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.
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.
Want to see more full solutions like this?
Chapter 10 Solutions
Bundle: Managerial Economics: Applications, Strategies And Tactics, 14th + Mindtap Economics, 1 Term (6 Months) Printed Access Card
- With an estimated market share of 37%, Atlas is the dominant company and the price leader in an oligopolistic steel industry. The remaining market share is distributed equally between seven companies. Suppose that one of those ten companies, Norton, attempts to gain market share by undercutting the price set by Atlas. Calculate the “Four Firm Ratio” and Herfindahl-Hirschman Index “HHI” in the above-described market and interpret your answer. What model can best resemble this market? Briefly explain this model. In your opinion, what will be the effect of Norton’s attempt described above on Atlas’s market share: will it increase, decrease, or not affected at all? Justify your answer.arrow_forwardWith an estimated market share of 37%, Atlas is the dominant company and the price leader in an oligopolistic steel industry. The remaining market share is distributed equally between seven companies. Suppose that one of those ten companies, Norton, attempts to gain market share by undercutting the price set by Atlas. Calculate the “Four Firm Ratio” and Herfindahl-Hirschman Index “HHI” in the above-described market and interpret your answer. What model can best resemble this market? Briefly explain this model. In your opinion, what will be the effect of Norton’s attempt described above on Atlas’s market share: will it increase, decrease, or not affected at all?arrow_forwardJ&R Construction Company is an international conglomerate with a real estate division that owns the right to erect an office building on a parcel of land in downtown Sacramento over the next year. This building would cost $15 million to construct. Due to low demand for office space in the downtown area, such a building is worth approximately $13.5 million today. If demand increases, the building would be worth $16.8 million a year from today. If demand decreases, the same office building would be worth only $12 million in a year. The company can borrow and lend at the risk-free annual effective rate of 6 percent. A local competitor in the real estate business has recently offered $728,000 for the right to build an office building on the land. What is the value of the office building today? Use the two-state model to value the real option. (Do not round intermediate calculations and enter your answer in dollars, not millions of dollars, rounded to 2 decimal places, e.g.,…arrow_forward
- [The soft drink industry is dominated by two cola firms- DEW and HEW. The market is worth $8 billion. Each firm can decide whether to advertise or not, but advertising costs $2 billion to any firm undertaking it. Moreover, advertising will create only negligible new demand as the market is already saturated. So, for the purpose of this question, assume that the market remains at $8 billion regardless of advertising. If one firm advertises and the other does not, then the former captures the whole market. If both firms advertise, then DEW captures 60% of the market and HEW captures 40% of the market, but the advertising must be paid for. If neither firm advertises, then the market is again split 60:40, with 60% going to DEW and 40% to HEW.] [Draw the payoff matrix for this game where each player’s payoff is equal to the value of market it captures less the cost of advertisement. [Do any of the firms have dominant strategies? If so, what are they? Is there a dominant strategy…arrow_forward[The soft drink industry is dominated by two cola firms- DEW and HEW. The market is worth $8 billion. Each firm can decide whether to advertise or not, but advertising costs $2 billion to any firm undertaking it. Moreover, advertising will create only negligible new demand as the market is already saturated. So, for the purpose of this question, assume that the market remains at $8 billion regardless of advertising. If one firm advertises and the other does not, then the former captures the whole market. If both firms advertise, then DEW captures 60% of the market and HEW captures 40% of the market, but the advertising must be paid for. If neither firm advertises, then the market is again split 60:40, with 60% going to DEW and 40% to HEW.] Draw the payoff matrix for this game where each player’s payoff is equal to the value of market it captures less the cost of advertisement. (please explain how you calculate the payoff matrix)arrow_forwardWith an estimated market share of 40%, Atlas is the dominant company and the price leader in an oligopolistic steel industry. The remaining market share is distributed equally between ten companies. Suppose that one of those ten companies, Norton, attempts to gain market share by undercutting the price set by Atlas. Calculate the “Four Firm Ratio” and Herfindahl-Hirschman Index “HHI” in the above-described market and interpret your answer. What model can best resemble this market? Briefly explain this model. In your opinion, what will be the effect of Norton’s attempt described above on Atlas’s market share: will it increase, decrease, or not affected at all? Justify your answerarrow_forward
- With an estimated market share of 60%, Atlas is the dominant company and the price leader in an oligopolistic steel industry. The remaining market share is distributed equally between ten companies. Suppose that one of those ten companies, Norton, attempts to gain market share by undercutting the price set by Atlas.Calculate the “Four Firm Ratio” and Herfindahl-Hirschman Index “HHI” in the above described market and interpret your answer. What model can best resemble this market? Briefly explain this model. In your opinion, what will be the effect of Norton’s attempt described above on Atlas’s market share: will it increase, decrease, or not affected at all? Justify your answerarrow_forwardArgyle is a large, vertically integrated firm that manufactures sweaters from a rare type of wool produced on its sheep farms. Argyle has adopted a strategy of selling wool to companies that compete against it in the market for sweaters. Explain why this strategy may, in fact, be rational. Also, identify at least two other strategies that might permit Argyle to earn higher profits.arrow_forwardAfter graduation from business school, Pete wanted to start a new business. In competition with another firm, he became involved in developing a new technology that would allow consumers to sample food over the Internet. Given the newness of this market, technological compatibility across firms is important. Pete’s firm, DigiOdor, is far advanced in developing its Sniff technology. His competitor, WebTaste, has been working on an incompatible technology, Smell. If they both adopt the same technology, Sniff or Smell, they each may gross $150 million from the developing industry. If they adopt different technologies, consumers will later decide to purchase neither product, leading to gross sales of $0 each. In addition to the above considerations, switching over to the other technology would cost WebTaste $100 million right away and DigiOdor $250 million. In other words, WebTaste would incur additional costs of $100 million if it switched to Sniff technology, and DigiOdor would incur…arrow_forward
- Consider the market for cola soft drinks where Pepsi and Coke are dominating this market with well above 90% markets share combined. Under what market structure do Pepsi and Coke operate? What microeconomic model can best describe the behavior of Pepsi and Coke? Explain the main theme of this model. Given the obvious market share of both Pepsi and Coke, on what grounds would you justify the multibillion-dollar annual advertising spending by those two companies?arrow_forwardSingComp-AI (“SCAI”) is a Singapore-based startup which develops compliance technology driven by artificial intelligence (“AI”) for financial institutions in Singapore. Compliance technology helps financial institutions in their adherence to applicable laws and regulations, as well as identifying and managing compliance-related risks. In the first year of its operations, SCAI assembled a competent team of professionals to help build its AI infrastructure and to support its growth. Marisa, an AI professional, was hired to head the product development team, and she is widely recognized as one of the key contributors to SCAI’s early success. In SCAI’s second year of operations, Marisa tendered her resignation. It was revealed that Marisa will be joining a rival company called “Eye-Tech” (“ET”), which upset the management of SCAI greatly. ET operates in the same business niche as SCAI, and is also looking to develop similar AI-driven compliance technology for financial institutions. Given…arrow_forwardOne CEO justified the merger of his soft-drink company with a machine tool company inthe following manner. This is a great merger. First the products are unrelated. This out company’searnings volatility is likely to decrease. Second, our management team has proven that we are bettermanagers than the former management team of the tool company, and this we are likely to discovernew way to create and capture value within the tool company. Evaluate this explanation for themerger.arrow_forward
- Managerial Economics: Applications, Strategies an...EconomicsISBN:9781305506381Author:James R. McGuigan, R. Charles Moyer, Frederick H.deB. HarrisPublisher:Cengage LearningManagerial Economics: A Problem Solving ApproachEconomicsISBN:9781337106665Author:Luke M. Froeb, Brian T. McCann, Michael R. Ward, Mike ShorPublisher:Cengage Learning