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Porter’s National Diamond Model

Discuss about the Analysis of Soft Drink Industry.

Coca cola and PepsiCo are the major players of soft drink industry in South Africa. Coca cola dominates the market with a market capitalization of around 30 percent higher than PepsiCo’s (DAFF, 2014). Coca cola dominates the market by investing heavily into the advertising and campaigns to increase its social visibility (Statista, 2010). Coca cola’s share a coke campaign spurted the sales and market growth of the company in a diversified country like South Africa (CCRED, 2015). The company has connected with the consumer through its relationship marketing (CNB Africa, 2014). Further, there are small players who have also witnessed growth in their volume sales through their low price strategy. Further, the industry has also witnessed introduction of new flavors in the market with the increasing demand of the consumer. The soft drink companies have introduced innovative flavors to offer a wider range of products to the consumer to differentiate themselves. Other important players of the industry are red bull, mountain dew, pepsi, 7up, fanta, dr. pepper and vitamin water. Coke is the leader in terms of market share followed by red bull leads, mountain dew and pepsi.

Porter’s Diamond Model provides a method to explain national competitive advantage of a country. Porter developed this model to analyze the international competitiveness of countries and evaluate how a country becomes successful in a specific industry (Porter, 2011). The model aims to evaluate the characteristics of the country in order to assess the firm’s achievements and success across the globe. The model suggests that the characteristics and attributes of the country affect the success and growth of the firm internationally. There are six elements of Porter’s National Diamond Model which assesses the national competitiveness which includes factor (input) conditions, demand conditions, government, related and supporting industries, chance and firm strategy, structure and rivalry (Porter, 2011). The home country which is taken for analysis affects the company’s strategies and provides a direction to build its structure.  

Factor conditions account for the availability of the resources within South Africa which includes human resources, physical infrastructure, administrative infrastructure, capital resources, information infrastructure, scientific and technological infrastructure and natural resources.

Human Resources: Human resource contributes towards the cost of production of soft drinks in the manufacturing process. Therefore, the factors to be considered are cost, quality and availability of unskilled labor, cost, quality and availability of skilled labor, administration cost for management of skilled labors and merchandising cost. South Africa has abundance of unskilled labor but the production cost is constraining the competitiveness because of unavailability of quality skilled labor and high cost of labor in South Africa (The Economist, 2014). 

Factor Conditions

Physical infrastructure: South Africa lacks the quality and availability of proper physical infrastructure facilities which are required by the industry (Deloitte, 2013). Physical infrastructure is very essential for the set up of production process and operational process, thus, lack of a physical infrastructure would be a hindrance for the entrance of the company.  

Administrative infrastructure: The cost of administrative infrastructure is very high in South Africa which would adversely affect the company (Rooyen, Esterhuizen & Stroebel, 2011). Administrative set up is again an importance parameter for the long term sustainability of the firm.

Capital resources: Capital resources such as loans and finance are very essential to set up the company operations in a foreign market. South Africa lacks sufficient capital resources which would hinder the establishment of the company (Rooyen, Esterhuizen & Stroebel, 2011).

 Information infrastructure: Information regarding the markets and suppliers are required to enter any new market so as to analyze the market favorable conditions and cost of production. The cost of information infrastructure is very high in South Africa (Rooyen, Esterhuizen & Stroebel, 2011).

Scientific and technological infrastructure: The cost of technology is very high and constrains the growth of soft drinks industry. The quality of the scientific infrastructure does not have a great impact on the industry but it is not easily available in the country (Rooyen, Esterhuizen & Stroebel, 2011).

Natural resources: The natural resources are present in South Africa, though not in abundant quantity, but support the production of the soft drinks (Rooyen, Esterhuizen & Stroebel, 2011).

Thus, the overall factor conditions do not provide a great support to the soft drink industry in South Africa.

The demand conditions indicate the need and requirement of the company’s product or service in the country which include market demand and size, potential market and overall market growth and sophistication.

Market size of South Africa does not support the industry and constraints the industry.

The market growth would help to analyze the future perspective of the industry. The market growth has been estimated to grow at a CAGR of 3.8 percent during 2016-2021 which would support the company.

The market information is easily available for South African market with low cost and great quality. The quality of products also supports the soft drink industry in the country with the increasing average income of the people in the country (Toit, 2006). Also, South Africa is one the most sophisticated market in the African continent which positively affects the industry.

Demand Conditions

The demand conditions favor the company to enter the market of South Africa because of estimated market growth for the next few years and availability of the market information.

Related and supporting industries provide the existence to the industry through cost-effective processes, innovation and internationalization. Soft drinks industry requires suppliers and partners for packaging and bottling of the soft drinks.

Financial institutions presence provides capital sources to the industry, which is present in the country. The presence of financial institutions supports the ongoing operations in the soft drinks industry. The research institutions support the development of new products as per the customer demand. The presence of research institutions in South Africa supports for research and development activity within the industry.

South Africa also has abundance of transport companies to ensure proper logistics and transportation of the soft drinks and carry out the supply chain activities effectively. The other basic necessities such as electricity are also available in South Africa to support the day to day operations of the industry. The suppliers for soft drink industry are also present in the country to support the bottling and other related processes of manufacturing and production.

Thus, related and supporting industries support the soft drink industry in South Africa.

This factor assesses the parameters of company which includes their goals and objectives, management and structure, policies and regulations. The presence of competitive firms also affects the industry because it triggers product innovation for the sustainability of the firm.

The soft drink industry has many players in South Africa such as Coca cola, pepsi, mountain dew, red bull, fanta and others. This creates tough competition within the industry which has led to the invention of innovative products such as flavored soft drinks.

South Africa’s sound legal system and strong investor and property protection supports the existence of soft drinks industry in the country by providing them the land and infrastructure for the manufacturing and production of the soft drinks. Further, South Africa has a great connectivity with the international markets which is again a positive influence on the industry (South African Consulate General, 2017).

Restriction on capital flow and strong labor union is also a positive influence on the strategy of the firm.

Though, there is a threat of substitutes and new entrants because of emerging small players in the soft drink industry who have introduced flavor drinks to provide a substitute of the soft drinks.

Related and Supporting industries

Thus, overall factors have a positive influence on the strategy, structure and rivalry of the companies in the country.

The government support has a strong influence on the sustainability of the firms of soft drinks because a government can either promote or hinder the activities of the firms. The government decisions and policies affect the consumer demand of the country which affects the overall industrial growth. PESTEL analysis would clarify the impact of government on soft drink industry.

South Africa is going through political crisis because of corruption allegations charged on the country’s President Jacob Zuma. Further, the Finance Minister has filed an affidavit regarding some suspicious transactions (Gaffey, 2016). These events have destabilized the country which affects the businesses very adversely. Further, the soft drink industry is affected by the country’s demography because consumption of soft drink is high for children and youngsters. South Africa has 30 percent younger population below the age of 15 which influences the soft drink business positively (Statistics South Africa, 2014).

South Africa is facing an economic crisis with decreasing currency rates. The Reserve Bank is intentionally keeping the currency low which is affecting the environment for businesses. The economic scenario of the country is effecting the business decision of the companies such as expansion of the business has become a costly affair with a high exchange rate (The World Bank, 2017). Thus economic instability of the country adversely affects the business operations of the companies of soft drink industry.

The decreasing currency of the country has an impact on the buying capacity of the people of South Africa. Further, increasing unemployment has also lowered the demand in the country. Though, the country has become more sophisticated with the social upliftment of society and people are moving towards living high standards of life. This is a positive factor for the soft drink industry, but there is also a tension of rising obesity and overweight in the country. Obesity and overweight leads to diseases such as cancer, diabetes and cardiovascular diseases. The cause of these diseases has been found to be sugared drinks which lead to obesity and excess weight. Therefore, the socio-cultural factors give us a mixed opinion about the soft drink industry.

The soft drinks contain added sugar and preservatives which affects the health of the consumers and leads to obesity and other health issues. The rising obesity in the country has forced the government to take some preventive action to reduce the consumption of carbonated drinks (Business Tech, 2015). The government has imposed sugar tax on the sugared products which adversely affects the soft drinks industry (Rensburg, 2016). Further, the government is also taking measures such as food advertising regulations and enhanced food labeling to reduce the consumption of soft drinks.

Context for firm strategy, structure and rivalry

Chance is the risk factor for an industry which is beyond the control of the firm. This includes economic and political stability, aids, price stability and crimes. The economy of the South Africa has seen ups and downs in the recent years. The country’s political stability has a positive influence on the sustainability of the company. The country has a record of high crime rate which affects the overall growth of the company. Further, there is no aid and support in case of any war or conflict in the country. Thus, there is a great amount of risk involved for the soft drink industry in South Africa because of unstable economy and rising crimes.

A company can enter a market through non-equity mode or equity mode. Non-equity mode is through licensing, exporting and contracting. Equity mode is also called foreign direct investment (FDI) method which involves merging and acquisition with the established businesses in the market (Dunning & Gugler, 2008). The company makes investment by acquiring the assets of the company to establish its control or substantial influence over the business. As per the guidelines of the OECD acquiring a minimum of 10 percent ownership stake is required by the company (Dunning & Gugler, 2008. Joint venture and wholly owned subsidiary are the two different methods for a company for foreign direct investment. Joint venture is the collaboration of two business parties by pooling their resources to pursue a common objective. JV formation is the common strategy used by the companies to enter a foreign established market to expand their business operations internationally. Joint venture gives access to the existing sales and distribution network of the country (Prescott & Swartz, 2010).

SoftBev is a local soft drink of South Africa and has established a strong hold over the market through market penetration. The company’s capital is approximately R650m after merging with a local player (Drink Stuff, 2014). The company has its own production plant in South Africa and is manufactured and packaged locally. Further, it provides quality products and services to its customers (Softbev, 2016).

The company could form a joint venture by partnering with the local manufacturer Softbev brand to establish its strong hold over the market. The company would benefit by partnering with the local company in terms of accessibility of market. The company would gain an access to the domestic market from the distribution network of the SoftBev. The company would be able to establish a trust factor among the consumers by partnering with a local firm because SoftBev has already established its own trust in the market. Further, the company would also gain access to the domestic suppliers which would assist the company to set up its own production operations in the country to maintain its sustainability. The company could gradually start its own production house once it has gained access to the market suppliers and distributors. Thus, the company would benefit from the partnership with the domestic firm.

Green field investment is another mode of foreign direct investment through which a company builds up its entire operations from the ground in the foreign company. The company has the complete control over the business from plant construction to employee policy and regulations the specifications are laid out by the company (Shenkar, Luo, & Chi, 2014). Acquisition is another FDI strategy in which company acquires certain shares of the company to establish substantial control over the company (Bruner, 2016).

It is better to understand the advantages of FDI for the company and the country before taking any step to make a major investment. The benefits of FDI are enjoyed after a long period by capturing the new market and accessing cheaper production facilities. The company and country both enjoy the benefits mutually wherein the country benefits from the transfer of technology and expertise from an advanced country.

Joint venture formation with SoftBev would give access to the local market resources of South Africa (Brand South Africa, 2011). The company would gain through market penetration and establish its own market.

Further, through a joint venture with SoftBev, the company would enjoy the existing distribution network of SoftBev in South Africa. The companies forming a JV would complement each other by offsetting each other’s weaknesses and forming a stronger company by maintaining their individual identities (Trost, 2013).

The Green field investment strategy would help the company to reduce its transportation cost by setting up its own production plant in South Africa (CFO Africa, 2016). The tariff barriers would also be eliminated from the cost of product which would increase the firm’s profitability (Lee & Rugman, 2012).

Through mergers and acquisition with SoftBev, the company would get an opportunity to gather the information on the domestic markets of South Africa. The company would now be able to develop strategies to tap the local market by gaining better insight of the existing market (Finkelstein, 2010).

It becomes difficult for a firm to roll back its process and projects after deploying Green field investment in the country and can also be financially devastating. Green field investment also demands huge amount of money and time for the research and development process to evaluate the feasibility of entering the foreign market (Shenkar, Luo, & Chi, 2014). Acquisition process requires borrowing of money which increases the company debts. Culture clash is another disadvantage of acquiring a company (Finkelstein, 2010).

Formation of a joint venture is time consuming because it takes time to build a relationship with another business entity such. The goals and objectives in a JV are also not clearly communicated which affects the productivity of work (Trost, 2013).

JV formation with SoftBev would disturb the balancing the level of expertise within the company by partnering with another business unit. Integrating two different business units is a challenging job because of different management and leadership styles incorporated within the company (Trost, 2013).

A successful joint venture would require deep research and analysis of the goals and objectives of the company.

After, thoroughly analyzing the advantages and disadvantages of FDI, following can be concluded:

Green field investment would require huge amount of money and time for research and development to evaluate the feasibility. Further, setting up operations in a foreign country from the ground level becomes very challenging. Acquisition would also not be a wise choice because it would increase the liability of the company and checking the financial security and credibility of a firm would again waste huge amount of time.

The company needs a strategy which does not require investment of money, manpower and time and also has an exit strategy to refrain from future risks. Though Joint Venture also has some disadvantages but is the most preferred option for the company to expand its business internationally. The company could go for a joint venture with one of the local firm which has been analyzed as SoftBev. SoftBev is one of the largest firms of South Africa and has a huge consumer base.

Joint venture formation with SoftBev would give access to the local market resources of South Africa (Brand South Africa, 2011). The company would gain through market penetration and establish its own market.

Further, through a joint venture with SoftBev, the company would enjoy the existing distribution network of SoftBev in South Africa.

Therefore, it is strongly recommended that the company chooses Joint Venture with the local firm of South Africa which has been identified as SoftBev.

After a thorough analysis of the soft drink industry in South Africa, there are two contemporary management issues which have been derived.

Unfavorable factor conditions: Factor conditions would support the growth of the company by providing human resources, infrastructure, technology, information and natural resources. South Africa has abundance of unskilled labor, but does not have sufficient skilled labor, which is essential for production process. Further, the cost of administrative labor is too high. Unavailability of the human resources would increase the overall cost of production.

South Africa also lacks physical infrastructure facilities which would not support the establishment of production and operational processes in the country. The high cost of administration, information and technology would hinder the development of the company in the country.

The unfavorable factor conditions would not support the establishment of the company’s production and operational processes. If the company plans to set up its operations in the country then the high cost of production and administration would hinder the overall growth of the company.

FDI may seem to be a lucrative choice for the company but there are many risks involved in foreign direct investment. First of all, selection of a FDI methodology is a costly affair because it would involve research and analysis of all the methodologies. Once the methodology has been selected, then selecting the appropriate local partner would be very challenging.

The company needs to choose the right partner who has the required resources that would complement the company’s resources. The resources for a soft drink industry are distribution network and market accessibility, production facilities and manpower (Yan & Luo, 2016). The next thing that company needs to access is the performance of JV partner and their perception about collaboration.

Further, the company needs to check the financial security of the partner to analyze the credit issues of the JV partner. The management practices also need to be reviewed by the company. Reviewing the production and marketing performance would help to analyze the market credibility of the joint venture partner (Yan & Luo, 2016). The company also needs to consider an exit strategy in order to protect company once the mission is achieved. The terms and conditions need to be considered by each firm to avoid any misunderstanding in the future.

Greenfield investment would again be a costly affair because setting up operations in a new country requires research and analysis to create suppliers and distributing partners.

References

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