Pepsi co diversification strategy case analysis

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
1898
Pepsi-Cola
was founded.
1932
Fritos 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 – 1996
Continued 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 bio
2006: $522 mio
2007: $1.3 bio

 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.

 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.

Analysis
-10%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
2006 2007
PercentageofGrowth
Percentage Volume Growth
0
10
20
30
40
50
60
2005 2006 2007
Volume Share of US Beverages

Analysis
Potential New Entrants
Low.
Only few MNCs have large market share.
Some local players with nich market.
Bargaining power
from Buyers
Very high
Cost to switch is very
low.
Retailer may have
bargaining
power, depend on
the size.
Rivalry
Very High.
Strong competitors such as: Coca-
Cola, Kraft, Nestle.
Have ability to develop new products
and entering new emerging market.
Firms offering Product Substitutes
High
Each beverages can be substituted.
More and more products with new taste
and healthy nutrition content.
Bargaining power
from Seller
Medium
Dependent to raw
materials, but
many providers
are available.

PepsiCo Internal Analysis
Five 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?

#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.

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

Five Questions To Do Internal Analysis (John Gamble, 2013)
:
#2 : What are the company’s competitively important
resources and capabilities?  SWOT
Analysis

PepsiCo SWOT Analysis
Internal 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

Internal 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.

Potential 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.

Potential 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.

Potential 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.

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

# 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)

#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 attractiveness
Rating scale : 1 = Very unattractive to Company; 10 = Very attractive to Company
Industry Attractiveness Measure Weight
Soft 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

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

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
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

Pepsi co diversification strategy case analysis

Pepsi co diversification strategy case analysis

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