Chapter 10, Problem 1E

To determine

To describe: The difference in the profits earned by related companies in the Cola trade is to be uncovered through Porter’s Five Force Analysis

Answer to Problem 1E

The profitability of firms in an industry is affected by various factors like the competition from existing companies and new entrants, the negotiating power of suppliers and buyers and the number and nature of substitute products available in the market.

Explanation of Solution

The profitability of the Cola syrup manufacturers like Coco Cola and PepsiCo is 81%, while the bottlers earn only 15% of the operating profits. The Five Force model formulated by Porter is used to analyze this difference in profitability if related companies in the Cola trade. The five forces that affect the profitability of a company as identified by Porter are

• Industry Rivalry
• Bargaining Power of Suppliers
• Bargaining Power of Buyers
• Threat of New Entrants
• Threat of Substitute

Cola syrup market has two major companies making them interdependent. Hence, they indulge in a non-price tactical competition rendering huge profits. Bottling companies settle with lower profits avoiding price competition. Bottlers depend on the syrup manufacturers. Due to their unique formula for the concentrate, the syrup manufacturers gain power over the bottlers, thus reducing their profitability. Few competitors make the market attractive for new entrants and pose a threat for the existing companies. The huge and increasing market demand trend for Cola drinks induces the companies to introduce substitute products. A change in the consumer preferences may pose a threat to the firm. Therefore, a number of factors influence the long run profitability of the firm.

Economics Concept Introduction

Introduction: Porter’s Five Force is a framework used to analyze the competitive environment of a company. The tool helps firms to comprehend the forces that affects its profitability in the industry.