Cocacola's Porters Five Analysis (Essay Sample)

Porters Five Analysis
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Introduction
Porters five analysis is a strategic management tool which determines whether products and services in an industry or organization are relevant to managerial profitability or not. In managerial economics and more so in economic theory, studies reveal that a cost minimizing firm is likely to maximize on returns or profits and shareholders welfare (Kubler & Carney, 2008,p.59). This research paper analyses the porters five model to explain why the leading syrup manufacturer, PepsiCo and Coca cola profitability is different from the bottlers. This is narrowed down to the analysed 81 operating profits as a percentage of sales going to the syrup manufacturers and 15 percent of operating profits as a percentage of sales to the bottlers.
Discussion
Porters five model normally assumes five vital forces, which determine the competitive power within markets (Schwarzinger, 2012, p.14). These forces are supplier power, buying power, competitive power, and threat of substitution and barriers to entry.
Buying Power
Porters buying power the number of customers, the size of the orders in the market and the cost of changing line of business defines force. Research shows that Coca cola and PepsiCo products have a market everywhere in the world. Realistically, what the scattered customers all over the world demand is coca- cola and Pepsi Co product and not the bottles. It is clear that the number of bottles used to package the syrup manufacturer’s products is categorized as a cost of production. A profit-making firm has to keep checks, monitor, and control any rising cost in the production process so as to maximize profits and shareholders wealth. Therefore, the bottles cost is always minimized by the manufacturers to the lowest possible point such that profits are maintained at only 15 percent of the bottlers sales of which they do not have control. On the other hand, the syrup manufacturers enjoy the full benefits of high profits, which account to 81 percent computed as a percentage of sales
Supplier Power
A general assessment of the number and size of suppliers in a market is carried out to determine output prices. Moreover, the uniqueness of the product or service creates an increased demand for the product in the market hence driving up the sales. This force in the market creates the whole difference between the Coca-Cola, PepsiCo, and the bottler’s profit margins. The syrup manufacturers major concern is create unique products such as fanta, coke, sprite and stoney which sell in the market and this uniqueness drives up the product’s prices due to increased demand hence potential to higher profits. On the other hand, the bottles are packing tools used by manufactures. Uniqueness does not count much for the bottlers hence there is no element of increased prices and profits and this leads to the bottlers making lower profits as compared to the syrup manufacturers.
Competitive Power
Competitive power is defined by the category of the market structure in which a firm is in existence. These market structures are Monopoly, duopoly, perfect competition market structure, monopolistic market and oligopoly (Schwarzinger, 2012, p.15). Coca cola and PepsiCo exist as two firms with extremely differentiated products which are unique on their own. In such a case, price rigidity is set meaning that the prices are steady. On the other hand, the bottlers industry exists under perfect competition market structure where prices are competitive and profits are low since a buyer has choices to make from a variety of sellers. The fact that syrup manufactures exist in a favorable market structure makes them enjoy 81 percent of profits as a percentage of sales whereas bottlers take home 15 percent of the operating profit as a percentage of sales due to perfect competition.
Barriers to Entry
The market structure in which the syrup manufacturers exist is restricted to free entry and exit in the industry. This restriction enables the few firms to set high prices and in return recoup higher profits (Schwarzinger, 2012, p.17). On the other hand, the bottlers firms exist in a market where there is free entry and exit to the market. This drives the prices down due competitive nature hence low profits. This makes the syrup manufacturing business more profitable than the bottlers do.
Threat of Substitution
Threat of substitution exists due to cross product sub...