Michael Porter developed the five forces framework or tool in the XX century, but this tool has proven itself useful in the XXI century as well. This model examines specific factors crucial for industries’ or businesses’ profitability. With the help of it, an accurate analysis can be created to evaluate the industry’s potential and ability to bring serious profits.
The five forces that Porter presents are the following: the threat of new entrants, the threat of substitutes, competitive rivalry, bargaining power of buyers, and the bargaining power of suppliers. Although it might seem that different industries demand different conditions to become profitable, Porter argues that all of them rely and depend on these forces. What is more, with the help of this forces business can assess its profitability and competitiveness.
The carbonated soda drink industry will be analyzed with the help of Porter’s model. This industry was created with the establishment of the Coca-Cola company in 1886 (Yoffie & Renee, 2011). Although it was unique in its section at first, similar companies began to spread. Coca Cola’s long-term rival Pepsi-Cola emerged in 1893. Although other big players are also parts of the industry, Coca-Cola and Pepsi-Cola are the major representatives and opponents in it.
The threat of New Entrants
New players in the industry provide low competitive pressure because of the existing major brands that are recognizable and preferred. Although entry barriers of the industry can also be seen as low because of the constant emergence of new brands, this industry demands serious investment because of the high costs that need to be regarded, e.g., logistics, labor, storage, etc. Since the industry is mostly represented by two or three major players (e.g., Cola, Pepsi, Schweppes), newcomers are not capable of competing with the major players because they are new to the market and unknown to customers. Frequently, new entrants emerge without economies of scale, which also hinders their ability to compete. The industry demands serious capital investment in production and manufacture; however, even if the manufacture is costly, it should not influence the price. It is important to understand that these demands can be met only if a company can provide serious investments; otherwise, a new business can lead to severe losses or bankruptcy.
Threat of Substitutes
The threat of substitutes in this industry can be seen as very high. First, even the major players have to compete. If customers decide to switch, they will not face serious costs because the prices among the substitutes are almost alike. Second, there are other substitutes for the products in the carbonated drink soda industry: tea, bottled water, coffee, sports drinks, juice, etc. It should be mentioned that with the current trends that focus on a healthy lifestyle and sporty living, customers might want to choose water or juice and not soda drinks. Moreover, as major players in the industry experiment with new flavors and marketing, it is also possible that customers will switch easily from one manufacturer to another (Yoffie & Renee, 2011). During the Cola Wars in the 1950s, Pepsi “battled Coke aggressively” in the USA (Yoffie & Renee, 2011, p. 7). Coca-Cola focused on overseas markets; however, these are also often flooded with (cheaper) substitutes. Nevertheless, customers’ loyalty to a brand can make a threat of substitutes lower than expected.
As Yoffie and Renee (2011) point out, competitive rivalry in the industry can be extremely severe and high. Because companies try to present new and innovative products along with aggressive marketing to attract consumers, only a few manufacturers can actually stay competitive. During the 1980s, due to the expansion of the major brands (Cola and Pepsi), many smaller companies were sold (Dr. Pepper, Canada Dry, Seven-Up, etc.) (Yoffie & Renee, 2011).
The growth rate of the CSD industry is slow, which makes the rivalry even more complicated. The presence of highly recognizable brands that are distributed globally is a serious factor that makes it challenging for other companies to compete. Moreover, almost the whole industry is divided into three major representatives, although other brands also exist or are regularly established.
It should also be mentioned that manufacturers strive to gain more attention and increase sales by presenting new flavors and varieties of drinks – this created additional pressure because a manufacturer should not only be attentive to the new brands that a competitor is creating but also provide substitutes to these new brands. When Coca-Cola introduced Diet Coke and Caffeine Free Coke, Pepsi introduced similar brands (Diet Pepsi, Caffeine-Free Pepsi) extremely quickly (Yoffie & Renee, 2011). Thus, the pressure of competitive rivalry in the industry is very high, which makes it challenging not only for newcomers but major players as well.
As the industry is owned by the major players, it is unlikely that other brands will be able to reach their success and attract customers loyal to other brands.
Bargaining Power of Buyers
The bargaining power of buyers is linked to their ability to drive prices down. As most of the manufacturers in the industry work with the same buyers who purchase the product in large amounts (grocers, large stores, malls, etc.), it makes their bargaining power relatively strong. Individual purchases are not as important for the industry because of the low price of soda drinks. What is more, since buyers prefer purchasing the product in large volumes, it also allows them to purchase it for a lower (wholesale) price.
It should also be considered that soda drinks are not regarded as a primary need for customers; therefore, if buyers notice serious discrepancies in prices between brands, there is a big chance they will switch brands to avoid costs. Thus, price sensitivity in this industry is significant and should be taken into consideration.
Nevertheless, the industry’s product is not easy to produce, and buyers cannot control the power of vendors in this aspect. However, there is another aspect that should be considered: individual buyers might have low income and be very price-sensitive. Thus, they will prefer a product that is cheaper than its substitutes, even if the difference is in cents.
Bargaining Power of Suppliers
The power of suppliers in this industry is not significant because there are many different suppliers who provide services to the manufacturers for a similar price. As there is not any lack of suppliers, a company can switch from one supplier to another if it is necessary. The main suppliers in the industry are bottling equipment manufacturers and packaging suppliers (Yoffie & Renee, 2011). It should be noted that some of the companies prefer creating a supplier and owning it. Companies do not face any switching costs when changing a supplier; that is why suppliers’ bargaining power is relatively unremarkable. Nevertheless, it is possible to become a successful supplier in this industry. However, companies will pay attention to the price and switch suppliers as long as it is beneficial.
Yoffie, D. B., & Renee, K. (2011). Cola wars continued Coke and Pepsi in 2010. Web.