Porter’s five forces model is a framework for the industry analysis and development of business strategy. Three (3) of Porter’s five (5) forces refers to rivalry from external/outside sources such as micro environment, macro environment and rest are internal threats. It draws ahead Industrial Organization economics to develop five forces that conclude the competitive intensity and consequently attractiveness of a market place or industry. Attractiveness in this framework refers to the generally overall industry profitability. An “unattractiveness” in industry is one in which the mixture of these five forces proceed to constrain behind overall profitability. An extremely unattractive industry would be one moving toward “pure competition”, in which existing profits for all companies are moving down to zero.
1.The threat of the entry of new competitors
Advertising and Marketing
Soft drink industry needs huge amount of money to spend on advertisement and marketing. In 2012, Pepsi invested approximately $2.58 billion. In 2013, the average advertisement expenditure per point of market share was $8.3 million. This makes it exceptionally hard for a new competitor to struggle with the current market and expand visibility. The beverages and food industries are highly saturated, as a result of which the barriers to new entrants are generally very low. With strong presence in the market Pepsi and Coco-cola enjoys good relationship with retail channels. This has enabled them to defend their position in the market thus increasing the barriers for new entrants.
Customer Loyalty/ Brand Image
Pepsi has been investing huge amount on advertisement and marketing throughout their existence. This has resulted in higher brand equity and strong loyal customers’ base all over the globe. Therefore, it becomes nearly unfeasible for a new comer to counterpart this level in soft drink industry.
Retail Distribution
This industry provides significant margins to retailers. For example, some retailers get 15-20% while others enjoy 20-30% margins. These margins are reasonably enough for retailers to entertain the existing players. This makes it very difficult for new players to persuade retailers to carry their new products or substitute products for Pepsi.
Fear of Retaliation
It is very difficult to enter into a market place where already well-established players are present such as Pepsi in this industry. So these players will not allow any new entrants to easily enter the market. They will give tough time to new entrants which could result into price wars, new product line, etc in order to influences the new comers.
Bottling Network
In this industry manufacturers have franchise contracts with their presented bottler’s that have privileges in a definite geographic area in eternity such as both Pepsi has contracts with their presented bottler’s. These contracts forbid bottler’s from taking on new competing brands for similar products. Latest consolidation between the bottler’s and the backward integration with Pepsi buying considerable numbers of bottling firms, it makes very difficult for new player to contract with bottler’s agreeable to distribute their brands. The alternative is that new entrances build their bottling plants, which will need intense capital and exertion. Because in 2000 new bottling plant needs capital of $80 million.
2.The intensity of competitive rivalry
The industry is almost dominated by the Coke and Pepsi. This industry is well known as a Duopoly with Coke and Pepsi as the companies competing. These both players have the majority of the market share and rest of the players have very low market share. Otherwise; competition is comparatively low to result any turmoil of industry structure. Coke and Pepsi primarily are competing on advertising and differentiation rather than on pricing. This resulted in higher profits and disallowed a decline in profits. Pricing war is nevertheless experienced in their global expansion strategies. Composition of Competitors
Except the Coke and Pepsi other competitors are of unequal size especially in local markets. Coke and Pepsi both players have the majority of the market share and rest of the players have very low market share. Scope of Competition
Scope of competition in this industry is generally global; Coke and Pepsi are approximately presents in 200 countries. Fixed Storage Cost
This industry needs huge manufacturing plants and contracts with bottling network companies. These contracts make sure that bottler’s must have standard manufacturing plant; these plants need huge capital and exertion. Degree of differentiation
Marketing and Product differentiation have become more significant. Coke and Pepsi mainly are competing on advertising and differentiation rather than on pricing. Pepsi has diverse advertisement campaigns according to conditions. Pepsi is recognized as the best-known brand name in the globe. More prominently, its consumers would not do without it, and have established a loyalty. Strategic Stake
Pepsi’s core operation is the manufacturing and distribution both for itself and beneath franchise, of non-alcoholic beverages and related products. Because of the strategic stake the main brand of the Pepsi has been around for a lot of years.
3.The threat of substitute products
This industry is enriched with enormous statistics of substitutes such as: water, tea, beer, juices, coffee, etc presented to the end-consumers. But all the suppliers of these substitutes need massive advertising, brand equity, brand loyalty and making sure that their brands are effortlessly accessible to the consumers. Most of the substitutes cannot counterpart the existing players’ offers or diversify business by offering new product lines of the substitute products to safeguard themselves from rivalry.
Aggressiveness of substitute products in promotion
Soft drink industry companies spend huge amount of money on advertisement and marketing to differentiate their products from others and also create brand equity, base of loyal customers and increase visibility.
Switching Cost
Switching cost of the substitute products is very low so consumers can easily shift towards the substitute products.
Perceived price/ value
Perceived price/value in this industry is very low because all products are comparatively same and are only differentiated by promotional activities.
4.The bargaining power of Customers (Buyers)
The most important buyers for the Soft Drink industry are fast food fountain, vending, convenience stores, food stores, restaurants, college canteens and others in the categorize of market share. The profitability/revenue in each of these segments obviously demonstrates the bargaining power of the buyers to pay different prices.
Fast Food Fountain
Pepsi and Coke mainly regard this segment as “Paid Sampling” due to small margins. This division of buyer’s is the slightest profitable because of the high bargaining power of the buyers. The bargaining power of the buyers is high because they purchase in bulks.
Vending Machines
Vending Machines provide products to the customers in a straight line with enormously no power with the buyer.
Convenience Stores
This segment is tremendously fragmented and has no bargaining power due to which it has to pay superior prices.
Food Stores
This segment of buyers’ is fairly merged with few local supermarkets and numerous chain stores. Since this segment presents best shelf space it demands lower prices.
5.The bargaining power of Suppliers
Most of the raw materials desirable to manufacture soft drink are basic merchandise such as flavor, color, caffeine, sugar, and packaging etc. The suppliers of these commodities have no bargaining power over the pricing due to which the suppliers in soft drink industry are relatively weak. Number of important Suppliers
Raw materials for soft drink are basic commodities which are easily available to every producer and have low cost which makes no difference for any supplier. Switching cost
All the raw material ingredients are basic merchandize and easily accessible to manufacturers. Switching cost to the suppliers is very low; manufactures can easily shift towards the other suppliers. Availability of substitutes
Soft drink products have standard raw material ingredients which could not have any alternatives or used instead of the actual ingredients. Threat of forward integration
Threat of forward integration is very low in this industry because manufacturers of the soft drinks need huge manufacturing plants, bottling
network, strong distribution network and best shelf space. Suppliers could not afford such kind of well-established network. Importance of buyer industry to suppliers
Soft drink industry is very important to the suppliers because buyers purchase larger amount of raw material. This encourages suppliers to remain in good contact with buyers. Suppliers’ product an important input to the buyer’s
Product of the suppliers is very important input for the manufacturers in this industry because these products do not have any substitute.
PESTLE ANALYSIS BY PEPSICO.
PepsiCo is the largest selling beverage the world over, of course after its arch rival PEPSI. It accounts for a 37% share of the global beverage market, and therefore they need to understand each and every country’s market in order to stay in line with their PESTLE situations. Pepsi is a big brand, currently holds the 23rd place in the Interbrands report of the World’s Leading Brands. Their advertisements feature major celebrities and athletes like David Beckham, Robbie Williams, Britney Spears, and Michael Jackson etc. Their market reach is also very diverse, as they’re present in almost every country from the US to New Zealand. Their PESTLE analysis is given below:
Political:
Pepsi is a non-alcoholic beverage and is therefore regulated by the FDA. So, they’re supposed to maintain a firm standard of the laws set out by the FDA with consistency. Also, many different markets across the world have different set of regulations that are either relaxed or are either stringent. There is competitive pricing by Pepsi’s competitors and that is one factor that Pepsi has to keep in mind at all times. The political scenario also matters greatly as there can be some civil unrest in certain markets or due to inflation the sales of the product can fall. Most importantly, cross border situations are starkly different therefore Pepsi has to stay in line with all those policies and changes so that they can
adapt to all those changes accordingly.
Economic:
As the recent economic downturn has plagued the economy, companies had to restructure their sales and marketing campaigns greatly. Also, with diminishing profits they had to undergo downsizing internally and re-think upon how to penetrate the market. Economic conditions have the highest influence on a business, regardless of what trade it is in. Though, in Pepsi’s favor, the economic downturn that started in 2008 resulted in increased sales of its beverages mainly as people were being laid off from jobs, they were spending time with friends and family or at home.
Social:
Social factors greatly impact Pepsi, as it’s a non-alcoholic beverage it has to remain in line with the strict and stark differences of cultures the world over. Also, Pepsi has to communicate its image as a global brand so that the people can associate it with themselves as something that connects the world together. Usually, the social implications are seen in marketing campaigns for example certain countries have religious festivals, so Pepsi has to keep in line with all those festivals in order to understand the psyche of their market and how they can cash upon the opportunity.
Technological:
With the advent of the new age in technology, companies have completely integrated themselves with all the recent changes that have taken place. To mention a recent trend that has greatly picked up and something that almost every business is turning toward is Social Media. The social media explosion has allowed for increasingly interactive engagement with the consumers with real time results so Pepsi has to stay ahead of all the developments that take place with keeping in view how the youth of today utilizes technology for their benefit and how can Pepsi reach them in order to keep on increasing brand recall and brand engagement.
Legal:
There can be many legal implications upon the beverage industry. I would cite one very famous incident took place in India, where Pepsi was accused of using contaminated water, given a lab test that was done upon the water flowing into the Pepsi factory that was located nearby an industrial estate. A massive recall was issued for the products from shelves and then the product was tested costing the company many billions of dollars upon the tests as India is a very major market.
Environmental:
These factors can affect Pepsi, but not immensely alter its trade and profit generation as these factors affect agri-businesses much more directly. PepsiCo has made significant progress conserving water through agriculture and manufacturing practices, as well as helped the communities in which we operate improve and manage their access to water. As a result of efforts, in 2010, PepsiCo India achieved country-level positive water balance, meaning the company actually replenished more water than it consumed, and has been water positive ever since. They did this by simultaneously working on two fronts. First, reduced water debit, that is, the amount of water used within operations, and second, increased water credit, that is the amount gave back by recharging and replenishing water through sustainable initiatives in agriculture and within communities. They are also engaged in efforts outside plants to conserve and recharge water. Agriculture accounts for 80 percent of water usage in India. They help farmers reduce fresh water consumption in agriculture through sustainable farming practices such as direct seeding of rice, which eliminates the flood irrigation system and helps reduce water consumption by 30 percent. They also promote the use of drip irrigation on potato farms. In 2012 They spread direct seeding to over 15,000 acres across four states and drip irrigation to over 2,000 acres. The PepsiCo Foundation has also partnered with leading water organizations to help deliver safe water to people in underserved regions of India. Through a grant to Water.org, for example, the PepsiCo Foundation is working to provide micro loans that will help 1 million families in India meet their drinking water and sanitation needs by 2016.
CONCLUSION:-
Hence Porter’s five forces determine a company’s competitive environment, which affects profitability. The bargaining power of buyers and suppliers affect a small company’s ability to increase prices and manage costs, respectively. For example, if the same product is available from several suppliers, then buyers have bargaining power over each supplier. However, if there is only one supplier for a particular component, then that supplier has bargaining power over its customers. Low-entry barriers attract new competition, while high-entry barriers discourage it. For example, opening a home-cleaning business is simple, but starting a manufacturing company is considerably more difficult. Industry rivalry is likely to be higher when several companies are vying for the same customers, and intense rivalry leads to lower prices and profits. The benefits of PESTLE analysis or PEST analysis is that it provides an understanding of the wider business environment and it can raise awareness of threats to a company’s ongoing profitability. It can also help an organization spot business opportunities and to anticipate future problems. Spotting these problems early allows the company to take steps to minimize or avoid them.
