Case Study

Is Coca-Cola the "Perfect" Business?3

What does a perfect business look like? For Warren Buffett and his partner Charlie Munger, vice-chairman of Berkshire Hathaway, Inc., it looks a lot like Coca-Cola. To see why, imagine going back in time to 1885, to Atlanta, Georgia, and trying to invent from scratch a nonalcoholic beverage that would make you, your family, and all of your friends rich.

Your beverage would be nonalcoholic to ensure widespread appeal among both young and old alike. It would be cold rather than hot so as to provide relief from climatic effects. It must be ordered by name—a trademarked name. Nobody gets rich selling easy-to-imitate generic products. It must generate a lot of repeat business through what psychologists call conditioned reflexes. To get the desired positive conditioned reflex, you will want to make it sweet, rather than bitter, with no after-taste. Without any after-taste, consumers will be able to drink as much of your product as they like. By adding sugar to make your beverage sweet, it gains food value in addition to a positive stimulant. To get extra-powerful combinatorial effects, you may want to add caffeine as an additional stimulant. Both sugar and caffeine work; by combining them, you get more than a double effect—you get what Munger calls a "lollapalooza" effect. Additional combinatorial effects could be realized if you design the product to appear exotic. Coffee is another popular product, so making your beverage dark in color seems like a safe bet. By adding carbonation, a little fizz can be added to your beverage's appearance and its appeal.

To keep the lollapalooza effects coming, you will want to advertise. If people associate your beverage with happy times, they will tend to reach for it whenever they are happy, or want to be happy. (Isn't that always, as in "Always Coca-Cola"?) Make it available at sporting events, concerts, the beach, and at theme parks—wherever and whenever people have fun. Enclose your product in bright, upbeat colors that customers tend to associate with festive occasions (another combinatorial effect). Red and white packaging would be a good choice. Also make sure that customers associate your beverage with festive occasions. Well-timed advertising and price promotions can help in this regard—annual price promotions tied to the Fourth of July holiday, for example, would be a good idea.

To ensure enormous profits, profit margins and the rate of return on invested capital must both be high. To ensure a high rate of return on sales, the price charged must be substantially above unit costs. Because consumers tend to be least price sensitive for moderately priced items, you would like to have a modest "price point," say roughly $1-$2 per serving. This is a big problem for most beverages because water is a key ingredient, and water is very expensive to ship long distances. To get around this cost-of-delivery difficulty, you will not want to

3 See Charles T. Munger, "How Do You Get Worldly Wisdom?" Outstanding Investor Digest, December 29, 1997, 24-31.

CASE STUDY (continued)

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    Is cocacola the perfect business case study?
    8 years ago
  • maja
    Is coca cola the perfect business case study?
    7 years ago
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    8 years ago
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    Is cocacola the perfect businesscase study?
    8 years ago

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