The Cola Wars Continue – Coca-Cola vs. Pepsi in 2006In reading the case, careful attention should be paid to the underlying economics of the soft drink industry and its relationship with average profits, to the relationship between different stages of the value chain in the industry, the relationship between competitive interaction and industry profits, and the impact of globalization on the structure of the 'industry. When preparing the case, you should begin by carefully characterizing the carbonated soft drinks industry. To do this, it is necessary to clearly specify the market for Coca-Cola and Pepsi in the industry value chain, their main suppliers and main buyers. Concentrate producers (CP) and bottlers are profitable. These two industry sectors are extremely interdependent and share the costs of sourcing, production, marketing and distribution. Many of their functions overlap; for example, CPs carry out bottling and bottlers carry out many promotional activities. The sector is already vertically integrated to some extent. They also deal with similar suppliers and buyers. Entry into the industry would involve developing operations in one or both disciplines. Beverage substitutes would threaten both CP and their associated bottlers. Due to operational overlap and similarities in their market environment, we can include both CPs and bottlers in our definition of the soft drink industry. In 1993, CPs earned pretax profits of 29% on sales, while bottlers earned profits of 9% on sales, for a total industry profitability of 14% (Table 1). This industry as a whole generates positive economic benefits. Then answer the following questions.1. Why is the soft drink industry so profitable? Answer: The answer is to view the industry through the lens of the competitive forces at play. Although competition in the sector is fierce, there are relatively few players and other competitive forces are weak or have been reshaped by dominant industry players. (i) Established Rivals: Weak – Industry dominated by two companies and a handful of niche players (i.e. Cadbury Schwepps / Doctor Pepper). (ii) Customer Power: Weak – Although it exists a choice, the customer base outside of fountain drinks is dispersed and therefore has limited, if any, power to negotiate lower prices. (iii) New Entrants: Low – New entrants are deterred by high capital investments in bottling, distribution and huge marketing budgets of existing players. (iv) Substitute offerings: high but actively transformed into low - However, soft drink sellers are reshaping this strength by improving the availability and convenience of acquiring their products through vending machines, fountain and convenience sales channels. In recent years, soft drink sellers have diversified into new products that threaten to take share from traditional sugary sodas (diet sodas, fruit juices, bottled water).).