MAKE or BUY decision? Pepsi and Coca-Cola war

Size: px

Start display at page:

Download "MAKE or BUY decision? Pepsi and Coca-Cola war"

Crystal Gilmore
6 years ago
Views:

1 MAKE or BUY decision? Pepsi and Coca-Cola war Akemi Yagi Mendoza MA4N0221 Dang Trang Thanh Nha MA4N0226 Jyoti Sharma MA4N0235 Nomin-Erdene Gan-Erdene MA4N0222

2 Content 1. MAKE or BUY decision? Introduction A case study -Delta Air Lines Conclusion 2. Pepsi And Coca-cola War Introduction A case study Coca-cola and Pepsi Conclusion

3 1. Definition 2. Case study Delta airplane with fuel material

4 Definition A make-or-buy decision is the act of choosing between manufacturing a product in-house or purchasing it from an external supplier. In a make-or-buy decision, the two most important factors to consider are cost and availability of production capacity.

5 Four stages of make and buy decisions

Case study When Delta Air Lines announced it would acquire a refinery to ensure a steady supply of fuel and ideally achieve greater cost control, it raised a new debate about vertical

6 Case study When Delta Air Lines announced it would acquire a refinery to ensure a steady supply of fuel and ideally achieve greater cost control, it raised a new debate about vertical integration: Is it a smart strategy, or not? Does it save money? Do I need to control this activity? (Source: Make vs. Buy Is Not the Question to Ask by Paul Leinwand, from The Bloomberg, May 14, 2012)

7 founded in 1924 a major American airline headquarters and largest hub in Atlanta, Georgia the sixth-oldest operating airline by foundation date Introduction Delta Air Lines

8 For an airline company, the biggest cost of doing business > jet fuel. Delta Airlines took the unprecedented step of spending $150 million for jet fuel refinery.

9 In a 2012 interview, Delta CEO, Richard Anderson, told CNBC that owning the refinery would allow the airline to participate in the pricing of jet fuel in the United States and have greater control over that critical business expenses.

10 The profitability of refineries is measured by something called the "crack spread" the difference between the cost of crude oil and the price of the refined product (in this case, jet fuel). For example, if a barrel of crude oil costs $100 and the price of a barrel of jet fuel is $150, the crack spread would be positive 50

11 dropped roughly six points

12 Bhaskara told Business Insider a savings of $40 million dollars in fuel costs per point for the airline this change translates into annual savings upwards of $240 to $320 million for Delta alone.

13 will allow Delta to reduce its fuel expense by $300 million annually and ensure jet fuel availability in the Northeast this is a smart way for Delta to manage its fuel expenses According to Delta's chief executive officer Richard Anderson

14 Purchasing the refinery has been useful for Delta. It's also caused the price of jet fuel to fall throughout the airline industry, according to Vinay Bhaskara, a senior aviation analyst at Airchive.com.

15 It's simple supply and demand: By focusing production of the former Phillips 66 refinery on jet fuel, Delta has flooded the marketplace with supply it would otherwise have purchased, helping its competition to save money on fuel.

16 Changes in Delta Airlines Innovative approach Pricing strategy Competitive advantage, buying refinery Merging with another U.S. Carrier Partnership with foreign airlines ( Air France, KLM) Source: Harvard Business Review

17 Delta Airlines Pricing for jet fuel changed Better control of their internal expenses Making radical changes in the company Reporting loses rising to $116 million in 2013

18 Rising Fuel Bills- Before Vertical Integration In 2013, the company spent about $11.5 billion Buy 4 billion gallons of jet fuel Source: Reuters (January, 2014)

19 With global demand shifting towards jet fuel and diesel Source: Delta Airlines

20 What factors are influencing in the airline industry? 1. Fuel Price 2. Demanding customers 3. Low cost carriers 4. Internet Source: Harvard Business Review

21 Delta s success in buying the refinery ( VIDEO)

22 Rise in fuel prices and costs

24 Revenue estimates ( 2013)

25 2015 U.S. Airline estimated Cash Flow

26 Comments from experts: Planned investment costs for the refinery appear to be offset by active fuel hedging strategies and although the refinery continues to produce loses, Delta is demonstrating trajectory for a rather competitive or perhaps industry leading fuel cost advantage. -stated Bob Ferrari ( The Ferrari Consulting and Research Group LLC and Supply Chain)

27 Discussion question: Delta buys refinery, becoming first airline to make own fuel After all the explanation, do you think it was a good investment, please give us your opinion.

28 Summary: Buying the refinery for Delta---- > Increase in sales Important to create competitive advantage Improving management of costs Success vertical integration in Delta Air Lines

29 Conclusion Make-or-buy analysis is done at the strategic and operational level. There are longer-term strategic considerations entwined with the make-or-buy decision that has great significance Make or buy is a decision not to be made on the basis of monetary considerations, that is companies must determine how that decision will affect the end product quality and the company's technology when making best make-or-buy decision.

30 Case Study: Pepsi And Coca-cola War

31 Which one do you like most and why?

32 Introduction Coca cola was formulated by John Pembert in 1886 in Altanta, Georgia, who sold it at drug store soda fountain as potion for mental and physical disorder. In 1899, Candler coca cola s first bottling franchise and network grew quickly. During 1920 s and 1930 s, woodroof(ceo) developed coke s international business. During the world war II, 64 coca cola bottling plants were set up. This contributed to coke s dominant market shares in most Euorpean and Asian countries

33 Introduction Pepsi cola was invented in 1893 in New bern, North Carolina by Pharmacist Caleb Bradhan. Like coke, pepsi adopted a franchise bottling system, and by 1910 it had built network of 270 franchised bottlers. But in 1923 and in 1932, pepsi struggled and declaring bankruptcy. Pepsi lowered the price and tried to expand its network. In 1938, coke filed against Pepsi, claiming Pepsi-cola was an infringement on the coca-cola trademark. In 1941, court in favor of Pepsi and cola wars began.

34 Products Coca cola, Thums Up Diet coke Fanta Sprite, limca Mazza Georgia Kibley Pepsi Diet Pepsi Mirinda 7 up, Mountain Dew Tropicana Aquafina Lays, Cheetos

35 Market Share 2014

36 Reasons For Coke and Pepsi War Prices Taste challenge Advertising

37 Price and Advertising Earlier cost based pricing Rs 8 Bottle(200ml) Coca Cola T in Rs 25(300ml) Coca Cola spends more on advertising than manufacturing Competition based Rs 8 (200ml) Pepsi T in Rs 25(300ml) Very flexible to come down with the price very quickly

38 Taste Without Brand Name: People preferring the taste of Pepsi 51% People preferring the taste of coca cola 44% Can t say 5% With Brand Name: People preferring the taste of Pepsi 23% People preferring the taste of coca cola 65% Can t say 12%

39 Strategic Analysis- SWOT Strength Weakness Opportunities Threats

40 SWOT Strength Most valuable for 13 years World largest in beverages: 15 bi dollar brand Extensive global distributed network Strong in emerging markets: China, Brazil, Eastern Europe 22 nd most valuable brand 2 nd largest F&B in the world,22 bi dollar brand Extensive global distributed network Successful marketing campaigns: celebrity endorsements

41 SWOT Weakness Declining market share since 2000 Negative publicity CSD focus: only 32 % non CSD share Price pressure from mass retailers(wal-mart): 40% of U.S. packaged sales Declining market share in beverages Negativity publicity Overdependence on U.S. market: total 50% of total sales Low market share in fountain accounts: 20 % Vs. Coke s 69% Price pressure from mass retailers(wal-mart): 12% of revenue

42 SWOT Opportunities Expand non CSD : Juice, sport, energy, bottled water,vitamin water etc. Global expansion in emerging markets: India, China, Brazil Growing nutritious snacks product markets Expand non CSD : juice,sport, energy, bottled water, vitamin water etc. Global expansion in emerging market: India, China, Russia

43 SWOT Threats Fear of losing market share due to rapid market fluctuations Barriers of new entry in international markets Competition with each other Decreasing brand loyalty among consumers Price pressure from mass retailers Changing consumers taste and preferences.

44 Case study -Cola Wars Continue: Coke and Pepsi

45 The U.S CSD Industry

46 Production and Distribution of CSD Involved 4 major participants

47 Coke vs Pepsi Sales

48 Coke vs Pepsi Annual Net Income

49 Dividend Growth by year

50 Employees Advertising

51 Negative health perception of CSD Health-conscious consumers have been turning away from sugar-sweetened beverages, and that s causing headaches for the country s top soda sellers.

52 Diet Coke vs. Diet Pepsi by Sales Volume

53 Who was the real winner? It's no longer a matter of who's winning it's about who's losing the least Lately, the answer is neither.

54 What is the next step for Coke and Pepsi's due to the decline in the U.S. CSD market? To invest more money, to help build up their market presences in other countries. What other markets could Coke and Pepsi go into?

55 One corner of the beverage industry that s actually winning? Energy drinks. Compared to the contracting Coca-Cola and PepsiCo businesses, energy drink companies like Monster and Red Bull have consistently experienced positive yearly growth:

Miranda Logan, Becki McGinnis, Kaelin Sayre, Haley Gillan & Amanda Morrissey

Miranda Logan, Becki McGinnis, Kaelin Sayre, Haley Gillan & Amanda Morrissey Mission Statement To refresh the world - in mind, body and spirit To inspire moments of optimism - through our brands and actions