Economics of business strategy

Economics of Business Strategy

Coca-Cola's most important resource allowing the company to expand internationally is its operational structure that is strongly dedicated to emerging markets outside the U.S. where sales of soda are still growing, especially in Brazil, China and Russia. By this measure, Coca-Cola is very well positioned with operating segments encompassing (1) Africa, (2) East and South East Asia and Pacific Rim, (3) European Union, (4) Latin America, (5) North America (6) North Asia, Eurasia, and the Middle East, and (7) bottling investments (Badal, 2007, p. 33). The structure of having strong geographic orientation to manage franchise relationships, but headquarters in Atlanta maintaining global responsibility for sales, finances, and marketing and for specific product lines like water or juices (see Holstein, 7 November 2011) allows Coca-Cola to quickly respond to the different countries' consumer demands. PepsiCo's biggest resource and capability is its broad product diversification encompassing a beverage line and a snack line (Frito-Lay etc.). The international market has served the snack division of Pepsi-Co well with operating profit rising 26% and snack volume up 9% in 2006. Mexico and Russia were two contributing markets to PepsiCo (Badal, 2007, p. 38). Pepsi-Co does also very well in its approach to meet increasing concerns about the potentially negative health effects of highly sweetened sodas, as well as salty and fried snack foods (see Sivy, 23 April 2007, p. 1) by introducing calorie, sugar, fat and salt reduced snacks. Question 2: PepsiCo has created greater value for its shareholders over those years. On 9 February 2010, Coca-Cola reported a huge surge in fourth-quarter profits. The 55% year-over-year gain in net income was due largely to increased sales volume in international markets. Coca-Cola earned $1.54 billion, or 66 cents a share, in the final quarter of the year. That is much better than the $995 million, or 43 cents a share, the soft-drink maker earned in the final quarter of 2008. Coca-Cola also had a strong showing in the revenue column, with sales coming in at $7.51 billion in the fourth quarter of 2009, compared with the $7.13 billion it had seen a year earlier (Dlugosch, 14 April 2010, p. 1). In the race for pure Coca-Cola sales, the edge still goes to Coca-Cola. The company's unit case volume - a measure of all the company's drinks sold worldwide - climbed 5%, with gains of 8% in Brazil, 20% in India and a remarkable 29% in China. In contrast, PepsiCo's international sales account for only about half of its revenue. That is up from the mere 25% of overall revenue PepsiCo garnered from overseas a decade ago, but it is still lagging (Dlugosch, 14 April 2010, p. 4). That is an edge for PepsiCo, because the company has more room for overseas' growth (see Dlugosch, 14 April 2010, p. 4). On 11 Feb. 2010, PepsiCo reported a near doubling of its fourth-quarter profit, also on strong sales in overseas markets. PepsiCo also saw its revenue grow, as sales for the final three months of the year rose about 4.5%, to $13.3 billion, from $12.74 billion the previous year. Coca-Cola shares were trading this week at a price-earnings ratio of 18.35, while PepsiCo shares traded at a P/E of 17.50. In layman's terms, that means Pepsi shares are a little cheaper. Coca-Cola shares, though, have a dividend yield of 3.2%, while Pepsi's dividend yield is slightly less, at 2.7%. From an investment perspective, buying PepsiCo shares seems to be the better decision because this company has diversified into snack items (Frito-Lays and others) while Coca-Cola has not. The ability to leverage sales across a wider variety of products is a powerful driver for PepsiCo in the U.S. And overseas (see Dlugosch, 14 April 2010, p. 4). The brand value was about equal for both companies because each of them has a powerful brand name and lots of popular products (see Dlugosch, 14 April 2010, p. 1). Question 3: Coca-Cola's organizational structure was the true driver of Coca-Cola's business in the quarter. Following its business strategy to "think global, act local," the company has strong regional managers, but headquarters in Atlanta maintains global responsibility for sales, finances and marketing that contribute largely to the company's overseas expansion (see Holstein, 7 November 2011, p. 1). Coca-Cola also profited from being the largest soda beverage company producing over 400 brands (see Badal, 2007, p. 32). By contrast, PepsiCo benefitted from its wide product diversification. PepsiCo's product line includes popular snack names, while Coca-Cola has stuck to beverages. That has given PepsiCo the lead in overall sales, $43 billion to $31 billion in 2009 (see Dlugosch, 14 April 2010, p. 1). Question 4: Both companies' vertical involvement in their main global markets was determined by the consideration that contracts between soft-drink concentrate producers and bottlers allow the bottlers to have the last say in retail price, new packaging (but they could use only authorized packaging), selling and advertising in its territory (Martin, 26 March 2004, p. 5). This often causes strain on the relationships between bottlers, that very often are unable to produce and sell in large volumes, and the concentrate producer (Martin ibid). To accelerate revenue growth and be more agile and flexible both companies engage in vertical involvement in their main global markets have partially integrated into the bottling market. Coca-Cola's vertical involvement in their global markets is determined by the consideration to gain more control of manufacturing and distribution of its investment in North America to accelerate growth on the one hand and to convert "passive capital into active capital" on the other hand. An example for this strategy is the company's decision to buy the bulk of its largest bottler ("Coca-Cola Enterprises) (see Ali, 26 February 2010, p. 1). The parent company would buy struggling bottlers and resell them to CCE (see Martin, 26 March 2004, p. 2006). In 2010 and 2011, Coca-Cola acquired CCE's entire North American business. The rest of CCE, which consists of operations in several European countries, would remain independent and acquire Coke bottling operations in Scandinavia and Germany (Coke Near Deal For Bottler, 2009,