Cases Study

Cola Wars Continue Coke and Pepsi in 2006

Cola Wars Continue Coke and Pepsi in 2006

Case 3: Has Wal-Mart Achieved a Sustainable Competitive Advantage?

Competitive advantage can be achieved by either from responsiveness to change or from innovation. In this case, Wal*Mart achieved a sustainable competitive advantage thanks to high responsiveness toward outside environment as well as inside environment. Outside environment includes demand and competition. Inside environment includes distribution and inventories management as well as the ability to encourage new initiatives.

Wal*Mart’s ability consistently to outperform Kmart and other discount retailers is based on a business system that responds quickly and effectively to changes in demand and competition. Using inventory and sales data, the local store manager decides which products to display, and allocates shelf space for a product category according to the demand of his or her store. In term of competition, Wal*Mart does not centrally set the price. At places when Wal*Mart and Kmart were located next to each other, Wal*Mart’s prices were roughly 1% lower. When Wal*Mart, Kmart and Target were separated by 4-6 miles, Wal*Mart’s average prices were 10.4% and 7.6% lower, respectively. In remote locations where there is no direct competition from large discounters, its price was 6% higher than where it was next to Kmart. Wal*Mart’s flexibility regarding customers demand and pricing strategy are key elements that sustain Wal*Mart’s competitiveness.

Wal-Mart’s distribution and purchasing are driven by point-of-sale date, resulting in low inventories, few stock-outs, and few forced markdowns. Using point-of-sale, A Wal*Mart store devoted 10% of its square footage to inventory, compared with an industry average of 25%. This give Wal*Mart cost advantage compared with other competitors in the industry.

Finally, in the heart of Wal-Mart’s fast response capability is the encouragement and rewarding of initiative at all levels of the company. The “shrink incentive plan” provided associate yearly bonuses if there store held shrinkage below the company’s goal. Shrinkage cost was estimated to be approximately 1.7% of Wal*Mart’s discount store sales in 1993, compared with an average 2% of direct competitors.

Case 2: Is the Cola Industry Attractive?

An industry is deemed to be attractive for new entrants when they can envision profitability in long-term. There are several determinants of the Cola industry profit which include customers’ demand, the intensity of competition, and the bargaining power of the concentrate producers relative to their suppliers. In term of demand, U.S. sales volume of CSD grew at a rate of 1% or less in the years 1998 to 2004. That is in contrast to the annual grow rate of 3% to 7% during the 1980s and early 1990s. The flat demand is observed to be indifferent in global market sales. Unless new entrants could enlarge the consumption market for the Cola industry, it is hard to say that this industry is still attractive.  That is not to weigh in competition and suppliers’ bargaining power which will create additional barriers for new entrants.

CSD consumptions seem to reach its peak in 1998 with 54 gallons per capita in the U.S. market. After 1998, CSD demand gradually declines perhaps due to customers awareness concerning children obesity and the growing of other alternatives such as bottled water and energy drinks. In response to public concern alleging CSDs as the largest source of obesity-causing sugars in the American diet, the industry  developed Diet Coke, Pepsi Zero and Sierra Mist Free using artificial sweetener such as aspartame. This is also the beginning for the introduction of non-carbonated beverages including bottled water and energy drinks. These alternatives garnered a higher profit margin than cola products; even though the demand for these alternatives are only one third the demand of cola products. Comparing the profit margin in the early 2000s, Pepsi’s Aquafina garnered a profit of 22.4% as opposed to 19.0% for a bottle of Pepsi-Cola. The switch to alternatives had a chain effect explaining the decline in cola products’ consumption.

In term of competition, the industry comprises of three major producers Pepsi, Coke and Cadbury which make up about 90% U.S. market and 80% world market of CSDs. Concentrate producers also pay a lot attention on advertising and marketing, composed of 43% net sales. Even though there is less capital investment requirement for concentrate producers of about $25-50 million than that of about $40-75 million for bottlers, a triopoly industry structure with high advertising and marketing cost will raise the barrier for entrants higher and eliminate their growing possibility. That is not to mention the restriction of access to channels of distribution. With Coke captured fountain sales and Pepsi focused on sales through retail outlets, there is less likely that new rivals can compete shelve spaces and product placement with them effectively. The high pretax profit of 30% applied for concentrate producers is meaningless unless rivalry between established competitors less intense.

The root of intense competition might come from the nature of the cola product itself. These products are virtually indistinguishable as the result of blind testing claimed by both Pepsi and Coke. The more similar the offerings among rival firms, the greater incentive for firms to cut price to increase sales. Competition and concentration of major rivals in one geographic market make it harder for new entrants to penetrate an established industry. Cadbury had to grow through strategic acquisition to gain momentum and economic scale. The only chance that new enterprise has is to create new demands by redefining the industry, overcome intense competition and quickly acquire the bargaining powers. The impossibility of such plan make the cola industry to be unattractive to new investors.

Case 1: Stick to the Core or Go for More

George Caldwell and Ian Rafferty worked at a giant multinational advertising agency for ten years. After leaving their jobs, they have partnered, found and run Advaark, also an advertising agency, together for seven years. Several high-profile clients that they gained from their own reputation in advertising industry gave them a good start. Over time, they build trust and long-term relationship with their clients thanks to their core competency, the production of unforgettable ads. It is clear that Advaark gains its sustainable competitive advantage thanks to its experienced owners. It would be really risky if the company expands its business to strategy consulting field which neither of its owners has much experienced. However, such initiatives could bring more revenues to the firm and further grow Advaark development if successful.

In this partnership, Caldwell takes care of operational activities with his sharp taste of making advertising and his know-how. Meanwhile, Rafferty is the visionary and eager to strive for more. Conservative as Caldwell is, he is reasonable when worrying the currentemployees and current clientsof Advaark. If he agrees to let Rafferty takes the new lead to strategy management, the current employees might find it hard to adapt to a new cultural environment which involves not only advertisement creative skills but strategic management skills. This organizational culture change could deeply hamper Advaark’s labor force. Besides, Advaark could easily mess up with the current clients when it comes up with some projects that do not fit their overall strategies. To some small to mid-sized clients, that might not be a big issue because they do not have a clearly recognized identity. To high-profile clients such as those Advaark is dealing with, it might cause big troubles since Advaark does not have insight personnel in strategic management field.

Rafferty also makes his case pointing out the annual growth rate of marketing strategy services in the U.S. is at least 16% in the next five years. If Advaark enters this segment at this time, it will acquire its competitiveness to be the several firsts in the new market. Since Advaark develops its new services, the company will save lots of cost as compared to the cost it might incur when Advaark wants to penetrate the market later on. The energy drink project is Rafferty first hit. The proposal to develop new toothpaste products by Advaark’s ex-client is very promising and suggestive. However, there is less evident how Advaark could differentiate itself from other competitors in strategy consulting field. GlobalBev was successful because this company already had its own manufacturing capabilities. Its distribution channels are in place. It takes three years for GlobalBev to be profitable with the new energy drinks. To other clients, Advaark has no clue.

The key element of this successful partnership depends upon its owners’ expertise about creating advertisings. At some point, when Advaark knows so well about its clients and their products, it can come up with some great ideas as to which directions its clients should go or what new products they should develop. However, the function of advertising and management is different. In this case, advertising is more about creativeness, how to attract the current market segment and gain market share. Strategic management is more about what new products should be marketed and how to make those products to be profitable overall. Advaark might need to have more successful projects other than GlobalBev before it could divert its business away from creating ads. To a mid-sized partnership firm like Advaark, the owners should be very careful when considering such new initiatives because it could very well consume all the companies’ current human resources and current capital sources.

Going Dark

Currently, the FBI can intercept messages on web-based email services and land-line phones that companies are using. However, they are unable to conduct surveillance over instant messages or VoIP programs. If one company is using Skype subscription for their customer service, it is impossible for investigators to wiretap the content of these conversations. Surveillance programs are required if the purpose is to enhance evidence gathering capabilities and intelligence collection of investigating agencies. American companies could help the FBI in their efforts against terrorists and potential criminals by integrating backdoor software to their communication systems.

Similar moves asking for surveillance over companies’ communication were rejected in 1990s. The government can only intercept cellular and telephone since then. Taking WorldCom as an example, the incident occurred because of the lack of transparency and outsider oversight. The FBI claim that they could have prevented the loss of millions of dollars if they had sufficient surveillance capacity at that time. Ten years later, the emergency of new technologies allows people to communicate and make phone calls over the Internet. The FBI, again, does not have control over the encrypted conversations. These new tools, in some senses, facilitate people who disguise as normal employees to serve as connectors for terrorism.

In the real world, Investigators are usually one step behind in the criminals because savvy Internet users are always able to delete their traces. Therefore, Justice Department once proposed ISPs to keep record of what their subscribers are looking at. The reason is that it takes the polices a while to track criminal traces; while ISPs are able to know exactly what activities one does online and when. However, the proposal dis not get through because technology companies want to protect their customers’ privacy.

Some suggest that lawful interception programs should be developed extensively with all American companies because terrorists threats could come from anywhere. This will support investigating process to find the link between subject surveillance and suspects. This will also discourage online potential crimes such as child molesters and extortionist. Another benefit is that new surveillance technologies also prevent copyright infringement which is a real online economic thread to music, movies, games and software products industry. However, the bad aspect of this options is that software always have defects that make these backdoor become more of front doors for savvy hackers. Business secrets might be revealed. Competitiveness might be hampered. Customers satisfaction might be negatively impacted if they know that their privacy is violated.

Another alternative is to apply backdoor only the major peer-to-peer networking websites and popular software companies. The first advantage is that criminal usually uses popular sites to transmit their communication. They think it would be harder to trace. This option will also eliminate software defection possibilities when backdoor are set specifically for those companies. However, companies can always find a way to avoid surveillance because backdoor will certainly reduce their security, affect their customer loyalty, and discourage people from using their services. In fact, their customers might turn into their opponents.

For conclusion, the FBI needs to identify particular types of services or technologies that are most in need to additional surveillance such as Skype or Google Talk. Focusing on certain services will certainly eliminate software defection and hacker risks. For companies that suffer a huge amount of cost when integrating new software, the government should offer them financial supports which make the plan more viable.

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