Case Study: Coca Cola Porter Five Forces Analysis

Coca Cola Porter’s Five Forces analysis covers the company’s competitive landscape as well
as the factors affecting its sector. The analysis focuses on measuring the company’s position
based on forces like threat of new entrants, threat of substitutes, bargaining power of
buyers, bargaining power of suppliers and competitive rivalry. Let us start the Coca Cola
Porter Five Forces Analysis:

A Quick Glance:

 Threat of New Entrants

Let us understand these dimensions.

1. Threat of New Entrants:

The threat of new entrants in the Coca Cola Porter Five Forces Analysis can be explained as
follows:

Coca Cola is one the leading beverage brands having a global customer base, worldwide
distribution & prominent brand presence. Coca Cola being the one of the most well-known
words in the world after OK says a lot about the kind of brand recognition Coca Cola enjoys.
Any new player can have a small customer base locally, but globally, Coca Cola is very safe
from new entrants. This is mainly because the beverage industry is highly saturated, and any
new entrant cannot benefit from economies of scale, which the current players like Coca
Cola enjoy extensively. Moreover, there is a significant knowledge barrier in terms of them
being able to develop a formula for a soft drink that can compete with Coca Cola, and even
the technological barrier can be assessed as substantial.

Any high-yield market would definitely attract new entrants who would want to have a
share in the market, and that would result in lower prices by both old and new firms and
hence lower profitability for all the players in the market.

There are new entrants in the beverage industry all the time. Still, for them to gain a
foothold as significant as Coca Cola would be an extremely difficult task. They would take a
lot of time and also spend a fortune on marketing activities to gain the kind of brand image
Coca Cola enjoys. The level of customer loyalty in the market is moderate, and hence to
develop a brand overnight with a significant customer base is almost an impossible task.

Hence the threat of new entrants in the industry is almost insignificant for Coca Cola.

Rating: 2.5/10
2. Threat of Substitutes:

Below are the threats of substitute products of Porter’s Five Forces analysis of Coca Cola:

Coca Cola not only has to compete with other soft drinks but other beverages that one can
drink instead of Coca Cola. Threat of substitutes is the possibility of customers switching to a
different product that fulfils the same basic need and hence reducing profitability. For a soft
drink product, the brand loyalty demanded is pretty low. Customers can easily switch to
competition, albeit momentarily.

Some of the biggest competitors of Coca Cola are Tea, Coffee, & lemonade. As people are
becoming more health-conscious, the threat of substitutes like freshly made Smoothies or
Fresh pressed juices has increased multiple folds. The main substitutes that Coca Cola needs
to consider are Pepsi, Fruit juices, Milk Shakes, Tea, Coffee & Water. This threat can be
mitigated by expanding the product line, such as introducing non-carbonated drinks. The
threat can also be tackled by being service-oriented rather than product-oriented and also
by focusing on what the customer actually needs rather than what they are buying.

As the Switching cost is negligible and the benefits of the substitute product are usually
good, the threat of Substitutes is Strong.

Rating: 8/10

3. Bargaining Power of Customers:

In the Coca Cola Porter Five Forces Analysis the bargaining power of the customers can be
explained as:

The Coca Cola company deals with various kinds of buyers with varying levels of bargaining
power. Some of them are listed below.

- Direct End-user - Zero bargaining power, they buy the product at a fixed price
which usually remains constant.
- Fast Food chain owners - They have Low to medium bargaining power as Coca Cola
is one of the most demanded beverages. Also, it is usually combined as a combo
offering.
- Vending Machines at malls and movie theaters - Low to medium bargaining power.
- Restaurants and Airports : They have low to medium bargaining power as Coca
Cola is priced differentially at each of the location and the customer pays the price.

One of the biggest challenges that Coca Cola faces in the category of direct end user market
is that they need to keep the prices fixed even if the manufacturing cost is fluctuating.
Hence, either the firm or the suppliers must absorb the loss.

This is a significant risk, but it is one that every other entrant in the mass market must face.
Hence, the overall bargaining power of customers is low to medium.

Rating: 3/10

4. Bargaining Power of Suppliers:

Following is the bargaining power of suppliers in the Porter’s Five Forces analysis of Coca
Cola:

Coca Cola works with several suppliers for its raw material, labour, or services. Bargaining
power of the supplier is the power which these suppliers enjoy. The bigger the company is,
the more long-term contracts it must make with its suppliers, as the change in the cost of
raw material or services will inadvertently lead to an increase in the cost of the final
product. For example, Sugar is one of the major raw ingredients in Coca Cola, and a change
in its price will eventually lead to a change in the price of the product. A year's bad harvest
will cause the product's cost to increase, which is not ideal for the company as it needs to
maintain the product's price constant. Contracts help prevent this and maintain a steady
flow of raw material at a constant price. Being the mammoth it is, it is much easier for Coca
Cola to shift to a new supplier, but it is much more difficult for the supplier to shift to a new
customer that buys in the same magnitude as Coca Cola.

Hence the Bargaining power of suppliers is low.

Rating: 1/10

5. Competitive Rivalry:

The impact of key competitors in the Coca Cola Porter Five Forces Analysis is as follows:

When you think of the competitors of Coca Cola, the first name that comes to mind is Pepsi
and these 2 companies have been in competition since the late 19th century. Their key
products are very similar in both taste and looks, but there are some key differences as well.
Competitive rivalry is the competitiveness of the rivals currently present in the market and
their advantages over one another. One of the critical advantages of Pepsi over Coca Cola is
that they also own several salty snacks brands such as Doritos and Lays, Coca Cola on the
other hand, has predominantly stuck to beverages. If tomorrow there is a sudden drop in
soft drink demand, it will affect Coca Cola more significantly as compared to Pepsi. But Coca
Cola also owns some other beverage brands, such as minute maid, costa coffee and vitamin
water. Even if people don't buy a soft drink, Coca Cola is betting that they will have to drink
something else instead. These 2 leading players are of similar size and offer similar products.
The level of differentiation is low.

Hence, we can conclude that Competitive rivalry between the firms in the beverages
industry is strong. Rating: 7.5
Summary:

The overall Porter’s rating is indicating an overall rating of 22/50, averaging 4.4/10, which is
in the low - medium band indicating that the overall risk level is low and the company is well
positioned in the market amongst its rivals and competitors.

To conclude, the above Coca Cola Porter Five Forces Analysis highlights the various elements
which impact its competitive environment. This understanding helps to evaluate various
external business factors for any company.