respond to each classmate 100 words a piece
This is a great example of knowing your strengths and doubling down on them. Since the return on capital for the soft drink division was higher than decently performing other divisions the CEO must have known it was something special. If I had to guess, I would say other factors such as market rivalry played a role in this decision as well. By selling the other divisions, Coca Cola had probably more time and money to invest in the soft drink division. This money and time could be used for various activities, such as marketing, product development, quality standards, etc. In the long run this obviously became a big success and the right decision. I think many companies are faced with similar very difficult situations. They must use their knowledge, expertise, and analysis to make guided decisions around opportunity cost. More pertinent than ever is data, and with this data companies are able to make very informed high confidence decisions. This underscores the importance of financial and data analysis when making decisions. Another great real world example that comes to mind in this situations is IBM. IBM has historically offered many different products and services such as hardware, computers, consulting services, etc. In recent years it decided to double down on hybrid cloud and AI offerings since these two categories had the largest return on capital. Through this process we have seen consistent revenue growth at a quarterly and annual basis. IBM decided to stop selling certain hardware as it is not as relevant in today’s world.
Opportunity cost principle is one of the most important principle of economics that guides the management to take decisions. In the case of Coca-Cola, the company is earning 16 percent return on capital for their soft drink business, but in the other projects, their earnings are only at 10 percent. So, for the other businesses, the opportunity cost is 16 percent, which is higher than 10 percent and it is wrong according to the opportunity cost principle. According to this principle, investment should take place in those businesses that have a lower opportunity cost. With this in mind, the soft drink business would be the better option since it has a lower opportunity cost than all of the other businesses. So, I think that the Coca Cola CEO made the right decision to sell the under performing businesses and invest the funds in the soft drink business. This will eliminate on the amount of money being lost by continuing to fund projects that will ultimately end up costing more money to make than the amount of profits being earned. It will also help raise more equity capitals for the expansion plan in the soft drink business to maximize on the potential profits that could come from this business that is already out performing the others while also being cheaper to produce. As a conclusion, I think that the Coca Cola CEO decision was the best in hopes of pushing the company forward, and making sure their resources are being used wisely and efficiently.