Porter’s Five Forces In Action: Sample

Analysis of Coca-Cola

Since its introduction in 1979, Michael Porter’s Five Forces has become the de facto

framework for industry analysis. The five forces measure the competitiveness of the

market deriving its attractiveness. The analyst uses conclusions derived from the

analysis to determine the company’s risk from in its industry (current or potential) .The

five forces are (1) Threat of New Entrants,(2) Threat of Substitute Products or Services,
(3) Bargaining Power of Buyers,(4)Bargaining Power of Suppliers,(5) Competitive Rivalry

Among Existing Firms. The following is a Five Forces analysis of The Coca-Cola Company

in relationship to its Coca-Cola brand.

Threat of New Entrants/Potential Competitors : Median Pressure

New entrants in Beverages - Soft Drinks brings innovation, new ways of doing things and

put pressure on The Coca-Cola Company through lower pricing strategy, reducing  costs,

and providing new value propositions to the customers. The Coca-Cola Company has to

manage all these challenges and build effective barriers to safeguard its competitive

edge. Coca-Cola dominates more than three-fourths of the non-alcoholic beverage

market and the remainder of the market is dominated by Pepsi , therefore Coca-Cola is

an oligopoly. An oligopoly is where two firms dominate, and it would be hard for new

non-alcoholic beverage manufacturer to break into the global market (Levitt, 1983).

Coca-Cola’s level of customer loyalty in the beverage industry is unprecedented and for

any brand to build customer loyalty it will take some time.

 The economies of scale is fairly difficult to achieve in the industry in which The

Coca-Cola Company operates. This makes it easier for those producing large

capacitates to have a cost advantage. It also makes production costlier for new

entrants. This makes the threats of new entrants a weaker force.

  The product differentiation is strong within the industry, where firms in the

industry sell differentiated products rather a standardised product. Customers

also look for differentiated products. There is a strong emphasis on advertising

and customer services as well. All of these factors make the threat of new

entrants a weak force within this industry.

 The capital requirements within the industry are high, therefore, making it

difficult for new entrants to set up businesses as high expenditures need to be

incurred. Capital expenditure is also high because of high Research and

Development costs. All of these factors make the threat of new entrants a

weaker force within this industry.

 The access to distribution networks is easy for new entrants, which can easily set

up their distribution channels and come into the business. With only a few retail

outlets selling the product type, it is easy for any new entrant to get its product

on the shelves. All of these factors make the threat of new entrants a strong

force within this industry.

 The government policies within the industry require strict licensing and legal

requirements to be fulfilled before a company can start selling. This makes it

difficult for new entrants to join the industry, therefore, making the threat of

new entrants a weak force.

How The Coca-Cola Company can tackle the Threat of New Entrants :
  The Coca-Cola Company can take advantage of the economies of scale it has

within the industry, fighting off new entrants through its cost advantage.

 The Coca-Cola Company can focus on innovation to differentiate its products

from that of new entrants. It can spend on marketing to build strong brand

identification. This will help it retain its customers rather than losing them to new

entrants

 Building capacities and spending money on research and development. New

entrants are less likely to enter a dynamic industry where the established players

such as The Coca-Cola Company keep defining the standards regularly. It

significantly reduces the window of extraordinary profits for the new firms thus

discourage new players in the industry.

Threat of Substitute Products: Median to high pressure

When a new product or service meets a similar customer needs in different ways,

industry profitability suffers. For example services like Dropbox and Google Drive are

substitute to storage hardware drives. The threat of a substitute product or service is

high if it offers a value proposition that is uniquely different from present offerings of

the industry. Main substitutes of Coca Cola products are the beverages made by Pepsi,

fruit juices, and other hot and cold beverages.  The number of substitutes of Coca Cola

products is high. There are several juices and other kinds of hot and cold beverages in

the market. The switching costs are low for the customers. Apart from it, the quality of
the substitute products is also generally good. So, based on these factors the threat

from substitutes is strong.

 There are very few substitutes available for the products that are produced in the

industry in which The Coca-Cola Company operates. The very few substitutes that

are available are also produced by low profit earning industries. This means that

there is no ceiling on the maximum profit that firms can earn in the industry in

which The Coca-Cola Company operates. All of these factors make the threat of

substitute products a weaker force within the industry.

 The very few substitutes available are of high quality but are way more

expensive. Comparatively, firms producing within the industry in which The Coca-

Cola Company operates sell at a lower price than substitutes, with adequate

quality. This means that buyers are less likely to switch to substitute products.

This means that the threat of substitute products is weak within the industry.

How The Coca-Cola Company can tackle the Threat of Substitute Products?

 The Coca-Cola Company can focus on providing greater quality in its products. As

a result, buyers would choose its products, which provide greater quality at a

lower price as compared to substitute products that provide greater quality but

at a higher price.

 The Coca-Cola Company can focus on differentiating its products. This will ensure

that buyers see its products as unique and do not shift easily to substitute
 products that do not provide these unique benefits. It can provide such unique

benefits to its customers by better understanding their needs through market

research, and providing what the customer wants.

 By being service oriented rather than just product oriented.

 By understanding the core need of the customer rather than what the customer

is buying.

 By increasing the switching cost for the customers.

The Bargaining Power of Buyers: Low pressure

Buyers are often a demanding lot. They want to buy the best offerings available by

paying the minimum price as possible. This put pressure on The Coca-Cola Company

profitability in the long run. The smaller and more powerful the customer base is of The

Coca-Cola Company the higher the bargaining power of the customers and higher their

ability to seek increasing discounts and offers.With regards to the commercial beverage

industry, buyers have an advantage of bargaining power, and this affects Coca-Cola’s

profitability directly. Coca-Cola does not sell directly to its consumers. Coca-Cola

depends on the sales of concentrates and syrups to independent bottling partners (The
Coca-Company, 2017). Coca-Cola’s success depends on the financial condition and

profitability of distribution organization such as fast food chains, vending machine

companies, and grocery stores. Ultimately, Coca-Cola must sell its product to

distribution networks and other customers at prices low enough that they can sell to the

consumer that results in profitability and customer loyalty.

 The number of suppliers in the industry in which The Coca-Cola Company

operates is a lot more than the number of firms producing the products. This

means that the buyers have a few firms to choose from, and therefore, do not

have much control over prices. This makes the bargaining power of buyers a

weaker force within the industry.

 The product differentiation within the industry is high, which means that the

buyers are not able to find alternative firms producing a particular product. This

difficulty in switching makes the bargaining power of buyers a weaker force

within the industry.

 The income of the buyers within the industry is low. This means that there is

pressure to purchase at low prices, making the buyers more price sensitive. This

makes the buying power of buyers a weaker force within the industry.

 The quality of the products is important to the buyers, and these buyers make

frequent purchases. This means that the buyers in the industry are less price
 sensitive. This makes the bargaining power of buyers a weaker force within the

industry.

 There is no significant threat to the buyers to integrate backwards. This makes

the bargaining threat of buyers a weaker force within the industry.

How The Coca-Cola Company can tackle the Bargaining Power of

Buyers :

 The Coca-Cola Company can focus on innovation and differentiation to attract

more buyers. Product differentiation and quality of products are important to

buyers within the industry, and The Coca-Cola Company can attract a large

number of customers by focusing on these.

 The Coca-Cola Company needs to build a large customer base, as the bargaining

power of buyers is weak. It can do this through marketing efforts aimed at

building brand loyalty.

 The Coca-Cola Company can take advantage of its economies of scale to develop

a cost advantage and sell at low prices to the low-income buyers of the industry.

This way it will be able to attract a large number of buyers.

 New products will also reduce the defection of existing customers of The Coca-

Cola Company to its competitors

The Bargaining Power of Suppliers: Low pressure

All most all the companies in the Beverages - Soft Drinks industry buy their raw material

from numerous suppliers. Suppliers in dominant position can decrease the margins The

Coca-Cola Company can earn in the market. Powerful suppliers in Consumer Goods

sector use their negotiating power to extract higher prices from the firms in Beverages -

Soft Drinks field. The overall impact of higher supplier bargaining power is that it lowers

the overall profitability of Beverages - Soft Drinks.Lastly, the final competitive force of

the analysis is: Coca-Cola’s suppliers. By forming strategic partnerships and agreements

with suppliers, Coca-Cola strives to standardize pricing. However, Coca-Cola’s usage of

commodities in manufacturing such as orange and fruit juice concentrates, sugar, and

additional derivatives prices can fluctuate. Per Coca-Cola’s 10-K report, “Increases in the

prices of our finished products resulting from a higher cost of ingredients, other raw

materials and packaging materials could affect affordability in some markets and reduce

Coca-Cola system sales” (The Coca-Cola Company, p.14, 2017). If substantial increases in

pricing for raw materials occur, Coca- Cola does not have the ability to pass the change

to their customers. Thus, increased supplier pricing increases operational costs which

could reduce Coca-Cola’s profitability and adversely affect bargaining power with

suppliers.

 The number of suppliers in the industry in which The Coca-Cola Company

operates is a lot compared to the buyers. This means that the suppliers have less
 control over prices and this makes the bargaining power of suppliers a weak
force.
 The product that these suppliers provide are fairly standardised, less
differentiated and have low switching costs. This makes it easier for buyers like
The Coca-Cola Company to switch suppliers. This makes the bargaining power
of suppliers a weaker force.
 The suppliers do not contend with other products within this industry. This means
that there are no other substitutes for the product other than the ones that the
suppliers provide. This makes the bargaining power of suppliers a stronger force
within the industry.
 The suppliers do not provide a credible threat for forward integration into the
industry in which The Coca-Cola Company operates. This makes the bargaining
power of suppliers a weaker force within the industry.
 The industry in which The Coca-Cola Company operates is an important
customer for its suppliers. This means that the industry’s profits are closely tied
to that of the suppliers. These suppliers, therefore, have to provide reasonable
pricing. This makes the bargaining power of suppliers a weaker force within the
industry.

How The Coca-Cola Company can tackle the Bargaining Power of

Suppliers?
 The Coca-Cola Company can purchase raw materials from its suppliers at a low
cost. If the costs or products are not suitable for The Coca-Cola Company, it can
then switch its suppliers because switching costs are low.
 It can have multiple suppliers within its supply chain. For example, The Coca-
Cola Company can have different suppliers for its different geographic locations.
This way it can ensure efficiency within its supply chain.
 As the industry is an important customer for its suppliers, The Coca-Cola
Company can benefit from developing close relationships with its suppliers where
both of them benefit.

Rivalry Among Existing Firms: High Pressure

If the rivalry among the existing players in an industry is intense then it will drive down prices
and decrease the overall profitability of the industry. The Coca-Cola Company operates in a
very competitive Beverages - Soft Drinks industry. This competition does take toll on the overall
long term profitability of the organization.

How The Coca-Cola Company can tackle Intense Rivalry among the
Existing Competitors in Beverages - Soft Drinks industry
 By building a sustainable differentiation
 By building scale so that it can compete better
 Collaborating with competitors to increase the market size rather than just competing for
small market.