Porter’s five forces model is a framework for the industry analysis and development of business strategy. Three (3) of Porter’s five (5) forces refers to rivalry from external/outside sources such as micro environment, macro environment and rest are internal threats. It draws ahead Industrial Organization economics to develop five forces that conclude the competitive intensity and consequently attractiveness of a market place or industry. Attractiveness in this framework refers to the generally overall industry profitability. An "unattractiveness" in industry is one in which the mixture of these five forces proceed to constrain behind overall profitability. An extremely unattractive industry would be one moving toward "pure competition", in which existing profits for all companies are moving down to zero.
The threat of the entry of new competitors
Advertising and Marketing
Soft drink industry needs huge amount of money to spend on advertisement and marketing. In 2000, Pepsi, Coke and their bottler’s invested approximately $2.58 billion. In 2000, the average advertisement expenditure per point of market share was $8.3 million. This makes it exceptionally hard for a new competitor to struggle with the current market and expand visibility.
Customer Loyalty/ Brand Image
Pepsi and Coke have been investing huge amount on advertisement and marketing throughout their existence. This has resulted in higher brand equity and strong loyal customers’ base all over the globe. Therefore, it becomes nearly unfeasible for a new comer to counterpart this level in soft drink industry.
Retail Distribution
This industry provides significant margins to retailers. For example, some retailers get 15-20% while others enjoy 20-30% margins. These margins are reasonably enough for retailers to entertain the existing players. This makes it very difficult for new players to persuade retailers to carry their new products or substitute products for Coke and Pepsi.
Fear of Retaliation
It is very difficult to enter into a market place where already well-established players are present such as Coke and Pepsi in this industry. So these players will not allow any new entrants to easily enter the market. They will give tough time to new entrants which could result into price wars, new product line, etc in order to influences the new comers.
Bottling Network
In this industry manufacturers have franchise contracts with their presented bottler’s that have privileges in a definite geographic area in eternity such as both Pepsi and Coke have contracts with their presented bottler’s. These contracts forbid bottler’s from taking on new competing brands for similar products. Latest consolidation between the bottler’s and the backward integration with Coke buying considerable numbers of bottling firms, it makes very difficult for new player to contract with bottler’s agreeable to distribute their brands. The alternative is that new entrances build their bottling plants, which will need intense capital and exertion. Because in 2000 new bottling plant needs capital of $80 million.
The intensity of competitive rivalry
The industry is almost dominated by the Coke and Pepsi. This industry is well known as a Duopoly with Coke and Pepsi as the companies competing. These both players have the majority of the market share and rest of the players have very low market share. Otherwise; competition is comparatively low to result any turmoil of industry structure. Coke and Pepsi primarily are competing on advertising and differentiation rather than on pricing. This resulted in higher profits and disallowed a decline in profits. Pricing war is nevertheless experienced in their global expansion strategies.
Composition of Competitors
Except the Coke and Pepsi other competitors are of unequal size especially in local markets. Coke and Pepsi both players have the majority of the market share and rest of the players have very low market share.