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Sheet1 Page 1 CASE STUDY FOR CHAPTER 1 Is Coca-Cola the ›Perfect › Business?1 What does a perfect business look like? For Warren Buffett and his partner Charlie Munger, vice-chairman of Berkshire Hatha w Your beverage would be nonalcoholic to ensure widespread appeal among both young and old alike. It would be cold rather t h through what psychologists call conditioned reflexes. To get the desired positive conditioned reflex, you will want to make it sw e 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 s m effect, you get what Munger calls a & lollapalooza± effect. Additional combinatorial effects could be realized if you design the p To keep the lollapalooza effects coming, you will want to advertise. If people associate your beverage with happy times, they w associate with festive occasions (another combinatorial effect). Red and white packaging would be a good choice. Also make s and price promotions can help in this regard--annual price promotions tied to the Fourth of July holiday, for example, would be 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 L 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 sell the beverage itself, but a key ingredient, like syrup, to local bottlers. By selling syrup to independent bottlers, your company can also better safeguard its & secret ingredients.m This also avoids the problem of having to invest a substantial amount in bottling plants, machinery, delivery trucks, and so on. This minimizes capital requirements and boosts the rate of return on invested capital. Moreover, if you correctly price the key syrup ingredient, you can ensure that the enormous profits generated by carefully developed lollapalooza effects accrue to your company, and not to the bottlers. Of course, you want to offer independent bottlers the potential for highly satisfactory profits in order to provide the necessary incentive for them to push your product. You not only want to & leave something on the table& for the bottlers in terms of the bottlers¶ profit potential, but they in turn must also be encouraged to & leave something on the table‡ for restaurant and other customers. This means that you must demand that bottlers deliver a consistently high-quality product at carefully specified prices if they are to maintain their valuable franchise to sell your beverage in the local area. 1 See Charles T. Munger, › How Do You Get Worldly Wisdom?L Outstanding Investor Digest,
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This note was uploaded on 12/30/2010 for the course ACC MG taught by Professor Dr.leiter during the Spring '10 term at Andrew Jackson.

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