Coke Near Deal for Bottler
Total Value Could Top $12 Billion; Strategic Shift Driven by New Consumer Tastes
February 25, 2010
By DANA CIMILLUCA, BETSY MCKAY and JEFFREY MCCRACKEN

In an earlier posting this year (http://marketdrivengrowth.blogspot.com/2010/01/why-vertical-integration-is-making.html), Rita McGrath highlighted that vertical integration is making a comeback as companies compete on offering consumers unique experiences or meeting their specific needs. In a dramatic departure from a VERY successful strategy, Coca Cola is forward integrating into bottling (actually making and distributing the final drink product) in the U.S. vs. selling the syrup and marketing the global brand and product.

"In a strategic about-face driven by big changes in consumer tastes, Coca-Cola Co. was nearing a deal late Wednesday to buy the bulk of its largest bottler, according to people familiar with the matter.

As part of the deal, Coke would buy Coca-Cola Enterprises Inc.'s North American operations, the people said. The rest of the bottler, which consists of operations in several European countries, would remain independent and acquire Coke bottling operations in Scandinavia and Germany……
……A Coke deal would mark a major change in the strategy the company has pursued for decades—setting up large, independent bottlers run separately from Atlanta-based Coke itself. It would also come as PepsiCo is about to close acquisitions of its two largest independent bottlers, putting pressure on Coke to make a similar move to gain the same competitive advantages PepsiCo stands to reap.

The anchor bottler strategy worked well for Coke in the 1980s and 1990s when consumers were drinking increasingly more soda that was shipped in high volumes. But since then, the interests of Coke and its bottlers have diverged, as the drinks giant seeks to adapt to consumers moving away from soft drinks to more niche, noncarbonated offerings.

Owning a bottler would give Coke flexibility. It could decide to distribute via its bottling system, through which products are delivered directly to stores. Or it could deliver drinks through warehouses—cheaper and preferable for products too small or not profitable enough to distribute cost effectively through the more expensive "direct store delivery" system……
…..Any deal could prove risky. A marketing and branding company, Coke could be distracted by taking on bottling drinks in a huge market. The net effect on its balance sheet is unclear: It would not only absorb bottling assets, but also potentially spin off others that it currently owns in Scandinavia and Germany as part of the deal. Coke owns several of its bottlers around the world, also including bottlers in Brazil, India and China.

For Coke, the deal would represent a partial reversal of a strategy it pioneered in the mid-1980s. Worried about losing control over its disparate bottlers,…...
…..That bottling system allowed Coke to build a network of anchor bottlers around the globe, maintain a powerful influence with large stakes, and generate an additional profit stream by buying up small bottlers and then selling them to the new anchor bottlers. But by the late 1990s, some of the big bottlers also became a problem for Coke, saddled with debt from acquiring small bottlers and new equipment.
Broader changes in consumer habits have also put pressure on the bottling system in the U.S., which was traditionally geared toward manufacturing and selling carbonated soft drinks rather than the types of drinks that are growing faster these days, like "enhanced water," or bottled water with vitamins and flavors.

When PepsiCo Chairman and CEO Indra Nooyi launched that company's similar move in April, she said owning the two bottlers would give it the flexibility to decide how its beverages should be distributed.

As the industry moves from a heavy reliance on carbonated soft drinks into water, juice, teas and other noncarbonated drinks, some soft-drink bottlers don't have the equipment to manufacture the noncarbonated drinks. "

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There are two issues I would like to discuss with the group:

1. Our next session for Driving Organic Growth is May 10 to 14t h Kellogg School of Management. It will be the best ever. We are extending the program one day to include the important topics of how to build the Capability Platform needed for future growth and how to secure your new market position. The web site is http://www.kellogg.northwestern.edu/execed/programs/LEAD17/index.htm

As always we strongly suggest sending teams if possible for the richest experience and lower price.

2. I have been invited to submit an article to a prominent business magazine to tell our story on growth—specifically the Market Driven Growth process. Over the years many of you related how you deployed the process and, if interested and it fits, I would like to include your story in the article. Contact me directly via email—bobcooper@racooperllc.com

Have great day

Microsoft’s Creative Destruction
By DICK BRASS
WSJ, 2/4/2010
San Juan Island, Wash.

This article is a striking example of the challenges highlighted in Christensen’s Innovators Dilemma—when large, highly profitable businesses suppress and in fact destroy innovation. I worked with Microsoft and they truly have the best and brightest folks; the problem is the power structure within the company and the success of their current businesses.

"As they marvel at Apple’s new iPad tablet computer, the technorati seem to be focusing on where this leaves Amazon’s popular e-book business. But the much more important question is why Microsoft, America’s most famous and prosperous technology company, no longer brings us the future, whether it’s tablet computers like the iPad, e-books like Amazon’s Kindle, smartphones like the BlackBerry and iPhone, search engines like Google, digital music systems like iPod and iTunes or popular Web services like Facebook and Twitter…….
…..At worst, you can say it’s a highly repentant, largely accidental monopolist. It employs thousands of the smartest, most capable engineers in the world. More than any other firm, it made using computers both ubiquitous and affordable. Microsoft’s Windows operating system and Office applications suite still utterly rule their markets.
The company’s chief executive, Steve Ballmer, has continued to deliver huge profits…… And yet it is failing, even as it reports record earnings…….
…… While Apple continues to gain market share in many products, Microsoft has lost share in Web browsers, high-end laptops and smartphones. Despite billions in investment, its Xbox line is still at best an equal contender in the game console business. It first ignored and then stumbled in personal music players until that business was locked up by Apple.
Microsoft’s huge profits — $6.7 billion for the past quarter — come almost entirely from Windows and Office programs first developed decades ago. Like G.M. with its trucks and S.U.V.’s, Microsoft can’t count on these venerable products to sustain it forever. Perhaps worst of all, Microsoft is no longer considered the cool or cutting-edge place to work. There has been a steady exit of its best and brightest…..
……Microsoft never developed a true system for innovation….
…. For example, early in my tenure, our group of very clever graphics experts invented a way to display text on screen called ClearType. It worked by using the color dots of liquid crystal displays to make type much more readable on the screen. Although we built it to help sell e-books, it gave Microsoft a huge potential advantage for every device with a screen. But it also annoyed other Microsoft groups that felt threatened by our success…..
….. Not everything that has gone wrong at Microsoft is due to internecine warfare. Part of the problem is a historic preference to develop (highly profitable) software without undertaking (highly risky) hardware. This made economic sense when the company was founded in 1975, but now makes it far more difficult to create tightly integrated, beautifully designed products like an iPhone or TiVo. (refer to our posting on the importance of vertical integration to enable companies to optimize offerings that touch the emotive component of the value proposition http://marketdrivengrowth.blogspot.com/2010/01/why-vertical-integration-is-making.html)

And, yes, part of the problem has been an understandable caution in the wake of the antitrust settlement. Timing has also been poor — too soon on Web TV, too late on iPods…..
….. The problem comes when the competition becomes uncontrolled and destructive. At Microsoft, it has created a dysfunctional corporate culture in which the big established groups are allowed to prey upon emerging teams, belittle their efforts, compete unfairly against them for resources, and over time hector them out of existence ….."

Steve Jobs and the Economics of Elitism
By STEVE LOHR
NYT 1/31/2010

The article highlights insights into Steve Job’s innovation process. The next posting will use the Innovation Radar, a powerful tool we discussed in the past to see how this skill is leveraged into a powerful business system and sustainable, competitive separation.

"The more, the better. That’s the fashionable recipe for nurturing new ideas these days. It emphasizes a kind of Internet-era egalitarianism that celebrates the “wisdom of the crowd” and “open innovation.” Assemble all the contributions in the digital suggestion box, we’re told in books and academic research, and the result will be collective intelligence.
Yet Apple, a creativity factory meticulously built by Steven P. Jobs since he returned to the company in 1997, suggests another innovation formula — one more elitist and individual…….
Apple represents the “auteur model of innovation,” ………
……..Apple products are known for being stylish, powerful and pleasing to use. They are edited products that cut through complexity, by consciously leaving things out — not cramming every feature that came into an engineer’s head, an affliction known as “featuritis” that burdens so many technology products…..
……“A defining quality of Apple has been design restraint,” says Paul Saffo, …..
....Great products, according to Mr. Jobs, are triumphs of “taste.” And taste, he explains, is a byproduct of study, observation and being steeped in the culture of the past and present, of “trying to expose yourself to the best things humans have done and then bring those things into what you are doing.”
His is not a product-design philosophy steered by committee or determined by market research. The Jobs formula, say colleagues, relies heavily on tenacity, patience, belief and instinct…….
……“Real innovation in technology involves a leap ahead, anticipating needs that no one really knew they had and then delivering capabilities that redefine product categories,” said David B. Yoffie, a professor at the Harvard Business School……
Timing is essential to make such big steps ahead. Carver Mead, a leading computer scientist at the California Institute of Technology, once said, “Listen to the technology; find out what it’s telling you.”
Mr. Jobs is undeniably a gifted marketer and showman, but he is also a skilled listener to the technology. He calls this “tracking vectors in technology over time,” to judge when an intriguing innovation is ready for the marketplace. Technical progress, affordable pricing and consumer demand all must jell to produce a blockbuster product. "