Alphabet Eyes New Frontiers, Harvard Business School, 9-717-418 After reading the case, respond to these questions: What is the rationale for Alphabet owning a variety of businesses that are significantly different from each other?Why did Alphabet invest in Nest? How is this different from its core businesses?Discuss the Alphabet reorganization, its purpose, and tradeoffs. What are the risks and benefits of greater decentralization? Submit your analysis through the Turnitin drop box found within the Assignments area by no later than end of Day 5.


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STRT 6200: Strategic Decision−Making in a Changing Environment
Professor Ravi Sarathy
Northeastern University
Fall 3 2018
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Downloaded by Frank Nakoh on 11/13/2018. Northeastern University, Ravi Sarathy , Fall 3 2018
STRT 6200: Strategic Decision−Making in a
Changing Environment, Sarathy − Fall 3 2018
Northeastern University
Downloaded by Frank Nakoh on 11/13/2018. Northeastern University, Ravi Sarathy , Fall 3 2018
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STRT 6200: Strategic Decision−Making in a Changing Environment,
Sarathy − Fall 3 2018
Table of Contents
“Coca−Cola in 2011: In Search of a New Model” by Yoffie, David B.; Kim,
“Mobike: A Smart Bike−Sharing Service Platform” by Qi, Guijie; Chen, Jiali;
Zhang, John
“Apple Inc. in 2015” by Yoffie, David B.; Baldwin, Eric
“Li & Fung: Navigating through Disruptive Changes” by Yew, Danielle; Neo,
Boon Siong
“Alphabet Eyes New Frontiers” by Alcacer, Juan; Sadun, Raffaella; Hull,
Olivia; Herman, Kerry
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REV: AUGUST 14, 2012
a in 201
11: In Search
of a Neew Mod
uhtar Kent, CEO
of The Coca-Cola
ompany (Cok
ke), breathed a sigh of rellief. On October 3,
2010, he had finally
y closed the la
argest acquisition in the co
ompany’s history: the $12 billion purch
hase of
the North
American operation
ns of Coca-Co
ola Enterprisees (CCE), Co
oke’s largest franchised bo
With the acquisitio
on, Coke now
w controlled approximatelly 90% of its total North A
American vo
reverssing its 1986 decision
to separate itself from
the bottlling business.. 
or most of th
he last 125 years,
Coke had
manufacctured concen
ntrate and fo
ocused on drriving
and and custo
omer loyalty through
vy investmen
nts in brand m
marketing. Th
he capital-inteensive
job off producing drinks,
runniing trucks, an
nd supervisin
ng distributo
ors mainly reesided with C
hise bottlers. This businesss model had served the co
ompany welll. Coke had b
become the w
largesst soft-drink company,
selling 1.7 billio
on servings off beverages eevery day to consumers in
n over
200 co
ountries thro
ough more th
han 300 bottling partners. Coke was co
onsidered thee most recogn
powerful brand in the world, va
alued at $70 billion
in 20100.1
Att the same tim
me, Coke faceed several challenges in th
he U.S. markeet, which pro
ompted Kent to rethink the strategy.. Selling soda
as was no lon
nger enough to quench A
American con
nsumers’ thirsst and
taste preferences.
drinks, which
represeented 76% of Coke’s globaal volume, haad lost
some of their fizz amid anti-ob
besity campaigns and actiive lifestyle m
movements. C
Consumers so
native non-carrbonated bev
verages, rangiing from teass to coconut w
water, which involved diffferent
uction and disstribution meethods from Coke’s
onal system. B
Broader issuees surfaced ass well,
ding environm
mental concerrns about pacckaging and rrising commo
odity costs (seee Exhibit 1 for the
challeenges facing Coca-Cola).
a and social n
networks werre also chang
ging the mark
landscape: Coke co
ould no longeer rely on trad
ditional mediaa alone to driive brand prefference.
Deespite the cha
allenges, Kentt was confiden
nt that Coke ccould achievee its “2020 vission” to doub
ble the
Coca–Cola system’’s revenues by
y the year 2020 (see Exhib
bit 2 for a sum
mmary of thee company’s v
for 20
020).2 Buying CCE was an important co
omponent forr realizing thiis vision. Ken
nt claimed, “I think
there is no better system
in the world than th
he franchise m
model, but it has to evolvee.”3 Yet theree were
y ways the fra
anchise system
m could evolve. For exam
mple, should C
Coke keep thee bottling bussiness
and control the wh
hole value chain? Or, shou
uld Coke “fix”” CCE and reefranchise thee bottling bussiness,
as it had
h done in th
he past? Or perhaps
Coke should keep manufacturin
ng and refran
nchise distribution,
ar to what thee beer industrry did? For on
ne of the mos t successful ccompanies in the world ov
ver the
last ceentury, Kent’’s answers to these questio
ons had the p
potential to rredefine Cokee’s business m
for the next 100 yea
or David B. Yoffie and
a Research Asso
ociate Renee Kim prrepared this case. H
HBS cases are deveeloped solely as thee basis for class disscussion.
Cases arre not intended to serve
as endorsemeents, sources of prim
mary data, or illusttrations of effectivee or ineffective man
ght © 2011, 2012 President and Fellow
ws of Harvard Colleege. To order copiies or request perm
mission to reproducce materials, call 1–800-5457685, write Harvard Busin
ness School Publish
hing, Boston, MA 02163, or go to ww
ww.hbsp.harvard.eedu/educators. Th
his publication may
y not be
d, photocopied, or otherwise reprodu
uced, posted, or tran
nsmitted, without tthe permission of H
Harvard Business S
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Coca-Cola in 2011: In Search of a New Model
Coca-Cola was first invented in 1886 by John Pemberton, a pharmacist based in Atlanta, Georgia.4
He combined syrup with carbonated water and sold the drink at a soda fountain in a local drugstore.
Five years later, Pemberton sold the concoction to Asa Candler, an Atlanta businessman. Candler
aggressively marketed the soda and made Coca-Cola available in every state by 1895. He kept the
formula a secret and locked it up in a bank vault, creating widespread speculation about the
ingredients. Convinced that Coca-Cola’s future was in fountain sales, Candler sold the bottling right
to two Chattanooga lawyers for $1 in 1899. According to Candler, “we have neither the money, nor
brains, nor time to embark in the bottling business.”5 Contrary to Candler’s belief, the bottling
business flourished. Over the next two decades, the Chattanooga team created a regional network of
more than 1,000 bottlers, which were usually locally owned and operated.
In 1916, Candler sold Coke to a group of investors, led by Ernest Woodruff, who took the
company public that year. His son, 33-year-old Robert Woodruff, became president four years later,
marking the beginning of a leadership that would span over six decades. Woodruff introduced
several hallmark innovations to put Coke within an “arm’s width of desire,” such as the six-bottle
carton, open-top cooler, automatic fountain dispenser, and vending machine. Coke became
synonymous with famous advertising slogans such as the “Pause that refreshes” and “It’s the real
thing.” The company’s product portfolio expanded by buying Minute Maid (1960) and launching
new, flavored sodas, Fanta and Sprite.
Woodruff was also credited with turning Coca-Cola into an international phenomenon. During
World War II, he promised that “every man in uniform gets a bottle of Coca-Cola for five cents
wherever he is and whatever it costs the company.” Coke received exemptions from wartime sugar
rationing for beverages that it sold to the military or to retailers that served soldiers. Sixty-four
overseas bottling plants were set up during the war throughout Europe and Asia, not only serving
American soldiers, but also giving locals their first exposure to Coke. Although Woodruff officially
retired in 1955, in effect, he continued to serve as Coke’s patriarch until his death in 1985. He
influenced major corporate decisions, which included handpicking Roberto Goizueta to become the
CEO in 1981, overruling retiring CEO J. Paul Austin’s own choice for his successor.
Goizueta Era (1981–1997)
Goizueta, a chemical engineer from Cuba, took over Coke amid an intense cola war. PepsiCo
(Pepsi) had been chipping away Coke’s lead in the U.S. market since the mid-1970s through a
successful taste-test challenge that promoted Pepsi as part of a young “Pepsi Generation.” In the
battle for more market share, both companies pushed for aggressive price promotions; reportedly as
much as 50% of their combined food-store volume was sold at a discount, eroding margins.
Consumers, accustomed to such discounts, frequently switched back and forth between brands,
buying whatever was on sale. Goizueta fought back by stepping up Coke’s advertising spending.
Most of Coke’s non-soda business was sold off, including wine and shrimp farming. Sugar was
replaced with high fructose corn syrup, which cost about 40% less than natural sugar.
The company introduced 11 new products during the 1980s, coupled with a greater variety of
packaging. The biggest hit was the launch of Diet Coke in 1982. Initially, the idea of extending the
trademark Coke name to another product was considered “heresy” by several company insiders and
bottlers. But Goizueta pushed through and debuted Diet Coke with the most expensive marketing
budget ($100 million in the first year) in the soft-drink industry’s history to date. By the end of 1983,
Diet Coke had become the best-selling diet soft drink.
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Coca-Cola in 2011: In Search of a New Model
Then, in hopes of creating another hit like Diet Coke, Goizueta decided to change the 99-year-old
Coke formula and replace it with New Coke in April 1985. New Coke not only fizzled, but also found
itself fighting consumers’ emotional attachment to the old Coke. Goizueta admitted, “We knew some
people were going to be unhappy, but we could never have predicted the depth of their
unhappiness.”6 Three months later, Goizueta returned the original formula under the brand name
Classic Coke.7 The comeback drove Coke’s stock price to a 12-year high.
Abroad, Coke continued to expand its presence, most notably across Asia to Eastern Europe. After
the fall of the Berlin Wall in 1989, Coke quickly invested $1.5 billion into the region to challenge
Pepsi’s early foothold. Coke built new networks of bottlers and distribution routes from the bottom
up, while Pepsi continued to rely on its existing state-owned bottlers and network. By 1992, Coke’s
market share in several Eastern European markets, including Hungary, Poland, and Czechoslovakia,
had nearly doubled from the previous year.8
The Lost Decade
In 1997, Goizueta’s leadership came to an abrupt end with his unexpected death from lung cancer.
“He was great and he was brilliant,” recalled John Farrell, vice president of strategic planning.9
Coke’s market value had risen from $4 billion to $147 billion, the share price had skyrocketed over
5,000%, and Coke had become one of the most highly valued brands in the world.
Yet Coke’s leadership struggled for the next decade, starting with Goizueta’s successor, Douglas
Ivester (see Exhibit 3a for Coco-Cola’s share price performance after Goizueta’s death). The 1997
Asian financial crisis crimped profits for the company that generated about two-thirds of its sales
from overseas. Another crisis surfaced in Belgium (1999) over alleged contamination fears, forcing the
company to conduct the largest recall in its history. Ivester was criticized for being slow to react,
dealing a severe blow to Coke’s brand image.
The board chose to replace Ivester with Douglas Daft (2000–2004). He tried to cut costs and laid
off over 6,000 employees during the early 2000s, Coke’s biggest job reduction in history. Legal
problems involving a racial discrimination suit and a questionable marketing test involving Burger
King cost Coke over $200 million in settlements. The company came under investigation by U.S.
government authorities over claims that Coke inflated profits by shipping excessive amounts of
syrup to its overseas bottlers, a practice known as “channel stuffing.” Abroad, more contamination
scares surfaced in India and Europe, tainting Coke’s already troubled image.
Several big opportunities to expand Coke’s business went astray as well. In 2000, Daft tried to buy
Quaker Oats for $16 billion, but the deal was killed at the last minute by several Coke directors who
thought the price tag was too high.10 Pepsi bought Quaker Oats instead, gaining ownership of
Gatorade, the leading brand in the fast-growing category of sports drinks. In 2001, after two years of
negotiations, Coke gave up on efforts to buy South Beach Beverage Co. (SoBe), only to watch Pepsi
acquire it. Around the same time, Coke called off a planned $4 billion juice and chips joint venture
with Procter & Gamble. “It was just one thing after another,” recalled Clyde Tuggle, Coke’s senior
vice president for global public affairs and communications.11 “We didn’t have the right answers, so we
kept stumbling, trying to figure out how to get out of our financial, structural, and reputation mess.”
E. Neville Isdell replaced Daft in April 2004, Coke’s third CEO in seven years. He was a 35-year
Coke veteran who had been called back from his retirement. “Neville was a world-class diplomat,
and this company had been successful when it worked with this kind of a leader,” recalled Farrell.
Isdell returned to find a demoralized company struggling with declining sales and ineffective
marketing. He brought some 150 senior managers from across the globe together for the first time in
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Coca-Cola in 2011: In Search of a New Model
years, and they collaborated to create a “manifesto for growth,” a new 10-year strategic plan. “We
needed to pull together and motivate our people again and that’s exactly what Neville did,” stated
Farrell. The plan called for the revival of Coke’s core sparkling brands (Coca-Cola, Fanta, and Sprite).
Isdell subsequently committed $400 million for marketing to strengthen their brand power.12 He also
expanded Coke’s portfolio to include non-sparkling drinks such as enhanced water and teas.
At the same time, Isdell tried to bring back several senior managers who had left Coke during its
period of turmoil, including Muhtar Kent. As the son of a Turkish diplomat, Kent spoke many
languages and had spent much of his career with Coke overseas. He was known to be personable yet
relentless, driven by a genuine passion for the business. When running a brewery in Istanbul, Kent
was frequently spotted talking to shoppers in supermarkets and customers in bars, offering free
bottles of his own brewery’s brand in hope of convincing them to switch. He returned to Coke in 2005
to spearhead the company’s international business; a year later, global sales increased 6%, the best
gain in six years.13 In 2008, Kent took over the CEO position from Isdell, who claimed that he had
only wanted to stay for a few years. Isdell enthusiastically described Kent: “He’s one of the world’s
best networkers, and that’s what you need in the business that we’re in.”14 Moving forward, analysts
noted that the biggest challenge for Kent was to figure out how to restore growth in North America,
the single largest market for non-alcoholic, ready-to-drink (NARTD) beverages, amid fizzling soda
sales (see Exhibits 3b, 4, and 5 share price performance and selected financials).
The Soft Drink Industry
Sparkling beverages were a $74 billion retail market in the United States that had thrived under
intense competition between Coke and Pepsi for over a century.15 Consumption had steadily
increased throughout the years, thanks to attractive prices and widespread availability, peaking at
864 eight-ounce servings per person per year in 1998. Although consumption had declined amid a
wider variety of alternative beverages, the average U.S. consumer still drank 708 servings of sodas a
year in 2010 (see Exhibits 6a and 6b for consumption numbers for various beverages). Megabrands—
a brand or trademark with annual volumes exceeding 100 million 192-ounce cases—dominated with
66% of the sparkling beverages’ market share, led by Coke brands (see Exhibit 7 for the top-10
sparkling brands). The soft-drink business model involved four primary participants: concentrate
producers like Coke itself, bottlers, retailers, and suppliers.
Concentrate Producers
Concentrate producers blended common ingredients and flavors, and shipped the mixture in
containers to bottlers. The manufacturing process itself involved relatively little investment in
machinery, overhead, or labor. A typical beverage-concentrate manufacturing plant could cost about
$50–$100 million to build and could supply several countries. As of 2010, Coke operated
approximately 30 principal beverage-concentrate plants for its entire market of over 200 countries.
Marketing, market research, and maintaining bottler relations were critical elements for
concentrate owners to build powerful, global brands. In 2010 alone, Coke spent $2.9 billion in
advertising expenses.16 “The value of this business is in the brand,” Kent insisted. “It’s much more
holistic than just the drink.” Bottlers’ cooperation played a major role in jointly implementing
marketing programs created by Coke. To help “influence” bottlers, Coke devoted about $5 billion in
2010 for its bottlers and resellers worldwide to engage in promotional or marketing programs.17 It
pursued customer development agreements (CDAs), whereby bottlers used funds provided by Coke
to secure shelf space with national retailers like Walmart and supermarket chains. In addition,
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Coca-Cola in 2011: In Search of a New Model
concentrate owners negotiated directly with their bottlers’ major suppliers to guarantee low prices
and reliable supply for key ingredients.
Bottlers bought the concentrate or syrup, added carbonated water and sweeteners, and then
packaged the drinks into bottles or cans. Each beverage ran on a specialized, high-speed production
line that was usually not interchangeable between different products and package sizes. The cost of a
large plant with multiple lines and automated warehousing could reach hundreds of millions of …
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