuing competition of Pepsi and Coca-Cola disallow other competitors to enjoy a high position in the industry. Also, new entrants will face many challenges such as low cost, and high market share in the internal markets.
Works Cited
Hill, Charles W. L. and Gareth R. Jones. Essentials of Strategic Management. Cengage Learning: Mason, 2012.Print.
