PEPSICO DIVERSIFICATION STRATEGY IN 2008

Anung Triningrum Herlyn Febrinasari

Company Profile Pepsico

PepsiCo is one of the most big multinational company in the world which produced beverages and foods
Established in 1965 from the merger of two big companies, which is Pepsi Cola Company (1898) and Frito Lay, Inc (1932).

PEPSICO CORPORATE HISTORY

1898, Caleb Bradham created formula to make Carbonation drinks and he called this as Pepsi Cola 1965, PepsiCo Established 1977, PepsiCo acquired Pizza Hut 1978, acquired Taco Bell 1986, acquired Kentucky Fried Chicken 1990, Wayney Calloway acquired Hot-n-Now 1992, acquired California Pizza kitchen 1993 acquired East Side Marios, DAngelo Sandwich Shops, and Chevys Mexican Restaurant 1980 and1990 acquired Mug root beer, 7UP International, Smart Food Popcorn , Mexican Cookie company, Gamesa, Sunchip

Four Major Divisions of PepsiCo

(before the strategy change)
PepsiCo Beverage North America Frito Lay

Quacker Oats Pepsico International

Problem Statements
1. What is PepsiCos corporate strategy? Briefly identify the business strategies that PepsiCo is using in each of its consumer business segments in 2008. 2. What does a 9-cell industry attractiveness/business strength matrix displaying PepsiCos business units look like? 3. Does PepsiCos portfolio exhibit good strategic fi t? What valuechain match-ups do you see? What opportunities for skills transfer, cost sharing, or brand sharing do you see? 4. Does PepsiCos portfolio exhibit good resource fi t? What are the cash fl ow characteristics of each of PepsiCos four segments? Which businesses are the strongest contributors to PepsiCos free cash fl ows?

PepsiCos Diversification Strategy

Product innovation Pada tahun 2007 , meningkatkan performa divisi salty brands dan kemudian peningkatan produk-produk yang sehat. Perusahaan tersebut telah menghilangkan lemak jenuh dari semua Lays, Fritos, Ruffles, Cheetos, Tositos dan varietas varietas Doritos dan mencari inovasi-inovasi untuk membuat snack asin yang lebih sehat. Acquisitions Acquisitions made by PepsiCo is the acquisition of products related to diversification. Particularly in research and Development and sales and marketing activities Close relationship with distributors : Helped distribution of newly launched snacks and isotonic drinks International Expansion The Power of One creating an efficient marketing, PepsiCo introduced the product in one website. Beside that, in terms of sales, PepsiCo entered into sales by combining them with complementary products

Diversification Strategy
Identifying Cross businesses strategy fits along the value chain to achieve synergy run business with the acquisition of Quaker Oats There are some identification could be applied: -R & D and technology activities -Distribution activities -Sales and marketing activities

PepsiCo Acquisition
The acquisition of fast-food restaurants including : Pizza Hut, Kentucky Fried Chicken, and Taco Bell. Acquisitions made by PepsiCo is a related acquisition. In 1980 -1990an acquired Mug root beer, 7UP International, Smart Food Popcorn ready to eat , Mexican Cookie company, Gamesa, Sunchip And this acquisition made by PepsiCo for a related product diversification. In 1992 PepsiCo acquired the Ocean Spray and Lipton which introduced a ready-to-drink teas (1993), Aquafina and Frappuccino ready-to-drink coffes (1994). Acquisitions after 2001, Quacker Oats and PepsiCo have begun to focus on their product including food, snacks, and beverages. 2006 and 2007 acquired the Flat Earth, which also is one kind of related acquisition.

1. Frito-Lay North America

How PepsiCo provide convenience to its customer over time with its product. Going abreast with the more conscious about nutritional and healthy content. improve the performance of the divisions score salty brands and further developing health and wellness product as a key strategic action. They offered fruit and vegetable snacks which is deficientcy in most diets

2. Pepsico Beverages North America

PepsiCo use Power of one which is a strategy for supermarkets to place Pepsi and Frito Lay products on shelves. improve the local distribution, the information flow coming from retailer through Innovation Summits. enhanced the nutritional properties of soft drink with attempt to develop new types pf sweeteners that would lower the clorie content of nondiet drinks offered healthier beverages like flavor and vitamin enriched water (for non carbonated Beverages Brands)

3. PepsiCo International
PepsiCo sale of beverage in international market utilize using Power of One Strategy with a modification for snack foods international to suit the different form country to country.

4. Quaker Foods North America

PepsiCo tried to enhance the quality of product while diversifying the products categories with hot and ready to eat cereals, pancake mixes and syrup, and rice and pasta side dishes

EVALUATING THE DIVERSIFICATION STRATEGY OF PEPSICO

1. Evaluating Industry Attractiveness 2. Evaluating Business Unit Competitive Strength 3. Checking the competitive advantage potential of cross-business STRATEGIC FIT 4. Checking for Resource Fit 5. Ranking the performance prospects of business units and assigning a priority for resource allocation 6. Crafting New Strategic moves to improve overall corporate performance

Measure
Market Size and growth rate Intensity of Competition Emerging Opportunities and Threats

Weight 0.1

PepsiCo North America 10/1

PepsiCo International 10/1

Frito-Lay 8/0.8

Quaker Oats 8/0.8

0.25
0.1 0.2 0.1 0.05

3/0.75
7/0.7 7/1.4 8/0.8 10/0.5

3/0.75
5/0.5 8/1.6 7/0.7 9/0.45

4/1
5/0.5 7/1.4 6/0.6 5/0.25

6/1.5
6/0.6 7/1.4 6/0.6 5/0.25

Industry Attractiveness

Cross-Industry Strategic fits Resource Requirements Seasonal and Cyclical Influences Societal, Political, Regulatory, and Environmental Factors Industry Profitability Industry Uncertainty and Business Risk

0.05

4/0.2

5/0.25

6/0.3

5/0.25

0.1 0.05

9/0.9 7/0.35

9/0.9 7/0.35

7/0.7 6/0.3

8/0.8 7/0.35

Overall Attractiveness Score

6.6

6.5

5.85

6.55

Competitive Strength
PepsiCo NA Competitive Strength/Market Position Weight Pepsi Co Intl Frito Lay Quaker

1. Relative market share

2. Cost relative to competitor cost 3. Ability to match or beat rivals on key attributes 4. Ability to benefit from strategic fit from sister business 5. Bargaining leverage with suppliers and buyers 6. Brand image reputation 7. Competitive valuable capabilities 8. Profitability relative to competitors Overall Competitive Strength Scores

0.15
0.20 0.05 0.20 0.05 0.10 0.15 0.10 1.00

7/1.05
4/0.8 6/0.3 9/1.8 7/0.35 9/0.9 8/1.2 8/0.8 7.2

9/1.35
8/1.6 8/0.4 9/1.8 6/0.3 7/0.7 7/1.05 7/0.7 7.9

9/1.35
5/1 6/0.3 9/1.8 7/0.35 8/0.8 7/1.05 8/0.8 7.45

4/0.6
3/0.6 4/0.2 8/1.6 7/0.35 10/1 8/1.2 10/1 6.55

Nine-Cell Matrix

High
Industry Attractiveness 6.6

PepsiCo North America Pepsi International

Medium
4.3

Quaker Oat North America Frito Lay North America

Low
2

Strong

6.6

Average
Competitive Strength

4.3

Weak

Strategic Fits
PepsiCo portfolio does exhibit good strategic fit PepsiCos management team was dedicated to capturing the strategic fit benefits within the business line up throughout the value chain share marketed research information to better enable each division to develop new product

Strategic Fits

R&D

Core products pepsico is food and beverages product. Since acquired Quaker Oats (QO) that product innovation is health product, is food diet containing. So with this acquisition, PepsiCo is also developing other products from different business units to create a product that contains elements of diet. R&Ds pepsico doesnt need long time research, PepsiCo can use the results of research that has been used QO to adopt in other products. So it result sinergy in R&D and can reduce cost.

Strategic Fits

Distribution

Before acquiring QO, QO is a great food company. Already have a strategy, good value chain and also high revenue. Moreover, they also have good distribution channels. By acquiring QO, PepsiCo gained an advantage in terms of distribution of products they would do. Through distribution channels that already exist in QO, so pepsico can distribute their products well and there are new distribution channel from QO.

Strategic Fits

Sales and Marketing

With the same distribution channels, then sales and marketing can be merged. For example, only with a similar promotion for all business units of PepsiCo with just one website. therefore it can save marketing costs. Moreover, to increase sales, it could use a crosssubsidy system.The market share line unit can be supported with other products. Example for food product sales, can be combined with the drinks. So that sales of all units can be achieved.

Strategic Fits & Value Chain Match Ups

1. Skills transfer
Routinely shared valuable expertise for instance when Pepsi Co acquired Quaker foods Technical and technological know how was shared among 230 plants, 3600 distribution systems, and 120, 000 service routes Shared market research information during power of one retailer strategy

Strategic Fits & Value Chain Match Ups

1.

2. Cost savings
Achieved economies of scope by combining related activities among the divisions. Quaker Oats integration $160 mill in cost savings by sharing product ingredients and packaging materials. $40 mill. in cost saving by joint distribution of Quaker snacks and Frito Lay products. Combination of Gatorade and Tropicana distribution saved $ 120 million by 2005

Strategic Fits & Value Chain Match Ups

1. 2.

3. Brand Sharing
Global name brand recognition of PepsiCo helped

introduced its snacks business around the world

Cash Flow Characteristics

KFC & PIZZA HUT

SPIN OFF

Strongest Contributor
Frito Lay

36% company operating profit +70% of salty snack food industry sales (US)

Carbonated Beverage

31.1% MS (US, 2007) Power of One strategy Soft drink innovation

Gatorade(76%), Propel(40%), Aquafina(15%)- MS Tropicana #1 brand (2007) Noncarbonated Better for You & Good for You bev. Beverage =70% division revenue

Revenues per Segment

(PepsiCos 2008 10K Report)

Resource Fit
Financial PepsiCos portfolio exhibit good resource fit. Overall businesss situation is good. There is no Cash Hogs and Dog. Non Financial Transferring skills and competencies (R&D, technology, and information)

Conclusion
There is no cash hogs which will erode all of the cash flow using to fund their expansion, or no Dog which also hurt the cash flow of PepsiCo. All of business units are in its good condition, they can generate enough cash flow for themselves and also for supporting other operating activities. With the companys business portfolios growth and more than sufficient cash-flow Strategic Fit Cost Reduction Economic of scope

Recomendation
Pepsico can continue its acquisition, in the country that still has a low market share. PepsiCo can strengthen its bargaining power through vertical integration.

THANK YOU