Purpose of Assignment
Students will develop cost curves on which firm behavior is based and will utilize these cost curves to determine the behavior of their chosen organization in the market served. Using the concept of comparative advantage, students analyze trade opportunities and use the model of supply and demand to explain factors that could affect demand, supply and prices. Students will determine various factors that could affect their organization’s total revenue and will recommend actions the firm could use to maximize their profit and their presence in the market served.
Assignment Steps
Scenario: You have been given the responsibility of working with your organization’s CEO to do a competitive market analysis of the potential success of one of their existing products.
Research an organization and a product produced by that organization in which an analysis can be conducted.
Write a 1,750-word analysis of the current market conditions facing your product, making sure you address the following topics:
Define the type of market in which your selected product will compete, along with an analysis of competitors and customers.
Analyze any comparative advantages and international trade opportunities.
Explain the factors that will affect demand, supply, and prices of that product.
Examine factors that will affect Total Revenue, including but not limited to:
Price elasticity of demand
Factors that influence productivity
Various measures of costs, including opportunity costs Externalities and government public policy and their effect on marginal revenue and marginal cost
Recommend how your organization can maximize their profit-making potential and increase their presence within the market served by the product.
Solution
Introduction
For this analysis, we chose Coca-Cola, which is a product of The Coca-Cola Company. It is one of the most renowned or globally recognized products. In this analysis, we will identify 1) the market in which the product competes, 2) its competitors, 3) its consumers, 4) product’s competitive advantage, 5) factors that affect sales 6) position of the product (in local and international markets), 7) factors that affects demand-supply-prices and 7) factors that impact total revenue. In addition to that, we will also analyze price elasticity of demand and factors that affect productivity.
Market, Competitors, and Customers
Market
Coca-Cola competes with the monopolistically competitive market, which has certain characteristics, which fall between the characteristics of competitive markets and monopoly. Such market (monopolistically competitive market) has a large number of buyers and sellers, which suggests that consumers have choices, opportunities, and advantage. It also suggests that because of a large number of sellers, producers or manufacturers, of a product that is competing in a monopolistically competitive market, can exert a very little influence on the market. Also, in a monopolistically competitive market, there is free entry and exit; however, in case of carbonated beverages (such as Coca-Cola), the economies of scale and brand recognition keep the competitors out. Another characteristic, of monopolistically competitive market characteristic that is relevant to this market, is product differentiation. This characteristic defines the strategy of the product for the market, and the company (The Coca-Cola Company) primarily relies on this characteristic to compete and earn a profit (Banutu-Gomez, 2012).
Competitors
There are some products that compete with Coca-Cola in this monopolistically competitive market, which include Pepsi, Red Bull, Sprite, Gatorade, Dr. Pepper, Lipton, etc. However, the main competitor, of Coca-Cola/Coke, is Pepsi, which is a similar product to Coke (but not identical). It is evident that as the new brands are entering the market and as the economies of scale are dropping (region/city wise), the competition is becoming stiffer, and the margins of profit have dwindled. In fact, some these competitors are competing against Coca-Cola in different markets of the world. It must be acknowledged that competition, in the market, not only reduces the size of revenue and margin of profit, but also reduces the influence of a firm/product in a market (Anestinaa, Femi, & Sulaiman, 2013).
Customers/Consumers
A couple of decades ago age of consumer-base, of Coca-Cola, was very diverse; however, with the time it has reduced. Primarily, it is because customers have become health conscious, which seems to suggest that taste has changed over the years. However, in developing countries and Muslim-majority countries, Coca-Cola and such brands are still very popular because of several reasons, which include the non-alcoholic nature of the product and fewer alternatives. As the size of customer/consumers is shrinking, the dynamics of the market are also changing, which are affecting strategies of all the competitors. Therefore, changes in the strategy, wherever they are required, will benefit in making a product (Coke/Coca-Cola) more competitive and profit generating (Gustavsen, 2005).
Analysis and Projection
It is apparent that monopolistically competitive market, of beverages (carbonated/soft drinks), is transforming as the taste and preferences are changing. It will affect both revenue and profit. As the economies of scale are becoming smaller, entry into this market is becoming relevantly easy. However, still, economies of scale are large enough to keep companies and firms out of the market and allowing brands to earn higher profits. Also, as the taste and preferences are changing, demand for the carbonated drinks, including Coke, is changing, which necessitates changes in strategy (including advertisement).
Comparative Advantage
Comparative Advantage is the ability of a firm to produce a product or service at a lower opportunity cost. In case of firms, which produce beverages, this concept is more comprehensive, as it is not limited to opportunity cost. The comparative advantage, which Coca-Cola has it’s 1) optimal production process, 2) distribution system and 3) globally recognized the brand. All these three factors increase the size of the comparative and competitive advantage of Coca-Cola. Also, these factors also produce new opportunities other than the comparative advantage against the rivals.
We learn that not only company can produce efficiently, but also it has very robust and effective distribution system. There are several reasons for the increased efficiency. The primary reason is that The Coca-Cola Company is producing this product for an extended period, which has allowed our company, The Coca-Cola Company, to improve its efficiency by systematically visiting its operations/production history. Also, the company produces more than five hundred brands, which allows the company to improve production and distribution (entire operation) from the knowledge obtained through production and distribution. The advertisement also plays a major part in developing and increasing the competitive advantage. However, as the taste and preferences are changing (along with an increase in competition), competitive advantage is diminishing (Dirisu & Iyiola, 2013).
Demand, Supply, and Prices of That Product
Endogenous factor, price, affects the quantity demanded, whereas exogenous factors, such as income, taste, and preference affect demand. As the product competes with the monopolistically competitive market, where the demand curve is relevantly flat; therefore, any change in price would have a huge effect on demand. It is because of the price elasticity of demand, for the product is more than one unit. It suggests that a one unit increase in price will reduce demand for the product more than one unit. As the competition increases, our premium product, Coke/Coca-Cola, will generate lesser revenue and because of the choices available (similar products), the company cannot make drastic changes in the prices to increase revenue even after investing heavily on the quality (product differentiation).
Not only there are challenges related to quantity demanded, but also regarding the demand. As people are becoming more health conscious, they prefer soft drinks less and less. In fact, the demand for the drinks, which are good for health, has shifted to the right, increasing their prices and revenue for the manufacturers of the product.
The supply has also shifted to the left because the demand for the product (Coca-Cola) has globally decreased. It has forced our company to cut 1200 employees. We project that the demand for the product will continue to decline, which is why the emphasis must be on the other products, which are health conscious. We have introduced variants of the product that have no adverse effect on health. However, the demand continues to decline, which compels us to re-think the overall strategy as the shift in decline, to the left, is caused by preference and taste (primarily).
Factors that will affect Total Revenue
Total Revenue is Price in Quantity (sales of products). Therefore, to learn which factors will affect total revenue, we must investigate prices and quantity (sold). The price of the product has increased gradually over the years, as the inflation has increased over the period. However, the sales of the product have decreased globally. There are numerous factors, which are responsible for the decline.
- The demand for the product has shifted to the left, which has caused a decrease in revenue. To keep the revenue stable and to meet the decline in demand, the company had to take action from the supply-side, which as downsizing.
- An increase in the number of competitors, local and international, has also adversely impacted sales, causing the revenue to decline. Also, because of the price elasticity of demand, there are few options regarding the increasing price of the product, even after improving the quality further.
Productivity is not an issue for the company, as it has optimized its operations. The real concern, about total revenue, remains the shift in the demand curve and the intensifying of competition.
Projection
It is apparent that total revenue will continue to diminish, globally, as the taste and preferences, of consumers, are changing. It is apparent that even a massive campaign will not be able to reverse the trend unless we produce a healthy variety of the product, which positively affects the health of an individual (Choi, 2017).
Market and Curves
We know, from the discourse, that when the price of Pepsi and other competitors will increase, the demand for Coca-Cola will increase (monopolistically competitive market). Therefore, the AR we will have a kinked Average Revenue Curve; the MR curve will be broken.
Market Structure and Shape of Demand Curve
The portion, of the demand curve, which is red, suggests that if Coca-Cola increases prices, then it will lose a large chunk of customers, who will switch to Pepsi or other such brands. The green portion, of the demand curve, suggests that if Coca-Cola reduces the price, it will gain more customers, but the increase will less than one (price elasticity of the demand curve).
Shift in Demand Curve
The graph above depicts the shift in the demand curve to the left, which has not affected prices; however, it has affected the revenue of the company. According to some estimates, it has lost 55% revenue, which is primarily because of the change in preference/taste, regarding carbonated drinks, as more studies are suggesting that carbonated drinks are unhealthy (Cheng, 2009).
Conclusion and Recommendation
In the end, it is concluded that Coca-Cola has tried price discrimination policy that was based on weather (hot/cold), which did not work. In fact, after the implementation of the policy, revenues, reduced (not because of the new strategy). The challenge is a consequence of the perception that developed over the years regarding the soft drinks. People consider it unhealthy, and therefore, demand has shifted to the left. We recommend that we must introduce a variant of Coca-Cola, which is healthy. The other option is that we gradually eliminate the product and focus on its substitute, which is a healthier product. Already, the company has a vast and optimized infrastructure, which reduced the cost of production and scale of economies to produce healthy drinking product.
References
Anestinaa, A. I., Femi, A., & Sulaiman, Y. (2013). Price Competition Among Retailers Of Coca Cola Products. International Journal of Sciences: Basic and, 9(1), 5-17.
Banutu-Gomez, M. B. (2012). COCA-COLA: International Business Strategy for Globalization. The Business and Managment Review, 3(1), 155-169.
Cheng, R. (2009). Dental erosion and severe tooth decay related to soft drinks:. Journal of Zhejiang University SCIENCE B, 10(5), 395-399.
Choi, C. (2017, February 10). Coca-Cola profits fall 55 per cent as consumers ditch sugary drinks. Retrieved from http://www.news.com.au/finance/business/retail/cocacola-profits-fall-55-per-cent-as-consumers-ditch-sugary-drinks/news-story/804f1efe051e2ff0a2513b080766f5bb
Dirisu, J. I., & Iyiola, O. (2013). Product Differentiation: A Tool Of Competitive Advantage And Optimal Organizational Performance (A Study Of Unilever Nigeria Plc). European Scientific Journal, 9(34), 258-281.
Gustavsen, G. (2005). Public policies and the demand for carbonated soft drinks: a censored quantile regression approach. International Congress, August, 23-27.
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