Case Study Description of Coca-Cola: Residual Income Valuation
The case illustrates the use of the residual income (also known as the abnormal earnings) valuation approach. Students are asked to provide a valuation of Coca-Cola Company using the residual income valuation methodology and understand how it maps into the discounted cash flow method. Students learn how forecasts of sales, performance, dividends, and other valuation inputs feeds into a valuation model. Students also learn the modified Dupont decomposition technique and how to reclassify financial statements to perform the modified Dupont analysis.
Authors :: Suraj Srinivasan, Beiting Cheng, Edward J. Riedl
Swot Analysis of "Coca-Cola: Residual Income Valuation" written by Suraj Srinivasan, Beiting Cheng, Edward J. Riedl includes – strengths weakness that are internal strategic factors of the organization, and opportunities and threats that Valuation Residual facing as an external strategic factors. Some of the topics covered in Coca-Cola: Residual Income Valuation case study are - Strategic Management Strategies, Entrepreneurship, Financial analysis, Financial management and Finance & Accounting.
Some of the macro environment factors that can be used to understand the Coca-Cola: Residual Income Valuation casestudy better are - – customer relationship management is fast transforming because of increasing concerns over data privacy, increasing commodity prices, increasing household debt because of falling income levels, technology disruption, geopolitical disruptions, there is backlash against globalization, central banks are concerned over increasing inflation,
wage bills are increasing, talent flight as more people leaving formal jobs, etc
Introduction to SWOT Analysis of Coca-Cola: Residual Income Valuation
SWOT stands for an organization’s Strengths, Weaknesses, Opportunities and Threats . At Oak Spring University , we believe that protagonist in Coca-Cola: Residual Income Valuation case study can use SWOT analysis as a strategic management tool to assess the current internal strengths and weaknesses of the Valuation Residual, and to figure out the opportunities and threats in the macro environment – technological, environmental, political, economic, social, demographic, etc in which Valuation Residual operates in.
According to Harvard Business Review, 75% of the managers use SWOT analysis for various purposes such as – evaluating current scenario, strategic planning, new venture feasibility, personal growth goals, new market entry, Go To market strategies, portfolio management and strategic trade-off assessment, organizational restructuring, etc.
SWOT Objectives / Importance of SWOT Analysis and SWOT Matrix
SWOT analysis of Coca-Cola: Residual Income Valuation can be done for the following purposes –
1. Strategic planning using facts provided in Coca-Cola: Residual Income Valuation case study
2. Improving business portfolio management of Valuation Residual
3. Assessing feasibility of the new initiative in Finance & Accounting field.
4. Making a Finance & Accounting topic specific business decision
5. Set goals for the organization
6. Organizational restructuring of Valuation Residual
Strengths Coca-Cola: Residual Income Valuation | Internal Strategic Factors
What are Strengths in SWOT Analysis / TOWS Matrix / Weighted SWOT Analysis
The strengths of Valuation Residual in Coca-Cola: Residual Income Valuation Harvard Business Review case study are -
Organizational Resilience of Valuation Residual
– The covid-19 pandemic has put organizational resilience at the centre of everthing that Valuation Residual does. Organizational resilience comprises - Financial Resilience, Operational Resilience, Technological Resilience, Organizational Resilience, Business Model Resilience, and Reputation Resilience.
Superior customer experience
– The customer experience strategy of Valuation Residual in the segment is based on four key concepts – personalization, simplification of complex needs, prompt response, and continuous engagement.
Operational resilience
– The operational resilience strategy in the Coca-Cola: Residual Income Valuation Harvard Business Review case study comprises – understanding the underlying the factors in the industry, building diversified operations across different geographies so that disruption in one part of the world doesn’t impact the overall performance of the firm, and integrating the various business operations and processes through its digital transformation drive.
Highly skilled collaborators
– Valuation Residual has highly efficient outsourcing and offshoring strategy. It has resulted in greater operational flexibility and bringing down the costs in highly price sensitive segment. Secondly the value chain collaborators of the firm in Coca-Cola: Residual Income Valuation HBR case study have helped the firm to develop new products and bring them quickly to the marketplace.
Diverse revenue streams
– Valuation Residual is present in almost all the verticals within the industry. This has provided firm in Coca-Cola: Residual Income Valuation case study a diverse revenue stream that has helped it to survive disruptions such as global pandemic in Covid-19, financial disruption of 2008, and supply chain disruption of 2021.
Ability to recruit top talent
– Valuation Residual is one of the leading recruiters in the industry. Managers in the Coca-Cola: Residual Income Valuation are in a position to attract the best talent available. The firm has a robust talent identification program that helps in identifying the brightest.
High switching costs
– The high switching costs that Valuation Residual has built up over years in its products and services combo offer has resulted in high retention of customers, lower marketing costs, and greater ability of the firm to focus on its customers.
Ability to lead change in Finance & Accounting field
– Valuation Residual is one of the leading players in its industry. Over the years it has not only transformed the business landscape in its segment but also across the whole industry. The ability to lead change has enabled Valuation Residual in – penetrating new markets, reaching out to new customers, and providing different value propositions to different customers in the international markets.
Training and development
– Valuation Residual has one of the best training and development program in the industry. The effectiveness of the training programs can be measured in Coca-Cola: Residual Income Valuation Harvard Business Review case study by analyzing – employees retention, in-house promotion, loyalty, new venture initiation, lack of conflict, and high level of both employees and customer engagement.
Low bargaining power of suppliers
– Suppliers of Valuation Residual in the sector have low bargaining power. Coca-Cola: Residual Income Valuation has further diversified its suppliers portfolio by building a robust supply chain across various countries. This helps Valuation Residual to manage not only supply disruptions but also source products at highly competitive prices.
Effective Research and Development (R&D)
– Valuation Residual has innovation driven culture where significant part of the revenues are spent on the research and development activities. This has resulted in, as mentioned in case study Coca-Cola: Residual Income Valuation - staying ahead in the industry in terms of – new product launches, superior customer experience, highly competitive pricing strategies, and great returns to the shareholders.
Digital Transformation in Finance & Accounting segment
- digital transformation varies from industry to industry. For Valuation Residual digital transformation journey comprises differing goals based on market maturity, customer technology acceptance, and organizational culture. Valuation Residual has successfully integrated the four key components of digital transformation – digital integration in processes, digital integration in marketing and customer relationship management, digital integration into the value chain, and using technology to explore new products and market opportunities.
Weaknesses Coca-Cola: Residual Income Valuation | Internal Strategic Factors
What are Weaknesses in SWOT Analysis / TOWS Matrix / Weighted SWOT Analysis
The weaknesses of Coca-Cola: Residual Income Valuation are -
High dependence on existing supply chain
– The disruption in the global supply chains because of the Covid-19 pandemic and blockage of the Suez Canal illustrated the fragile nature of Valuation Residual supply chain. Even after few cautionary changes mentioned in the HBR case study - Coca-Cola: Residual Income Valuation, it is still heavily dependent upon the existing supply chain. The existing supply chain though brings in cost efficiencies but it has left Valuation Residual vulnerable to further global disruptions in South East Asia.
Lack of clear differentiation of Valuation Residual products
– To increase the profitability and margins on the products, Valuation Residual needs to provide more differentiated products than what it is currently offering in the marketplace.
Slow decision making process
– As mentioned earlier in the report, Valuation Residual has a very deliberative decision making approach. This approach has resulted in prudent decisions, but it has also resulted in missing opportunities in the industry over the last five years. Valuation Residual even though has strong showing on digital transformation primary two stages, it has struggled to capitalize the power of digital transformation in marketing efforts and new venture efforts.
Slow to strategic competitive environment developments
– As Coca-Cola: Residual Income Valuation HBR case study mentions - Valuation Residual takes time to assess the upcoming competitions. This has led to missing out on atleast 2-3 big opportunities in the industry in last five years.
Interest costs
– Compare to the competition, Valuation Residual has borrowed money from the capital market at higher rates. It needs to restructure the interest payment and costs so that it can compete better and improve profitability.
Ability to respond to the competition
– As the decision making is very deliberative, highlighted in the case study Coca-Cola: Residual Income Valuation, in the dynamic environment Valuation Residual has struggled to respond to the nimble upstart competition. Valuation Residual has reasonably good record with similar level competitors but it has struggled with new entrants taking away niches of its business.
Capital Spending Reduction
– Even during the low interest decade, Valuation Residual has not been able to do capital spending to the tune of the competition. This has resulted into fewer innovations and company facing stiff competition from both existing competitors and new entrants who are disrupting the industry using digital technology.
High dependence on star products
– The top 2 products and services of the firm as mentioned in the Coca-Cola: Residual Income Valuation HBR case study still accounts for major business revenue. This dependence on star products in has resulted into insufficient focus on developing new products, even though Valuation Residual has relatively successful track record of launching new products.
Need for greater diversity
– Valuation Residual has taken concrete steps on diversity, equity, and inclusion. But the efforts so far has resulted in limited success. It needs to expand the recruitment and selection process to hire more people from the minorities and underprivileged background.
Slow to harness new channels of communication
– Even though competitors are using new communication channels such as Instagram, Tiktok, and Snap, Valuation Residual is slow explore the new channels of communication. These new channels of communication mentioned in marketing section of case study Coca-Cola: Residual Income Valuation can help to provide better information regarding products and services. It can also build an online community to further reach out to potential customers.
Aligning sales with marketing
– It come across in the case study Coca-Cola: Residual Income Valuation that the firm needs to have more collaboration between its sales team and marketing team. Sales professionals in the industry have deep experience in developing customer relationships. Marketing department in the case Coca-Cola: Residual Income Valuation can leverage the sales team experience to cultivate customer relationships as Valuation Residual is planning to shift buying processes online.
Opportunities Coca-Cola: Residual Income Valuation | External Strategic Factors
What are Opportunities in the SWOT Analysis / TOWS Matrix / Weighted SWOT Analysis
The opportunities highlighted in the Harvard Business Review case study Coca-Cola: Residual Income Valuation are -
Reforming the budgeting process
- By establishing new metrics that will be used to evaluate both existing and potential projects Valuation Residual can not only reduce the costs of the project but also help it in integrating the projects with other processes within the organization.
Learning at scale
– Online learning technologies has now opened space for Valuation Residual to conduct training and development for its employees across the world. This will result in not only reducing the cost of training but also help employees in different part of the world to integrate with the headquarter work culture, ethos, and standards.
Redefining models of collaboration and team work
– As explained in the weaknesses section, Valuation Residual is facing challenges because of the dominance of functional experts in the organization. Coca-Cola: Residual Income Valuation case study suggests that firm can utilize new technology to build more coordinated teams and streamline operations and communications using tools such as CAD, Zoom, etc.
Creating value in data economy
– The success of analytics program of Valuation Residual has opened avenues for new revenue streams for the organization in the industry. This can help Valuation Residual to build a more holistic ecosystem as suggested in the Coca-Cola: Residual Income Valuation case study. Valuation Residual can build new products and services such as - data insight services, data privacy related products, data based consulting services, etc.
Use of Bitcoin and other crypto currencies for transactions
– The popularity of Bitcoin and other crypto currencies as asset class and medium of transaction has opened new opportunities for Valuation Residual in the consumer business. Now Valuation Residual can target international markets with far fewer capital restrictions requirements than the existing system.
Reconfiguring business model
– The expansion of digital payment system, the bringing down of international transactions costs using Bitcoin and other blockchain based currencies, etc can help Valuation Residual to reconfigure its entire business model. For example it can used blockchain based technologies to reduce piracy of its products in the big markets such as China. Secondly it can use the popularity of e-commerce in various developing markets to build a Direct to Customer business model rather than the current Channel Heavy distribution network.
Increase in government spending
– As the United States and other governments are increasing social spending and infrastructure spending to build economies post Covid-19, Valuation Residual can use these opportunities to build new business models that can help the communities that Valuation Residual operates in. Secondly it can use opportunities from government spending in Finance & Accounting sector.
Harnessing reconfiguration of the global supply chains
– As the trade war between US and China heats up in the coming years, Valuation Residual can build a diversified supply chain model across various countries in - South East Asia, India, and other parts of the world. This reconfiguration of global supply chain can help, as suggested in case study, Coca-Cola: Residual Income Valuation, to buy more products closer to the markets, and it can leverage its size and influence to get better deal from the local markets.
Remote work and new talent hiring opportunities
– The widespread usage of remote working technologies during Covid-19 has opened opportunities for Valuation Residual to expand its talent hiring zone. According to McKinsey Global Institute, 20% of the high end workforce in fields such as finance, information technology, can continously work from remote local post Covid-19. This presents a really great opportunity for Valuation Residual to hire the very best people irrespective of their geographical location.
Leveraging digital technologies
– Valuation Residual can leverage digital technologies such as artificial intelligence and machine learning to automate the production process, customer analytics to get better insights into consumer behavior, realtime digital dashboards to get better sales tracking, logistics and transportation, product tracking, etc.
Changes in consumer behavior post Covid-19
– Consumer behavior has changed in the Finance & Accounting industry because of Covid-19 restrictions. Some of this behavior will stay once things get back to normal. Valuation Residual can take advantage of these changes in consumer behavior to build a far more efficient business model. For example consumer regular ordering of products can reduce both last mile delivery costs and market penetration costs. Valuation Residual can further use this consumer data to build better customer loyalty, provide better products and service collection, and improve the value proposition in inflationary times.
Lowering marketing communication costs
– 5G expansion will open new opportunities for Valuation Residual in the field of marketing communication. It will bring down the cost of doing business, provide technology platform to build new products in the Finance & Accounting segment, and it will provide faster access to the consumers.
Loyalty marketing
– Valuation Residual has focused on building a highly responsive customer relationship management platform. This platform is built on in-house data and driven by analytics and artificial intelligence. The customer analytics can help the organization to fine tune its loyalty marketing efforts, increase the wallet share of the organization, reduce wastage on mainstream advertising spending, build better pricing strategies using personalization, etc.
Threats Coca-Cola: Residual Income Valuation External Strategic Factors
What are Threats in the SWOT Analysis / TOWS Matrix / Weighted SWOT Analysis
The threats mentioned in the HBR case study Coca-Cola: Residual Income Valuation are -
Technology acceleration in Forth Industrial Revolution
– Valuation Residual has witnessed rapid integration of technology during Covid-19 in the Finance & Accounting industry. As one of the leading players in the industry, Valuation Residual needs to keep up with the evolution of technology in the Finance & Accounting sector. According to Mckinsey study top managers believe that the adoption of technology in operations, communications is 20-25 times faster than what they planned in the beginning of 2019.
Barriers of entry lowering
– As technology is more democratized, the barriers to entry in the industry are lowering. It can presents Valuation Residual with greater competitive threats in the near to medium future. Secondly it will also put downward pressure on pricing throughout the sector.
Backlash against dominant players
– US Congress and other legislative arms of the government are getting tough on big business especially technology companies. The digital arm of Valuation Residual business can come under increasing regulations regarding data privacy, data security, etc.
Trade war between China and United States
– The trade war between two of the biggest economies can hugely impact the opportunities for Valuation Residual in the Finance & Accounting industry. The Finance & Accounting industry is already at various protected from local competition in China, with the rise of trade war the protection levels may go up. This presents a clear threat of current business model in Chinese market.
Learning curve for new practices
– As the technology based on artificial intelligence and machine learning platform is getting complex, as highlighted in case study Coca-Cola: Residual Income Valuation, Valuation Residual may face longer learning curve for training and development of existing employees. This can open space for more nimble competitors in the field of Finance & Accounting .
Consumer confidence and its impact on Valuation Residual demand
– There is a high probability of declining consumer confidence, given – high inflammation rate, rise of gig economy, lower job stability, increasing cost of living, higher interest rates, and aging demography. All the factors contribute to people saving higher rate of their income, resulting in lower consumer demand in the industry and other sectors.
Increasing wage structure of Valuation Residual
– Post Covid-19 there is a sharp increase in the wages especially in the jobs that require interaction with people. The increasing wages can put downward pressure on the margins of Valuation Residual.
New competition
– After the dotcom bust of 2001, financial crisis of 2008-09, the business formation in US economy had declined. But in 2020 alone, there are more than 1.5 million new business applications in United States. This can lead to greater competition for Valuation Residual in the Finance & Accounting sector and impact the bottomline of the organization.
Environmental challenges
– Valuation Residual needs to have a robust strategy against the disruptions arising from climate change and energy requirements. EU has identified it as key priority area and spending 30% of its 880 billion Euros European post Covid-19 recovery funds on green technology. Valuation Residual can take advantage of this fund but it will also bring new competitors in the Finance & Accounting industry.
Regulatory challenges
– Valuation Residual needs to prepare for regulatory challenges as consumer protection groups and other pressure groups are vigorously advocating for more regulations on big business - to reduce inequality, to create a level playing field, to product data privacy and consumer privacy, to reduce the influence of big money on democratic institutions, etc. This can lead to significant changes in the Finance & Accounting industry regulations.
Instability in the European markets
– European Union markets are facing three big challenges post Covid – expanded balance sheets, Brexit related business disruption, and aggressive Russia looking to distract the existing security mechanism. Valuation Residual will face different problems in different parts of Europe. For example it will face inflationary pressures in UK, France, and Germany, balance sheet expansion and demand challenges in Southern European countries, and geopolitical instability in the Eastern Europe.
Easy access to finance
– Easy access to finance in Finance & Accounting field will also reduce the barriers to entry in the industry, thus putting downward pressure on the prices because of increasing competition. Valuation Residual can utilize it by borrowing at lower rates and invest it into research and development, capital expenditure to fortify its core competitive advantage.
Shortening product life cycle
– it is one of the major threat that Valuation Residual is facing in Finance & Accounting sector. It can lead to higher research and development costs, higher marketing expenses, lower customer loyalty, etc.
Weighted SWOT Analysis of Coca-Cola: Residual Income Valuation Template, Example
Not all factors mentioned under the Strengths, Weakness, Opportunities, and Threats quadrants in the SWOT Analysis are equal. Managers in the HBR case study Coca-Cola: Residual Income Valuation needs to zero down on the relative importance of each factor mentioned in the Strengths, Weakness, Opportunities, and Threats quadrants.
We can provide the relative importance to each factor by assigning relative weights. Weighted SWOT analysis process is a three stage process –
First stage for doing weighted SWOT analysis of the case study Coca-Cola: Residual Income Valuation is to rank the strengths and weaknesses of the organization. This will help you to assess the most important strengths and weaknesses of the firm and which one of the strengths and weaknesses mentioned in the initial lists are marginal and can be left out.
Second stage for conducting weighted SWOT analysis of the Harvard case study Coca-Cola: Residual Income Valuation is to give probabilities to the external strategic factors thus better understanding the opportunities and threats arising out of macro environment changes and developments.
Third stage of constructing weighted SWOT analysis of Coca-Cola: Residual Income Valuation is to provide strategic recommendations includes – joining likelihood of external strategic factors such as opportunities and threats to the internal strategic factors – strengths and weaknesses. You should start with external factors as they will provide the direction of the overall industry. Secondly by joining probabilities with internal strategic factors can help the company not only strategic fit but also the most probably strategic trade-off that Valuation Residual needs to make to build a sustainable competitive advantage.