Introduction
Business organisations exist to make profits. Most business organisations sell their products using distributors or dealers who are well known to the organisations. The existence of these organisations is founded on offering consumer-oriented products to drive sales.
Products created by the organisations can be raw materials, intermediate items or finished goods. The product creation process often targets a particular group or groups of the population. The buying potential of these groups determines the extent to which a certain product is manufactured. Consequently, the production process is driven by the demand for that item.
The manufacture of various products requires varying inputs, which vary from one organisation to another. The complexity of the materials used in the production process is also dependent on the nature of the commodity produced because certain items require more inputs than others.
However, the quantities of inputs for the manufacturing process can be regulated by the manufacturers. In addition, the nature of a product determines how the final product is marketed. Consequently, a single product can be manufactured partially or wholly by a particular company.
Frequently, companies produce certain products after a thorough evaluation of their capacity to produce a product at ease. Additionally, the cost of production is also put into consideration. Therefore, the company only sets out to produce a certain item if its production is cost effective to the company. Risky ventures or processes that are costly to the company are often foregone.
However, it is possible for a company to engage in the creation of raw materials and marketing provided that the company has enough resources to invest. Such a move is what gives rise to company integration as a company becomes its own input producer, processor or manufacturer.
The company also markets its products in company integration. When a company realizes such achievements, it is said to be vertically integrated. The process of vertical integration is often gradual because a company begins with the units of production that are easy to put together using various methods.
Vertical integration company case – Coca-Cola Company
Vertical integration entails a company’s involvement in activities that allow it to control the inputs and outputs. Companies achieve this through employing various production techniques aimed at eliminating input suppliers and output distributors.
Companies that are vertically integrated produce products from their basic forms to the consumption stage. These companies are capable of exploiting consumers because they control the output entirely. The process of vertical integration is long-term and is mainly achieved after some time if the company operates on a large scale (Joskow 2005).
Input production during the integration process involves the company venturing into the production of raw materials. Companies making soft drinks may, for instance, venture in bottling of drinks to reduce the cost of production.
The inputs for this process are customised to suit the special needs of the company during the bottling process. It is also possible to determine the required units for processing or manufacturing because the company’s operations scheduled and every activity is an in-house job.
A brief insight on the origin of the soft drink businesses can be achieved by centering on one of the most lucrative and groundbreaking companies in existence (Saltzman, Levy & Hilke 1999). In the year 1886, an Atlanta pharmacist who was known as John Pemberton came up with a novel drink by adding flavoured treacle to aerated water.
The beverage was at the outset promoted as a therapeutic beverage, which was put up for sale in a pharmacy for five cents a glass. Asa Griggs Candler, who was a local businessperson, purchased the Coca-Cola brand for $2,300 in the late 1880’s. Candler later turned out to be the earliest head of the company.
Candler, who was a gifted salesperson, transformed the soft drink from a creative piece of work into a business opportunity by publicizing Coca-Cola as a thirst-quenching infusion rather than a therapeutic beverage. This change turned out to be a critical moment for the Coca-Cola Company as well as the entire industry that dealt with aerated beverages (Saltzman, Levy & Hilke 1999).
It is essential to give the details of the chronological circumstances of a product and the extent of rivalry within its market. Such details enable the total comprehension of the existing state of affairs and make it possible to foresee the most probable future direction of the aerated soft drink business.
Aerated soft drinks comprise a special blend of seasoned syrup and fizzy water. Every drink that is devoid of alcohol, carbon dioxide and milk that is prepared by blending treacle and fizzy water falls under the category of soft drinks (Saltzman, Levy & Hilke 1999).
The large profit margins realized from the sale of carbonated drinks by the soft drink companies have become sources of contention regarding the extent of rivalry within the soft drink market. The Federal Trade Commission has carried out a number of inspections in the preceding thirty years to establish the sources of the assets in various companies in the soft drink industry.
In addition, the Department of Justice has brought several price-fixing cases against some carbonated soft drink companies (Saltzman, Levy & Hilke 1999). In the nineteenth century, there were numerous companies selling several varieties of flavoured carbonated drinks. Most of these drinks appeared as medicinal drinks in their adverts, and their sale was done in normal retail shops and pharmacies.
The Coca-Cola Company together with Pepsi Cola were among the first firms to market the carbonated soft drinks on a large scale in the United States. These two companies have greatly invested in popularising their products to create awareness about their products, which continues to date.
The companies have grown to be worldwide competing companies with big market shares using forward and backward integration. The integration of the production process is what makes the Coca-Cola Company to price its goods favourably hence giving it an advantage in the soft drink industry.
The Coca-Cola Company started with the manufacturing of beverage concentrates and syrups that were mainly used in the manufacture of soft drinks (Fredrix 2009). These products were the basic inputs used in the manufacturing of the soft drink that was commonly referred to as soda after the town of the Coca-Cola Company’s founder.
However, the company did not bottle the drink or market it. A different company did the marketing and bottling of the concentrate or the syrup after packaging. The Coca-Cola Company’s specialization was the production of the concentrates and syrup.
Consequently, the company, being the originator and inventor of the idea of the concentrates and syrup, copyrighted the formula of making soda to avoid duplication of the method by other rival companies. During the early stages, opportunities for forward integration existed.
The company could integrate forward by bottling the soda and marketing it. However, the Coca-Cola Company lost those opportunities when it left other companies to bottle its products. It was not clear to the company the best which bottling method would be the most appropriate for its commodity.
It was during that period of indecisiveness that the company chose to buy part of the shares of the bottling companies. The acquisition of shares of the bottling company was a main breakthrough of the company, which would later become the main task done solely by the company.
When a company vertically integrates upwards, it aims at increasing the value of its products. The income generated by a firm through value addition is higher in comparison to the value of the intermediate item or raw material (Williamson 2010). The bottling of the soda in partnership with other bottlers gave the company an opportunity to earn the company higher returns.
These returns aided the expansion and dissemination of the company to various parts of the United States and eventually to neighbouring countries. Vertical integration for the Coca-Cola Company was gradual. As the company partnered with bottling companies, it acquired bottling facilities that could be used for its soda.
The bottling companies bottled soda for various companies hence making it difficult for a company to customize its soda bottles to suit its tastes and preferences. Nevertheless, the Coca-Cola Company was able to design customized and appealing bottles after establishing its bottling facility.
Vertical integration gives a company more flexibility because a company can alter the production process or a product without having to incur extra costs. The convenience of having everything done by a single company is achieved through vertical integration.
The global presence of the Coca-Cola Company is highly attributed to the adoption of the vertical integration system. The manufacture of the concentrates and syrup is centralized, and the distribution of the concentrates to various countries where diluting and branding activities take place is efficient.
In these countries, the bottling of the soda takes place in bottling plants owned by Coca-Cola. The company uses its trucks to deliver the drinks from the bottling factories to distributors in various locations. The transportation of the soda from the company warehouses to the selected official distributors is thus the sole responsibility of the company. Transportation costs are major costs assumed by companies that transport products.
Therefore, vertically integrating the provision of transport services using the company’s trucks or any other mode of transport reduces the cost of hiring the services of other transporting companies. Such extra costs would raise the cost of production and cause the prices of commodities to increase (Allain, Chambolle & Rey 2010).
The Coca-Cola Company has greatly invested in promoting its brand name through various innovative tactics. These strategies ensure that the company vertically integrates marketing of its products, which maintains the image of the company as a first choice brand.
The Coca-Cola Company makes use of adverts to foster brand allegiance among its existing and potential clients, which was initially done by the bottling companies. For example, Coca-Cola emphasizes the use of publicity to establish a lasting brand impression for its merchandise and the entire company.
In addition, the company utilizes an integrated marketing consultation approach to depict the brand and maintain it in the minds of existing clients (Hu & Chuan 2009). In the past ten years, the Coke Company has used up several billion dollars internationally in the marketing of its products (The Coca-Cola Company 2011).
Coca-Cola’s long-standing investment in trade name recognition gave the company immense recognition as the most important brand name in the entire world (Fredrix 2009). Vertical integration causes the company to be involved in all aspects ranging from the production of drinks in the company to the distribution of the final product from the company to the customer through the retailer.
The company has gained recognition by sponsoring various events, for example, musical shows such as the ‘The American Idol’ (The Coca-Cola Company 2012). Consequently, the company creates a strong brand name from such activities.
Conclusion
The upward and downward integration of the Coca-Cola Company helped it grow from a small company to a multinational company. The use of the right approach to business management especially the distribution process and advertising is highly attributed to its success.
The company’s distribution approach of establishing bottling branches in various regions and countries was a key forward leap for the company. The patenting of the company’s innovation and invention also protected the company from direct competition (Williamson 2010).
The ability to carry out various roles was due to the firm’s acquisition of bottling facilities partially under equity holding and later by fully acquiring bottling plants. The use of celebrities in advertising and sponsoring of major events created a good company image resulting in strengthening of the company’s brand.
The promotion methods used by the company also made it a choice soft drink for many people. Therefore, the company was successful in vertically integrating its production and distribution process.
References
Allain M-L. C., Chambolle & Rey, P 2010, Vertical integration, innovation, and foreclosure. Web.
Fredrix, E. 2009, Coca-Cola still viewed as most valuable brand. Web.
Hu, F-L. & Chuan, C. C. 2009, “How can different brand strategies lead to retailers’ success’-comparing manufacturers brand for Coca-Cola and private brand for Costco,” Journal of Global Business Issues, vol. 3 no. 1, pp. 129-133.
Joskow, P. L. 2005, “Vertical integration,” in C. Menard & M. M. Shirley (eds), Handbook of new institutional economics, Springer, New York, pp. 319-348.
Saltzman, H., Levy, R., & Hilke, J. C 1999, Transformation and continuity: The U.S. carbonated soft drink bottling industry and antitrust policy since 1980. Web.
The Coca-Cola Company 2011, FAQs – advertising. Web.
The Coca-Cola Company 2012, 125 years of sharing happiness. Web.
Williamson, O. E. 2010, “Transaction cost economics: the natural progression,” American Economic Review, vol. 100 no.3, pp. 673-690.