The Porter five forces analysis is an industry analysis used in the development of a business strategy to measure the competitive intensity and attractiveness of a specific market. The five forces analysis includes an analysis of the threat of substitute products or services, the threat of established rivals, the threat of new entrants, the bargaining power of suppliers and the bargaining power of customers. The soft drink industry is one that has been long existing and dominated by the giants known as Coca-Cola and Pepsi and saturated with many cheaper and lower quality substitutes. It is hypothesized that a five forces analysis of the soft drink industry will show that the soft drink industry is well saturated with competition and not an attractive market to enter. Two main parts of the soft drink industry are the 1. The concentrate producers (suppliers) and 2. The bottling companies (buyers). In his article that introduces the concept of the five forces analysis, Michael E. Porter from Harvard Business school states “Awareness of the five forces can help a company understand the structure of its industry and stake out a position that is more profitable and less vulnerable to attack”. The following are things considered in each of the analysis of the forces followed up with an application to both parts of the soft drink industry.
As the soft drink industry began to rise in the late 20th century, the fragmentation of different aspects of the industry resulted in a fierce competition between Coca-Cola, Pepsi, and other soft drink providers. To further compete with each other, each major player invested in coordination between its essential product, soft drink concentrate, and other important aspects of the product such as the bottling, distribution, and retail of the product. The result is the major giants today with large-scale production capabilities, brand recognition, top quality, and low costs. Any firm attempting to compete with such wide-scale integration by the giants that dominate the industry can be assured that making an effective impact in the industry will be significantly difficult and resource consuming. Notwithstanding, there are many innovative techniques that may crack the giant-dominated industry. Currently, high-fructose corn syrup is one of the main ingredients in soft drinks. Sugar is fairly expensive in the U.S. relative to the world and this leads firms in all industries to resort to HFCS. HFCS has been alleged to contribute to obesity, cardiovascular disease, and diabetes. With this in mind, if a company wishes to compete with the massive companies that dominate the soft drink industry they should incorporate health into their business model instead of just cost and competition. Where Coke and Pepsi may be in the industry to sell the most, gain the most market share and make the most profit, an innovative industry that looks to provide a sweet carbonated drink like soda without the detrimental health effects of HFCS and Aspartame while maintaining a highly competitive price on competing shelves in retailers should be in a position well suited to make an effective mark in the soft drink industry.
Gatorade is a great example of a company that has incorporated some of the above recommendations to succeeding in its widespread entrance into the drink market. Rather than a soft drink, Gatorade is identified as a sports drink. The key ingredients in this sports drink are electrolytes and carbohydrates used to replenish the body of an athlete. Unknown to most people is that Gatorade is actually produced by PepsiCo and competes with Coca-Cola’s version of the product, PowerAde. Gatorade was initially developed in 1965 by researchers at the University of Florida to develop a drink that could hydrate and replenish the energy of an athlete. When such a drink was finally developed and made available, a major player in the soft drink industry was able to purchase all rights to production and distribution of the product. The incentive for companies like Coke and Pepsi to do this lies within their relative market shares of the soft-drink industry and the market share of the entire beverage industry as a whole. The effort to compete and reduce costs has resulted in cheap, syrupy, readily available sodas detrimental to health matched with knock-off brands from every grocery store. In an effort to preserve health, consumers have shifted to other drinks such as sports drinks, bottled water, and tea. As a response, instead of watching their shares shrink away, these soft drink giants began buying and producing other types of drinks than simply sodas, thus furthering their total market share. However, as healthy as Gatorade is intended to be, some of the ingredients put into it by the soft drink giant are less than healthful. Recently, there was a petition started by a Mississippi teenager to remove the ingredient “Brominated Vegetable Oil” used products to prevent the colors and flavors from separating (Young). The teenager was informed through an article in the Scientific American about the health risk of BVO, the flame retardant banned in Japan and Europe. A specific study of a man consuming two to four liters daily of BVO resulted in adverse side effects such as memory loss, tremors, fatigue, ptosis and elevated serum chloride (Horowitz). The patient also lost the ability to walk and was eventually diagnosed with bromism. Fortunately, the disorder was reversed through hemodialysis (Alice).
As both the soda and drink industry grows with the rate of population, it can be expected that both of the industry giants will grow as well. However, if a company can crack the secret of producing healthy drinks at as competitive as a price as a $1.50 two-liter bottle of soda, that company could potentially become the greatest drink-producing giant in the history of the industry.
Alice, Matthew. "What Is Brominated Vegetable Oil and Why Do Soda Companies Put It in Their Drink?" San Diego Reader. N.p., 29 July 1999. Web. 03 June 2013. <http://www.sandiegoreader.com/news/1999/jul/29/what-brominated-vegetable-oil-and-why-do-soda-comp/>.
Horowitz, Zane. "Bromism from Excessive Cola Consumption." Clinical Toxicology - Informa Healthcare. University of California - Davis Medical Center, 1997. Web. 03 June 2013. <http://informahealthcare.com/doi/abs/10.3109/15563659709001219>.
Porter, Michael E. "The Five Competitive Forces That Shape Strategy." Harvard Business School, 1979. Web. 3 June 2013. <http://polisci2.ucsd.edu/snunnari/HBR_on_Strategy_23_41.pdf>.
Yoffie, David B. "Cola Wars Continue: Coke and Pepsi in 2006." Harvard Business School, 16 Apr. 2009. Web. 3 June 2013. <http://iexploretheworld.files.wordpress.com/2011/07/cola-wars-continue-coke-and-pepsi-in-20061.pdf>.
Young, Saundra. "Gatorade Removes Controversial Ingredient after Girl's Online Petition – Eatocracy - CNN.com Blogs." Eatocracy RSS. N.p., 28 Jan. 2013. Web. 03 June 2013. <http://eatocracy.cnn.com/2013/01/28/gatorade-removes-controversial-ingredient-after-girls-online-petition/>.