Case Study on Pepsi

This project aim is to analyze the diversification strategy of PepsiCo in 2008. PepsiCo is the largest food and beverage business in the world. The benefits of PepsiCo’s diversification strategies are identified. The business strategy is analyzed to determine its efficacy across PepsiCo’s consumer business segments and product portfolio. The value chain match-ups are determined and analyzed to ascertain their relevance to the success of PepsiCo’s strategy. The competitive strengths of PepsiCo’s three structural divisions and six reporting segments are assessed and related to relevant theories and strategy tools.

Summary of the case

PepsiCo is an American multinational corporation headquartered in Purchase, New York, United States, with interests in the manufacturing, marketing, and distribution of grain-based snack foods, beverages, and other products. PepsiCo is a world leader in convenient foods and beverages, with revenues of about $39.5 billion and over 142,000 employees.

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The company’s portfolio of businesses in 2008 included Frito-Lay salty snacks, Quaker chewy granola bars, Pepsi soft drink products, Tropicana orange juice, Lipton Brisk tea, Gatorade, Propel, SoBe, Quaker Oatmeal, Cap’n Crunch, Aquatint, Rice-A-Roni, Aunt Jemima pan cake mix, and many other regularly consumed products. The company consists of the snack business of Frito-Lay North America and the beverage and food businesses of PepsiCo Beverages and Foods, which includes PepsiCo Beverages North America (Pepsi-Cola North America and Gatorade/Tropicana North America) and Quaker Foods North America. PepsiCo International includes the snack businesses of Frito-Lay International and beverage businesses of PepsiCo Beverages International. PepsiCo brands are available in nearly 200 countries and territories.

Many of PepsiCo's brand names are over 100-years-old, but the corporation is relatively young. PepsiCo was established in 1965 through the merger of Pepsi-Cola and Frito-Lay. Tropicana was acquired in 1998 and PepsiCo merged with The Quaker Oats Company, including Gatorade, in 2001. PepsiCo’s success is the result of superior products, high standards of performance, distinctive competitive strategies and the high integrity of our people.

Vision

The vision of PepsiCo is to be a responsible company that supports continuous improvement of all areas across the globe in which they operate. These areas include the environment, social, and economic conditions creating a better future then the present.

Mission

PepsiCo’s mission is to be the world's premier consumer Products Company focused on convenient foods and beverages. They seek to produce healthy financial rewards to investors as they provide opportunities for growth and enrichment to their employees, their business partners and the communities in which they operate. And in everything they do, they strive for honesty, fairness and integrity.

SWOT Analysis

Strengths

Branding - One of PepsiCo’s top brands is of course Pepsi, one of the most recognized brands of the world, ranked according to Interbrand. As of 2008 it ranked 26th amongst top 100 global brands.

Pepsi generates more than $15,000 million of annual sales. Pepsi is joined in broad recognition by such PepsiCo brands as Diet Pepsi, Gatorade Mountain Dew, Thirst Quencher, Lay’s Potato Chips, Lipton Teas (PepsiCo/Unilever Partnership), Tropicana Beverages, Fritos Corn, Tostitos Tortilla Chips, Doritos Tortilla Chips, Aquafina Bottled Water, Cheetos Cheese Flavored Snacks, Quaker Foods and Snacks, Ruffles Potato Chips, Mirinda, Tostitos Tortilla Chips, and Sierra Mist.The strength of these brands is evident in PepsiCo’s presence in over 200 countries. The company has the largest market share in the US beverage at 39%, and snack food market at 25%. Such brand dominance insures loyalty and repetitive sales which contributes to over $15 million in annual sales for the company.

Finance -As one of the leading beverage and food distributors and producers in the world,PepsiCo obviously has very strong financial backing and has been performing especially well. Their basic financial statement is very promising with revenues above Coca-Cola and the highest PepsiCo has ever seen, as well as low debt and liabilities.20 PepsiCo has shown and average of six percent growth since the year 2000 and has accomplished many growth goals by acquired and manufacturing a wide range of products.The pure size of PepsiCo is a competitive advantage because they produce so many commonly used products throughout the world and are minimally leveraged by market ups and downs.

Illustrating this point is their increasing ROE, ROA, and ROI ratios that have experienced great increases over the past several years where soda sales have declined Diversification - PepsiCo’s diversification is obvious in that the fact that each of its top 18 brands generates annual sales of over $1,000 million. PepsiCo’s arsenal also includes ready-to-drink teas, juice drinks, bottled water, as well as breakfast cereals, cakes and cake mixes.This broad product base plus a multi-channel distribution system serve to help insulate PepsiCo from shifting business climates.

Distribution - The company delivers its products directly from manufacturing plants and warehouses to customer warehouses and retail stores. This is part of a three pronged approach which also includes employees making direct store deliveries of snacks and beverages and the use of third party distribution services.

Weaknesses

Overdependence on Wal-Mart - Sales to Wal-Mart represent approximately 12% of PepsiCo’s total net revenue. Wal-Mart is PepsiCo’s largest customer. As a result PepsiCo’s fortunes are influenced by the business strategy of Wal-Mart specifically its emphasis on private-label sales which produce a higher profit margin than national brands. Wal-Mart’s low price themes put pressure on PepsiCo to hold down prices.

Overdependence on US Markets - Despite its international presence, 52% of its revenues originate in the US. This concentration does leave PepsiCo somewhat vulnerable to the impact of changing economic conditions, and labor strikes. Large US customers could exploit PepsiCo’s lack of bargaining power and negatively impact its revenues.

Low Productivity - In 2008 PepsiCo had approximately 198,000 employees. Its revenue per employee was $219,439, which was lower than its competitors. This may indicate comparatively low productivity on the part of PepsiCo employees.

Image Damage Due to Product Recall - Recently (2008) salmonella contamination forced PepsiCo to pull Aunt Jemima pancake and waffle mix from retail shelves. This followed incidents of exploding Diet Pepsi cans in 2007. Such occurrences damage company image and reduce consumer confidence in PepsiCo products. Opportunities

Broadening of Product Base - PepsiCo is seeking to address one of its potential weaknesses; dependency on US markets by acquiring Russia’s leading Juice Company, Lebedyansky, and V Wwater in the United Kingdom. It continues to broaden its product base by introducing TrueNorth Nut Snacks and increasing its Lipton Tea venture with Unilever. These recent initiatives will enable PepsiCo to adjust to the changing lifestyles of its consumers.

International Expansion - PepsiCo is in the midst of making a $1, 000 million investment in China, and a $500 million investment in India. Both initiatives are part of its expansion into international markets and a lessening of its dependence on US sales. In addition the company plans on major capital initiatives in Brazil and Mexico.

Growing Savory Snack and Bottled Water market in US - PepsiCo is positioned well to capitalize on the growing bottle water market which is projected to be worth over $24 million by 2012. Products such as Aquafina, and Propel are well established products and in a position to ride the upward crest. PepsiCo products such as, Doritos tortilla chips, Cheetos cheese flavored snacks, Tostitos tortilla chips, Fritos corn chips, Ruffles potato chips, Sun Chips multigrain snacks, Rold Gold pretzels, Santitas are also benefiting from a growing savory snack market which is projected to grow as much as 27% by 2013, representing an increase of $28 million.

Threats

Decline in Carbonated Drink Sales - Soft drink sales are projected to decline by as much as 2.7% by 2012, down $ 63,459 million in value. PepsiCo is in the process of diversification, but is likely to feel the impact of the projected decline.

Potential Negative Impact of Government Regulations - It is anticipated that government initiatives related to environmental, health and safety may have the potential to negatively impact PepsiCo. For example, manufacturing, marketing, and distribution of food products may be altered as a result of state, federal or local dictates. Preliminary studies on acrylamide seem to suggest that it may cause cancer in laboratory animals when consumed in significant amounts. If the company has to comply with a related regulation and add warning labels or place warnings in certain locations where its products are sold, a negative impact may result for PepsiCo.

Intense Competition - The Coca-Cola Company is PepsiCo’s primary competitors. But others include Nestlé, Groupe Danone and Kraft Foods. Intense competition may influence pricing, advertising, sales promotion initiatives undertaken by PepsiCo. Resently Coca-Cola passed PepsiCo in Juice sales.

Potential Disruption Due to Labor Unrest - Based upon recent history, PepsiCo may be vulnerable to strikes and other labor disputes. In 2008 a strike in India shut down production for nearly an entire month. This disrupted both manufacturing and distribution.

PepsiCo’s Problem

Negligence on employees - One of the main lacking components of PepsiCo’s values is their employees. Of the many concerns they have about the consumer and clients, little is said about the way employees are treated and what expectations and responsibilities are towards them. Programs exist that help employee’s take part in the community, and also future employees by offering school programs and scholarships.

However, little effort is directed towards the responsibility of the company to employees. Coinciding with their values, objectives, and commitment, employees are left out of the grand scheme and mayeven be considered a means to an end. The limited focus on employees may be a problem in the long-run due to retention issues and resulting lack of quality.

Poor business strategy - PepsiCo’s business strategies were working out very well for them except for in their international operations. The international segment had relatively low profit margins which meant that PepsiCo needed to implement a new organizational structure that would better utilize strategic fits between the company’s international operations Low Productivity - In 2008 PepsiCo had approximately 198,000 employees. Its revenue per employee was $219,439, which was lower than its competitors. This may indicate comparatively low productivity on the part of PepsiCo employees.

Image Damage Due to Product Recall - Recently (2008) salmonella contamination forced PepsiCo to pull Aunt Jemima pancake and waffle mix from retail shelves. This followed incidents of exploding Diet Pepsi cans in 2007. Such occurrences damage company image and reduce consumer confidence in PepsiCo products.

Conclusion and Recommendation

Overall PepsiCo is a successful company with substantial revenue, and a large footprint in the marketplace. PepsiCo should continue to expand their growth and take advantage of potential opportunities by continuing to improve on areas at the corporate top level, in the markets that they currently are in, and in new markets and market segments that they wish to expand into and at last PepsiCo should become more proactive in the health food/product market place rather than being reactive to the market trends. They need to improve their responsiveness and future projections to market trends and changes that can therefore allude to different product segments and target markets.

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