MAKE or BUY decision?

Pepsi and Coca-Cola war

Akemi Yagi Mendoza MA4N0221

Dang Trang Thanh Nha MA4N0226

Jyoti Sharma MA4N0235

Nomin-Erdene Gan-Erdene MA4N0222

Content

1. MAKE or BUY decision?

Introduction

A case study -Delta Air Lines

Conclusion

2. Pepsi And Coca-cola War

Introduction

A case study –Coca-cola and Pepsi

Conclusion

1. Definition

2. Case studyDelta airplane

with fuel material

Definition

• A make-or-buy decision is the act of choosing

between manufacturing a product in-house or

purchasing it from an external supplier.

• In a make-or-buy decision, the two most

important factors to consider are cost and

availability of production capacity.

Four stages of make and buy decisions

Case study• When Delta Air Lines announced it would

acquire a refinery to ensure a steady supply of

fuel and ideally achieve greater cost control, it

raised a new debate about vertical integration:

Is it a smart strategy, or not?

Does it save money?Do I need to control

this activity?

(Source: Make vs. Buy Is Not the Question to Ask by Paul Leinwand , from The Bloomberg, May 14, 2012)

Introduction

Delta Air Lines

• founded in 1924

• a major American airline

• headquarters and largest hub in Atlanta, Georgia

• the sixth-oldest operating airline by foundation date

• For an airline company, the biggest cost of

doing business— > jet fuel.

• Delta Airlines took the unprecedented step of

spending $150 million for jet fuel refinery.

• In a 2012 interview, Delta CEO, Richard

Anderson, told CNBC that owning the refinery

would allow the airline to participate in the

pricing of jet fuel in the United States and

have greater control over that

critical business expenses.

• The profitability of refineries is measured by

something called the "crack spread" the

difference between the cost of crude oil and

the price of the refined product (in this case, jet

fuel).

• For example, if a barrel of crude oil costs

$100 and the price of a barrel of jet fuel is

$150, the crack spread would be positive 50

dropped roughly six points

Bhaskara told Business Insider

• a savings of $40 million

dollars in fuel costs per

point for the airline

• this change translates into

annual savings upwards of

$240 to $320 million for

Delta alone.

• “will allow Delta to reduce its fuel expense by

$300 million annually and ensure jet fuel

availability in the Northeast”

• “this is a smart way for Delta to manage its

fuel expenses”According to Delta's chief executive officer Richard Anderson

• Purchasing the refinery has been useful for

Delta.

• “It's also caused the price of jet fuel to fall

throughout the airline industry”, according to

Vinay Bhaskara, a senior aviation analyst

at Airchive.com.

• It's simple supply and demand:

By focusing production of the former

Phillips 66 refinery on jet fuel, Delta has

flooded the marketplace with supply it would

otherwise have purchased, helping its

competition to save money on fuel.

Changes in Delta Airlines

• Innovative approach

• Pricing strategy

• Competitive advantage, buying refinery

• Merging with another U.S. Carrier

• Partnership with foreign airlines ( Air France,

KLM)

Source: Harvard Business Review

Delta Airlines

Pricing for jet fuel changed

Better control of their internal expenses

Making radical changes in the company

Reporting loses rising to $116 million in 2013

Rising Fuel Bills- Before Vertical

Integration

Source: Reuters (January, 2014)

In 2013, the company spent about $11.5 billion

Buy 4 billion gallons of jet fuel

With global demand shifting

towards jet fuel and diesel…

Source: Delta Airlines

What factors are influencing in the

airline industry?

1. Fuel Price

2. Demanding customers

3. Low cost carriers

4. Internet

Source: Harvard Business Review

Delta’s success in buying the refinery

( VIDEO)

https://www.youtube.com/watch?v=QUaROYXW3Do

Rise in fuel prices and costs

Revenue estimates ( 2013)

2015 U.S. Airline estimated Cash Flow

Comments from experts:

“Planned investment costs for the refinery appear

to be offset by active fuel hedging strategies and

although the refinery continues to produce loses,

Delta is demonstrating trajectory for a rather

competitive or perhaps industry leading fuel cost

advantage.” -stated Bob Ferrari ( The Ferrari

Consulting and Research Group LLC and Supply Chain)

Discussion question:

“Delta buys refinery, becoming first airline to make own fuel”

After all the explanation, do you think it was a good investment, please give us your opinion.

Summary:

• Buying the refinery for Delta---- > Increase in

sales

• Important to create competitive advantage

• Improving management of costs

• Success vertical integration in Delta Air

Lines

Conclusion

• Make-or-buy analysis is done at the strategic and operational level.

• There are longer-term strategic considerations entwined with the make-or-buy decision that has great significance

• Make or buy is a decision not to be made on the basis of monetary considerations, that is companies must determine how that decision will affect the end product quality and the company's technology when making best make-or-buy decision.

Case Study: Pepsi And Coca-cola War

Which one do you like most and why?

Introduction

• Coca cola was formulated by John Pembert in 1886 in

Altanta, Georgia, who sold it at drug store soda fountain as

potion for mental and physical disorder. In 1899, Candler

coca cola’s first bottling franchise and network grew quickly.

• During 1920’s and 1930’s, woodroof(CEO) developed

coke’s international business. During the world war II, 64

coca cola bottling plants were set up. This contributed to

coke’s dominant market shares in most Euorpean and Asian

countries

Introduction

• Pepsi cola was invented in 1893 in New bern, North Carolina

by Pharmacist Caleb Bradhan.

• Like coke, pepsi adopted a franchise bottling system, and by

1910 it had built network of 270 franchised bottlers.

• But in 1923 and in 1932, pepsi struggled and declaring

bankruptcy. Pepsi lowered the price and tried to expand its

network.

• In 1938, coke filed against Pepsi, claiming Pepsi-cola was an

infringement on the coca-cola trademark. In 1941, court in

favor of Pepsi and cola wars began.

Products

• Coca cola, Thums Up

• Diet coke

• Fanta

• Sprite, limca

• Mazza

• Georgia

• Kibley

• Pepsi

• Diet Pepsi

• Mirinda

• 7 up, Mountain

• Dew

• Tropicana

• Aquafina

• Lays, Cheetos

Market Share 2014

Reasons For Coke and Pepsi War

• Prices

• Taste challenge

• Advertising

Price and Advertising

• Earlier cost based pricing

• Rs 8 Bottle(200ml)

• Coca Cola T in Rs 25(300ml)

• Coca Cola spends more on advertising than manufacturing

• Competition based

• Rs 8 (200ml)

• Pepsi T in Rs 25(300ml)

• Very flexible to come down with the price very quickly

Taste

Without Brand Name:

• People preferring the taste of Pepsi 51%

• People preferring the taste of coca cola 44%

• Can’t say 5%

With Brand Name:

• People preferring the taste of Pepsi 23%

• People preferring the taste of coca cola 65%

• Can’t say 12%

Strategic Analysis- SWOT

• Strength

• Weakness

• Opportunities

• Threats

SWOT Strength

• Most valuable for 13 years

• World largest in beverages:

15 bi dollar brand

• Extensive global distributed

network

• Strong in emerging markets:

China, Brazil, Eastern

Europe

• 22nd most valuable brand

• 2nd largest F&B in the

world,22 bi dollar brand

• Extensive global distributed

network

• Successful marketing

campaigns: celebrity

endorsements

SWOT Weakness

• Declining market share

since 2000

• Negative publicity

• CSD focus: only 32 % non

CSD share

• Price pressure from mass

retailers(Wal-Mart): 40% of

U.S. packaged sales

• Declining market share in

beverages

• Negativity publicity

• Overdependence on U.S.

market: total 50% of total sales

• Low market share in fountain

accounts: 20 % Vs. Coke’s

69%

• Price pressure from mass

retailers(Wal-Mart): 12% of

revenue

SWOT Opportunities

• Expand non CSD : Juice,

sport , energy, bottled water

,vitamin water etc.

• Global expansion in

emerging markets: India,

China, Brazil

• Growing nutritious snacks

product markets

• Expand non CSD : juice

,sport, energy, bottled water,

vitamin water etc.

• Global expansion in

emerging market: India,

China, Russia

SWOT Threats

• Fear of losing market share due to rapid market fluctuations

• Barriers of new entry in international markets

• Competition with each other

• Decreasing brand loyalty among consumers

• Price pressure from mass retailers

• Changing consumers taste and preferences.

Case study -Cola Wars Continue:

Coke and Pepsi

The U.S CSD Industry

Production and Distribution of CSD

Involved 4 major participants

Coke vs Pepsi Sales

Coke vs Pepsi Annual Net Income

Dividend Growth by year

Employees Advertising

Negative health perception of CSD

Health-conscious consumers

have been turning away from

sugar-sweetened beverages,

and that’s

causing headaches for the

country’s top soda sellers.

Diet Coke vs. Diet Pepsi by Sales

Volume

Who was the real winner?

• It's no longer a matter of who's winning—it's

about who's losing the least

• Lately, the answer is “neither.”

• What is the next step for Coke and Pepsi's due

to the decline in the U.S. CSD market?

• To invest more money, to help build up their

market presences in other countries.

• What other markets could Coke and Pepsi go

into?

One corner of the beverage industry

that’s actually winning?Energy drinks. Compared to the contracting Coca-Cola and PepsiCo

businesses, energy drink companies like Monster and Red Bull have

consistently experienced positive yearly growth: