CHAPTER 1: INTRODUCTION AND COMPANY PROFILE Company Profile PepsiCo is one of the world's largest food and beverage

companies, with 2007 annual revenues of more than $39 billion and total operating profits of more than $7 billion.

Mission PepsiCos mission is to be the world's premier consumer products company focused on convenient foods and beverages. Vision "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-Cola was created in the late 1890s by Caleb Bradham, a New Bern, N.C. pharmacist. After its encouraging growth, the company PepsiCo is established. PepsiCo, Inc. is founded by Donald M. Kendall, President and CEO of Pepsi-Cola and Herman W. Lay, Chairman and CEO of Frito-Lay, through the merger of the two companies.

Our Business

PepsiCo, which previously comprised PepsiCo North America and PepsiCo International, is now organized in three business units as follows: 1. PepsiCo Americas Foods (PAF) 2. PepsiCo Americas Beverages (PAB) 3. PepsiCo International (PI) Subsidiaries brand of PepsiCo
1) Pepsi-cola brands 4) Quaker brands

2) Frito-lay brands 5) Gatorade brands

3) Tropicana brands

This report is based on the management reporting that existed through fiscal year-end 2007 reporting structure.

Our Operations/ markets

Outside of United States, Pepsi largest markets are Mexico, the United Kingdom and Canada. With almost all the business unit headquarters are located in USA PepsiCo is very much concentrated to US market. However with its strategy to grow by expanding overseas, PepsiCo now is a global company with presence in all over the world. Among the international business units headquarters located around the world are: PepsiCo Asia Hong Kong, PepsiCo Europe Switzerland, PepsiCo Latin America Region Foods and Beverages Mexico, PepsiCo Middle East and Africa United Arab Emirates, Sabaritas Mexico

Corporate Social Responsibility Statement PepsiCo is committed to being an environmentally responsible corporate citizen. They express that commitment in their Environmental Policy and apply it to all aspects of their business. Among Pepsis environmental policy are:

Comply with applicable legal and regulatory requirements and company standards and conduct regular audits to verify compliance.

Consider our potential environmental impacts in our daily business decision-making processes.

Monitor emerging issues and keep abreast of regulatory changes, technological innovations and stakeholder interests.

In this report however, issues of Pepsi Cola ONLY will be analyzed. Both internal and external issues of Pepsi Cola will be analyzed. Options and recommendation will be provided as well to resolve these issues or problems.

CHAPTER TWO: INTERNAL AND EXTERNAL ANALYSIS

I. INTERNAL ANALYSIS 1. Competitive Stance
The suitability of Pepsi Cola current strategy can be evaluated through its positioning strategy and its strategy to grow. Pepsi Cola currently positions itself by following differentiation strategy that emphasize on product quality and reputation or brand. These are achieved by utilizing elements of marketing mix, the 4Ps. Among the 4Ps, Pepsi Cola adopts advertising innovation (Promotion), product innovation (Product), and packaging innovation (part of Product in marketing mix). On the other hand, as strategy to grow, Pepsi Cola chooses to use external growth by expanding to overseas market (Place), a means achieved by joint venture and acquisition. Pepsi Cola differentiation strategy emphasizes on: 1. Advertising Innovation Pepsi Cola has always been innovatively promoting its products using advertisement as the main tool. A tool which allowed by big reserve of cash owned by PepsiCo Inc. as the parent company Pepsi Cola use advertisement aggressively in two ways, they are: celebrity endorsement and advertisements with food to lure consumers. The advertisement of Pepsi Cola has always

Pepsi ad's message: The soda and hot dog are great together.

targeted on youngster or Generation X with the age range of 18 to 29 years old. Hence to target these target market, Pepsi Cola has always used big celebrity that loved by young people to endorse its products. In fact, this is the traditional and most favorite method used by Pepsi. Take for example its 2001 promotion, Pepsi Cola use Britney Spears for its commercial with the slogan of The Joy of Pepsi and it is proven as the most successful advertisement ever. More than 2 million fans click their way to Britneys own version of The Joy of Pepsi. Currently Pepsi Cola also experiment on its advertisement tactic to be paired up with food. According to USATODAY, 2003; Pepsi Co. now interested in exploring the idea of combining food and drinking Pepsi Cola for TV and outdoor advertisements. Therefore, now the Pepsi Cola advertisements will stage people enjoying their favorite food accompanied with Pepsi Cola as the chosen beverage; rather than Pepsi Cola traditional advertisement of borrowing celebrity power to endorse the product. In short, these two advertisement types traditionally play a major role in building Pepsi Cola brand image in a tight competition with Coca Cola. However, from US market share alone; Pepsi Cola advertisement innovation has yet maintain a dominant market share, there is still so much to catch up with Coca Cola market position. As Beverage Digests 2008 report shows, Pepsi Cola US market is 30.8 only percent while the Coca Cola Companys is 42.7 percent. The reason maybe because celebrity endorsement method is deemed quite outdated to meet the high expectation of Generation X. Advertisement with food yet still need to be proven on its effectiveness. As Taylor J., the vice chairman The Harrison Group quoted in Marketing Daily says, Peoplenot just teenagers--are moving away from emotional branding and toward design and performance." 2. Product Innovation Another strategy adopted by Pepsi Cola to differentiate itself is product innovation. With global network Pepsi Cola need to update its beverage drink to match consumers expectations in various overseas markets. As Ron Coughlin, PepsiCo International chief marketing officer of beverages says, Product innovation today . More about giving people what they havent asked for but are dying to have Hence, to fulfill that Pepsi Cola determined to expand its current product line through research and development. This determination is reflected in PepsiCo, Inc. 2008 annual report,

we are also committed to securing our innovation pipeline, and have coordinated our research and development departments across the Company into one global innovation team. The result can be judged from the development of Pepsi Cola back from 1903 with the original Pepsi Cola to the present (2009) that shows many product diversification added into the portfolio. Among the products are Diet Pepsi (with artificial-sweetener variant), Pepsi Blue (blue-colored berry flavored soda), and many more. Some of the products also will be adjusted to the local taste and thus enriching the portfolio. Unfortunately some products have been deemed as failure in the market. Products like Pepsi Crystal, Pepsi AM, and Pepsi Light has not received good response from its respective market. For example, in the case of Pepsi AM, Pepsi with the same level of sugar but double the caffeine. This idea may seem wonderful at first but in the end the production was stopped in 1990. The reason maybe because if public wanted to get caffeine boost as offered in Pepsi Extra, they rather drink coffee (they already familiar with coffee and it is understandable that people drink coffee to get that that caffeine boost). Furthermore, as some marketing expert notice, the name itself Pepsi AM dictates when it must be consumed and thus restricts the consumption to specific-occasion usage. This kind of market fallacy by marketer may be avoided by deep marketing research on what actually customer desire from a carbonated drinks. 3. Packaging Innovation Pepsi Cola realize the emerging importance of packaging as marketing media in pursuing differentiation strategy. With the youth or generation X as the target market, Pepsi Cola need to quickly adapt to their smart preference and being authentic. According to Romanik, R., the writer from Package design magazine, todays youth is demanding authenticity from the products they come into contact with in their day-to-day experiences This is what Pepsi Cola has been doing. Pepsi latest innovations to distribute cans with vibrant blue-gray shades design yet still showing the distinct brand equity of Pepsi (the Pepsi globe, iconic Pepsi blue, and tilted Pepsi capital letters) is meant to capture the youths mind and reflect their culture along Pepsi Cola dimension.

Some of latest Pepsi can design which stimulate the discovery and to pique the interest of collectors. Furthermore, Pepsi also leave the design of a virtual digital board that will appear in Times Square, New York to the creativity of consumer or web users to design it. Through a contest, the winner can show case his/her design to the public. This idea is right on trend with the adept of youth on using MySpace and YouTube to channel their creativity and energy. Pepsis innovative ways of using packaging to position itself among customer minds is certainly complementing the trend of consumer who is moving away from emotional branding and toward design and performance. Young people who like challenge and appreciate arts or technology savvy will certainly worship these ways of advertising and the reward for Pepsi Cola will be bigger market share. Pepsi strategy to grow: Pepsi Cola strategy to grow is external growth by expanding to overseas market. This will follow the combination of Market Building and Product Development strategy by Haperberg, A & Rieple A. model that offers existing products to new market and offers new product to existing market respectively. This strategy is absolutely involving a lot of risks, but Pepsi Cola is seeing it as opportunity. This strategy expressed in PepsiCo Annual Report 2008. Since Pepsi Cola also aim to expand in international market, they have made significant investment in countries like China (invest in more plants and sales force) and Russia (acquire JSC Lebedyanski, Russian largest beverage company) in 2008 alone. Meanwhile, in the country where Coca Cola has strong presence, Pepsi Cola also determines to battle it out. For example in Middle East market, numbers of methods are attempted by Pepsi to win the battle; one of them is the launching of e-vending that allows customer to call a number on Pepsi vending machine through cell phone, order a treat and pay when their phone bill arrives. The e-vending system is certainly unique enough to lure customers. However, the problem is that it needs a lot of maintenance work to ensure system stability. The scale is also too

small to lure a big chunk of Middle East market since the system for now limited to the UAE (United Arab Emirates) only. There are also some problems on Pepsi Cola strategy to expand overseas. First, is that they tend to ignore the need to be innovative when they are in the winning position. The obvious example; in Middle East market, Pepsi Cola has enjoyed two-decade head start yet its market share was threatened when Coca Cola back in the game after the boycott. Apparently Pepsi Cola was enjoying too much its monopoly position in Middle East and ignores their vendors and distributors needs by denying short lines of credit. This ignorant attitude can be fatal for Pepsi and as the result, they are position in the region is threatened when now Coca Cola is back. Second problem is that in most cases Pepsi Cola is not creative enough to beat Coca Cola in international market. Pepsi Cola has the tendency to copy-cat Coca Cola promotional strategy. For example, again in Middle East region, they copy Coca Cola strategy of using Point-ofpurchase to boost sales. When Coke slipped freebies, iceboxes, and barbecue spatulas into beverage packs; Pepsi Cola follow along this strategy.

2. Financial Analysis
Change 2008 10% 4% 2.50% 26% -19% 5% 25% n/m -14% -3% -2.20%

Total net revenue Operating profit FLNA QFNA LAF PAB UKEU MEAA Corporate-net impact of mark-to-market on commodity hedges Corporate-other Total operating profit Total operating profit margin Source: PepsiCo, Inc. 2008 Annual Report

2008 $43,251 $2,959 $582 $897 $2,026 $811 $667 ($346) ($661) $6,935 16%

2007 $39,474 $2,845 $568 $714 $2,487 $774 $535 $19 ($772) $7,170 18.20%

2006 $35,137 $2,615 $554 $655 $2,315 $700 $401 ($18) ($720) $6,502 18.50%

2007 12% 9% 2.50% 9% 7% 11% 34% n/m 7% 10% -0.30%

From the table above, the total operating profit decreased 3% and total operating profit margin decreased 2.2% in the year 2008. This is perhaps caused by the unfavorable net mark-tomarket impact the commodity hedges and increased restructuring and impairment charges that contributes to 13% (10% (2007) - (-3%) (2008)) of operating profit decline and 1.9% (0.30% (2007) - 2.20% (2008)) of profit margin decline. Besides that, the leverage from the revenue growth was also offset by the impact of higher commodity costs. In the era of global recession now, the higher commodity cost may give huge negative impact on any operating business and PepsiCo Inc. is certainly not exempted from this condition (even though the size of PepsiCo operation will at least minimize the negative impact).

However, in the year 2007, the total operating profit increased 10% and total operating profit margin decreased 0.3%. The reason is because operating profit growth reflects leverage from the revenue growth. However this growth was offset by increased cost of sales that due to higher raw material costs. Furthermore, there was also no net impact of acquisitions on operating profit growth but there was an impact of foreign currency which contributed 12% to operating profit growth.

The below table is the table for PepsiCo Inc. performance in 2008:
FLNA QFNA Net Revenue, 2008 (%) 12,507 1,902 Net Revenue, 2007 (%) 11,586 1,860 % Impact of: Volume -1.5 Effective net pricing 7 4 Foreign exchange Acquisitions % Change 8 2 Source: PepsiCo, Inc. 2008 Annual Report LAF 5,895 4,872 PAB 10,937 11,090 -4.5 3 UKEU 6,435 5,492 4 4 2 8 17 MEAA 5,575 4,574 13 6 1 2 22 Total 43,251 39,474 1 6 1 2 10

11 9 21

-1

The changes in net revenue from 2007 to 2008 were increasing in all Pepsi business unit except for PepsiCo Americas Beverages (PAB) which experience 1% decline; reflecting the sales volume declines in North America. The other business unit increased net revenues however may be caused by favorable effective net pricing and that offset sales decline. The effective net pricing of Pepsi have to be strategic and competitive, because there are major competitors in soft drink industry like Coca-Cola and F&N. The retail price of Pepsi Cola cannot be higher marked up as it would affect the sales due to tight competition. If PepsiCo were to lower its price to gain advantages over its competitor, it will only enjoy slimmer profit margin and worse, it might engage other competitor into Price War. Thus, its not worth it.

3. Culture and Architecture

An organizational success may depend on the suitability of its culture and architecture. Culture and architecture of an organization is very important because it represents the personality of the organization and its configured relationship to stay competitive in business. The dominant element of organizational culture and architecture found in PepsiCo Inc is stories and symbols. Stories and Symbols Stories are tales told by organizational members to each other and outsiders about what has gone on in the organization; and Symbols are the ways in which the organization is represented and it can be tangible or intangible (Habeberg, A. & Rieple, A., 2001). In PepsiCo, there are many great stories going on about their CEO and how they rise into power. Mostly the purpose of these stories is to emphasize the leadership of the top executives and to motivate employees to follow the same path. In a way, it is shaping the organizational culture. The good example of PepsiCo Inc. stories of great leader is Indra Nooyi the CEO of PepsiCo who has lead PepsiCo International to a more glorious path of environmental and health conscious products. When she voted to become the next CEO of PepsiCo; she told her long time colleagues and main challenger for the post, Mike White, Tell me whatever I need to do to keep you, and I will do it". This kind of scene may be rare in hypercompetitive realm of C-suites but not at PepsiCo. After the selection, she works hard by directing PepsiCo towards product portfolio enrichment with healthier food and beverages.All in all, Nooyi direct PepsiCo to expand in Asian

market and less fixated on the US. The story above is just about one inspiring CEO in PepsiCo Inc. There are more stories like that are discussed and spread out through out the organization and of course to the external stakeholders. The issue here is whether the stories about executives are effective enough to motivate employees in the same way. Employees are divided into many organizational levels and often, only the higher management has the same motivation and commitment towards the company and not the lower level of management. Thus, raising the issue of unity and balance in the organization. At least however, the story about Indra Nooyi above is clearly implying the culture of Pepsi that give more freedom to their employees and the culture of team-work that employees have so that the company can grow (as the team-work exist between Nooyi and Mike White) If the stories are proven effective to motivate employees, the next issue will be what can be done to foster this good culture?

3. Resource and Value Chain Analysis Resources

Resources are very important to an organization as they enable organizations to create and implement the strategies that improve its efficiency and effectiveness. The two dominant resources found in PepsiCo are intellectual and reputational assets 1) Intellectual Assets Intellectual assets are sustainable competitive advantage as competitors do not find any ways to copy or produce substitutes products that can compete with your product, or even make your product obsolete (Habeberg, A. & Rieple, A., 2001). PepsiCos trademark is one of the most famous marks in the world. In fact, the trademark of Pepsi enjoys strong reputation beyond the soft drinks for which the company is most famous. Furthermore intellectual asset like Pepsi Cola recipes is among the most important strategic resource for Pepsi. Without this formula what they are now. Thus, it is very clear that PepsiCo intellectual asset is strategic reource which will retain or increase in value. The issue need to be considered here is how can PepsiCo leverage these assets to get into other businesses or market? Actually, PepsiCo has in some degree already leveraged this strategic resource. The original formula of Pepsi Cola for example has been developed and localized with local taste to penetrate into different overseas market. The only setback is to find the right local taste to be infused with Pepsi Cola. Choosing
Trademark of Pepsi

that has improved for many years, Pepsi Cola is not The Cola. And PepsiCo will not become

the right project to develop requires deep market research and PepsiCo has some record of failure products that have not been accepted well in the market (like Pepsi AM). Thus, PepsiCo need to be careful in this mater. 2) Reputational Assets Reputational assets refer to organizations product brands and company image or reputation. Brand names and company reputation for an organization can be exceptionally durable; therefore, it has a very good chance of being sustainable competitive advantage (Habeberg, A. & Rieple, A., 2001). PepsiCo reputation and product brands are one of the most valuable strategic resources for the company. Pepsi reputation is so
Brand name of Pepsi

well known that people will buy PepsiCo products without hesitation. Global customers associate Pepsi brand name with uncompromising quality and reasonable price. New version of Pepsi Cola for example will undoubtedly attract many fans to try it (even though later on they will decide whether they like it or not). The point here is that customers trust Pepsi brand name and do not hesitate to buy its products. The issue here is how can PepsiCo leverage this asset to get into other business or market? Other than food and beverage industry; PepsiCo can use its already branded name, to venture into other industries such as daily attire, for example, cap, t-shirts, shoes and etc. T-shirt with PepsiCo brand for example is sold world wide because of its cool image brought by its promotional objective that aim Generation X. By doing this, PepsiCo can easily penetrate into the industry with the advantages over its competitor, and while doing this, PepsiCo can also increase its mind share among the consumer by making its brand product available widely.

Value Chain
In manufacturing-type organizations, value chain refers to a chain of activities that every manufactured product goes through, from product design stage, to assembling of resources, to making the product, and distributing it to the customers (Habeberg, A. & Rieple, A., 2001).

Supply The inputs for Pepsi-Colas products are primarily sugar and packaging. Sugar could be purchased from many sources on the open market, and if sugar became too expensive, PepsiCola could easily switch to corn syrup. Therefore, suppliers of nutritive sweeteners did not have much bargaining power against Pepsi-Cola. Furthermore, Pepsi-Cola effectively further reduced the supplier of can makers by negotiating on behalf of their bottlers, thereby reducing the number of major contracts available to two. With more than two companies vying for these contracts, Pepsi-Cola was able to negotiate extremely favorable agreements. Operations PepsiCo American Beverages (PAB) manufactures and sells beverage concentrates and fountain syrups under various brands like Pepsi, Mountain Dew, and many more. PAB sells concentrate and finished goods for some of these brands to authorized bottlers who will sell Pepsi brands as finished goods to independent distributors and retailers or sold directly to them. The franchise of bottler systems has become a hurdle to Pepsi Company because bottler franchisees have become very strong on its own, and will not be dictated by PepsiCo on their company operations. Some of the franchisees are unwilling to support certain Pepsi products and at times product their own private label products that are competing directly with Pepsi products In this case, Pepsi actually can try to restructure its organization by merging the bottlers or buying over these bottlers. With one structure, PepsiCo is surely gaining more control.

PepsiCo can actually also expand its operations to unrelated diversification like can manufacturers since PepsiCo has the resources and the know-how technology from the experience in the business for decades. Pepsi can also cooperate with its existing bottler company to work on this project. Pepsi however may consider not using its Pepsi brand name in the unrelated product line while keep maintain its influence from behind. Distributions PepsiCos products are brought to market through direct-store-delivery (DSD); customer; and foodservice and vending distribution networks. Marketing and Sales Pepsi Cola focuses on customer preferences, and thus it is very important for Pepsi Cola to study consumers behavior Appealing to the local cultures is an efficient way to gain sales. For example, in the Chinese market, Pepsi associates itself with the local pop stars and the pop culture. By using the source credibility techniques, it creates the image that Pepsi is following the culture of youth. This part of the value chain can actually be outsourced to a third party company to run it for PepsiCo. Reason why is when outsourcing the marketing and sales to a company that specialized in this segment, they know how to market the product inside-out and more importantly, against the competitor. By doing this, PepsiCo can be more focus on their production of the product. After-Sales Services Pepsi-Colas customers include authorized bottlers and independent distributors; foodservice, distributors and retailers. They normally grant their bottlers exclusive contracts to sell and manufacture certain beverage products bearing their trademarks within a specific geographic area. The after-sales services could be expand, where this is one of the criteria where effects the consumer the most. When consumer actually gets more value when purchasing the product of PepsiCo, it would create more mind share among the consumer, thus increasing the awareness of the branding.

II. EXTERNAL ANALYSIS 1. PEST analysis

Political/ Legal Environment Factor
Political factors are enforced by the government includes government stability, taxation policy, foreign and domestic trade regulations and so on. For legal factor, it includes different types of law such as consumer law, employment law and many more. These factors can affect how a company operates, its costs, and the demand for its products. Some of the political factors that can influence PepsiCo are: 1. Government stability Government stability can affect and disrupt industries and business companies operate in those countries. For example, we can look into an incident that happened to PepsiCo in Burma when the Burma was under the brutal Stale Law and Order Restoration Council regime. The government status was not stable and in order to rebuild the countrys infrastructure, two millions of people have been forced to work for no pay under brutal conditions to attract international investment. This condition was connected with the human right issue to the workers. PepsiCo running out of choice, need to export the colas with hard currency because it cannot use Burmas low currency to buy some imported supplies for its bottling plants. Based on this case, PepsiCo should analyze the stability of a country before invest in it to avoid loses in business and will not harm the human right of the workers that can lead to negative image of the company and lost contracts with other companies.

2.

Environmental law and regulation Besides that, the business is also subjected to the environmental laws and regulations. Growing environmental awareness is heading to increasing legislation. The issue here is on waste management and public concern. Pepsi is trying its best to focus sustainability efforts on water and energy, designing sustainable packaging, promoting recycling through outreach and education. There are four objectives to be met: The first objective is to minimize the quantity of packaging material entering the nations solid waste system. PepsiCo has reduced the amount of aluminum in each Pepsi can 10% and energy to produce it. The soft drink bottles are 40% lighter today due to the changes in package design. Second is minimizing the consumption of scare natural resources. PepsiCo will reduce the energy that used in their facilities and franchise bottling plants. For instance, it will reduce and re-using water in their facilities and franchise bottling plants. Next is maximizing the recycling and reuse of packaging materials. Pepsi bottles and cans are designed to be 100% recyclable. In fact, they're among the most recycled packages made. Recycling could save 95% of the energy used to make this can. The last is to protect human health and the natural environment from adverse effects associated with the disposal of packaging materials.. New and sustainable packaging technologies will be designed to be environmentally responsible throughout their entire lifecycle.

ECONOMIC FACTOR There are few economic factors that can become the market risks.
1. Instable currency exchange rates

PepsiCo as an international company is involved in exposure to the movements that affected by the economic growth in the currency exchange rates, inflation, interest rate, government actions and so on. PepsiCo has to deal with its financing and operating strategies immediately once all these changes occurred. For currency exchange rates, there are some countries that bringing the big impact on

translating PepsiCos international operating profit; like Mexican peso, British pound, and Brazilian real. The macro-economic conditions in those countries have negative impact on the companys operations through years. For example, nowadays the currency exchange rate of Mexican peso has been dropped and the political is not stable because of the influence by the disease H1N1. Since PepsiCo set up the subsidiary company at Mexico, when the profit translates into US dollar, it will decrease. From surface we may see it as a disadvantage to PepsiCo, but in the other way round, it can become an opportunity to the company. While the currency rate is dropping, the price of raw materials in Mexico that needed by the company will decrease. The company can buy in the raw materials in big bulk and store them for the further production. The actions that can be taken to respond for all these conditions would be prudent pricing aimed at sustaining volume, renegotiating terms with supplier and securing local currency supply alternatives. Besides that in the period PepsiCo can hire expert from Mexico and pay them in Peso that cheaper when the US dollar translated into Mexican. However, this way is risky because PepsiCo need to be careful on the ratio of lower cost of material compared to lower profit margin as well. If the ratio is down sided, PepsiCo may consider to close up the plants in the afflicted country.
2. Increasing commodity prices

The cost of raw materials is a vital issue to deal with the production cost. The commodity prices in different areas have a great influence on the cost of raw materials especially in the inflation period. PepsiCo is subject to market risk with respect to commodities because its ability to recover increase costs through higher pricing will be limited by the competitive environment in which its operating. This means that the commodity prices increase will lead to higher cost of production. But PepsiCo cannot simply increase their products price because they may lose their considerable market share if compete with Coca Cola, the market leader in soft drink industry. . 3. Global economic recession Due to the economic recession, people may cut down the consumption level in soft drinks. This will affect the company operations as they need to pay employees, need more

warehouse to store the products that have not been sold out, spend more cost on production and distribution and so on. Since the global economic recession causes consumer purchasing power all over the world gone down and consequently global demand. Sales and profit also will drop. Too bad for Pepsi, they cannot increase it cola price due to tight competition with Coca Cola. Once Pepsi increase it prices, Coca Cola will get all the benefit and increase its market share. Thus the impact chain will only bring negative impact for Pepsi.

SOCIO-CULTURAL ENVIRONMENT FACTOR

According to Haberberg and Rieple (2001), socio-cultural environment can be defined as trends and developments within society as a whole, affecting the demographic structure of the population, lifestyles, attitudes, culture, issues of public and private concern, tastes and demands. The main social factors influencing PepsiCo is: Emerging trend of healthy lifestyles for some consumers PepsiCo is subjected to lifestyle changes because nowadays consumers are more defined. PepsiCo have to pay attention to the social mobility for not losing a possible market. Due to this, PepsiCo lost its market share in year 2000 as consumers seek for alternative healthier beverages. This trend is causing PepsiCo to change their products into the healthier beverages also in order to increase sales in a stagnant market (Datamonitor, 2005). PepsiCos response to this was to introduce cola that contained much less caffeine and sugar than the regular colas. In fact, PepsiCo switches to non-cola products such as bottlewater, ready-to-drink tea and sports drinks. In turn, bottled water gained the market share up to 12.8% in unit sales (Deichert, et al., 2006). However, younger consumers (particularly teens and those in their twenties) have less attention span for products and are more likely to prefer products that seem to be fun and different (Duff, 1999; Deichert, et al., 2006). Moreover, this group of market likes to try new thing and sweetness beverage. They also feel that drinking Pepsi Cola is cool. The teen population in United State itself is 21,038,989 (resource from The National Campaign). It is a nig market for Pepsi Cola and may significant influence its market share in

United State. Therefore, innovation of products is necessary to fulfill this group of target market.

Technological Factor
The main influence for PepsiCo from technological factor is: Influence on distribution management and marketing selling Pepsi-Cola Bottling Company of Northeast Wisconsin (Pepsi NEW) sells its products in a route sales model. Moreover, Pepsi NEW met Logicalis to utilize new technology to improve efficiencies and reduce costs. Logicalis proposed a wireless order entry system that allows Pepsi's route salesmen to enter their sales during route delivery directly into a PDA type device which syncs wirelessly with internal systems and eliminates paperwork and re-keying of information. Besides that, technology help Pepsi Cola to development e-commerce. For example, Pepsi Cola expand their market segment and promote products at international through internet. Technology also help Pepsi to create the creative advertising trough several media tools, it may stimulate sales of products. (Adopted from Deichert (etl), 2006). Pepsi Cola should invest money into the technology development for product innovative, bottle design and inventory management even though the costs for R&D are expensive. According to Jerry Gregoire, vice president, information services, the competitive advantage will go to apply technology getting products into the stores less expensively while increasing the availability of sales information.

2. Porter 5 forces

Michael Porter's famous Five Forces of Competitive Position model provides a simple perspective for assessing and analyzing the competitive strength and position of a corporation or business organization (Haberberg and Rieple, 2001). 1. BARGAINING POWER OF BUYER Buyers affect an industry through their ability to force down prices, bargain for higher quality or more services, and play competitors against each other. The power of buyer can be measured as following: Are there a large number of buyers relative to the number of firms in the business? Yes, there are a large number of buyers relative to the number of firms in the business. The soft drink market share is mostly monopolized by Pepsi-Cola and Coca-Cola only; therefore there is still a lot of room to grow for Pepsi Cola. Among the Pepsi Colas buyers are end-user consumers and business consumers like retailer store such as supermarket, national mass merchandising, fountain sales, vending machine and convenience stores. Hence the numbers of buyers are relatively medium to the number of firms in the business. Does the customer face any significant costs in switching suppliers? No, significant costs in switching suppliers are not much because as mentioned as above, the soft drink market is monopolized by Pepsi-cola and Coca-cola and their both of their price is similar; therefore consumers switching cost are low. Furthermore, if customers were to switch to tea or coffee for example; the switching cost will be even lower. However, business customers with contract-base may have higher switching costs. If they want to chance supplier and the process are to terminate some contract, penalty may be involved. In the end the costs in switching suppliers face by business customer is high. Bargaining Power of Buyer 1 Are there a large number of buyers relative to the number of firms in the business? Yes No

Does the customer face any significant costs in switching suppliers? (business customers) As concluded, the bargaining power of buyer is mediocre because retail outlets have not

been able to exhibit much buyers bargaining power over the industry, although they can do so better than end-user consumers. Traditionally these outlets have been fragmented and have been reliant on the major soft drink brands to increase store traffic. However, there has already been evidence of the increasing buyers power on the part of grocery stores, as they successfully resisted an attempt to increase inputs price of Pepsi Cola. As grocery chains increasingly consolidate and as popularity of discount outlets continue to grow, buyer power on the part of retailers is likely to increase in the future.

2.

BARGAINING POWER OF SUPPLIERS Suppliers can affect an industry through their ability to raise prices or reduce the quality of purchase goods and services. The bargaining power of supplier can be measured as following:

Pepsi Cola can substitute inputs readily. Yes. The inputs for Pepsis products were primarily sugar and packaging. Sugar could be purchased from many sources on the open market. The firms also could easily switch to corn syrup as they did in the early 1980s if the sugar becomes too expensive in the market. PepsiCo do not need to worry much about sugar because they still can change the sugar to corn syrup. Therefore, the suppliers of nutritive sweeteners do not have much bargaining power against Pepsi. Can supplier also do not have much power over Pepsi because the market are now crowded with aluminum suppliers.

Pepsi-Colas business is important to the suppliers. Yes. Suppliers had very little power because several can companies are competing for the contracts with bottlers and an abundant supply of inexpensive aluminum in the early 1990s.

By reducing the number of major contracts available to cans and bottlers together, PepsiCo negotiated on behalf of their bottlers to reduce the can suppliers; thus, reducing supplier power even more. With lesser supplier, PepsiCo business will be too important for the current supplier to lose. With its gigantic size and massive order, PepsiCo business is a very lucrative one. The loss of PepsiCo business can be fatal for them (just like what happen to Marks&Spencer and its British clothes supplier). This show how powerless those suppliers compared to Pepsi.

Bargaining Power of Suppliers 1 2 Pepsi Cola can substitute inputs readily. Pepsi Colas business is important to the suppliers.

Yes

No

As concluded, the bargaining power of suppliers are low, suppliers to the soft drink industry are, for the most part, providing commodity products only and thus have very little power over the industry. Sugar, bottles and cans are standardized goods which can be obtained from many sources and available substitutes. Pepsi Cola with its massive order size also is one of the most lucrative businesses in the world to be obtained for suppliers.

3.

THREAT OF NEW ENTRANTS New entrants to an industry typically bring to it new capacity, a desire to gain market share, and threats to an established corporation. The threat of entry depends on the presence of entry barriers and the reaction that can be expected from existing competitors. An entry barrier is an obstruction that makes it difficult for a company to enter an industry.
The threat of new entrants can be measured as following:

Is a lot of capital needed to enter soft drink industry?

Yes. The capital needed is tremendously huge. Even though the production technologies required for manufacturing soft drinks is widely available for the potential entrants; the question here is whether the new entrants have the fund and resources to buy it. This factor alone already poses a barrier for new entrants to enter the market.

Are there any established brand identities in soft drink industry? Yes, it is Coca Cola. Coca-cola is an established brand identity in soft drink industry. Coca Cola has a strong brand identity in the global market and is one of most respected brands in the world. In 2007, the brand value of the company was 44.13 billion US dollars, preceded by only Microsoft, General Electric (GE) and Google. Coca Cola also ranked 4 th in the list of top 10 powerful brands in the world in the particular year. In addition, Coca Cola has been generating 70% of its sales from outside of US. Thus, this factor also makes the barrier to entry for new entrant is formidably high.

Threat of New Entrants 1 2 Is a lot of capital needed to enter soft drink industry?

Yes

No

Are there any established brand identities in soft drink industry? As conclusion, the threat of new entrants for Pepsi Cola is low. This is due to high barrier to entry. Part of it is caused by bottling operations that require

huge fixed assets which are specific not only to the process of bottling but also to a specific type of packaging. In another word, the high operation cost represent high barrier of entry. Exit costs are thus also high. Perhaps the most significant barrier to entry, however, is the strong brand identity associated with the best-selling soft drinks. Placing another cola on the market is not an attractive value proposition.

4. THREAT OF SUBSTITUTES

Substitute products are those products that appear to be different but can satisfy the same need as another product. The threat of substitutes can be measured as following: The Pepsi Colas consumers will incur costs in switching to a substitute. No, Pepsi-Colas consumers will not incur costs in switching to a substitute. It is very cheap for consumers to switch to other substitutes like tea or coffee; making the threat of substitute product fairly high. Pepsi Cola customer has no real substitute. Pepsi Cola does not really have real substitute except for Coca Cola of course. Most of the other substitute products of Pepsi Cola are bottled water, sports drinks, coffee, and tea. Bottled water and sports drinks however are increasingly popular with the trend to be a more health conscious consumer. Threat of Substitute 2 3 The Pepsi-Colas consumers will incur costs in switching to a substitute. Pepsi-Cola customer has no real substitute. Yes No

As concluded, the threat of substitutes although is mediocre, it still poses a big threat to the overall profitability of the industry, and that is because in recent times a health trend has taken over all respects of life, worldwide. Therefore, it would show a heavy reduction in the use of sugar yard carbonated cola based beverages, and instead rapid consumers to choose for healthier drinks such as fruit juices, and energy drinks.

5.

DETERMINANTS OF RIVALRY AMONG EXISTING COMPETITION In most industries, corporations are mutually dependent. A competitive move by one firm can be expected to have a noticeable effect on its competitors and thus may cause retaliation or counter efforts. The rivalry among existing competition can be measured as following: There are significant product differences and brand identities between the competitors. Yes there are significant product differences and brand identities between the competitors. Taste will be an important part of the preference for a particular soft drink; thus although there is no monetary switching cost, there may be a loss of enjoyment associated with a less-preferred brand. Because of this, consumers have historically been brand-loyal and not based purchase decisions on price. The products are similar but not homogeneous and buyers are fairly brand loyal. Pepsi-Cola competitors are all of approximately the same size as Pepsi-Cola? Not all the competitors are approximately the same size as Pepsi-Cola. However, the major competitor of Pepsi Cola is Coca-cola. According to Beverage Digests 2008 report, Pepsi-cola U.S market share is 30.8 percent, while the Coca-Cola is 42.7 percent. Coca-cola outsells Pepsi in most parts of the U.S. From operation work, and markets; Coca Cola is almost the same size if not exceeding Pepsi Colas. The rivalry among existing competition 1 identities between the competitors. 2 Pepsi Cola competitors are all of approximately the same size as Pepsi Cola? Yes No

There are significant product differences and brand

As concluded, the rivalry of Pepsi-Cola is high. In U.S, the market is dominated by the two international giants, Pepsi and Coke, with market shares respectively of 30.8%, and 42.7%, leaving little room for others to grow; heating up the competition. Even though competition is getting fiercer and Cola war happen between these two companies, they still can avoid engaged in price wars (price wars normally is the indicator of tight competition; just like what happen in PC industry now). Instead, they compete primarily on advertising, promotion and new products development rather than price.

Overall Industry Rating Overall Industry Rating 1 BARGAINING POWER OF BUYER 2 BARGAINING POWER OF SUPPLIERS 3 THREAT OF NEW ENTRANTS 4 THREAT OF SUBSTITUTES High Moderate Low Implication Bargaining power of buyers is mediocre Bargaining power of suppliers is low Threat of new entrants is very low Threat of substitutes is 5 DETERMINANTS OF RIVALRY AMONG EXISTING COMPETITION mediocre Rivalry is mediocre to high

A thorough investigation of the five-force template shows us Pepsi Cola is fairly strong in soft drink industry.

SWOT analysis
SWOT factor Points
1. Strong product innovation

Reasons
PepsiCo has reliable R&D and able to come out with many product lines to satisfy various market needs. Deep marketing research needed. PepsiCo has history of strong financial background to make possible all the operational and marketing activities PepsiCo utilize design creativity to appeal to youngsters. Creative design yet still reemphasizing Pepsi Cola strong brand identity PepsiCos trademark and brand name is one of the most famous marks in the world. Pepsi Cola formula is the key success and sustainable competitive advantage of PepsiCo Global customers associate Pepsi brand name with uncompromising quality and reasonable price. PepsiCo advertisement always lagging behind Coca Cola. It is not creative enough. PepsiCo always stick to celebrity endorsement method which may have been outdated and do not appeal to youngsters (target market) Franchise systems have become a hurdle to PepsiCo because too many bottler franchises have become very strong on its own, and will not be dictated by PepsiCo on the operations. Some of the franchises are unwilling to support certain Pepsi products and at times product their own private label products that are competing directly with Pepsi products.

2. Strong financial

3. Creative packaging

Strength

innovation

4. Strong intellectual and reputational assets

1.

The absence of innovation in advertising

Weaknesses
2. Failing franchise (bottling) systems operations

3.

Weak strategy in overseas market

PepsiCo do not manage its overseas operation well. They invest a lot in overseas but weak in its strategy to manage (especially promotional strategy) thus not able to maintain its market share. Most of the time Pepsi lag behind Coca Cola. Instable currency rate in overseas market give opportunity to PepsiCo to buy cheaper raw material and pay lower salary when they use US dollar to purchase. Since US dollar normally is in the top of the currency rate, other countrys instable currency usually resulted on their lower currency compared to US dollar. The ratio on the lower cost of production and profit margin however need to be monitor. Creation of diverse product line opens opportunity to enter new market segment. Ex: diet cola for consumers who do not want the calories (diet segment). Increased commodity price means increased cost of production for Pepsi Cola. It is a bigger threat because Pepsi cannot increase the price of its cola due to the competition with Coca Cola When global recession is happening all prices will increase. Consumers purchasing power will drop leading to the drop in demand, sales and profit subsequently. From the Porter 5 forces, the rivalry is intense with Coca Cola being the market leader. This rivalry escalated and lead to Cola war which so far, won by Coca Cola.

1. Instable currency rate

Opportunities

2. New market segment opening up

1. Increased commodity price

Threats
2. Economic recession

3. Rivalry with Coca Cola becoming more intense

Strategic issues identified from SWOT:

1. Pepsi Cola has strong product innovation (Strength) that come from its excellent R&D

and financed by strong financial background (Strength) which may help them to venture into new market segment (Opportunities).
2. Pepsi Cola has creative packaging innovation (Strength) that helps in promotional

activity and establishing their brand name even more.

3. Pepsi Cola also has well known intellectual asset (Strength) and strong reputational asset

(Strength) which both has made Pepsi brand a world-famous brand and they actually are the core of Pepsis Sustainable Competitive Advantage.
4. The failing of the separate-bottler system (Weaknesses). The separation make bottlers

have some control over the distribution channel which made them stronger now and they retaliate to Pepsi Cola decisions.
5. Pepsi Cola has been lacking of innovation in advertising (Weakness) which make them

keep losing to Coca Cola when the competition is getting intense (Threat)
6. Pepsi has weak strategy in overseas market (Weakness) especially in promotional

strategy.
7. The lower currency rate opens up opportunity to Pepsi Cola to buy cheaper material and

pay lower salary when they convert US dollar to other currency (Opportunity).
8. Increased commodity prices (Threat) which partly caused by economic recession

(Threat) have increase the cost of production and drop in demand for Pepsi Cola and this putting them in a bad situation. Sales and profit drop subsequently.

CHAPTER

3:

STRATEGIC

ISSUES,

OPTIONS

AND

RECOMMENDATIONS
From all the issues above, there are three main issues need to be addressed because they are survival issues. They are:

Issue 1 : The failing of the separate-bottler system (Weaknesses). The separation makes bottlers
have some control over the distribution channel which made them stronger now and they retaliate to Pepsi Cola. Pepsi sell their soda through franchisees system to gain market share. When this network grew big, Pepsi group them into sizable chains and the network was administered by a Metro unit that was renamed Pepsi-Cola Bottling Group (PBC) in 1997 (adapted from fundinguniverse.com, 2001) The system was in fact one of Pepsi strength and it was the backbone of success. PBG first became an independent company in 1999 and it accounted 55 percent of Pepsi Cola beverages sold in the United States and 32 percent worldwide (fundinguniverse.com, 2001) Everything seemed went well until the PBG network become very strong and it retaliate to some Pepsi Co decision regarding prices and unsupportive towards some of PepsiCo products. The reason was stem from the excessive authority granted to PBG. PBG had the exclusive right to manufacture, package, sell and distribute the cola beverages bearing the Pepsi Cola and Pepsi trademarks as well as its fountain syrup. In another word, PBG is the one who mix the concentrated cola syrup with water and carbon dioxide, put the cola inside the bottle and distribute it. PepsiCo role in this system is just to sell the concentrated cola syrup and buy other raw material from suppliers. PBG also reasoned that the profit margin they gain is too slim in most deals. Thus, conflict grew and it is escalated until the scale they suing each other. Undoubtedly, with these much of authority granted to PBG; they become very strong on its own and would not be controlled by PepsiCo. Furthermore, the spin off in 1999 makes PBG position even become stronger. Even though, PepsiCo has 33% of PBGs shares (JustDrinks.com, 2009); it was not enough to control them. Obviously something needs to be done on this big internal issue because it is tearing PepsiCo apart. It is a matter of SURVIVAL.

Issue 2: Pepsi Cola has been lacking of innovation in advertising (Weakness) which make them
keep losing to Coca Cola when the rivalry is getting intense (Threat)

As explained before, Pepsi Cola strategy in advertising has always been celebrity endorsement. It is the most favored and tradition strategy used by Pepsi. Unfortunately this method is no longer effective. With the youths demand authenticity from brand, they no longer attracted to what celebrity use (and blindly follow them). Rather, the youths now is carefully select and choose the brand from its features and benefits. Furthermore, this strategy also requires a lot of capital to contract the celebrity as well as to broadcast the advertisement through TV as the main media. Another problem with this is TV strength has been eradicated since the emergence of internet. There is strong evidence that youths nowadays spend most time to surf internet rather than watching TV. The celebritys bad reputation also may spilled over to the products endorse, for example Edison Chan who embroiled in sex scandal may bring bad image to the products he endorsed. In short, celebrity method is no longer effective and it requires huge capital. PepsiCo somehow do not notice this problem and it takes effect on its market share. There is strong trend that Pepsi Cola popularity has been down in youths market as they more inclined to purchase Coca Cola because of its attractive promotions. Coca Cola use the mixture of sponsorship (by sponsoring American Idol, a popular TV singing competition among youths, especially in US; and Olympic Beijing 2008); and point-of-sale tool for vendors (vendors in Middle East get lots of benefit like free fridge and real time inventory request (AMEinfo, 2007). All in all, Pepsi outdated advertising method and lacking of innovation has causes it lose to Coca Cola a considerable market share. When intense rivalry with Coca Cola and Cola War are going on, Pepsi certainly cannot afford losing this matter. Hence, it is the matter of SURVIVAL.

Issue 3: Increased commodity prices (Threat) which partly caused by economic recession
(Threat) have increase the cost of production and drop in demand for Pepsi Cola and this putting them in a bad situation. The global economic is greatly affecting Pepsi and many giant companies. The result can be seen from Pepsi financial analysis in previous section that shows 3% decline in total operating profit in 2008; and this may be just the beginning. The decline reported caused by increasing commodity prices and drop in consumer purchasing power. When companies retrench workers in mass scale and market shrinking, people will try to save as much as possible thus cutting their consumption level. This is bad for Pepsi since now people may switch to drink water rather than soda. When the world demand drops; sales and profit will also drop insidiously. Worse for Pepsi it also followed by recession that plaguing many countries. Many Pepsi suppliers as well as its bottling subsidiaries in countries that hit hard by this recession like England and Mexico. With many local companies gone bankrupt, the countries economic totally not stable. Thus, posing a big threat for Pepsi. Pepsi American way of building relationship with supplier also does not help this condition. With its short-term and based-on-contract relationship, many suppliers cannot stand the pressure and not able to help Pepsi with this issue. Worse for Pepsi, they cannot increase its cola prices due to competition with Coca Cola. Thus Pepsi is sandwiched between these bad conditions. If Pepsi cannot address this issue effectively, Pepsi may need to close up some plants overseas and reducing its operation scale. B doing that, Pepsi may as well admit defeat to Coca Cola. Hence, it is the matter of SURVIVAL.

OPTIONS
Issue 1 : The failing of the separate-bottler system Options 1 : Buy over/ totally merge with the rest of the bottlers Based on the issue, the problem of the separation of bottlers has raised and threatens the companys operations and sales. At first, PepsiCo separated itself with its bottlers because the company thought that it would help the company focus on soft drink growth while kept the bottling assets off its balance sheet. But this condition tends to be changed significantly. The first option can be taken is buy over or totally merge with the separated bottlers. For starting, PepsiCo has bought over the dominant bottlers: the Pepsi Bottling Group and Pepsi Americas that have great influences on PepsiCos manufacturing and distribution to concentrate on its bottling business. Slowly, PepsiCo can further merge with the rest bottlers in different strategic areas to conquer the bottler industry. First, the company can offer large amount of money with intention to buy over the other bottlers. Besides that, PepsiCo can buy over their share with attractive price per share to own the bottlers. By owning more, it bottlers would give Pepsi the synergy and the ability to control over how it distributes its beverages, allowing it to revamp production and distribution all around the world and squeeze out costs. Option 2: Pepsi can try to gain more control by using exclusive contract to control them. PepsiCo could actually use exclusive contract to deal with those bottlers. The contract will be restricted with rules and regulations to defend the companys benefits and avoid those bottlers to take advantage over PepsiCo. The contract agreement may contain that all the products need to bear with PepsiCo trademark in manufacture, packaging and distribution. They are not allowed to produce the products in their own decision, setting up other product that similar with PepsiCos products and simply change for the products price. Everything will be under control by PepsiCo in terms of product quality, price, distribution channels, and so on. Failure to carry out the approved plan in the agreement could result in a termination of the contract. If any bottlers are breaking the rules in the contract may go against law.

Issue 2: Pepsi Cola has been lacking of innovation in advertising Option 1: Pepsi can use more frequently internet technology. For the lacking of innovation problem, Pepsi Cola could use internet technology. Moreover, to appeal to the Generation X, Pepsi can open a blog site featuring news, fashion, and music to have youngsters express their creativity and post funny video for Pepsi adv. Pepsi also can use the current trend of Viral Marketing that use interesting video or email and send it to your personal contacts who will forward it to their own contacts, which will forward it to the next contacts; it will multiply just like a virus. Consumers even can create a funny video with friend photo incorporated in it along with other personalized data. This trend is adopted well by Generation X whom always eager to take up the latest trends and hungry for technology. Viral marketing also are in line with the booming of MySpace, blogging space and YouTube that help Pepsi Cola to distribute the video or email even more. Thus it may be very effective to reach the heart of fun-loving and dynamic young people. This way, Pepsi also would not lose out to Coca Cola who always been using the mixture of promotional tools to gain market share. Option 2: Pepsi can use its strength, the packaging innovation as new marketing method Pepsi can use its strength, packaging innovation as one an effective way to markets. Pepsi can come out with more limited edition bottles to attract collectors and for youngsters. Nowadays, many consumers like to collect special products. If the products are limited or special enough, consumers who are less price-sensitive will be willing to purchase it. Beside that, it also enforces Pepsi strong identity. With unique bottle shape and not only design; consumers will easily identify Pepsi bottle everywhere. Ex: Create bottles with 4 seasons theme, water drop shape, etc On the other hand, Pepsi Cola can come out with the difference size of the bottle according to their target market. Example, for kid, Pepsi Cola can produce mini can of 100ml especially for them since kids usually cannot finish the normal can volume. Another reason why Pepsi should utilize more packaging innovation is because CocaCola has been producing different cans and bottles. The design is so attractive that induce people to collect them. When people collect those cans, they will remember only Coca-Cola every time

they want to buy a soda. Thus it is creating a niche market share that easily builds into brand loyal consumers. Issue 3: Increased commodity prices and economic recession Option 1: Build guan xi relationship with suppliers Guan xi literally means "relationships", stands for any type of relationship. However, it is also understood as the network of relationships among various parties that cooperate together and support one another. By getting the right "guan xi", Pepsi Cola can minimize the risks, frustrations, and disappointments when doing business with the suppliers. PepsiCo can try to use more guan xi relationship with suppliers. Among the benefits of long term relationship are willing to help each other and even giving better quality raw material with the lower cost. It may increasing product and services quality and also reduces total cost of production. Besides that, it can be an opportunity to stimulate demand of Pepsi Cola because of high quality product also reasonable commodity price. It may help Pepsi to survive in economy recession by asking suppliers for temporary price drops. In order to build a good relationship with suppliers, PepsiCo should strive for a relationship of mutual trust and respect. Firstly, PepsiCo must pay the bills on time, which can go a long way to fostering good will and can help PepsiCo out when they need their supplier to go the extra mile for them. Besides that, PepsiCo should avoid quibbling over every bill. It will improve the relationship between PepsiCo and its suppliers. Furthermore, PepsiCo can send a person to social and communicate with suppliers and given them some benefit or gift. It can help PepsiCo to know well the suppliers needs

Option 2: Pepsi can use more in pack / on pack premiums to stimulate demand. The reason for doing it is to create more attention and attraction towards the Pepsis product, where it would generate more demand from the consumers. In the current global economic recession which impacts economies of all countries, any discount in products or free product during purchasing will attracts consumer because consumers sees the values of Pepsis products, where it lessen the burden of the consumer as they can get more of Pepsis product

with the same amount of money. Any benefits for the consumers will be the deciding factor because it is nature of humans to look for benefits they will get in whatever decision they have to made, same goes to when purchasing something for usages. It would be Pepsis strategy as well by bringing more values to the consumer, by doing this; Pepsi can actually create more mindshare in the society when having some attractive promotions, and over the time to get more market share along the way of gaining popularity as the main soft drink in the market. Because of the current global economic recession, Pepsi try to use more in pack/on pack premiums to stimulate its demand. For example, if Pepsis and another competitor products displayed in the supermarket, with only Pepsi having the promotion of free 1 can of soft drink when the consumer purchased 5 cans, consumer will definitely decides to choose Pepsi compare to another competitor brand because consumer pay less to get 6 cans of soft drinks compare to the other.

RACES OPTIONS EVALUATION Pepsis strategy issue 1: The failing of the separate-bottler system
Resources Medium-low: PepsiCo may only have enough capital to buy over or merge few dominant bottlers. To really buy or merge with all the bottlers requires tremendous capital; the bottlers scale may be too wide for PepsiCo to do that. Option 1: Buy over/totally merge with bottlers Acceptability Consistency Effectiveness Sustainability Low: High: High: High: This decision Consistent with This concept is Because the can be well- the existing effective in structure may accepted by the strategy. addressing the give competitive shareholders of The option is issue. Once the advantage. The PepsiCo because matching bottlers merged bottlers will be it can cut down PepsiCo value with PepsiCo, controlled by the the costs of chain since they there will be no company and production and were in one problem with the acting as one concentrate on structure before. bottlers entity. bottling anymore. All business. decisions are However the made by bottlers surely PepsiCo, there will retaliate to will be no this approach problem with the and try to bottlers boycott the anymore. All attempt. PepsiCo decisions are may need to made by resort to hostile PepsiCo top takeover. management. Evaluation Dubious. The option will bring many advantages to the company in long run. But it needs huge capital and the ability to deal with all the bottlers to come up with a common commitment. A lot of problem may come along the way.

4/10

31/50 2/10 8/10 9/10 8/10

Resources High: PepsiCo as the main partner of the bottlers has the capability and the experts to take care the details of the exclusive contract. PepsiCo financial is strong enough to manage the process.

Option 2: Use exclusive contract to control bottlers Acceptability Consistency Effectiveness Sustainability Low: High: High: High: The level of Consistent the It is effective The strategy acceptability by existing strategy. with tighter may work well the bottlers will There are no control; the in the future. be low due to much changes bottler problem Problem only different with the can be happen in the opinions. The organizational overcome. beginning bottlers surely structure. Just process to retaliate to the relationship implement the PepsiCo attempt becomes stricter. exclusive to control them. contract.

Evaluation Accepted This option is most favorable for PepsiCo; but not for the bottlers. Negotiation and cooperation needs to be carefully assessed to come out with the contact.

8/10

3/10

7/10

8/10

7/10

33/50

Pepsis strategy issue 2: Pepsi Cola has been lacking of innovation in advertising
Resources High: PepsiCo has big financial background to do the R&D on IT. Option 1: Pepsi can use more internet advertising Acceptability Consistency Effectiveness Sustainability Medium: Medium: High: Medium: Stakeholder will Conflicts with Internet is a Internet may not agree because the current global network be popular celebrity strategy of that has high method in long endorsement is celebrity cost efficiency run since costly and not endorsement. and creates mass customers trend effective for the However, this brand awareness. is keep on sales volume. method suits the It is a very changing one. expectation of effective Therefore, Generation X, method, advertising Pepsi target matching with strategy will also market. target market changing to preference. follow their preferences. Evaluation Worth considered. This strategy can reduce overall production cost and also increase the brand name through internet promotion. But the sustainability may be questioned.

8/10

6/10

Resources High: Would require

5/10 9/10 5/10 Option 2: Utilize packaging innovation Acceptability Consistency Effectiveness Sustainability High: High: Medium-high: High: The shareholders Consistent with Quite effective It is very

33/50

Evaluation Accepted. This option is

deeper equipment, skill and knowledge. However the company has the resources already since they already started it.

will certainly accept this option. It is a form of maximizing the companys strength. No conflict with at all.

the current strategy on packaging innovation. Pepsi just leverage more this strength.

method. It is a strength in promotional activity and establishing the brand name

sustainable. It can be a competitive advantage in the future. Have potential to expand even more.

strongly recommended. This is another innovative strategy that matching PepsiCo strategy to increase sales.

8/10

9/10

9/10

7/10

8/10

41/50

Pepsis strategy issue 3: Increased commodity prices and economic recession

Resources High: PepsiCo own the talented people to builds the relationship. It also backed up with Pepsi intellectual and reputational assets. Option 1: Use more guan xi relationship with suppliers Acceptability Consistency Effectiveness Sustainability High: Medium: High: High: There will be no Suppliers with Suppliers will This option is opposition from love it. Suppliers cooperate with sustainable. stakeholders have been vying this strategy Because this since the to secure Pepsi because it will option seek to purpose of this long-term build a long- build long-term option is to build business. term business relationship. good However, the relationship that relationship with suppliers will fulfills both suppliers and get not like the party needs. It is low commodity intense a win-win prices. competition situation among them during the supplier selection stage. Evaluation Valuable for long-term This option brings many good benefits for company and it is very sustainable.

7/10 8/10 8/10

9/10

9/10 41/50

Resources

Option 2: Use more in pack/on pack premiums to stimulate demand Acceptability Consistency Effectiveness Sustainability

Evaluation

High: PepsiCo have the resources. PepsiCo produces millions of products everyday, there are always extra stock which can be clear off by bundling with promotion to increase the sales rate.

High: Clearing off old stocks with promotions is great idea; businesses often use this option to clear of the old stock and increase sales in short-term.

High: No conflict with existing strategy. Shareholders especially consumers would welcome this strategy as they will get benefits from it as well. .

High: The response expected from the public will definitely direct and good since consumers will reap all the benefits.

Low: It cannot be sustained. Intention and strategy is good but cannot be done in a long run as the company would eventually suffer from low profit margin if keep giving away free items all the time.

Valuable for short-term This option would definitely bring benefits and value towards PepsiCo. The only limitation is it only can be performed in a short period of time.

9/10

9/10

9/10

9/10

2/10

43/50

CHAPTER IV: CONCLUSION

In short, from the internal and external analysis performed towards Pepsi, there are 3 strategic issues and options for each issue that can be concluded. The strategic issues are: the failing of the separate-bottler system; lacking of innovation in advertising; and increased commodity prices and economic recession. While the proposed solutions are: use exclusive contracts to control bottler; utilize packaging innovation; and build guan xi relationship with supplier (long-term) as well as use more in pack/on pack premiums to stimulate demand (shortterm). There will be no perfect solution for the issues but the proposed options at least will address each issue to some degree. PepsiCo will try their best to use their internal resources to overcome the external environment challenges.

As Indra Nooyi, the CEO of PepsiCo says,

While we cant control the macro environment situation, we can enhance PepsiCos operating agility to respond to the changing environment

(EMMNewsExplorer, 2008)