Pepsi co diversification strategy case analysis

PEPSICO’S DIVERSIFICATION

STRATEGY IN 2008

Case Analysis Purpose

To analyze how the PepsiCo’s diversification strategy has maximized the shareholders value.

To identify problems, opportunities, and strategic actions that would sustain its impressive financial and market performance.

Agenda

Case Analysis Purpose Strategic Profile Situation analysis SWOT Analysis Strategy Formulation Strategic Alternative Implementation

Pepsico’s Strategic Profile

The world’s largest snack and beverage company, with 2007 net revenues approximately $39.5 billion.

Has restructuring their major product portfolio and acquired many companies since 1997.

Portfolio of business in 2008 included Frito-Lay salty snacks, Quaker Chewy granola bars, Pepsi soft drinks, Tropicana orange juice, Lipton, Gatorade, Quaker Oatmeal, etc.

PepsiCo’s Strategic Profile

1997: Spun off the restaurant business

1898Pepsi-Cola was founded.

1932Fritos and Lay were founded. 1961

Fritos and Lay were merged into Frito-Lay Company.

1965: Frito-Lay and Pepsi-Cola was merged into PepsiCo Inc.

1970 Entered Japan and Eastern Europe. Open one snack food plant per year.

1977 – 1986 Acquired Pizza Hut, Taco Bell, and KFC.

1980 – 1996Continued acquired various foods and beverages companies, and quick service restaurants.

1993: Introduced Lipton tea and Aquafina.

1996: Needs for a company turnaround were identified, where the potential strategic fit benefits between restaurants and PepsiCo’s food and beverages are difficult to realised, and low margin of restaurant business.

1997 – 2000: various acquisitions on overseas F&B companies (Australia and Saudi Arabia).

August 2001: Quaker Oats were acquired with $13.9 billion, with Gatorade as the most valuable assets.

2005 – 2007: various tuck in acquisitions of small, fast growing F&B companies in US and overseas.2005: $1.1 bio2006: $522 mio2007: $1.3 bio

PepsiCo’s Strategic Profile

Most PepsiCo brands had achieved number one or number two positions.

Impressive performance of stock price compared to other S&P 500 companies.

Down turn on its stock price has begun in 2008. Focused on sustaining the impressive

performance through: Product Innovation, Close Relationships with Distributors, International Expansion, and Strategic Acquisitions.

PepsiCo’s Strategic Profile Product Innovations

To make snack foods and beverage healthier. Really believed the“good-for-you” or “better-for-you” products.

Relationship with distribution allies Develop Power of One Retailer Alliance Strategy, collaborate with

retailers to increase consumers purchase more than one product of PepsiCo.

International Expansion and strategic acquisition Organised into four divisions, all followed general strategic approach:

Frito-Lay North America, PepsiCo Beverages North America, PepsiCo International, and Quaker Foods North America.

Developed new organisational structure in 2008 to handle international operations.

The international operations have two problems: i.e: PepsiCo is relatively unsuccessful to introduce Quaker brand products to outside the US and the international operations less profitable than North America, and also slow bottling water growth.

Situation Analysis – General Environment Analysis Political, regulators, and legal factors

Protectionism in emerging countries More and more protected consumers Stricter legislation to defend against obesity Gatorade was not allowed to use PepsiCo distribution channel for 10 years.

Economic High growth potential of emerging market with strong competition

Population demographics Glee generation prefers healthy foods and concerns with environmental problems. In some countries consumer may prefer noncarbonated beverage.

Societal values and lifestyles Start to leave sodas and sugar Healthier lifestyles promotes opportunities and different pattern of consumption

Technological Strong research development departments to develop new ingredients, e.g: new

substitute of sugar, elimination of trans fat. More efficient value chain

Ecological / Natural Environment Environment friendly packaging solutions

Situation Analysis – Industry Analysis Changes on consumer preferences:

Prefer healthier foods and more aware of the nutritional content, e.g.: concern on salty foods, trans fat, sugar, etc.

Desire to escape from the norm and taste snacks from a wider, often global palate.

Consumer in developed countries concerns on obesity issues. This drive for smaller snack bags which easier for indulgence and to take during outing.

International markets may have different taste preference for snack foods, e.g: spicier snack foods in Thailand market.

Closer relationship with distribution allies to analyse the consumer habits and improve the value chain to avoid stock out in the retailers.

World class advertising. Intense competition in beverages requires world class advertising. Gatorade sub brand use Tiger Woods as the marketing ambassador. In Indonesia, even local beverages companies use world class celebrities such as Miss Universe.

New style of packaging and design. Joint distribution system between PepsiCo’s products.

Situation Analysis – Industry Analysis

2006 2007

-10%

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10%

20%

30%

40%

50%

60%

70%

80%

90%

Percentage Volume Growth

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2005 2006 20070

10

20

30

40

50

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Volume Share of US Beverages

Situation Analysis – Industry Analysis

Potential New EntrantsLow.

Only few MNCs have large market share. Some local players with nich market.

Bargaining power from Buyers

Very highCost to switch is very low. Retailer may have bargaining power, depend on the size.

RivalryVery High.

Strong competitors such as: Coca-Cola, Kraft, Nestle. Have ability to develop new products and entering new emerging market.

Firms offering Product SubstitutesHigh

Each beverages can be substituted. More and more products with new taste and healthy nutrition content.

Bargaining power from Seller

MediumDependent to raw materials, but many providers are available.

PepsiCo Internal AnalysisFive Questions To Do Internal Analysis (John Gamble, 2013) :

How well is the company’s strategy working? What are the company’s competitively important

resources and capabilities? Are the company’s cost structure and customer

value proposition competitive? Is the company competitively stronger or weaker

than key rivals? What strategic issues and problems merit front-

burner managerial attention?

PepsiCo Internal Analysis#1 : How Well Is The Company’s Strategy Working ?

The two best indicators of how well a company’s strategy is working are :

1. whether the company is recording gains in financial strength and profitability and

2. whether the company’s competitive strength and market standing is improving.



PepsiCo Internal AnalysisFive Questions To Do Internal Analysis (John Gamble, 2013) :

#2 : What are the company’s competitively important

resources and capabilities? SWOT Analysis

PepsiCo SWOT AnalysisInternal Strength and Competitive Capabilities :

Core competencies on product innovation and strong global distribution capability

A strong financial condition Have a good financial resources to grow the

business Strong brand name image and company reputation Proven capabilities in improving production

process Good supply chain management capabilities Good customer service capabilities

PepsiCo SWOT AnalysisInternal Strength and Competitive Capabilities :

Alliances/joint ventures with other firms that provide access to valuable technology, competencies and attractive geographic markets.

Strong commitment to sustainable growth – called Performance with Purpose - focused on generating healthy financial returns while giving back to the communities PepsiCo serve.

PepsiCo SWOT AnalysisPotential Internal Weakness and Competitive Deficiencies :

Non-Carbonated Drinks. The U.S. market shows a recent trend that is shifting towards non-carbonated drinks.

Health Food Alternatives. Consumers are becoming increasingly health conscious.

International operations had a low profitability, relative to US operations.

Held large market shares on outside US but had been relatively unsuccessful in making international brand.

Highly dependencies on key customers, especially bottling partners.

PepsiCo SWOT AnalysisPotential Market Opportunities :

Significant opportunity to grow internationally (from US market) by expanding PepsiCo’s existing business and through acquisitions, particularly in emerging markets.

North American Beverage Business – stagnant and decline but still profitable (can be revitalized).

Expand the global leadership position of its snacks business.

Opportunities from global trend to increase healthier products and new product packaging alternatives.

PepsiCo SWOT AnalysisPotential External Threats to a Company’s Future Prospects :

High rivalry competition. Global economic crisis. Environment (packaging) issues Market risks arising from adverse changes in :

commodity prices, cost of raw materials and energy; foreign exchange rates; and interest rates.

PepsiCo Internal Analysis

PepsiCo Internal Analysis# 3 : Are The Company’s Cost Structure and Customer Value Proposition Competitive?

PepsiCo Internal Analysis# 4 : Is The Company Competitively Stronger Or Weaker Than Key Rivals?

PepsiCo Competitive Strength vs Secondary Level Rivals :

“Stronger”

PepsiCo Competitive Strength vs Primary Level or Key Rivals :

“Equal”

(Not Stronger or Weaker)

PepsiCo Internal Analysis#5 : What Strategic Issues and Problems Merit Front-Burner Managerial Attention?

There are 5 strategic issues and problems must be addressed by PepsiCo’s management: Revitalizing Its North American Beverage Business. Broadening Its Diverse Portfolio of Global Products. Successfully Navigating The Global Economic

Crisis. Expanding in International Markets. Maintaining Its Commitment To Sustainable Growth.

Evaluating industry attractivenessRating scale : 1 = Very unattractive to Company; 10 = Very attractive to Company

Industry Attractiveness Measure WeightSoft Bottled Chilled Isotonic Salty Hot

drinks Water Juices Beverages Snacks Cereals

Market Size & projected Growth Rate 0.25 9 2.25 8 2 6 1.5 4 1 8 2 5 1.25

Industry Profitability 0.15 8 1.2 7 1.05 6 0.9 7 1.05 9 1.35 7 1.05

Intesity of Competition 0.15 5 0.75 4 0.6 7 1.05 10 1.5 5 0.75 8 1.2

Emerging Opportunities & Threats 0.2 7 1.4 8 1.6 6 1.2 7 1.4 7 1.4 5 1

Resource Requirements 0.05 9 0.45 7 0.35 7 0.35 8 0.4 7 0.35 8 0.4

Product Innovation 0.15 8 1.2 10 1.5 8 1.2 5 0.75 6 0.9 7 1.05

Social Political Environmental Factors 0.05 7 0.35 8 0.4 7 0.35 7 0.35 6 0.3 7 0.35

Totals 1 7.6 7.5 6.55 6.45 7.05 6.3

Evaluating Business-unit Competitive Strengh

Rating scale : 1 = Very Weak; 10 = Very Strong

Competitive Strength Measure Weight PepsiCola Aquafina Tropicana Gatorade Frito-Lay Quaker

Dole, Sobe Snacks Oatmeal

Relative Market Share 0.25 3 0.75 3 0.75 2 0.5 6 1.5 6 1.5 6 1.5

Market & Promotion 0.2 7 1.4 5 1 6 1.2 8 1.6 8 1.6 6 1.2

Product Innovation 0.1 6 0.6 6 0.6 8 0.8 8 0.8 8 0.8 6 0.6

Distribution 0.15 7 1.05 6 0.9 6 0.9 7 1.05 7 1.05 6 0.9

Resources 0.1 8 0.8 8 0.8 8 0.8 8 0.8 8 0.8 8 0.8

Brand Name / Image 0.2 6 1.2 5 1 7 1.4 8 1.6 8 1.6 6 1.2

Totals 1 5.8 5.05 5.6 7.35 7.35 6.2

Nine-Cell Industry Attractiveness- Competitive Strength Matrix

Strategy Formulation - Objective

Increase International

Sales

Improve Operating Margin

Reinforce the International

Presence

Manage the Stock Price

Strategy Formulation - Strategic alternatives

1. Adapting product to spesific consumers needs

Taste are different in function of each country

gives an idea of what the consumers prefers Follow the customer's taste in order to

attract them.

example: in Mexico spicy food, in Europe healthy food with less saturated fat


2. Increase the presence with International acquisitions

Reinforce their presence on new markets Increase the relationship with local

companies in order implement easier New target: emerging countries


3. Forecast the trends and relying on marketing intelligence with extensive research & development

Nowadays, the customer’s taste is changing:

Pepsico has to focus on healthy products in order to respond to consumer health and wellness (reduce the consumption of statured fats, cholesterol, trans fat, and simple carbohydrates).

Improve the packaging in order to follow more and more environmental criteria

Communication more about the sustainable efforts

Strategy Formulation - Alternative Evaluation

Decision GridRating scale : 1 = Less Favorable; 10 = most favorable

Criteria Weight Alternative 1 Alternative 2 Alternative 3

COST 0.20 4 0.80 2 0.40 5 1.00

RISK 0.20 3 0.60 2 0.40 4 0.80

TIME 0.10 6 0.60 3 0.30 4 0.40

BRAND EQUITY 0.20 8 1.60 9 1.80 10 2.00

INTERNATIONALIZATION 0.15 9 1.35 10 1.50 5 0.75

CUSTOMER SERVICE 0.15 7 1.05 5 0.75 9 1.35

TOTAL 1 6.00 5.15 6.30

Strategy Formulation - Alternative Choice

According to the alternative evaluation, the best choice for the company is Alternative 3.

PepsiCo would be try to forecast customer’s trends and relying on marketing intelligence with extensive research & development.

Strategic Alternative Implementation - Action Items

Try to forecast customer’s

trends

Anticipate the trend by

providing new products through

innovation

Strategic Alternative Implementation - Action Plan

Rely on marketing research in order to detect new customer's needs

Rely on research & development to create new products suiting the needs