Companies can easily be tempted to react to unfavorable market trends by attempting a major transformation that takes their business in diverse new directions. But, although Coke faces challenges, according to the March 18, 2015 Wall Street Journal article “What Is Coke CEO’s Solution for Lost Fizz? More Soda,” Coke does not plan to diversify much. In contrast, Coke’s rival Pepsi has embraced diversification more, but profit suffered and Wall Street objected. Both Coke and Pepsi face market trends unfavorable to their flagship soda products.
According to my 25+ years researching business success and failure patterns, it is usually a mistake for a company to respond to weakening market conditions with a drastic transformation. Thus, Coke seems to be headed in the right direction, at least for now. Coke plans to stick with beverages, especially soda, This builds on the company’s strengths, which is a wise move. At the same time, however, Coke is not relying entirely on its soda business, which faces challenges as consumers increasingly prefer healthier fare. Coke’s Dasani water is perceived as healthier than soda and, thus, has a more favorable growth outlook.
So, Coke seems to be headed in the right direction by sticking with its strengths while also pursuing higher growth areas that are still very related to those strengths. Although it is at a juncture where many companies might be tempted to diversify into areas that don’t fit their business very well, Coke is indicating that it will not make this mistake. This contrasts with the way many companies challenged by flattening markets respond to their predicament by being lured into highly diverse new directions. These companies often seem to think they can thrive by pursuing new directions, but that is generally not the case. Instead, they usually end up doing poorly. Coke, on the other hand, despite facing adverse circumstances, may be able to hold its own by avoiding highly diverse new directions.
As someone who does workshops on taking the right strategic risks, I have to say that Coke’s current approach is much better than New Coke’s “too much risk for too little reward” approach taken years ago when the infamous new product was introduced. Although New Coke was launched long ago, its lessons still have implications for what Coke is doing today.
Nonetheless, Coke is not completely out of the woods. It still has to pay attention to the weakness in its market and consider how it might handle the situation should further declines occur. But, if Coke can find ways to stick to its strengths, yet pursue some growth–or at least stem declines–it can very well be on the right track. It can be far ahead of companies that pursue drastically unrelated new directions allegedly justified by the threat of decline.
