Comparing Coca-Cola and Pepsi: A Competitive Analysis
In 1934, Professor G.F. Gause of Moscow University published the results of a set of experiments where he put two very small animals called protozoa’s of the same genus in a bottle with more than enough supply of food (see Porter and Montgomery). The conclusions made by Gause were very helpful in understanding the nature of competition. It was learned during the analysis of the results that if the animals were of different species, they could have survived in an area of limited space and resources.
And more importantly they could have persisted together. Yet, because they were of the same kind they were not able to make it. This lead to Gause’ conclusion, “No two species can coexist that make their living in the identical way” (Porter & Montgomery, p.3).
It seems that truth is universal and what is true in the animal world can also be said in the business world where competition is all about survival and the need to be number one.
But what if the entities that will be placed together in the same environment (in the same industry) are not minute organisms but are giants like Pepsi and Coke? Will they ever exhibit the same cutthroat behavior? Maybe not but it can be assured that both will be very competitive for they could not have reached their current position without desiring to be at the top of the heap.
In this study the proponent will examine the behavior of two mega-companies, Coca-Cola and Pepsi. The main question is how do they position themselves dominate a very competitive soft-drink industry. Porter’s five forces will aid in the analysis of the dynamics involved.
Porter’s Five Forces
According to Wendy Lomax, Porter’s economic business theory is not new, in fact it was introduced in the 1980s. Yet it is one of the most famous in business literature when it comes to analyzing competitive forces working in an industry. These five forces was enumerated by Lomax as follows:
· Threat of new entrants
· Bargaining power of suppliers
· Bargaining power of buyers
· Threat of substitutes
· Intensity of rivalry
Coca-Cola and Pepsi
What does one do with giants? There can be one practical answer. It is to stay clear and run for cover. Using the first of the five forces, for the one considering entry into the field, the status of both companies can be an insurmountable barrier. The technical term is economies of scale. The new player has to develop machinery equal to or greater than Coca-Cola or Pepsi in order to get a significant slice of the market. In other words businesses will not trust the new entrant if it cannot deliver efficiently and at a competitive price too. How can one compete against these behemoths? In the words of Porter and Montgomery, “…Coca-Cola and Pepsi-Cola, which are globally standardized products sold everywhere and welcomed by everyone. Both successfully cross multitudes of national, regional, and ethnic taste buds […] Everywhere both sell well” (p.189).
Every business wants to grow big; at least big enough to make serious money. It is also good to be gigantic considering that at that level of the game the corporation takes a life of its own and becomes an entity able to wield tremendous amounts of influence that can be used do good. Now, what if the question is reversed and turned to businessmen running powerful corporations such as Wal-Mart, General Electric, Shell and so on. What does a giant do? As one will see in the above description of Porter’s five forces it is interesting to note that with regards to Coca-Cola and Pepsi it is a whole new ball game. What exactly does this mean? Simply put in the analysis of the softdrink industry and one put both companies in the picture, the equation changes radically. It is one thing to study the industry looking at it as a level playing field. It is also another thing if one looks at it with those two giants preparing to rough it out with the rest of the competitors.
The force created by the head on collision between Coca-Cola and Pepsi creates such an environment that both their actions create consequence that can be felt all over the world. This leads to the second to the last force in the discussion, which is the threat of the substitute. Again, Pepsi and Coca-Cola create the rules here. There is no significant impact coming in from the outside because these two companies are committed to outdo each other in the area of providing a substitute. Both companies are so large that they will create substitutes for every sector of the market and they will think of every niche that must be covered.
When all the above are all taken into consideration, the conclusion is simple – Pepsi and Coke is an example of a tight oligopoly (McAfee, p. 27). Preston McAfee contrasts this “fragmented firms like dry cleaning and jewelry making where many small firms are involve fighting it out for a slice of the pie and are usually owner-operated. “Dominant firm industries are the opposite, with a single large firm and perhaps, a fringe of small competitors. In between these cases is the tight oligopoly, with two or three players…” (McAfee, p. 27). This insight into the market helps in framing ones understanding about the industry and the degree of competition between the few dominant players involve.
Coca-Cola versus Pepsi
Since the two companies belong to a tight oligopoly, then it follows that they behave according to that relationship. In the following the proponent will show that both companies will fight toe to toe with each other and both will not yield any market share to another. According to F.R. David, in view of Porter’s five forces, “…rivalry among competitive firms is usually the most powerful […] For example, Pepsi recently filed a complaint against Coca-Cola, for illegally trying to force competitors out of the European market” (David, 2001).
Yet at the same time there are areas and instances where both understand the wisdom of cooperation.
This is an area where Pepsi got the upper hand in the early rounds of the slugfest between its chief rival Coca-Cola. According to Michman and Mazze, “From 1950 to 1960 Pepsi-cola increased its market share from approximately 17 percent to 31 percent” (p. 232). And this all due to improved packaging. Coca-Cola was caught sleeping during this time, not really worried that Pepsi could catch up. But that will not happen again and in recent decades Coca-Cola has had to undergo major change in its brand image.
The classic method of expanding market share for both companies is the use of the “target-market strategy”. Michman and Mazze defined this strategy as market segmentation, “…the strategy of dividing a market into groups of consumers with relatively similar characteristics, wants, and needs, and purchasing patterns” (p.232). This in turn can be broken down further into three broad strategies, which are enumerated as follows 1) market segmentation; 2) lifestyle market segmentation; and 3) product differentiation (p. 233).
An example of how these strategies can be used alone or in consort can be seen in Pepsi’s aggressive “New Generation” campaign. In said advertising onslaught Pepsi wanted focused on a core market (youth) rather than challenging Coke for control of the whole market. This was done because Coca-Cola had been around much longer than Pepsi. Michman and Mazze elaborates on this, “Coke’s strength was its tradition, which meant that older consumers had a stronger attachment, whereas younger consumers would more easily switch brands” (p. 233).
Alluding to Porter’s five forces, it is interesting to note that both behemoths can earn more by cooperation rather than confrontation. With the whole industry in mind, there is no need to drag each other down to the point of destroying everything. McAfee said that Coke and Pepsi will not do negative advertising against each other and they shy discouraged acquiring exclusive contracts with cinemas. Negative advertising hurled at each other can result in creating a very bad image for cola products. On the other hand acquiring exclusive contracts from cinemas is very costly and does not profit both camps.
A study of how two great companies compete with each other has validated a long ago observation that at the center of life is the need to compete. It was shown how competitive both Pepsi and Coca-Cola can become in order to get that edge or that much coveted market share. The use of packaging and target market strategies had made them top players in the soft-drink industry. Yet is also interesting to know that cooperation was used to help them compete against others who are waiting in the wings ready to push them out of the race.
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