How Coca-Cola Makes Sense of their Value Chain
Category : Capacity Utilization, Softdrink Industry, Value Chain
How Coca-Cola Makes Sense of Their Value Chain
"We have delivered strong business results and increased value to our shareowners by expanding our consumer appeal across our beverage brands and connecting in very meaningful ways with the communities we serve.”
--- (Chairman and Chief Executive Officer)
As a primary advocate of value-building in beverage industry, Coke converged with different value-added activities. Within the Coca-Cola system that is consists of suppliers, bottling partners, customers and consumers, one of the primary value-added activities which is the Coca-Cola Retailing Research Councils, such contributes largely on the value chain of the company especially on the aspect of innovation and products. This paper includes Coke’s Porter’s five forces analysis and diverse value-chain activities in different areas. In addition, the document presented the interplay between the Research Councils and how it impacts Coke’s value chain as well as creating the absolute effective position. ,
A company that fully understands the importance of value chain in business is the Coca-Cola Company. A global leader in the beverage industry, the Coca-Cola Company further indulges in enhancing their value propositions as an instrument to create ‘virtuous cycles of geographic expansion’ and thus greater advantage. Coke, the term the paper will use to refer to the company, owns the most important elements of the value chain or the “globally leverageable intangibles” such as the brand, the technology, the management, the marketing expertise and the relationships (Bryan et al 1999, pp. 54-55).
For this reason, Coke was chosen to be the subject of this value chain paper. Coke, in addition, addresses that value chain as drivers of increased profit, enhanced ability to invest more into gaining greater geographic access and penetrating existing markets more deeply as well as more confidence in investing on intangibles like intellectual property and talent, and increased sale and specialization advantages (Ibid, p. 54); making the company the most conceivable subject for the intents of this paper.
Coke – Porter’s Five-Force Model
Soft drink industry is divided into two segments namely production of soft drink syrup and manufacturing and/or distribution of soft drinks in retail level. Coke chose to concentrate their operation on the first segment while intimately depending on independent bottlers companies. Basically, the company is engaged into blending raw material ingredients (product planning), packaging in plastic canisters (market research) and shipping to bottlers (advertising).
Rivalry condition is concentrated on two main actors – Coca-Cola and Pepsi Cola – thus, the emergence duopoly competition or the Cola wars. The term Cola wars was invented to describe the extent of campaigns of mutually-targeted advertisements between the two cola giants. Through these advertisements, the two companies attack each other and therefore a tough competition that strategically hampers the profitability of each other.
Existence of substitute products is wide and thick and substitute products for Coke reached the market where Coke has a strong presence. Apart from the primary rival (PepsiCo), the company finds intensified competitions on companies that produce, market and sell teas, beers, milk, coffee, wine, powered drinks, juice, bottled water, sport drink and other refreshments causing a significant decline in Coke prices. To reduce threats, Coke embraced the idea of bottling and concentrated on product diversification.
Penetrating the soft drink industry is hard because of the established name of Coke; hence, new entrants must first overcome the remarkable marketing muscle and marketing presence of Coke. Other barriers to new entrants are the: direct-store-delivery (DSD) strategies and the Soft Drink Inter-Brand Competition Act of 1980. Respectively, Coke has long-term relationships with their retailers and distributors making possible the defense of the position by means of discounts and other tactics, and regulation make it impossible for new bottlers to enter areas where an existing bottler operates.
Bargaining power of suppliers is low due to two reasons. First, the main inputs are sugar and packaging. Sources of sugar are on the open market which subsequently makes the creation power of suppliers at low levels. There are several suppliers for packaging as well as the abundance in supply of inexpensive aluminum. Second, direct negotiations from concentrate producers to suppliers are present; an initiative to encourage reliable supply, faster delivery and lower prices.
Bargaining power of buyers depends on the marketing channel used. For Coke, there are five core channels such as food stores, convenient stores, fountain, vending machine and mass merchandisers. The bargaining power of buyer is high for fountain supermarkets and mass merchandising because of the low profitability and strong negotiation power of retail channels but for vending bargaining power is non-existing caused by high profitability.
Coke – Value Chain
As one of the most exceptional business concepts that emerged, value chain refers to the series of activities firms and organizations converged into towards putting the goods or services in the marketplace, and wherein through all and each of the activities within the chain, the product or the service gains value. The premise is that the chain of activities provides the product more added value than the sum of added values of all activities. Michael Porter (1985) advocated that value chain analysis could be a strong tool to analyze the sources of competitive advantage, to discover new ways of creating and sustaining the competitive edge and to design for a more efficient organizational structure.
The commitment of the company to become a world class leader in customer and distribution services which are reflected in the continuum of building value chain excellence. The purpose of Coke’s value chain is divided into four areas namely shareholder, business operation and key processes (Diagram 1 in Appendices section).
1) To deliver superior returns to its shareholders is the mission of the Coca-Cola value chain. The key elements to achieve this end are a strong brand equity and revenue management that is comprised of sales, volume, pricing and costs.
2) Consumers and customers are the focal points of the value chain driven by brand preference, pervasive market penetration and superior price/value ratio.
3) Operational drivers are identified as the strategic metrics, process excellence and organizational excellence.
4) Key processes are further divided into five key functions: Consumer and Customer Service Systems, Demand and Operations Planning, Warehousing and Logistics, Manufacturing, and Infrastructure Planning and Development.
There are four enablers in Coke’s value chain. These are the suppliers, the customers the Coca-Cola Retailing Research Councils and the Customer Development and Training (refer to Diagram 2). Coke’s suppliers include business partners that provide the company with raw materials such as ingredients, packaging, machinery and services. Authorized and direct suppliers are subjected to comply with all applicable laws and regulations specially which tackles just employment practices. In addition, these suppliers must comply with the company’s Supplier Guiding Principles.
Coke’s customers range from far-reaching, international chains of retailers and restaurants to major corporations to small and independent businesses to corner markets down to local pushcart vendors. Coke works with these people for the purpose of creating mutual benefits alongside their bottling partners. To assist them in their initiative, serving the customers are assisted by account management teams that provides service and support tailored to the need of the customers.
Coca-Cola Retailing Research Councils provide research concerning issues that have significant impacts on the food retailing industry. Within the company, there exists collaborative customer relationship process. The purpose of this collaboration is to improve shopper marketing and supply chain collaboration. Acceleration of innovation in order to provide superior beverage selections to every customer is another aim of the collaboration.
To provide support to smaller customers in terms of making their business more efficient and profitable is the job of Customer Development and Training. In different areas of operation, Coke had established customer development training centers. Through this, the exchange of information about broadening the range of beverages offered, providing nutritional informations and ensuring beverages are marketed responsibly.
Coke’s value chain initiatives could be summed up in 11 areas:
Supplies of Components and Materials
Coke has a relatively wide range of cooperation among its suppliers. The company has generally not experienced difficulties obtaining raw materials. Through the assistance of Coca-Cola Bottlers’ Sales and Service, Coke purchase materials like nutritive sweeteners and non-nutritive sweeteners and bottling requirements with different companies like The NutraSweet Company, Ajinomoto Co., Inc., Nutrinova Nutrition Specialties & Food Ingredients and Tate & Lyle.
Order sizes depended on customers or sales volume per person, frequency of visit based history and order collection based on customer attributes, made possible through order collection personnel. Variables are geography, density and logistics.
Moreover, total value of purchase is highly-reliant on the purchase agreement between Coke and suppliers. In general, the total value of purchase over time per supplier is 43% in terms of value and 36 % by volume on just-in-time basis.
Coke has 68 days inventory on hand and has 5.7927 inventory turns. The figures mean that Coke sells its entire inventory 5.79 times each year.
Coca-Cola has a patent portfolio inside and outside the US, 800 and 1800, respectively; relating to various beverages with related technologies. Apart from product formulation as the trade secret, technologies complementary to these are packaging, vending equipment, fountain equipment and water treatment.
Driven by the consumer value proposition, R&D is the core commitment. Implementation of strategies has been modified in efforts to allow more freedom to local operating divisions. R&D is not outsourced but works jointly with development partners.
The three largest components within the system are manufacturing, fleet/transport and sales/marketing equipment.
There are nearly 850 plants in the manufacturing process, with system’s fleet of approximately 200, 000 vehicles to transport ingredients, packaging and finished beverages.
Beverage concentrate are shipped to bottling operations by sea while finished beverages are mostly transported by road into distributors and retail customers.
There are 9 million vending machine and coolers that keep products cold.
These components are placed in 200+ countries of operation
Level of capacity utilization is maintained at 77.3% at an average. Coca-Cola realized that the very high degree of capacity utilization will be the key towards sustainable growth thus Coke accurately track and analyse such through company-wide leveraging. Examples of activities are standardization of asset infrastructure, simplifying support models and reducing maintenance cost, capital expenditures and consumable costs.
Coke uses different technology to control product quality like the Chemunex. Coca-Cola invested in real-time microbiology analyzer or the D-count. Such technology is adapted because of: quantitative analysis with satisfying detection limit, automated analysis with reduction of the analytical time, reliability of the results and robustness of the system for an intensive routing use.
Testing is done on three basic steps: 1) sample preparation – rinsing to transfer of sample to buffer solution, 2) analysis on D- count and 3) reading the results.
Inventories of Final Goods
As claimed, the selling numbers of Coca-Cola ranges from 9 glasses per da to over six trillion from the period of 1886 to 2003. Getting from this, we can determine that the unpredictability of sales follow a logical pattern that serves as indicators of the amount Coke produced and sold.
Given the lack of cyclicality in different segments, the company invested in raising advertising budget into 38%.
Sales and Marketing
Coke is getting their products advertised more frequently by means of own advertising as well as through sponsorships and other organizations. For example, Coke products appear in McDonald’s advertisements, appearing on side boards of basketball arenas and other sporting events and also appearing on social events as sponsors in effort to be a household product and to demonstrate goodwill.
Marketing also depended on the targeting of Coke products at individuals and groups of all ages and demographics. Marketing, in addition, comes in different styles and forms such as network television, radio and print media. To achieve brand visibility and become well-known to widest possible markets and most consumers reach, a number of new commercials are introduced each year.
In the distribution of products, the wholesalers have no involvement; but rather conform to agent network. The company divides a country into various regions and established a franchisee within these regions. Franchisees have own bottling plants and has the autonomy to manage daily operations (Hughes, et al, 1998, p. 14).
Within each region are different dealers that orders through three primary categories: bulk, sideload and full service.
Coca-Cola system ensures that dealerships are assisted upon. So the company opened their distribution system and embraced the DSD system or the direct-to-store concept. The movement is from wholesalers channels into DSD channels.
Coke – Value-Added Activities
Creating value at Coke simply purports three major factors. These are: (1) marketing ‘unique’ products (brand-building), (2) generating identity-preserved products and (3) combining familial activities (collective efforts). The company offers a hundred of brands including soft drinks, juice drinks, energy drinks, sports drinks and others for all types of consumers. In fact, the company had introduced at least 29 new lines of products from October 2004-August 2007 and is already offering more than 400 brands in over 200 countries which aimed at hydrating, energizing, nourishing and/or relaxation. Coke, as we all know, is continuously looking for new beverages that will bring enjoyment to their customers. In addition, Coke is being supported by the Beverage Science and Innovation.
Innovation was driven by the facilitation of the “three cola strategy” consisting of reinvigoration of the trademark Coca-Cola and Diet Coke and introduction of Coca-Cola Zero to increase the portfolio of the company. Since the Coke portfolio is driving the growth, and disparity, in the colas segment, the company had realized for deeper integration in marketing and merchandising specially the three brands. In 2007, the Coke Side of Life creative platform was used to make the people aware of the ‘specialness’ of the iconic Coke brands. Marketing strategies not only focus on the brands themselves but also on seasonal summer and Christmas peaks through global creative advert and extensive digital activities.
There are also limited flavors that had been offered in the market following the success of Coca-Cola with lime and the fusion of two bets citrus flavors lemon and lime or the Diet Coke Citrus Zest. For this products and Coke Zero, the Coca-Cola system allotted sampling campaigns in different experiential locations like sporting events and train stations and investing on high-end advertising such as heavy-weight TV, cinema, billboards and prints (Trade Support, 2006).
Truth remains that despite the success, Coca-Cola Company “handles just part of the process”. Along with the 90, 500 associates are the 300 bottling partners and over 20 million customers that produce, deliver and sell more than 450 brands in the world. Known as the Coca-Cola system, this has been the key to operate in the global scale while maintaining the local approach. The Coca-Cola Company manufactures the concentrates, beverage bases and syrups that bring uniqueness in the products and sell them to bottling companies. Coke owns and licenses the brands and markets them through extensive advertising and promotion.
Bottling partners serve as the producers and distributors of the brands and the main connectors between the customers and the company. Bottling partners range from international and publicly-traded business to small, family-owned operations. They are responsible for producing, packaging, distributing and merchandising the brands through localized marketing plans that are developed in partnership with Coke. Customers come is close contacts with the consumers. These are the grocery stores, restaurants, street vendors, mass merchandisers, convenient stores, drug stores, movie theaters and amusement parks. What they do is they sell the products to the consumers.
Coca-Cola Retailing Research Councils – Impact on Innovation and Products
Research Councils conduct different studies on issues that could possible assist retailers to respond to the ever-changing marketplace. According to the company, the unique value of these activities is vested on the fact that retailers define the objective, the scope of each project and own the process after it was released and disseminated to the broader retail community. Examples of the study conducted are food retailing formats in Asia, critical protocols towards food retailing endeavors, Latin American consumption and marketplace trends.
There are five council members: Asia, Europe, Latin and North America and National Association of Convenience Stores (NACS). Such councils are cashing in on research to innovations of product portfolio by means of introducing new concepts and ideas about merchandising and store formats as well as idea generation for connecting store performance and the actions of store management teams as examples of retail innovations. Other examples of consumer-centered innovations include most of “shopper perception is reality” that drives Coke company to effectively embrace pricing strategies based on consistent communication, promotions that are based on personalization and the concept of self-checkout on the basis of what shoppers want like the DIY.
Products-wise, the Council aimed at ensuring sustainable products and responsibly-sourced and traceable products as well as eco-friendly packaging, and this product must be accessible at reasonable prices. Ensuring product assortment is also under the Council’s scrutiny to further guarantee innovative health goods. Assortment for Coca-Cola means small/fractionable, to consume right after at affordable prices (Fernie and Sparks, 1999, p. 28).
Coca-Cola Retailing Research Councils – Interconnection with the Value Chain
Wherever in the Coke community, the slower growth, the increased competition, the more differentiation concept and the growth of partnerships have been faced as challenged because of its impact on value creation at the retail level especially when the some stores create more value compared to others. To wit, the Research Council is the responsible entity which will define what retailers can do to improve the performance.
Notably, it is a matter of management styles especially when it comes to employees to create exceptional loyalty and get most out of the market potential. Retailers create greater value, aside from that, through positioning four conditions in place that are always associated with great performance and these are clarity and commitment to goals, focus on key drivers, simple mechanisms that propel achievement and cadence of accountability.
Strategically, Research Council removes unnecessary costs that could be incurred from distribution and supply systems; increase consumer choice and reduces overall costs of inventories and physical assets. Apart from this, the Research Councils are the key towards achieving Class A standards as part of the CPE program. CPE stands for Constant Pursuit of Excellence. Such program is initiated within the Coca-Cola system in order to support growth, to improve customer service and to increase market responsiveness. These are evidenced by the following:
· Inventory levels are down
Each of the facilities and components such as the concentrate manufacturing facilities and canning plant that received Class A rates obtained significant progress in inventory turnover, with specific facilities that accomplished the number of weeks of inventory on hand declined between 50 to 75%.
· Improved productivity
Level of quality targets within these facilities, whether for products, bottles or cans, coupled with high responsiveness to production experienced productivity gain of 85% to 100%.
· Improved customer delivery performance
In different facilities, order fulfillment and delivery are technically reported to be 100% on time. In fact, the time since the last missed shipment is measured in years, not days, weeks or months. For Coke, this is just a part of putting value not just to the products but on punctuality and customer responsiveness.
· Better supplier delivery performance
Prior to acquiring the Class A rate, the performance of the supplier is measured to be falling between 50 to 75%. But right after the complete integration of CPE, while taking into critical account of the Research Councils’ role, worldwide facilities had experienced supplier on-time delivery performance of higher than 95%.
· Improved business processes
For different processes like purchasing and customer order processing, there had been a large reduction in cycle times.
· High data integrity
Inside different Coke facilities, inventory record accuracy and bill of material accuracy is reported to be 99-100% and 100%, respectively.
· Decline in cost of goods
The reductions, as high as 20%, in each facility annually is viewed to be a significant improvement.
· High team spirit
Communications within and between marketing, finance, quality assurance and manufacturing are improved with respect to the global teams.
The focus of the company is on holistic improvement instead of systems replacement that centers on the development of the business operation in different levels but most significantly on the retailing. Implementations are the key towards proactive functionality within manageable and actionable initiatives. Coke’s plan is one facility at a time with decision-making that is based on anticipated benefits.
Coke – Creation of the Absolute Effective Position
Through managing the subsistence of beverage leadership, Coke continued to deliver unit case volume growth. The sustainability of the business too is motivated by the expanded portfolio that makes way for the offerings to new customers and satisfying the evolving needs nutrition occasions of the current customers. These are proven by the ranking – 4 of the top 5 nonalcoholic sparkling beverage brands are owned by the Coca-Cola Company; number of associates – 90, 500 worldwide; operational reach – 200+ countries; consumer servings – 1.5 billion per day and beverage variety – more than 2, 800 products.
Brand-wise, the original Coca-Cola is still the best known brand globally as it also offers the ultimate refreshment for young people. Diet Coke is the second biggest soft drink brand due to lighter taste that aimed for women in their twenties. Bloke Coke or Coke Zero is already a record-breaking success as it brings great Coke taste but with zero sugar for men aged between 20 and 29. Evidently, the beverage leadership position is delivered by how consumers can more around the Coke portfolio depending on their needs at different stages of their lives.
Financially, the Coca-Cola Company reported in February that profit jumped of about 18% with net income nearly $6B - $5.98 billion on $28.9 billion in revenue. The fourth quarter earnings per share of $0.52 had increased with 79% compared to that of the previous year and $0.58 after considering items with impacting comparability which is of 12% increase. The overall earnings per share increased by 19% ($2.57) and $2.70 after considering items impacting comparability which increased by 14%. Further, Coke and its bottling partners delivered unit case volume growth of 6% for the year 2007 and four consecutive quarters of double-digit earnings per share growth. Worldwide, the sparkling beverage volume increased by 4% and the still beverages by 12%.
In terms of systemic integration, adding value was more profitable for consumers. As the company focuses their attention in creating beverages and eventually marketing them, they were enabled to “understand and meet the diverse and ever-changing beverage needs and desires of the consumers globally”. With its bottling partners, there had been the existence of collaboration, support and shared values and goals and through its customers, Coke brands were made possible for the consumption in local communities. Driven by the Coca-Cola system, the company is now no. 1 in sales of sparkling beverages, juices and juice drinks, no. 2 in sales of sports drinks and no. 3 in sales of bottled water.
Value creation in marketing unique brands require the production and product testing as well as meeting food and beverage safety regulations and labeling requirements. To ensure product quality, Coke must oblige with marketing and production requirements and also maintain safety and liability or processing obligations. Moreover, value is created by means of creating, establishing and stabilizing product demand. To wit, a unique brand differentiates itself from the others to create its own demand. Identity, in addition, limits competition from other beverage producers who might be willing to sell at low, low prices or try to produce and sell products of low quality. Coke brands from production to promotion have unique locations and geographic features that are not easily duplicated exactly by competitors.
Creation of value pushes the company in accomplishing what they are now today – technically, financially and systemic-wise – or perhaps creating a win-win situation for the consumers. With all said, value creation at Coke is being reflected by the price consumers have to pay. The idea of value or what the consumers get with their money means more than just making food and drink affordable. For Coke, it meant increasing the variety and quality of goods or “affordability”. Notably, because of production and distribution technologies, affordability now comes with a new meaning. Affordability is nowadays characterised by availability, quality and choice. Since consumers always decide what value is, Coke decided to make value for them in three areas: choice, information and goodwill.
Choice, according to Neville Isdell (2004), is any option that allows the consumers to act on a decision about his or her preferences especially if its concerns health and lifestyle. For Coke, this means products that provide beneficial impact on individual health on a much broader range of portion size options.
Informations are the guiding force that helps consumers decide about the food and beverage that are right for them as well as basic facts about ingredients and nutritional content. This assures them of quality, safety and production. As Isdell puts it, “whether and how much value consumers are willing to confer on any information we provide is going to have everything to do with our credibility”. Meaning, how much trust does the consumers vested on the products and the company.
Provided that consumers also value goodwill, is it just right to create value for them through ethical shopping. For Coke, this has a lot to do with what is beyond consumer’s awareness or what they do outside manufacturing facilities and retail locations. Goodwill governs Coke to adhere and build through programs, policies, research, innovation and market persuasion.
Programs for consumers aimed at making them move, in affirmative manner, linked with policies. Aside from the availability of programs, another way Coke builds value with consumers is by “policies that promote choice and availability of transparent, action-oriented information”. Doing the right thing does not necessarily mean to provide them with array of choice and information but a more pressing concern is how they can act to do such.
In putting the greatest value to consumers, it is only righteous that brands, identity and collectivity must come together. How? At Coke, they do extensive research and design, they produce the goods and they bring them to the market. Through the informations, consumers make informed decisions from all the choices Coke made available.
At Coke, the creation of the absolute effective position is central on investing on Coca-Cola Retailing Research Councils. Along with its four key processes, Coke creates value through proactively engaging their retailers at technically every levels of the value chain from raw materials down to end-products. Conforming to holistic improvements, Coke strategically put value to store management, providing consumers with the right to choose while also enjoying the health benefits of its brands. More than complying to standards and acquiring first rates, Coke aimed at enhancing the shopping experience and enjoyment of refreshments which are reflected in the figures they accumulate coupled with ethical operation.
Diagram 1 Four Areas of Coca-Cola Company’s Value Chain
Diagram 2 Value Chain Actors in Coca-Cola Company
Diagram 3 Drivers of Cost Advantages in Coca-Cola Company
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