Strategic Management Internal Analysis and SWOT Analysis essay
Executive Summary
This report is devoted to analysis of internal environment of Coca-Cola company using economic value added approach and resource based framework. The importance of analysis of internal environment is outlined in the introduction, and the essence of both approaches to analyzing internal environment is explained in Section 1. In Section 2, EVA for Coca-Cola company (for year 2010) is calculated. The results of calculations show that the company’s financial position is strong and it effectively increases shareholder income.
In the next sections, analysis of tangible and intangible resources (section 3) and distinctive capabilities (Section 4) of Coca-Cola is performed. As a result of this analysis and preliminary analysis, SWOT of Coca-Cola company are outlined in Section 5, and an overview of the performed analysis with appropriate considerations is presented in the conclusion.
Introduction
Assessment of internal and external environment is highly important for any company in order to develop strategic vision, perform marketing planning, choose directions for development and compete successfully at the market. Internal forces affecting the organization are the factors which are largely controlled by the organization; these forces determine the strengths and weaknesses of the organization and serve as a background for creating competitive advantages and new market approaches for the organization.
There are two key approaches to performing internal analysis of an organization: Porter’s Value Chain and Resource-Based framework. These two approaches can be viewed as complementary ones, but there also are significant differences. While Porter’s value chain focuses on the value added (created) by the organization, resource-based framework focuses on the sources of competitive advantages and particular differences existing by the companies. Value chain analysis thus allows to identify critical processes and costs, and resource-based framework outlines key distinctive capabilities of the organization. The purpose of this paper is to apply EVA and RBV approaches to the analysis of the Coca-Cola company, to identify key strengths and weaknesses of the company and to complete the company’s SWOT.
1. Methods of analysis of internal environment
The analysis of strengths and weaknesses of Coca-Cola in this report will relate to financial effectiveness of the company’s operations analyzed by the method of economic value added and to the resources and distinctive capabilities shaping the competitive advantages of the company. EVA (economic value added) is a financial measure which shows the effectiveness of residual income generation and focused on after-tax cash flows.
Resources and competitive advantages will be estimated using the resource based framework. This framework is used to determine sustainable competitive advantages shaped by tangible and intangible resources of the company as well as its distinctive capabilities. According to RBV framework, the resources or capabilities which are valuable, rare, inimitable and non-substitutable, are the basis for the company’s competitive advantage. Tangible resources include physical, financial and human resources; intangible resources include technical and intellectual resources as well as goodwill. Distinctive capabilities of the company can be classified into architectural, reputational and innovative capabilities. The sections below present EVA calculation, analysis of Coca-Cola tangible and intangible resources and distinct capabilities, and the resulting list of strengths and weaknesses of the company.
2. EVA calculation
In order to determine the economic value added by Coca-Cola Company in 2010, it is necessary to apply the formula for EVA: economic rent equals NOPAT (net operating profit after taxes) less WACC (weighted average cost of capital) multiplied by the invested capital. NOPAT for Coca-Cola can be determined by taking income before tax ($14,243 million) plus interest expense ($733 million) less tax expense ($2,384 million) (The Coca-Cola Company, 2011). Thus, for year 2010, Coca-Cola’s NOPAT is equal to $12,592 million. Further, it is necessary to determine invested capital, which can be calculated as total assets ($72,921 million) less accounts payable ($9,132 million) (The Coca-Cola Company, 2011), which is equal to $63,789 million.
In order to determine WACC, it is necessary to determine the cost and share of debt and equity capital. Marginal tax rate for Coca-Cola is 35%, and its cost of debt can be evaluated as 1.3%, according to the S&P rating of A+ assigned to the company (S&P ratings, 2011). Thus, the cost of debt for Coca-Cola is 1.3%*(1-0.35) = 0.845%. The cost of equity for the company can be determined using CAPM equation as risk free rate plus beta multiplied by equity premium. Risk-free rate for 2011 is 0.25%, equity risk premium for 2011 is 5.5% (2011 US Risk Equity Premiums, 2011), and beta for the company is 0.49 (The Coca-Cola Company, 2011). Cost of equity for Coca-Cola thus equals to 0.25% + 0.49 * (5.5% + 0.25%) = 3.07%.
The share of equity for Coca-Cola is $31,003 million / $72,921 million = 42.52%, and the share of debt is thus 100%-42.52% = 57.48%. WACC for Coca-Cola equals to 0.4252 * 3.07% + 0.5748 * 0.845% = 1.79%. EVA = $12,592 (mln) – 1.79%*63,789 (mln) = $11,450.18 million. Added value of the company is positive and constitutes 17.95% of invested capital, which means that the operations of the company are effective and financially viable.
3. Resource analysis
Key physical resources of Coca-Cola include, first of all, diverse product portfolio: the company sells more than 3,500 products (2010 Year in Review, 2011), and managed to enter numerous market segments such as regular beverages, diet beverages, juices, juice drinks, energy drinks, waters, milks, teas and coffees, etc. The company also has a diverse network of manufacturing locations and warehouses, and partners with a variety of bottlers, thus increasing the distribution network. Key physical factor is the growing popularity of Coca-Cola products in emerging economies: during 2010, the company’s sales have increased by 6% in the Pacific region, and by 12% in Africa and Eurasia segment (2010 Year in Review, 2011).
Another group of resources shaping the strengths of the company are financial resources. Coca-Cola is financially viable: its revenues have increased during the recent 2 years, and are expected to grow in 2012 (U.S. Beverages & Snacks, 2011). The company’s successfully increasing its shareholder value, and one more particularly important characteristics of its financial stability is unusually low beta (0.49) (The Coca-Cola Company, 2011). This means that Coca-Cola’s vulnerability to economic fluctuations is rather low.
The company employs 139,600 associates in more than 200 countries, and treats the employees as key resource (2010 Year in Review, 2011). Incentives such as Coca-Cole University and numerous benefits are used to retain and attract talents (2010 Year in Review, 2011). The company focuses on intellectual resources, and one of the powerful factors for Coca-Cola is its R&D potential, shaped by the selection and recruitment of proper talents.
With regard to technical resources, the company’s potential is currently directed towards innovative product development, packaging and marketing. Coca-Cola has always been the innovator in bottling, and the company also managed to combine new technical ideas with powerful marketing ideas. Overall, marketing can be considered as the most valuable intellectual resource of Coca-Cola (Polk, 2009). Coca-Cola’s goodwill is also a significant resource, but recently due to claims associated with the improper quality of products (and issues with toxic elements in India in 2007) the company’s goodwill has been growing slower than PepsiCo’s goodwill (Kaplan, 2011). In the end of 2010, PepsiCo’s goodwill constituted $26.44 billion, and Coca-Cola’s goodwill was only $19.4 billion (Goodwill and Intangibles for Coca-Cola, 2011).
4. Distinctive capabilities
Key distinctive capabilities of the company rely to the architecture class of capabilities. The most important distinctive capability of Coca-Cola is related to its beverage concentrates and syrups with unique tastes, which made the company popular worldwide. Production facilities and infrastructure further add to Coca-Cola’s unique capabilities: the company owns more than 30 beverage concentrate manufacturing plants worldwide and more than 300 warehouses for beverage distribution only in North America, let alone numerous bottling partners worldwide (Polk, 2009).
One of very important distinctive capabilities of Coca-Cola is its market share: every day about 55 million of beverages are served worldwide, and Coca-Cola’s share is more than 1.7 billion, which constitutes 3.1% of all word beverage servings (Kaplan, 2011). Another highly important distinctive capability is strong brand recognition: the company’s portfolio includes 17 products which are worldwide brands worth more than a billion dollar each (U.S. Beverages & Snacks, 2011).
With regard to reputation, the situation is ambiguous. On one hand, the company has 4 extremely popular brands (Coca-Cola, Sprite, Fanta and Diet Coke). On the other hand, the company has been subject to numerous class lawsuits related to the presence of toxic elements in the drinks and there were claims associated with improper quality of water in the bottles (U.S. Beverages & Snacks, 2011). These claims have affected the reputation of the company. Moreover, the customers are now more and more concerned about the healthy way of living, and there is certain loss of consumer confidence associated with the above-mentioned claims.
5. Strengths and weaknesses of the company
Basing on the results of RBV analysis and on the results of previously performed analysis of external environment, it is possible to outline the following strengths and weaknesses of Coca-Cola company.
Strengths:
Leading market presence
Strong portfolio of world leading beverage brands
Large-scaled operations
High financial stability (strong financial position)
Low sensitivity to economy fluctuations
Strong manufacturing and distribution infrastructure
Growing popularity in emerging economies
Weaknesses:
Reputation of brands affected by product recalls
Loss of consumer confidence in product safety
Restocking resulting from premium pricing
Negative public opinion associated with effects of Coca-Cola products on health
Opportunities:
Further expansion into developing economies
Creating products for health-concerned customers
Growing consumption at nonalcoholic ready-to-drink beverage market
New technologies for increasing production automation
Threats:
Scarcity and poor quality of water in some countries
Changing consumer preferences (more attention to healthier products)
Fluctuations of foreign exchange rates
Intensive competition
High threat of substitutes
Conclusion
EVA calculation for year 2010 shows that Coca-Cola’s added value constituted $11.4 billion in 2010, which shows that the company’s operations are successful, and financial position of Coca-Cola is rather strong. Analysis of the company according to RBV framework shows that key groups of factors creating competitive advantages for Coca-Cola are physical and financial factors from tangible group of factors, and such factors as technical and intellectual factors from intangible group of factors. Distinctive capabilities of the company are centered around architecture capabilities, and include strong market leadership, large manufacturing and distribution network. The company is experiencing problems with brand reputation due to product claims and recalls. Goodwill strengthens the positions of Coca-Cola, although PepsiCo is outperforming Coca-Cola by this parameter. Overall, the company’s financial stability and brand leadership are key determinants of success for Coca-Cola, but it should pay attention to competitor’s actions and pay more attention to quality control of the products and their effects on consumer health.
