Cola Wars

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Cola Wars

• Key Take-aways

2
How much does industry matter

• 10-20 of the variation in firms profits
  accounted for by the industry in which the firm
  competes
• Analysis based on accounting profits in publicly
  held companies

3
How much does industry matter really
4
Porters Five Forces

• Porters five forces framework is a key tool for
  Industry analysis

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Porters Five Forces
Threat of New Entry

• Economies of scale
• Proprietary product differences
• Brand identity
• Switching costs

• Capital requirements
• Access to distribution
• Absolute cost advantages
• Government policy
• Expected retaliation

Bargaining Power of Suppliers

• Differentiation of inputs
• Switching costs
• Presence of substitute inputs
• Supplier concentration
• Importance of volume to supplier
• Cost relative to total purchases
• Impact of inputs on cost or differentiation
• Threat of forward integration

• Buyer concentration
• Buyer volume
• Buyer switching costs
• Buyer information
• Ability to integrate backward
• Substitute products
• Price / total purchases
• Product differences
• Brand identity
• Impact of quality / performance
• Buyer profits

• Switching costs
• Concentration and balance
• Informational complexity
• Diversity of competitors
• Corporate stakes
• Exit barriers

Threat of Substitutes

• Relative price performance of substitutes
• Switching costs
• Buyer propensity to substitute

Source Michael E. Porter Competitive
Advantage (New York Free Press 1985)
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Rivalry

• How hard firms compete on price (or increase
  quality levels at a given price) depends on
• Concentration and balance
• Industry growth
• Fixed versus marginal costs
• Product differences
• Brand identity
• Switching costs
• Business cycle fluctuation/intermittent
  over-capacity
• Diverse stakes
• Exit barriers

7
Entry

• Barriers to entry include
• Economies of scale
• Product differences
• Brand identity
• Switching costs
• Capital requirements
• Access to distribution
• Absolute cost advantages
• Learning/experience curve
• Access to necessary inputs
• Low cost product design
• Government policy
• Expected retaliation

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Threat of Substitutes

• The ability of the industry as a whole to
  profitably raise price (the elasticity of the
  industrys demand curve)
• Tobacco pharmaceuticals inelastic demand
• Steel elastic demand
• Likely to change over time with technological
  changes or changes in consumer tastes
• Determined in part by relative performance /
  price of substitutes

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Buyer power

• Intrinsic Strength
• Buyer concentration
• Buyer volume
• Switching costs
• Buyer information
• Ability to backward integrate
• Substitute products

• Price Sensitivity
• Price/Total purchase
• Product differences
• Brand identity
• Impact on quality/performance
• Buyer profits
• Decision makers incentives

10
Supplier Power

• Mirror image of buyer power
• Amount of value chain captured by suppliers
  influenced by
• size and concentration of suppliers
• degree to which suppliers provide commodity vs.
  custom inputs (differentiation)
• availability of substitute inputs
• ability to backward integrate
• importance of volume to suppliers

11
Dynamics

• Industry analysis provides a snapshot of
  current conditions in an industry
• As we saw in Coors the industry landscape is
  subject to tectonic shifts over time.
• Some of these shifts are under the control of the
  players in the industry
• Coke and Pepsi shaped the terrain with respect to
  their bottlers
• Franchising
• Exclusivity
• Consolidation and spinoff