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Kathy Moncher W0402690

Discussion 7

Mgmt 464-07

Case 19: Pepsicos Diversification Strategy in 2008 1. Pepsicos corporate strategy is to achieve growth and long-term value through new product innovation, related diversification,, and strategic alliances and acquisitions. Pepsico introduced many new products such as Doritos and Funyuns. Pepsico also diversified into salty and sweet snacks, bottled water, isotonic beverages, chilled juices, RTD tea and coffee, hot and RTE cereals, flavored grains, and other breakfast foods. Pepsico has created several strategic alliances with distribution allies with its Power of One strategy. Pepsico also focused on International expansion and strategic acquisitions. Pepsico also focused on product reformulations to develop healthier products. The company is organized into four business units: Frito-Lay North America, PepsiCo Beverages North America, Quaker Foods North America, and Pepsi International. All of these divisions follow the parent company general strategy but they also have separate aspects to their business level strategy. All of the consumer products try to achieve competitive advantage through a differentiation strategy known as Better-For-You or Good-For-You. Frito-Lay, salty and sweet snack division Improve the core brands by making them healthier while maintain superior taste Product Innovation to create new healthy and tasty snacks PepsiCo Beverages North America, carbonated and noncarbonated beverages Power of One Innovation Summits provides consumer insight and recognizes supply chain issues Product innovation of carbonated beverages focused on improving the nutritional value In noncarbonated beverages, the focus was on providing a large amount of options for healthy drinks Quaker Foods North America, hot and RTE cereals, breakfast foods, rice and pasta Good-For-You products that are very healthy options Better-For-You products that are healthier alternatives Launch new oatmeal products Pepsi International, all PepsiCos brands sold outside North America Focused on growing market share Modify snacks to suite tastes of locals Also improved the nutritional value of products 2. My assessment of the long-term attractiveness of PepsiCos different units is demonstrated in Table 1. The most attractive industries are salty snacks, soft drinks, and bottled water.

Kathy Moncher W0402690

Discussion 7

Mgmt 464-07

3. My assessment of the competitive strength of PepsiCos business units is demonstrated in Table 2. The strongest SBUs are Pepsi, Frito-Lay, and Gatorade. 4. My 9-cell industry attractiveness/business matrix displaying all of PepsiCos business units is demonstrated in Table 3. 5. PepsiCos portfolio does exhibit good strategic fit. Cross business skills transfer Expertise shared between SBUs such as PepsiCo and Quaker Technological skills shared among all production and distribution systems Shared market research such as information gained during Innovation Summits Cost savings along value chain Achieved economies of scope by combining related activities among divisions The Quaker Oats integration shared product ingredients and packaging materials within company Joint distribution between Quaker snacks and Frito-Lay products. Combination of Gatorade and Tropicana reduced production costs Cross business use of brand name World known Pepsi brand name helps introduce new products and snacks 6. PepsiCos portfolio does exhibit good resource fit. Businesses add to companys overall resource strengths and provide support for the entire group. Revenues increase at 7% annually Net income increases 12% annually Continuous increases in dividends to shareholders Ability to pursue future acquisitions Ability to reinvest in core businesses Ability to fund an $8 billion share buyback plan 6b. Cash Flow Characteristics Pepsi and Frito-Lay (strongest contributors to free cash flows): Frito-Lay North America Operating Profit, 2007: $2845m Internal Cash Flow: $2845+$437= $3282m Accounted for 29% of total revenue and 36% of operating profit in 2007 Accounted for 70% of the salty snack food industry in the US PepsiCo Beverage North America Operating Profit, 2007: $2188m Internal Cash Flow: $2188+$302= $2490m Accounted for 28% of total revenue and 31% of operating profit in 2007 Accounted for 26% of US market share in liquid refreshments

Kathy Moncher W0402690

Discussion 7

Mgmt 464-07

7. My overall evaluation of PepsiCos business portfolio is that is very strong and provides the companys shareholders with above average returns. All of PepsiCos SBUs are leaders in their market and provide a sound cash flow for the company. 8. I think Indra Nooyi needs to address the following three strategic issues: Low profitability in the international market o Divest businesses with low profitability The recent downturn trend in PepsiCos stock price o Restructure product lineup, eliminating similar product offerings o Pursue aggressive cost cutting within the entire company o Emphasize Environmental Sustainability in all divisions, Performance with a Purpose PepsiCos overdependence on the US market revenues o Focus more on international markets with high growth potential o Make strategic acquisitions in global markets to increase profitability PepsiCos free cash flows should be used to pay higher dividends to share holders and to expand internationally.