Resources and Capabilities of Coca-Cola Essay.
In the competitive corporate world it is very important for organizations to have a strategy. This strategy should be based on resources and capabilities that the firm has and also taking into consideration the opportunities that arise in the external environment enabling companies to achieve sustainable competitive advantage. (Grant, 2005). The company that I have chosen is Coca-Cola. The reason behind me choosing this company is because from my point of view, Coca-Cola has been a company that has always invested, upgraded and leveraged its resources and capabilities to be the most successful brand in the soft drink industry for more than 120 years.
According to Interbrand´s report on Best Global Brands, Coca- Cola has been ranked in the first position for the 13th consecutive years. Estimating its brand value at $77.8 billion and having a rise in 8% since last year annual report. (The New York Times, 2012).
Coca-Cola´s was discovered by John Pemberton, a pharmacist from Georgia, as a result of an accident, which has now become the most consumed soft drink in the world.
(The Coca-Cola Company, 2012). Around 1.7 billion of Coke products are consumed in a day. (The World Fact Book, 2012). Its portfolio of products range from the traditional Coca-Cola, carbonated soda water, bottled water, tea, sports drink and fruit juices, having over 3,500 products and brands. The company holds 275 bottling partners around the world; these companies are dedicated to produce, package and distribute most of the company´s products. The company competes in over 200 countries. (The Coca-Cola Company, 2012).
The resource based view is a framework that suggests that companies obtain competitive advantage by focusing on strategies that exploit their internal strengths by responding to the external opportunities and trying minimize external threats and internal weaknesses. (Barney, 1991). The advantage of this model is that the firm can consider factors that are within their control. (Connely, 2010). Moreover, this model has two assumptions in analyzing resources. The first one is that the firm is heterogeneous to the strategic resources they control. The second is that resources aren’t perfectly mobile across firms and thus heterogeneity can be long lasting. (Barney, 1991).
Before talking about Coca-Cola´s resources and core capabilities it is important to understand the difference between these two. “Resources are the productive assets owned by the company, capabilities are what the firm can do well. Resources can be classified as three types; tangible resources, intangible resources and human resources.” (Grant, 2005, p. 136-137). Authors such as Teece and Pisano (1997) suggest that an organization has to always renew and recreate its resources to meet the needs of changing environments. They are three basic types of dynamic capabilities the ones sensing opportunities and threats, the ones concerning seizing opportunities and the ones concerned in re-configuring the capabilities of an organization. Dynamic capabilities can take various forms such as recruitment and management process, major strategic moves, such as acquisitions and alliances.
Tangible resources are physical and financial resources that can take a variety of forms. These assets and capabilities determine how efficiently and effectively a company performs its functional activities”. (Grant, 2005, p.139). To determine if a company has a strong financial position financial analyst tend to evaluate in general the gross profit margin, operating margin, ROA and ROE ratios. The Coca Cola Company has a very strong financial position, its sales were $46.542 billion, its gross profit margin in the year 2011 was 60.86%, 2010 it was 63.86%, in 2009 it was 64.22% meaning that the company has been consistent in their efficiency of manufacturing and distribution during the production process. (Google Finance, 2011). The operating margin in 2011 was 23.06% and 2010 it was 39.13%.
The margin is the measure of the proportion of company´s revenue left after deducting variable costs. The margin has been consistent which means that the company is always trying to maintain its variable costs. The ROA is the indicator of how efficient a company is using its assets to generate earning. In 2011, Coca-Cola´s ROA was 10.17%, during this year the management was less efficient at using its assets but during last few it has been quite efficient. In 2010 it was 16.19%; in 2009 it was 14.02%. The ROE from last year has dropped from 28.17% in 2010 to 17.73% in 2011, even though the company is trying use less shareholders equity to produce profits. (Coca-Cola´s Annual Report, 2011).
The physical resources that Coca-Cola owns can be classified into building, equipment and their bottling partners. The buildings account for $ 5.24 billion, the property, plant and equipment account for $ 23.15 billion. The distribution of the drink is done through 275 bottling partners. The bottling partners manufacture, package, merchandise and distribute the finished branded beverages. (Coca-Cola´s Annual Report, 2011).
The intangible resources tend to contribute more than tangible resources. They can be classified as; intellectual property, resources for innovation and reputation. (Grant, 2011). One of Coca-Cola´s most valuable intangible resource is its secret formula. The company tends to sell concentrated syrups to their bottling partners, who then use the syrup to produce the final product. This means that the company does even share their secret formula with its bottling partners. (Coca-Cola´s Annual Report, 2011).
According to Coca- Cola another intangible resource that they own is their technology and the know-how. They related this technology to the “Company´s products and the processes for their production, the packages used for our products, the design and operation of various processes and equipment used in our business and certain quality assurance software.” (Coca-Cola´s Annual Report, 2011, p. 9).
An intangible asset that Coca-Cola owns is its “Goodwill”. The goodwill can be classified as the strong brand name, good customer relations or good employee relations. (Investopedia, 2012). In 2011 Coca- Cola´s good will accounted for $ 12,219. The company performs impairment tests of goodwill at geographic operating areas. The operating areas are: Eurasia and Africa, Europe, Latin America, North America and Pacific.
Coca- Cola´s brand loyalty and recognition can be considered as Coca-Cola´s most valuable intangible resource. Every day 1.7 billion of coke products are consumed in a day, more than 60% of the of the world´s population have a Coke drink in a day. (Market Line, 2011). Moreover, the red and white logo is recognized by 94% of the world´s population. (Business Insider, 2012).
The Coca-Cola Company had 146,200 employees worldwide in the year 2011, respectfully called associates. The Company always tries to keep their employees engaged by motivating and indulging responsibility in projects. Their work place includes on site company gym, free Coca-Cola drinks, summer and flexible working hours. Training and development also plays a big role, they continually invest in employee development plans, internal talent management, leadership development for managers and employee performance management. They also tend to reward their employees by different elements such as pension, health care and additional holidays.
Once analyzed Coca-Cola´s tangible and intangible resources I now proceed to analyze their core competence and dynamic capability. Core competence can be defined as “the linked set of skills, activities and resources that, together, deliver customer value, differentiate a business from its competitors and potentially can be extended and developed”. (Johnson et al, 2011, p. 89).
Coca-Cola´s major dynamic capability is large investment in marketing. In 2011, Coca- Cola spent $ 3.3 billion on advertisement. (Google Finance, 2011). Their marketing programs are developed to “Think Globally, but act locally” designed to enhance more consumer awareness and product appeal for customers. The company tends to differentiate its marketing strategy in developed markets and developing markets. In developed markets is objective is continue having growing profits and in developing markets its objective is to increase brand value. In emerging markets they invest in brands and infrastructure programs to give access to the consumers to the product. In developed markets they invest in making the product affordable, good communication with its customers and differentiation within its products. (Coca-Cola´s Annual report, 2011).
Another core competence that enables the company owns to gain competitive advantage is their distribution and bottling operations. Most of their products are “manufactured, sold and distributed by independently owned and managed bottling partners”. (Coca- Colas Annual report, 2011, p. 32). The company owns nearly 275 bottling companies, distributing their products in more 200 countries. Three most known bottling companies are Coca-Cola Hellenic, Coca-Cola Femsa, and Coca-Cola Amatil. Coca-Cola Hellenic distributes in 28 European countries. In 2011, 46% of the unit case volume of Coca-Cola Hellenic consisted of Trademark Coca-Cola Beverages.
Coca-Cola Femsa is a Mexican company covers most of parts of South America. In 2011, 62 percent of the unit case volume of Coca-Cola FEMSA consisted of Trademark Coca-Cola Beverages. Coca-Cola Amatil covers Australia, New Zealand, Papua New Guinea, Fiji and Indonesia. In 2011, 45 percent of the unit case volume of Coca-Cola Amatil consisted of Trademark Coca-Cola Beverages. According to Coca-Cola the ownership of bottling companies helps them reduce costs and make the product more available throughout the world. In the next five years the company has committed to invest $30 billion in their bottling companies. (Coca-Cola´s Annual Report, 2011).
Coca-Cola´s innovation in products can be classified as one of its most dynamic capability. They always try to “recreate and renew” their products. The company holds around 500 products. (Coca-Cola´s Annual Report, 2011). Their innovation philosophy is “70/20/10”. They invest “70 of their resources in existing products, 20% in innovations related to existing products and 10% in pure innovation. (Forbes, 2012). The newest products launched into the markets are mini cans of 7.5 ounces and has only 90 calories. Another new product is Sprite Green, naturally sweeten Truvia, every 8.5 ounce serving has 50 calories and 5% lemon juice. (World of Cola, 2012).
Once analyzed all of Coca-Cola´s resources and core capabilities, the next step is to use the VRIN model, which consists in externally analyzing the firm’s resources and dynamic capabilities to see if these are useful to generate sustainable competitive advantage. VRIN stands for Value, Rarity, Inimitability and Non-Substitutability. (Barney, 1991). Nevertheless some authors such as, McEcily and Chakravarthy (2002), believe that the framework lacks semantic logic that account for characteristics that impede certain activities in the firm at the same time enhancing others.
The value of resources can be determined if they can give a company competitive advantage at a cost that it allows the organization to have acceptable profits. (Johnson et al, 2011, p. 89). In case of Coca-Cola the company is very innovative this makes them the market leader. It always takes advantage of new market trends to develop new products and gain competitive advantage. In 1892, they were the first ones recognize about the change that consumers were getting more health conscious and introduced the Diet Coke, a low calorie beverage, which since then became the world´s top-selling low-calorie soft drink. (World of Coca-Cola, 2012)
In terms of Rarity, rare capabilities are those that no or few firms posse. (Johnson et al, 2011, p. 89).According to Coca-Cola their brand value, brand loyalty and brand recognition are capabilities that no other firm holds in the industry. As stated before, their brand value is estimated at $ 77.8 billion and their logo is recognized by 94% of the world population. They have been holding this capability since many years which drives them sustainable competitive advantage. (Coca-Cola´s Annual report, 2011).
Coca-cola resources can also be classified as inimitable. Their distribution system and bottling companies are so widely spread throughout the world, making their products available to customers everywhere at any time of the day. It is really difficult for companies to have such wide distribution network as the costs would be really high for a new firm trying to do this. (Forbes, 2012)
Moreover, their secret formula of making coca-cola is considered as non substitutability resource. This is because it hasn’t been discovered by any other soft drink company. Even thought there are substitutes available in the market none of them meet up to Coca-Cola´s taste or standard. (Coca-Cola´s Sustainability Report, 2011)
In conclusion, Coca-Cola´s history, brand equity, people, distribution network, secret recipe, etc. are resources that are difficult to imitate, while being extremely valuable. The company constantly works to gain competitive advantage by developing healthier products as consumers are becoming more health conscious and by having big investments on marketing programs to have more consumer engagement. Even though Coca-Cola´s strategies and competitive advantage are extremely sustainable the company can face competition from healthier and more environmental friendly firms, which the company is trying to tackle by implementing the 2020 vision.
The 2020 vision has 5 long-term objectives. The first one is energy conservation/climate change which consists in reducing by 15% carbon footprint. Second, sustainable packaging/recycling makes their packaging 100% recyclable. Third, water stewardship which consists in establishing a water sustainable operation in which they minimize the use of water and have neutral water impact on the local communities where they operate. The Fourth is product portfolio/wellbeing, they intent to provide healthier beverages for every lifestyle and occasion. Fifth, diverse and inclusive culture consists in creating a better work place to work every employee with a wide diversity of culture.