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Porter’s Five Forces Analysis of Pepsi

Pepsi Five Forces Analysis

Pepsi and Coca Cola are the leading brands in the soda industry. However, the soda industry has felt the chill during the last few years. Apart from the sweeping health consciousness, there are other factors too that are affecting its profitability. Pepsi had a bad 2015 and things do not seem to be taking a very bright turn. There are economic and social factors that are affecting business in the industry. Below is a five forces analysis that analyses the state of competition in the soda industry and how much control Pepsi has over it. The five forces model was developed by Michael E Porter. These five forces are a part of every industry and market and have an important influence on profitability. Evaluating the strength of these five forces can provide the business managers with valuable insights to formulate effective strategies.

  1. Bargaining power of the suppliers:

The suppliers do to form a strong group and exert little influence or pressure in case of Pepsi. The reason is that they are fragmented and there number is also high. So,  Pepsi has several options and its switching costs are low. Pepsi has higher control and suppliers would like to retain their business with the soda giant. These individual suppliers are not very big in size either and their chances of forward integration and competing with Pepsi are very low.  All these factors work in the favor of Pepsi and give it higher bargaining power as compared to its suppliers.

  1. Bargaining power of buyers:

Individual buyers are not a major influence and do not exert any noticeable pressure on Pepsi’s business. Except for the large businesses/retailers or distributors, small businesses and individual buyers do not have any significant bargaining power. Whatever little bargaining power the large buyers have is because they buy in large volumes. Retailers like Costco have some bargaining power and influence for they purchase in bulk. Moreover, the market of Pepsi is not concentrated in a particular area but is spread over the world. Due to all these  factors the bargaining power of customers is weak.

  1. Threat of new entrants:

World class brands like Pepsi cannot be built overnight. It takes both large investment and efforts. From operations to marketing, all areas require a huge investment and highly skilled staff. Not just this, to build a brand image and gain customer loyalty, is even difficulty. Still, small brands can compete in the local markets. However, such brands generally remain confined to small regions.   Pepsi has very few direct competitors and except Coca Cola, none can match its resources and capabilities. So, the threat of new entrants for a brand like Pepsi with strong brand image is minimized. Becoming a major player in the soda industry is not easy. Apart from product quality and brand image, there are so many other challenges too that discourage new players.

  1. Threat of substitutes:

There are so many substitutes for Pepsi’s products in the market. The switching costs for customers are also low. Apart from Coca Cola’s products, fruit juices, energy drinks, and many other hot and cold beverages are its substitutes. This threat is mitigated to some extent by Pepsi’s brand image and global presence. The brand also invests a lot in marketing to keep the threat from substitutes under control. Moreover, the substitute products are generally good in quality. Pepsi places a lot of focus on customer engagement for this purpose. Overall, the threat of substitutes is a strong force that Pepsi has to continually contend with.

  1. Competitive rivalry among the existing players:

Had not it been for the rivalry between Pepsi and Coca Cola, the two soda giants would have had to invest significantly less in marketing and advertising. These two brands remain engaged in intense rivalry and people also believe that the cola wars are still continuing. Dr Pepper Snapple is also a competitive threat for the soda giant. The competitive threat from other brands is lower but among the main players it is a very strong force.  So, overall the competitive rivalry in the industry is a strong force. The competition between Coca Cola and Pepsi has always attracted lots of publicity and attention.