Organizational Economics

Introduction

Organizational Economics mainly refers to a field of economics in which the transactions occurring within organizations are studied, and transactions occurring in the greater market context are not considered. The paper is based on the analysis of publicly-traded Coca-Cola Company. It was relatively easier to conduct research regarding the inner-workings of the chosen firm. In the beginning, a company overview will be given, and following that, various economic factors affecting the firm such as demand, production, costing, and pricing shall be analyzed in the context of the U.S. The soft drinks of the Coca-Cola Company have been chosen as the product line.

Company Overview

American multinational corporation, Coca-Cola Company, is the retailer, manufacturer, and marketer of non-alcoholic beverages. It operates within the beverage industry, and it is a public company. The company was founded in 1892 by John Stith Perberton and Asa Griggs Candler. The headquarters is in Atlanta, Georgia, United States, and it serves across worldwide locations (Coca-colacompany.com, 2020). At present, the key people are James Quincey (CEO) and Brian Smith (COO and President). As of 2018, the revenue generated by the firm is US$31.85 billion. The net income of the company as of 2018 is US$6.43 billion, and the number of approximate employees in the company is 62,600. The company offers 350 brands across 200 countries. Usually, it gained fame due to its famous soft drinks, and the famous brands are Diet Coke, Sprite, Vitaminwater, Minute Maid, Georgia, Del Valle, Gold Peak, and others. Consequently, it managed to be one of the largest marketers of beverage and became a No.1 provider of still and sparkling beverages.

Figure 1: Coca-Cola Company

(Source: ien.com, 2020)

The company nearly offers 1200 low-calorie products and approximately 200 calorie products since 2016. The top-most competitors of the Coca-Cola Company include Pepsico, Red Bull, Britvic, Tropicana products, and Monster Beverage. The competitors produce and sell non-alcoholic beverages only. Coca-Cola operates in the soft drinks industry, and therefore its market structure is an oligopoly. It has consistently played a dominant role in the beverage industry despite facing fierce competition. The company uses a range of competitive strategies so that it can maintain its dominant power. The company managed to have more autonomy in comparison to other brands, and it has created entry barriers for any new competitor in the soft drinks industry. Therefore, the company managed to remain attractive in the market because the threat from new entrants is much lower. Strengthening relationships with customers is one of its prime objectives since its inception.

Demand Analysis 400

Production and Cost Analysis

In a multinational firm, profit or financial gain is considered as one of the top priorities. Profit can be derived after deducting the money spent on producing the product. At the end of the financial year, the costs associated with raw materials, transportation, and processing of the products is analyzed so that profit gained after selling the product can be determined. The difference that exists between total sales and the total cost is referred to as the profit. At present, the company has been witnessing in profits. This trend has been noticed for the past ten years. Profit is the result of the consistent effort of the firm in meeting the customer’s needs. However, profit does not remain the same and tend to fluctuate in every financial year. Coca-Cola is affected by the price fluctuations of raw materials (Kraus, 2019). An increase in the cost of raw material tends to create continuous pressure on production. Other determinants of production fluctuations are natural disasters, along with political instability. Raw materials might not be available, and the premises in which the products are manufactured might be affected due to either of the factors mentioned above. This, in turn, reduces profit margins. While producing any specific product, the company considers various types of costs. These are the costs of materials, labor, and FOH. Again, the material cost is divided into direct and indirect costs. The cost of syrup, sugar, color, citric acid is the direct cost of materials. Similarly, the cost of gas, oil, and machinery are considered as indirect material costs. Direct labor costs include wages, monthly salary, and benefits (BBC News, 2020). Indirect labor costs include employee training and supervisor salary. Lastly, FOH involves costs of taxes, rent, communication expenses, and promotion.

Figure 2: Company focuses on attractive packaging

(Source: ien.com, 2020)

Production in Coca-Cola gets affected due to a range of factors. The Coca-Cola Company employs a huge combination of resources (Zhang, 2018). The production analysis involves an analysis of land, labor, labor, capital, and entrepreneurship. The elements are used together to produce a product. The company uses sophisticated equipment to control its production process. It has been producing quality drinks by following the international standards ISO 22000 and ISO 9001 (Team, 2020). The production lines are reliable. The company uses physical locations to build its production buildings. It uses minerals, including carbon and water treatment, is done as well. While producing its beverages, the company actively requires a productive workforce. This is referred to as labor. Therefore, it has considered using skilled labor that is familiar with their jobs. Specialists in accounts, marketing, production, and distribution are hired in the organization. Similarly, the company uses control equipment and high-designed processes and vehicles for packaging its products. Across a range of locations, coordination is necessary, and the company actively engaged with its stakeholders.

Pricing Strategy Analysis

Pricing strategy is one of the essential business decisions that a company makes because, based on the strategy, customers would be attracted to purchase the product. The pricing decisions of the management have a direct impact on the annual revenue of the firm. In the case of Coca-Cola, it has been known that the company managed to make a mark in the 20^th-century soft drink industry due to its effective pricing strategy. It managed to become one of the world’s “third most profitable” companies because coke has been sold across 200 nations.

Coca-Cola uses three types of pricing strategies-

Market price- The company sets the price based on the market rate, and it is derived after analyzing the competitor’s prices (Morim et al., 2017).

Price skimming- It charges premium prices so that it can ensure maximum revenue earnings.

Market penetration- It has also consistently charged the lowest prices in Indian markets in order to gain the highest sales.

The management has also used a cost-based framework optimally for deciding the prices. Cost-based pricing mainly involved item-related expenses such as operational costs, item costs, and capital expenses. The efforts and ideas have always been focused on entering the new market by offering the lowest prices to customers initially. Thereafter, it has increased the prices of the products after analyzing the surrounding competition. The company actively uses alternate pricing strategies to maintain its position in the market. For instance, it utilizes psychological pricing to attract buyers. Setting the price of coke at $2.49 would make customers feel that the price is under $2.50 (Kiiru, Makokha & Gichuhi, 2017). This, in turn, would make customers feel like purchasing the product.

Figure 3: Pricing strategies used by the company

(Source: intelligencenode.com, 2020)

Similarly, the company employed the promotional strategy for deciding its prices. During festivals it diminishes the prices and motivates customers to purchase the bottle of coke. It actively provides free samples to customers in order to promote its products. Again, the company uses segmented pricing as well based on the different types of packages it offers. Difference in costs exists because different types of packages have been designed for different customer-base. The price of RGB or Returnable Glass Bottles differs from PET or Plastic Bottles. Similarly, different prices exist for packages of Tetra packs, Beverages in the bag, and Aluminium Cans (BBC News, 2020). Another actively used pricing strategy of Coca-Cola is discriminatory pricing. The prices are discriminated based on the channels through which they are sold. It can either be sold through wholesalers, retailers, or super markets or restaurants. Lastly, in the U.S market, Coca-Cola has managed to gain a substantial foothold because it has targeted the needs of the American customers and offered them the soft drink at a price that no other brand could offer.

Conclusion

The paper is based on the well-known carbonated drink company, Coca-Cola. The chosen organization is publicly-traded and considered one of the leading producers and marketers of soft drinks. It offers a range of products, and the motto has been meeting the increasing needs and demands of young customers. In this paper, various strategies employed by the organization to create its own space in the market have been analyzed. Concepts and their applications have been understood and elaborated in the paper. Demand analysis, production analysis, cost, and pricing analysis has been outlined in order to meet the criteria.

References