Case Study 1 – Cola Wars in China Group 5

Liberty University Dr. Aaron Blossom

Jeff Moore, Ana Sanchez, Keith Shumaker, Tony Swaim, and Prisca Villa July 31, 2016

Executive Summary

Existing Mission, Objectives, and Strategies

Due to several strategies, they were able to appeal to the children’s market but also appeal adults and become a household name. In competition with Coca-Cola, the Wahaha Group was able to

succeed in many ways but can benefit more if the Wahaha Group shifted their vision and mission to possibly new markets.

New Mission Statement

Existing Business Model

SWOT Analysis

Strengths

There are six key strengths found in Wahaha’s organization: Chinese culture, strong distribution system, brand awareness, their distribution network, their joint venture with Danone, and research and development.

Research and development. Wahaha’s R&D department has the unique ability to collaborate with Danone and share costs. R&D is important to the future of the organization in order to keep up with market trends and keep new and improved products entering the marketplace.

Weaknesses

There are three main weaknesses found in Wahaha’s organization: Sales people, foreign brand awareness, and water utilization.

Opportunities

Like cultured countries. Like cultured countries would be a great opportunity for Wahaha to expand. Currently, Wahaha has a strong brand in China, but could offer their products to other countries with similar values such as Japan and Indonesia.

Global presence. With a global presence, it would allow Wahaha to expand their operations significantly. They could focus on one market at a time in order to verify market penetration and profitability.

Threats

Low Barriers to Entry. It is somewhat easy for another organization to enter into the competitive market place and take market share.

Consumers Nutrition Selections. Taste buds and nutrition standards are ever evolving which could easily eat into Wahaha’s margins.

Internal Factor Evaluation Matrix

The internal factor evaluation matrix for weaknesses shows sales people at a 0.40 weight, 1 rating, and a weighted score of 0.40. Foreign brand awareness at 0.40 weight, 2 rating, and

0.80 weighted score. Finally, water utilization at a 0.20 weight, 2 rating, and 0.40 weighted score. This shows that foreign brand awareness is a weakness that must be overcame. External Factor Evaluation Matrix

SWOT Bivariate Strategy Matrix

There are many different strategies that could be implemented in order to overcome the issues presented in the SWOT analysis.

SO strategies. There are three dominant SO strategies, product development, market penetration, and move into additional foreign markets. If Wahaha wants to compete, strengths can overcome opportunities in several ways. Product development would involve using R&D to overcome the opportunity of rapid growth in the non-cola industry to increase sales. Market penetration would use the strength of brand awareness to overcome the global presence opportunity. Finally Moving into additional markets would use many of the strengths, and overcome several opportunities as well.

BCG Matrix

growth but low market share. A star involves high market growth and high market share. Finally, a cash cow involves high market share and low market growth.

Carbonated Drinks

When taking a look at the products that Wahaha offers, financial information for specific products was unable to be obtained. This makes constructing a BCG matrix difficult without hard figures. Utilizing the figures stated in the case study Cola Wars in China (2016) it is found that future cola market share and market growth were increasing significantly during the case study years (p.5). This would classify Future Soda as a star in 2001. Customer perception and needs have changed significantly since then. Based upon financials of Coca-Cola Asia, it is found that most soda’s in China have decreased to low market growth. With this information, it is found that Wahaha’s Future Soda would currently be classified as a cash cow depending on market share.

Teas and Packaged Water

Dairy Drinks

Competitive Forces Analysis

There are several competitive forces impacting the Wahaha Group in China, each of which can be best explained within Porter’s five forces model. Porter’s five forces are barriers to entry, threat of substitutes, bargaining power of both suppliers and buyers, and the rivalry among existing players. The first, barriers to entry, were low for the entire beverage industry in China, and in the early 1980s there were over 30 local manufacturers and distributors of beverages (Dai & Dawar, 2003). The barrier to entry was even lower for Wahaha since it had manufacturing facilities, distributor networks, and knowledge of the local market prior to entering the beverage market (Dai & Dawar, 2003). This prior role lowered the time, cost, and knowledge requirement for Wahaha to transition from a provider of bottled soda water, ice cream, and stationery to a Wahaha Natrient Beverage for Children. However, Wahaha’s dominance in various beverage markets was short as the low entry barriers attracted fast-follower competitors.

This fast-follower problem created the second competitive force against Wahaha: threat of substitutes. Wahaha’s low-technology products were not unique, making competitor entry into the market not only easy, but readily substituted. Wahaha responded to the substitute problem through diversification and extensive market research on what its rural customer base wanted.

competitors, which led Wahaha to target this niche market and produce colas that appealed to the sweeter taste preferences of the rural Chinese at a price they could afford. The competitors attempted to enter the rural market, but the companies could not control the prices the distributors set since the companies sold syrup to bottlers who sold the final product to distributors. Wahaha’s full control of its production line and distributor relations led to a price control advantage that prevented the international rivals from gaining too great of a foothold in the rural, price-conscious communities. However, though the major competitors could not claim the same control or low-cost benefit, they had strong brand identity and accessibility throughout China, which kept Wahaha considering how it might need to respond in the future to the products, advertising, or brand loyalty of its competitors (Dai & Dawar, 2003).

Competitive Profile Matrix

The competitive profile matrix shown in Appendix F is used to compare Wahaha with its two leading competitors in China: Nestle and Coca-Cola. According to Dai and Dawar (2003), Wahaha has worked to overcome the challenges presented by international competitors by focusing on four main critical success factors: advertising, distribution of product, product diversification, and price competitiveness. Wahaha and Coca-Cola have competed for years on advertising, both utilizing the Beijing Olympics as an opportune moment to reach the broader Chinese market. However, Coca-Cola has worked hard to advertise in the urban cities while Wahaha has utilized unique options to reach the rural areas through wall murals and direct distribution networks (Dai & Dawar, 2003).

Competitor Analysis: Coca-Cola

better compete with the flavors of international colas, which has eaten in the revenues of Coca- Cola’s cola products. Internationally, Coca-Cola’s revenues have been steadily falling as consumers gravitate towards healthier options like bottled tea and water. Regardless of the decreasing revenues, Coca-Cola still maintains a strong current ratio and quick ratio, both indicators of the company’s ability to cover its debts. Inventory turnover is increasing, indicating that it is taking longer periods of time for Coca-Cola’s products to sell, and as a result the total asset turnover is decreasing, an indicator that Coca-Cola is turning its assets into sales less efficiently. Furthermore, accounts receivable turnover is increasing, and indicator that Coca-Cola is reducing the time between credit extension and credit collection, a good sign for cash reserves, but the return on assets indicates that Coca-Cola is losing profit compared to all of its assets.

Perhaps unsurprisingly, Coca-Cola’s market in China is reacting the same as the rest of the company’s international markets, sluggishly and with reduced profits.

Ratio Analysis

money to generate a profit. Nestle has a strong return on equity in Asia with an average .22 for the previous three years. Nestle has been effective at using the investors funds to grow their business in Asia and still have funds for future growth. The operations in Asia are able to take the investments of the shareholders and put it to work to create an attractive return This ratio signals

good returns to potential investors which can help Nestle in the future to grow their investments.

sales which, although smaller than the others, is a significant contribution to the overall sales of

the company.

Alternative Strategies

Cost leadership strategy

One of the existing strengths that Wahaha holds in the marketplace is their low price in comparison to their competitors. Wahaha, which was already priced lower than the competition, has the ability to reduce the price of their products even lower to a point where the larger Coca- Cola and Pepsi begin to lose profitability. As Coca-Cola and Pepsi begin to invest in more infrastructures in China and are able to bring their costs down they are increasing the threshold for price reduction. By being able to reduce their prices Wahaha could lose their competitive price advantage.

Wahaha could implement a cost-leadership strategy which will reduce their cost to consumers and regain a competitive edge. Rothaermal (2014) says “A cost-leadership strategy… seeks to create the same or similar value for customers by delivering products or services at a lower cost than competitors, enabling the firm to offer lower prices to its customers” (p. 166).

Marketing and Brand Development

Wahaha has built a brand by connecting with smaller rural communities and moving outwards. This strategy has connected them to a large portion of their community but does not compete as strongly in the mass market against the big competitors. Another strategy that Wahaha could execute would be to invest in a more diversified and larger scale advertising and media campaign. By increasing their presence in the eye of the consumers they can begin to win

over more market share.

This does not have to be a drastic change and could be as simple as a a campaign that makes people take notice of their products. Coca-Cola recently had a marketing campaign “Share a Coke”, where bottles had different names on them. This brought a lot of social media attention to the brand and strengthened their name in the eye of the consumer.

Product Diversification.

One of the most ambitious strategies would be a differentiation strategy. The soft drink market saw explosive growth in the 1990’s, “Worldwide, the growth of carbonated drinks had been slowing in recent years from an average annual rate of 4 percent between 1994 and 2000 to a predicted rate of only 2 percent in 2003” (MBA Policy and Strategy). While that soft drink market should not be invested in further Wahaha could look to differentiate. Wahaha initially started by creating products for children and hold a lot of success at that targeted population.

popularity. Although the competitors in the market also have bottled water options, Wahaha’s

connections with rural communities could be a ripe market for bottled water.

Pro-Forma Financial Statements

This new strategy utilizes some of the company’s cash on hand as well as new debt but allows the company to penetrate the new markets and begin to rebuild. With a financial strategy focused on cash and short term debt the company will be able to shift their focus back to increasing their cash reserve in a relatively short time period. This will allow the company to integrate the increased operating cost and revenue without the risk of long term debt. The

reduction in the current ratio does show liquidity risks but the new strategy should allow the

Recommended Strategy and Business Model

The long term strategy is vital because it will put added pressure on competitors when they attempt to ramp up their strategy to enter the market more aggressively. The marketing strategy should consist of web based advertising, emails, and conferences. “In most industries and market sectors, attendance at exhibitions, conferences and similar events can be essential for any company looking to achieve substantial or sustained success in China” [Har16]. The marketing strategy and timeline are critical guidelines for efficient and successful results. Key marketing sectors in China with specific targets (Marketing Timeline Chart) are addressed with aggressive guidelines for focus. A schedule for review analysis,

national and regional Marketing, local marketing, in-store marketing, and relationship marketing are all provided in detail. The focus will be in local marketing due to the mere size of the

A content analysis and new direction. International Journal Of Business, Marketing, &

Decision Science, 7(1), 95-110.

https://bookshelf.vitalsource.com/#/books/9781308652184/ Nestle SA Current Ratio. (n.d.) Retrieved from

http://www.gurufocus.com/term/current_ratio/NSRGY/Current-Ratio/Nestle-SA Nestle SA: Financials. (n.d.) Retrieved from

Appendix A

STRENGTHS

• Chinese Culture

• Strong Distribution System

WEAKNESSES

• Sales People

• Foreign Brand Awareness

OPPORTUNITIES

• Rapid growth in non-cola industry

• Additional Marketing

THREATS

Appendix B

Internal Factor Evaluation Matrix

Appendix C

Appendix D

Appendix E

*BCG Matrix picture received from netmba.com

Appendix F

Competitive Profile Matrix

Appendix G

Appendix H

Appendix I

Nestle Financial Ratios

Appendix J

Appendix K

Appendix L

NPV Chart

Appendix M

Appendix N

Business Model-Branding

Marketing Distribution Sales