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  • Subject area(s): Marketing
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  • Published on: 14th September 2019
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BUSINESS STRATEGY (001) Team #11

Adam Berning, Ashley Boggs, Emily Burton, Gina Broeker, Hannah Findish

Case 9: PepsiCo

1. What is PepsiCo's corporate strategy? Briefly identify the business strategies that PepsiCo is using in each of its consumer business segments in 2015.

PepsiCo's corporate strategy is one of diversification. This strategy is characterized primarily by their ability to innovate products quickly in response to constantly shifting trends among their consumer base (one example being their ability to gain share by capitalizing on recent health trends that are driving growth in certain product categories while allowing decline in others). In addition to product innovation, PepsiCo employed global distribution strategies that it backed up with strong relationships with those involved in various points along their supply chain. Beyond this, PepsiCo also involved their capital allocation into the fiber of their corporate strategy; examples of this include the well-timed and well-researched acquisitions they made and the forward thinking nature of their policy on stock dividends. PepsiCo deployed each of these components of their strategy all with environmental and social responsibility in mind.

2. What is your assessment of the long-term attractiveness of the industries represented in PepsiCo's business portfolio?

My assessment of the long-term attractiveness of the industries represented across the length of PepsiCo's extensive portfolio of businesses is that they are highly attractive given the historical strength of the company, their proven ability to develop products efficiently while staying above the innovative curve of the industries through which they compete, and PepsiCo's advantageous market position of holding brands that compliment one another in a way that allows for sales to be driven across more than one industry by means of a singular objective or investment. This measure of long-term attractiveness is further supported by the relatively blue ocean of developing international markets, which will offer ongoing opportunities for continued growth across much of the presently less-developed world. A wider international reach would come with a new set of challenges but with revenues growing by $1.2 billion across Latin America over the 2011 to 2014 timeframe, PepsiCo is exhibiting its ability to adjust to cultural differences and acclimate their regional strategies to the tastes of new and expanding consumer bases, unlocking previously untapped global profit levels.

3. What is your assessment of the competitive strength of PepsiCo's different business units?

PepsiCo is divided into six business units: Frito-Lay North America, Quaker Foods North America, Latin American Foods, PepsiCo Americas Beverages, PepsiCo Europe, and PepsiCo Asia, Middle East & Africa. One major strength of PepsiCo is that they have a global presence and cover a wide range of products, from cereals to snacks to beverages to meet all customer wants and needs. This global presence and diversity is useful for PepsiCo in gaining a broad customer base. Additionally, PepsiCo has developed a strong merger and acquisition strategy to expand their overall brand. PepsiCo increased their competitive advantage for Frito Lay, Quaker Foods and Latin American Foods, with the development of Better-For-You and Good-For-You snacks to go along with their wide variety of less healthy options. The company has also developed a large marketing strategy to help increase brand recognition which has helped with the overall competitive strength of each of the business units.

4. What does a 9-cell industry attractiveness/business strength matrix displaying PepsiCo's business units look like?

  A 9-cell industry attractiveness/business strength matrix shows parts of a business to be either high medium or low on the industry attractiveness scale, or strong, average or weak on the competitive strength/market position scale. For PepsiCo it is important to consider all of the product lines they offer from Frito-Lay and Quaker, to the other international brands. When doing a nine-cell matrix Frito-Lay would be placed in the very top left segment of the chart making it high in industry attractiveness and strong in competitive strength because the competition is low and the want is high, however pepsi-cola overall would be placed somewhere in the middle, with medium long term industry attractiveness and average competitive strength due to the growth of other healthy beverage options including their orange juice, aquafina, Gatorade and the Lipton tea which could eventually out-compete the soda options. .

5. Does PepsiCo's portfolio exhibit good strategic fit? What value-chain match-ups do you see? What opportunities for skills transfer, cost sharing, or brand sharing do you see?

Yes, PepsiCo exhibits a great strategic fit in their company. An example of PepsiCo's excellent strategic fit is how seamless they are able to combine all of their plants, distributive systems, and service routes all around the world. In regards to value-chain matchups, it is easy for PepsiCo to combine many different business activities such as sales and marketing, purchasing, technology, distribution channels, and R&D. Potential cost sharing, skills transfer, and brand sharing opportunities exist within the company. When PepsiCo combines their business activities, as previously stated, cost sharing is visible. Since PepsiCo is so large and placed all around the world, they can transfer skills within the corporation. Brand sharing is visible in regards to the “Power of One” strategy. This is an important strategy that PepsiCo executes, allowing it's products to be cross-marketed in all retail locations, which can also be an example of strategic fit in the marketing category. Ultimately, it allows for benefit by combining both Pepsi-Cola and Frito-Lay.

6. Does PepsiCo's portfolio exhibit good resource fit? What are the cash flow characteristics of each of PepsiCo's six segments? Which businesses are the strongest contributors to PepsiCo's free cash flows?

PepsiCo's portfolio offers good resource fit. They have four segments: Frito-Lay North America, PepsiCo Beverages North America, PepsiCo International, and Quaker Foods North America. Frito-Lay accounts for 29% of PepsiCo's total revenue. It is important that the company continues to keep up with diet trends and look into healthier snack options as this division overlooks 70% of the salty snacks in the US. The department mainly focuses on convenience, nutritional content, and indulgent snack foods. The company went back to their basics in this departments and has started to use “lighter” alternatives to deliver healthier, less oil, and baked options. They have expanded their product category by making baked fruits and vegetables. This has increased their sales and has proven to be an important division of PepsiCo.

PepsiCo Beverages is an important segment to the company with a 26% market share in 2006, being the largest retailer of liquid refreshments. They were able to achieve success due to their high innovation where they were able to learn what their target wanted. This is where SoBe Life Water came from. They piggybacked off of the dieting trend to offer a healthier drink option, along with Aquafina. Clearly, the PepsiCo Beverage department is doing strategic actions to grow the company.

The third branch is PepsiCo International. PepsiCo was able to extend their brand image overseas with this strategy. The company continued to increase their overall sales within developing countries with non-carbonated beverages by bringing their “Power of One” motto to better reach their customers needs globally. Since carbonated beverages are consumed 10x more in the United States than in developing countries, PepsiCo was able to dominate in the Middle East for being the first beverage retailer there. By going global, they have found great success in targeting locations that did not have any noncarbonated beverages, such as Mexico where they dominate market share by 75%.

PepsiCo's fourth and final segment is Quaker Foods North America which focuses on popular cereals, oatmeal, pancake mixes, and pasta sides. They are in high competition with Kellogg who holds 30% of the market share while Quaker Foods holds 14%. This segment focuses on “good for you” motto through its products for their customers. These four departments make for a strong PepsiCo company.

7. Based on the preceding analysis, what is your overall evaluation of PepsiCo's business portfolio in 2015? Does the portfolio provide the company's shareholders with an opportunity for above-average market returns?

As a large competitor in the beverage and snack category, PepsiCo was considered, in 2006, to be a moderately attractive company. PepsiCo has the ability to remain competitive in its product category due to its competitive landscape. PepsiCo's only main competitor is Coca-Cola which holds a larger percentage of market share, has a stronger relation to their customers through marketing tactics, and extensive distribution networks. A new brand would not be able to compete with Coca-Cola and PepsiCo. PepsiCo's investors have an advantage because of their diverse product portfolio, high profitability, and a bright future of entering foreign markets.

8. What strategic actions should Indra Nooyi take to sustain the corporation's impressive financial and market performance? Should its free cash flows be used to fund additional share repurchase plans, pay higher dividends, make acquisitions, expand internationally, or for other purposes? What other strategic actions should be pursued by corporate level management?

In order to keep PepsiCo innovative and relevant for consumers, Indra Nooyi must continue to satisfy their customers' wants with new products and exciting marketing tactics. PepsiCo must continue to deliver products with affordable, but competitive prices, along with variety. PepsiCo saw how going into untapped markets turned into a great return on investment for them, so continuing to to go into international markets comes with worldwide plants, international retailers, service routes, and distribution channels will only cause PepsiCo to grow exponentially. There is still such an emphasis on eating healthy in the United States which is an area PepsiCo needs to grow more in. PepsiCo could expand more upon appealing to their customers by introducing lines of natural/organic ingredients to make their products, while maintaining the brand's goal of delivering good tasting drinks and snacks to their loyal customers.

In 2007, PepsiCo had $15 billion dollars of free cash flows to be projected from 2007-2009. This amount of free cash flows could be used to penetrate into international markets for long term company growth. PepsiCo has a huge opportunity in China's market where they only retained 36% of China's soft drink share and 16% of salty snack share. With China's government becoming less and less regulated, PepsiCo needs to move fast and get their products at the top of consumers' minds in China. PepsiCo has 75% market share in Mexico, but they should not stop there. They could promote their products to drive up sales. Same goes for Russia and Brazil, where extensive promotions will help them drastically. As for the United States, PepsiCo needs to continue to bundle their products for US consumers. By continuing with extensive marketing research, improving retailer, customer, and distributor relations, and strong logistical systems are all crucial aspects of PepsiCo continuing to thrive as a company.

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