Chapter II: The Coca-Cola System

Coca-Cola has sharpened its management system primarily through trial and error. It was one of the first U.S. corporations to become multinational and has internalized many of the initial lessons from its international ventures. Coca-Cola is organized as a franchise system where local bottlers have primary ownership over the operation and distribution, but the Coca-Cola Company dictates the formula, production process, and much of the advertising for the local bottler. The relationship between the global corporation and the local bottler has been consistent throughout the history of Coca-Cola’s operations resulting in varying management strategies. Currently, Coca-Cola has shifted more toward allowing limited decentralization at the local level to encourage increased localization of product creation and advertising material.

The Coca-Cola Company was founded in 1886 and the Coca-Cola Export Corporation was established in 1930 (Kuisel 53). Coke was being sold in Latin America before the establishment of its Export Corporation; in 1897 Coke was sold in Mexico and in 1927 it was distributed in Honduras, Colombia, and Haiti. One of the first international bottling plants was established in Havana, Cuba in 1906 (Louis 29). In 1928, it was sold in Venezuela and by 1942 Coca-Cola was sold in Nicaragua, Argentina, Brazil, Costa Rica and Uruguay (Lydersen). Currently, Coca-Cola has bottling plants or operations in at least 12 Latin American countries and is sold in at least 42 (Coca-Cola Company 1-121). Coca-Cola is present in over 200 countries worldwide and produces more than 300 beverage brands (Coca-Cola Company 2008: 3). The corporation’s economic success depends heavily on its access to international markets and its relationship with domestic and foreign governments.

Some of the earliest Coca-Cola salesmen, who introduced Coca-Cola to foreign markets before the establishment of the export corporation, operated similar to Catholic missionaries bent on spreading Catholicism to ‘remote’ parts of the world. As Pendergrast explains “Asa Candler fully indoctrinated them [salesmen] into the religion of Coca-Cola… stressing the purity of the ingredients, the sanctity of the secret formula, the extraordinary qualities of the product” (65). Candler focused heavily on economic expansion very early in Coca-Cola’s history and was even described as having a “Napoleon complex” (Pendergrast 65). Asa Candler, the founder of the Coca-Cola Company, kept a close eye on international relations. In 1899, he announced the appointment of a salesman for business operations in Cuba and Puerto Rico following the Cuban War for Independence, a war that resulted in Cuban liberation from Spain. Candler was organizing a business plan for Cuba, following closely behind U.S. military and economic intervention into Cuba. McQueen points out that the French coined the term “coca-colonization” to refer to “the expansion of U.S. capital, commodities and cultures” (206). Coca-Cola’s operations and its cultural impact were, in many parts of the world, seen as synonymous with growing U.S. imperialism because Coca-Cola often followed on the coattails of U.S. military intervention.

Coca-Cola CEO Robert Woodruff was also particularly focused on expanding Coca-Cola markets outside of the United States in the early 1920s. In 1926, Woodruff established the Foreign Department to oversee international ventures. From the start, Coca-Cola set up contracts that placed the majority of ownership and risk in the hands of local bottlers. Aside from financial reasons, Coca-Cola executives speculated that local bottlers could connect better to local populations and “the Company wouldn’t suffer from the stigma of being an intrusive American product” (Pendergrast 168). Making connections with local markets became difficult, Pendergrast states,

Coca-Cola had to rely either on already established local bottlers, who might not push the product properly, or on wealthy entrepreneurs who knew nothing about soft drinks… the Company preferred to deal with prominent locals, but often wound up using American corporations. In Guatemala and Honduras, for instance, the United Fruit Company, which dominated the local economy, took the franchise (Pendergrast 168).

Internationally, Coca-Cola aligned itself mostly with wealthy entrepreneurs, prominent locals, or American corporations. In the case of Chile, Coca-Cola started operations in 1941 (Herrera 1). Morton Hodgson, Robert Woodruff’s nephew, owned and operated the first plant, along with plants in Argentina and Uruguay (Pendergrast 242). He established the plants after Mladin Zarubica, owner of an Australian Coca-Cola plant, surveyed areas of Latin America gathering information on “age and sex distribution, natural resources, the water situation, cultural prejudices, available refrigeration, and weather” (Pendergrast 242). The plants were partially owned by the Joroberts Corporation, whose investors included heads of General Motors and U.S. Steel (Pendergrast 242).

Coca-Cola was not a local product in foreign markets; it was a U.S. product that struggled to entice local audiences. Language and culture created significant barriers in Coca-Cola’s international business endeavors. Pendergrast details one particularly amusing anecdote, “in Cuba, an unfortunate wind blew one day as the soft drink manufacturer tested the new art of skywriting. ‘Tome Coca-Cola’ (Drink Coca-Cola) was blurred so that the crowds below received the message, ‘Teme Coca-Cola’ (Fear Coca-Cola)” (169). In another instance, Coca-Cola executives sent a letter to a Brazilian company in Spanish “thereby confusing and offending the Portuguese speaking businessmen who received the letter” (Allen 173). Coca-Cola was not initially well received in many foreign countries, yet through aggressive marketing and persistent lobbying at all levels of national and international government Coca-Cola was able to force a presence in almost all the countries it established bottlers.

The Coca-Cola Company does not have a uniform business plan for all of its bottling plants across the world. Instead, it operates within a variety of local environments. The company statements explain:

One of our greatest strengths is our ability to conduct business on a worldwide scale while maintaining a local approach. At the heart of this approach is the Coca-Cola bottling system. The Coca-Cola system comprises our Company and our bottling partners -- more than 300 worldwide. Many consumers do not realize this, but there is a distinction between our Company and our bottling partners (www.thecoca-colacompany.com).

Coca-Cola emphasizes the separation between the corporate entity and the local bottlers. Under this system, the Coca-Cola Company can legally divorce itself from the day-to-day operations of the foreign bottlers. It can operate in a variety of ways depending on the cultural, legal, or governmental restrictions of the region. Ethical practices are defined by the “regional” economy, thus concepts of workers’ rights, discrimination, corruption, and profiteering are not universal, but defined by local criteria.

Oddly enough, the majority of its profits come from bottlers, over which they claim to have very little ownership (See Figure 1). The company states;

The Coca-Cola system is not a single entity from a legal or managerial perspective, and the Company does not own or control most of our bottlers. In 2006, bottling partners in which our Company had no ownership interest or a noncontrolling equity interest produced and distributed approximately 83 percent of our worldwide unit case volume (The Coca-Cola Company).

The Coca-Cola Company, in a legal sense, contracts out to local bottlers that conduct themselves how they see fit within a set of managerial guidelines. Coca-Cola, in turn, can avoid culpability for abuses taking place at foreign bottlers. Aside from avoiding culpability, it can also divide up production and subcontract to areas viewed as the most profitable. Gary Gereffii explains "this new international division of labor was created in order to exploit reserve armies of labor on a world scale by using the advanced transport and communication technologies that permit the spatial segmentation of the production process" (507 1989). Corporations, like Coca-Cola, profit from subcontracting various sections of the commodity chain out to the lowest bidder. It also profits from creating a complex network that, through technology, is easy to manage, but difficult for consumers to understand, connect with, or visualize.

Even though the Coca-Cola Company does not technically have controlling ownership over the majority of its international bottlers through its franchise system, bottlers are expected to adhere to a rigorous set of managerial standards put forth by the parent company. These standards are outlined in the “Coca-Cola Management System: The Quality Management System Standard,” an annual corporate publication which is described as “the framework in which we coordinate and guide our continual improvement activities and relentlessly pursue excellence in execution” (4). The framework contains four layers (See Figure 2). Part of the implementation of these four layers includes the development of a business plan by each organizational unit.

The business plan must consider the following six items;
a. Determination of the factors of success for the organizational unit;
b. An assessment of financial, economic, environmental, safety, and other current factors that bear on the organizational unit’s success;
c. An assessment of the risks posed by internal and external factors that could affect the organization’s ability to meet its objectives and the assets that it needs to manage;
d. Human resource capabilities and needs;
e. Quality capabilities and needs, including resource availability;
f. Objectives and metrics
(Coca-Cola Company 2008: 10)

Each organizational unit must also maintain documentation of the creation, establishment and implementation of the business plan, as well as documentation of:
a. Document control procedure;
b. Quality Manual;
c. HACCP program;
d. Control of nonconforming material and product procedure;
e. Quality Statement (may be controlled through its inclusion in the Quality Manual);
f. Objectives and metrics;
g. Control of records procedure;
h. Competency requirements and levels for each position;
i. Design and development control procedure;
j. Commercialization procedure;
k. Procurement, outsourcing, and supplier management procedure;
l. Materials, products, and service integrity procedure;
m. Calibration procedure;
n. Audit procedure;
o. Audit schedule;
p. Incident Management and Crisis Resolution (IMCR) Plan;
q. Corrective action procedure;
r. Preventive action procedure.
(The Coca-Cola Company 2008: 15).

Through a detailed set of guidelines and meticulous record keeping, the Coca-Cola Company can monitor almost every aspect of an organizational unit’s business practices which makes the company’s detachment seem limited to legal liability. Louis and Yazijian explain, “[The Coca-Cola Company’s] detachment from a bottler’s activities, even if laws or human rights have been violated, is conspicuously inconsistent with the company’s obsession with overseeing local production and promotion” (185).

The breakup of commodity chains on a global scale, as articulated by Gereffi, creates a tension between coordinating a massive global network of production, which is based on seeking out cheap labor, while also depending heavily on emerging markets and foreign consumers for profit growth. As previously mentioned, Coca-Cola statements relate that in 2006, 83% of Coca-Cola’s worldwide unit case volume was produced and distributed by “bottling partners in which our Company had no ownership interest or a noncontrolling equity interest” (The Coca-Cola Company). Simultaneously, the Coca-Cola Company has been increasingly dependent on international sales (or sales outside North America) in the last ten years. In one USA Today article, Muhtar Kent, CEO of Coca-Cola noted that “the company’s international business, in particular emerging markets, continue to fuel growth” (Tong). CSR initiatives are one way to attempt to strike a balance between these tensions. Neville Isdell commented that:

The Coca-Cola Company operates in more than 200 countries around the world. While it’s fair to say that we are a truly global company, we’ve learned that there is no such thing as a global consumer – all consumers are local. That means you have to win their trust at the local level. And the only way to do that is through individual relationships… by focusing on local needs and demands… and by acting as an integral part of the local communities in which you operate (Isdell 2006).

Isdell stresses the importance of consumer trust and localizing corporate operations to win consumer loyalty.

Balancing global and local operations has been challenging for the Coca-Cola Company since its inception. In 2000, Coca-Cola shifted its international business approach, attempting to put more control into the hands of local bottlers in response to declining profits. Part of this strategy was the decentralization of price setting, advertising and brand creation. Mooij & Hofstede explain “Coca-Cola launched a series of innovation centers around the world wherein scientists are able to work directly with marketing managers to develop, package, and sell new drinks at local market levels” (61-62). This current trend has included attempts to become more sensitive and responsive to local markets. Coca-Cola’s marketing chief was quoted as stating “[the company’s] big successes have come from markets where we read the consumer psyche every day and adjust the marketing model every day” (Mooij & Hofstede 62). The company attempts to dream itself anew on a daily basis in response to local, shifting tastes with the ultimate goal of constantly capturing the essence of consumer desire.

Coca-Cola needs to be particularly sensitive to local backlash in part due to the landscape of the contemporary global market, where multinational corporations are becoming increasingly dependent on international consumer trust, as well as reserves of cheap labor. CSR initiatives are one way to make local connections while simultaneously obscuring the harsh realities of the global market, including exploitation of labor. In the case of the Coca-Cola Company, there has been a push and pull relationship between global and local operations. Despite increased decentralization, local operations are still heavily overseen by the parent corporation through the company’s management system. The Coca-Cola franchise system allows Coca-Cola to operate on a transnational level with the ability to coordinate relatively consistent production, making adjustments to the level of centralization over time. The result varies from location to location, but the goal is to make Coca-Cola appear as embedded in local culture as possible, obscuring the local bottler’s connection to a heavily coordinated global system.