University of Jordan

Faculty of Business
Strategic Management

“Coca-Cola Company”

Case Study
STRATEGIC MANAGEMENT

Prepared By

Fathi Salem Mohammed Abdullah

2009

History analysis
  In May, 1886, Coca Cola was invented by Doctor John Pemberton a
pharmacist from Atlanta, Georgia. John Pemberton concocted the Coca
Cola formula in a three legged brass kettle in his backyard.
 Being a bookkeeper, Frank Robinson also had excellent penmanship. It
was he who first scripted "Coca Cola" into the flowing letters which has
become the famous logo of today.
 The soft drink was first sold to the public at the soda fountain in
Jacob's Pharmacy in Atlanta on May 8, 1886.
 Until 1905, the soft drink, marketed as a tonic, contained extracts of
cocaine as well as the caffeine-rich kola nut.
 Until the 1960s, both small town and big city dwellers enjoyed
carbonated beverages at the local soda fountain or ice cream saloon.
Often housed in the drug store, the soda fountain counter served as a
meeting place for people of all ages. Often combined with lunch
counters, the soda fountain declined in popularity as commercial ice
cream, bottled soft drinks, and fast food restaurants became popular.
 On April 23, 1985, the trade secret "New Coke" formula was released.
Today, products of the Coca Cola Company are consumed at the rate
of more than one billion drinks per day.

Vision Statement (actual)

To maintain our reputation as the leading cola company in the world.

Mission Statement (actual)

Everything we do is inspired by our enduring mission:

 To Refresh the World... in body, mind, and spirit.
 To Inspire Moments of Optimism... through our brands and our actions.
 To Create Value and Make a Difference... everywhere we engage.

(proposed)

At Coca Cola we believe our main responsibility is providing customers (1) with
refreshing beverages including soft drinks, water, energy drinks, juices, and tea (2) to fit
any occasion in their day to day lives (6). Our signature product, Coke (7), is a favorite
around the world and a wide variety of our products are sold in over 200 nations (3). We
use the only the most sophisticated equipment (4) to process and make our products to
ensure each glass of Coke product is as good as the last (5). Our employees (9) are fairly
compensated and we practice fair trade in all markets we compete. We value our
 responsibility to all communities we serve and support many educational and leadership
programs (8).

1. Customer
2. Products or services
3. Markets
4. Technology
5. Concern for survival, profitability, growth
6. Philosophy
7. Self-concept
8. Concern for public image
9. Concern for employees

The Five Forces Framework

Barriers to Entry:
The several factors that make it very difficult for the competition to enter the soft drink market
include:
 Bottling Network: Both Coke and PepsiCo have franchisee agreements with their existing
bottler’s who have rights in a certain geographic area in perpetuity. These agreements
prohibit bottler’s from taking on new competing brands for similar products. Also with
the recent consolidation among the bottler’s and the backward integration with both Coke
and Pepsi buying significant percent of bottling companies, it is very difficult for a firm
entering to find bottler’s willing to distribute their product.
The other approach to try and build their bottling plants would be very capital-intensive effort
with new efficient plant capital requirements in 1998 being $75 million.
 Advertising Spend: The advertising and marketing spend (Case Exhibit 5 & 6) in the
industry is in 2000 was around $ 2.6 billion (0.40 per case * 6.6 billion cases) mainly by
Coke, Pepsi and their bottler’s. The average advertisement spending per point of market
share in 2000 was 8.3 million (Exhibit 2). This makes it extremely difficult for an entrant
to compete with the incumbents and gain any visibility.
 Brand Image / Loyalty: Coke and Pepsi have a long history of heavy advertising and this
has earned them huge amount of brand equity and loyal customer’s all over the world.
This makes it virtually impossible for a new entrant to match this scale in this market
place.
 Retailer Shelf Space (Retail Distribution): Retailers enjoy significant margins of 15-20%
on these soft drinks for the shelf space they offer. These margins are quite significant for
 their bottom-line. This makes it tough for the new entrants to convince retailers to
carry/substitute their new products for Coke and Pepsi.
 Fear of Retaliation: To enter into a market with entrenched rival behemoths like Pepsi
and Coke is not easy as it could lead to price wars which affect the new comer.
Suppliers:
 Commodity Ingredients: Most of the raw materials needed to produce concentrate are
basic commodities like Color, flavor, caffeine or additives, sugar, packaging. Essentially
these are basic commodities. The producers of these products have no power over the
pricing hence the suppliers in this industry are weak.
Buyers:
The major channels for the Soft Drink industry (Exhibit 6) are food stores, Fast food fountain,
vending, convenience stores and others in the order of market share. The profitability in each of
these segments clearly illustrate the buyer power and how different buyers pay different prices
based on their power to negotiate.
 Food Stores: These buyers in this segment are some what consolidated with several chain
stores and few local supermarkets, since they offer premium shelf space they command
lower prices, the net operating profit before tax (NOPBT) for concentrate producer’s in
this segment is $0.23/case
 Convenience Stores: This segment of buyer’s is extremely fragmented and hence have to
pay higher prices, NOPBT here is $0.69 /case.
 Fountain: This segment of buyer’s are the least profitable because of their large amount
of purchases hey make, It allows them to have freedom to negotiate. Coke and Pepsi
primarily consider this segment “Paid Sampling” with low margins. NOPBT in this
segment is $0.09 /case.
 Vending: This channel serves the customer’s directly with absolutely no power with the
buyer, hence NOPBT of $0.97/case.
Substitutes: Large numbers of substitutes like water, beer, coffee, juices etc are available to the
end consumers but this countered by concentrate providers by huge advertising, brand equity,
and making their product easily available for consumers, which most substitutes cannot match.
Also soft drink companies diversify business by offering substitutes themselves to shield
themselves from competition. Rivalry:
The Concentrate Producer industry can be classified as a Duopoly with Pepsi and Coke as the
firms competing. The market share of the rest of the competition is too small to cause any
upheaval of pricing or industry structure. Pepsi and Coke mainly over the years competed on
differentiation and advertising rather than on pricing except for a period in the 1990’s. This
prevented a huge dent in profits. Pricing wars are however a feature in their international
expansion strategies.
PEST Analysis

The PEST Analysis is an analysis to examine the macro-environment of Coca-

Cola’s operations (Johnson, Scholes and Whittington, 2008).

Political

Like most companies, Coca-Cola is monitoring the policies and regulations set by
the government. There are no political issues in this instance.

Economic

There is low growth in the market for carbonated drinks, especially in Coca-Cola’s
main market, North America. The market growth recorded at only 1% for North
America in 2004.

Social

There are changes in consumers’ lifestyles. Consumers are more health conscious.
This affects the Coca-Cola’s sales of the carbonated drinks as consumers prefer
non-carbonated drinks such as tea, juices and bottled drinks. Demand for
carbonated drinks decreases and this leads to a decrease in Coca-Cola’s revenues.

Technological

As the technology advances, new products are introduced into the market. The
advance in technology has led to the creation of cherry coke in 1985 but consumers
still prefers the traditional taste of the original coke.
External Audit

Opportunities Threats

1. Bottled water consumption has 1. Consumption of American

increased 11 percent. beverages is denounced by
2. According to the S&P Industry foreign officials in areas where
Survey, consumers are drawn conflicting interest exist.
2. Multiple lawsuits against the
to new smaller beverage
new Enviga beverage for
brands that are not sold on a calorie burning claims in
mass scale. advertising
3. Word Economic Forum’s 3. Smaller, lesser known brands
annual Davos, Switzerland are turning to major beer
gathering grants international distributors for bottling.
voice. 4. Overall carbonated drink sales
4. Less developed countries are have been flat due to links of
in desperate need to improve sugar to obesity and high
fructose corn syrup to heart
community water supplies.
disease.
5. Energy drink sales are
5. Pepsi is more diversified
expected to increase 7 to 8 offering beverage and food
percent in 2007. products.
6. Disposable income has 6. High cost of commodities such
increased 6.2 percent. as sugar, and metals used in
7. Consumers are striving to drink production of cans.
and eat their way to better 7. Many smaller companies are
health than pervious fierce competitors around the
generations. world in their local markets.
8. EPS is expected to rise 7 to 8
percent in 2007.

CPM – Competitive Profile Matrix

Coca-Cola Pepsi Cadbury Schweppes

Critical Success Weight Rating Weighted Rating Weighted Rating Weighted
Factors Score Score Score
Market Share 0.15 4 0.60 3 0.45 2 0.30
Price Comp 0.10 3 0.30 3 0.30 3 0.30
Financial Position 0.12 4 0.48 4 0.48 3 0.36
Product Quality 0.15 3 0.45 3 0.45 3 0.45
Product Lines 0.15 4 0.60 4 0.60 3 0.45
Customer Loyalty 0.15 4 0.60 4 0.60 3 0.45
Employees 0.11 3 0.33 3 0.33 3 0.33
Marketing 0.07 3 0.21 3 0.21 3 0.21
Total 1.00 3.71 3.56 2.85

External Factor Evaluation (EFE) Matrix

Key External Factors Weight Rating Weighted Score

Opportunities
1. Bottled water consumption has increased 11 0.06 4 0.24
percent.
2. According to the S&P Industry Survey,
consumers are drawn to new smaller beverage 0.05 2 0.10
brands that are not sold on a mass scale.
3. Word Economic Forum’s annual Davos, 0.02 2 0.04
Switzerland gathering grants international voice.
4. Less developed countries are in desperate need 0.02 2 0.04
to improve community water supplies.
5. Energy drink sales are expected to increase 7 to 0.06 3 0.18
8 percent in 2007.
6. Disposable income has increased 6.2 percent. 0.05 3 0.15
7. Consumers are striving to drink and eat their 0.07 3 0.21
way to better health than pervious generations.
8. EPS is expected to rise 7 to 8 percent in 2007. 0.07 4 0.28
Threats
1. Consumption of American beverages is
denounced by foreign officials in areas where 0.02 3 0.06
conflicting interest exist.
2. Multiple lawsuits against the new Enviga
beverage for calorie burning claims in 0.04 2 0.08
advertising
3. Smaller, lesser known brands are turning to 0.06 2 0.12
major beer distributors for bottling.
4. Overall carbonated drink sales have been flat
due to links of sugar to obesity and high fructose 0.10 2 0.20
corn syrup to heart disease.
5. Pepsi is more diversified offering beverage and 0.20 3 0.60
food products.
6. High cost of commodities such as sugar, and 0.10 3 0.30
metals used in production of cans.
7. Many smaller companies are fierce competitors 0.08 3 0.24
around the world in their local markets.
TOTAL 1.00 2.84

Internal Audit

Strength Weakness
 1. Product line has over 400 brands. 1. Product line is limited to
2. Strong global presence, located in beverages.
over 200 countries. 2. A failed $16 billion acquisition
3. Long history has built excellent of Quaker Oats hinders long-
brand recognition. term growth.
4. Partnership longevity with 3. Negative publicity in India
established sporting events because of water issues, has
including the Olympics. led to poor brand image and
5. Industry leader in market hindered growth there.
capitalization with $112 billion. 4. Lack of management
6. Return on Equity yielded 30 willingness to place foreign
percent in 2006. products into American
7. Leader of dividend yields of 2.6 markets.
percent. The company has had 43 5. Marketing deficiencies due to
consecutive years of an annual turnover in leadership and a 16
dividend increase. percent decrease in advertising
8. Joint venture between The Coca spending.
Cola Company and Nestle has 6. Coca Cola’s inventory
resulted in the establishment of turnover is only 5.4 compared
Beverage Partners Worldwide to Pepsi Co.’s 8.0.
(BPW).
9. Coca-Cola has formed a strong
partnership with McDonalds, with
McDonalds becoming their largest
customer.

Financial Ratio Analysis (December 2007)

Growth Rates % Coca Cola Industry SP-500

Sales (Qtr vs year ago qtr) 19.20 22.20 11.60
Net Income (YTD vs YTD) 8.30 25.70 17.10
Net Income (Qtr vs year ago qtr) 13.30 30.00 9.30
Sales (5-Year Annual Avg.) 6.54 8.45 13.09
Net Income (5-Year Annual Avg.) 5.01 9.38 19.82
Dividends (5-Year Annual Avg.) 11.49 12.61 10.00
Price Ratios
Current P/E Ratio 25.4 26.2 20.3
P/E Ratio 5-Year High NA 49.9 26.8
P/E Ratio 5-Year Low NA 20.7 6.8
Price/Sales Ratio 5.00 3.96 2.37
Price/Book Value 6.97 5.71 3.45
Price/Cash Flow Ratio 21.10 19.60 10.70
Profit Margins
Gross Margin 64.2 52.7 34.5
Pre-Tax Margin 26.0 17.5 17.8
Net Profit Margin 19.8 14.2 12.6
5Yr Gross Margin (5-Year Avg.) 64.4 59.1 34.3
5Yr PreTax Margin (5-Year Avg.) 27.9 20.1 16.4
5Yr Net Profit Margin (5-Year Avg.) 21.1 14.9 11.4
Financial Condition
Debt/Equity Ratio 0.49 0.69 1.06
Current Ratio 0.8 1.0 1.1
Quick Ratio 0.6 0.7 0.9
Interest Coverage 55.1 41.0 31.8
Leverage Ratio 2.1 2.5 3.7
Book Value/Share 8.52 10.25 18.53
Investment Returns %
Return On Equity 28.9 22.0 24.9
Return On Assets 14.9 11.2 7.6
Return On Capital 22.6 16.9 10.2
Return On Equity (5-Year Avg.) 32.0 25.4 18.5
Return On Assets (5-Year Avg.) 16.7 12.6 6.4
Return On Capital (5-Year Avg.) 24.6 18.2 8.6
Management Efficiency
Income/Employee 76,690 56,327 92,892
Revenue/Employee 386,732 360,922 806,706
Receivable Turnover 9.8 10.1 14.3
Inventory Turnover 5.4 6.8 7.8
Asset Turnover 0.8 0.8 0.8
Adapted from www.moneycentral.msn.com

Date Avg. P/E Price/Sales Price/Book Net Profit Margin (%)

12/06 20.30 4.71 6.61 21.1
12/05 21.00 4.18 5.84 21.1
12/04 23.30 4.65 6.29 22.3
12/03 25.00 5.99 8.79 20.8
12/02 31.10 5.56 9.18 20.3
 Date Book Value/ Share Debt/Equity ROE (%) ROA (%) Interest Coverage
12/06 $7.30 0.27 30.0 17.0 28.7
12/05 $6.90 0.35 29.8 16.6 25.4
12/04 $6.61 0.45 30.4 15.4 29.1
12/03 $5.77 0.38 30.9 15.9 29.3
12/02 $4.78 0.45 33.7 16.3 27.4
Adapted from www.moneycentral.msn.com

Net Worth Analysis (December 2007 in millions)

1. Stockholders’ Equity + Goodwill = 17,000 + 1,400 $ 18,400
2. Net income x 5 = $5,000 x 5= $ 25,000
3. Share price = $58.00/EPS 2.34 =$24.78 x Net Income $5,000= $ 123,931
4. Number of Shares Outstanding x Share Price = 1,600 x $58.00 = $ 92,800
Method Average $65,032

Internal Factor Evaluation (IFE) Matrix

Key Internal Factors Weight Rating Weighted

Score
Strengths
1. Product line has over 400 brands. 0.09 4 0.36
2. Strong global presence, located in over 200 countries. 0.10 4 0.40
3. Long history has built excellent brand recognition. 0.06 4 0.24
4. Partnership longevity with established sporting events 0.05 4 0.20
including the Olympics.
5. Industry leader in market capitalization with $112 0.12 4 0.48
billion.
6. Return on Equity yielded 30 percent in 2006. 0.04 4 0.12
7. Leader of dividend yields of 2.6 percent. The company
has had 43 consecutive years of an annual dividend 0.04 4 0.16
increase.
8. Joint venture between The Coca Cola Company and
Nestle has resulted in the establishment of Beverage 0.06 4 0.24
Partners Worldwide (BPW).
9. Coca-Cola has formed a strong partnership with
McDonalds, with McDonalds becoming their largest 0.10 4 0.40
customer.
Weaknesses
1. Product line is limited to beverages. 0.09 1 0.09
2. A failed $16 billion acquisition of Quaker Oats hinders 0.10 1 0.10
long-term growth.
3. Negative publicity in India because of water issues, has 0.03 2 0.06
led to poor brand image and hindered growth there.
4. Lack of management willingness to place foreign 0.02 2 0.04
products into American markets.
5. Marketing deficiencies due to turnover in leadership and 0.05 2 0.10
a 16 percent decrease in advertising spending.
6. Coca Cola’s inventory turnover is only 5.4 compared to 0.05 2 0.10
Pepsi Co.’s 8.0.
TOTAL 1.00 3.09

SWOT Strategies

Strengths (S) Weaknesses (W)

Opportunities (O) SO Strategies WO Strategies

1. Improve environmental 1. Market

awareness with
 community international
involvement (S2, S4, beverages to
O2, O3).
2. Market new diet drinks
American
that have healthier consumers (W4,
sugar substitutes (S5, O2, O6, O7).
O7). 2. Increase marketing
efforts for bottled
water (W5, W6,
O1).

Threats (T) ST Strategies WT Strategies

1. Acquire Krispy 1. A
Kreme (KKD) to cquire Krispy Kreme
(KKD) to help diversify
help diversify the the product line (W1, T5).
product line (S5, 2. A
T5). cquire Golden Enterprises
2. Acquire Golden (GLDC) to help diversify
Enterprises the product line (W1, T5).
(GLDC) to help
diversify the
product line (S5,
T5).

SPACE Matrix
Coordinate: (3.6, 2.2)
 FS
Conservative Aggressive

CA IS

Defensive Competitive

ES

x-axis: -1.4 + 5.0 = 3.6

y-axis: 5.4 + -3.2 = 2.2
Coordinate: (3.6, 2.2)

Grand Strategy Matrix

 Rapid Market Growth

Quadrant II Quadrant I

Weak Strong
Competitive Competitive
Position Position

Quadrant III Quadrant IV

Slow Market Growth

The Boston Consulting Group (BCG) Matrix

Relative Market Share Position

Industry Coke
Sales Stars Question Marks
Growth
Rate

Cash Cows Dogs

The Internal-External (IE) Matrix

The IFE Total Weighted Score
 Strong Average Weak
3.0 to 4.0 2.0 to 2.99 1.0 to 1.99
High I II III
3.0 to 3.99

Medium IV V VI
The EFE Total 2.0 to 2.99
Weighted Score
Coca Cola

Low VII VIII IX

1.0 to 1.99

Grow and Build

Divisions Percent Revenue 2006

North America 29.1
Bottling Investments 21.2
North Asia, Eurasia & Middle East 16.5
European Union 14.6
Latin America 10.3
Africa 4.6
East, South Asia & Pacific Rim 3.3
Corporate 0.4

QSPM
Strategic Alternatives
 Acquire KKD and Produce new diet
GLDC drinks that have
healthier sugar
Key Internal Factors Weight substitutes
Strengths AS TAS AS TAS
1. Product line has over 400 brands. 0.09 2 0.18 4 0.36
2. Strong global presence, located in over 200 0.10 --- --- --- ---
countries.
3. Long history has built excellent brand recognition. 0.06 2 0.12 4 0.24
4. Partnership longevity with established sporting 0.05 --- --- --- ---
events including the Olympics.
5. Industry leader in market capitalization with $112 0.12 4 0.48 3 0.36
billion.
6. Return on Equity yielded 30 percent in 2006. 0.04 4 0.16 3 0.12
7. Leader of dividend yields of 2.6 percent. The
company has had 43 consecutive years of an 0.04 --- --- --- ---
annual dividend increase.
8. Joint venture between The Coca Cola Company
and Nestle has resulted in the establishment of 0.06 --- --- --- ---
Beverage Partners Worldwide (BPW).
9. Coca-Cola has formed a strong partnership with
McDonalds, with McDonalds becoming their 0.10 --- --- --- ---
largest customer.
Weaknesses
1. Product line is limited to beverages. 0.09 4 0.36 1 0.09
2. A failed $16 billion acquisition of Quaker Oats 0.10 --- --- --- ---
hinders long-term growth.
3. Negative publicity in India because of water issues,
has led to poor brand image and hindered growth 0.03 --- --- --- ---
there.
4. Lack of management willingness to place foreign 0.02 --- --- --- ---
products into American markets.
5. Marketing deficiencies due to turnover in
leadership and a 16 percent decrease in advertising 0.05 --- --- --- ---
spending.
6. Coca Cola’s inventory turnover is only 5.4 0.05 4 0.20 1 0.05
compared to Pepsi Co.’s 8.0.
SUBTOTAL 1.00 1.50 1.22

Acquire KKD and Produce new diet

Key External Factors Weight GLDC drinks that have
healthier sugar
 substitutes
Opportunities AS TAS AS TAS
1. Bottled water consumption has increased 11 percent. 0.06 --- --- --- ---
2. According to the S&P Industry Survey, consumers
are drawn to new smaller beverage brands that are 0.05 1 0.05 3 0.15
not sold on a mass scale.
3. Word Economic Forum’s annual Davos, Switzerland 0.02 --- --- --- ---
gathering grants international voice.
4. Less developed countries are in desperate need to 0.02 --- --- --- ---
improve community water supplies.
5. Energy drink sales are expected to increase 7 to 8 0.06 --- --- --- ---
percent in 2007.
6. Disposable income has increased 6.2 percent. 0.05 --- --- --- ---
7. Consumers are striving to drink and eat their way to 0.07 2 0.14 4 0.28
better health than pervious generations.
8. EPS is expected to rise 7 to 8 percent in 2007. 0.07 4 0.28 3 0.21
Threats
1. Consumption of American beverages is denounced
by foreign officials in areas where conflicting interest 0.02 --- --- --- ---
exist.
2. Multiple lawsuits against the new Enviga beverage 0.04 --- --- --- ---
for calorie burning claims in advertising
3. Smaller, lesser known brands are turning to major 0.06 --- --- --- ---
beer distributors for bottling.
4. Overall carbonated drink sales have been flat due to
links of sugar to obesity and high fructose corn syrup 0.10 2 0.20 4 0.40
to heart disease.
5. Pepsi is more diversified offering beverage and food 0.20 4 0.80 2 0.40
products.
6. High cost of commodities such as sugar, and metals 0.10 --- --- --- ---
used in production of cans.
7. Many smaller companies are fierce competitors 0.08 --- --- --- ---
around the world in their local markets.
SUB TOTAL 1.47 1.44
SUM TOTAL ATTRACTIVENESS SCORE 2.97 2.66

Recommendations
 The QSPM strategies assessed whether acquiring KKD and GLDC (a potato chip and
snack food company) was a better option than producing a new diet soda line made form
more healthy sugar alternatives. Both scores on the QSPM are relatively close and given
the financial condition of KKD and GLDC, it is recommended Coca Cola undertake both
strategic alternatives. The Net Worth of both companies is provided below. It is
estimated it would cost $200 million to research, produce and market the new diet drinks.

Krispy Kreme (KKD) Net Worth January 2008 (in millions).

1. Stockholders’ Equity + Goodwill = 79 + 28 $ 107

2. Net income x 5 = $-42 x 5= $ NA
3. Share price = $2.73/EPS -0.94 = NAx Net Income $-42= $ NA
4. Number of Shares Outstanding x Share Price = 65 x $2.73 = $ 177
Method Average $142

Golden Enterprises (GLDC) Net Worth January 2008 (in millions).

1. Stockholders’ Equity + Goodwill = 19.4 + 0 $ 19.4

2. Net income x 5 = $1.2 x 5= $ 6.0
3. Share price = $2.95/EPS 0.19 =$15.52 x Net Income $1.2= $ 18.6
4. Number of Shares Outstanding x Share Price = 11.2 x $2.95 = $ 33.0
Method Average $19.3

EPS/EBIT Analysis
$ Amount Needed: 360M
 Stock Price: $58
Tax Rate: 35%
Interest Rate: 5%
# Shares Outstanding: 1,600M

References
1. www.moneycentral.msn.com
2. www.coca-cola.com
3. Strategic Management concepts and cases by Fred David 12 edition
4. Exploring Corporate Strategy text & cases 8th edition