However there are also some disadvantages, which mainly are the costs. These costs come in the form of research costs to know what people want and what they are looking for. The surveys and sending people out will make short-term costs rise. This will cause a short-term fall of profits. Another disadvantage is the reasearch and development of the product itself. Maybe the innovated good requires new machinery that has to be purchased. It may also mean introducing a new production process. This will surely raise costs causing a short-term fall in profit. Opportunity cost will be another disadvantage of using innovation. This is the benefit of the next best option foregone when making a choice between a number of alternatives. It may mean spending money on a new product instead of spendind money on advertisment. The risk of failure is quite big. It may be that the procuct is a complete flock and would make the company lose large sums of money may make its reputaion go down amongst its costumers.
Another technique that coca cola can use is reputaion. This is the image that costumers and stakeholdres have from the company. Reputation can be gained in a number of ways. Coca cola has chosen to be “environmentally friendly”. Nowadays there are many people who are said to be “green” and which would therfore praise cocacola for being environmentally friendly. Being green can be done thorugh recycling. Coca cola can use recycled raw materials or recycle them. Many of coca colas plastic bottles are recyled and as a result less resources are lost and costs decrese. This makes profits increse. For example in 2003 the recycling rate was 76%. This means that 76% of the products were recycled or reused. Coca cola is also using methane processing in its beverage industry. This process reduces the production of waste and CO2 emissions. By making clean-burning bio-fuel from their garbage, the Coke company will save about U.S. $577,000 per year on waste disposal fees and about U.S. $78,000 on light and fuel costs.
The advantages of this are that there would be a good reputation between the consumers. Being “green” will make people “back up” the company and they may become brand loyal. If this happens then coca cola can have guaranteed sales beacuse people will always be encouraged to buy products from an “environmentally friendly” company. It attracts a new market segment. It may also give coca cola price inelasticity. Since it may be one of the few companies using this method it can put prices up without the fear of losing demand. This will mean they will have a higher revenue increasing long term profitability. Recomendation may also be achieved by being “green”. This recomendation may make coca colas sales increase beacsue people will want to buy their product. This will increase revenue increasing profits making coca cola able to expand.
This method will also have its disadvantages. Again it the costs of this are high. Trying to be environmentally friendly may mean having to invest in non-pollutant machinery which generally is much more expensive. It also means having limited choice of suppliers beacuse it has to look for ones which respect the environment. This will mean they might have to put up with high prices since they have no other choice. It may also mean introducing new production methods which will make costs increase and a possible slow down in the process. This will generally mean a short term reducement of profits and may result in a slight increase of price which is risky if the product isnt price inelastic enough, i.e if there is a cheaper alternative from a competitor or if being “green” isnt the most important factor for cosumers.
Another factor is marketing. This is a very important factor for coca cola. In order for the comapany to maintain its strong market position, Coca Cola needs to continuously strengthen its brand to maintain brand loyalty and positive responses and differentiate itself from its competitors. If coca cola used strong marketing it may raise barriers to entry, thus decreasing the threat of new entrants to the industry. Potential rivals within Coca Cola's target segments will experience difficulties in entering the market, due to difficulties in winning the 'Coca Cola loyalists' as well the company's large capital, value-chain efficiencies and skilled resources. Coca Cola's brand represents quality, taste and excitement to the market, qualities that remain unmatched by the company's competitors, thus severely reducing any threat of being substituted. Increased brand awareness and publicity will reinforce Coca Cola's product s' benefits to its customers, which will make it more difficult for rivals to compete on the same level. . This is due to the fact that no matter what the people in the advertisement are doing, the advert portrays them enjoying themselves. This message that is conveyed through Coco Cola's advertisements implies that no matter what personality or what ever kind of lifestyle someone has drinking cola boosts their confidence as well as allowing them to get pleasure from every day activities that are considered as being dull. This makes marketing very essential for coca cola because it is what it gives it this effect on people. All the adverts are dominated by the colour red. This gives a bright, bubbly, lot of energy, loving and not to mention lively atmosphere. The white meaning a loyal, pure and trustworthy company and.
The disadvantages of this are obviously the high costs of adevertisment. It takes lots of money to employ specialists who know how to catch peoples attention and make advertisments succeful. It is a.,,,,,,. As an example the first year's gross sales were $50 which was not enough to cover the $73.96 advertising costs. However it is vary rare for this to apeen now since there are things which can be used to predict if it is going to be good or not. Advertising elasticity of demand (page of index) is and example. It shows the responsivness of demand to a change in advertising expenditure. With this coca cola could predict how much to spend on advertising and if it would be worth it or not.
Furthermore another technique that can be used is to have good realtionships with stakeholders. These are groups of people affected by any decision of the company. I will use consumers as an example.
APENDIX:
- Overview about coca cola company.
- Economies of scale.
- Monopoly Power.
- Motivation.
- Costs, Revenue and Profits.
- Demand curve to show a rise in demand.
- Price elasticity of demand.
- Advertising Elasticity of Demand.
The Coca-Cola company started up in 1883. It is truly global, and its main product is recognised and consumed worldwide. The Coca-Cola Company is the world's largest beverage company and is the leading producer and marketer of soft drinks. The Company markets four of the world's top five soft drinks brands: Coca-Cola, Diet Coke, Fanta and Sprite.
Economies of scale are the factors that allow unit costs to fall as the size of the firm grows. Internal economies of scale occur as a result of factors within the firm. There are six types of internal economies of scale.
The first one is Financial economies. Fims such as Coca cola have several financial advantages beacuse they are large and so it becomes a more credit-worthy borrower than a smaller firm. This means that a large firms have more assets than a small firm, like machinery, deeds to factories and offices, that they can offer to the lenders in case of the unlikely event that they cannot repay the loan. Because this event is so unlikely financial institutions are wiling to lend money to these firms. Because of this low risk borrowing, financial institutions may not charge them so much for giving them a loan and large firms have more power to negociate lower interest rates and lower administration charges.
Marketing Economies is another type. This is divided in two. The fisrt thing is that large companiescan afford to advertise and as one advert covers many units of products, the avarage costs of advertising is low. For example coca cola inversts large sums of manoey on the advertisment of “diet coke”. Although it is for diet coke it is representing all the types of tastes of coca cola, so with one advertisment it advertises many of its products. Altough large firms spend huge amounts of money on advertising their products to create a want for them, their advertising costs are spread over a very large output. The other aspect of marketing economies is purchasing. This is were large firms can buy “in bulk”. This means they get large discounts to reduce costs and as a result avarage cost per unit falls.
Managerial economies is where large companies can afford to employ skilled managers and specialist workers. This means that less mistaked and waste is made which makes costs fall. Also coca cola is able to afford to emply specialist buyers who have the knowledge and the skills necessary to buy the best quality materials at the best possible prices. This makes costs decrease.
Large companies such as cocacola can buy new capital. This means that they save labour costs and repair/manteinance costs which makes production faster. Output is higher and avarage costs falls. This is called technical economies of scale.
Production economies. This is where large companies are able to organise production and distribution in a way that reduces costs. For example they divide up the production process into specialized tasks so that production becomes faster as each owrker becomes and expert in their particular job. For example in coca cola some workers can specialise in creating the packaging material and another of the bottling and canning the finished drink In small firms however there are simply not enough workers or specialized machinery to make this profitable. This specialisation makes production more efficient so costs fall. Another example is tht coca cola can use transport to reduce cost. By using big lorries it means they can carry more and do all the things at once. This reduces costs such as petrol.
Finally there is risk-bearing economies. This is where in order for a firm such as coca cola to reduce the risk of a fall in consumer demand damaging the firm, large enterprises often produce a whole variety of goods and servicves,so that if demand for one falls they still have others they can make and sell. This is known as deversification which means producing a diversity or whole variety of products.
External economies of scale occur as a result of the firm being part of the market. An example of this is creating a common pool of labour. The concentration of firms in the same place may lead to the build up of a labour force equipped with the skills required by the industry. This will reduce the training cost and again average cost per unit falls.
Monopoly power is when one supplier controls the market. It is defined by law that any firm that has more than 25 per cent share of the market is a monopoly. Coca cola may gain this by introducing a new product since there would be no substitutes and it would therefore become the only supplier of that particular good. This may give it monopoly power. As a result monopolist is able to permanently earn high profits, way above the profits the firm could earn producing another product in a different market. It is often refered to as abnormal profits. This will also exert a strong influence on the price, which they will charge for their product. It may mean having price inelasticity demand goods, where price can be high without affecting demand. This is calculated by dividing the percentage change in quantity demanded over the percentage change in price. If the figure is less than one then this shows that the product is price inelastic.
Motivation is anything that causes people to achieve more than they would otherwise do. There are many motivation techniques firms can use in order to make their workers more motivated and therefore more productive. This motivation may come in form of money, as Taylor suggests, or in social needs, as Maslows hierarchy of needs suggests. Motivated workers are verey significant for a company such as coca cola. A motivated worker will be more happy to work and therefore productivity increases and output per worker increases as well. Reputation will increase thourgh improved quality and a friendly service. Also waste errors decrease through high productivity and costs fall. There are better industrial relations and therefore there are few strikes which means production can carry on without any failures. Another advantage of having motivated workers is that the firm gets low labour turn-over which means less people leave the company. This means less recruitment and training costs. Also there is a low resistance to change. Poeple are happy and more willing to change with the company to keep it flixible.
Profit is the money the company makes from sales after its costs have been paid. Reward for enterprenures for taking risks of settting a business. It is calculated by taking total costs from total revenue. Coca cola made $1.72bn by the end of june of this year compared to $1.58bn in the same period a year ago.
Total revenue is the money that is made when you multiply the quantity sold by the price of your product. Coca colas revenue was $6.3bn, up 7% from the $5.91bn recorded in the same quarter in 2004.
Costs are dived into two. There are fixed costs which dont change as output increases and variable casts which do change. Fixed costs have to be paid even if zero is produced. For example coca colas insurance or the rent it pays. Variable costs vary with outpu, if zero is produced nothing is paid. Examples include raw materials or taxes.
These two are the divided into direct and indirect which help us have a clearre idea of the types of costs. Direct costs are those involved in the production process such as electricity. Indirect costs are those which are not involved in production but help sales or disribution. Things like marketing or transport are included.
Demand Curve:
In this diagram we can see what happens when demand increases. The demand curve shifts to the right to “new demand”. As this happens prices begin to rise slowly in order to prevent excess demand. More is selled even at a higher price and equilibrium point moves from EQ 1 to EQ 2. This is where demand equals supply.
Price elasticity of demand:
This is price sensity i.e how far demand reacts to a change in price. If coca cola achieves price inelasticity it means she can play with prices withtou having a big impact on the demand. It is calculated by the percetage change in quantity divided over the percentage change in price. If the value is less than one then it means it is price inelastic. Possible things which might affet the elasticity of demand is that its an essential product, its addictive of habit forming and no substitutes or the company uses strong brand advertising such as coca cola.
To understand this better we can use a curve.
Advertising elasticity of demand:
The calculation for this is the percentage change in demand over the percentage change in advertising. If the answer is greater than one then it is advertising elastic. This will mean that an increase in advertising leads to a greater increase in demand. However if the figure is positive it is inelastic which means advertising has little impact on demand. This is a good way for business such as coca cola for not wasting money.
