Coca Cola Globalisation Methods And Plans Business Essay
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Keywords: coca cola globalization, coca cola company globalization
This part of the research report would provide a detailed account of Coca-Cola's globalisation methods and plans using the business techniques explained in part 2 which are the SWOT analysis and Ohmae's five Cs. It would include a description of results of Coca-Cola's globalisation plans and methods with any limitation. Besides that, market results of Coca-Cola expansion with the use of tables and flowcharts. There would be a critical analysis of the results of the globalisation effect of Coca-Cola. Lastly, conclusions would be drawn based on overall research findings while overseeing how well projected objectives and research questions are met and appropriate recommendations.
According to the Levin Institute,
"Globalisation is the process of interaction and integration among people, companies, and governments of different nations, driven by international trade and investment and aided by information technology. This process has major effect on the environment, culture, political systems, economic development and prosperity, and on human physical well-being and societies around the world."
(Levin Institute, n.d)
Its effects influences people as businesses tend to move beyond their domestic and national markets to other markets around the globe, where different markets are interconnected. It is also seen as extending its reach to other parts of the world.
3.2 Why did Coca-Cola globalise?
Using Kenichi Ohmae's 5Cs framework with reference to the BPP textbook, we can understand the reasons why Coca-Cola moved towards international markets for expansion.
The Coca-Cola Company wanted everyone around the world to enjoy its product. It was the owner's vision for its product to be enjoyed worldwide. The company's success was also ensured since it enjoyed homogenous customers where people around the world enjoyed the same taste. This partnered with major advertising campaigns made Coca-Cola one of the most famous brand name in the world. With the help of creative advertising, Coca-Cola was able to capture the loyalty of consumers to continue use of its products. Advertising is seen as a medium for the company to communicate and promote its products to its customers which is widely used by The Coca-Cola Company.
According to Figure 1, there is clear indication of gradual increase of unit case sales over the 4 year period. Table 1 show that the increase of unit cases sold over the 4 years compared to the previous year has dropped slightly in 2009 with only 2.95% whereas the highest increase was in 2007 with a 6.07% increase from 2006.
The Coca-Cola Company has also introduced new products to existing markets in order to suit to a particular country taste bud. In 2009, research testing of a new fountain dispenser called the Coca-Cola Freestyle is able to dispense more than 100 different brands of beverages which is currently being placed in selected US markets and would continue to be placed worldwide. The purpose of the new dispenser is to capture data of what kind of taste people have in preference, this allows the company to gather data on statistics of people's choice in order to develop and introduce a new product into the market. (The Coca-Cola Company)
The Coca-Cola Company enjoys large economies of scale by moving into international markets. Large scale bottling in the long run makes the company more competitive by improving their production methods in order to achieve the lowest cost possible. They also look into potential international markets for growth and investment opportunities. After local market needs are fulfilled, the company would want to enter into new markets in order to increase its sales and profits. It would also increase the company's customer base since there is a new supply of demand to be met. Listed below in Figure 2 and Table 2 is the net operating revenue, operating income and net income for the Coca-Cola Company over 4 years.
Net operating revenue, operating income and net income ($ millions)
$ (millions)Figure 2: Net operating revenue, operating income and net income of The Coca-Cola Company over a 4 year period
According to Figure 2, the company's net operating revenue is seen to be increasing gradually over the 4 year period while dropping only slightly in 2009 although there was a major recession. Net income also has been increasing over the 4 year period to a record high of $ 6.8 billion in 2009. This could be due to better cost management.
Further analysis on Table 3 indicates that the company's cost is also kept at a constant level of around 33% to 36% of total net operating revenue in order to maintain a high gross profit margin of 63% to 66%. This is to ensure that the company is always profitable to attract move investors.
According to the recent capital expenditures made by The Coca-Cola Company, the company is still seen expanding its operations worldwide with increased capital expenditure made over the 4 years. This can be found in Table 4 below which show the capital expenditures made by the company from 2006 to 2009.
The Coca-Cola Company competes in the non-alcoholic beverages segment of the commercial beverages industry. The beverage industry is highly competitive, as there are many different types of drinks in the market ranging from non-alcoholic to alcoholic products. There are many companies that are similar to The Coca-Cola Company, some of which tends to compete for share of market across the world. The company particularly globalised due to the fact that they wanted to gain access into new and bigger markets since their domestic market needs are already fulfilled. Another reason would be due to strong competition from The Pepsi-Cola Company as they are the company's biggest rivals. According to the Coca-Cola Company, there are numerous competitive factors that could impact the business which include "pricing, advertising, sales promotion programs, product innovation, increased efficiency in production techniques, the introduction of new packaging, new vending and dispensing equipment, brand and trademark development and protection." (The Coca-Cola Company) Below Figure 3 and Table 5 indicates the top 10 beverage companies ranked accordingly by market share.
According to Figure 3, The Coca-Cola Company still leads in market share of 41.9% ahead of PepsiCo of 29.9%. This is a good sign for the company as PepsiCo is the company's biggest competitor. The company should remain focus on defending its market share and stay the market leader. According to the data in Table 5, market share for The Coca-Cola Company and PepsiCo have negative share change in 2009 while the others have a slight improvement or no improvement. This should not be taken lightly by the company as the competitors might team up and take on the company.
Coca-Cola also went international so that they can mitigate their foreign currency exchange rates by earning revenue in a different currency through sales in a particular country. Selling products and services in multiple countries also reduces the company's exposure to possible economic and political instability in a single country. In 2009, The Coca-Cola Company traded in 71 different functional currencies in addition to the U.S Dollar. A total of 74 percent net operating revenue was derived from outside the United States. Therefore, increases or decreases in the value of the U.S. dollar against other currencies will have a major effect on the items that are denominated in foreign currencies. Listed below in Figure 4 are foreign exchange rate gains or losses from 2006 to 2009.
The Coca-Cola Company would want gain access to cheaper labour, raw materials and finance. Such as the cost of labour hour in China is only $1.27 per hour (Malone, 2008) which is ranked fairly low compared to other developed countries. This would minimize the cost of bottling and result in higher revenue gained. Bottling plants in China as of end of October 2009 total at 39 plants and is still increasing at a high rate. (The Coca-Cola Company) Furthermore, resources that are difficult to obtain in their home market can be located elsewhere at a better price while going international. This can be achieved by outsourcing some of their operation to other countries in order to improve efficiency since service providers are specialised in its services rendered. Outsourcing is widely used by today's company, as it allows the company to focus on its core activities where non-core activities are outsourced to specialist industries. This can lead to a saving in fixed cost as there is no need to hire monthly salaried staff.
As per Figure 5, we can see that average salary earned in the United States of America (USA) is much higher than the salary earned in China which is more than a 150 percent difference. This is mainly because China is still a developing market while USA is a developed market. This enables the company to fetch a lower cost for labour in China than in USA.
3.3 How did Coca-Cola globalise
There are different entry modes a company can choose on how to enter a market. The Coca-Cola Company uses different stages of entry modes depending on the markets. It mainly depends on the total size or market population, the percentage of that population using their products, and the quantity of products that they can sell to non-users. Once the market is identified and selected, they would first consider the degree of resource commitment and the extent of the firm operational involvement in that particular region.
As their bottling strategy, the company would first help their bottlers to build up their business. This is by injecting funds into the said bottlers through equity investments. This is beneficial for both the company and its bottler as in increase in production capacity at bottler level would have a resulting increase in concentrate sales. The level of investment depends on the bottler's capital structure and resources at the time of investment. (The Coca-Cola Company)
According to the company, it maintains business relationship with three types of bottlers which are:
- Bottlers in which the company has no ownership interest;
- Bottlers in which the company has invested and has a non-controlling ownership interest; and
- Bottlers in which the company has invested and has a controlling ownership interest.
Bottling operations in which the company has as of 31st December 2009:
According to the company, controlling interest is only often held for a temporary basis. By owning such interest, it helps by being able to exert influence in monitoring bottler's revenue. It also develops the bottler's business where funds are used to build the capital structure of the bottle which would enable them to widen its operations.
As part of their long term strategy, the company would consider reducing their ownership interest in the bottler when their investment matures. The company then comes down to two options, one is to combine their bottling interest with others to form strategic alliances, or the other is to sell their interest to equity method investee bottlers. However, the company will still continue to monitor the bottler's results. For investments that are non-controlling interest, the company would provide its expertise and resources to strengthen those businesses.
The stages of entry are explained in detailed below using China as an example by referring to Mok's journal review. (Mok et al. , 2002)
During the first stage (1974-84), Coca-Cola exported and sold its concentrate to its franchised Chinese-owned bottlers. Local market agents were held fully responsible for production and distribution whereas the company were in charge of advertising. Due to the bottler's opportunistic behaviour which first prioritise their own bottom line, it limited the expansion of Coca-Cola's market share in early stages. The method used is seen as exporting through contractual agreements as trust of the bottlers has yet to be gained.
During the second stage (1985-92), Coca-Cola bought equity shares in the bottling businesses in order to reduce the effect of uncertainty. Besides that, it was also to restrict the opportunistic behaviours of its local bottlers since their only focus was on their own bottom-line which were disadvantageous to Coca-Cola. This is known as Foreign Direct Investment (FDI) into the said bottlers which may include acquisitions of well established companies in the later stage.
During the third stage (1993-present), Coca-Cola teamed up with two foreign bottlers which are the Kerry and Swire group under a franchise agreement. The company then began to internalise its management and operations by sourcing locally. Soon then, the whole operation was handed to locals and watched over by the foreign division manager. Sourcing for upstream suppliers is decentralised to the division manager since buying locally would have savings on taxes. Contracting in local language would be made easier as a result of the localisation.
Coca-Cola was the leading bola business in India before 1977. However, a change of government forced them to pull out their business since new legislations required the sharing of the secret formula with a local partner which posed a huge risk. The Coca-Cola only re-entered the market in 1993, after Indian regulations were changed to allow foreign brands to operate without any Indian partnership. By then, PepsiCo had already captured majority share and ruled without competition as they were there since 1988. (Srivastava, 2010)
To make things worse, Coca-Cola suffered a huge blow to their brand name in India as their plants had huge demands for water, which led thousands of farmers out of work by draining the water that feeds their crops which had implications on the local economy. Besides that, the waste sludge produced by their plants sold as fertilizer was proven to be toxic to the soil. (Brown, 2003). PepsiCo's market in India has been strong since then, as it has become the "default" name for colas in India.
However, the company has not given up on the Indian market as growth is picking up slowly. Their strategy includes introducing other products in their portfolio to the market and buying up a local brand cola competitor Thums Up, to compete against PepsiCo. Thums Up is now ranked first in India with a market share of 16.16% as of 2009, Sprite also a product of Coca-Cola is ranked second with 15.6% compared to Pepsi's market share of just 13% according to AC Nielsen data. (Bhushan, 2009)
The Coca-Cola Company's mode of entry often changes according to suit the particular country. Internationalisation is seen as a sequential process whereby firms gradually increase their commitment to new markets and accumulate knowledge slowly in order to increase their capabilities. It suggests that firms initially use entry modes that allow them to maximise knowledge acquisition whilst minimizing the risk of their assets.
3.4 Effects of globalisation
The effects as a result of The Coca-Cola Company's globalisation have had a huge impact on the world. By using the SWOT analysis, the effects of globalisation of The Coca-Cola Company can be separated into positive and negative effects. Positive effects consist of strengths and opportunities, whereas negative effects are the company's weaknesses and threats.
3.4.1 Positive effects
Competition to improve quality
Globalisation has led to increased competition for the non-alcoholic beverage market for the company. Hence, there is an overall competition to improve the quality of their products for them to compete for market share. In order to survive, the company must be able to cope with the rising standards of their customers. The company must be able to compete at low prices and continuously improve their bottling processes. Keen competition forces companies to accelerate their product innovation and advertising campaigns which can be seen as strength for the industry.
The economic environment is changing rapidly as a result of globalisation. The future development of the world is shaped as a result of globalisation. Benefits to society are often shared among people for the greater good. With the invention of seatbelts by Volvo shared, it increased the survival rate of car accidents. (Bellis, n.d) An example would be the bottling plants built by The Coca-Cola Company uses mechanics that are advanced automated robotics which introduces countries to a more effective and efficient way of bottling which could then be improved further to suit local needs. By improving their production line around the world, it would strengthen the company's presence. The company will be able share their technical know-how around their bottling plants based on experience in different countries. Such as improvements made in one country can be shared with other bottling plants owned by the company around the world. The first bottling plant that follows Leadership in Energy and Environmental Design (LEED) standards was opened in 2009 in Latin America. (The Coca-Cola Company)
Popularity and recognition
As a result of mass expanding and advertising programs, the company was able to enter into countries worldwide which eventually made their brand name one of the most well-known brands of today. Many companies have since followed by expanding into international waters while keeping focus on brand recognition would eventually come to known worldwide still can be seen in today's industry. Advertising campaigns are the strengths of The Coca-Cola Company as it can capture the loyalty of consumers with easily recognised advertisements. An example would be the commercial advertisement in 1971 where The Hillside Singers sang a song called "I'd like to teach the World to Sing in Perfect Harmony." (The Coca-Cola Company) In this commercial, people of all different cultures and races come together to sing about wanting world peace and infers that world peace can be achieved by buying someone a coke.
With the company's global expansion, it was able to provide job opportunities in over 200 different countries worldwide which would definitely build and enhance the economic development of one's country. The Coca-Cola Company itself currently has 92,800 employees worldwide as of 2009 (Hoovers, 2009) and much more if other related parties are added. This is seen as an opportunity for the company as it would be able to employ a diverse background of employees from all around the world.
Cultures around the world have come together and created so many different societies across different cities around the globe which have grown and improved according to globalisation. Some old traditions are discarded while new ones are form from day to day. The same can be said of Coca-Cola, which has pop-up in countries across the world and change the way people have their meals. The brand is widely accepted by different nations due to homogenous markets. This is such a great opportunity for the company to make an impression and an indelible move as the different types of cultures around the world, where there is a similar or common culture, that is, Coca-Cola. (Kulkarni, n.d)
Huge portfolio to pursue
Since The Coca-Cola Company has over 200 brands in its portfolio, there are other many up and coming new brands for the company to pursue. This would ensure the company's survival in the late future if a brand succession plan is in place. An unknown product does not mean it's a failure, just not yet discovered by people. Once discovered it will pave the road to success and therefore securing the company's future. One of the main company strategies is to buy out competition of rising brands that they think would do well in the distant future.
3.4.2 Negative effects
Lack of popularity in other portfolio brands
In addition, the other brands offered besides the main brand Coca-Cola lacks popularity. It is mostly unknown or rarely seen on shelves probably due to restricted distribution in a particular country as testing acceptance of the market. These brands are kept low profiled and no related link is made to the main brand in case the brand fails. This is seen as a weakness in the line of products Coca-Cola has to offer as advertising allowance is not fairly distributed to all their products.
There are also certain health effects to be concerned with as a result of Coca-Cola's globalisation. By referring to the book Liquid Candy written by Jacobson (Jacobson, 2005), he discusses the effects of consuming soda drinks that could lead to several health concerns. Below are adverse health effects viewed as a threat to the company's going concern if people boycott their products which would have adverse effect on the company's revenue and survival.
Sugar is important source of carbohydrates for our body. However, soft drinks contain high amounts of sugar (Better Health Channel, n.d) where regular consumption could lead to overweight or obese problems. By being obese, it tends to increase the chances of having diabetes and many other types of diseases. Obesity could also lead to social and psychological problems such as starving oneself to reduce weight.
Soft drinks often have links with lower calcium levels which could lead to the disease osteoporosis. Deep concern should be placed on children since calcium is needed in early stages for development of bones. Too much soft drinks could lead to poor bone materialisation in the future life of the children. Therefore, in order to safeguard ones future, parents should control the intake of soda drinks of their children.
Soft drinks also have high levels of phosphoric acid which can be harmful to ones teeth. The acidity level in soft drinks can be compared to that of vinegar which can cause corrosion of the enamel. Most of the soft drinks contain caffeine for its energy boosting effects. Therefore consuming too much soft drink could lead to caffeine addiction. There are withdrawal symptoms such as nausea or headache if one is addicted. High intakes of caffeine can lead to insomnia and even irregular heartbeats. (Yakowicz, 2010)
Changing health consciousness
With the company's globalisation, bad aspects of foreign cultures would tend to affect its way into local cultures. Such as the soft drinks craze that is spreading around the world. Although beneficial for the company where higher consumption leads to higher revenues, consuming too much will have adverse health effects on its consumers. The health consciousness of people are starting to change, as they are moving towards a healthier lifestyle in which avoidance on soda drinks may be a threat to the company future.
Companies often seek to lower their cost in order to earn a higher profit margin. One of the methods is to outsource their non-core activities such the payroll function to service providers. This would ensure a lower cost with an acceptable level of quality in work done. As a result, it increases unemployment rate in developed nations. Developing countries like China and India dominate the outsourcing market because of their fairly low labour cost. There is a higher risk of retrenchment for employees in the developed countries as they can be replaced by their counterparts across the world in pursuit of low cost. Therefore, a threat exists where the company might lose its good employees to competitors if it shows the slightest signs of restructuring.
Local industries taken over by foreign multinationals
Foreign multinationals often take over local companies as a mode of entry into the particular country. It would deprive the upbringing of local industries as those who remained will have to face a tougher competition posed by the foreign multinational. This is one of the strategies used by The Coca-Cola Company as they are actively acquiring local bottling plants around the world. A threat would be present if the local governments start to restrict the company from further expansion in its country in order to safeguard their home grown companies. This would serve as an obstacle to the company's expansion plans into the said country. (Pillai, n.d)
Waste and pollution
Developing countries are often taken advantage of by foreign multinationals. Since developing nations need high levels of foreign investment to boost its economic development, the local governments would tend to overlook on the pollution caused as they cannot risk a withdrawal of funds from the country. The environmental laws and regulations of a developing nation are also in the process of setting up. Therefore, foreign multinational companies often take this advantage by setting up plants at an early stage. The Coca-Cola Company has taken advantage of this matter in India where their factories produced waste sludge and were sold as fertilizer which was proven toxic to crops. (Brown, 2003) As this poses a threat to the environment, the company's licenses can be revoked if not settled. Measures should be taken by the company to implement environmentally friendly plants for the future in deluding the toxic waste.
The international expansion of The Coca-Cola Company can be seen worldwide. Its products have permeated into societies all over the world. The first project objective of this research project has been met, which evaluates the positive and negative effects of globalisation of Coca-Cola brand name where the SWOT analysis was used is outlined below in Figure 7.
- Popularity and recognition
- Competition to improve quality
- Lack of popularity in other portfolio brands
- Health effects
- Huge portfolio to pursue
- Cultural influence
- Job opportunities
- Job insecurity
- Changing health consciousness
- Local industries taken over by foreign multinationals
- Waste and pollution
The second project objective was to assess the job opportunities The Coca-Cola Company created jobs worldwide. As of 2009, the company has 92,800 employees employed worldwide. By providing jobs to developing countries such as China and India, it would greatly help the development of the said country.
We can understand why The Coca-Cola Company moved towards globalised markets based on Ohmae's 5Cs as discussed previously. According to market research, The Coca-Cola Company has the largest non-alcoholic beverage market share worldwide with a market share 42.9% as of 2009 according to (Sicher, 2010) with 24.4 billion unit cases sold worldwide in 2009. (The Coca-Cola Company) Therefore, the third project objective was also met.
The main recommendations for The Coca-Cola Company are to exploit their strengths and opportunities, while mitigating their weaknesses and threats.
The main strength is its popularity of the brand Coca-Cola. The company can use the Coca-Cola name to support their other products if the product is accepted by consumers. A step further is to advertise the products side by side since its advertising campaigns are refreshing and easily recognised. This enables the company to capture a new type of customer loyalty.
Popularity of a brand name mainly depends on the people's word of mouth. This can either be positive or negative in different conditions. Other brands that the company offer lack popularity which is a weakness for the company. The company should not just focus on the main brand but also push potential brands to the public.
The Coca-Cola Company should pursue other brands in their portfolio since Coca-Cola is already a world known product. This can be done with increased advertising for the less popular products which would lead to more brand recognition if the product is successful. If a product is unable to capture a market and operations are running at a loss, the product should be discontinued. Funds saved from closing the division can be used to improve other brands or to acquire new potential brands.
A major threat to the company is the changing health consciousness of the people. The company has made efforts since then by introducing low sugar and caffeine-free products into their portfolio and must continue doing so. Besides that, there is strong competition from other rival brands such as PepsiCo. The main idea here is to steal market share from its rivals such as finding out what are the strong brands the rival have and to introduce a similar product that would serve as an alternative.
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