Strategic analysis of the Coca-Cola Company using Porter's Five Forces and PEST analysis

Coca-Cola External

Coca-Cola's industry conditions, according to the Five Forces analysis, are generally favorable. The environmental conditions, according to the PEST analysis, are also generally favorable. This means that with few obstacles, Coca-Cola should be able to achieve its business objectives.

NCAIS Code

The industry code for Coca-Cola is 312111: Soft Drink and Ice Manufacturing (U.S. Census Bureau, 2007).

Porter's Five Forces

Porter's Five Forces explain the ability of firms to earn profits in their industry. The bargaining power of suppliers is relatively low. Coca-Cola is a high volume buyer -- the highest in the industry -- and for most suppliers this volume is critical to the business. The inputs are not well-differentiated, so the switching costs for Coke are not especially high. The bargaining power of buyers is moderate. Most wholesale and retail buyers are all but obligated to carry Coca-Cola, given the popularity of the firm's products. Some of the largest buyers, like Wal-Mart or Target, do have buying power because of the volume of business that they do. Other than brand loyalty, however, consumers can switch very easily between Coke products and competing products. Many consumers are price sensitive, however, and there are many low-priced generic beverages on the market.

The intensity of rivalry in this industry is very high. Coca-Cola and Pepsi are the market leaders, and there are a host of generic products on the market as well. The two main firms have an intensely personal rivalry and very high exit costs, raising the stakes. In addition, the largest markets (such as the U.S.) are mature, meaning that the companies are battling intensely for a relatively fixed market. Both firms, however, are differentiated players and maintain relatively high prices, so the oligopoly situation does not cause these firms to sell at a loss in order to gain market share.

The soft drink industry is characterized by moderate barriers to entry. Anybody can make soda, but the primary barrier to entry is with distribution. It is almost impossible for a new firm to match the saturation-level distribution because of the high costs involved and the difficulty in establishing the brand awareness that would compel store owners to dedicate that kind of shelf space to a new product. Thus, while entering the industry is easy, being anywhere near competing with Coke is not. The threat of substitutes is very high. Consumers have myriad choices for refreshing beverages. Coca-Cola has responded to this trend by introducing a wide range of drinks itself, but the fact that consumers can substitute anything from tap water to alcoholic drinks for a Coca-Cola product means that Coke products must create a strong, unique value proposition in order to attract business. That can have a negative impact on profitability.

All told, the soft drink industry is a favorable one in which to operate, especially for the big two firms who have substantial advantages in bargaining power over buyers and suppliers. The industry is a slow growth industry with intense rivalries, but there are limits to new entrants and the leading firms have substantial bargaining power over both buyers and suppliers, allowing them to turn profits consistently.

PEST Analysis

Another tool for environmental scanning is the PEST analysis (QuickMBA, 2010; no author, 2011). The different facets of the external environment affect the companies in the market in different ways, and it is important for management to understand each of these forces and how it affects the firm. The political/regulatory environment concerns the different laws and tax policies that the company faces. In general, this environment is stable in all of the company's key markets. Major issues such as competition regulation have not been a factor in recent years. There are a variety of laws that Coca-Cola must deal with, but none that are firm-specific (i.e. not affecting the firm's competitors) or particularly onerous. The legal environment has at times proven challenging -- Coke faced an out-of-court settlement for $192 million a decade ago resulting from systemic discrimination on the part of the company. The major legal issues that Coca-Cola has faced in recent years all seem to have been preventable at the managerial level, rather than actual legal risks (Insurance Journal, 2000).

The economic environment is challenging at present. Because Coca-Cola's products are largely discretionary, demand is likely to decline during periods of economic distress. Indeed, Coke's revenues declined in FY 2009 and its profits declined in FY 2008 (MSN Moneycentral, 2012). The economic prognosis is moderate for the coming years in the United States, according to the Congressional Budget Office (2011). This implies that growth in the U.S. market may be sluggish. There is room for better growth internationally, especially in Asia where economic growth is strong and the markets are not yet saturated.

The social environment is generally favorable to Coca-Cola. There are some concerns with respect to the healthfulness of Coke's products, but those concerns are not shared by the majority of the population anywhere, as evidenced by the company's massive sales and ongoing sales growth. Rapid growth of the middle class in the developing world is a social factor firmly for the benefit of Coca-Cola, especially given that the company has a perhaps the world's most widely-recognized brand (Interbrand, 2011) and American products are generally thought of very highly in most of the world.

The technological environment does not have that much impact on Coca-Cola. One of the more positive impacts of technological change is that Coca-Cola now has more marketing opportunities as a result of increased Internet and social media usage. Given Coke's mastery of more traditional media forms, a shift to online marketing where the company is less dominant could also be viewed as a threat. Some models also include the environmental conditions as well, and it is worth noting that this is an important factor for Coca-Cola. The firm's sales are better when it is warmer, so trends towards warmer weather or unusually hot weather should benefit the company -- like March on the Eastern seaboard and Great Lakes region this year.