coke by HC111111092214

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									       Author: Jason Bingham
            MBA Student
          Student number:
Brisbane Graduate School of Business
Queensland University of Technology

         Assessment item 2
           Issue analysis
Due date: Thursday 15 February 2001
 GSN418 Marketing Management 2

Introduction                                           1

Product                                                1

Product life cycle and new product strategy            2

Branding and new product strategy                      3

Marketing channels                                     4

Pricing                                                4

Promotion                                              6

People and ethics                                      6

Conclusion                                             7

References                                             9

Appendix I     Production cycle                        10

Appendix II    Article: "Rebuilding the Coke bubble"   11
On Saturday 3rd February 2001, an article appeared in The Weekend Australian
newspaper titled "Rebuilding the Coke bubble". The article is essentially an outline of
the new corporate and marketing strategies that have been implemented by The
Coca-Cola Company ("Coke") since the death of well known CEO Roberto Goizueta in
1997, and more recently, the appointment of Australian Douglas Daft as CEO in
1999. This paper is an analysis of that article. Marketing issues that are both
explicit and implicit in the article are identified and related to marketing theory.
Coke's basic product offerings are outlined, followed by a critical evaluation of Coke's
current marketing strategies in the context of the marketing mix. Finally, the
conclusion summarises the main issues identified in this paper and briefly discusses
the implications for the future of Coke's marketing strategies.

Product                                                        Fig. 1 - Product levels

A product is "a bundle of attributes (benefits) that a
seller offers the potential buyer to satisfy buyer's needs
and wants" (McColl-Kennedy and Kiel 2000, p. 45).
Products have three levels, the core product, the actual
product and the augmented product (see figure 1).
Using the traditional Coke soft drink as an example, the
core product is refreshment, the actual product is the
tangible attributes including sugar, syrup flavour, size,
weight etc., and the augmented product is the service
components and other intangibles such as brand image
(McColl-Kennedy and Kiel 2000, p. 277).

Coke products have two basic classifications, depending on the stage of the
manufacturing and selling process. When a Coke product is sold to consumers it is a
consumer good, however the materials that manufacturers utilise to produce the
final product are industrial goods (see appendix 1 for details of the production cycle).
As consumer goods, Coke is considered to be a convenience product because it is
purchased frequently and with little effort. As industrial goods, Coke is comprised
using materials and parts (e.g. sugar, carbonated water, bottle, label etc.), capital
items (e.g. plant, machinery), and supplies and services (e.g. marketing,

The product mix for Coke includes the total set of products that the Company sells
and can be considered in terms of its breadth, depth and consistency. Specifically
referring to the information provided in "Rebuilding the Coke bubble", the product
mix for Coke beverages is divided into four categories:

     1.   Refreshments - main Coke brands;
     2.   Hydration - mainly waters;
     3.   Energy and stimulation - brands with caffeine and vitamins; and
     4.   Nutrition and health - juices and milks.

Breadth refers to the four product lines above and depth refers to the number of
items within each product line. For instance, in Asia Coke sells more than 250
different drinks, which would be spread across the four product lines. Consistency
refers to the interrelatedness of the product lines, which in this case are closely
interrelated, in that they are all non-alcoholic beverages with similar end uses.

                                                Issue analysis: "Rebuilding the Coke bubble"   1
Product life cycle and new product strategy
Each Coke product has a different life cycle. The traditional Coke soft drink has
existed for many years and continues to be popular. Its product life cycle is
illustrated in figure 2. Considering how long the Coke soft drink has been on the
market and the increase in competition in recent years, it is likely that this particular
product is in the mid-late maturity stage (but seeking to return to growth via
               Fig. 2 - The product life cycle: Coke soft drink





                Introduction       Growth                  Maturity             Decline

The Coca-Cola Company's strategy for growth during the next decade involves the
introduction of a range of new products specifically for regional markets. Charlie
Frenette (manager for Europe) described the new ventures as "short-cycle fashion
brands", inferring that the brands are expected to have shorter product life cycles,
which would thereby effect the requirements of marketing. Figure 3 illustrates the
likely product life cycle of the new innovations, as compared to the traditional Coke
soft drink depicted in figure 2.
                                                                      Fig. 3 - "Short-cycle fashion brands":
The danger for Coke during the next                                             New Coca-Cola products
decade is that the large expenditure                 Sales/Profit
required to launch new product
innovations will not guarantee market
success and profitability. The                                                                          Sales
Company will have many products in
the introduction and growth stages,
but few are likely to achieve the same
success in the lucrative maturity stage                                                                 Profit
as the traditional core brands have.
Therefore, there is a significant risk                            +
that profits will be proportionately less
over time, in accordance with the                                 0
changes in the product life cycles.                                                                    Time
This helps explain why Coke is eager                              -
to return its focus to customers, their
                                                                      Intro. Growth     Maturity       Decline
tastes and how to improve time-to-
market (e.g. recent launch of Fanta

                                                           Issue analysis: "Rebuilding the Coke bubble"       2
Exotic in 4 months as compared to 3-5 years under the old system).

Branding and new product strategy
A brand is "a symbol, design, name, or combination of these that identifies a seller's
product and distinguishes it from the competition" (McColl-Kennedy and Kiel 2000, p.
293). The Coke brand is anchored in the consumer's mind using consistent features
such as red colour and the distinctive cursive style to write the brand name
(trademark). Coke soft drink has even used packaging (e.g. traditional curved Coke
bottle) to add recognition to its brand. Although the Coke soft drink has essentially
the same brand features as the Company, other products in the product mix have
their own individual branding. Some of the better known brand names controlled by
the Company include 'Fanta', 'Lift', 'Sprite' and 'Mount Franklin'. The Company also
uses brand extensions with products such as 'Diet Coke'.

In order to launch its new short-cycle products (and new individual brands) in
restricted time periods, the Coca-Cola Company will have to meticulously refine its
new product development process. Booz-Allen and Hamilton (1982) outline seven
key steps in the new product development process, including:

     1.   New product strategy;
     2.   Exploration (idea generation);
     3.   Screening;
     4.   Business analysis;
     5.   Development;
     6.   Test marketing; and
     7.   Commercialisation.

"Rebuilding the Coke bubble" briefly outlines some of the strategies that Coke will
employ to refine its new product development process. Coke is seeking to
decentralise the development of new products through fundamental changes to its
new product strategy. For instance, regional offices are being encouraged to explore
and screen new product ideas that can be launched in local markets.

Furthermore, the performance criteria for regional offices are shifting in an attempt
to remove conflict between short-term financial targets and long-term profitability.
In one effort to minimise this problem, Frenette suggests that he is prepared to "act
as a venture capitalist, investing the firm's money in any promising prospect from a
passionate local boss". This approach is likely to encourage an environment of
innovation in regional Coke offices that has not previously existed.

In another approach to innovation, Jeremy Schwartz, marketing and innovation
director for Europe and Asia, is recruiting innovation teams of 8-12 people with
mixed skills, to develop new ideas and take them through to commercialisation. This
approach is characteristic of new product venture teams, which experience shows
are an effective way of organising new product innovation (McColl-Kennedy and Kiel
2000, p. 368). It is likely that such teams would spend significant time on
developing product characteristics that will increase the rate of acceptance by
consumers. Five characteristics commonly considered important are compatibility,
observability, simplicity, trialability and relative advantage (McColl-Kennedy and Kiel
2000, p. 373).

                                               Issue analysis: "Rebuilding the Coke bubble"   3
Marketing channels
Channels of distribution are "all the organisations and structures involved in
facilitating the sale and movement of product from the producer to the final
consumer" (McColl-Kennedy and Kiel 2000, p. 441). The major functions of
marketing channels are the transaction function, logistics function and facilitation
function. Channel participants can be classified into three groups, including:

     1. Primary channel institutions (perform the selling function);
     2. Facilitating channel institutions (do not take direct role in selling); and
     3. Merchant institutions (usually retailers).

Coke usually has conventional marketing channels, often with four levels including
the manufacturers, wholesalers, retailers and consumers. However, there are
regional peculiarities and vertical integration often occurs, whereby Coke may
distribute direct to retailers, or may actually act as the retailer (e.g. vending

Cooperation of channel members is essential, as all members are dependent on each
other. In the article, Schwartz is acknowledged to have been working to improve
relations with bottlers, "without whom nothing would happen". If the marketing
channels used by Coke are cooperative and power is distributed equitably across the
channels, increased integration is likely to occur, which will create more efficiency,
better competitiveness and enhanced profitability.

Physical distribution management is important in getting the product to consumers in
an efficient manner. Physical distribution systems includes five key components,

     1.   Order processing;
     2.   Materials handling;
     3.   Warehousing;
     4.   Inventory; and
     5.   Transportation.
                                         (McColl-Kennedy and Kiel 2000, pp. 472-474)

Efficient physical distribution management will assist Coke in providing customer
service, by ensuring that the right product gets to the right place at the right time
(McColl-Kennedy and Kiel 2000, p. 476).

Coca-Cola's marketing efforts aim to increase sales, and subsequently, increase
operating profit. However, pricing must be kept reasonably constant to maintain
market competitiveness with other beverage suppliers (this relates to elasticity in
demand). Successful marketing will increase consumer demand, and in turn,
increase willingness to supply, ceteris paribus (other things being equal). From an
economics perspective, marketing strongly interrelates with the law of supply and
demand i.e. "the price of any good adjusts to bring the supply and demand for that
good into balance" (Mankiw 1998, p. 78).

Applied to the marketing of Coca-Cola products (and considering that the products
are supplied to consumers at generally fixed prices regionally), high demand and

                                               Issue analysis: "Rebuilding the Coke bubble"   4
            relatively fixed price will create a shift in supply, thereby improving sales and total
            revenue. The effect of marketing on demand (and total revenue) and supply when
            price is constant is illustrated in figures 4 and 5.

         Fig. 4 - Marketing shifts demand                                   Fig. 5 - New equilibrium when supply shifts

Price                                            S₁                Price                                            S₁


 P₁                                                                 P₁                                                         E

                                                         D₂                                                                   D₂
                                                 D₁                                                                 D₁

                                           Q₂         Quantity                                               Q₂          Quantity

        D₂ = shift in demand curve for Coca-Cola products                  S₂ = shift in supply curve for Coca-Cola products
        Q₂ - Q₁ = excess demand                                            P₁ x Q₂ = New total revenue (greater than P₁ x Q₁)
        P₁ x Q₁ = Initial total revenue                                    E = New equilibrium price and quantity
        (P₁ x Q₂) - (P₁ x Q₁) = Additional revenue available

            The slopes of the demand curve and supply curve indicate elasticity or inelasticity.
            In this case, considering the nature of the beverage market, both the demand curves
            and supply curves are elastic. In terms of the demand curve, this is because Coca-
            Cola products are not necessities, have close substitutes and have narrow category
            definitions, all of which create elasticity. In terms of the supply curve, this is
            because production levels can respond to demand in a short period of time (Mankiw
            1998, pp. 90-106).

            For example, Douglas Daft (CEO: The Coca-Cola Company) aims for the Company to
            attain 7-8% volume growth per year over the next decade. Assuming that in this
            market the quantity demanded and the quantity supplied stay reasonably close to
            equilibrium, the percentage change in quantity demanded and quantity supplied over
            time will be similar. Assume also that price increases over time at a rate similar to
            inflation (say 4-5%). When applied to the following formulae for price elasticity of
            supply and demand, both results are >1, which indicates elasticity. Hence the slope
            of the supply curve and demand curve in figures 4 and 5.

            Price elasticity of supply            = Percentage change in quantity supplied
                                                        Percentage change in price

                                                  = .075

                                                  = 1.66 (indicating elasticity)

                                                                    Issue analysis: "Rebuilding the Coke bubble"          5
Price elasticity of demand   = Percentage change in quantity demanded
                                   Percentage change in price

                             = .075

                             = 1.66 (indicating elasticity)

The promotional mix consists of advertising, personal selling, sales promotion and
publicity (Barry 1986, p.519). Since the death of Goizueta in 1997, Coke's overall
promotional performance has been less than satisfactory. Investors have lost
confidence due to declining profit growth, and a succession of poorly handled
negative publicity has made matters even worse. The Company's misfortunes have
included poisoning scares in Europe, anti-trust issues, racial discrimination claims in
the U.S. and deteriorating relationships with bottlers over syrup prices.

It is apparent that Coke has had ineffective crisis management strategies and has
perhaps even been unable to determine when situations actually warrant treatment
as a crisis. The problem seems to stem from the Company's poor responsiveness to
its environment, largely caused by a slow decision-making system, centralised in
Atlanta. The weakness of centralisation is that ownership is taken away from those
staff in regional offices who are best positioned to act in the interests of the

Daft's strategy of "thinking local, acting local" is designed to remove the barriers that
have inhibited Coke's performance in local markets. The previously popular
approach of Coke and other large corporations had been to “think global, act local”,
the exception of which has been Nestle which has avoided deviating from a
decentralised multi-national model (Rothenberg 2000). Coke‟s new strategy will
better enable local offices to take new products to market with minimal interference
from Atlanta. Push and pull promotional strategies can be tailored to the specific
tastes of local target markets, and publicity issues can be responded to swiftly by
local management.

If Coke intends to improve market share for both its core brands and new product
brands during the next decade, it will have to design more effective promotional
campaigns that elicit the desired response from consumers. Diagnostic tools such as
the AIDAS model are useful, but are still based on broad generalisations (McColl-
Kennedy and Kiel 2000, pp. 545-546). It seems evident that Coke could learn
valuable lessons on promotion if it studied the strategies of its key competitors (e.g.
Pepsi) more closely. Pepsi's success can be largely attributed to effective marketing
strategies such as the sponsorship of extreme sports, and celebrity endorsement in
local markets. In Australia for instance, Kylie Minogue has only recently regained
popularity, yet Pepsi already has her endorsing their product on television

People and ethics
People play an integral role at all levels of product delivery, from production workers
to salespeople and corporate managers. "Rebuilding the Coke bubble" raises

                                                Issue analysis: "Rebuilding the Coke bubble"   6
important issues regarding the previous management of people within The Coca-Cola
Company. As mentioned already, the Company has failed to leverage its regional
human resources for the maximum benefit of the Company. In addition, Coke has
failed in a fundamental task of any proficient management team, that being
succession planning. For instance, it is surprising that better contingencies had not
been developed for the loss of former CEO Roberto Goizueta. One explanation may
be that Goizueta had charismatic leadership qualities that gave the Coke
management a misguided sense of infallibility (Wood et al. 2001, p.472).

The inability of Coke to manage its people internally has been reflected in the
Company's recent poor handling of public relations. As globalisation gains
momentum worldwide, social pressure will further increase for companies such as
Coke, to be seen as "community friendly". Coke's future profitability may well
depend on its ability to engage in societal marketing in which greater emphasis is
placed on ethics and corporate social responsibility. The challenge for Coke is to
strike a balance between profitability and responsibility, and to ensure that it takes
into account all stakeholders that its actions effect. Some of the stakeholders
include consumers, competitors, employees, communities, governments and physical

"Rebuilding the Coke bubble" is essentially a summary of what has gone wrong with
Coke since 1997 and how "thinking local and acting local" will hopefully change the
fortunes of the Company. The article suggests that although Coke's new strategies
are credible options for success, there is a threat that new product development may
come at the expense of the core brands. Furthermore it implies a strategic conflict

         The need for local offices to shift focus from short-term financial
          performance to product innovation; and
         The need for watertight financial controls to protect the Company from
          overspending on new product development.

In other literature, Douglas Daft further clarifies Coke‟s new approach when he
summarises the six principles that will guide Coca-Cola into the twenty-first century.
The principles include:

     1.   Consumer    demand must drive everything;
     2.   Coca-Cola   Classic is the Company‟s most important brand;
     3.   Coca-Cola   must be known for serving all non-alcoholic beverages;
     4.   Coca-Cola   must be the best marketer in the world;
     5.   Coca-Cola   must think local and must act local; and
     6.   Coca-Cola   must be a modern citizen. “Our image is everything”.

                                                                     (Daft in Unger 2000)

If Coke's new strategies are to ensure the Company maintains a competitive market
position, new product innovations will have to provide tangible benefits in relatively
short periods of time. Changing product life cycles will have to be carefully
considered when forecasting future revenue, and as the needs and wants of
consumers change, the marketing focus will have to adapt. Furthermore, brand

                                               Issue analysis: "Rebuilding the Coke bubble"   7
building will be crucial in attracting consumers and building sales volumes. This
includes the need to strengthen the core Coke brand, which still accounts for 60
percent of sales. Perhaps most importantly, Coke will have to portray to consumers
the image of a locally aware company that recognises its corporate social

                                             Issue analysis: "Rebuilding the Coke bubble"   8

Barry, T.E. (1986) Marketing: An Integrated Approach, New York: The Dryden Press.

Booz-Allen & Hamilton Inc. (1982) New Product Management for the 1980s, New
York: Booz-Allen & Hamilton Inc.

McColl-Kennedy, J.R. and Kiel, G.C. (2000) Marketing: A Strategic Approach,
Melbourne: Nelson Thomson Learning.

Rothenberg, R. (2000) „An Interview with John Quelch‟, Strategy + Business, 1.html, (accessed

Unger, H. (2000) „Daft outlines decentralized Coke‟, The Atlanta Journal-Constitution,
(accessed 13/02/01).

Wood, J., Wallace, J. and Zeffane, R. (2001) Organisational Behaviour: A Global
Perspective, Milton: John Wiley & Sons Australia Ltd.

                                              Issue analysis: "Rebuilding the Coke bubble"   9
Appendix I - Production cycle (schematic of canning cold-fill operation)

                                          Issue analysis: "Rebuilding the Coke bubble" 10
Appendix II - Article: "Rebuilding the Coke bubble”


                                     Issue analysis: "Rebuilding the Coke bubble" 11

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