KO Advantages Coca-Cola Pursues a Differentiation Strategy,

KO Advantages

Coca-Cola pursues a differentiation strategy, and has built its company around the pursuit of this strategy. The strengths that the company has -- R&D, marketing, and heavy advertising -- all directly support the differentiation strategy. Coca-Cola uses its strategy to foster sources of sustainable competitive advantage, although the strongest of these is the company's brand. All told, Coke has an excellent strategy that does not result in many missed opportunities. There are different strategic directions that the company could take, but there is also evidence that Coca-Cola management is aware of these options and has rejected them. All told, the approach that the company has taken remains successful, and should be successful for the foreseeable future.

Strategies

Porter's generic strategies typology highlights four main strategies that can be used to succeed in business (QuickMBA, 2010). Two of these are focused on niche markets, which obviously does not apply to a mass market company the size of Coca-Cola. The other two strategies are cost leadership and differentiation. Coca-Cola is seldom the cost leader in its markets. Usually, there are generic or house-brand products that are similar to Coke's products but are priced lower. In general, Coca-Cola follows a differentiation strategy. The company relies heavily on branding and other marketing elements, along with patented product recipes, in order to create differentiation in the market place.

Integration with SWOT

In general, Coca-Cola's strategy is effective in the context of its threats and opportunities. The differentiation strategy should be supported by the company's strengths. For Coca-Cola, this is generally the case. The company needs to have a strong innovation pipeline because differentiated firms are at the forefront of new innovations and ideas in their industries (Lee, 2012). Coca-Cola places significant emphasis on R&D for this reason, and their R&D strategy is supported by a human resources department that attracts and retains the best people in the industry.

The differentiation strategy is supported, extensively, with advertising. Coca-Cola has a history of iconic advertising and uses this advertising to create a mystique around its most important brands. The mystique combines with product formulation to engender strong brand loyalty among consumers. The company spent $2.9 billion on advertising in 2010, one of the highest amounts of any company in the world (McWilliams, 2011). This advertising expense is not congruent with a cost leader, but is congruent with a firm that is trying to create a valuable and powerful stable of brands, something that can definitely be said of Coca-Cola.

The R&D pipeline and advertising also address the external environment. New products are one of the few ways to create growth in the beverage industry, where growth in many of the largest markets is based on population growth, and there is intense competition for growth in the fast-growing emerging markets. The external environment is characterized by intense competition, and that is something that can be managed by staying in front of the competition on the new products curve, gaining first-mover advantage in the marketplace (Liang & Czaplewski, 2009). To highlight the value of first-mover advantage, Coca-Cola was first to the market and Pepsi has been playing catch-up ever since.

Sustained competitive advantages

While the first mover advantage is something that Coca-Cola has been able to maintain over the long-run, it is worth considering that the company's ability to foster other competitive advantages is one of its key success factors. The company has a lot of advantages, and against most firms these factors are sustainable. Porter identified two main sources of sustainable competitive advantage, cost advantage and differentiation advantage, both relating to his generic strategies (QuickMBA, 2010).

Sustainable competitive advantages should be ones that competitors cannot easily replicate. For the most part, Coke only has one competitor -- Pepsi -- that can replicate its sources of competitive advantage. So the question then becomes -- what does Coca-Cola have that Pepsi cannot replicate? It is not distribution, management or organizational culture, all of which are replicable albeit with great difficulty. What Coca-Cola has is the world's most iconic brand. Pepsi has a strong brand as well, but that company simply does not have the brand power than Coca-Cola has (Interbrand, 2011). The company's brand allows it to enter new markets, gain distribution rights, to cultivate a favorable political environment and to gain credibility with consumers and retailers alike for new products.

Coca-Cola's Strategy

There are few unaddressed threats or missed opportunities. Diversification, it could be argued, is one. Coca-Cola's management may not agree with that assessment, since the company has been careful not to diversify out of non-alcoholic beverages, but this is a threat to the company that it has not addressed in a meaningful. Pepsi has diversified out of beverages, in contrast to Coca-Cola, and is now a larger company overall. In addition, Coca-Cola may not have adequately addressed the weather issue. We know that Coke's sales increase when the weather is good, but aside from a strong Christmas promotional strategy for its core brand, Coca-Cola does not do a great job pursuing cold weather beverages. If Coke had a better position for colder climates, it might find that its sales were less affected by the weather -- consumers would simply switch from one product to another.

Altered Strategic Choices

A company as successful as Coca-Cola does not make too many missteps, but that does not mean that it cannot improve its operations. Strategically, the company has succeeded by building a company that is uniquely focused on driving value from one core business, so it is hard to recommend that the company diversifies, yet there is room for some diversification because ultimately the firm's dependence on a single industry creates some vulnerability. Its strength has allowed it to avoid challenges thus far, and it has grown along with the population of the planet, but eventually growth opportunities will slow. Coca-Cola should consider branching out, even if just in the form of vertical integration.

Another strategic choice that the company has made is to allow low cost competition to enter the market. The differentiated strategy is an important one for the brands the company has now, but there is room for growth in cost leadership brands as well. As long as these brands are distanced from the existing Coke portfolio, the company should be able to gain total market share by introducing them. The key here is that as the largest beverage company, Coca-Cola actually has the economies of scale to be the lowest-cost producer in the industry. It could actually undercut the current cost leaders, and that is a sustainable competitive advantage. This might not fit with the strategic vision that the firm has, but it is worth pointing out that this opportunity does exist should Coca-Cola management find a way to enter this market without diluting the value of its core brands.

A third new strategic alternative is to focus on high growth countries. This is a variation on the company's current strategy, but with maturity in the existing top markets, the path to growth goes through emerging markets. Coca-Cola can not only experience strong growth with its core brands, but can develop entirely new brands for these markets. This would leverage the company's innovation pipeline and it would also give Coke the opportunity to gain first mover advantage and find the "blue ocean" in product categories where there are few serious competitors.