Global Strategic Management - Coca Cola

Global Strategic Management (10756524) 1. Executive Summary The purpose of this report is to construct strategies by analysing the general beverage industry– in particular, carbonated drinks – and the competitive environment. CocaCola Amatil (CCA) is one of the most popular and recognizable brands in the world of business (Heller et al 2006, p.1). Thus, from this analysis, CCA’s potential growth and strategic management to maximize profitability will be examined. Eventually, these crucial factors in business management are affecting CCA’s performance in the market, including expanding into larger market and launch takeovers of other companies that CCA believe will create value for the company. This report will also discuss and outline each aspect in the general environment that CCA is operating in, Australia, and also the strength of each aspect in regards to Porter’s five forces. Along with the analysis, the effect that each aspect brings to strategic management will also be discussed, focusing mainly towards several aspects to CCA’s strategic management. 2. About CCA CCA’s main drive to success was their overall strategy to produce and promote their products, which is geared towards the continued success of this famous brand, including advertising to build and maintain brand awareness (Khan 2005, pp.16). However, despite a strong brand, management of change has been necessary at CocaCola. The corporate culture involving a super-brand like Coke can result in managers becoming overconfident in the product as well as the processes and procedures that have built up throughout the company over time. The threat is that the public will simply get bored with the brand (Amer 2002, pp.12). Therefore, CCA has undergone radical changes over the years by expanding more into the markets and launching takeovers. The process involves a potentially large proportion of risk and may proved to be calamitous. This paper will refer to how Coca-Cola has taken advantage of strategic management to undermine the risk and be profitable. 3. Strategic Management Strategic management, in contrast with business policy is a technical approach and as Wheelen and Hunger (2002, p.2) wrote, “strategic management is that set of managerial decisions and actions that determine the long run performance of a 1

Global Strategic Management (10756524) company”. Strategic management involves strategic process, which is when CCA defines business objectives and assesses both the internal and external situation to formulate and implement the strategy, evaluate the process, and make adjustments as necessary to stay on track. It involves environmental scanning, strategy formulation, strategy implementation and evaluation and control (Azam 2009, pp.1). In order to construct strategies for CCA, the major objective to be focused upon is to maximize profitability, thus increase value of the firm. First and foremost, accessing the internal strength and weaknesses of CCA is very crucial. Relative superiority and deficiency is important information (Khan 2008, pp.8). For instance, knowing that CCA’s business in South Korea was not benefiting and causing problems regarding human labor and too much expense, CCA made a crucial decision to close down the facility. This act shows how CCA has minimized its weakness and liability (Fin. Report 2008). While internal strength and weakness can be accessed through CCA’s managers, external components involving the industry are more complicated. The threats and opportunities that lies in the surroundings of CCA refers to the general environment, that will be discussed later on in this paper. 3.1. Expanding into markets Currently, CCA controls about 59% of the world market, greater than any other carbonated drink company. Expanding into market can be done by acquiring other companies that operate in the same industry for the reason that CCA have larger share in the beverage industry, such as mineral waters, alcoholic drinks or juice. However, expansion is better if its within the soft drink segment, because it is one of the largest growing segment in the nonalcoholic ready-to-drink beverage category. CCA can also increase its market share independently, through strategic management that caters towards maximizing the potential of the company, but compact the weaknesses, so that it will not cost a liability to the firm. The firm’s definite strength is the fact that it has a larger market share, its historic reputation and brand familiarity. Strategies used to capitalize this strength include: increasing people’s awareness towards the product through effective marketing, advertising and promotions; also invest in innovative projects to further develop existing products. Such innovations may include 2

Global Strategic Management (10756524) improvisation of the products’ packaging design, to attract a larger target market group and also researching on how to improve the substances used to produce the product, for instance, including vitamins or more healthy ingredients in the drink. In turn, this will change people’s mindset about CCA product regarding health issues. By doing this, CCA stands a chance to eliminate the threat of substitute for the reason that drinking coke is not healthy or for a reason that it is a “boring” drink. 3.2. Takeover CCA received a merger proposal from Lion Nathan Limited, however due to many conditions that need to be satisfied and would be hassle for CCA to do so and the fact that CCA thinks the proposal was not attractive, Lion Nathan withdrawn its proposal to merge with CCA. Through mergers and takeover, the merged companies can conduct surveys to discover customer preference concentrate upon maximizing the potential of that particular product. Improving on the moral and working environment of managers and employees may result in internal changes. This is important because positive minds and comfortable environment may affect the working attitude of managers, as the main driver of success. Incentives can also be given to motivate employees, such as giving bonuses and benefiting schemes for making the efforts to make CCA a better company. Furthermore, synergies for production and distribution efficiency can be created. Looking at CCA’s financial statement, the firm has been facing difficulty in managing cost, especially fuel cost. This is because its production facility is not widely dispersed, therefore distribution are costly. The merged companies will be able to have use each other’s resources and thus, creating a more dispersed production plant, which will save cost in transporting the goods and also keeping it at warehouses. Consequently, saving a large amount of revenue earned. Furthermore, effectiveness of advertising (commercialization) may also aids in increasing awareness of product, thus increase in demand and consumption. It is also important that the companies maintain customer satisfaction, thus guaranteeing their loyalty to the product. This can be done through serving customers with creativity and consistency and generate growth across all channels. One of the most straightforward business management strategies known for CCA is to 3

Global Strategic Management (10756524) launch takeovers. As a result, it is able to selectively broaden the family of beverage brands to drive profitable growth. Moreover, it enables CCA to be in the front line to lead and accelerate the global growth of carbonated soft drink. Takeovers or mergers will create value for CCA when it offers competitive advantage for the firm. The competitive advantage may include economies of scale, increase market share and synergies created from resources that are unobtainable should CCA stay independent. It allows CCA to grow and increase capability together with fellow bottlers. 4. Financial Aspects Strategic operating management measures and determines the profitability and business efficiency. CCA was earning less than its cost of capital, implying that CCA’s earnings were not meeting its required rate of return. This indicates the need for CCA to have a great change in its management structure (Heller et al 2008, p.2). A fall in turnover of goods in year 2008 from 2007 denotes that CCA deploys their assets less efficiently in generating profits and cash flows. CCA has been making a constant investment in assets, such as launching of new range of products, resulting in assets overload. Changes in product mix, such as price rise, weakened economy, or an increase in proportion of lower priced products, leads to a decrease in sales and affects total turnover. Investing in major projects caused smaller return on assets figure. CCA is on the stage of mature in the product life cycle, resulting in cash excess from operation and may cause decreasing production capacity, which led to the increase in sales and revenue. In order find a balance, strategies to increase production efficiency has to be implemented, such as decreasing cost in distribution, but add on human capital. As a matter of fact, CCA is currently undertaking expanding strategy – “Project Zero” – including expanding SAP platform, automated warehousing, increased production capability (Fin Report 2008). 5. Industrial Environment and 5 Forces Model Applying Porter’s 5 forces allows the garnering a retrospective view of the potential attractiveness in terms of profitability of the company. Analyzing the beverage industry will also allow a more accurate outlook on its potential. The analysis below 4

Global Strategic Management (10756524) will concentrate on the industry from CCA perspective and also its effect on strategies discussed before.

5.1. Bargaining Power of Supplier Inputs, such as materials, labor, supplies, etc. are standard rather than unique or differentiated. This allows variable substitutes of inputs readily and resulted in numerous potential suppliers. Suppliers themselves will find it hard to enter business like CCA and perform function in-house. Since CCA is producing at large scale, to suppliers, this business is very important, however the cost of purchase has significant influence on overall costs. This requires CCA to carefully choose its suppliers to suppress cost problem (Azam 2009, p.7). 5.2. Bargaining Power of Buyers There are a large number of buyers and customer relative to the number of firms in the industry, each with relatively small purchases. However, there is no cost incurred in switching suppliers. CCA’s product is very unique to some degree and has accepted branding. However, customers are very highly sensitive to price, therefore choosing the most cost efficient suppliers are very crucial to minimize cost, thus maximizing profit (Azam 2009, p.8). 5.3. Threats of Substitute Generally, substitutes have performance limitations that do not completely offset their lowest price or their performance is not justified by their high price. Obviously, it cost the customers nothing to switch to CCA’s substitutes, such as coffee, tea and juice. Besides, there has been a high potential of customers to substitute CCA products (Azam 2009, p.7). CCA can further develop its competitive advantage against substitutes through takeovers to minimize the potential of decrease in sales. 5.4. Rivalry Among Competing Firms CCA’s main rival is Pepsi and the biggest threat that they pose is price. When prices change, the effect on beverage industry towards the consumption of soft drink is drastic (Khan 2005,pp.27). Although the product is not complex, which makes it easier for other companies to compete against CCA, they do not own a share in the 5

Global Strategic Management (10756524) market as large as either CCA or Pepsi are. This is because it is hard to commit into this industry, as it will be hard to get out of this business, involving specialized skills, facilities and long-term contract commitments. Capital needed to enter the business line is very large (Azam 2009, p.9). This will result in less competition, thus enabling CCA’s chance to gain more market share. 5.5. Threats of New Entrants Large companies like CCA, have a cost or performance advantage in the beverage industry, because of established brand identities. Beside Pepsi, there are proprietary product differences in the industry. The capital needed to enter the industry and to be frontline in the industry like CCA today is very expensive, for the reason to build production plant, managing the company, commercialization, etc. and also a long time frame to build the confidence and loyalty in the target market. Newcomers also face difficulty in accessing the distribution channels and it may be more costly compared to what CCA has to pay, given their level of experience in the industry. Licenses, insurance and qualifications are difficult to obtain. However, upon entering the industry, newcomer can expect a strong retaliation in the market. When this happens, their position may pose a threat to CCA and CCA may find more challenges in implementing strategies to obtain more market share and maintain customer’s loyalty (Ahmed 2008, p.6). Overall, CCA are not competing mainly against Pepsi. The fight is against its substitutes. Their main goal is so that public should reach to Coke whenever one feels like drinking something. As a result, a strategic management to win the fight is to put up a large number of vending machines at every street corner, restaurants and cafes. Consequently, sales will took a quantum jump and CCA have less to worry about competitor and substitutes. 6. General Environment General environment is the external environment before an organization starts strategy formulation; it must scan the external environment to determine the strengths and weaknesses. Thus, how and to what extend is each trend is affecting strategic management within CCA.

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Global Strategic Management (10756524) 6.1 Demographic The population of people in Australia is growing older and there is an increase in the younger generation, which affects the strategic orientation of CCA. Geographical areas where most of retirees live will not be a potentially great target market, as they might prefer healthier drinks (non-carbonated, such as juice or milk), because of health concern. However, as discussed before, CCA can tackle this issue with innovative development of products (Amer 2002, p.25). 6.2 Economic Australia is a very economically developed country, with a high quality, cost and standard of living, alongside with low inflation and unemployment rate. Economic growth had been tremendous in the past decade, yet it did not make Australia financial viable against the global crisis now, so does CCA. Consumer might prefer water, as a cheaper substitute of Coke, and less people will also be spending time in cafes or restaurants (which led to the decrease in potential purchase of coke drinks), as they are trying to be conservative with monetary issues. CCA’s strategies have to adjust with the situation to cope as well, for instance, cutting cost as much as possible to reduce selling price. When the economy recovered, economic growth in Australia benefits CCA’s strategy for profitability, as more people work harder, the demand for caffeinated drinks increases, thus pushes CCA’s sales, turnover and profitability margin up (Amer 2002, p.26). 6.3 Political In Australia, the corporate rate is 30%, which is decent compared to other countries that put pressure on businesses upon high excise tax and company tax. Australia is also a country that is very well protected by the law, especially in regards to patent and intellectual property. Australia government has also acted in the best interest of the population, thus making forecast in political climates easier. Overall, Australia is a safe ground for large MNC like CCA. With fewer surprises in political variables (i.e., tax and patent law changes, deregulation, special tariffs), formulation of new strategies and implementation of current strategies are also easier to be carried out and outcome easier to be forecasted. Nevertheless, it is crucial that CCA abide the law and regulations in Australia and at the same time, maintain close rapport with strategists who are experts in legalistic skills and cultural issues involve in a diverse nation like 7

Global Strategic Management (10756524) Australia. Overall, government stability will aids in implementing CCA’s strategies (Amer 2002, p.25). 6.4 Sociocultural Australia has been opening a wide door for foreigners and migrants from other countries, resulting in less Caucasians nowadays, compared to a decade ago. In addition, migrants entering Australia are mainly youngsters, who are pursuing their studies. Since CCA’s main target market is young people, this situation is benefiting CCA. As a matter of fact, coke is a global product, where it is very well known everywhere in the world. Thus, in this case, brand familiarity will result positively in CCA’s favor. Furthermore, the gap between rich and poor is narrowing with in line with the economical advancement in Australia, creating more job opportunities (Amer 2002, p.28). 6.5 Technological Technology nearly underlies every strategic management decision, especially in Australia, where technological advancement can dramatically affect firms’ product, market, processes, marketing practices, competitive position, etc. It can also create new market, where CCA can expand into, resulting in profiliferation of new and improved products, change the relative competitive cost positions in an industry, and render existing products obsolete. Furthermore, technological changes can reduce or even eliminate cost barriers, creating better production capacities, shorter production runs, inventory management and shortage in technical skills, resulting in changing values and expectations of employees, manages and customers of CCA. Most importantly, technological advancement can function as a catalyst to create a competitive advantage for CCA that are more powerful compared to the existing advantage. To implicate with rapid development in technology, CCA should pursue strategies that take advantage of Australia’s high-technological opportunities, to achieve sustainable, competitive advantages in the market, thus expanding market and launch takeovers. To accommodate with CCA’s development, Australia also has a good reputation for availability and reasonable cost for money and raw materials (Amer 2002, p.25). 6.6 Global 8

Global Strategic Management (10756524) Global considerations impact virtually all strategic decisions. The boundaries of countries no longer can define the limits of out imaginations ((Amer 2002, p.29). Australia also has maintained a good relationship with many countries, which made large MNC like CCA easier to perform trade, export and import goods, especially through specific trade agreement, where tariffs and tax are minimize, thus lowering cost of operation. Efficiency and minimum hassle has improved global business activity. Overall, every aspect of the general environment is shaping the way Australians live, work, produce, and consume. New trends will impact on CCA’s strategy, as it create a different type of consumer, and consequently, a need for a different product needs, thus, demanding for constant change in strategies. 7

Conclusion

The ultimate strategy for CCA to maximize profitability is to first identify their core competency, and then change the playing field, carbonated drink in this case, to suit CCA’s core competency (Amer 2002, p.18). Working with a focus in specialty and strength will create opportunities for growth and advancement. However, although it is good to be a leader individually and have strong core competencies, it is always better to work with one another, harness each other’s core competency, launching takeovers. This way, CCA will have a greater chance in performing above par and expansion to take hold of larger market share is possible. Generally, CCA is in its mature phase of product life cycle. This means that they generate a lot of extra cash from operation. Excess cash can be used to finance new projects that may add value to increase wealth of shareholders or to have dividend payout to shareholders. However, strategically, it will be wiser if CCA choose to retain those excess cash, especially in a credit crunch like now, many companies are coping badly to maintain liquidity. Excess cash will be useful to fund further operating, financing and investing decisions, this includes funding mergers, takeovers and means to gain greater share in the market.

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Reference 9

Global Strategic Management (10756524) Khan M. 2008, “Nature of Strategic Management”, Virtual University of Pakistan, viewed 24 May 2008, Heller et al 2006, “Coca-Cola Management”, Thinking Management, viewed 20 May 2008, Khan A. 2005, “Marketing Strategies of Coca-Cola”, Term Project, viewed 20 May 2009, Amer W. 2002, “Intelligent Process Management for Increased Productivity”, Blue Tech Inc., viewed 21 May 2008, Ahmed S. 2008, “A Strategy Audit: Paloka”, Business Policy, viewed 20 May 2009, Azam Q. 2009, “Strategic planning”, Business Policy, viewed 21 May 2009, Coca-Cola Amatil, 2008 End of Financial Year Report

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