Pepsi_Co Diversification Strategy Case Analysis

Case Analysis Purpose To analyze analyze how the PepsiC PepsiC o’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 FritoLay salty snacks, Quaker Chewy granola bars, Pepsi soft drinks, Tropicana orange  juice, Lipton, Gatorade, Quaker Oatmeal, etc. 

PepsiCo’s Strategic Profile 1965: Frito-Lay and Pepsi-Cola was merged into PepsiCo Inc. 1898 Pepsi-Cola was founded.

1932 Fritos and Lay were founded.

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

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.

1993: Introduced Lipton tea and Aquafina.

1977 – 1986 Acquired Pizza Hut, Taco Bell, and KFC. 1980 – 1996 1961 Continued acquired Fritos and Lay were various foods and merged into Frito-Lay  beverages Company. companies, and quick service restaurants.

1997: Spun off the 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 bio 2006: $522 mio 2007: $1.3 bio

PepsiCo’s Strategic Profile 

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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 

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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 

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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

ua on na ys s – n us ry  Analysis Changes on consumer preferences: 

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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.

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Joint distribution system between PepsiCo’s products.

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Situation Analysis – Industry  Analysis Volume Share of US Beverages

Percentage Volume Growth

60

90% 80%

50

70%

60%

   h    t   w   o   r 50%    G    f   o   e 40%   g   a    t   n   e 30%   c   r   e    P

40

30

20

20% 10%

10

0% 2006 -10%

0 2005

2006

2007

2007

Situation Analysis – Industry  Analysis Potential New Entrants Low. Only few MNCs have large market share. Some local players with nich market.

Bargaining power

Rivalry

Bargaining power

from Seller

Very High.

from Buyers

Medium

Strong competitors such as: Coca-Cola,

Very high

Dependent to raw

Kraft, Nestle.

Cost to switch is very

materials, but

Have ability to develop new products

low.

many providers

and entering new emerging market.

Retailer may have

are available.

bargaining power, Firms offering Product Substitutes High Each beverages can be substituted. More and more products with new taste

depend on the size.

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

How well is the company’s strategy working?

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What are the company’s competitively important resources and capabilities?

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Are the company’s cost structure and customer  value proposition competitive?

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Is the company competitively stronger or weaker  than key rivals?

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What strategic issues and problems merit frontburner 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 Analysis #1 : How Well Is The Company’s Strategy Working ?

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

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

#2 :

What are the company’s competitively important resources and capabilities?

Analysis

SWOT

PepsiCo SWOT Analysis Internal Strength and Competitive Capabilities : 

Core competencies on product innovation and strong global distribution capability

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A strong financial condition

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Have a good financial resources to grow the business

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Strong brand name image and company reputation

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Proven capabilities in improving production process

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Good supply chain management capabilities

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Good customer service capabilities

PepsiCo SWOT Analysis Internal Strength and Competitive Capabilities : 

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

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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 Analysis Potential Internal Weakness and Competitive Deficiencies : 

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

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Health Food Alternatives. Consumers are becoming increasingly health conscious.

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

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

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Highly dependencies on key customers, especially bottling partners.

PepsiCo SWOT Analysis Potential Market Opportunities : 

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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 Analysis Potential External Threats to a Company’s Future Prospects : 

High rivalry competition.

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Global economic crisis.

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Environment (packaging) issues

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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”

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PepsiCo Competitive Strength vs Primary Level or Key Rivals : “Equal”

(Not Stronger or Weaker)

PepsiCo Internal Analysis #5 : What Strategic Issues and Problems Merit FrontBurner Managerial Attention?

There are 5 strategic issues and problems must be addressed by PepsiCo’s management : 

R ev i t a l i zi n g It s N o r t h A m e r ic a n B e v er a g e B u s i n e s s   .

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B r o ad e n i n g It s D i v e r s e Po r t f o l i o o f G l o b al P r o d u c t s . 

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S u c c e s s f u l l y N av i g a t in g T h e G lo b al E c o n o m i c   Crisis  .

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E x p a n d i n g i n I n t e r n a t io n a l Ma r k et s . 

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M ai n t a i n i n g I t s Co m m i t m e n t To S u s t a i n a b l e G r o w t h . 

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

Industry Attractiveness Measure

Soft

Bottled

Chilled

Isotonic

Salty

Hot

drinks

Water

Juices

Beverages

Snacks

Cereals

Weight

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

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

Emerging Opportunities & Threats

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

Dole, Sobe

Relative Market Share

Frito-Lay

Quaker

Snacks

Oatmeal

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

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

Distribution

Totals

1

5.8

5.05

5.6

7.35

7.35

6.2

Nine-Cell Industry AttractivenessCompetitive 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

Strategy Formulation - Strategic alternatives 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

Strategy Formulation - Strategic alternatives 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 Grid Rating 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

ra egy ormu a on Choice

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erna ve

 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