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Redefining the Rules of Engagement of the Cola Wars

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Redefining the Rules of Engagement of the Cola Wars FW University of Florida Warrington College of Business Administration HONORS THESIS Redefining the Rules of Engagement in the Cola Wars A comparative study of multi-point corporate social responsibility practices as part of an integrated strategy and source of competitive advantage in the soft drink manufacturing industry. Presented by: Frederique Whitaker UF ID: 4104 - 9853 Faculty Advisor: Jennifer Knippen ~ 1 ~ FW Abstract: The Cola Wars commenced over a century ago as Coca-Cola and Pepsi vigorously began fighting for market share in the soft drink manufacturing industry. Today the war continues but the battlefield has expanded beyond the storefront to all the firms’ stakeholders. This thesis seeks to explain the linkages between these two firms' corporate social responsibility (CSR) practices and their respective resources and capabilities, and suggests these linkages could help explain differentials in performance between the two rivals. This result will be achieved through both industry- and firm-level analyses, to identify sources of superior profitability and competitive advantage in The Coca-Cola Company and PepsiCo, before analyzing each firm's multi-faceted approach to CSR, the linkages between their practices and resources and capabilities and the implications for each firm’s respective performance. This analysis concludes with some future strategy recommendations for these two industry leaders. ~ 2 ~ FW Table of Contents Introduction ...................................................................................................................................................4 Brief History of the Cola Wars......................................................................................................................5 Soft Drink Manufacturing Industry Analysis................................................................................................7 Industry Performance ................................................................................................................................7 Industry Attractiveness: Relative Power of Industry Forces.....................................................................7 Key Success Factors and Competitor Analysis.........................................................................................9 Recent Evolution of the Industry.............................................................................................................10 Future Opportunities and Threats to Consider ........................................................................................11 Firm-Level Analysis: The Coca-Cola Company.........................................................................................13 The Coca-Cola Company Overview .......................................................................................................13 The Coca-Cola Company's Resources and Capabilities .........................................................................14 Future Considerations..............................................................................................................................16 Firm-Level Analysis: PepsiCo, Inc. ............................................................................................................17 PepsiCo Overview...................................................................................................................................17 PepsiCo's Resources and Capabilities .....................................................................................................18 Future Considerations..............................................................................................................................20 Corporate Social Responsibility Initiatives: PepsiCo and The Coca-Cola Company.............................21 The New Approach: PepsiCo and Coca-Cola's Corporate Social Responsibility Initiatives......................22 Initiatives Directed Towards the Consumers ..........................................................................................22 Initiatives Directed Towards the Suppliers .............................................................................................23 Initiatives Directed Towards the Community .........................................................................................24 Initiatives Directed Towards the Environment .......................................................................................25 Initiatives Directed Towards Employees ................................................................................................27 Linkages to Industry Forces ....................................................................................................................28 Linkages to Coca-Cola and Pepsi's Resources and Capabilities .............................................................29 Performance Implications – Effect on Shareholders...............................................................................32 Recommendations ...................................................................................................................................33 Appendix A .................................................................................................................................................37 List of References........................................................................................................................................39 ~ 3 ~ FW Introduction For over a century, Coca-Cola and Pepsi-Cola have been archrivals, constantly competing for more market share. Now, as sales of cola drinks are dropping (Hoover’s, 2012) and giving way to more nutritious alternatives, the Cola Wars, a term coined in the 1980s to describe both firms' mutually targeted campaigns, have been revived. This time around, the aim of Coca-Cola and Pepsi's strategies is to change their corporate image: they are producing and marketing healthier beverages and they are engaging in corporate social responsibility (CSR) whenever an opportunity arises. Firm performance and strategy are believed to be directly linked to its resources and capabilities. In fact, in the quest to match resources and capabilities with external opportunities and to reach high profitability, it has become apparent that a firm's identity, purpose and competitive advantage are growing to be more important than industry attractiveness. This is where corporate social responsibility's role comes into play. Firms can leverage their resources and capabilities or develop new ones in order to be better corporate citizens and to gain a new source of competitive advantage (Grant, 2008). However, as companies are redirecting their strategies to match trends in their external environments, one can wonder how the investment in corporate social responsibility is linked to resources and capabilities and to performance. How is every initiative to become a better corporate citizen linked to and utilizing a firm's resources? Does a firm base its decisions on resources that it can leverage or does it seek to develop new ones and grow? Also, some questions that arise involve a firm's stakeholders, how they are affected by the company's corporate social responsibility decisions and who and why the firm is targeting by each initiative. In the case of the soft drink industry, both major players have been redefining the rules of engagement in the Cola Wars, as both Coca-Cola and PepsiCo are using multi-point CSR practices as part of an integrated strategy and source of competitive advantage. This project seeks to explain the linkages between these two firms' CSR practices and respective resources and capabilities, and to suggest how these linkages could lead to differentials in market performance between the two rivals. This result will be achieved through both industry- and firm-level analyses, in order to identify sources of superior profitability and competitive advantage in leading firms, The Coca-Cola Company and PepsiCo, before analyzing each firm's multi-faceted approach to CSR, the linkages between their practices and resources and capabilities and the implications for each firm’s respective performance. This analysis will conclude with some future strategy recommendations for these two industry leaders. ~ 4 ~ FW Brief History of the Cola Wars From the very beginning, the soft drink manufacturing industry has been dominated by two major players. For over a century, The Coca-Cola Company and PepsiCo (formerly known as Brad’s drink and Pepsi-Cola respectively) have been competing for the largest soft drink sales. Both firms are now multi- billion dollar global enterprises (Hoover’s, 2012). Company Births Everything began in 1886 when John Pemberton, an Atlanta pharmacist, invented Coca-Cola, which recipe has remained a secret ever since. The main ingredients of this new, revolutionary drink were cola leaves, kola nuts, sugar and water. In 1895, Coca-Cola was available in all states and by 1989, the soft drink could also be found in Canada and Mexico. (Hoover’s, 2012; The Coca-Cola Company, 2012) Twelve years after the creation of Coca-Cola, Caleb Bradham (pharmacist) invented Pepsi-Cola, claiming it could cure dyspepsia and indigestion. Soon after Coca-Cola successfully went public in 1919, Pepsi went bankrupt in 1923 due to the rationing of sugar. After being bought by Loft Candy in 1941, Pepsi merged with the company's current operations to become The Pepsi-Cola Company. (Hoover’s, 2012). The Beginning of Advertising
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