Redefining the Rules of Engagement of the Cola Wars

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: Redacted

Faculty Advisor: Jennifer Knippen

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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.

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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

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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.

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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 multibillion 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 Wars and Expansion

During and following the Great Depression, both firms expanded overseas and started their first advertising campaigns. Coca-Cola launched new slogans in 1929 and 1941 and Pepsi created the world's very first radio jingle in 1939. Coca-Cola expanded a few decades later when it bought Minute Maid (1960) and launched new soft drinks such as Sprite in 1960, TAB in 1963 (Coca-Cola’s very first “diet” drink) and Diet Coke in 1982. During this same period, Pepsi bought Mountain Dew in 1964 and chose to diversify by acquiring Frito-Lay in 1965. It became apparent that both firms would be long-lasting competitors, as people worldwide started to choose their favorite brand and stayed loyal. (Hoover’s, 2012)

“The Pepsi Challenge”, or the introduction of the term the “Cola Wars”

In 1975, PepsiCo launched the “Pepsi Challenge”, a series of blind taste tests given to thousands of people across the country by Pepsi representatives in public locations such as mall and larger shopping centers. Results revealed that Pepsi-Cola was the most appreciated by the majority of Americans. This deepened the rivalry between both soda adversaries who began launching worldwide radio and television advertising campaigns, participating in events like the “Space Shuttle Challenger” in 1985 to test

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FW packaging and seeking endorsements by famous sports and music stars such as Elvis Presley, Ray Charles and Michael Jackson. In the 1990s, PepsiCo started its very successful “Pepsi Stuff” campaign, which led to boosted sales across the country over the entire decade. (Taylor, 2006).

From New Coke to Today's Situation

As both companies were fighting for more market share, Coca-Cola introduced “New Coke” in 1985, as its latest new cola recipe. This deviation from traditional Coca-Cola proved to be a monumental failure, allowing Pepsi to gain the most market share for the first time in history. New Coke was rapidly replaced by Coca-Cola Classic and The Coca-Cola Company soon reclaimed its market share and the leading position in the industry for decades, even beating Pepsi-Cola for the 2nd most sold soft drink in 2010 with its Diet Coke. The ongoing competition can now be observed in all activities and products taken on by these two firms, who have both introduced their corporate social responsibility practices as a modern day weapon to gain competitive advantage and to remain front-runners in the race for the most sold soft drinks. (“Cola Wars, Continued: Good for you, not for Shareholders”, 2012).

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Soft Drink Manufacturing Industry Analysis

The US nonalcoholic beverage manufacturing industry has grown constantly over time, and took an historic turn with the introduction of carbonated soft drinks, Cola drinks, at end of the nineteenth century. This industry includes about 450 companies with combined annual revenues of approximately forty billion dollars. Eighty percent of this industry revenue is attributed to soft drink manufacturing, which can be considered as a completely separate category. (Hoover’s, 2012).

Industry Performance

The soft drink manufacturing industry is performing quite well. Industry output forecasts predict regular growth over the next four years (about 4% per year) and US retail food and beverage sales have increased 5% this year compared to 2011, according to Hoover’s Industry Overview (2011). Also, the market value of the industry is expected to rise by 1.8% by 2015, to reach $127,006.6 million (Datamonitor, 2011). The industry faced a small challenge beginning of 2009 during the economic crisis when most stock prices dropped. Coca-Cola’s stock price fell to $39.10 but has since recovered to $72.00 today while Pepsi’s stock price fell to $47.10 before rebounding to $65.20 today. (Yahoo! Finance, 2012). Although there is very slow growth in soda sales, most firms in the industry have managed to redirect their strategy and diversify in order to follow trends and increase global sales. The industry's recent performance has been affected by several external threats and opportunities while impacting the industry's attractiveness, as the economic crisis led to the emergence of new rivalry (cheaper private labels gaining market share) for example.

Industry Attractiveness: Relative Power of Industry Forces

The industry forces can be analyzed according to their strength and importance relative to other forces, which mainly include buyers, suppliers, rivals, new entrants and substitutes. Each of these forces can be studied separately so as to better understand the functioning and attractiveness of this industry. A source of growing concern for this industry is the bargaining power of suppliers. It has historically been moderate to low as raw material suppliers are not too differentiated and switching costs are low. Water is the main ingredient in most soft drinks and it is readily available through many different sources; thus this resource has not caused great troubles for firms in the industry up until recently. Today, water is

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FW considered a limited natural resource that might cause a challenge to this industry in the future as it is mainly owned by national governments that state the importance of its preservation and limit firms' access to it. Another important ingredient is sweeteners (nutritive and non-nutritive) that meet regulatory requirements quite easily and are available through many different sources. (Coca-Cola and PepsiCo, 10- K Reports, 2011).

Another force affecting this industry quite strongly is the threat of substitutes. It has triggered many of the industry leaders' decisions to acquire substitutes and competitors. Substitutes mainly include non-carbonated soft drink such as fruit juices, sports drinks, sweet teas, coffee, water and alcohol. In fact, over the years, firm leaders have bought or developed their own numerous carbonated soft drinks, with less caloric or sugary versions (Coca-Cola owns traditional Coca-Cola, Diet Coke, Sprite and PepsiCo owns Diet Pepsi, Mountain Dew, Sierra Mist for example), but have also acquired substitutes such as sweet teas, sport drinks, fruit juices and water brands. However, many substitute brands do exist and switching costs are low. Another substitute that poses quite a high threat is alcohol, of which sales have even increased during the economic crisis when the soft drink industry saw its sales and performance drop. (Datamonitor, 2011).

Evidenced by the infamous Cola Wars, rivalry among existing firms is quite significant in the industry. Although concentration is rather high as Coca-Cola, PepsiCo, and Nestlé, the top three industry players worldwide, produce 60.4% of the global market volume, which decreases the intensity of competition (Datamonitor, 2011), there are many competitors, over 450 companies in the US and over 3,000 worldwide, ranging from private labels and niche producers (of booster smoothies for example). These smaller players are increasing their market share and as population growth and consequently market growth is slightly stagnating, most industry players experience excess capacity and frequent price wars (Hoover’s, 2012).

Finally, two other factors affecting the industry's attractiveness are the threat of new entrants and the bargaining power of buyers. For the former, no great capital requirements are required to start one’s own bottled water company or to launch a soft drink with one recipe for example. However, given the durable and appropriable resources and capabilities, such as huge plants and equipment size, reputation, and distribution and retail strategic relationships, owned by the incumbents (mainly Coca-Cola, Pepsi and Dr Pepper Snapple group drinks), the threat of new entrants is quite low for these leaders and in the industry (One Source, 2012).

Concerning the buyers, consumers encounter very low switching costs and as most industry

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FW products are readily available everywhere and in the same locations, which makes switching very easy and increases the buyers’ power. Differentiation is key to lower buyer power, as they may become loyal to one drink rather to another due its specificities, taste and reputation. As for retailers and wholesalers, they can easily negotiate with the industry sellers for lower prices and better agreements. The soft drink manufacturers need the shelf space in retail stores such as Wal-Mart and have to deal with such powerful firms who could advantage a competitor if one chose not to cooperate or lower one's prices (Hoover’s, 2012).

Key Success Factors and Competitor Analysis

In this industry, access to key resources and creating brand loyalty through consumer well-being and awareness are key factors that need to be maintained in the long term for this industry to remain profitable. Therefore, players in the industry need to focus on maintaining great relationships with suppliers and the government and with their consumers, by adapting to trends, innovating, and marketing their products appropriately.

Sources of Competitive Advantage

One of the major sources of competitive advantage in this industry is differentiation. As Robert Goizueta, former chairman of Coca-Cola once said: “If the three keys to selling real estate are location, location, location, then the three keys of selling consumer products are differentiation, differentiation, differentiation” (as cited in Grant, 2008, p. 240). In fact, successful differentiation implies finding uniqueness that creates value for customers and understanding their wants, needs choices, and motivations. Comprehending all these aspects of the demand side will create great differentiation opportunities. (Grant, 2008, p. 241).

Other sources of competitive advantage in the soft drink industry are the use of distribution channels and the exploitation of scale economies. These explain why industry concentration is so high and why the industry is less accessible for new entrants. Producing at such a large scale reduces costs enables the big firms to maintain their performance and keep prices low to satisfy buyers and decrease the threat of substitutes.

Major Players in the Industry: Strategy and Performance

The major companies in the soft drink manufacturing industry in the US are Coca-Cola, PepsiCo,

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Dr Pepper Snapple Group and Monster Beverages. These firms also sell globally, where they face international competitors such as Cott (Canada), Danone (France), Nestlé (Switzerland) and Red Bull (Austria) (Hoover’s, 2012).

Most of these firms' objectives and strategies lie in product and process innovation (including making healthier drinks), strategic relationships (with suppliers and distributors mainly) and being a good citizen, strong marketing practices, vast advertising budgets, including sales promotions, and point-of- sale promotions and displays. The bigger players, including Coca-Cola and PepsiCo even offer marketing support to their partners and buyers. The Coca Cola Company is a leader in marketing who spends a big portion of its expenses in advertising only (25% of all expenses approximately) (The Coca-Cola Company, 10-K report, 2011).

In this industry, there are three distinct categories of players: large multinational firms, private label producers, and small, niche producers. It is difficult to compete with the cost advantages of the dominant companies in such an industry so the smaller producers need to establish a differentiation advantage. The highest performers of the industry are by far Coca-Cola and PepsiCo and they are the ones who spurred the famous Cola Wars. Coca-Cola is the higher performer of the two firms with 27% market share and the two highest performing sodas: the traditional Coca-Cola and Diet Coke, which overtook Pepsi-Cola in the beginning of 2011 with just over 10% total market share (Alani, 2011). One could argue that generally Coca-Cola is the most successful firm in the soft drink industry as PepsiCo has diversified into snacks and other food and Dr Pepper Snapple Group, the 3rd biggest player in the US, has not expanded as globally and overall is much smaller in terms of sales revenue (One Source, 2012).

Recent Evolution of the Industry

Trends, Opportunities and Threats Currently Affecting Industry Structure

Overall, the focus of the industry has shifted according to recent trends and concerns. Soft drink sales have been decreasing and industry players have had to diversify into other non-alcoholic beverages in order to satisfy society’s new thirst for healthy drinks such as fruit juices, sport drinks and water.

Population growth in the US and in other Western developed countries is currently stagnating, creating a threat to the industry. In fact, the industry’s growth and performance can be directly linked to the number of existing consumer buyers. The threat could affect the industry in the long term and is one of the main reasons why most firms have transformed this challenge into an opportunity by going global,

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FW selling in more and more international countries. With a world of new buyers opening up to industry players in developing countries mainly, comes also an increased amount of new rivals and industry challenges. (Hoover’s Industry Overview, 2012)

One of the most challenging threats for this industry may be the availability of natural resources in the long term. For the moment, obtaining resources from suppliers has not been a problem for these firms; however, water is a limited resource that all players need to use in a sustainable manner (The Coca-Cola Company, 10 - K Report, 2011).

Another factor influencing the threat of substitutes is acquisitions. Firms in this industry are increasing their product mix and diversifying in order to compete on all levels and avoid the drop in soft drink sales. The national health concerns, school debates and protests about selling soft drinks to young children and teenagers, and the rise of obesity and diabetes have all pushed firms in this industry to expand their offerings to include healthier drinks. While firms have acquired substitutes, they are now also facing new rivals, from the entire alcoholic and non-alcoholic beverage industries. (Hoover’s, 2012). Thus, the major competitors are involved in numerous global acquisitions which results in both vertical integration – Coca-Cola acquiring bottlers for example, and horizontal, with most competitors acquiring other non-alcoholic beverages in all regions of the world (Pepsi acquiring Wimm-Bill-Dann Foods, a Russian food and beverage company, in 2011) (OneSource, PepsiCo, Inc., 2012).

Another major effect of society and government regulation on this industry is the concern for the community and the environment that is constantly gaining awareness and importance. Most industry players are now focusing much of their attention on corporate social responsibility. Both industry leaders, The Coca-Cola Company and PepsiCo, have redirected their strategies to incorporate many social measures, being involved in numerous causes, appointing staff responsible for sustainability and modifying their marketing accordingly. In fact, in May 2011, Coca-Cola introduced a new Office of Sustainability and appointed Beatriz to be its first chief sustainability officer as of July 1 (McWilliams, 2011).

Future Opportunities and Threats to Consider

The industry is overall still very profitable with sales and firm stock prices having increased since the 2009 economic crisis. Soft drinks are still very popular and healthier or less sugar-intensive products are continuously being developed and successfully being introduced into the market. Innovation and

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FW adaptation are key to these firms' success in today’s society. This industry is a fairly stable one that seems like it will be performing well and regularly over the next years (Hoover’s, 2012). However, some opportunities and threats that could affect the industry's performance should be considered.

In fact, there is still room for quite some opportunities in this industry, which could help maintain performance at a higher level. In order to overcome the overall slow growth of the soda sales, larger companies can continue to acquire other firms, either up or down the value chain to maintain more control over quality and prices and to reduce costs. Firms can also expand into global areas where growth is still high, including developing countries such as India, China and Brazil.

Moreover, companies can manage all their brands better by keeping up with all the marketing practices and innovating constantly. For example, firms could innovate in packaging to make it cheaper, more user-friendly and environmentally friendly. This could become a source of competitive advantage for one company. Also, one major trend and opportunity in this industry is to focus on society and the community. Producing healthier drinks (more nutritious and less sugary), discovering and using environmental friendly practices in all areas of business (from production to selling) and giving back to the society (donating to charities, becoming involved in selfless causes) are all new ways in which all major players are reformulating their strategy. (Hoover's, 2012).

However, some major threats for the future exist in this industry; they can be grouped into two main categories. The first concerns the lack of market opportunities in the US market. As consumer preferences and trends are changing, there is slow growth in the industry and high competition, which is gradually leading to price wars and saturation. Private label brands are also gaining market share and momentum as consumers are becoming more restricted in their budgets since the economic crisis. Firms will have to find ways to differentiate themselves or reduce costs in order to deal with this threat.

This leads to the second broad threat, that of government regulations on soft drink manufacturing ingredients and on access to water, mentioned earlier. As sodas are proving to be detrimental to one's health, a growing issue the government wants to correct, water is a limited natural resource that people all over the world are trying to protect through regulations and laws that could pose serious threats to this industry in terms of having easy and cheap access to their raw materials. (Hoover's, 2012; OneSource, 2012).

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Firm-Level Analysis: The Coca-Cola Company

The Coca-Cola Company Overview

The Background

The Coca-Cola Company is a soft drink manufacturing company that encompasses a portfolio of over 3,500 products and brands, sold all over the globe. Its types of products range from the traditional Coca-Cola, a carbonated water soda, to bottled water, tea, sports drinks and 100% fruit juices. Not only does Coca-Cola produce and market all these products, it also owns many of its bottling companies, which it has acquired over time. It totals 275 bottling partners across the entire world, from various sizes with various partner agreements. These bottlers produce, package and distribute most the company's products so they are extremely important in the firm's performance. Coca-Cola maintains strategic relationships with all bottling partners and customers in order to promote the company's sustainable growth and value. Overall, The Coca-Cola Company competes in all non-alcoholic beverage markets, all across the world (in over 200 countries). (The Cola-Cola Company, 2012).

In order to adapt to the fast-moving world surrounding us, Cola-Cola has launched its 2020 Vision to help guide all its employees and partners towards reaching its mission for the future. The company's mission is: "to refresh the world, to inspire moments of optimism and happiness and to create value and make a difference" and its goals are to satisfy everyone's wants and needs in terms of refreshing beverages, to promote value thanks to its numerous strategic partnerships, to protect the planet and its inhabitants by creating sustainable and healthy communities and to maximize return to shareholders. All these measures should enable Coca-Cola to maintain its growth and high quality level. (The Coca-Cola Company, 2012). In fact, its overall mission has not changed too drastically over time, as long-term growth and value creation have been its strategy for many decades. Only a greater emphasis is put on the importance of multi-point sustainability and corporate social responsibility.

Recent Situation

Recently, the firm has been involved in two major practices: promoting its growth by entering new markets (new countries, or different products) and by acquiring new brands and bottling partners, and engaging in sustainability and corporate social responsibility practices on a very regular basis and encompassing many different types of good deeds. The recent trends in the industry have significantly influenced Cola-Cola as they stirred its will to promote sustainability, launch health and lifestyle

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FW campaigns and diversify into all types of non-alcoholic beverages. Also, competition is intensifying and thereby forcing Coca-Cola to try to reduce costs (acquire bottling partners and ease access to raw materials with supplier partnerships across the world) and to be continuously innovative, whether it concerns their product development (Coca-Cola Zero for example) or their marketing (large advertising expenses and focus on sustainability practices.)

Performance

Overall, The Coca-Cola Company is the leader of its industry, in terms of market share (27% worldwide), stock price (over $72 in April 2012), and efficiency (23.4% operating margin). Coca-Cola is consistently performing well, having increased its dividend payment constantly over the past forty-nine years and regularly maintaining a reasonable return on equity (27.7%, slightly below the industry's of 31%) and net income ($8.57 billion). After the beginning of 2009 when the Coca-Cola experienced challenges due to the economic crisis, the company began to grow and outperform itself period after period (Morningstar, Key Ratios, 2012) (See Exhibit 1).

The Coca-Cola Company's Resources and Capabilities

“If you gave me $100 billion and said, “Take away the soft drink leadership of Coca-Cola in the world,” I'd give it back to you and say, “It can't be done.”? - Warren Buffet, chairman of Berkshire Hathaway (Grant, 2008, p. 240)

The main reason for Warren Buffet’s position is Coca-Cola's differentiation and competitive advantage. This advantage is mainly due to its numerous valuable resources and capabilities.

Intangible Resources

Coca-Cola's greatest strengths reside in its intangible resources. It is mainly thanks to its reputation and brand equity, that it can differentiate itself from its competitors. In fact, in 2006, Coca- Cola was the world's most valuable brand, worth $67.5 billion, according to research by Interbrand (Grant, 2008, p. 134). Its name and products are well known and appreciated in nearly every single country in the world and its availability enables Coca-Cola to nearly always be at one's reach if desired or needed, just as it promises to do in its mission. It relies heavily on product innovation, marketing and developed distribution systems in its differentiation strategy. This has enabled it to be the market leader since many decades and to maintain this position, even catching PepsiCo up in the race for the 2nd most sold soft

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FW drink (Alani, 2011). It has gained great loyalty over the years, of consumers who would not drink anything else but Coca-Cola products. In fact, some have become so loyal that when Coca-Cola introduced New Coke with a new recipe, it was a tremendous failure, underlining that authenticity is more important to consumers (Greenwald, 2005).

Human Capital

The Coca-Cola Company has about 139,600 employees globally, working and living in over 100 different countries. As attracting and retaining talent all over the world is one of Coca-Cola's most important goal, the company takes pride in its leadership and innovation programs, empowering its employees and wanting to create an inspirational workplace. Creativity and passion are some of the core values that are shared across the company worldwide. (The Coca-Cola Company, 2012).

Tangible Assets

The Coca-Cola Company can count on sound, substantial tangible assets that have even been growing in the past few years. Some figures include the firm's cash level: $12.803 billion in 2011 (increased from $8.517 billion in 2010), total current assets: $25.497 billion in 2011 ($21.579 billion in 2010) and plant and equipment: $14.939 billion in 2011 (compared to $14.727 billion in 2010 and $9.561 billion in 2009). (Yahoo! Finance, 2012). All these figures show that Coca-Cola can count on vast tangible resources to finance its operations, acquisitions and other activities such as marketing and corporate social sustainability.

Coca-Cola's Capabilities

Coca-Cola has great tangible and intangible resources. Its products, factories, bottling partners and financials are resources that enable Coca-Cola to ensure quality, flexibility and responsiveness. One can count on the firm's consistency and worldwide presence and continuous supply. Also, the company's human capital and brand equity are other resources that create long-term value, loyalty and performance. These are really the firm's core assets, on which it has built its sustainable competitive advantage. All these assets enable Coca-Cola to outperform its competitors consistently by being globally available, coherent, and innovative.

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Future Considerations

The company's history, brand equity, people and partners are assets that are difficult to imitate while being extremely valuable. Also, Coca-Cola's most traditional itself is not replicable, as its recipe has always been kept a secret and it has been able to appropriate its resources (through secrecy, increasing bargaining power and embeddedness). Its strategy and competitive advantage have been so sustainable mainly thanks to these resources and the durability of its product. Coca-Cola is constantly working on maintaining these advantages in order to remain the market leader. Its acquisitions (both up and downstream the value chain and horizontally, of diversified products) and its persistent marketing efforts prove the firm’s intention to remain on top of the industry and tackle all challenges early and innovatively. It takes many of the opportunities it sees, including entering the healthier products market (100 of the latest 800 products it introduced were low calorie or low sugar) and increasing its sustainability and corporate social responsibility efforts (consuming water in a more sustainable manner, helping causes all around the world, etc).

The Coca-Cola Company's strategy and competitive advantage are extremely sustainable, although some threats do lie ahead. Increasing competition and lack of resources (or government regulations on these resources) are main issues that the firm will face. Competition from cheaper brands, from more local products, or from healthier, niche brands is really increasing and could decrease Coca- Cola’s market share considerably in the future. They will need to differentiate themselves even more and focus on their core competencies and assets, which are the most sustainable. The company’s new emphasis on environmental and social measures is a great start to increasing the preservation of the planet's limited natural resources and increasing its brand equity and awareness (See Exhibit 2).

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Firm-Level Analysis: PepsiCo, Inc.

PepsiCo Overview

The Background

PepsiCo is a company focused on providing consumers with non-alcoholic beverages and convenient foods. Pepsi was founded in 1898 by Caleb Bradham who formulated its very first and now classic Pepsi-Cola product. Later PepsiCo was formed in 1965 from the merger between Frito-Lay and Pepsi. The company is divided into four main branches: PepsiCo Americas Beverages, PepsiCo Americas Foods, PepsiCo Europe, PepsiCo Middle East and Africa. Each of these branches is responsible for the manufacturing, selling and distributed of hundreds of PepsiCo products. These brands owned by PepsiCo are very diversified and range from its sodas: Cola, Sierra Mist, Mountain Dew, etc., to its healthier beverages: Aquafina water, SoBe waters, teas and energizers, and Tropicana fruit juices to its food products under the Quaker and Frito-Lay umbrellas (potato chips, popcorn, cookies, cereals, pasta, etc.). PepsiCo is present and continuously expanding in all markets across the globe successfully. (PepsiCo, Company: The PepsiCo Family, 2012).

PepsiCo's mission statement is:

"To be the world's premier consumer products company focused on convenient foods and beverages. We seek to produce financial rewards to investors as we provide opportunities for growth and enrichment to our employees, our business partners and the communities in which we operate. And in everything we do, we strive for honesty, fairness and integrity." (PepsiCo, Company: Our Mission and Vision, 2012).

Also, thanks to its "Performance for Purpose" program, PepsiCo wants to align its financial and business success with increased world and societal well-being. Corporate social responsibility is central to this company's mission and values as it thrives to deliver products of great quality, develop strong relationships with its employees and partners, and do good for the people in the world and for the planet itself thanks to many environmental and communitarian programs. PepsiCo seeks to do "the right thing", for the world, and for the company.

Recent Situation

The strong emphasis on corporate social responsibility has really been underlined in the last

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FW couple of years. Since Indra Nooyi became PepsiCo's CEO, she has sought to transform the company into a healthier product maker and better corporate social citizen. For example, Nooyi is aiming at increasing the revenue from nutritious products by 30% by 2020 and is increasing the number of initiatives the firm is undertaking, including an online competition for causes to finance in 2010 instead of buying advertising time during the Super Bowl. (“Cola Wars, Continued”, 2012). Also, innovation and providing the best possible products to its customers is at this heart of this company, who has just started the launch of its brand new product: Pepsi NEXT, the very first cola drink with the cola taste but 60% less sugar. PepsiCo is hoping to get as many people as possible to "Drink it to Believe it" and reach as much awareness as it can. This could possibly affect the company significantly for the best, or be another failed launch like its Pepsi Edge, discontinued in 2005 after being just one year on the market. (PepsiCo, 2012).

Performance

Overall, PepsiCo is performance has been quite stable over the years, with the exception of the recent downturn Nooyi attempting to correct via the PepsiCo transformation. Concerning its carbonated beverages, Coca-Cola has consistently outperformed Pepsi in terms of market share, except for a short period of time in 2006 (“Cola Wars, Continued”, 2012). Further, Pepsi's other beverages are losing some of their market capitalization to Coca-Cola products, including the Tropicana fruit juices (to Coca-Cola's MinuteMaid) and Gatorade (to Coca-Cola's Powerade). Its stock price is increasing rather constantly since the drop beginning of 2009 mainly due to the economic crisis (from $47.10 in March 2009 to $66.15 in April 2012). PepsiCo's return on equity is 30.50% (slightly above Coca-Cola's), its net income is $6.44 billion and its operating margin is 15.60% (Morningstar, 2011). These figures include sales and operations figures related to its food products so it is not a direct comparison to Coca-Cola’s performance in soft drink manufacturing. (See Exhibit 3).

PepsiCo's Resources and Capabilities

Intangible Resources

Similar to The Coca-Cola Company, PepsiCo's strategy is mainly based on establishing a differentiation advantage. Its strong intangible resources enable it to be a strong competitor. In fact, its brand equity and other intangibles such as its reputation, strategic relationships with suppliers, bottling partners and distribution centers result in customer loyalty. The performance- and family-oriented culture (especially visible amongst executives is another asset that leads to firm's long-term success, as

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FW developed by Morris (2008). The overall awareness and availability of Pepsi products increase the value of this brand equity.

Human Capital

PepsiCo is a massive company in terms of its sheer size alone, with a workforce of nearly 300,000 employees. Performance is strongly rewarded and employees enjoy generous benefits. Communication and collaboration between teams and divisions are facilitated through general openness and support for the upper management and executives. Its workforce is well trained and selected for its motivation and skills. (PepsiCo, Values and Philosophy, 2012)

In the light of its executives' recent decision to reformulate Pepsi's strategy and restructure the firm accordingly, the CEO announced in February 2012 that 8,700 employees would be laid off, spanning over a range of thirty countries, representing about three percent of its current workforce (Huffington Post, 2012). This should lead to reduced costs, increased efficiencies and larger investments in marketing and research and development.

Tangible Resources

One of the main differences between Pepsi and Coca-Cola is that PepsiCo is diversified and has a strong global presence in the convenience food industry too. This enables PepsiCo to have even larger global sales and outreach, with more economic stability and mitigation of risks as a result of all its product diversification. Even when carbonated soft drink sales started to drop a couple of years ago, PepsiCo still had strong revenues and performance in other sectors, such as its Frito-Lay snacks.

PepsiCo's tangible resources can be summarized with some figures. Its cash levels were $4.067 billion in 2011 ($3.943 billion in 2009), its total current assets were $72.882 billion in 2011 and $12.571 billion in 2009) and its plant and equipment amounted to $19.698 billion in 2011 (compared to $19.058 billion and $12.671 billion in 2010 and 2009 respectively). These are lower than Coca-Cola's and PepsiCo assets were overall better in 2010 than in 2009 and 2011, maybe due to recent strong investments in Pepsi NEXT and other global acquisitions. (Morningstar, 2011) (See Exhibit 3).

PepsiCo's Capabilities

Overall, PepsiCo's diversified tangible resources, skilled and intensively trained workforce and strong brand equity lead to its financial control capability and exemplary strategic management of multiple businesses. These enable PepsiCo to successfully manage its large portfolio and stronger

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FW diversification which in turn leads to larger sales and revenue, but also economies of scale and synergies mainly in its research and development, distribution and marketing functions (Grant, 2008). Also, its culture and structure lead to responsiveness and innovation. PepsiCo is capable of ensuring the quality and constant availability of its products in thousands of locations across the world. Moreover, the fact that PepsiCo is involved in different businesses has also enabled it to build on its healthy new image in many areas which creates even more coherence and credibility, as it can combine owning more nutritious and healthy drinks now with the production and sales of low calorie and low fat snacks or meals.

Future Considerations

PepsiCo has been growing and innovating successfully for decades, despite the recent slower growth challenges it has faced. PepsiCo's extremely large and diversified portfolio, sales in over 200 countries and its long-term efforts for employee empowerment and satisfaction and strategic relationships with partners are some of the main reasons why PepsiCo's competitive advantage is sustainable. Its brand names and global presence are so significant that it would be tough to lose its advantage to competitors, new entrants or substitutes, especially as it is still extremely innovative and investing a lot in its future growth plans with its strong R&D, new healthy products following or leading global trends and emphasis on doing good to the planet and its inhabitants and to its all its stakeholders as a whole (PepsiCo, 10-K Report, 2011).

PepsiCo's performance and future could be rather optimistic. PepsiCo is successfully taking advantage of its opportunities (sustainability and healthy product diversification) while responding to its threats (ensuring the sustainability of natural resources such as water and potato fields) through several of its new programs and adaptation to global consumers' tastes and needs with innovation and speed-to- market (PepsiCo, Purpose, 2012) (See Exhibit 4).

All these should be positive signs for the future, although not everything is as simple given PepsiCo's recent challenges exhibited in its financial performance and shareholders' dissatisfaction. Also, nothing guarantees that investments and innovation will pay off, with the launch of Pepsi NEXT that could be yet another failure in the industry. PepsiCo will have to prolong its efforts in its corporate social responsibility measures, in ensuring quality franchises (with its bottling partners mainly) and in developing and marketing successful new products, starting with Pepsi NEXT. It is thus refocusing its resources and capabilities on these new opportunities that Coca-Cola is also exploiting fully.

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Corporate Social Responsibility Initiatives: PepsiCo and The Coca-Cola Company

After the 2003 scandal in India concerning the two Cola giants' high levels of pesticides and water pollution in the production of their sodas and the industry’s slow or even declining growth since the end of the 20th century, both firms have recognized the need for change. As a response to the new government regulations, public opinion and social trends both firms adapted their strategies and missions to incorporate sustainability and corporate social responsibility measures in all aspects of their business, affecting all stakeholders (Hoover’s, 2012; One Source, 2012).

For example, Indra Nooyi, who has been with PepsiCo since 1994 and became CEO in 2006, saw that the opportunities laid in mergers and acquisitions of healthier products and global expansion. She also realized the importance of the company doing business for a greater good, in a win-win situation in all countries and with all of PepsiCo’ partners (Morris, 2008).

The Coca-Cola Company expanded overseas rapidly and quickly gained a stronger market position and revenues than PepsiCo in beverages but was strongly criticized for its unethical behavior, especially in India. Coca-Cola was also faulted for the unhealthy consequences of its product, such as rising obesity and diabetes. Muhtar Kent, Coca-Cola's CEO, and other executives also saw the need to look to the future to newly acquired nutritious drinks, innovating in healthier sodas, and promoting its coherent positive corporate image (Morris, 2008).

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The New Approach: PepsiCo and Coca-Cola's Corporate Social Responsibility Initiatives1

Initiatives Directed Towards the Consumers

Both PepsiCo and The Coca-Cola Company are aware of the increasing importance of health issues in today's society, including the government, media and, general public. Therefore, they adapted rapidly to this changing environment by implementing programs and initiatives to offer healthier products and promote more active lifestyles.

The Coca-Cola Company

Coca-Cola owns over 800 products that are low- or no- calorie and 19 of their 20 top brands fall into this category, such as Diet Coke and Coca-Cola Zero, teas and water. Coca-Cola argues there is not one particular type of food or beverage that is responsible for obesity but rather how people lack balance between their caloric intakes with energy output. Therefore, the company also promotes physical activity and overall healthier lifestyles. Some examples of its involvement are in youth athletic programs (dancing, running and swimming competitions in Manchester city), the Copa Coca-Cola a youth football championship launched in 1998 already in Mexico and its sponsorship of the London 2012 Olympics (The Coca-Cola Company, Active Healthy Living, 2012).

Other approaches by Coca-Cola to help increase health awareness and activity are sport-friendly packaging, producing and marketing smaller or more convenient cans and bottles, and offering transparency in caloric and ingredient contents. Finally, Coca-Cola also markets responsibly, never targeting children under 12 and never showing children unaccompanied by adults in advertising (The Coca-Cola Company, Active Healthy Living, 2012).

PepsiCo

PepsiCo is also extremely conscientious when it comes to offering the best value to its consumers and ensuring their long-term well-being. Pepsi has made even more commitments to making its products healthier, particularly since Indra Nooyi became CEO and changed the company's direction. Nooyi divested Taco Bell, Pizza Hut and KFC before becoming CEO and has now encouraged new measures to

1See Appendix A for a cross-comparison of initiatives by each firm. All information in this section related to the two firms’ detailed initiatives has been retrieved, selected and classified from The Coca-Cola Company’s and PepsiCo’s official websites, from the different tabs under the “Sustainability” and “Purpose” categories respectively. These references can be found in the list of references.

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FW better products, including the goal of “reducing the average amount of added sugar per serving in key global beverage brands, in key countries, by 25 percent by 2020 (with a 2006 baseline)”, according to the company's 2010 Performance for Purpose sustainability report. A large part of Pepsi's promise to its consumers is linked to its food brands, including a similar reduction in ingredients considered unhealthy such as sodium and saturated fat (Morris, 2008; PepsiCo, Human Sustainability, 2012).

Overall, PepsiCo is offering other healthier solutions to its consumers. In the soda category, its Pepsi Max labeled “no sugar” and Pepsi ONE with one calorie are already successful in several countries and regions, including the US, the Middle East and China. Pepsi Next, a very sweet drink with lower calories, was test launched on a small scale in 2011 and should prove to be their latest successful innovation. Pepsi also acquired and developed much healthier beverages such as its bottled water Aquafina, its fruit juice branch Tropicana or even its Naked Juice smoothies. All of these brands include low or no calorie drinks such as Trop50. Generally, PepsiCo seeks to reduce sugar and saturated fat in its products, increase the use of high-oleic sunflower oil and encourage the consumption of lower calorie products. Finally, Pepsi also wants to increase the well-being and awareness of its consumers by adapting to local markets to respect different tastes, cultures and values and using local products at affordable prices. Like Coca-Cola, Pepsi is using better packaging and labeling to promote more active lifestyles and is using advertising sensibly (by not advertising directly to children or in schools). (PepsiCo, Human Sustainability, 2012)

Initiatives Directed Towards the Suppliers

Another stakeholder that plays an important role in these two players' strategies is the supplier. As noted previously, the suppliers do not have strong power over these companies and can be influenced significantly by the soft drink manufacturers, who wish to set and enforce their rules and preferences up the value chain. However, as resources are becoming more scarce and regulated, relations in the industry are shifting slightly and the big firms are including their suppliers in their sustainability programs, while trying to comply with government regulation on water and other farming products.

The Coca-Cola Company

The Coca-Cola Company emphasizes the importance of its suppliers producing their crops sustainably and acting responsibly towards the community and the environment. It provides and enforces compliance with their Supplier Guiding Principles, rules of engagement directed towards sustainability

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FW opportunities, operational innovations and efficiencies and supply chain coordination. It is also involved in numerous worldwide initiatives and associations meant to improve all global resources and supplier practices. Some of these initiatives include “Bonsucro”, a global metric standard for responsible sugarcane production, “Project Catalyst” meant to encourage farmers in the Great Barrier Reef to use sustainable agriculture practices, reduce fertilizers, pesticides and chemicals runoffs and maintain fresh water purity. The Coca-Cola Company is present worldwide with its goal to improve suppliers' resources' quality and sustainable use of land, as it also launched or participates in sources' practices in China (Guangxi), South Africa, The Honduras, and many others (The Coca-Cola Company, Community, 2012).

PepsiCo

PepsiCo is committed to buying from responsible, innovative and environmentally friendly sources. It enforces several documents and processes on its suppliers to ensure consistent product quality and the coordination with its goals and strategy. These include supplier standards such as Supplier Corporate Social Responsibility Assurance and Environmental Supplier Outreach. PepsiCo’s global “Supplier Code of Conduct”, in place since 2007, ensures responsible environment management and integrity in employee practices and is reviewed by PepsiCo on a yearly basis. (PepsiCo, Responsible & Sustainable Sourcing, 2012).

Additionally, both of these companies must comply with national governments to maintain access to their natural resources, mainly water. There are numerous rules and regulations imposed on these companies by governments that have their own goals to not only preserve the environment but also maintain sustainable access to their limited resources, such as water. Overall, programs linked to partnerships with suppliers affect all other stakeholders, mainly those who consume the products containing the suppliers' raw products, the surrounding community through various programs and agreements with global producers, and the environment, as suppliers are required to have green and sustainable practices according to Pepsi's environmental supplier outreach and to Coca-Cola's natural resources protecting initiatives (The Coca-Cola Company, Water Stewardship, 2012; PepsiCo, Environmental Sustainability, 2012).

Initiatives Directed Towards the Community

As both main competitors of the Cola Wars have been very successful over the years, they have also substantially given back to the global community. Here are some of the ways in which the makers of

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Pepsi-Cola and Coca-Cola support worldwide population.

Both the Coca-Cola Foundation (since 1984) and the PepsiCo Foundation (since 1962), donate to numerous types of people and organizations. The main areas of focus for both firms are education by providing access to children in underdeveloped communities and sponsoring schools across the globe, health by promoting healthier lifestyle, using more natural ingredients and selling more nutritious products and the environment by focusing on local water preservation and community recycling. They are also helping underprivileged communities by donating to various charitable causes ranging from women's rights and equality programs to delivering medicine to regions in need, funding disaster response and community rebuilding (e.g., Coca-Cola donated $33 million to its Japan Reconstruction Fund after the deadly earthquakes of March 2011) (PepsiCo, PepsiCo Foundation, 2012; The Coca-Cola Company, Community, 2012).

Since 2010, The Coca-Cola Company have a very specific goal of giving 1% of its yearly operating income to the communities, and they reached that goal already the first year it was introduced by donating a total of $102 million, or 1.2% of its operating income. The PepsiCo Foundation only donated 25.9 million to charitable causes that same years and was involved in similar activities as Coca- Cola, through its other programs and grants. Another aspect of these firms' way to give back, is to strongly encourage and reward their employees or associates to be great citizen and donate some of their time and effort to the community too, through programs such as Pepsi's “matching gifts” in which it donates whatever an associate gave to a charity or doubles the amount if the associate is a volunteer, or Coca-Cola's allowing employees paid days off to volunteer in local charities (PepsiCo, Talent Sustainability, 2012).

Initiatives Directed Towards the Environment

Both PepsiCo and Coca-Cola have been criticized for their lack of preservation of natural resources (mainly water and energy) and their pollution levels (e.g., carbon footprint, massive waste and packaging inefficiencies). The two companies have included their numerous efforts to be better citizens towards the environment in their programs 2020 Vision and Performance for Purpose by Coca-Cola and Pepsi respectively (PepsiCo, Purpose, 2012; The Coca-Cola Company, Sustainability, 2012).

Preserving water and energy levels

Water is a limited resource necessary to both businesses and to our planet's sustainability;

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FW therefore, regulating its consumption rapidly became a necessity and priority. PepsiCo's goal is to increase its water saving efficiency by 20% in 2015 (based on 2006 figures). Conservations made by operations improvements and water usage efficiencies from new acquisitions in 2009 and 2010 are approximately 18%, amounting to 13.8 billion liters (PepsiCo, Environmental Sustainability, 2012). Coca-Cola had a similar goal as it had set forth to become 20% more efficient from 2004 to 2012 and had already reached 16% in 2010. Other ways to use less water in operations include reusing treated waste water for activities not linked to production itself such as cleaning trucks, or using ionized air to wash product packages (The Coca-Cola Company, Performance Highlights, 2012).

Another initiative is using clean energy.. Coca-Cola and PepsiCo have installed solar panels on most of their buildings and are testing new energy sources such as biomethane for a Coca-Cola landfill construction site, and heat recovery projects for PepsiCo’s Mexican and US plants. PepsiCo has already been awarded four times the “Energy Star Sustained Excellence Award” (PepsiCo, Environmental Sustainability, 2012; The Coca-Cola Company, Energy Efficiency and Climate Protection, 2012).

Reducing carbon footprint to fight against climate change

Some major areas with the potential to decrease these firms’ carbon footprints include greenhouse gas emissions such as CO2, preserving energy and controlling agricultural practices. The latter is one of the largest sources of Coca-Cola’s and PepsiCo’s eco-footprints and needs to be managed by biodiversity measures (i.e., use more arable crops and reduce its loss), healthy oil usage (i.e., palm oil), and overall sustainable farming (i.e., soil conservation, careful chemical and safe insecticides usage). Both firms are looking to be 'cleaner' in their operations by using less carbon, having greener fleets, eliminating energy intensive coolers and engaging in efficient engineering, building and design (PepsiCo, Environmental Sustainability, 2012; The Coca-Cola Company, Energy Efficiency and Climate Protection, 2012).

Waste reduction, Packaging innovations

PepsiCo engages in its "5 Rs" program: “to reduce, recycle, use renewable sources, remove environmentally sensitive materials and promote the reuse of packaging in the entire process of packaging selection, design and procurement”, according to their 2010 Performance for Purpose Report. It enables the company to successfully reduce packaging weight by 350 million pounds. One example of innovation leading to more eco-friendly solutions is that of its bottled water. PepsiCo has managed to reduce the weight of its bottled water product, Aquafina, from 24 pounds to 10.9 pounds in only a few years. Also, the firm tries to recycle as much as it can from its operations, eliminate waste from its plants and re-use other waste for other activities (PepsiCo, Environmental Sustainability, 2012).

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The Coca-Cola Company wishes to eliminate all waste through packaging innovations, recycling and re-using its waste. One of its precise goals was to reuse 50% of its bottles and cans via recovery by 2020. It is currently on the right track as it is currently recovering 36% of its packages. Another one of its goals is to use 25% of recycled PET (polyethylene terephthalate) for its plastic bottles by 2015. Overall, Coca-Cola is very tied global markets and requires its partners in Mexico, China and many other countries comply to such measures too. Coca-Cola wants to send a worldwide positive message about recycling, in which it partners with government regulations and campaigns to increase awareness (The Coca-Cola Company, Performance Highlights, 2012).

Initiatives Directed Towards Employees

In the soft drink manufacturing industry, the top competitors have a very large number of employees that they call “associates” and try various ways to attract and retain valuable talent. PepsiCo and The Coca-Cola Company take a stand on many employment issues and implement programs to promote human rights and treat all candidates or employees fairly across the world.

The Coca-Cola Company

Coca-Cola's main initiatives to be a more responsible employer include assurance of the respect of human rights through the protection of all its associates globally, and expect the same of its partners and suppliers. This includes the prevention of child labor (in sugar canes in El Salvador and in Mexico for example) and human trafficking. Coca-Cola is also seeks to retain its workforce by a strong ethical culture and active engagement of its employees. The company offers significant training programs for both managers and employees on rules of conduct to be observed for the safety and well-being of everyone. Associates are allowed and encouraged to join labor unions and are protected from the consequences of whistle blowing by an anonymous hotline though which about 100 issues are shared, fully investigated and resolved each year (The Coca-Cola Company, Workplace, 2012).

PepsiCo

PepsiCo's equivalent of this whistle blowing policy is the “Speak Up” program, that is also operated 24 hours per day and offered in many countries in which it operates. Also, PepsiCo trains its managers and employees to understand the company's “Code of Conduct” and respect it and the human rights involved to ensure ethical and legal adherence. PepsiCo then focuses more on the suppression of briberies, corruption, and illegal activities linked to all business sectors. Also, PepsiCo prides itself on its

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FW diversity and inclusion program, including women empowerment (31% of the US executives), symbolized by Indra Nooyi, their CEO. PepsiCo has won numerous awards for its diversity and integration efforts (PepsiCo, Talent Sustainability, 2012).

Both PepsiCo and Coca-Cola have strict health and safety regulations, the former emphasizing more the importance of its associates’ wellness and healthy lifestyles. PepsiCo empowers employees and implements rewards programs. Generally, they are considered good companies to work for, having both been ranked worldwide as great workplaces, including The Coca-Cola Company who was ranked 23rd in the “World’s Top 25 Best Multinational Workplaces” ranking, and “Best Companies to Work For” in many countries (The Coca-Cola Company, Our Company, Awards & Recognition, 2011).

Linkages to Industry Forces

Linking these various corporate social responsibility initiatives to the industry environment provides insight into why such successful multinational companies commit such effort and investment in all these initiatives. Several industry forces are positively affected by the corporate social responsibility practices of these leading firms. First, one of the major threats to the industry is suppliers, and the availability of resources. Through Coca-Cola and Pepsi's efforts in environmental sustainability, they are using water more efficiently and responsibly, respecting government regulations and thinking long-term, so as not to deplete the limited sources of water too quickly. This enables the firms to maintain cooperation with suppliers by complying with governments and protecting their scarce resources. Pepsi and Coca-Cola’s enforcement of their codes of conduct and supplier guidelines is another way to constrain this industry force (PepsiCo, Purpose, 2012; The Coca-Cola Company, Sustainability, 2012).

Also, as both companies have faced more difficult times and have seen their soft drink sales diminish, they are constantly acquiring or developing healthier solutions for their consumers, to whom they make promises in their corporate social responsibility programs. By acquiring healthy substitutes, Pepsi and Coca-Cola are not only diminishing the threat of substitutes but also gaining overall non- alcoholic beverages market share, pushing competitors further back too. By appealing to more consumers through marketing their new initiatives and the health benefits of their products, Pepsi and Coca-Cola are increasing sales, market share and industry concentration (PepsiCo, Human Sustainability, 2012; The Coca-Cola Company, Beverage Benefits, 2011).

Differentiation is a main determinant of competitive advantage in such companies selling

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FW consumer goods. Being good corporate citizens is yet another way for these firms to differentiate themselves and decrease the intensity of rivalry. Indra Nooyi, Pepsi's CEO, claims that it is not about Cola Wars but about doing things that are better for consumers and for our planet. She believes that “companies today are bigger than many economies” and that they need to make a change and act responsibly to be an example for the rest of the world (Morris, 2008).

Linkages to Coca-Cola and Pepsi's Resources and Capabilities

Corporate Citizenship and Human Capital

PepsiCo and Coca-Cola are both committed to ensuring their associates' safety, well-being and motivation thanks to many of its employee sustainability measures. This is can prove to be extremely useful in the long term. In fact, skills and know-how are extremely important characteristics of human capital resources (Grant, 2008); thus, by providing intensive training courses to their employees, these firms can better leverage this resource. Creating motivation and better communication thanks to rewards, benefits and employee empowerment or hotlines are also ways to capitalize on this asset.

Also, if the company acts as a responsible corporate citizen, this will encourage employees to behave similarly towards society's health issues and climate change amongst others. Employees could feel part of something bigger and more important to the world and may perform better, being more motivated, for the greater good.

Corporate Citizenship and Tangible Resources

Corporate Social Responsibility affects Coca-Cola and Pepsi's tangible assets in many ways. First, these firms are reducing costs and thus increasing profits due to many of their initiatives,. Some examples of how they reduce cost is through recycling, reducing waste in operations, increasing plant efficiencies (in energy consumption for example) and using resources more responsibly (less water consumption costs less and is more sustainable). Plants and equipment become more efficient and under stricter control thanks to many of the initiatives linked to consumer well-being (ensuring the high quality of the products), supplier partnerships (acquiring firms up the value chain to ensure quality, increase price and operations control), and through waste reduction. (The Coca-Cola Company, Performance Highlights, 2012; PepsiCo, Performance, Operations, 2010).

Such initiatives can be costly, especially at first, and some other initiatives are pure donations, to

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FW give back to the communities and to society as a whole. However, Pepsi and Coca-Cola have the financial wealth and stability to invest in such programs. For example, Coca-Cola's goal of giving back 1% of its operating income (approximately $100 million) utilizes its financial resources Coca-Cola and increases its reputational assets by being a good global citizen and promoting its positive image through it (The Coca-Cola Company, Performance Highlights, 2012).

Corporate Citizenship and Intangible Resources

Both firms realized the need to change their image after the India scandals and since changed their direction towards healthier products, while maintaining their core brand equity. Pepsi and Coca-Cola successfully geared their strategy towards creating reputations of great corporate citizens. They needed to adapt their reputation to a changing society with different needs. Growing the number of socially responsible initiatives linked to all stakeholders has enabled these firms to leverage their brand equity and make their leadership even more durable and inimitable (Grant, 2008).

Pepsi and Coca-Cola's new marketing strategies, focus on consumer and community well being and sustainability makes them even more differentiated and wholesome. With the strengthening of their intangible resources, these two companies are capitalizing on what is what is most important to their long-term global success, their brand equity. Donating to charities, funding regions affected by natural disasters, and sponsoring schools in underdeveloped regions are all examples of actions that associates their name with selfless causes that increase the value of their brand names. (The Coca-Cola Company, Sustainability, 2012; PepsiCo, Purpose, 2012).

Corporate Citizenship and Capabilities

PepsiCo is quite effective in sales promotion and execution and has successfully managed multiple businesses, acquisitions and international expansions. Its corporate responsibility has enabled it to acquire new capabilities or develop those it already had established. In fact, all these sustainability initiatives are linked to numerous capabilities such as brand management (managing its diversified portfolio with new marketing, publicity and public relations positively affected by its corporate citizenship), continuous improvements in operations (water and energy efficiencies, recycling waste), and innovating new products (developing and marketing new low or zero calorie products).

Coca-Cola's main capabilities are flexibility and speed of response as they are available in nearly all markets at all times. Also, its acquisition, international and distribution management have long been capabilities that have contributed to Coca-Cola's permanent global responsiveness and success. Thanks to

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FW measures such as healthy and nutritious product innovation, quality measures and giving back to the community in education, health and lifestyle and environment mainly, this company is promoting its reputation after some quality assurances issues (in India, with some product recalls in 2010), is innovating strategically and is managing its brands more effectively, under a same vision.

Some Other Differences Between Both Industry Leaders

All these linkages help rationalize and understand the role and importance of Pepsi and Coca- Cola's initiatives. They are extremely similar in the types of initiatives they engage in and in how it can be linked to the industry, and to their resources. However, some differences do arise.

Partly because a large portion of PepsiCo's brands are in a completely different industry, Indra Nooyi claims: “From my perspective, we are a different company... different from a business makeup, different culturally”, (Morris, 2008). PepsiCo sells a lot of “good-for-you” and “better-for-you” food products including energy bars, cereals and whole wheat. Thus, it is much closer to its suppliers and crops, which are also controlled tightly to ensure sustainability and high quality but which are also more subject to inflation and increased scarcity. In terms of revenue, commodity costs represent 25% of Pepsi's total revenue and only 11% of Coca-Cola's (Morris, 2008). Therefore, it is more expensive for Pepsi to be a healthier food provider and to ensure high quality sources, but it still prides itself for taking these initiatives and become a better corporate citizen.

Also, both companies took different paths to becoming healthier and more sustainable. On the one hand, PepsiCo was the first to tackle green issues and was a better corporate citizen from the start, and therefore was more proactive in its approach. It also took on the health movements by divesting its fast food companies and developing and acquiring more nutritious brands such as SunChips, a multigrain snack, in 1991, Quaker Oats in 2001 progressively but consistently (Morris, 2008). On the other hand, Coca-Cola innovated in its own less caloric intensive products early (Diet Coke was launched in 1982), recognized the opportunities in non carbonated soft drinks (by acquiring fruit juice MinuteMaid in 1960) very early, and expanded internationally very aggressively at first which gave it a huge market share advantage. It took Coca-Cola some time to become a better corporate citizen, and so demonstrate more of a reactive approach as many of their early initiatives were a response to public relations issues. Its double-digit growth in the 1990s led to other issues such as race discrimination, lost law suits, lack of product quality and pollution overseas. Coca-Cola also acquired its water brand and sport and energy drinks (Powerade and Vitaminwater) later. However, Coca-Cola has been able to capitalize on its brand equity, correct its mistakes and become much more sustainable at all levels to maintain its market share

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FW advantage. (The Coca-Cola Company, Heritage, 2012; Hoover’s, 2012).

Performance Implications – Effect on Shareholders

After all, PepsiCo and The Coca-Cola Company are both public companies with demanding shareholders. In recent periods, shareholders have been disgruntled (especially PepsiCo's) with losses and low dividends paid. Without an empirical study, it is impossible to determine which initiative affected which performance and what is attributable to what. However, some overall results do indicate positive effects linked to these firms' corporate social responsibility measures.

The Coca-Cola Company summarized in its 2010 Annual Review and shareowner information its environmental impact savings. Coca-Cola preserved 287 trees thanks to its latest forestry standards, consumed 201 million less energy than it used to with its new standards and saved 104,563 gallons of water thanks to its water preservation initiatives. These initiatives and results have led to significant cost reductions in operations, gained efficiencies due to less waste, and overall growth further attributed to its improved corporate image and impact.

PepsiCo is actually already using “Key Performance Indicators” linked to its sustainability measures. They indicate and evaluate some results linked to certain initiatives of its Performance with Purpose program. These indicators not only reassure shareholders with positive financial performance, but also underline that the company is making significant progress thanks to these efficient and effective programs. This report shows that PepsiCo reduced its water consumption in 2010 (by 2.3% since 2009), its fuel and energy use too (by 0.9% and 0.1% respectively since 2009) and improved its building efficiencies. These enhance the firms' sustainability but also reduces its cost and gains efficiencies. (PepsiCo, Reporting, KPI Highlights, 2010).

Overall, both companies are experienced positive performance effects coinciding with the implementations of their socially responsible practices and appear to be sharing these earnings with their shareholders. PepsiCo increased its dividend payments regularly from 2009 to 2011 (from $2.732 billion to $2.978 billion to $3.157 billion), its total revenue (from $4.232 billion 2009 to $57.838 billion in 2010 to $66.504 billion in 2011) and its net income (from $5.946 billion in 2009 to $6.443 billion in 2011) (Yahoo! Finance, PepsiCo, 2011; PepsiCo, Reporting, KPI Highlights, 2010). Coca-Cola also increased its dividend payment constantly over the years 2009, 2010 and 2011 ($3.8 billion to $4.068 billion to $4.3 billion), its total revenue (from $30.990 billion to $35.119 billion to $46.542 billion from 2009 to 2011).

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Only its net income decreased from 2010 to 2011 (from $12.834 billion to $9.262 billion although 2011 still represents an increase from 2009's $7.605 billion). (Yahoo! Finance, The Coca-Cola Company, 2011)

Recommendations

Opportunities and Threats

With all the opportunities and threats developed in this project, one can see that PepsiCo and Coca-Cola's future is full of challenges. They cannot pause and enjoy their industry leadership as they operate in a fast-moving global environment that requires constant innovation and improvement for success. Their competitive advantage and resources and capabilities are very sustainable; however, they need to face the threats of rising commodity prices, limitation on access to water and other natural limited resources and the increase in competition in all areas. To survive these threats while satisfying shareholders and respecting all other stakeholders, PepsiCo and Coca-Cola should respond by proactively seeking and engaging in opportunities such as global expansion, diversification, improvement with government relations and corporate citizenship and efficient operations, packaging and marketing solutions.

Recommended Change

First of all, public scandals and mistakes such as the accusation of water pollution in India, of the use of chemicals leading to cancer, lawsuits and other criticisms (e.g., a man claimed he found a dead mouse in a can of Mountain Dew) (Randall, 2012) need to be avoided as much as possible. Such errors can be incredibly costly to these multibillion-dollar firms who rely heavily on their brand equity and reputation. Maintaining a relationship of trust and loyalty with its customers and consumers is necessary for its long-term success and these firms should thus do all they can to be exemplary in all business areas.

Also, Coca-Cola and PepsiCo should fulfill their promises made in their respective programs, 2020 Vision and Performance with Purpose, as this will enhance their credibility, satisfy many stakeholders and surely increase sales linked to their positive image. This fulfillment is a great source of differentiation but also of long term sustainability and good corporate citizenship.

Finally, they should keep on focusing on responding positively to health concerns and introducing or acquiring more nutritious products and solutions across the world. This opportunity is not to be ignored, as, although their traditional Cola drinks are what first made their brand image so powerful, they

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FW now need to adapt to societal trends, producing and marketing healthier drinks for the future to maintain sales of all products high and keep a positive brand image.

Future Research

As Coca-Cola and PepsiCo have invested and researched so much in sustainability efforts, it would be particularly interesting to complete an empirical examination of the precise linkages and correlations between all initiatives and firm-level measures such as performance in terms of sales, productivity and market share. Future research should also examine the mechanisms through which these initiatives influence performance measures such as job satisfaction and customer satisfaction and loyalty. Such a comprehensive study would enable the firms to better understand which initiatives are more or less successful and valuable to their mission of providing the best possible products and satisfaction to their consumers while performing strongly and doing right by all other stakeholders. This research could then be applied to other industries and other firms with the goal of enhancing our understanding of the role of corporate social responsibility on firms' performance, on our planet, and its population.

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Exhibit 1 - The Coca-Cola Company’s Key Financial Ratios from 2002 to 2011

source : Morningstar 2011

Exhibit 2 - The Coca-Cola’s SWOT Analysis

source : One Source 2011

Exhibit 3 - PepsiCo’s Key Financial Ratios from 2002 to 2011

source : Morningstar 2011

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Exhibit 4 - PepsiCo’s SWOT Analysis

source : One Source 2011

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Appendix A

Stakeholders/Companies PepsiCo, Inc. The Coca-Cola Company Consumers:  Products: • Acquire healthier food and beverage brands, • 800 low- or no- calorie drinks 19/20 billion brands have a or are • Reduce sugar, fat and sodium • in existing and newly devel- low- or no- calorie substitute

oped products (by 25 or 15% • Reduce sugar and calories in its

each), products by 20% by 2020. • No sugar or calories: Pepsi ONE

and Pepsi NEXT

• Adapt to local tastes and needs • Connect with consumers of devel-  Local Markets: oping local markets through sports

events and other activities (Man- chester City Youth Championship,

Copa Coca-Cola)

 Packaging, Labeling, • Encourage physical activity • Sport-friendly and convenient and Marketing: • Transparency Suppliers:  Compliance Docu- • Supplier Code of Conduct: • Supplier Guideline Principles ments: • Supplier CSR Assurance • Projects Bonsuco and Catalyst • Environmental Supplier Out- • Ensure sources practice the same reach involvement globally, incl. China, South Africa and The Honduras Community:  Foundations • PepsiCo Foundation (1962) and The Coca-Cola Foundation (1984)  Focus • Education, health and the environment • School Sponsorships • Conscientious Advertising (not to children under 12 and no unaccompanied children are shown in campaign)  Local Measures and • Local water preservation and anti-pollution and waste measures Support • Grants and Programs designated to give back, help numerous causes (equality rights protection, delivery of medical supplies, disaster relief) Environment  Programs • Performance for Purpose/ 5 R’s • 2020 Vision  Water Saving Goals • 20% from 2006 to 2015 • 20% from 2004 to 2012  reached • Reuse treated waste water to 16% by 2010 already clean fleet Install solar panels to recover  Energy Saving • • Install solar panels to recover heat heat • Use of biomethane

 Operations • More environmentally-friendly • ‘Cleaner’ coolers, less fleets and  Reduce CO2 emissions and efficient waste recovery Employees  Ethics • Code of Conduct: focus on sup- • Rules of conduct (for suppliers pression of bribes, corruption too): focus on human rights, pre-

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and illegal transactions vention of child labor and human trafficking in all regions (El Salva-  Diversity • Strong inclusion, 31% female dor, Mexico) executives  Whistle Blowing • “Speak Up” • Anonymous 24/7 hotline  Wellness • Health and Wellness promotion, • Safety rules, well being and free- strong safety regulations dom promoted (encouraged to join labor unions) rd  Talent : Attract and • Advantageous rewards and • Overall, 23 best multinational Retain benefits, performance and fam- workplace ily oriented culture sources: PepsiCo and The Coca-Cola Company Official Websites

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