Questions

1. What is PepsiCo corporate strategy? Briefly identify the business strategies that PepsiCos is using in each of its customer business segments in 2008. 2. What does a 9-cell industry attractiveness / business strength matrix displaying PepsiCos business unit look like? 3. What is your overall analysis of PepsiCos business portfolio in 2008? Does the portfolio provide the companys shareholders with an opportunity for above-average market returns?

1.0

PepsiCos Strategies

PepsiCo had planned and executed many strategies throughout the years which brought them positioned at where they are now. But mainly, PepsiCos strategy is based on these four approaches: Product Innovation Close Relationship with Distribution Allies International Expansion Strategic Acquisition Based on above main strategies, later discussion will go into further details on each strategy. Further elaboration will be discussed on these topics: Strategic Acquisition Organized the company into 4 business division (new organizational structure) Developing understanding of consumer taste preferences International Expansion Product reformulations Power of One retailer alliance strategy

1.1

Strategic Acquisition

PepsiCo started this approach with a merger with a snack company in 1965, Frito-Lay. Later in 1977, 1978 and 1986 PepsiCo had move on by acquisition of fast food restaurant, Pizza Hut, Taco Bell and Kentucky Fried Chicken. Former PepsiCos CEO Wayne Collaway described PepsiCo as a balanced three-legged stool consisting of beverage, snacks and fast food companies. Between 1980s and 1990s, PepsiCo had been acquired quite number of companies in their quest to be a leader in the industry, with the acquisition of Mug Root Beer, 7Up International, Smartfood ready-to-eat popcorn, Walkers Chips, Smiths Chips, Gamesa and Sun-Chips. It follows with Hot-nNow in 1990 and California Pizza Kitchen in 1992. During 1993, PepsiCo acquired another three companies, namely East Side Marios, DAngelo Sandwich Shops and Chevys Mexican Restaurant. In 1997, PepsiCos CEO at the time decided to spin-off their fast food business and only focuses on food and beverage division, and begins their restructuring initiative. They started to acquire Cracker Jack, Tropicana, Smiths Snackfood Company, SoBe, Tasali Snack Foods and Quaker Oats Company. The spin-off decision and new business focus had succeeded and resulted with increase by 7% in revenue and 12% in net income. The acquisition of Quaker Oats in 2001 which cost $13.9 billion had recorded as the largest acquisition that PepsiCo had accomplished. In fact, it had exceed total acquisition cost made in 2005 ($1.1 billion), 2006 ($522 million) and 2007 ($1.3 billion). Acquisition made by PepsiCo is not just a normal acquisition but a strategic one whereby they do not simply purchase any company they want, but a stable brand company with high potential of profitability which later achieved number 1 or 2 positions in their respective food and beverage categories. They do face stiff competition from Coca Cola, Frances DANONE and Swisss Nestle when they are trying to acquire Quaker which had a most profitable brand that is Gatorade, and they succeed. The acquisition had diversified PepsiCo from a carbonated beverage producer into salty and sweet snacks, soft drinks, orange juice, bottled water, ready-to drink teas & coffees, purified & functional waters, isotonic beverages, hot & ready-to-eat breakfast cereals, grain-based products, and breakfast condiments company.

1.2

New Organizational Structure

PepsiCo started with four business division which each division focuses on different types of products which are: Frito-Lay North America - snacks and chips business PepsiCo Beverage North America - beverages business Quaker Foods North America - cereals, rice and pasta business PepsiCo International - snacks and beverages business outside North America

Unfortunately, not all division had succeeded especially PepsiCo International. Most of the business came from North Americas divisions. Therefore, in 2008, PepsiCo reorganized its structure into three business division to address the low relative profitability of its international operations and to produce faster growth in international markets. The new division structure: PepsiCo Americas Beverages PepsiCo Americas Foods PepsiCo International Six sub-division will work together under the flag of these three new divisions; Frito-Lay North America, Quaker Foods North America, Latin American Foods, PepsiCo Americas Beverages, United Kingdom & Europe, Middle East, Africa & Asia. This move had achieved economies of scale by combining related activities among the division and better coordination. However, recently PepsiCo had reorganized back their business division into four divisions (PepsiCo Family, 2010) which are: PepsiCo Americas Beverages PepsiCo Americas Foods PepsiCo Europe PepsiCo Asia, Middle East & Africa

1.3

Developing understanding of consumer taste preferences

PepsiCo researched and modified the taste of their products in their attempt to develop understanding of the consumers preferences. They realized that consumer preferences differ not just by brand loyalty or interest, but also geographical features and health conscious. This is when PepsiCo managed to make some modest modification on their product in order to capture this segment such as by selling their classic salty taste snacks in Latin America, spiced snacks in Asian country like Thailand and White Mushroom chips in Russia. The growing concerns on health also brought the company into expanding its product line by offering bottled water (non carbonated) namely Aquafina and Propel. As the bottled water market is increasing and improving, PepsiCo once again make a step in expanding its healthy beverages offerings from unflavoured Aquafina to worldwide hits nutrient-rich Gatorade.

1.4

Product Reformulations

A new trend emerge as more and more people nowadays are starting to consider on their wellness and health by controlling their diet in term of nutritional values and volumes intake. This had brought PepsiCo into reformulation strategy where they modified their product to be in-line with the need of this new potential segment.

The new PepsiCos product will addressed the consumers health and wellness concerns, as they tried to make snack food and beverages which previously positioned as junk food to be less unhealthy. They are trying to reposition the snack food and beverage segments by developing good-for-you and better-for-you products. These two new categories do not entirely change the product but simply adding more values into it. PepsiCo is capturing growth opportunities from intersection of business and public interest. Some changes made are by eliminating trans fats from its snack by changing the oil used in producing them with sunflower oil but still retained its original famous taste. PepsiCo also introduced two new mini packaging as to position their product in a better proportion and volume conscious.

1.5

International Expansion

PepsiCo management believed international market offered the companys greatest opportunity for growth. This was supported by the per capita consumption in other countries are nearly as high as in the United States especially in snacks market. It is expected that China and Brazil would be the two largest international market for snacks by 2010, followed by United Kingdom, Mexico and Russia. The same goes to the beverages industry as PepsiCo also tried to penetrate international market. Since the acquisitions, mergers and partnerships, PepsiCo had increase the numbers of its globally famous product line such as ready-to-drink Lipton tea and coffee, Tropicana, Aquafina and Gatorade. As in 2007, Gatorade was available in 42 international markets, meanwhile Tropicana and Lipton in 27 international markets. It is projected by 2012, PepsiCo to launch Gatorade in 15 additional markets, Tropicana in 20 new markets and Lipton in 5 new international markets. One of the achievement in this approach is it has made Tropicana to be the number one juice brand in Europe. Aquafina also being expanded in Eastern Europe, Middle East and Asia, whereby in 2006 it was the number one bottled water in Russia and Vietnam, and the number two brand in Kuwait.

1.6

Power of One retailer alliance strategy

This strategy had been in effect for 10 years and continually boosting PepsiCos sales volume. It also helps in identifying new product formulations desired by consumers. Under this retailer alliance strategy, PepsiCos marketers and retailers collaborated to devise tactics in increasing consumers tendency to purchase more than one PepsiCos products in one visit. These two parties collaborate not just in stores but also having a special offsite summits to discuss current issues and planning for future strategies. The summit had contributed in identifying supply chain inefficiencies and also in developing new shipping procedures that help to reduced stock-outs in retailers stores. An example for that is where used the strength of Frito-Lays brand to gain shelf space for Pepsi in the store. Apart from that, this alliance strategy also is a way for PepsiCo to obtain new information on consumers preferences form the retailer as they may use them in improving or reformulate their new products.

2.0

PepsiCos 9-cell Industry Attractiveness / Business Strength Matrix

FRITO-LAY High in competitive strength Traditional product lines Upscale restaurant-influenced flavour Healthier snacking options QUAKER Least competitive business division Traditional product lines Consumer loyalty Continuous product innovation Better-for-you snacking options PEPSI BEVERAGE Competitive business division Lower-calorie, non diet, beverage options Leading edge isotonic sports drink selection Traditional soft drink lines Non-carbonated beverage options Medium attractiveness especially in International market

3.0

Overall Analysis

The portfolio provides shareholders opportunity for above-average market return as can be referred from PepsiCos arsenal in exhibit 6. Their strategies in product innovation, close relationship with distribution allies, international expansion and strategic acquisition done had produced positive results as increases in stock price, revenues and net income. Thanks to the strategies applied, as recorded in PepsiCos 2010 annual report, net revenue grew 33%, core earnings per share (EPS) grew 12% and core division operating profit rose 23% on a constant currency basis. Management operating cash flow excluding certain items reached $6.9 billion, up by 23%, whereby Management Operating Cash Flow had increased from 4.8 billion in 2008 to $6.8 billion in 2010. $8 billion was returned to the shareholders through share repurchases and dividends and annual dividend was raised by 7%. PepsiCos continues to operate from a position of balance and strength, and currently is largest food and beverage in North America and the second-largest food and beverage business in the world. PepsiCo is globally increasing where 45% of its revenue comes from outside the United States. They operate in more than 100,000 routes, serve 10 million outlets and generate more than $300 million in retail sales every day (PepsiCo, 2010). Overall, PepsiCos portfolio presents a good strategic fit where it contributes: Skills transfer: By its strategic acquisition, PepsiCo able to transfer all the knowledge and skills from various companies towards their product research and development, technology, and system development. Cost savings: Acquisition and Power-of-One strategy allow PepsiCo to be strategic in its Supply Chain Management, operations, distribution, and service which contributes in cost savings. Quaker Oats integration had contributed in $160 million in cost saving by sharing product ingredients and packaging materials. Joint distribution of Quaker snacks and FritoLays product also recorded $40 million in cost saving. Brand sharing: Under the Power-of-One alliance strategy, PepsiCo managed to gain shelf space for Pepsi products using the strength of Fritos brand and also some reformulation strategies based on information from the retailers. Apart from cast saving it also had improves PepsiCos product sales.

4.0

Recommendations
International ventures - It is recommended for PepsiCo to have more international ventures in the future in order for them to maintain their leading position in the business and to expand further. By their strategic acquisition strategy, they could have scan further in new markets and areas, looking for profitable potential acquisition. Increase R & D from cash cows - As to balance out its profit margin of different division, those cash cows may supply their high volume cash into research and development. It is either for new product reformulation, environmental scanning or new potential business and market search. Stronger marketing campaign - Consumers had positioned Pepsi as a secondary compared to Coca Cola, especially in Malaysia. Less people are aware of other PepsiCos products as lack of marketing effort done. In fact, PepsiCo had numerous offerings that consumers may think of but lack of awareness might jeopardize the companys effort in dominating the business. New international products - This is related to international ventures as more international acquisition will contribute into it. The more PepsiCo desire to expand internationally, the more ventures they have to make. Another option is by reformulating PepsiCos products to make it globally accepted. By this way, the new offering can be easily adopted in most areas. More focus on Quaker foods - Quaker foods are vastly popular in the United Kingdom compared to other business division and geographical areas. By applying good marketing and product research and development, Quaker foods may well be distributed not just regionally but also globally which could result in better profit margin for other business division.

Bibliography
PepsiCo Family. (2010). Retrieved 20 April, 2011, from PepsiCo: http://www.pepsico.com/Company/The-PepsiCo-Family/PepsiCo-Americas-Beverages.html PepsiCo. (2010). PepsiCo's 2010 Annual Report - Performance With Purpose. Retrieved 20 April, 2011, from PepsiCo: http://www.pepsico.com/Download/PepsiCo_Annual_Report_2010_Full_Annual_Report.pdf