Chapter 11 – Decision Making with a Strategic Emphasis
For the vast majority of consumer products the Mass/Club channel will require the lowest trade margins
followed by Grocery stores, and Convenience/Specialty stores. However, in the cola industry on-shelf
pricing is usually the lowest in the grocery channel, because Supermarkets and Convenience stores tend
to utilize cola products as “loss leaders”, while Mass and Club stores generally draw customers based on
overall low pricing and attempt to maintain some small margin on all products.
5. Based on a comparison between your cost analysis and competitive benchmarking would you
recommend that Pop’s, Inc. enter the “Cola Market” and compete directly with Coke and Pepsi?
Provide a strong justification for your conclusion and discuss what factors influence the difference
in on-shelf pricing between Coke & Pepsi and Pop’s Cola.
Competing head to head with Coke and Pepsi directly on a cost basis will obviously not be a wise strategy
for Pop’s Cola. In fact, the following table reveals that Pop’s pricing is approximately 25% higher than its
competition on the 2 Liter and 36% higher on the 12-Pack product.
nearly impossible for a company like Pop’s, Inc. to compete on cost against these giants, because the
competition can spread these costs over such large sales volumes.
The other major reason that makes it difficult to compete on price is the advantage that Coke and Pepsi
share in being “Loss Leaders.” This margin advantage results in a on shelf price differences of over 30
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Cents per 2 Liter and over 80 Cents per 12 Pack of Cola. These trade margins result in significant barriers
to entry, which prevent smaller players from competing on price.
There are some additional considerations that argue against proceeding with the proposed strategy. First, a
six million dollar promotion budget is far too small to support a nationwide rollout of a new brand of
cola. As was stated earlier, this budget would be quickly consumed by paying the slotting allowances
sponsored events. The proposed budget could not begin to cover these various expenses.
Second, while the contract manufacturing arrangement with Shull Enterprises may appear on the surface
to be a good solution to Pop’s limited production capabilities, a deeper analysis will demonstrate the
infeasibility of this approach. Indeed, this represents a situation where somebody failed to sit down and
apply “business sense” to the numbers. The proposal involves investment in equipment for one
manufacturing facility. This really makes no sense for a soda that will be distributed nationally (the cola
production and logistical nightmare for a single bottling facility.
Third, somewhat related to the previous point are problems associated with the proposed distribution
strategy. The current plan involves delivering full truckloads to customers’ distribution warehouses. This
may work for larger retail chains, but would likely be infeasible for smaller chains and independent
stores. For example, the latter would be incapable of receiving and storing 46,000 cans of Pop’s Cola.
Even if these retailers were part of some type of retail cooperative, the costs of marketing to and through
them would quite likely be different than with larger chains, and these differences would need to be
incorporated in the cost analyses.
6. Prepare an alternative strategy for gaining market share in the beverage industry. Determine
whether Pop’s, Inc. should compete using a “Low Cost” or a “Differentiation” strategy, and provide
specific examples of how you would implement your strategy.
In most industries there are two distinct ways to compete through following either a “Low Cost” or a
“Differentiation” Strategy. Assuming an industry has an average 20% profit margin and maintains 80%
full product costs, the graph below is useful in illustrating that both strategies can be successful. In order
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Chapter 11 – Decision Making with a Strategic Emphasis
Several examples of these two strategies exist in the beverage industry. Store brands such as Sam’s
Choice or Big K follow a “Low Cost” strategy. Since these store brands are obviously marketed directly
through the retailer they have the unique relationship with the trade channels that allow them to gain shelf
space and negotiate trade margins. A differentiation strategy is followed by companies like Dr. Brown’s,
Stewart’s, and IBC Rootbeer. If successful, such a strategy allows brands to become specialty items and
therefore charge a premium price and achieve reasonable profit margins.
Due to the competitive advantage that Coke and Pepsi share in relation to scale and trade margins, Pop’s,
Inc. should obviously avoid a “low cost” strategy. While Pop’s, Inc. can realistically reduce some costs on
the Pop’s Cola brand, without forming an alliance or achieving some major technological breakthrough in
the production process, it will be nearly impossible to gain a cost advantage.
Moreover, ask the students whether it would be wise to market the proposed cola on the basis of price. At
this point students should be reminded of the national blind taste test results. The Pop’s management team
became excited about the new cola when consumers responded favorably to it when compared to Coke
and Pepsi in the blind taste tests. Students should be asked to consider whether it would be sound business
have them discuss whether they believe consumers would view it as superior when the “Pop’s” brand is
attached to it. Consumers often cannot distinguish well between brands in blind tests, but have clear
preferences when a product is branded.
In the authors’ opinion it is quite clear that Pop’s, Inc. would need to follow a differentiation strategy. This
decision would require Pop’s, Inc. to research ways to redefine its target markets and differentiate its
products to meet each market’s needs. Over the years students have come up with a wide variety of
“Differentiation” strategies. While the likely success of these differentiation strategies is questionable,
discussing these ideas with students often highlights the advantages and disadvantages of each proposal.
It is important to emphasize that effective marketing research is really the key to developing specific
target markets and creating products that meet their needs.
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• Packaging – Pop’s, Inc. should research all possible packaging options and consider developing some
sort of new-to-the-world packaging for its premium cola. One specific idea is utilizing glass bottles to
differentiate; this packaging alternative has worked successfully with other premium products.
• Sizing – In order to take the emphasis off Coke and Pepsi price points, Pop’s, Inc. may want to create a
totally new size line-up. For instance Pop’s, Inc. may be able to sell a .75L Bottle or a 200 ml can of its
premium beverage that would alleviate consumers’ desire to constantly compare pricing to Coke and
Pepsi.
• New-to-the-world flavors/ingredients – Research could be conducted to identify ways of creating a new
soda category. In other words, many good arguments could be built against competing directly with the
flagship brands of the cola giants. There have been few successful national cola brands and those that
have survived are relatively minor players in the global cola war (e.g., R.C. Cola, Shasta, and Jolt). As is
described in the case, Pop’s, Incorporated achieved its current level of success in the non-cola market.
This is its area of expertise and primary strength. Students should be reminded that the company’s initial
motivation was based simply on the new management team’s “belief” that the best path to greater success
would be to enter the cola market. There was no sound marketing research suggesting this would be the
“best” strategy. Indeed, the “best” strategy may be to reinvigorate the “old creative juices” and generate
the type of innovation that led to earlier successes in the non-cola market. Certainly several newer
premium soda brands have built their success largely with non-colas (e.g., Jones, Stewart’s, Oragina, IBC,
and Switch).
• Health Supplements – Research ways to add vitamins or health supplements into cola or non-cola
carbonated drinks. Many of today’s youth are looking for a drink that is not only refreshing, but also
healthy. If Pop’s, Inc. could develop a cola or non-cola with superior taste and health benefits it would
certainly allow a platform for a national launch. Switch, for example, recently introduced a line of
“healthful” sodas that are made by reconstituting fruit concentrates with carbonated water. There are no
artificial ingredients. This type of approach may also open up opportunities for some creative distribution
strategies. For example, many school systems have recently removed soda machines due to concerns
(e.g., specialty, gourmet, and health food stores, as well as certain types of restaurants and delis) may
become important channel members.
• Channels – Pop’s, Inc. needs to research specific target markets and develop products to meet those
specific consumer’s needs. Pop’s, Inc. could do this by providing private labeled soda to specialty stores.
There are marketing research techniques designed to help develop product concepts that represent
“optimal” configurations of features, package design, size, flavors, or benefits (e.g., conjoint analysis) as
well as arriving at a consumer-based price rather than a cost based price (e.g., discrete choice modeling,
conjoint analysis). These would likely lead to very different assumptions and estimates of sales and costs.
These research techniques can be briefly mentioned as a way to get students to begin thinking and asking
questions about how adopting various types of differentiation strategies would affect sales estimates as
well as estimates of costs in the areas of (a) raw materials, (b) packing materials, (c) manufacturing, and
(d) distribution.
Pitfalls to a Differentiation Strategy
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While a Differentiation Strategy would seem to be the best solution for this specific case, there are no
guarantees that this strategy will produce a meaningful competitive advantage. Michael Porter points out
that to build competitive advantage through differentiation a firm must seek sources of uniqueness that
are time consuming or burdensome for rivals to match. Other common pitfalls and mistakes pointed out
by Porter include (Porter 1985, pp. 160-161):
• “UNIQUENESS THAT IS NOT VALUABLE” – Uniqueness only leads to differentiation when the
buyer perceives that it either lowers the buyer’s cost or raises buyer performance.
• “TOO MUCH DIFFERENTIATION” – Over differentiating so that price is too high relative to
competitors or that product quality or service levels exceed buyer’s needs
• “TOO BIG A PRICE PREMIUM” – Trying to charge too high a price premium (the
larger the price differential the harder it is to keep buyers from switching to lower priced competitors.)
• “IGNORING THE NEED TO SIGNAL VALUE” – Failing to communicate discernable product
differences and relying only on intrinsic product attributes to achieve differentiation.
• NOT KNOWING THE COST OF DIFFERENTIATION – Not understanding or identifying what buyers
consider as value.
A low-cost provider will defeat a differentiation strategy when buyers are satisfied with a basic product
and are not willing to pay a higher price for “extra” attributes.
ADDITIONAL IN-CLASS DISCUSSION ITEMS
Target or Price-Led Costing verses Cost-Plus Mark-Up Approach
Based on the data provided in this case, Pop’s, Inc.’s approach to pricing has been primarily a cost-plus
mark-up approach. Under this approach a company develops a product, determines the cost, and adds a
mark-up to the product in order to determine the product’s selling price. While this method is obviously
simple and straightforward, the method fails to take into consideration what consumers will pay until the
end of the process. Peter Drucker points out that cost-based pricing can be an expensive approach:
“Most American and practically all European companies arrive at their prices by adding up costs
and putting a profit margin on top. And then, as soon as they have introduced the product, they
have to cut the price, redesign it at enormous expense, take losses and often drop a perfectly good
product because it is priced incorrectly. Their argument? ”We have to recover our costs and make
a profit.”
This is true, but irrelevant. Customers do not see it as their job to ensure a profit for
manufacturers. The only sound way to price is to start out with what the market is willing to pay –
and thus, it must be assumed, what the competition will charge – and design to that price
specification.
Starting out with price and then whittling down costs is more work initially. But in the end it is
much less work than to start out wrong and then spend loss-making years bringing costs into
line.” (Drucker 1993)
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Target or price-led costing is a much more efficient approach since knowledge of both the market and
customers are incorporated into the design of the product. While market research is costly, cost-based
pricing often requires much more costly fixing of pricing and product problems that never should have
occurred.
Discuss the decision to utilize contract-manufacturing versus in-house manufacturing. Ask students
to discuss the advantages and disadvantages of each decision.
contract manufacturers with available capacity Pop’s, Inc. can save time in getting its product to market
(Speed to Market).
While contractual agreements to outsource often reduce risk in terms of cost fluctuations, in the long-run
it may be difficult to negotiate any future cost savings. The Company may find themselves locked into a
specific pricing structure despite increases in volumes or manufacturing processes, which may make it
harder for Pop’s, Inc. to respond to competitive actions. Additionally, outsourcing can include higher per
piece manufacturing costs due to the inclusion of Contract Manufacturer’s profit margins. In order to
avoid these disadvantages most start-ups can negotiate a short-term contract to utilize contract
manufacturing during the launch a product and subsequently invest in an in-house production facility
once the product has proven itself.
Discuss the decision to enter a test-market. Ask students to discuss the advantages and
disadvantages and whether other alternative research methods exist.
downsides to utilizing a test market. The largest disadvantage is the risk of revealing your company’s new
products and strategies to competitors before a national expansion, which will obviously reduce any “First
to Market” advantage that you hoped to gain through differentiation.
While the test market is normally the most accurate from of volume forecasting and testing, other
measures (e.g., simulated test market) exist that will allow companies to obtain a less accurate volume
forecast, but will dramatically reduce the risk of revealing the company’s strategy. The most common
alternative method is to allow customers to try the product and then answer questionnaires regarding the
product attributes and pricing.
Discuss the promotional budget. Ask students to discuss how the proposed budget was
determined and the advantages and disadvantages of this type of “top-down” budgeting
(i.e., top management arbitrarily sets the budget).
One way to make this case discussion richer from a strategic vantage point would be to consider how an
“objective and task” method of budgeting could be employed. This approach begins by setting feasible
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Chapter 11 – Decision Making with a Strategic Emphasis
tasks that would need to be performed in order to achieve the objectives. They could then be encouraged
to think about the “most appropriate” processes by which cost estimates would be generated in order to
determine the overall budget necessary for promotional success.
Concluding the Case Discussion
At the conclusion of the case discussion, students should be told that the purpose of this case is to help
them recognize how they, as accountants, can add significant value to a firm’s strategic planning process.
There is ample evidence from the workplace and academia that aspiring accountants need training on how
to think beyond the numbers. They need to learn to think strategically. They add value first by asking the
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