5
Applied Strategic Management Studies
Carry out an outline strategic analysis for a company/SBU of your choice. The completed project should include the following analysis
1. An appraisal of the relevant business environments and major competitors including the derivation of key success factors.
2. An appraisal of company resources and capabilities, and an assessment of the company financial performance in terms of efficiency, profitability and gearing, including the derivation of distinctive competencies.
3. A review of the options available to the company and recommendations for future strategic direction.
4. Recommendations for structures, systems and policies to implement these strategies successfully.
5 Outline your assessment of the usefulness of strategic management models for your company analysis.
REPORT ON STRATEGIC ANALYSIS, CHOICE AND IMPLEMENTATION IN THE COCA-COLA COMPANY
EXECUTIVE SUMMARY
The Coca-Cola Company is one of the leading companies in the beverage industry producing non alcoholic carbonated soft drinks but recently it has moved to production of functional soft drinks because of the increasing demand for these drinks and also because of the increasing competition. A strategic analysis of the company is necessary to determine how future strategies will be developed and how they will be implemented for the company to reach its desired future state.
In analyzing the company’s strategic position the SWOT analysis model was used to determine analyze the company’s internal environment and external environment. The PESTEL analysis model also proved to be a good tool in analyzing the external environment further, while the five forces model was used to assess the industry attractiveness.
Major strengths include its strong brands, introduction of new carbonated products and innovation of some functional drinks, as well as very strong distribution channels around the world. Weaknesses of the company include; a bad reputation among its customers and peers, difficulties in adopting change quickly and also lack of its own bottling facilities.
Opportunities come from the political, economic and technological environment while its threats emerge from the environmental factors, social as well as the technological environment.
Key success factors of the company come from its well-built global presence, strong brand names, good distribution networks, advertising strategies and ability to innovate. Some of Coca-Cola’s competitors include PepsiCo, GSK, Cadbury Schweppes and GlaxoSmithKline
In order to determine the strategic choices available to the company and an appropriate strategy for the company to reach its desired state the Ansoff matrix was used. Recommendations are given on the appropriate strategy and also on ways of implementing these strategies in terms of Coca-Cola’s structure, policies and systems.
STRATEGIC ANALYSIS, CHOICE AND IMPLEMENTATION IN THE COCA COLA COMPANY
INTRODUCTION
The Coca-Cola Company is a market leader in the beverage industry supplying its products worldwide. It has its headquarters in America with branches around the world. With its global presence, and with the need to produce more functional products, it is important to assess the business environment, competitors, resources and capabilities, strategic options as well as ways of implementing strategies in the company. The purpose of the report is to give a detailed analysis of the company’s strategic position, its strategic choice and implementation.
STRATEGIC POSITION / ANALYSIS
This is the first stage in strategic management. It assesses the current state of the company in terms of its internal and external environment, its competition, its resources and capabilities as well as the key success factors (Williamson Cooke and Jenkins 2003).
Analysis of the internal (resources and capabilities) and external business environment and competitors
SWOT Analysis
Strengths
Over the years the Coca-Cola Company has established its brand of products in over 200 countries around the world and most of its products have continuous demand in the countries in which it operates and in countries where it supplies its products. The company’s brand of products, that is Coca-Cola, Fanta, Diet Coke and Sprite have continued to be market leaders and represent one of the major sources of income for the company (Lewis 2007). This is mainly attributed to the loyalty among the company’s consumers.
Even with growing competition from companies such as PepsiCo, GSK and Red Bull, it has managed to have continued growth in sales as more and more consumers are in demand for its products while new products are gaining market as well. New innovations such as Coca-Cola Zero upon its introduction and launch in North America managed to gain a 1% market share in supermarkets, meaning the company has a constant market for its products (Lewis 2007).
The company has continued awareness on the need to shift its Non Dairy Drinks from the typical Carbonated Soft Drinks it is known for to the Functional Soft Drinks category. The major reason for this awareness is because demand for the functional drinks such as energy, sports and hydration drinks is on the rise and it is likely to be overtaken by competitors if it sticks to the carbonated drinks. Major innovations of non carbonated drinks of the company include the minute maid brand which has proven a success in the countries in which it is currently available.
The company through its Coca-Cola Enterprises has great distribution channels from which products are made available worldwide in order to achieve global penetration. Existing distribution channels have been adequately utilized to help in the distribution of other upcoming products (Lewis 2007). For instance, It has been able to utilize the Diet Coke distribution channel to retail the Diet Coke Plus product. This has enabled them to make the Diet Coke Plus brand to reach its customers with ease.
Weaknesses
The Coca-Cola brand of products has over the years been associated with the conventional soft drinks as opposed to the new functional drinks. Even though it is gradually adopting production of the FSD products, it is doing so at slow pace that is not enough to sustain the number of consumers interested in its array of non carbonated drinks.
Shortly after introduction of Dasani, a brand of bottled water in 2004, the company realized that it had used surplus amounts of bromate in the water and it had to recall the product. The company had the option to continue selling the product but it recalled it because it posed great health risks to the consumers (Hindle 2008). If the consumers were to take the water in large amounts then they were at a risk of getting cancer. However, the company’s good intentions were prejudiced by the public who believed that the company had not practiced caution when producing the water. Apart from a large loss which was incurred due to the recall, $32 million, this incident has made its customers have a certain lack of trust in the Dasani water which the company continues to produce to date.
One of Coca-Cola’s weaknesses also seems to be its lack of sufficient bottling facilities. Over the years it has had to rely greatly on other bottling companies where it has limited control over the activities of these companies. Some of the bottling companies are prone to changes in the market and increasing competition from competitors, this has made the company unable to increase their products’ prices because for such increases to be successful, the bottling companies have to convince the consumers to buy the products with the high charges in place. However, the companies have not been able to convince them because they themselves lack funds to compete with competitors and if consumers can not buy the products at high prices they need to lower them to continue having sufficient market. If Coca-Cola can not sufficiently increase its prices in the future, it is likely to suffer revenue impairment while its competitors are making huge amounts of profits (Hindle 2008).
The company’s has in recent years been affected by numerous rumours. In Middle East, targets were not met because the consumers in that region are vulnerable to the rumours about the company being against the Muslim religion. Rumours in India had been that the company’s drinks contained pesticides (Lewis 2007). These falsified statements have affected the company’s reputation and it still has a hard time convincing its customers from those regions.
Since the company’s major source of revenue comes from carbonated drinks, with the global decline in that market, the company is likely to make losses if it can not find sufficient market for its products while it adjusts to producing the functional drinks like its competitors.
Another issue that has adversely affected the company’s image is the increased number of job cuts that the company engages in, in a bid to reorganize and restructure its portfolio (Lewis 2007). In 2000 around 6,000 workers in the company’s headquarters and international operations were made redundant and still the company is contemplating more job cuts in the near future. This has made the company have a bad name in terms of its investments and human resource planning.
Opportunities
With its strong distribution channels around the world, the company has sufficient means for distributing its new functional drinks to consumers. It does not have to create new channels and this is as the existing ones are enough for that purpose. Besides providing a good opportunity for the company products to reach customers, as there are no costs involved, it will have engaged in cost saving measures (Hindle 2008).
Greater growth opportunities for the company are imminent because of the increasing mergers and acquisitions that the company is actively involved in. By forming such alliances with smaller companies, the company will be able to increase its customer base and it will also be able to build its weakening reputation because more consumers will have more faith in the company when they see others forming partnerships with them.
More people across the globe continue to consume beverages at alarming rates everyday. Research shows that people take beverages at the rate of 50billion times a day with Coca-Cola’s products accounting for 1.6 billion. Overall Coca-Cola has immense growth opportunities in countries around the world (Lewis 2007).
PESTEL environmental analysis
The macro environment factors that pose opportunities for Coca-Cola Company include:
The company operates in a favourable political environment as there are no strict laws imposed by the government on non alcoholic beverages because they fall under the food category required by the Food Drug and Administration agency (Lewis 2007). So the company is unlikely to get in trouble with governments in international operations. The only circumstances that could threaten its operations are amendments to laws and regulations and political unrest; however these are unlikely to affect the company as it has managed to thrive as a multi-national company.
The company also operates in a favourable economic environment both in America and in other countries as they offer greater sales opportunities. This is likely to provide immense growth opportunities for the company now and in the near future.
Technology wise, the Coca-Cola Company is rapidly using the internet and other forms of media to market its products. This has also become a major way in which it advertises its products to the public and creating more awareness for its existence among its customers and world wide.
Threats
Five Forces Model
Cadbury Schweppes which is a new entrant in the beverage industry took a main role in energy drinks with its Accelerade brand. This managed to garner $50m in the United States beating Coca-Cola’s energy drinks. Such entrants, pose a big threat to the company if it is unable to produce more functional drinks, it is likely to lose its market share and attractiveness (Lester 2009).
Competition and rivalry continues to intensify in the beverage industry (Dess 2011). Companies like PepsiCo and GSK pose a great threat to Coca-Cola because they produce more functional drinks than Coca-Cola and they are proving to be tough competitors than Coca-Cola had expected. Red Bull Company which also produces energy drinks has taken up a major role in the sports drinks as demand for the Coca-Cola carbonated drinks is gradually decreasing.
PESTEL environment analysis
The macro environment poses the following threats to the company:
The social environment poses a great threat to the company because more and more people are adopting a healthier lifestyle. More people are concerned with health issues and will strive to buy drinks that are non-carbonated as well as those that are recommended health wise. Carbonated drinks have been known to weaken the immune system and because of the sugar contained in them they provide higher chances of obesity cases. As many people adopt healthy living, the company is likely to lose its customers if it can not keep up with the demands of consumers to produce healthier products (Dess 2011).
The technological environment could also pose threats to the company as other companies are coming up with new products that are much healthier and those that serve a specific purpose to the consumers. If Coca-Cola can not keep up with the technological advances to produce more and new functional products then it is likely to lose its customers to competitors (Lewis 2007). For instance, in terms of energy drinks Lucozade and PepsiCo’s Gatorade have dominated the demand for sports drinks ahead of Coca-Cola’s Powerade.
In terms of its environment, water consumption could prove to a big threat. Water comprises the main component in the beverages. If the company uses water at a faster rate than is available, it is likely to incur shortages that may lead to production problems. Further, water is a very important resource in many productions but at the same time a scarce one in many countries. The company has also received criticism about the disposal of containers that have been said to pollute the environment.
Key success factors and competencies
A key success factor and competency of the company is the well established global presence because of its operations in over 200 countries in the world while supplying its products to billions of people worldwide.
Coca-cola’s success mainly comes from its unique brand of products that is Coca-Cola, Fanta, Diet Coke and Sprite. They have a sufficient and continuous demand from countries around the world and they account for the company’s major source of revenue. Building a renowned brand name has also proven to be one of its key competencies (Lewis 2007).
In terms of marketing its products, it has managed to make very memorable adverts that have continued to catch the attention of consumers and thereby getting sustained recognition from billions of them from all over the world. This is also a key competency because it has kept its consumers wanting more of its products through its numerous adverts.
With innovations of products such as Coca-Cola Zero, and Coca-Cola Vanilla which have been some of its key success in innovation, the company has proven that it has a key competency in innovations and it is able to adapt to changes in order to meet customers’ expectations.
Other key success factors include its abilities to form mergers with other small companies that have helped boost its image and its wide range of its products. Other competencies include unique distribution channels and skilled labour that has enabled it produce products for sustained competitive advantage (Dess 2011).
Analysis of the company’s financial performance as at the end of 2009
Efficiency
In terms of the company’s efficiency, the trade receivables days have increased from 153 days to 160 days. This means that the company’s debtors are taking longer to pay their debts in 2009 as compared to 2008. This is a 0.3% increase and even though a small margin, if the trend continues, the company will be prone to more bad debts that can affect its liquidity position as most of cash will be held up by debtors. Also the increase could mean that the company is having difficulties in its credit management system (Carey, Knowles and Clark 2011). To deal with the problem, the company should encourage early settlements and offer discounts for early payments, or it could even charge high interest rates for those debtors that have taken longer than expected.
Profitability
Net profit has increased by 2.4 % in 2009, this means that the company’s profitability is increasing at a very slow rate and this could be due to decreased sales in areas such as India and Middle East where the rumours have adversely affected the company’s sales level. Further the profitability might have been affected because declining market for the company’s products where customers opt to buy healthier and functional beverages.
Gearing
In terms of gearing the company’s debt to equity ratio has increased by 77% in 2009; however the company continues to be funded majorly by shareholders equity. For a recommended of 3:2, the company could be paying more taxes unlike if it were funded by more debt than equity that could enable it have more profits exempted from tax (Carey, Knowles and Clark 2011).
Usefulness of the Strategic management models used
SWOT analysis model
This strategic analysis tool is widely used to determine the internal strengths and weaknesses of a company as well as the external opportunities and threats that face a company. When used appropriately it is able to help one determine the current state of the company, both internally and externally. The model can also help the company in question find ways to optimize on its performance both for the current state and for the future (Hindle 2008).
In the case of Coca-Cola Company using the SWOT analysis tool helps to determine the strengths and weaknesses that the company is currently facing. These are internal to Coca-Cola and are those factors that exist that can help it develop strategies for the future. The external factors will help the company match its abilities with those factors in order to achieve optimal performance levels.
It is important that before strategies can be developed in Coca-Cola Company, its internal capabilities be addressed to see how they match with opportunities in the external environment and how to capitalize on these capabilities. Further the internal capabilities should be assessed to determine how they can be used to overcome threats in the external environment (Hindle 2008).
Opportunities in the environment can also be used to overcome the company’s weaknesses where they provide favourable conditions for the company to improve on its performance. It is also important that a combination of weaknesses and threats be avoided because they will only bring losses to Coca-Cola with the current immense competition.
PESTEL analysis model
The PESTEL analysis tool is vital in analysing a company’s macro-environment. In doing a PESTEL analysis, it is possible to determine how the company interacts with its external environment in order to identify the opportunities and threats that come with relating to the external environment (Williamson Cooke and Jenkins 2003).
A thorough analysis of the PESTEL macro-environment should reveal the key environmental factors that could help Coca-Cola capitalize on its strengths or help the company avoid activities that could lead to its downfall where it can not manage its weaknesses. Basically this strategic analysis model when combined with the SWOT analysis model should optimally assess the current position on Coca-Cola (Hindle 2008).
Analysis of the political, economic and legal environment is essential for the company because operating in various countries around the world could pose major challenges than if it were to operate on a national level (Williamson Cooke and Jenkins 2003). Further it is best that Coca-Cola is aware of the changes in the environment, society and in technology so that it is able to produce products that do not pose harm to the environment and it should not deplete the natural resources, it should also be able to produce products that meet the needs of society and are up to date.
Five Forces Model
Porter’s five forces model is also a key tool in analyzing a company’s competitive environment that is its industry. A company should always be aware of those factors that could pose great competition in the market. Factors include; the bargaining power of suppliers and buyers, threat of new entrants and substitutes, as well as the competitive rivalry among the companies (Dess 2011).
For the Coca-Cola Company, this model is very essential because with the increase in the number of companies in the beverage industry it needs critical analysis of how to combat competition, as it also looks for ways to deal with threats of new entrants such as Cadbury Schweppes. It also needs to ensure that it operates in an attractive industry if it has to improve its profitability.
STRATEGIC CHOICE
After the company’s current state has been analyzed, the next step is to develop strategies and to choose the best course of action that will help give optimal results in terms of its feasibility, acceptability and suitability to the company requirements. This chosen strategy should be one that will enable the company reach its future desired state (Dess 2011).
The Ansoff matrix
This is an essential tool that could help Coca-Cola and any other company to decide on a number of strategic choices in terms of growth in its products and markets (Lester 2009, p.52). Some of the strategic options available to Coca-Cola Company include:
Market penetration strategy
The company could continue to produce the carbonated drinks and at the same time continue with production of the functional drinks, while engaging in intense marketing to increase the market share of the existing brands in the existing markets. To drive out competitors Coca-Cola will have to devise a unique pricing strategy and engage in aggressive promotions to increase customer loyalty.
Product development strategy
The company could also decide to produce more functional drinks than carbonated drinks in order to keep up with demand for these drinks while keeping production of the carbonated drinks at a lower level. This will introduce new products to the existing market but the company will be required to have innovative competencies that will help it differentiate its new products from competitors (Lester 2009).
Market Development strategy
Alternatively, the company may decide to open up more markets in areas such as Middle East, India and other places around the world to increase the market for its existing carbonated and functional soft drinks. It may also need to form new distribution channels or use special pricing policies to gain a competitive edge in the new market.
Diversification strategy
Using this option, Coca-Cola will specialize in producing more functional drinks as well as finding new markets for those drinks. Such a strategy is very risky because a combination of products that the company has little experience in its marketing plus finding markets that the company has little or no knowledge could mean failure if more caution is not practiced (Lester 2009).
STRATEGY IMPLEMENTATION
For the any of the above strategies to be implemented successfully Coca-Cola has to adopt a number of changes in terms of its policies, structures and even its systems (Lewis 2009).
Structure
The company’s structure should be matched to its chosen strategy in terms of primary activities needed to accomplish that strategy, outsourced and internal activities, company’s building blocks, relations with external factors and the authorities needed to manage functional / divisional units within the company (Williamson Cooke and Jenkins 2003).
Systems and processes
New strategies may work with the existing systems or the company may have to do little changes to the systems. In terms of matching strategy with Coca-Cola’s systems, the company has to decide on whether to do redesign, improve or re-engineer its systems.
Policies
Organizational policies are also a key factor for strategy implementation (Lester 2009). Coca-Cola has to decide on whether to change its policies regarding the packaging or water usage for environment conservation purposes, or even its policies on product components in order to ensure the health and safety of consumers. Policies concerning workers’ welfare should also be taken into consideration.
CONCLUSION
Any company wishing to plan for its future must thoroughly analyze its strategic position to find the strategic options from which one viable course of action should be implemented to reach that desired future state. In the case of Coca-Cola developing strategic options is not enough it has to choose a strategy that is feasible, acceptable and suitable for its needs. Further it has to choose the right manner in which it is to be implemented.
RECOMMENDATIONS ON COCA-COLA’S STRATEGIC DIRECTION AND STRATEGY IMPLEMENTATION
If Coca-Cola is to reach its desired future state then it has to adopt the product development strategy. This is the most viable because it is acceptable and suitable to the company as it can use it to do away with competitors producing functional drinks. It is also feasible because selling functional drinks in its existing market will be easy because it has established a global presence. Further it needs to price these products in a manner that will attract customers to buy them.
Since Coca-Cola has an established structure, it will need little or no modifications. However, it will need to find a person with the required capabilities to foresee development of the new products. In terms of the systems and processes, they will need improvements to ensure that they can produce the required products in the best way possible, they need not be re-engineered. Further it will need to improve in its policies to avoid future environmental pollution or resource depletion, as it has had various cases of overusing the water available while its packaging has been criticized for environmental pollution.
References
Carey, M. Knowles, C. and Clark, J. 2011, Accounting: A Smart Approach, Oxford
University Press.
Dess, G. 2011, Strategic Management: Creating Competitive Advantages, McGraw-Hill
Education.
Hindle, T. 2008, ‘SWOT analysis’, Guide to Management Ideas & Gurus pp. 181-182 EIU:
Economist Intelligence Unit Business Source Complete, EBSCOhost, viewed 5 September 2011.
Lester, A. 2009, Growth management: Two hats are better than one, Palgrave Macmillan.
Lewis, H. 2007, Global market review of functional energy and sports drinks – forecasts to
2012: 2007 edition: Future growth strategies of leading energy and sports drinks companies, Aroq Limited, United Kingdom, Bromsgrove.
Williamson, D, Cooke, P, and Jenkins, W. 2003, Strategic Management and Business
Analysis, Elsevier Butterworth-Heineman.
Appendices
Appendix A: Coca-Cola’s financial statements for the year 2008 and 2009
Consolidated Balance Sheets as at April 2009 and April 2008
ASSETS April 2009 April 2008
CURRENT ASSETS
Cash and cash equivalents 6,816 4,701
Marketable securities 263 278
Trade accounts receivable, less allowances 3,139 3,090
Inventories 2,298 2,187
Prepaid expenses and other assets 2,198 1,920
TOTAL CURRENT ASSETS 14,714 12,176
INVESTMENTS
Equity method investments: 5,316
Coca-Cola Hellenic Bottling Company S.A. 1,386
Coca-Cola FEMSA, S.A.B. de C.V. 840
Coca-Cola Amatil Limited 680
Coca-Cola Enterprises Inc. –
Other, principally bottling companies and joint ventures 2,410
Other investments, principally bottling companies 441 463
TOTAL INVESTMENTS 5,757
OTHER ASSETS 1,793 1,733
Property, plant and equipment — net 8,425 8,326
Trademarks with indefinite lives 6,042 6,059
Goodwill 3,988 4,029
OTHER INTANGIBLE ASSETS 2,384 2,417
TOTAL ASSETS 43,103 40,519
LIABILITIES AND EQUITY
CURRENT LIABILITIES
Accounts payable and accrued expenses 5,651 6,205
Loans and notes payable 6,701 6,066
Current maturities of long-term debt 461 465
Accrued income taxes 356 252
TOTAL CURRENT LIABILITIES 13,169 12,988
Long-term debt 5,017 2,781
OTHER LIABILITIES 2,944 3,011
Deferred income taxes 865 877
THE COCA-COLA COMPANY SHAREOWNERS’ EQUITY
Common stock, $0.25 par value; Authorized — 5,600 shares 880 880
Capital surplus 8,021 7,966
Reinvested earnings 38,911 38,513
Accumulated other comprehensive income (loss) (2,893) (2674)
Treasury stock, at cost (24,207) (24,213)
Equity attributable to shareowners of the coca-cola company 20,712 20,472
Equity attributable to non controlling interests 396 390
TOTAL EQUITY 21,103 20,862
TOTAL LIABILITIES AND EQUITY 43,103 40,519
Consolidated Income Statements for the year ended April 2009 and April 2008
April 2009 $m April 2008 $m
NET OPERATING REVENUES 7,169 7,379
Cost of goods sold 2,590 2,624
GROSS PROFIT 4,579 4,755
Selling, general and administrative expenses 2,624 2,803
Other operating charges 92 78
OPERATING INCOME 1,863 1,874
Interest income 60 65
Interest expense 85 117
Equity income — net 17 137
Other income (loss) — net (40) (11)
INCOME BEFORE INCOME TAXES 1,815 1,948
Income taxes 456 448
CONSOLIDATED NET INCOME 1,359 1,500
Less: net income attributable to non controlling interests 11
Net income attributable to shareowners of 1,348
The Coca-Cola Company
Basic net income per share 0.58 0.65
Diluted net income per share 0.58 0.64
Average shares outstanding 2,313 2,322
Effect of dilutive securities 6 29
Average shares outstanding assuming dilution 2,319 2,351
Appendix B: Calculations
2009 2008
Efficiency ratio
Trade receivable days = 3139 /7169 × 365 = 160 days 3090 / 7379 × 365 = 153 days
Profitability ratios
Net profit margin = 1863 / 7169 × 100 = 26% 1874 / 7379 × 100 = 25.4%
Gearing ratio
Debt to equity ratio = 5017 / 21108 = 0.23 2781 / 20862 = 0.13
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