Oct. 24 (Bloomberg) -- Coca-Cola was losing the Philippines, where failure might have been the beginning of the end of our global business. By 1981, the nation was the world’s 10th-largest soft-drink market, but Pepsi had a 2-to-1 market share and the Coke bottler, owned by the Soriano family’s San Miguel Corp., warned that it could no longer sustain its losses unless Coke shared the burden.

John Hunter, head of Coca-Cola Philippines, hammered out an agreement with the Sorianos to buy 30 percent of the bottling operations for $30 million. At the time, it was Coke’s largest foreign investment.

Roberto Goizueta, the new chairman and chief executive officer, went to the board -- composed of Southern gentlemen, many of an advanced age, who sometimes nodded off during meetings. I don’t know how he persuaded them to invest in a country run by dictator Ferdinand Marcos, whose power was eroding, but Goizueta did, although some dubious board members chose to abstain from the vote.

Next, Hunter convinced the Sorianos that the new joint venture needed me as its president and controller. The challenge was to prove that I was running the company for the benefit of both groups of shareholders without being adversarial to either side. This was a risky venture, and I had much to lose.

Hunter’s view was that, over time, the franchise model could work well in the Philippines. Coca-Cola’s profit margins on sales of concentrate are wider than the bottlers’ margins. Yet bottling can be an excellent business if you build the brand.

We’re No. 1

I believe that, when the Good Lord created the world, he created Coke as No. 1 and Pepsi -- referred to in our offices only as “the Imitator” -- as No. 2. Coke’s Philippines problem was fixable. That wasn’t just blind faith, even though 18 Coke bottling plants were run down and some should have been closed. (On a quality scale of 1 to 100, Coca-Cola plants in the country measured 29.) Pepsi was simply more aggressive -- but lacked discipline.

When we first arrived, Marcos had just been re-elected, although conditions were about to deteriorate. The dictator suffered from lupus and looked quite unhealthy, but his wife, Imelda, was lively. During a social meeting, she proposed a toast to the partnership between Coca-Cola and the Sorianos, mixing San Miguel Beer and Coke, half and half. We reluctantly followed her lead, mixing the same unsavory drink.

At some point in the meeting, someone dropped a chair on the parquet dance floor, and I saw the three security teams -- Coca-Cola’s, San Miguel’s and Imelda’s -- go for their weapons. Luckily, there was no gunfire.

I couldn’t control the big-picture politics in the Philippines. So I focused on getting to know the culture: Interestingly, expats are able to live, to a degree, within Filipino society. In Japan, you are rarely invited to someone’s home. But in the Philippines, it’s not unusual. There is a level of integration that I haven’t seen anywhere else in Asia.

The Philippines is a place where people’s family, military and school allegiances are much stronger than their bonds with employers. Certain phrases were worth keeping in mind. There was, for instance, “Utang na Loob,” which means obligation and translates as: If I do you a favor, you are expected to do one in return. There was the word “pakikisama,” which means getting along, avoiding confrontation when first meeting someone.

In business situations, another truth made itself known: “Yes” often meant, not “I agree with you,” but only “I hear you.” The worst thing any of us non-Filipinos could do was to get annoyed and say, “You agreed to do this.” I was in their culture and had to understand the way it works.

A Cultural Interpreter

I decided to hire a Filipino manager, a cultural interpreter. John Hunter recommended Jesus Celdran (aka King King or King2). Ultimately, we became inseparable, even though I was in my 30s, and he was about 20 years older. King King could understand what I was trying to do, but was able to say, “That doesn’t work here.”

An example: sales incentives. We had 10,500 employees. I thought that, instead of giving them a $200 bonus, we could actually give them a refrigerator worth $400 because we could buy the appliance at cost. “No, boss. That doesn’t work,” King King told me. He explained that when a salesman wins a $200 bonus, it goes into his back pocket. It’s his play money, unlike his salary, which he hands to his wife. In the Philippines, the wife handles the money and basically gives an allowance to her husband. My plan was abandoned.

In one of my first meetings with management, I addressed another sensitive cultural issue, expat salaries, which were much higher than those of the Filipino execs. I explained to my Filipino direct reports that this was necessary to attract foreign talent. “If you disagree,” I told the Filipinos, “you shouldn’t be part of the team. … Absent that one difference, we are one team.”

I began the process of modernizing the bottling plants and energizing the sales force. But there was also the matter of advertising, normally the purview of Coca-Cola executives in Atlanta. The campaign at that time was “Have a Coke and Smile.” With Pepsi outselling us 4-to-1 in Manila, I wanted a change.

Pepsi had Michael Jackson, so we developed a series of commercials with Filipino stars. It could have been considered a violation of company rules, but Tony Eames, then region manager, got us exempted. As there was only one bottler in the Philippines, it made sense for a representative of the Sorianos to collaborate with us during storyboard development. This allowed him to reciprocate by accepting my input in other areas. It was a great lesson on how the franchise system should work.

Mindanao Strategy

King King, Tony and I traveled almost every weekend, hopping from one island to the next. King King had great credibility in Mindanao as a hero of World War II -- he had served with the guerrilla forces as an intelligence officer behind Japanese lines -- and he had a facility for languages. On Mindanao, two insurgencies were under way, one led by the communist New People’s Army and the second by the Moro National Liberation Front. And yet, this was Coca-Cola’s strongest market.

Pepsi made a major mistake in failing to attack our customer base there. Since we had a strong lead, we could charge higher prices and use these profits to combat “the Imitator” in Manila. If Pepsi had used that strategy against us in Mindanao, it would have strangled our top profit center.

Wherever we traveled, we would hold sales rallies with music, good food, San Miguel beer and theatrics. I would sometimes smash a Pepsi bottle against the wall of a bottling plant to rev up the troops. In one town, the local bottling manager arranged for us to ride to one of the rallies on a tank. Appealing to the country’s militaristic fascination, we created a sales team called “Tiger Force,” and played the song “Eye of the Tiger” from the film “Rocky III.”

To this day, when I hear it, I am energized. I feel all over again the thrill of the fight. This was business war. When we launched Mello Yello, billed as “the World’s Fastest Soft Drink,” I led the salesmen in calisthenics -- doing push-ups on the stage. Then we’d run around the plant.

I find it useful to look at our business through the lens of our competitor. To that end, I took the team to the Intercontinental Hotel in Manila, where they entered a room decorated with Pepsi posters. There were Pepsi T-shirts and ice-cold Pepsi. Then, I conducted an all-day session designed to detect the weaknesses in the Pepsi system. Workers got honest assessments of their flaws and strengths.

Roberto Goizueta, the Coca-Cola CEO, helped our cause, flying in for a visit to Manila. It was interesting to see Roberto, who is Cuban, in his Latin mode. The Sorianos were Spanish Filipinos, and they bonded with Goizueta completely. At an evening party, we all did the “tinikling,” a Filipino dance. Never underestimate the power of social interactions, team sports or cocktails.

Bottle Sizes

At the end of my first 12 months, Coca-Cola was increasing its market share, led by the energized sales force and Mello Yello. New packaging also helped. Pepsi had been selling a 12-ounce bottle for the same price as an 8-ounce one. San Miguel had lacked the capital to convert to 12-ounce bottles, but Coca-Cola’s investment made it possible, and so a plan was hatched to convert to the larger size.

I said no to a complete conversion, partly because I knew Pepsi couldn’t continue to sell the 12-ounce drink at its current price; inflation would deflate their profits. Plus, keeping the 8-ounce bottle reduced the number of new 12-ounce bottles we had to produce, saving us money. And, because manufacturing capacity for the new bottles was limited, keeping the 8-ouncers meant that we could accelerate, by at least a year, the debut of the 12-ouncers.

The strategy paid off. Our profits increased along with our share of the market. In response, Pepsi brought in a new team of expats. They committed the sin that I had tried to avoid: sitting around at the Manila Polo Club, drinking beer and complaining about the Filipinos. This is what happens when management is disconnected; you get alienation all around and little understanding of the market or the customers.

In 1983, Coca-Cola took the lead in the Philippines. We built a new bottling plant in Manila and significantly upgraded four other facilities. By 1984, Coke sales had increased 11 percent, despite a 5 percent drop in soft-drink sales across the country. What’s more, I had gotten used to the humidity.

But then Coke sent me to colder climes. I was off to West Germany to head the company in Central Europe.

(Neville Isdell was a force at Coca-Cola for more than 30 years, assuming the role of chairman and chief executive officer in 2004, after working for the company in Zambia, South Africa, Australia, the Philippines, Russia, Germany, India and Turkey. This excerpt, the first of two, from his memoir, “Inside Coca-Cola: A CEO’s Life Story of Building the World’s Most Popular Brand,” written with David Beasley, to be published Oct. 25 by St. Martin’s Press. The opinions expressed are his own. Read Part 2.)

To contact the writer of this article: Neville Isdell at dbeasley4@yahoo.com

To contact the editor responsible for this article: Mary Duenwald at mduenwald@bloomberg.net