Porter’s Five Forces Analysis of Coca Cola
Porter’s five forces model, named after its developer Michael E Porter, is a strategic analysis tool that helps to analyse some critical forces affecting the level of competition in an industry. This model has acquired great popularity and fame over time and is used widely across the business world for evaluating the profitability and attractiveness of various industries. The five forces that this model evaluates are a part of every industry and every market. Managers can form strategies based on an analysis of these forces to increase the profitability of their business. This is a Five Forces analysis of the soda giant Coca Cola. Coca Cola is the leading brand in beverages sector and has a global presence. Its only major competitor is Pepsi.
Bargaining power of suppliers:
The bargaining power of suppliers of Coca Cola is weak. It is so because the number of suppliers is high and the switching costs for Coca Cola low. While Coca Cola can easily switch from one supplier to another, it is not possible for any supplier to switch away from Coca Cola as easily. That can lead to losses for any of the suppliers. While there are several suppliers, the size of individual suppliers is small or moderately large. Moreover, forward integration is a distant possibility for most of its suppliers. Even if there are no substitutes for raw materials like sugar, the number of suppliers is still high. So, the main factors that have come to light regarding the bargaining power of suppliers are:
- Large number of suppliers
- Small to moderately large size of individual suppliers.
- Forward integration difficult for the suppliers.
- Switching costs for Coca Cola not so high
Bargaining power of buyers/customers:
The bargaining power of individual customers in case of Coca Cola is low. Individual customers generally buy small volumes and they are not concentrated in specific markets either. However, the level of differentiation between Pepsi and Coca cola is low. Mostly they sell similar flavors. Switching costs are not high for customers and still the two brands enjoy high brand loyalty. The customers of coca cola are not price sensitive. Backward integration is not a possibility for the customers whether it is an individual customer or a large retailer. If a retailer acquires some bargaining power then it is only because it buys in large volumes. Still, overall the customers’ bargaining power is weak.
Threat of new entrants:
In the beverages industry there are several factors that discourage new brands from entering. Growing a brand overnight is impossible. There are significant investments to be made. From operations to marketing every part requires a large investment. Some local brands may start it at smaller scale and still marketing and hiring qualified staff requires generous investment. The level of customer loyalty in the industry is moderate and for any brand to build customer loyalty it will take some time. So, while new entrants can compete with brands like Coca Cola at a smaller or local level, to build a brand as big is a mammoth task requiring both capital and skilled human resources.
Threat of substitutes:
Main substitutes of Coca Cola products are the beverages made by Pepsi, fruit juices, and other hot and cold beverages. The number of substitutes of Coca Cola products is high. There are several juices and other kinds of hot and cold beverages in the market. The switching costs are low for the customers. Apart from it, the quality of the substitute products is also generally good. So, based on these factors the threat from substitutes is strong.
Competitive Rivalry between the existing players:
There are two major players in the soda industry and they are Coca Cola and Pepsi. There is intense rivalry between the two major players. There are a few smaller players too but they do not pose a major competitive threat. The two main players are nearly of the same size and they have similar products and strategies. The level of differentiation between the two brands is also low and therefore the price competition is intense. People have already heard of the Cola wars. So, the level of competitive rivalry between the existing firms is a strong force.