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ABP POST GRADUATE DIPLOMA IN MANAGEMENT STUDIES
Assignment for Course: M2-ME: MANAGERIAL ECONOMICS
Topic: Issues of Demand and Supply in the Coca-Cola Company
Submitted to: Dr Joel Barima
(Student's Enrolment Number only)
Submission date: 10th July
CERTIFICATION OF AUTHORSHIP: I certify that I am the author of this paper and that any assistance I received in its preparation is fully acknowledged and disclosed in this paper, I have also cited any sources from which I used data, ideas or words, either quoted directly or paraphrased. I also certify that this paper was prepared by me specifically for this course.
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Certain things in life are regarded as basic human needs. Things such as Food, Shelter, Clothing, and more recently sex are said to be essential to human life. Human wants are insatiable; unfortunately there are no enough resources to satisfy all. Due to this fact, priorities are set and the issue of choice comes in. Humans will therefore make a choice between the scarce resources with which they wish to produce and this leads us to the different factors of production in economics talking about Land, Capital, Labour and Entrepreneur. This report mainly looks at these factors of production with particular reference to the Coca-Cola Company and also looks into the issues of demand and supply and factors that influence it.
BREIF HISTORY OF COCA-COLA
John Pemberton, an Atlanta pharmacist, was inspired by simple curiosity. One afternoon he stirred up a fragrant, caramel-coloured liquid and when it was done he carried it a few doors down to Jacob's pharmacy. Here the mixture was combined with carbonated water and sampled by customers who all agreed this new drink was something special. So Jacob's pharmacy put it on sale for 5 cents (about 3p) a glass. Pemberton's bookkeeper, Frank Robinson named the mixture Coca-Cola, and wrote it out in the descriptive script. To this day Coca-Cola is written the same way. In the first year Pemberton sold just nine glasses of Coca-Cola a day. A Century later the Coca-Cola Company has produced more than ten billion gallons of syrup.
Established in 1886, Coca-Cola owns or licences as well as markets more than 500 non alcoholic beverage brands primarily sparkling beverages but also a variety of still beverages such as waters, enhanced waters, juices, ready to drink teas and coffees and energy and sports drinks. Along with Coca-Cola which is recognised as the world's most valuable brand, the company owns and markets four of the world's top five non alcoholic sparkling beverage brands, including diet Coke, Fanta and Sprite.
The Coca-Cola Company is actually the world's leading owner and marketer of non alcoholic beverage brands and the world's largest manufacturer, distributor and marketer of concentrates and syrups used to produce non alcoholic beverages. The company's branded products are made available to consumers throughout the world through a network of bottling partners, distributors, wholesalers and retailers- the world's largest distribution system. The company was finally incorporated in September 1919 under the laws of the state of Delaware and succeeded to the business of a Georgia Corporation with same name that has been organised in 1892 and today the Coca-Cola Company operates in more than 200 countries of the world. To this day, of the 54 billion beverage servings of all types consumed worldwide every day, beverage bearing trademarks owned or licensed by Coca-Cola account for 1.6 billion.
FACTORS OF PRODUCTION
As we know factors of production are the resources that are necessary for production, be it any good or service. They facilitate production but do not become part of the production. Economists have classified these factors into four different groups namely; Land, Labour, Capital and Entrepreneur
Land generally refers to all natural resources. This category includes wildlife, minerals, timber, water, air, oil and gas deposits, arable land and mountain scenery. Land as a factor of production is normally paid in economic rent because they are simply irreproduceable.
Labour refers to the physical and intellectual abilities of individuals to produce goods and services. But labour is not homogeneous, that is not all workers are the same. Different individuals have different physical and intellectual capabilities and attributes and even though all labour are not worth the same and rewarded the same but the fact remains that every human labour is essential to production. Labour is usually paid or rewarded in form of wages.
Capital is referred to as manufactured commodities which are used to produce goods and services for final consumption. Machinery, office buildings, equipment, warehouse space, tools, roads, bridges, research and development, factories, and so forth and so on. A distinction is usually made between economic capital and financial capital, things such as stocks, bonds certificates of deposits, savings account and cash.
Entrepreneurship refers to the ability to recognise profitable opportunities, and the willingness and ability to appropriate the use of land, labour and capital to produce the goods and services that are in demand by the consumer. People who exhibit this ability are called entrepreneurs. For instance an individual spots a need in the community, he thinks it might be an opportunity for business and decides to take the risk to provide that need for people. In return he gets money for it so as time goes on, depending on the volume, nature and usefulness of the good or service to the people he can make a lot of money. Bill Gate who founded Microsoft Corporation is an example.
COCA-COLA'S USE OF THE FACTORS OF PRODUCTION
Most businesses and manufacturing firms usually acquire land in order to build their factories so as to continue production. Thus, firms normally have factories at different strategic locations especially where there are greater business potentials. The Coca-Cola Company also has its way of dealing with this factor of production. Over the years, while most of its branded beverage products have been manufactured, sold and distributed by independently owned and managed bottling partners, from time to time Coca-Cola do take control of bottling and canning operations, often but not always, especially in underperforming markets. More so, Coca-Cola has a no controlling ownership interests in numerous beverage joint ventures, bottling partners and emerging beverage companies. This means that Coca-Cola does not have to own or acquire the land in every market they operate, yet they make their products available to all.
This is a very economically viable decision for Coca-Cola otherwise; it would be such an enormous cost for the Company to buy and acquire all the land as considering their global nature and of course the market for land as shown in figure 1. The forces of demand and supply also play role here in that as the price of land increases the demand is low, and vice versa. Therefore instead of going into the rigours of acquiring land the company sells its concentrates and syrups to independent bottlers who convert them to finished goods licensed to Coca-Cola, thereby saving a lot of costs and at the same time delivering their products and beverages to local communities.
However, Coca-Cola needs to maintain good relationship with its bottling partners as anything short of this will be a threat to the smooth operation and profitability of the business. As an independent company, its bottling
Partners, some of which are publicly traded companies, make their own business decisions that may not always align with Coca-Cola interests.
Again, many of the bottling partners have the right to manufacture or distribute their own products or certain products of other beverage companies. This means that Coca-Cola will have to provide an appropriate mix of incentives through a combination of pricing, marketing and advertisements in order that the companies give as much attention to Coca-Cola brands as they give their own products. Whatever be the case this relationship has an indirect effect on the company's profitability.
Most labour services, rather than being final goods ready to be enjoyed by consumers, are inputs into the production of other goods. The Coca-Cola Company believes it is built around two core assets, its brands and the people (the employees), whom it equally refers to as associates. Therefore, the Company believes in its employees and gives them decent wages and salaries in order to motivate them towards greater productivity. Firstly the Company makes use of two categories of labour; skilled and unskilled labour. In the skilled category are the executives and board members who take major decisions regarding operations, marketing and advertising. These are actually seasoned professionals whereas, the unskilled employees work in the factories bottling and packaging. However, all employees receive decent remuneration. For every operating group (i.e. different geographical zone) the Company usually has a team of employees who run the zone. Today Coca-Cola has a large work force of about 98,200 around the world who lives and work in different markets. This allows the Company to learn from each market and consequently share those learning soon. As a result the Company's culture is even more collaborative. Â From beverage concept and development to merchandising, these associates share ideas across departments and markets in new ways. Consequently, associates are increasingly enthusiastic about their work and inspired to turn plans into action. This simply means higher productivity for Coca-cola.
More so the Company has a strategy of penetrating markets through the local people in the communities they serve. Sometime Coca-Cola employs un masse to make sure it does not run out of essential labour and pays them reasonably.
The way and manner in which Coca-Cola handles his labour concerns is commendable in that, the Company is strong and viable, though the Company has not done specifically well in the last ten years but it has got one of the highest workforce in any industry. A workforce of over 98,200. So all things being equal the higher the workforce the higher the productivity. However, the Company must be aware that labour just like any other factor of production is governed by the law of demand and supply as shown below.
The figure for instance shows the demand and supply relationship for quantity of apples produced as against price (fig a) and quantity of apple pickers as against wage received (fig b) in a certain Company. Fig b is similar to the number of workers Coca-Cola is likely to employ. It shows that the higher the wage the more likely is the supply of labour so as long as Coca-Cola is willing to offer higher wage there will be more employees to meet up with the demand of its products.
However the Company will be careful as a time comes when additional employees may mean lower contribution or output. See the production function below.
Fig 2. The Production Function
The curve shows that at a later time an additional worker may not produce an equivalent output instead there may be diminishing returns. This is called the marginal product of labour (MPL) i.e. the increase in output due to an additional unit of labour. At this time as the number of employees increase, the marginal product of labour declines. Each additional worker contributes less to production than the prior one. The amount of some resources-called fixed resources-cannot be increased in the short run. Therefore, any increase in the amount of labour implies that there is less of the fixed resources for each worker to work with. This leads to diminishing marginal product of labor.
THE COCA-COLA COMPANY AS A MONOPOLY
The term monopoly is used to describe the market structure in which there is only one producer of a good or service for which there are no close substitutes and entry into or exit from the industry is impossible. Simply put the features of a monopoly are as follows;
One and only one firm produces and sells a particular commodity or service.
There are no rivals or direct competitors of the firm.
No other rival can enter the market for whatever reason legal, technical or economic.
Monopolist is a price maker i.e. he tries to take the best of whatever demand and cost conditions exist without the fear of new firms entering to compete away his prices.
Under the first axiom, if the commodity is soft and carbonated soft drinks, Coca-Cola will not be regarded as a monopoly since it is not the only firm in the industry of carbonated soft drinks. Other competitors in the industry include Pepsi, Tetrapak, Harboe, AquaD'Or, 7Up, Dr Pepper, Nestle etc. Coca-Cola has no special rights to exclusively produce carbonated soft drinks either.
Again for monopoly to exist there are no rivals or direct competitors to the firm. Once again Coca-Cola cannot be regarded as a monopoly since there are other competing firms in the industry. Pepsi is the number one competitor with Coca-Cola. Others are 7Up etc. If anyone cannot have coca-cola then they can have Pepsi or 7Up etc.
However Coca-Cola may only be seen as a monopoly only in terms of its brands and market practices. For instance one of the famous Coca-Cola brands is Coke and this product is produced only by the Coca-Cola Company and with a unique taste. Consumers can only buy this product from the Company or its partners and bottlers so in this regards Coca-Cola can be said to monopolize the manufacture and sale of this product "Coke". Because only the Coca-Cola Company makes the soft drink "Coke", it is up to them to determine the price at which they would sell the product. "Fanta" is another brand which Coca-Cola can claim monopoly.
Coca-Cola Company may also be monopolistic in terms of their market practices of not allowing their major partners and distributors (by agreement) to stock any other beverage drink at the same time together. This is geared towards decreasing and discouraging competition from rivals.
More over Coca-Cola Company has a number of patent rights for the formulation of certain beverage brands which automatically allows it the exclusive right to manufacture those brands in which it has patents. So as long as the patency endures no other firm can manufacture those products and brands except Coca-Cola.
The Coca-Cola Company can be regarded as a monopoly only as it matters to their brands and market practices.
FACTORS THAT AFFECT THE DEMAND AND SUPPLY OF COCA-COLA PRODUCT BRANDS
The term demand refers to the quantity of a given product that consumers will be willing and able to buy at a given price. As a general common sense rule - 'the higher the price of a particular product the lower will be the demand for it'. The term supply refers to the quantity of a particular product that suppliers (producers and/or sellers) will make available to the market at a particular price. The higher the price, the greater the quantity that suppliers will be willing to supply to the market. Markets consist of individual or groups of businesses that are prepared to supply a product, and customers who demand
the product. Market price is determined by the interaction of the forces of demand and supply. Demand and supply can be illustrated by schedules and curves that illustrate how quantities demanded and supplied will vary with price. The figure below show the demand curve for a particular good. This will be similar to that of Coca-Cola.
A Demand Curve
Number of Widgets
People Want to Buy
Graph of Demand Curve
Change in price determines a shift in demand as shown below
A Shift in Demand
The Demand and Supply curve together showing a point of intersection. This is equilibrium point. At this price buyers are willing to buy and suppliers are equally willing to supply.
Supply and Demand Together at Last
Number of Widgets
People Want to Buy
Number of Widgets
Sellers Want to Sell
Graph of Supply and Demand Curves