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Who dares wins success through intelligent risk

A story of global success

No study of business success in the twentieth century would be complete without mentioning Coca-Cola. Coca-Cola is the product which perhaps best exemplifies global marketing. The Coca-Cola trademark is recognised by 94 per cent of the earth’s population and Coca-Cola is the second most universally understood phrase after OK. It is not only instantly recognisable but it can be found almost anywhere from petrol stations and shops in Central Africa, to small villages in mountainous areas on all five continents.

The first Coca-Cola was developed according to legend, by Dr John Styth Pemberton in a three-legged brass pot in his backyard. If you look at the first outdoor advertisement for Coca-Cola which appeared in the nineteenth century you can see that the company is based on a core strength which has an enduring quality. Coca-Cola is ‘delicious and refreshing’. This theme has been a key feature of advertising for the drink ever since and more recently the message was that ‘Coke is the real thing’ i.e. anything else which purports to be similar, is at best, simply a pale imitation.

Who dares wins success through intelligent risk

The Coca-Cola Company has several important soft drinks products the most well known of which are:

  • Coca-Cola
  • Diet Coke
  • Sprite
  • Fanta

Key aspects of Coca-Cola´s business

The Coca-Cola Company’s business policy provides an object lesson in many important principles of business. For example:

  1. Focus on the best lines – Coca-Cola concentrates on its most profitable lines. In 1984 77 of Coca-Cola’s operating income came from soft drinks. Today the figure is 97 By selling off businesses not sharing the same attractive financial fundamentals as the soft drink business Coca-Cola now operates only in the area of high-return business.
Who dares wins success through intelligent risk
  1. Reinvestment – Re-investing profits is the key to ongoing business development. If profits are made today it is important to make sure of a base from which profits may be made tomorrow. In the 199Os Coca-Cola concentrated its profits on re-investment. In 1983 the company’s dividend payout ratio was 65 i.e. most of its profits were paid out as dividends to shareholders. Since then Coca-Cola has been increasing dividends at a slower rate than earnings growth, so today, 6O% of profits ($66O million in 1994) were available for reinvestment.
  2. Focus on the consumer – All successful businesses today are based on focusing on the consumer. If a company meets the requirements of its consumers (and indeed exceeds these requirements), then you have a sure-fire recipe for success.
    An important measure of success is the volume and value of sales that you make.
    The worldwide success of Coca-Cola is illustrated in the chart below:
Who dares wins success through intelligent risk

Coca-Cola has set out to become the world’s number one consumer marketing company by taking clear actions to differentiate its products.

  1. Differentiation with customers – The direct customers of Coca-Cola are outlets such as service stations, newsagents, leisure centres, cinemas, clubs, supermarkets and many other retailers selling soft drinks. In this area, the emphasis in marketing has therefore been on providing superior delivery, promotional services and sales support. All of these elements clearly differentiate Coca-Cola as being the beverage supplier most likely to generate profits for retailers.
  2. Differentiation with Consumers – The end consumers of Coke are the millions of people who consume soft drinks worldwide. Over many years Coca-Cola has expanded its markets horizontally in country after country until there is virtually no place on earth where people do not drink Coca-Cola. Today this horizontal growth is almost total, with fewer than 20 countries not taking the product. Coca-Cola is therefore now trying to develop the brands vertically.

This simply means creating a deeper consumer desire for that brand than existed the day before. It involves giving people additional reasons to buy Coca-Cola brands instead of reasons to buy competing ones. That is the essence of differentiation. It is not an easy task, because already 5.6 billion people have a well established understanding of what Coca-Cola means to them. However, there are considerable strengths which support Coca-Cola in this task namely:

  • The trademark is so widely known and part of the public imagination.
  • Coca-Cola is continually building on its existing expertise in marketing and consumer understanding and is supported by access to a wealth of financial and creative resources.
  • Coca-Cola has an ‘action orientation’. Instead of waiting for change to happen it is at the leading edge, driving the action forward.
  1. Win the largest market share – Being the major player in a business market is the key to business success. A company only becomes the major player in a market by being the best, and being the best means having a detailed understanding of its consumers’ requirements and then exceeding these requirements.

Once a company is a major player then it has considerable advantages to draw upon. These advantages are based on having a higher return on capital than its rivals and the opportunity to plough this return into fresh investment. Such areas for investment are marketing, product research and development, and other aspects of sound business growth.

Organisations do not become successful by sticking rigidly to a tried and tested formula. Of course, they stick to and cement their core strengths, but in a turbulent and dynamic marketplace, they also adapt and become agents for change. Successful individuals and companies have to keep succeeding, and keep challenging themselves to do better to increase their lead.

Today, with hindsight, a number of key people at Coca-Cola recognise that the company has not always been prepared to take the risks that were required to achieve success. In the 6Os and 7Os for example the organisation was somewhat conservative. It became reluctant to take risks, or even initiate change in the core business. Experimentation was confined to diversification away from the core business and into wines, coffee, water desalination and even fish farms. As a result, Pepsi-Cola was able to make inroads into the US market share, while Coca-Cola continued to expand outside the United States.

Strategic change in the 1980s

The 198Os heralded an era of change for Coca-Cola. On the 8th of July 1982 diet Coke was launched in the United States, starting a new period in which Coca-Cola was prepared to take risks by bringing in new products in the soft drinks sector. Within a year it had become the largest selling low-calorie soft drink in America.

In April 1985 the Company took the ultimate risk. It removed market-leading Coca-Cola from the US market and introduced New Coke. The decision was made after extensive marketing – for example by canvassing 190,000 consumer opinions and taste tests of various Coke formulations.

The launch was spectacular in that within 24 hours more Americans were aware of the birth of New Coke than had known about man’s first steps on the moon in 1969. However, the market reaction did not match the research. Within days, several opinion polls showed that consumers overwhelmingly preferred the original taste of Coca-Cola to the new Coke. There were floods of complaints across America.

In this case, blind testing did not tell the full story. Coca-Cola had minimised the ‘product’ risk but completely underestimated the brand risk. Consumers told the company that they were going to buy the new Cola, but they were thinking more hypothetically. As a result, the company overread the research.

Consumers wanted to remind the company that their favourite soft drink belonged to them. It was more than a drink, it was a brand that was an integral and inseparable part of their lives! Chairman CEO Roberto C. Goizueta can laugh about it today, he might even make the same decision again based on the research that was used. But few executives would have taken the risk that he and his company took.

The Coca-Cola Company listened and then dared to replace its winning formula. It was now daring enough to admit it had been wrong to do so. They meant to change the dynamics of sugar colas in the US, and they did exactly that albeit not in the way they had planned. In the end, the company learned that in order to maintain the interest and the respect of its consumers, it would have to continually differentiate its brands in ways that offered highly relevant value.

The original Coca-Cola reappeared as Coca-Cola Classic to regain the top slot as the USA’s leading soft drink, while the new formula, today known as Coke II, remained on the market bringing in additional sales and gaining extra market share. By 1994 Coca-Cola USA’s core sugar colas volume had grown 29 per cent since 1985. The company’s share of U.S. soft drink sales, which had been declining, climbed from 39 per cent to 41per cent. Today, The Coca-Cola Company stands at more than $75 billion – better than eight times what it was on April 23, 1985.

Since the 198Os the company has focused on its core business. In particular, it recognises that it needs to face its past mistakes with honesty and that the culture of the organisation needs to be based on openness. and intelligent risk-taking. The events of 1985 changed forever the dynamics of the soft drinks industry and the success of The Coca-Cola Company. Goizueta characterised the new Coke decision-then and now as a prime example of taking intelligent risks.

Mr Goizueta emphasized that every single one of the best people at the Company has taken some significant risks in moving the business forward. And every one of them has endured risks that failed. With the benefit of hindsight, you start to learn that the perception of risk is often based on faulty assumptions. Sometimes if you look at the decision in a different way, what appears dangerous at first is not really such a risk after all. But it is important to remember that intelligent risks are based on honesty, careful calculations and anticipated results. They are not gambles made on a whim or determined by a toss of a coin.

The Coca-Cola Company is committed to re-inventing itself for successive generations of consumers. In product terms, this means offering a range of new drinks to provide a wide repertoire of refreshments – choice, variety, excitement, and fun. The company has recently launched a variety of new drinks in the United States and, of course, Fruitopia in the United Kingdom. The launch of Fruitopia and OK Soda (in the United States) in 1994 was based on ‘pre-search’ – not selling what you can make, but making what you can sell. Fruitopia is a line of all natural fruit juice drinks which offers variety, taste and refreshment, with a range of flavours including Passion Fruit Lemon Affinity and Blackcurrant Babylon. Fruitopia and OK Soda reflect The Coca-Cola Company’s emphasis on creating value by actively meeting consumer needs with new products. These new products will support existing brands and help to generate growth for the organisation.

At the same time, Coca-Cola has updated its advertising approach. Instead of focusing on classic commercials such as the seventies ‘I’d like to teach the world to sing.’ – there are now a variety of commercials under the umbrella theme ‘Always Coca-Cola.’ The adverts are different and designed to meet the mood of programmes that people are watching and hence target different audiences. The organisation has also been prepared to take risks in other areas related to the promotion and distribution of its soft drinks. For example, Coca-Cola has become the number one sponsor associated with football, music, T.V shows and films in the UK. The ITV Diet Coke Movie Premieres constituted ITV’s first ever programming- strand sponsorship.

Daring to risk success

The culture at Coca-Cola has shifted from the conservatism of the 1960s and 1970s to one of ‘daring to risk success’. Risk can involve failure, but if corporate value systems place too much emphasis on penalising failure rather than on rewarding success, people will not take risks – neither the people nor the business will flourish.

Coca-Cola was able to turn its experience of launching New Coke into a success by recognising its mistakes. The emphasis today is on being bold enough to face new challenges and being able to seize market opportunities.

Ploughing back profits into investment has enabled the company to provide the impetus to take fresh risks. The emphasis on consumer orientation has meant that products have continued to be successful, providing the impetus and cash flow for new growth. Through ‘pre-search’ Coca-Cola can produce the products that consumers want, and if they do not prove to be successful they are bold enough to listen and to make changes. The secret of success is to be flexible in your response to ongoing change in the market.

Taking intelligent risks will often mean taking bold decisions rather than ‘making do’ with working arrangements. For example, in 1987 the company caused an upheaval in its own distribution system in the UK. It replaced the services of two well-established bottlers and set up a single, new, British operating partner. It achieved this by establishing a jointly-owned company with the then bottler of Coke’s biggest competitor. Sales doubled within the first five years of the new venture!

Today Coca-Cola is not only Britain’s most popular soft drink but is the biggest selling of all grocery brands across all categories. The number two is Diet Coke! Elsewhere in the world, The Coca-Cola Company has proved itself ready to do business in novel and inventive ways. The day the Berlin Wall came down in 1989, Coca-Cola representatives were handing out cans of Coke to the East Germans as they walked into West Berlin. Within three months the company was distributing Coca-Cola to the Eastern States.

By 1990, 21 million cases of Coca-Cola were sold there and $450 million was being invested in land, buildings and equipment. By 1993, per capita consumption in the former East Germany had matched that of the western states at the time of the reunification.

Taking risks – a learning process

Intelligent risk taking at Coca-Cola has three main features:

  1. There is confidence in the core business. The organisation knows that people like Coca-Cola and want to have it available to them.
  2. Action is taken boldly and swiftly. Once Coca-Cola recognises what they want to do, they get it done in a decisive, no-nonsense way e.g. the expansion into Eastern Europe.
  3. The company is capable of learning ‘on the run’. It has the flexibility to change course if things do not quite work out as was originally planned e.g. the launch of New Coke.

The important thing about intelligent risk taking is not how you take a risk, or even what the risk is. Learning through the experience of taking risks is vital if better results are to be achieved next time.