Niranjan Chatterjee’s Weblog

June 12, 2012

Global Marketing in Beverage Industry: Problems and challenges of global marketing in beverage industry as observed through the steady ascent of Coca-Cola and Pepsi as global marketers

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1. Objective

The main objective of this research paper is to engage in a detailed analysis of the main drivers that motivate the beverage industry towards globalisation and whether there is at all any such absolute necessity for this industry to attempt any form of large scale globalisation. This study also focuses on the challenges associated with globalisation such as determining proper global pricing and product strategies and considers Coca-Cola and Pepsi as two of the biggest examples of beverage companies that have gone global in a massive way.

The project would begin with discussion on what exactly the term ‘globalisation’ has come to mean in modern business and commerce and would then proceed towards a rational examination of the concept of “brand” and its components and the extent to which proper branding can help a product in getting established in the global market without too much of resistance from all the constituents that form a marketplace.

The project will then undertake a general review and analysis of various determinants that play a substantial role in the success or otherwise of a globalisation venture of a beverage company taking the track records of Coca-Cola and Pepsi as frames of reference.

The next and possibly the most logical issue that this project tackles is the relative advantages and disadvantages that are associated with globalisation and how some companies have been able to glean the maximum advantage while some have not been so successful in doing so. The marketing strategies of the more successful ones like the Coca-Cola and those of the lesser participants like the Pepsi have been analysed and an attempt has been made to locate the exact reasons as to why Coca-Cola surged forward while Pepsi lagged behind. One of the reasons might be a reasonable degree of customisation that Coca-Cola implemented, at least in its advertisements, that Pepsi could do not do with such élan as its arch rival managed to achieve.

No study can be complete without a contrarian view and this study of globalisation cannot be complete without a review of the anti-globalisation ideas that have gained considerable ground in recent years.

2. Methodology

There are several methods and techniques that can be applied while conducting a study but the two most prominent approaches are the hermeneutic approach and the positivist approach. The positivist approach maintains that truth is observable and can be measured with correct methods. Further, it is also assumed that truth is an inviolable concept that cannot be influenced by the observer.

The other basic approach is the hermeneutic approach that maintains that the researcher should analyze the text from the author’s perspective while keeping in mind the social and cultural milieu in which the text was written. Actually hermeneutics is very closely related to Weber’s concept of Verstehen. In its basic form, this approach to conducting a study focuses on proper interpretation of text (Cooper and Schindler 1998).

This approach is often considered to be a close approximation to qualitative studies as researchers gather data that have to be interpreted properly and placed in the right context to obtain the correct result. Any error in viewing the data out of the proper social, cultural or economic context will most certainly lead to a wrong conclusion (Phillips and Brown 1993).

In the research undertaken in the present instance, there is no scope of adopting the positivist approach as there is no truth as such that needs to be uncovered and dispassionately observed and analyzed; all that is available is a huge mass of data garnered from secondary sources. The approach would be to collate this secondary data in as unbiased manner as possible and attempt to analyze it keeping in mind the socio-cultural milieu to which the particular data alludes to. Thus, hermeneutic approach would be the most suitable approach in the present context where the data available from secondary sources will be critically analyzed to arrive at concrete logical conclusions.

It might be proper to clarify and emphasize at this stage that secondary sources are data that have already been collected, analyzed and results presented by some earlier research process conducted in the related field. For the purposes of current research process, secondary data consists essentially of relevant information published in journals, magazines and websites (Zikmund 2000).

There are certain advantages and disadvantages of basing a research on secondary sources. The main advantage of secondary data is its ready availability in huge quantity and at negligible cost whereas collection of primary data is a very costly and time consuming exercise which is not always possible for every researcher to undertake on a large scale. Simultaneously, the inherent disadvantages of secondary data can also not be denied as the data available in journals, magazines and websites have been compiled by someone other than the researcher and the credibility and relevance of the data can very well be questioned (Emory 1985).

So, in the current research process, the researcher has exercised considerable precaution and judgment before incorporating any secondary data in the research material and can claim with a reasonable degree of confidence that the secondary data is authentic and entirely credible.

Since we will base our research process entirely on qualitative approach, it is perhaps necessary that we also clarify what exactly a qualitative approach signifies. Though it is difficult to give a technically accurate meaning of qualitative approach, all that can be said about this approach is that it concentrates on processes and meanings that cannot be concretely quantified in terms of amount, quantity or frequency. However, such an approach provides a deeper understanding of the researched variable in the larger context of interrelated social forces that combine together to continually influence the researched phenomenon (Hamel 1993).

There are a sizeable number of experts that believe although qualitative approach might not be that sound statistically or mathematically, it indeed provides a far greater understanding of a phenomenon in its socio-cultural milieu which helps the researchers to formulate logical theories about why and how a phenomenon occurs under certain specific circumstances (Markus and Robey 1988).

3. Literature Review

3.1 Global companies

Globalisation in the sense of interdependence among nations is possibly not a very well comprehended concept. International trade and investment is actually controlled by a comparatively miniscule set of multinational enterprises and it has been observed that the largest 500 multinational enterprises account for over 90% of the world’s stock of foreign direct investment and they, themselves, conduct about half the world’s trade (Rugman 2000).

But a large number of these companies are not ‘global’ companies as such since most of them have the vast majority of their sales within their home leg of the ‘triad’, namely in North America, the European Union (EU) or Asia. Kenichi Ohmae, who was a leading McKinsey consultant in Japan at that time, had published a ground breaking study – “Triad Power” in 1985 where he argued that triad – the geographic space consisting of the United States, the EU and Japan shares a number of commonalities: low macroeconomic growth; a similar technological infrastructure; the presence of large, both capital-intensive and knowledge-intensive, firms in most industries; a relative homogenization of demand and protectionist pressures (Ohmae 1985).

This concept was possibly echoed earlier, though not in so categorical terms, by Theodore Levitt when he said consumers, though spread across the length and breadth of the world, are gradually becoming more and more alike in their tastes and preferences and this is resulting in the emergence of humongous global markets for standardised products on an unprecedented scale. Levitt could foresee that large corporations have been able to realise the massive scope of reaping the benefits of such a huge market by increasing the production levels and enjoying economies of scale. He could also envisage how such benefits of economies of scale would translate into cost reductions that would result in price reductions which would be impossible for local competitors to emulate thus resulting in a free playing field for giant multinational companies.

The main reason as to why such accustomed differences in national and regional preferences would gradually melt away, according to Levitt, was an astonishing progress of technology that has revolutionised the way people communicate with each other and travel from one end of the world to the other. Phenomenal improvement in communication and transportation has made the world a lot smaller space where the practice of yesteryears followed by multinational companies of maintaining product and price differentiation among various markets is no longer possible as the world or, major portions of it (this admission was the closest that Levitt could go towards the concept of ‘triad’ as put forward by Ohmae one year later), have become one vast market where they have to sell the same product in the same way everywhere. Thus, Levitt felt the age of multinationals have gone and now is the age of global corporations that sold standardised products in every corner of the markets they serve (Levitt 1984).

As both Ohmae and Levitt agree that the biggest examples of such globalisation can be observed in the ubiquity of Coca-Cola, Pepsi and McDonald that have actually become ‘global’ in the sense that these brands have grown beyond the ‘triad’ and penetrated literally all corners of the world. This issue is more relevant in the case of Coca-Cola and Pepsi that have been selling their standardised products in every market and dominate each one of them. McDonald has accommodated local tastes and preferences and has introduced local flavours in Middle East, Indian and Chinese markets (Bremner 2007) Coca-Cola and Pepsi have, however, been able to satisfy multitudes local tastes and preferences and have consistently emerged successful in every corner of the world.

3.2 Global marketing

The principle of global marketing works upon an age old adage that says “buyers everywhere are same but different” which means all buyers anywhere on the globe have common needs but the preferences are different. Any company functioning with this principle tries to come up with a single inimitable promotion strategy for its product in an extremely cluttered advertising arena (Rugman and Girod, Retail multinational and globalization: the evidence is regional 2003).

This brings to a sharper focus the significance of global marketing where marketing activities are synchronized and incorporated across very large number of countries essentially with the main rationale of achieving cost efficiency. The process can involve various essential activities such as standardised product strategy, identical brand names, unvarying packaging, similar advertisement messages, and coordinated sales campaigns across world markets (Vahlne and Johanson 2002).

However, one must not confuse between exporting and marketing globally. Generally, global marketing has some specific features such as most of the companies operating globally try to integrate sourcing and production with marketing, which though geocentric in nature, offers mostly a uniform marketing mix across various markets spanning several countries and even continents. Certainly, a truly global company instead of offering different products for each and every country brings in the market a distinct high quality branded product as a universal offering. Though at a first glance one might not be able to locate any appreciable difference with export, where an organisation also offers a product across international markets, the basic difference between export and global marketing is that while in the case of former a product is offered in a market after careful considerations of nature of the market and cultural affinities of the consumers of that market, in case of latter, the product is offered across a wide swath of markets that might have significant difference in terms of nature and culture of consumers. This standardisation of the product that is put on sale in widely varying markets is the main feature of global marketing (Schmitt and Simonson 1997).

Thus the most appropriate definition of global marketing would be; marketing activities by companies that emphasize three main features: global integration, standardization of effort, and coordination across markets.  In simple terms it actually means integration and coordination of all marketing activities across different markets spread across different countries into a single standardised format. It is perhaps needless to add that even though it is called global marketing it obviously does not mean that a company has got to enter each and every country in the world. It simply means widening business horizon to take advantage of opportunities and remain prepared against threats on a global basis.

It does not require too much of imagination to realise the enormous amount of market volatility a global marketer has to tackle while carrying on a global business. The basic problem that a global marketer has to tackle is to strike a balance between global marketing strategies of the company and the swings in the local market. The best possible way to achieve this is to develop the ability to ‘think globally and act locally’.

Global marketing has never been easy for any company as it also involves the chaotic task of maintaining equilibrium between standard and nonstandard approaches (standardisation and customisation) which, as any level headed marketer would admit, is absolutely necessary to retain the relevance of a global company in local markets. However, the degree of non-standardisation that a company might allow to creep into its product portfolio would depend entirely on similarities and differences in world markets (Keegan 2001).

The basic principle of global marketing is that the main difference between markets is not so much in tastes and preferences of consumers and their cultural leanings but mainly in the rules, regulations and laws that are prevailing in each country. Thus a common single strategy for marketing a product should work equally well irrespective of the market where it is applied.

The global market is now not what it was a few decades ago. Many countries have lowered their tariff barriers and are continually embracing free trade policies to further open up their markets to foreign and global players. Thus local producers are increasingly being subjected to competition from global players and with progressively shortening product cycles and ever improving technology, only those that can offer the best products at cheapest prices will survive; the rest will simply vanish from the commercial scene. Several international management experts feel that in near future only those companies that operate on a global basis will survive and prosper – others simply have no chance (Kay 1995).

Like any other marketer, a global operator would also love to develop consumer loyalty which happens to be the only protection against economic turmoil that the world economy is currently going through. Consumer loyalty ensures the survival of a brand, global or otherwise, through worst forms economic turmoil and downturn as consumers will rarely desert the brand even when marginally cheaper locally manufactured substitutes are available. Though consumers can be lured to buy a product through temporary price reductions, such price discounts are surely not the way to foster consumer loyalty. The only way to forge an emotional bond with consumers is to present a product that satisfies an overriding need of the consumer. In current world economic scenario, only global marketers have the wherewithal to spend money on elaborate research and development to come up with products that genuinely have a superior quality and are able to comprehensively fulfil customer requirements.

A global marketer thus needs to undertake serious market research to understand whether there is a scope for fulfilling some unfulfilled demand that existing products in the market are unable to satisfy and manufacture a product that fills in the utility gap. Once such a product is presented to customers, their loyalty towards that product is assured.

A product that has a large number of committed buyers obviously enjoys a high degree of brand equity and the marketer must continuously take pre-emptive steps to ensure a sustained advantage for the producer by enhancing the brand equity.

For that, an analysis is necessary to ascertain loyalty of frequent buyers as they are a source of constant revenue and also to quantify the impact of price reductions, discounts and intense promotional campaigns on consumer loyalty. These are important parameters that need to be monitored on a regular basis (Srull & Wyer, 1989). A global marketer has to, as already stated, thus ‘think globally and act locally while making such decisions as they are likely to vary significantly between markets and between countries.

3.3 Coca-Cola as a global company

As in 2004, Coca-Cola stood 129th in the Fortune 500 list and recorded 38.4% of its sales in North America, 22.4% in Europe and 24.9% in Asia. Out of total Coca-Cola sales in Asia, 74% of it was in Japan and the company was trying very hard to increase its market share in China (Rugman and Verbeke 2004).

(Pie Chart created by author)

There is a conundrum however, that marketers are yet to solve. It has been observed that countries that urge the world to respect and recognise their individuality and culture also urge the global corporations to transfer latest products in their markets almost simultaneously as they appear in first world markets (Wan and Hoskisson 2003). Coca-Cola and Pepsi though would not have to contemplate much on this issue as they have already penetrated deep into almost all of world’s markets.

The author of this project simply cannot resist the temptation of recounting an anecdote, though apocryphal, concerning Mr. Raj Narain, the health minister of the Janata Government that was formed in India in 1977. It is widely believed that Mr Narain, while debating in the Indian Parliament on some issue related to general standards of civic amenities available in Indian villages had commented that, while the Indian Government had not been able to provide clean drinking water to all its villages, Coca-Cola had been able to deliver its product in each and every Indian village. Nobody has taken the trouble of scouring through the records of Parliament to verify whether Mr. Narain had indeed uttered these words or not, but one thing is absolutely clear, and that is, Coca-Cola could win over every market it entered – partly through its inimitable taste and partly through its equally inimitable channels of distribution.

3.4 The power of Branding

There are two definitions of branding that are in circulation for years and we can term them as ‘erstwhile’ and ‘established’. While the ‘erstwhile’ or the most simplistic definition of brand denote a name or a logo or a trademark that signified ownership, the ‘established’ definition of brand includes the added values that a brand imputes on the product. While the products are made in factories, brand values are essentially a matter of personal perception that stay in the mind and have a longevity that far exceeds that of the product  (Blamer and Greyser 2003).

These values might or might not be directly noticeable but are attributed to the product through intelligent mix of continuous advertisements conceived by communications experts and delivered through proper channels as determined by experienced mass media advertisers. An example might be the brand of Starbucks that does not only bring back the experiences of exquisite coffee but also remind a person that the company is among the top five best employers (Schmidt & Ludlow, 2002).

Quite a few management experts perceive brand as simply the physical experience that a consumer recalls every time he is exposed to the brand and views a brand as an important and extremely effective tool for advertising, sales promotion and marketing. This somewhat constricted perception of brand is often termed as brand experience which many experts claim to be one of the most important bases on which a consumer makes a final decision.

Brand managers who are of this view, try to build a brand around the unique selling point of a particular product and a properly calibrated brand management builds up a favourable image of the product in the minds of prospective customers who get convinced about the superiority of the product much before the actual purchase.

If such a brand exists, advertising and sales promotion becomes that much easier since the unique selling points of that product need not be repeated or stressed in advertisements or sales promotion programs. A mere reference to the brand would be enough to cause a recall of all the USPs of the product.

Branding thus is a very effective tool in creating a favourable impression in the minds of prospective customers. This is many a time carefully manipulated by brand managers to instil a perception of value in the product so much so that customers willingly pay a higher price for it even though the raw materials and ingredients used in it are not in any way different or superior to those used in manufacturing competitive products. Customers can be motivated to pay a price that defies logic through a carefully managed advertising campaign (Olins, 2003).

Marketing experts describe this phenomenon as brand value and this can be built up only by orchestrating other aspects of marketing. When a brand reaches a stage where it can be instantly recognized over large sectors of targeted market places, without the name of the manufacturer, it is said to have obtained brand franchise as it has become matured enough to stand on its own without any help of manufacturer’s goodwill. This, as already stated earlier, can be achieved through sustained advertising, sales promotion and marketing.

A case in point is Coca-Cola and Pepsi that have so much brand franchise (built through years of sustained advertising and sales promotion) that the name of the manufacturers and their status as possibly two of the largest producers of soft drinks and beverages are completely irrelevant to the consumer who is already convinced about the efficacy of the soft drinks they offer at the time of purchase (O’Guinn, Allen, & Semenik, 2006).

It would be most logical at this stage to discuss a little about corporate brand equity. Brand equity is an intangible value associated with a brand that motivates a customer to pay a price that is higher than competitors’ products that have similar ingredients and satisfy similar needs. Example of brand equity could be the products of Coca-Cola and Pepsi that sell in market at a considerable premium over comparable local substitutes.

Corporate brand equity refers to reputations of companies that are held in high esteem by consumers and it is reflected in market-to-book ratio which is the ratio of net asset value of companies and their market capitalization. It is on an average 4.7 for the S&P 500 companies (Haigh & Knowles, 2004).

Corporate brand can also be considered as another form of address that carries with it certain inviolable tenets of business ethics and norms that act as a shield to protect the organisation as well as all its stakeholders from any form breach in corporate ethics. Corporate brand actually acts as very strong covenanted identity about the manner in which the company carries on its business and produces products that serve the best interests of consumers (Balmer March, 2002).

Source: AC3ID Test™ trademarked by J. M. T. Balmer, 2001.

The world has become a smaller place courtesy improved transportation facilities and widespread reach and penetration of internet. Marketers now have the entire world as their market and they have made full use of it as is evinced in increased preference by consumers for branded products. They are increasingly buying brands instead of products and are willing to pay premiums for leading brands. Thus a strong brand is especially a great asset of those firms that are global in the truest sense and offer soft drinks and beverages as Coca-Cola and Pepsi. A strong brand as can be seen has an identity of its own and can command an unprecedented amount of loyalty. Such a loyal clan of consumers is every marketer’s dream, especially in these bleak and gloomy times of an economic downturn (Srull and Wyer 1989).

4. Findings and Analysis

4.1 Fierce competition between two cola giants

So it is not unnatural for these competing companies to bitterly fight with each other in an attempt to dominate consumers’ mindscape. With gloomy financial forecasts that do not predict a quick end to current economic downturn, both Coca-Cola and Pepsi have turned their attention to reviving consumer spirits through Pepsi’s “Every generation refreshes the world” and Coca-Cola company’s “Open happiness” that will replace it hugely successful “Coke side of life” which, quite obviously, is the brighter side. This however is not the first time that these competitors have unleashed advertisement blitzes to uplift the spirits of their consumers across the whole world. The -“Have a Coke and a smile” and “Joy of Pepsi” instantly come to the mind of any discerning observer of this never ending rivalry between Coca-Cola and Pepsi. But now it seems that both these giants are feeling an extra sense of urgency to do their bit in livening up an otherwise gloomy landscape.  Jeff Cioletti, editor in chief of Beverage World, felt that such uplifting campaigns are indeed necessary for both these giants to be close to their consumers’ hearts in these distressing times (Zmuda 2009).

Very recent stories of fisticuffs between delivery men of Coca-Cola and Pepsi over shelf space in a supermarket however have nothing to do with corporate rivalry; it was more a personal and localized matter between two individuals.

But one must never forget that this war between Coca-Cola and Pepsi is not restricted to American markets only. They fiercely fight with each other in every market of the world. A case in point would be the way they fought tooth and nail when Coca-Cola made its appearance in Delhi market where Pepsi was already enjoying a head start of three years. Coca-Cola fired the first salvo by proclaiming more or less literally from every roof top that the real thing was back. Pepsi responded with a brilliantly crafted rejoinder that started off with a bold declaration “Today Pepsi would like you to try a Coke.” and ended with a statement that has become one of the best examples of how to drag through dirt a competitor without breaking the norms of clean and healthy advertising: “Coca-Cola and Coke are registered trademarks of the Coca-Cola Company. Pepsi is the choice of a new generation.” Admittedly, Coca-Cola had very little to offer as a riposte. What followed however went beyond the realms of advertising and bordered on criminal offence as many Pepsi billboards and signboards were found smeared with black paint. Pepsi filed a police complaint laying the blame squarely on the doorstep of Coca-Cola, but, as expected, nothing substantial or concrete could be unearthed regarding the culprits that had actually defaced Pepsi’s advertisements.

Pepsi waited for an opportune moment and struck with full force on the day Coca-Cola was launched in Delhi. It hiked the price of Pepsi Cola from Rs. 5 to Rs. 6 per 250-ml. bottle that left Coca-Cola managers scrambling for cover to find a suitable counter strategy as they realised retailers were bound to hawk both Pepsi and Coke at Rs. 6 a bottle which would effectively neutralize Coke’s penetration price of Rs. 5 for a 300-ml. bottle. Neel Chatterjee, general manager, marketing, of Pepsi Foods Ltd, said that they had sold an average 29,000 crates the same day. He estimated that Coke would have sold about 18,000 crates that day (Easwaran 1994).

(Pie chart created by author)

4.2 Consumers gain as cola war continues

Pepsi had filed an anti-trust suit against Coca-Cola in May, 1998 alleging that Coca-Cola was using its substantial superiority in fountain-dispensed soft drinks in restaurants and movie theatres to stifle any move that Pepsi was making in entering that market.

While replying to the charges levelled by Pepsi, lawyers of Coca-Cola argued that “The `cola wars’ have brought consumers in the United States and, throughout the world, the benefit of low prices, extraordinarily broad availability, and wide consumer choice.” The lawyers went on to further declare that though Coca-Cola dominates the overall soft drink market others were not completely marginalised as was evident from the figures provided in Beverage Digest that stated that Coca-Cola has a 43.9 percent share, followed by PepsiCo with 30.9 percent and Dr Pepper Co. with 14.5 percent (Walsh 1998).

(Bar Chart prepared by author)

4.3 Cola giants close ranks when faced with common threat

Though these two cola giants are at each other’s throats most of the time, they also close ranks if they perceive there is a common threat that might harm businesses of both. It had happened in Middle East where the cola giants have perhaps fought the toughest and bitterest battle outside of United States. Initially Coca-Cola was way behind Pepsi and was actually referred to as “red Pepsi” as it was gradually clawing back after a hiatus of 25 years of boycott by Arab nations as retaliation against doing business with Israel, a Jewish state.

However, both these giants took a battering due to the regional instability that has become chronic to this region. In fact, anti-American sentiments took such a serious turn that Coca-Cola had to close its principal Middle East office in Bahrain and shift its strategic personnel back to Europe in March, 2003. Coca-Cola Egypt, the parent company’s largest subsidiary in the region was forced to float a $150 million share offering in March following losses of more than $100 million.

Pepsi also had to suffer several setbacks on account of this market instability that resulted from the political and social instability in this region. They are also facing challenges from home grown soft drinks and both have decided to push their non-core brands harder in a market that is gradually becoming populated with non-carbonated drinks.

These two companies have also closed ranks in India when they faced a scathing censure from an environmental watchdog that alleged in August, 2003 that samples of drinks produced and marketed locally by the two companies contained “residues of four extremely toxic pesticides and insecticides: lindane, DDT, malathion and chlorpyrifos … enough poison to cause – in the long term – cancer, damage to the nervous and reproductive systems, birth defects and severe disruption of the immune system”. The following day, as across the subcontinent young radicals took to the streets to smash bottles of Coke and Pepsi and call for a country-wide boycott, the two companies took the unusual step of holding a joint press conference to refute the allegations (Lidstone 2003).

4.4 Coca-Cola and Pepsi – why one went ahead of the other

As already stated in this thesis, Pepsi is behind Coca-Cola by a good 14% of global market share and the most obvious question that immediately crops up in any rational researcher’s mind is what could be the reason for Pepsi falling behind Coca-Cola as it was founded only seven years after Coca-Cola which was established in 1885 by John Pemberton as a patent medicine.

The early founders of the brand Coca-Cola, going back to the 19th century, had a grand vision of globalisation and wanted the drink to be available everywhere on planet earth and, they have succeeded to a large extent in achieving that highly ambitious target.

Just to put things in proper perspective, it may be stated that Coca-Cola has been in Africa for about 80 years – the first franchise was opened in Johannesburg in 1928. Today there are 160 manufacturing plants across the continent. Coca-Cola holds the number one position in the non-alcoholic beverages (excluding tea and coffee) segment and controls around 30% of the market. Coca-Cola Africa is readying itself for one of the biggest sporting events of the world – 2010 FIFA World Cup in South Africa (Versi 2007).

This information only puts in sharper relief the continuous surging forward of Coca-Cola while Pepsi remains stuck to its pre-eminence in Middle Eastern markets Saudi Arabia and other Arab countries where Coca-Cola was forced out of the market due to political reasons rather than commercial and economic.

Before we get into the analysis of this anomaly it would be better to accept the fact that from the customer’s standpoint, the difference between Coca-Cola and Pepsi is basically a matter of perception rather than actual taste. Both are sweetened carbonated beverages with Pepsi being a little sweeter than Coca-Cola and that might be one of the reasons as to why many people prefer Pepsi over Coca-Cola in a blind test but would prefer to drink Coca-Cola if they are asked to drink an entire can. Some say that the there is also a difference in the degree of carbonation between the two but it has been confirmed through laboratory testing that the extent of carbonation depended on the location of manufacture and on an average the degree of carbonation is almost the same in case of both Coca-Cola and Pepsi (Balabanis, et al. 2001).

Samuel McClure and his colleagues have found through elaborate scientific observation done on a batch of 67 volunteers that it is basically a matter of perception that is accentuated by visual messages and marketing messages that prompts a customer to choose one drink over the other. The researchers started with asking these 67 volunteers about their personal choices first by asking them and then subjecting them to blind tests. They actually gave subjects a couple of sips of either Coca-Cola or Pepsi and as they drank what was given to them, the researchers scanned the subjects’ brains by using the technique known as functional magnetic resonance imaging (fMRI). This technique of brain mapping uses harmless magnetic fields and radio signals to measure blood flow in regions of the brain since such flows indicate levels of brain activity. While this experiment was done, each volunteer was exposed to either anonymous pictures or photos of Coca-Cola or Pepsi cans before they took their sips.

The experiment allowed the researchers to study the regions of human brain that were activated when the subjects used information only related to taste as compared to when they also had information about the brand.

It was observed that while brand recognition about Pepsi did not have any specific effect on the perception zones of the brain, knowledge about the brand when Coca-Cola was sipped had a remarkable effect on “dorsolateral prefrontal cortex” and the hippocampus. Both these areas and, hippocampus in particular, tend to modify human behaviour and reaction by recalling cultural information. Thus when the subjects were sipping Coca-Cola, their perceptions about the brand played a great role in enhancing their enjoyment rather than the taste of the soft drink alone. No such exception was however noticed when they drank Pepsi (McClure, et al. 2004).

This perception or image about the brand Coca-Cola has been built up through decades of sustained advertising and though Pepsi was never shy of advertising its presence or product, its endeavours must have definitely fallen short of the potency of the sustained and varied campaigns unleashed by Coca-Cola over almost century and a quarter since it first came in the market. This, as this experiment also strongly suggests, might be one of the main reasons as to why Pepsi could not measure up to the stature of Coca-Cola as the leader in soft drinks market (Ruigrok and Wagner 2002).

One needs to draw another distinction at this stage between Coca-Cola and Pepsi. We are comparing here only the performances in the soft drinks sector but we must remember while Pepsi generates most of its revenue around the globe from its snack divisions, Coca-Cola is purely a beverage company. Thus, it is perhaps obvious that Coca-Cola will be a couple of steps ahead of Pepsi in this struggle for market share, if it wants to survive. Moreover, when it comes to investment, Pepsi prefers to channelize funds in only those markets where it is the dominant player (as in Middle East) whereas Coca-Cola, which has long been proud of the fact that it operates in every corner of the globe and is a leader in most of the markets that it operates in. As a result of this inherent difference in corporate attitude, Coke earns more than 60% of its revenue from outside of United States while Pepsi earns most of its revenue from within the United States (Wilbert 2006).

So, we have been able to cite one more reason as to why Pepsi has fallen behind Coca-Cola in the age old rivalry between cola giants. But there are other reasons too that have contributed to this scenario.

One of the major outlets of cola drinks in the United States is through fountains and Coca-Cola has a huge lead over Pepsi in this segment. Throughout the 1980s Coca-Cola had more than 80% of market share in this sector (Allen 1994).

Though it reduced to 65% with Pepsi’s share increasing to 22% by 2000, still Pepsi was way behind its main rival. Pepsi tried to force its way into this sector by coming to some form of agreement with food-service distributors who along with napkins, ketchup, French fries and hamburger buns also provide soda syrup that is used in soda fountains in 90% of the restaurants across United States. But when Coca-Cola could sense that Pepsi is trying to directly challenge its market monopoly in this area it warned the five major distributors of this syrup that they cannot simultaneously supply soda syrups of both Coca-Cola and Pepsi, they have to choose between one of these producers and, if they insisted on supplying both the manufacturer’s product, Coca-Cola would be constrained to terminate their contract with such a distributor. Though Pepsi approached the court of law claiming that Coca-Cola is trying to push out Pepsi from this market by exercising its near monopoly status, there still remains a huge gap between the two competitors in this market. This happens to be one of the major reasons as to why Coca-Cola is ahead of Pepsi in terms of overall market share of cola drinks (Ghemawat 2003).

5. Problems and challenges faced by cola companies

Coca-Cola and Pepsi have of late been plagued by a series of local competitors that have grabbed a considerable share of the market but more than that have for the first time posed a challenge to these two cola giants. These two superpowers of the cola world had all along projected themselves as invincible and this challenge to their unquestioned supremacy might just be the beginning, opening the floodgates of a bigger challenge when the consumers also start thinking that they have genuine alternatives other than Coca-Cola and Pepsi to choose from whenever they feel like drinking a bottle of chilled carbonated beverage.

UAE’s Star Cola and state-owned ZamZam Cola of Iran gain their strength from the image of ethical, Islamic alternative to American Coca-Cola or Pepsi. But these products are limited to their countries of origin and if there are any exports they are essentially to other Gulf countries only.

Two other enthusiastic entrants in the Middle East market are UK-based Qibla Cola and Paris-based Mecca Cola. Mecca Cola had already signed an agreement to set up a bottling plant in Jebel Ali Free Zone during the middle of 2003 and had set for itself a target of 10% of the total cola market in the region. Qibla Cola also was in the process of setting up a bottling plant in UAE and was streamlining its distribution infrastructure in Egypt and Saudi Arabia.

Advertisements of both these brands have an underlying religious appeal of being genuinely Islamic and they try to take full advantage of the simmering anti-Americanism that has always been in this part of the world. One advertisement of Mecca Cola runs “No more drinking stupid, drink with commitment”. Though surely rather awkward but the underlying religious appeal is hard to miss. Both these brands profess to donate 10% of their profit to charitable causes and Qibla Cola identifies itself rather too blatantly with the Palestinian cause and tries to don the garb of a champion of ‘free trade’. Mecca Cola is also having problems of getting its name registered in Saudi Arabia and yet to commence operation in that vast cash rich market.

Though it would be a complete misnomer to say that these new entrants have dented the hegemony of Coca-Cola and Pepsi, it is a fact that both these behemoths are facing declining sales. Coca-Cola attributes this to a steady rise in the demand for non-carbonated beverages like juices and water. The real danger to their supremacy is not form Mecca Cola or Qibla Cola but from from crossover producers such as Egypt’s Fayrouz, which produces non-alcoholic malt beverages for the halal market. The marketing tactic for Fayrouz is very clever. It was originally in the non-alcoholic malt drink market, but by launching a new range of flavours it took on the big American producers and its orange and apple flavours are now outselling Mirinda and Fanta.

Coca-Cola and Pepsi have responded by pushing their non-cola brands and in Yemen, Coca-Cola has been able to achieve substantial increase in the sale of Canada Dry while the sale of classic Coke has remained constant.

Some researchers have come to the conclusion that the real competitor to Coca-Cola and Pepsi in Middle East is water. This is borne out by the fact that while the  sales of bottled water have grown by more than 40 per cent in the last four years, reaching 2,202 million litres in 2002, per capita consumption of carbonated soft drinks  over the same period declined by 16 per cent (Lidstone 2003).

Coca-Cola also got embroiled in a series problems and contamination scare that dented the sales in Europe very heavily. Economic slowdowns in emerging markets like South Korea also damaged global sales. In the meanwhile a racial discrimination lawsuit in Atlanta tarnished the company’s carefully manicured image. As if this was not enough, Doug Ivester suddenly resigned the chairman’s post (McClatchy-Tribune Information Services 2000).

6. A New Threat – Attempted Global Boycott of Coca-Cola and Pepsi

A full page advertisement in the New York Times on 4th July, 2003 made a scathing attack on how corporate power has managed to complete its stranglehold on the government of United States. This negative feeling towards the erstwhile flag bearers American free spirit and spirit of enterprise did not materialise overnight, it took nearly six odd months, almost from the time George Bush ordered “Operation Iraqi Freedom,” citing dubious information of Iraq having a large storehouse of weapons of mass destruction. The world looked on in horror as the only superpower of the world suddenly started acting like a rogue state. The world-wide reaction against United States took the form of a rethink about the relation that would be maintained with corporate America and the conclusion was pretty obvious. Coca-Cola, the most ubiquitous symbol of corporate America was suddenly on the line and saying no to the United States was saying no to war. And saying no to United States suddenly became very easy as one could simply refuse to enter McDonald’s outlet or not drink a bottle of Coca-Cola or Pepsi. This boycott was never organised in a formal way but it started off on its own. The London-based Boycott America website (www.boycottamerica.org) launched in the wake of the Iraqi invasion, took the issue much beyond Iraq and the Bush administration’s military adventurism. It referred to American threat to environment as the country successfully stalled protocols aimed at curbing climate change and its threat to the world’s food chain with the proliferation of genetically modified organisms as additional reasons to press on with the boycott. Though such boycotts are usually short-lived and die a quiet death as emotions cool down, one must admit that there is a very strong undercurrent in large parts of the world against things that are American, mainly American global companies.

7. Sea change in business approach of multinational companies

Multinational corporations no longer produce products. They are now solely in the image business. They no longer build factories. Today they build advertising campaigns. They no longer invest in plant and machinery or land and buildings but they invest in images. They scour across the globe in search of worst working conditions, which translates into the lowest wages and costs. They fire their employees while cultivating customers and continuously driving down living conditions all over the third world.

Coke and Pepsi typify the most successful of all the branders. Their assets rest on World Trade Organization protected amalgam of image and license. The scenario is pretty uncomplicated as it were. Coke and Pepsi own an image – one that ultimately represents American cool. In nations around the world people manufacture their own Coke and Pepsi under license, using their own water and bottles, often using their own sugar. They then sell it to themselves, using their own distribution networks, sending the profits off to the United States. These two companies, which in essence dominate the world’s beverage market, produce nothing tangible.

They sell cool while vacuuming money up from around the world. In doing so they are spreading a toxic culture of obesity – the same culture that is killing citizens in the U.S. homeland, where soda pop consumption has doubled since the mid 1980s, contributing to a 50 percent rise in the obesity and diabetes rates during the same time span.

The most sophisticated and attractively crafted advertisements in media outlets around the world seduce people to consume Coca-Cola and Pepsi, conveniently suppressing the highly damaging information that each bottle of these beverages contains an average of eleven tablespoons of sugar. Developing nations are left to deal with the health consequences while Coke and Pepsi investors deal up the profits (Niman 2003).

 

8. Conclusion

Though there is indeed some very sound logic in the statements of those who oppose American giant global companies, the fact remains that as long as capitalist system of production is going to continue, maximisation of profit will remain as the sole motive of any business house or an entrepreneur. Thus there will always be an attempt to reduce costs and one cannot really find any fault with the global companies if they throng third world countries in search of cheap labour.

The highly impassioned statements that these global giants are exploiting helpless people might sound very soothing to the ears as we secretly pat our backs on being ‘ethical’, but any person who has the slightest knowledge about the ground reality prevailing in these nations would most surely agree that those workers (generally women and underage children) would have either way worked since they cannot survive otherwise. So, it is always better to toil at a place where payment (however meagre it might be) is assured.

All those crusaders for prevention of child labour are mostly unaware of the dire truth that in third world countries a child is considered as an additional pair of hands that would augment the family’s income. If the global companies have not come to the scene, these children would have had to toil under much starker conditions.

In any case, use of child labour has always been an issue against Nike, Gap and other global companies. Coca-Cola and Pepsi are always manufactured in factories where untrained and underage workers are never employed. Thus, these two global companies cannot be accused of being complicit party to exploitation of children and women.

However, there can be no argument to support Coca-Cola and Pepsi as they constantly motivate people to consume more and more of their respective colas that contain as much as eleven tablespoons of sugar in each bottle. Global companies Coca-Cola and Pepsi surely play havoc with global health and some restrictive action in this regard is always welcome.

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Push and Pull System – A study of push and pull systems of managing supply chain and monitoring logistics

Filed under: Corporate Management — niranjanchatterjee @ 9:55 am
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Introduction
The basic purpose of any production process is to add value to the raw materials that are introduced in the process by utilizing the available labour and capital in the most efficient manner possible. It is pretty obvious that the production process will most certainly be geared towards producing those items that are in greater demand as any business entity tries to shorten the working capital cycle as much as possible so as to generate maximum amount of profit in the shortest possible time frame. But there is one other element that affects the overall profitability of any organisation, and that is the volume of capital employed. As any student of management accounting is aware of, the quantum of capital employed in plant and machinery is more or less uniform across an industry as all players generally opt for the latest technology so as to enjoy maximum levels of operating efficiency. So, there is not much to differentiate between the competitors in that regard. But the area where the leaders leave the stragglers behind is supply chain management and inventory control. If a proper and taut control over inventory is not maintained, the level of capital employed can never be brought down while keeping the operational efficiency intact.
Supply Chain
These days the management gurus are looking beyond the narrow and immediate confines of inventory management and are looking at managing the supply chain as a whole. Supply chain attempts to view the whole production process as a seamless entity that begins with market research for correctly evaluating consumer demand and follows the flow of inputs and services through the production process right till the time when the finished product reaches the final consumer. Thus this is a wider concept that includes all the stakeholders; right from the supplier that supplies raw materials to the final consumer that buys the product to satisfy a particular need. In between of course lie the producer, the labour and the service inputs from the tertiary sector of the economy. A supply chain in its most basic form has four components, and they are:
o Supplier of raw materials and services
o Manufacturer
o Transport and Warehousing Provider
o End user
(Dependable Logistics Services 2009)
Supply chain management, as is clear from the above diagram, is basically akin to running a relay race and just as in a relay race the entire team is as good as its weakest link, so also in supply chain management the entire operation is as efficient as its least efficient sections. That is to say, a super efficient manufacturer is not enough to make the entire supply chain effective – all the components must be equally efficient for the chain to function smoothly. In fact, an imbalance in efficiencies might actually lead to a build-up in inventory rather than reducing its overall level.

Pull System
Pull system, being one of the most efficient forms of production system that almost guarantees higher levels of productivity and profitability, is based on consumer demand and is geared towards meeting specifically what is demanded by the consumer. This method of customer order-driven production schedules quite obviously eliminate to a great extent wastages inherent in handling, storing and delivering the final product to the actual consumer. Since the production process is set in motion upon specific demand of customers, it is essentially a system of replacing what has been consumed or used. Thus the main trigger that sets in motion the production process is a stock void that is created on account of servicing a customer order. There is a pull exerted on the production process by downstream information that is generated by extraneous factors and the entire production is inherently intertwined with the idea of filling up any gap that has been created in the available stock.
Some obvious benefits of “pull’ system of production are:
o Drastic minimisation of work in progress and consequent reduction of working capital locked in inventory.
o Proper utilisation of available space. Also, the requirement of floor space will automatically come down as levels of inventories held as work in progress reduce. This will reduce the necessity of maintaining large shop floors which is usually a very costly exercise.
o As the entire production process is geared towards customers’ specific demands, the actual deliveries to the final customers will obviously be much more punctual and precise.
o “Pull” system of production eliminates scheduling complexities that otherwise plague the “push” based system of production and ensures a common system of moving materials through the plant. It also spawns much better interaction with the customer while simultaneously increasing employee involvement as quality issues get highlighted very quickly. Decision making is dispersed at every level with the customer also playing a very important and integral role in the entire process.
The most important benefit of “pull” method of production is that the producer never wastes any resources on producing a product that might not have any customer. This, by itself, makes the organisation highly efficient if return on investment becomes the only criterion to judge the efficiency of a business entity. (Webster 2007)
The best example of “pull” system can be found in Toyota Motor Corporation. Just-in-time manufacturing, kanban production system, or, more specifically the famous “Toyota Production System” is the best example of such a system in practical action.
Though it would be grossly unfair to describe the “Toyota Production System” as simply a kanban production system, one has to admit that way back in the early 1950s Taiichi Onho developed kanbans to ensure a drastic reduction in factory overheads by lowering inventory levels of work in progress and evolved a revolutionary new concept called Just-In-Time (JIT) which is described as “Producing only what is needed, in necessary quantity and at necessary time.” (Toyota Production System 1995)
These path breaking concepts did not generate immediate acceptance in western world, but the industrial recession during 1970s forced auto majors as Ford and General Motors to wake up to the benefits of the new system of production and supply chain management. Taiichi Onho also discovered that the cost per part manufactured reduced substantially when such manufacturing is done in small batches instead of large lots. There was another benefit of manufacturing in small batches. As the workers dealt with relatively less volumes, it was easier for them to identify manufacturing defects almost immediately and restrict any further expense of material and labour on a defective product. All these measures ensured maximum utilisation of capital employed. (Tolliday 1998)
(Ibrahim 2008)
An example of how kanban can be practically implemented in a furniture manufacturing company is clearly illustrated in the diagram on the previous page. It is a classic example of how inventory is “pulled” all along the production process; right from raw materials to finished output.
Toyota often refers to the kanban system as the ‘supermarket concept’. The managers in a supermarket always ensure that the shelves are full with items in such a way that almost all the customers get what they want. This has two-fold benefit. The first, quite obviously, is higher turnover and, the second benefit is that customers would not unnecessarily buy more and hoard since they can very easily get what they want and whenever they want. Taiichi Onho considered subsequent processes as customers and preceding process as a supermarket, ready to supply whatever is required in exact quantities that are necessary so that subsequent processes need not unnecessarily hoard components to survive in temporary stock-out situations.
While on the topic of “pull” system of production, it would not be fair if a mention is not made of McDonald’s. A McDonald’s outlet never prepares burgers in anticipation of customer as there would always be a possibility of demand not matching with quantity produced leading to either inventory stockpiling or a stock-out situation. As a customer places an order, a pull is exerted on the production system signalling it to get started. Here the entire production process depends on the order quantity and in a way works in the reverse direction. The management of McDonald’s ensures that the production process is so efficient that not a single customer has to wait beyond a reasonable period before the order is served. The ambience of any McDonald’s outlet and the cleanliness (especially that of restrooms) is maintained to the highest standard so that not even a single customer feels impatient while waiting for the food to be served.
“Push System”
The other more popular method of managing supply chain is known as “push system” of production where the process is triggered by some predetermined scheduling that is done in anticipation of expected demand. This method of production control is also related to replenishing stocks, but not when there has been a drop in stock levels, instead in anticipation that there would be a future drop in stock levels due to an expected demand. So, there is a push generated from within the process to produce desired levels of inventory that would most certainly be needed in future. Thus “push” system of supply chain management places the onus of inventory squarely on the manufacturer.
In “push” system the production is scheduled in accordance with a Master Production Schedule and as such the whole process is controlled by upstream information that is generated by forecasts prepared in-house about future demands. This method is widely followed by manufacturers and it serves its purpose reasonably well when the demand levels of finished products are reasonably stable. Then, the producers are able to satisfy existing demand without too much of consternation. However, in today’s world of advancing technology that brings in its wake a high risk of obsolescence, stable demand can be expected only in those industries that deal with basic goods and services that are generally labelled as ‘necessities’. For any other form of industry, there is no guarantee that technological advance might not make a huge stock of finished output completely unusable almost overnight.
A case in point is companies that manufactured typewriters. Before the advent of personal computers, a typewriter happened to be the most basic part of office equipment. But today you would hardly find an office that has a typewriter. The change did not take much time; it almost swept away all typewriters beneath the cavernous carpet of obsolescence before typewriter manufacturers realised what had hit them.
“Push” and “Pull” systems – a possible interface
One feels that a these two systems though operating on almost diametrically opposite premises are not actually competing ideas. A pure “push” or a pure “pull” method might not be ideal for any industry.
(Factory Physics 2009)
While pure “push” ensures high levels of efficiency through vastly improved return on capital employed, pure “pull” might lead to a situation where manufacturers that have miscalculated consumer demand ending up with huge volumes of unsold stock. Thus, most producers actually follow a middle path where production is carried out both as a response to clear and concise consumer demand and also in anticipation to consumer demand that is expected to materialise when the finished product finally rolls out of the production line. Hence, it can be theoretically conceptualised that there is an area where “push” and “pull” meet and that push-pull boundary is the ideal zone where a producer should operate. (Womack and Jones 2005)
A hypothetical scenario might clarify the issue a little bit. If production is carried on only on the strength of “pull” of consumer demand, chances of maintaining a reasonable stock of finished goods is almost nil. In such situations, a company is unable to take advantage of sudden spurts of consumer demand that might very well happen in today’s complex society where every process, be it consumption or production, is dependent on so many other related and often apparently unrelated processes, forces and features. It is a well known fact in commercial world that urgent demands are usually accompanied with a premium price tag. If a company is unable to satisfy urgent demands on account of insufficient stock, it tends to lose out on such premium businesses.
Similarly, if the entire production process is carried out on the basis of anticipated demand, there is always the risk of getting saddled with huge volumes of unsold stock if there is even a minor error in anticipating future demand. This risk is more prevalent in industries working in the field of cutting edge technology where there is a very high degree of obsolescence. The other problem in production carried out by only “push” forces is that producers tend to continuously add choices as they mass customise their offerings thus making it progressively difficult for consumers to choose from the available alternatives.
“Push” and “Pull” systems – as observed in automobile sector
It is quite obvious from the above discussion that it would be prudent for every manufacturer to opt for a mix of “pull” and “push” systems of production. Almost every producer, including Toyota, who happens to be the most ardent follower of “pull” system of production, has opted for a judicious mix of the two systems where “push” system is operational up to a certain stage of production while the final stages are totally guided by the “pull” method.
Toyota is aware that it manufactures high value goods and any unsold stock would result in heavy strain on working capital requirements. Therefore it never produces fully manufactured cars in anticipation of future demand. Rather, it produces “platform” products according to some predetermined schedule, but manufactures the completed version only against confirmed demand. In this way, the lead time for final delivery is substantially reduced while Toyota does not have to block large amount of capital as the platform products are basically at the initial stages of production where neither much labour nor significant volumes of overhead have been expended. This hybrid method tries to include the leanness of “pull” system with the inherent agility and ability to quickly satisfy consumer demand of “push” system and some experts prefer to call it a “leagile” system. (Goldsby, Griffis and Roath 2006)
The best example of this “leagile” production system is observed in the Scion line of cars produced by Toyota. While the basic platform is manufactured in Japan according to certain predetermined production schedules, the various models, viz., tC, xB or xD are manufactured according to specific demands either at Toyota’s Long Beach production facility or at a dealer’s production facility, if that happens to be logistically more economical. Toyota has also made a marketing coup by taking this agility in its production system even further by allowing customers to mix and match the various specifications of these three models to create unique designs and models for themselves. Thus, customers get the satisfaction of getting their unique cars within a very short time while Toyota retains its leanness by keeping inventories at the minimum.
Conclusion
Perhaps the biggest challenge to “push” based production process has come from the internet. The producers are involving the customers more and more in the process of production and the dividing line between the producer and the consumer is gradually getting blurred with companies actively encouraging customers to track their personal orders through the production process and ensure that their orders are processed and delivered on time. As the consumers are becoming more and more involved in the process of production, the differentiation between “push” and “pull” is progressively getting blurred. (Greeff and Ghoshal 2004)
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Greeff, Gerhard, and Ranjan Ghoshal. Practical E-Manufacturing and Supply Chain Management. Oxford: Elsevier Science & Technology Books, 2004.
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