Rivalry Among Existing Firms

• Q6

1. Competitive Force 1: Rivalry Among Existing Firms

Coca-Cola held 42.3% market share of soft-drink industry in 2014 while Pepsi held 27.5% market share. There are relatively high concentration and a balance of competitors in soft-drink industry. Coca-Cola and Pepsi have more freedom in pricing than the other players do. They can implicitly cooperate with each other to avoid severe price war.

Coca-Cola and Pepsi have competitive advantages in scale and scope. They benefit from economies of scale. They buy raw materials at a lower price as they produce more, so they can in turn sell cheaper products. Also, they can afford more advertisements then their competitors do to maintain their brand value and customer loyalty.

2.  Competitive Force 2: Threat of New Entrants

Coca-Cola and Pepsi retain high profits in the industry because the threat of new entrants is limited. New entrants suffer from the same disadvantages of economies scale as existing competitors do. They also suffer from the fixed cost for equipments and heavy advertisements for entering. Coca-Cola and Pepsi have first move advantage to set industry standards and enter into agreements with suppliers and distribution channels. For example, Coca-Cola’s entrenched its position in restaurant chains as McDonald’s.

3.  Competitive Force 3: Threat of Substitute Products

Coca-Cola and Pepsi have so diverse products that they actually own considerable amount of substitute products. For example, Coca-Cola also owns Sprite and Fanta, the substitutes for Coke. However, Coca-Cola and Pepsi are pressured by non-carbonated drinks because people are seeking for more healthy life style.

4.  Competitive Force 4: Bargaining Power of Buyers

Buyers have low bargaining power and limited price sensitivity. Most products from Coca-Cola and Pepsi are differentiated. Soft drinks are cheap and represent a very small fraction of the buyers’ cost.

5. Competitive Force 5: Bargaining Power of Suppliers

Bottlers and raw material suppliers have low bargaining power because there are lots of substitutes for them. In order to attract larger orders from Coca-Cola and Pepsi, they offer relatively low price. Coca-Cola and Pepsi enter exclusive contracts with bottlers so they can’t bottle for other beverage producers.The lower costs of packaging and raw material is crucial for Coca-Cola and Pepsi to remain their high profits.

• Q7

Airlines fail to differentiated themselves by implementing frequent flyer program because the cost for the program is very low. They attract frequent flyers by offering higher quality service such as free checked luggages and priority seating. The program is expected to fill more seats on the plane and increase margin cost, but the costs are too low to set barriers. Thus, all airlines have such programs now.