STRATEGIC MANAGEMENT

CASE STUDY: PEPSICO. -2005

COURSE INSTRUCTOR: PROF. ALI ASKARI DATE: 9TH SEPTEMBER, 2011

GROUP 06: DANIA BAIG NIMRA JAWAID SYEDA FARYAL JAFRI UROOJ FATIMA

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PEPSICOS INTRODUCTION
PepsiCo is best known for Pepsi, the worlds second most popular soft drink after coca cola classic.Pepsi co is the international food and beverage company with sales of $29.3 billion and net income of $4.0 billion in 2004. Pepsi has 153000 employees and markets more than 500 varieties of food and beverage products in more than 200 countries.Pepsi started in 1960 to being the worlds third largest food and beverage company in world, behind only nestle and Kraft foods.

MISSION STATEMENT
To be the worlds premium consumer products company focused on convenience foods and beverages.

VISION STATEMENT
"PepsiCo's responsibility is to continually improve all aspects of the world in which we operate - environment, social, economic - creating a better tomorrow than today."

HISTORY
Pepsi is a carbonated soft drink that is popular the world over. First made in the 1890s, by pharmacist Caleb Bradham in New Bern, North Carolina, the soft drink has wooed millions of people with its flavor. Have you always wondered how your favorite drink Pepsi came into being? This soft drink, which has been running popular since years together, has a long and interesting history of its own. It is produced and manufactured by the reputed company PepsiCo. Such is the popularity of the drink that over the years, many of its variants have come into the market. We bring you the detailed history of Pepsi in the lines below. Pepsi made its first appearance in the world in 1890s. Pharmacist CalrbBradham of New Bern, North California, as a cure for indigestion. The product got its trademark on June 16, 1903. Bradham shifted the bottling of the drink from his drugstore to a rented warehouse in the year 1903. Since then, the product has never looked back. In the year 1931, due to the disastrous effect of World War I, there was sudden fluctuation in the price of sugar, which led Pepsi-Cola Company into bankruptcy.

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In 1931, Pepsi Cola was bought by the Loft Candy Company Loft president, Charles G. Guth who reformulated the popular soft drink.
Pepsi cola fortunes reached to the lowest point when in 1933 cocacola

refused an opportunity to buy it. In 1933, 12-ounce bottles of the soft drink were re-introduced, which were originally priced at 10 cents each. This found fewer sales for itself and then the producers thought of bringing the rate down to 5 cents. This brought a boost to the company, which it badly required at this point of time.
In 1941, just before the entry of US in to World War II, Loft candy merges

with its Pepsi- cola subsidiary and changed it name to the Pepsi cola company.
After this Pepsistarted diversification through acquisition of pizzahut

(1977), Taco Bell (1978), KFC (1986), and Hot NNow (1990). Pepsi co was less successful with its attempts at unrelated diversification. It acquired NORTH American Van Lines in 1968 and Wilson Sporting Goods in 1970 and sold both of them in 1975.
From 1975 to 1983, Pepsi co conducted its highly successful Pepsi

challenge a blind taste test between coca cola and Pepsi in which most participants expressed their preference for Pepsi.
Despite being making several of acquisitions and divesture over past 10

years company is not been able to consistently achieve the 15+ percent annual increase in earning. In 1997, PepsiCo divested its restaurant operations by spinning them off to shareholder as a new company: TriCon Global Restaurants.
Many of PepsiCo's brand names are more than 100-years-old, but the

corporation is relatively young.PepsiCo was founded in 1965 through the merger of Pepsi-Cola and Frito-Lay. Tropicana was acquired in1998 in $3.3 billion and PepsiCo merged with The Quaker Oats Company, including Gatorade, in 2001.

INTERNAL ISSUES
o Organizational structure

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PepsiCo owns its corporate headquarters buildings in Purchase, New York. The company is engaged in the snack food, soft drink and juice businesses. Each product category is further divided into four divisions:
1.Frito-Lay North America (FLNA) 2.Pepsi-Co beverage North America (PCNA) 3.Pepsi-Cola International (PI)

4.Quaker foods North America(QFNA)

o Frito-Lay North America (FLNA):

Frito-Lay North America (FLNA) is a division of PepsiCo, Inc.which manufactures

markets and sells a variety of corn chips, potato chips and other snack foods.
FLNA is headquartered in Plano, Texas, a suburb of Dallas. Products manufactured and sold in North America include Lays and Ruffles

brand potato chips, Doritos and Tostitos brand tortilla chips, Cheetos brand cheese-flavored snacks, Fritos brand corn chips, a variety of branded dips and salsas and Rold Gold brand pretzels.
FLNA is Pepsi co largest division in terms of operation profit,Sells eight of the ten

top supermarket snack chips brands. (Lays, ruffles, Doritos) and has the leading share in all major snack categories.
Over al FLNA has 15% of convenience food market, followed by Kraft foods 12%,

Hershey 6% and Kellogg 5%.

o PepsiCo beverage North America (PCNA)

PepsiCo Beverages North America sells several brands of carbonated and non

carbonated consumer beverages in the United States and Canada.

Case Study The various beverage products span through carbonated soft drinks includes

Pepsi, Diet Pepsi, Mountain Dew and account for about one third of the carbonated beverage sales in US.
Non carbonated beverages includejuices, readymade teas, isotonic sports drinks,

bottled water, and enhanced waters. Several established brands include Gatorade (sports drink), Tropicana products, Aquafina Water, SoBe (south beach beverage company), and Dole. The Company has also established strategic partnerships with Lipton and Starbucks to create, market, and sell ready to drink Lipton tea brands and bottled ready to drink Starbucks Frappuccino drinks.
The sales of PepsiCo carbonated drinks have been flat in recent years wile the

sale of noncarbonated beverages have grown steadily

o PepsiCo International

PepsiCo's international division operates in approximately 200 countries, with

largest operations in Mexico and the United Kingdom and accounts for 30% of international soft drink market which is dominated by coca cola.
Pepsi co beverages and snacks business is growing fastest in Asia- pacific

region.
Pepsi co concentrates on emerging markets rather than going head to head with

cocacola around the world. In past decade, it has spend nearly $1 billion to develop markets in Eastern Europe, china, India and Russia.

o Quaker Foods North America (QFNA)

Quaker

Foods North America, created following PepsiCos acquisition of the Quaker Oats Company in 2001, manufactures, markets and sells Quaker Oatmeal, Rice-A-Roni, Cap'n Crunch and Life cereals, as well as Near East side dishes within North America.

Case Study Quaker foods produces cereals, pancake syrups and mixes, rice side dishes and

oatmeal snacks.
This division also owns and produces the Aunt Jemima brand, which as of 2009

was the top selling line of syrups and pancake mixes within this region.
Quaker has a long-standing reputation for producing healthy food products.

Quaker products are often marketed with Tropicana orange juice, as both products are typically used at breakfast.

THE U.S BEVERAGE INDUSTRY

The beverage industry of U.S is divided into alcoholic beverages and non alcoholic beverages. Alcoholic beverages include beer, wine, distilled spirits. Non alcoholic beverages include carbonated soft drinks, water, milk and coffee. Non alcoholic beverage market have 87% share In U.S market. Of the 87% market, carbonated soft drinks comprise 28% of the market, followed by bottled water, milk and coffee with about 12% each. Facts and figures in the case reveals that both PepsiCo. And Coca-Colas market shares have dropped of late, while rivals Cadbury Schweppes and Cott corporations shares have increased. The top ten selling carbonated soft drinks are Coke, Pepsi, diet Coke, mountain dew ( Pepsi ), Diet Pepsi , sprite(coke), doctor pepper(Cadbury), CF diet coke, diet doctor pepper(Cadbury) and Sierra mist .(Pepsi). The top ten drinks are made by the top three soft drink makers: coca cola, Pepsi co and Cadbury Schweppes. these three soft drink makers have about 90% of the market. These three companies does not makes an alcoholic beverage. Pepsi Bottling Group is the worlds largest manufacturer and distributor of Pepsi co beverages. It account for over half of domestic Pepsi co product shipments and about a third of international shipments.

COMPETITORS
In beverages, PepsiCos main competitors are Coca cola and Cadbury Schweppes In snacks and cereals, its main competitors are Kraft Foods, Kelloggs and General Mills. In 1981, while PepsiCos executives focused on doubling sells every five years, coca cola concentrated on increasing profits.

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By 1997, coca cola had created more wealth for share holders through price appreciation and dividends then its passed records.

CADBURY SCHWEPPES
The British firm known for its Cadbury candy products.

It is the third largest producer of soft drinks. Its beverages include 7UP, A&W Root Beer, Canada Dry, Schweppes mixers and Dr. Pepper It primarily markets its beverages in North America and Western Europe.

KRAFTS FOODS
It is the primary competitor for the Frito-Lay snack foods division. It is the largest food company in the United States and produces a wide range of snack food, cookies, crackers and cheese products. In 2004 Kraft foods had sales of $32.2 billion and net income of $2.6 billion. PepsiCos Quaker oats unit ranks forth in the ready-to-eat serial market behind Kelloggs, Generals mills and the post unit of Kraft food.

HEALTH ISSUES
Due to the increase concern for health issues, Americans are seeking to reduce the fat and sugar in their diets. To cater to this healthier life style, in 1998 Frito-lay introduce its line of WOW! Fat free potato chips made with Procter & gambles olestra Unfortunately WOW! Caused tendency for abdominal cramps then for being fat free. In recent years, consumers have shown an increasing interest in healthy alternatives to carbonated soft drinks. Recognizing that many of its potential customers desire healthier fare, PepsiCo. Removed the Trans fat fro all of its salty snack products. Since 2002,placed its smart spot logo (a green circle containing the words Smart Choice Made Easy on its product that contribute to healthier lifestyle In 2004, just over one-third of PepsiCos sales came from Smart Spot products.

NATURAL ENVIRONMENT ISSUES

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PepsiCo realizes that protecting the environment is an important part of its corporate citizenship. The company encourages conservation, recycling and energy use programs that promote clean air and water and reduce landfill waste. In the US, soft drink containers are the most recycled form of consumer packaging. PepsiCo uses some recycled materials to make its containers, thus saving millions of pounds of raw material each year. About half of the Pepsi aluminum cans and a third of the content of its glass bottles come from previously used materials. For over 30 years, PepsiCo and its bottlers have encouraged recovery of beverage containers through local programs such as curbside recycling, drop off programs and recovery efforts by Boy Scout troops and other community organizations.

SWOT ANALYSIS
STRENGTHS PepsiCo has several strengths that enabled them to be the 2nd-largest food and beverage company in the world. The first strength is being a diversified company: This allowed them to earn more, and in times when a particular division fails to gain a substantial amount of revenue, it can be balanced by the other strong divisions of the firm. Well-built distribution channel: is also a great strength, since it is important that your customers have easy access to your product in order for it to turn into sales.

Companys ability to respond quickly to emerging trends and issues such as health and environmental issues and the development of the PEPSI Generation.

Lastly, the companys strong strategy of penetrating the international market is also strength and they did this by focusing more on the emerging markets.

WEAKNESSES The main weakness that can be seen in PepsiCo is its focus. Due to its diversified products, it tends to have divided concentration on each division (unlike Coke and Kelloggs wherein they focus on one product line). This weakness tends to lead to less market shares of each division.

OPPORTUNITIES

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One of the opportunities that can be quickly seen is the companys efforts in penetrating the emerging markets ofPepsiCo International (PI). Instead of focusing in already developed markets, PI has focused on emerging markets such as China, India, Eastern Europe, and Russia. Doing so gives the company a better grip on an opportunity to grow and increase market share than by competing with Coca-Cola on already matured markets. One strategy of PepsiCo is introducing a Pepsi Generation theme for the product, they aim to appeal to the younger generation and make them lifelong Pepsi drinkers. We see opportunities in this area since the possibilities of designing new trends are endless. This lets them appeal to long-time drinkers as well as sway new ones. PepsiCo also sees the opportunity in surfacing issues like, health and environmental, and by quickly responding to these concerns at hand, they appeal to the consumers first before any other company does and this may also lead to greater market share. They have opportunities in this area since they have the company has the capability and the mindset to respond to such issues fast with creative ideas. THREATS The competitors are the companys threats. Each of PepsiCos division has its close competitors. It has been observed that most of their competitors are singleproduct line companies, giving them a more direct handle of the industry. PepsiCo will have to compete with these strong competitors head on in order to maintain its market share. If PepsiCo is not careful enough, its competitors may eat its market share. Emerging health/environment issues are also posing as threat to PepsiCo. More Consumers are starting to eat and live healthy, but as we can see majority of PepsiCos products are not healthy (junk food and soft drinks).

DEFINITION OF THE ISSUE

The PepsiCo-2005 case study has several issues revolving it. It has the internal issue that PepsiCo has not been able to consistently meet its growth goal of 15+ percent annual increase in earnings for the last 10 years.

Its external issues consist of its products as reaching maturity stage industry wise. Division wise, the company holds a large share of each respective market, but over-all the company sustains a flat growth rate and fails to meet its growth goal.

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3 YEARS STRATEGIC PLAN FOR PEPSI COLA

In respect to this, it can be seen that the real issue in this case is the need of a strategy to sustain a compound annual growth rate (CAGR) in earnings per share of 15 percent per year. Here we will develop a three-year strategic plan for PEPSICO that can best ensure this growth through this decade.

A.

Divestiture

Refers to selling a division or part of an organization. It is often used to raise capital for further strategic acquisitions or investments. Divestiture can be part of an overall retrenchment strategy to rid an organization of businesses that are unprofitable. We have thought of dropping Quaker Foods because it is the division with the least contribution of profits but we thought otherwise because Quaker Foods is newly acquired and is currently in adjustment period. It is slowly picking up momentum as consumers are looking for healthier food and Quaker Foods is the division of PepsiCo giving that to them.

B.

Unrelated Diversification

Mean that the businesss value chain differs to an extent that no competitively valuable cross-business relationships exist. It favours capitalizing upon a portfolio of businesses that are capable to gain profits in their respective industries. For Frito-Lay Foods, its best to plan for them to go for unrelated diversification. Since it is a product-based business, a strategy includes creating a service-based business like a convenience store that would offer Frito-Lay products and other PepsiCo products as well. This is a new venture for PepsiCo and it could turn out to be a success once again. C. Horizontal integration

One of the most significant trends in strategic management today is the increased use of horizontal integration as a growth strategy. Mergers, acquisitions, and takeovers among competitors allow for increased economies of scale and enhanced transfer of resources and competencies.

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The first alternative is to create a permanent merger with Pepsi beverage and Cadbury Schweppes. Pepsi has a 31.7% market share while Cadbury Schweppes has 14.5% and together they have 46.2% which beats Coca-Colas 43.1% market share. This merger and infusion of powers was made to hopefully be able to topple Coca-cola.
D.

Product Development

Product development is a strategy that seeks increased sales by improving or modifying present products or services. By acquiring Cadbury Schweppes and continuing Quaker foods the company can also implement the product development strategy to respond to the emerging trends. Quaker Foods must continue to familiarize themselves with the market and later on introduce more health products to the consumers as this is the emerging lifestyle trend. A product and packaging development will also be done as we plan to appeal to a larger target market. E. Market penetration:

A market-penetration strategy seeks to increase market share for present products or services in present markets through greater marketing efforts. PepsiCo international can use market penetration strategy by discovering new Asian pacific markets such as China, India, Eastern Europe, and Russia. Doing so gives the company a better grip on an opportunity to grow and increase market share than by competing with Coca-Cola on already matured markets.

CONCLUSION
In this case study PepsiCos strengths and weaknesses are examined in detail, while the external forces of the market are addressed as well. This case addresses the internal and external forces of PepsiCo in terms of its competitive market. These are examined in the context of its opportunities and threats within the marketplace and conclude with a detailed competitor analysis with particular attention paid to its largest and most able competitor Coda-Cola. Further examination is made of PepsiCo's corporate business level strategies and of particular markets that indicate the direction of that strategy. The strategic analysis concludes with the recommendation that PepsiCo develop an even greater strategic effort on the China market and this is concluded with a 5 year outlook. Finally, an overview of some of the guiding principles of PepsiCo's

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corporate governance mandates is offered while its corporate social responsibility is also addressed to a little extent."