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How Does A Five-Forces Analysis Explain Industry Profitability?

The document discusses Porter's five forces model and its application to the soft drink industry. It analyzes why the soft drink industry has been profitable, noting the low costs of raw materials and production. Marketing played a key role in positioning soft drinks as affordable and ubiquitous household items. Coke and Pepsi can likely sustain profits by leveraging their strong brands, vertical integration, market dominance as an oligopoly with low bargaining powers of suppliers and buyers, and diversification beyond carbonated soft drinks into other products. Their future profitability will depend less on carbonated soft drinks and more on their expanded product portfolios.

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Joyal Thomas
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136 views1 page

How Does A Five-Forces Analysis Explain Industry Profitability?

The document discusses Porter's five forces model and its application to the soft drink industry. It analyzes why the soft drink industry has been profitable, noting the low costs of raw materials and production. Marketing played a key role in positioning soft drinks as affordable and ubiquitous household items. Coke and Pepsi can likely sustain profits by leveraging their strong brands, vertical integration, market dominance as an oligopoly with low bargaining powers of suppliers and buyers, and diversification beyond carbonated soft drinks into other products. Their future profitability will depend less on carbonated soft drinks and more on their expanded product portfolios.

Uploaded by

Joyal Thomas
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOC, PDF, TXT or read online on Scribd
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92110094 Assignment 1_Cola Wars Joyal Mathew Thomas

How does a five-forces analysis explain industry profitability?

The basic principle of Porter's five forces analysis explains it is that profitability decreases as
competition increases. The five forces described three fall under the industry participants,
and the final two relate to the vertical participants. The first force is the Threat for New
Entrants; if the entry is easy, it means a high level of competition. Rivalry among existing
competitors, in this scenario, a manager needs to assess the level of existing competition. If
a competitor is established, greater is the competition, similarly if the competitive rivalry is
low, the company can set a higher pricing strategy and yield more sales and profits. The
threat of new products or services can cause an erode in the sales of an established product
as the new substitute can be a much more convenient option for the consumer, eventually
weakening the company's power, affecting profitability. Bargaining power of suppliers,
where the suppliers are limited, eventually increases the company's cost and has to set low
pricing/profit margin to sustain in the market. The final force, the Bargaining power of
buyers, is dependent on the companies customer base if the company has a small client
base, the customer has more power to negotiate on prices and vice versa.

Why has the soft drink industry been so profitable?


If we look into the manufacturing aspect of the soft drink, the basic materials required to
prepare the soft drinks were the most affordable items. The investment was low in terms of
capital and material cost, including machinery, overhead, and labor cost. Due to this low
investment cost, the product cost was also priced at a very affordable rate. The soft drink
was very well positioned in the market by trying to get into the consumers mind of how it is
a household drink at an affordable price. The company increased the advertising and the
product availability to ease the consumer to procure it through different channels. The
marketing channels used to promote the soft drinks have increased, and these different
channels have helped them greatly increase their sales. The CSD supply chain followed by
the companies is also another critical factor that attributes to the profitability of the soft
drink industry. From World War II to the current date, the soft drink has made its
positioning in the people's daily lives, making them feel that the CSD is a drink they need by
making them realize what the CSD is and its details.

Can Coke and Pepsi sustain their profits in the future? Why or why not?
Coke and Pepsi can sustain their profits in the future as from the very beginning, they have
relied on the five-force analysis. Considering the threat of new entrants, Coke and Pepsi
have a strong brand name which is very difficult for any new entrant to breach. They have
production operations of bottling up companies and in-house service, which makes the cost
affordable. Rivalry among existing competitors, in this case, we can see an oligopoly, with
Coke and Pepsi in market domination. The bargaining power of buyers and suppliers will be
low in this, as we can see in Exhibit 8, retailers preferred Coke and Pepsi over other brands.
The threat for a substitute is almost negligible as both companies have expanded their
product range into CSD and non-CSD, snacks, franchise etc. The cola wars in the future will
not be based on CSD sales. They have already expanded into various other sectors that will
not affect the company's profitability detrimentally by losing one sector or product. Their
profitability depends on the products they have already expanded into and not just CSD, in
turn, trying to create value to customers globally.

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