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Prepared for

Dr. BAD 433 Notre Dame University FALL 2010

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1 PepsiCo Case Study

Executive Summary
PepsiCo, Inc. is one of the world's top consumer product companies with many of the world's most important and valuable trademarks. Its Pepsi-Cola Company division is the second largest soft drink business in the world, after Coca-Cola. To stay on the safe side, PepsiCo has introduced different division to expand the business. The most two successful divisions are FritoLay North America and PepsiCo American Beverages. To further analyze the internal and external position on the organization we started by suggesting a vision and mission. Then we stated the strengths and weakness versus threats and opportunities. Finally we shall conclude this study by recommending some effective strategies that would help PepsiCo to overcome future problems and reduce internal weaknesses faced by the company. It will mostly focus on the product development, and how it is a mean of achieving competitive advantage in addition to how to overcome any obstacle in the foods and beverages industry where competition gets intense. The tools that we will be using, is a SWOT matrix and analysis, SPACE matrix to evaluate PepsiCos current position in the market; BCG matrix which portrays differences among divisions in terms of relative market share position and industry growth rate. In addition to the financial ratios of the company that will explain its position with respect to the industry.

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Outline Companys History--------------------------------------------------------------3 Vision-----------------------------------------------------------------------------4 Mission---------------------------------------------------------------------------4 SWOT Analysis-----------------------------------------------------------------6 Ration Analysis------------------------------------------------------------------10 Current Ration ---------------------------------------------------------10 Asset Test---------------------------------------------------------------10 Debt Ratio---------------------------------------------------------------11 Total Asset Turover----------------------------------------------------12 Price/Earning------------------------------------------------------------12 SWOT Matrix--------------------------------------------------------------------14 SPACE Matrix-------------------------------------------------------------------16 BCG Matrix----------------------------------------------------------------------18 Recommendation: Suggested Strategy---------------------------------------19 References------------------------------------------------------------------------20

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Company History:
PepsiCo, Inc. is one of the world's top consumer product companies with many of the world's most important and valuable trademarks. Its Pepsi-Cola Company division is the second largest soft drink business in the world, with a 21 percent share of the carbonated soft drink market worldwide and 29 percent in the United States. Three of its brands--Pepsi-Cola, Mountain Dew, and Diet Pepsi&mdashe among the top ten soft drinks in the U.S. market. The Frito-Lay Company division is by far the world leader in salty snacks, holding a 40 percent market share and an even more staggering 56 percent share of the U.S. market. In the United States, Frito-Lay is nine times the size of its nearest competitor and sells nine of the top ten snack chip brands in the supermarket channel, including Lay's, Doritos, Tostitos, Ruffles, Fritos, and Chee-tos. FritoLay generates more than 60 percent of PepsiCo's net sales and more than two-thirds of the parent company's operating profits. The company's third division, Tropicana Products, Inc., is the world leader in juice sales and holds a dominant 41 percent of the U.S. chilled orange juice market. On a worldwide basis, PepsiCo's product portfolio includes 16 brands that generate more than $500 million in sales each year, ten of which generate more than $1 billion annually. Overall, PepsiCo garners about 35 percent of its retail sales outside the United States, with Pepsi-Cola brands marketed in about 160 countries, Frito-Lay in more than 40, and Tropicana in approximately 50. As 2001 began, PepsiCo was on the verge of adding to its food and drink empire the brands of the Quaker Oats Company, which include Gatorade sports drink, Quaker oatmeal, and Cap'n Crunch, Life, and other ready-to-eat cereals.

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VISION
What do we want to become? this is answered by the vision statement that must clearly state what do we want to become in the long term. A comprehensible vision statement will set basic foundations for a clear mission statement. Pepsicos original vision is: Pepsicos responsibility is to continually improve all aspects of the world which we operateenvironmental, social, economiccreating a better tomorrow than today. This vision is considered to too vague and does not clearly reveal the basic components and products of the business, which are foods and beverages. Suggested vision Our vision is to be the premier organization to quench the thirst of the world by our refreshing beverages and to provide nutritious superior tasting food for a better lifestyle.

MISSION
When dealing with the mission statement we should make sure that it is clear, broad in scope, answers the question: what is our business? and include the following 9 components: 1- Customers 2- Products and Services

5 PepsiCo Case Study 3- Markets 4- Technology 5- Concern for survival, growth and profitability 6- Philosophy 7- Self-Concept 8- Concern for public image 9- Concern for employees

Suggested mission: We aim to maintain our excellent reputation and optimize long term return for shareholders while being fully acknowledged of our responsibilities towards our society and the environment while adopting diversity and inclusion. We want to revive the world by providing foods and beverages for people of all ages to refine their health lifestyle. We use the latest innovative technologies in our operations to find the most efficient way in protecting the natural resources and decreasing the negative impacts on our planet Earth. Our competitive advantage lies in our human resources, thus continuously motivating them through an inspired and empowered working environment. We focus on our bottlers, distributors and retailers because we believe that together we create mutual enduring value by nurturing a winning network of global and local customers and suppliers to address global nutrition challenges to create moments of pleasure and confidence.

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SWOT analysis:
Pepsico, believes that any internal or external change can directly or indirectly affects its operations. It works hard to sustain its strength and improve its cycle to diminish the existing weaknesses. However it knows that any factor which can now be an opportunity may later become a threat. For example, the global economy plays an important role in almost all industries. The downturn has resulted in unfavorable economic conditions and increased volatility in foreign exchange rates and may have adverse impact on Pepsicos business results of financial condition; this is considered to be a threat. When the global economy grows, it would create an opportunity. We will state some strengths, weaknesses, threats and opportunities in this following section:

Strengths:
y y Well known reputation, great tasting products, outstanding quality and supreme value Talent sustainability, Pepsico believes that employees are the most basic asset. Thus it provides them with continuous training and motivation programs to sustain the talent within. y Proper information technology infrastructure, to stay up to date with the latest innovations, thus the ability to be proactive and have a quick response to any change in customer taste.

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New research centers built to create new products, specifically targeted to diet foods and beverages, thus having a robust pipeline of new products.

Outsourcing certain function such as information technology support service, and administrative functions (payroll processing and administrative benefit plan). This decrease costs and increase efficiencies.

Successful implementation of business transformation initiatives, to stay on track with new strategies and ahead of competitors.

Acquired bottling firms, since they believe its a sum greater than parts. So now they have a united beverage company ready to face challenge, which increases flexibility and ease response.

Pepsico takes the environment seriously, thus creating a go green strategy where they created a plant in Rochester NY that captures solar energy thus using natural light.

Effectiveness of the advertisement campaigns and the wellness of the marketing department and the product packaging.

Weakness:
y Disruption of supply chain, even if by an external factor will directly affect Pepsico, because they have mutual interrelated benefits. y Pepsico evaluated its overall financial statements. An understanding of internal control over financial reporting thus assessing the risk that a material weakness exits. y Category weakness in some areas of production, such as a decline in Europe for certain products due to the inability to satisfy the markets desires.

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As mentioned earlier, threats and opportunities can be same factors but what matters is their course of action. In the coming section we will find similar point for threats and opportunities.

Threat:
y Aging of general population, changes in demographics change the tastes of consumers, so traditional tastes need to be renewed. y Changes in social trends, especially towards healthier foods and beverages; the threat would be against the less healthy products the organization produces. y y Changes in travel, vacation or leisure activity patterns Weather, climate change would affect the agricultural productivity that would affect the availability of resources to be used as input for the production such as sugar cane, corn, wheat, rice, oats, potato and various fruits. y Negative publicity resulting from regulatory action that could limit the business activities, increase the operating expenses, reduce demand for products or result in litigation against companies in this industry. y Downturn in the economy, such as the economic crisis, or taxes specifically targeting the consumption of such products. y Unstable political conditions or civil unrest in countries in which Pepsico operates.

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Opportunities:
y Social trends: being directed towards healthy food, so Pepsico has the opportunity to be the first to present such foods and beverages and to be the premier in its industry. y y Changes in travel, vacation or leisure activity patterns Climate change, if the weather was good, they would have better productivity of raw material. y y Good publicity, more acceptance for the products. Upturn in the economy, Pepsico would be able to have more investments, and cutomers would be able to purchase more products. y Good political condition and civil stability would create opportunities for Pepsico to operate in new areas of the world.

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Ration Analysis
iYEAR Current Ration = Current Assets/Current Liabilites Current Asset
(in millions)

Current Liabilities
(in millions)

CR

2008 2007 2006

$10,806 $10,151 $9,130

$8,787 $7,753 $6,860

1.23x 1.31x 1.33x

The current ratio is a diagnostic tool that measures whether or not a business has enough resources to pay its bills over the next 12 months. For this business, the current ratio gives a clean bill of health. For every dollar in current liabilities, there is $1.23 (year 2008) in current assets. A current ratio of over 1 is good news, generally, although if you are comparing your current ratio with that of the industrys it may seem poor.

ii-

Asset test: We have many diagnostics to test the assets in the organization, such as inventory turnover, DSO and fixed assets turnover. In this case we are going to use inventory turnover Inventory Turnover = Sales/Inventories Sales (in millions) Inventory (in millions)

YEAR

Inv. Turnover Ratio

2008

$43,251

$2,522

17.1

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2007 2006

$39,474 $35,137

$2,290 $1,926

17.2 18.2

The inventory turnover ratio measures the efficiency of the business in managing and selling its inventory. This ratio gauges the liquidity of the firm's inventory. It also helps the business owner determine how they can increase their sales through inventory control. Generally, a high inventory ratio, as the case of Pepsico, means that the company is efficiently managing and selling its inventory. The faster the inventory sells the fewer funds the company has tied up. However, it has to be careful if they have a high inventory turnover as they are subject to stockouts.

iii-

Debt Ratio, we are going to use total debt ratio which is total debt to total assets. DR = Total Debt / Total Assets

YEAR 2008 2007 2006

Total Debt (in millions) $7,858 $4,203 $2,550

Total Assets (in millions) $35,994 $34,628 $29,930

TDR 21.83% 12.1% 8.5%

This ratio shows how much your business is in debt, making it an excellent way to check your businesss long-term solvency. For example, Pepsioco in 2008 has 21.83% which is 0.21, so

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$0.21 dollars in debt for every dollar of assets. So for this business, the total debt ratio tells us that this business is in good health since the ratio is less than 1. The lower the debt ratio, the less total debt the business has in comparison to its asset base. As we notice Pepsicos total debt ratio has been increasing since 2006, however this does not mean that the company is going backward, but it means that it is using these debts to expand its business. ivYEAR 2008 2007 2006 Total Asset Turnover = Sales/ Total Assets Sales (in millions) $43,251 $39,474 $35,137 Total Assets (in millions) $35,994 $34,628 $29,930 TAT 1.20x 1.14x 1.17x

The lower the total asset turnover ratio, as compared to historical data for the firm and industry data, the more sluggish the firm's sales. This may indicate a problem with one or more of the asset categories composing total assets - inventory, receivables, or fixed assets. Business owners should analyze the various asset classes to determine where the problem lies. However in PepsiCos case we notice that this ratio is increasing though it is still somewhat low. vPrice Earning= Price per share/Earning per share

YEAR 2008 2007 2006

Price per Share 14122/ (229+177) = 34.78 10387/(299+177) = 25.5 7758/(229+177)= 19.1

Earnings per basic Share $3.26 $3.48 $3.42

PR ratio 10.66x 7.32x 5.58x

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The P/E ratio tells analyst how much an investor in common stock pays per dollar of current earnings. The P/E gives you an idea of what the market is willing to pay for the companys earnings. The higher the P/E the more the market is willing to pay for the companys earnings. Some investors read a high P/E as an overpriced stock and that may be the case, however it can also indicate the market has high hopes for this stocks future and has bid up the price. As in the case of PepsiCo, the P/E reveals some attractiveness in 2008 and maybe a sleeper that the market has overlooked in 2006. What is the right P/E? There is no correct answer to this question, because part of the answer depends on the investors willingness to pay for earnings in PepsiCo. The more you are willing to pay, which means you believe the company has good long term prospects over and above its current position, the higher the right P/E is for that particular stock in your decisionmaking process.

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SWOT MATRIX
STRENGTH Reputation, great taste/quality Talent sustainability Proper information technology New research centers Outsourcing Successful business implementation 7- Acquired bottling firms 8- Environmentally friendly 9- Good advertising and marketing 123456THREATS WEAKNESS

1- Disruption of supply chain. 2- Material weakness 3- Category weakness

ST S2,T4: Make use of changes in travel to capture fresh graduates with fresh talents to sustain, especially those who travel for sake of working. S1,8,9 T5,8: Use the good reputation to create environmentally healthy ads to get positive publicity. S3,4 T3,8: use of technology and research centers to create special places where fruits and vegetable grow regardless of climate change be able to compete S5, T6: use outsourcing in times of economical downturn to decrease costs S1, T6,8: during crises, maintain

WT W1, T6: contact suppliers in different regions and countries to stay on the safe side when instability in any country occurs (youd be supplied by others) W2, T2: Study the changes in social trends to provide the appropriate materials to stay updated with the latest demands.

1- Aging of general population 2- Change in social trends (towards healthier foods) 3- Climate change 4- Changes in travel 5- Negative publicity 6- Downturn in economy 7- Unstable political condition 8- Competitors.

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good quality (for long term customer loyalty) with affordable prices to stay ahead of competitors.

Opportunities

SO S1,9 O 2,3: Create new high quality products and link them, through advertisement, to leisure activities such as sport drinks to sport activities. S4, O1: Use the new research centers to create healthy products to stay updated with the latest demands. S7, O5: Upturn in economy allows the organization to increase its investment thus the ability to acquire more bottling firms and similar organizations, such as Pepsico acquiring Russias to juice companies. S8, 06: When the climate is good and sunny, theyd be able to make use of solar energy and natural light better thus being once again environmentally friendly.

WO W1, O5: When political stability occurs, theyd be able to have suppliers from different regions to have full access to the components of the supply chain all over the world, to always stay ahead of competitors. W3, O4 5: Launch new products, such as Mountain Dew in U.K, to deliver differentiated value across brands and countries.

1- Community directed towards healthier food. 2- Changes in leisure activities. 3- Good publicity 4- Upturn in economy 5- Good political conditions 6- Climate change

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SPACE Matrix
After reading the case and searching through the Pepsico website, we were able to have a slight view of the position the organization is in, and thus we gave approximate ratings. Financial Position (FP)
-Liquidity: the current ratio for 2008 is 1.23x, which is good -Stockholder s equity in 2008 has decreased since 2007 and 2006 to become 12,203 million dollars, still considered to be good. -Inventory turnover has decreased to 7.81. -Price earnings ratio, average position

Ratings
5.0 3.0 4.0 4.0 16.0

Competitive Position (CP)


-High product quality -Product life cycle, depends on product but mainly of average age -High technological know-how

Ratings
-2.0 -3.0 -2.0 -7.0

Stability Position (SP)


-Technological changes are frequent -Operations in less developed countries are experiencing high inflation and political instability -Competitive pressure

Ratings
- 1.0 -4.0 -5.0 -10.0

Industry Position (IP)


-Deregulation provides geographic and product freedom -Pepsico is financially stable although it is facing some increase in costs and Decrease in revenues -It s good position has allows Pepsico to acquire bottling firms, and the best Juice company in Russia

Ratings
4.0 3.0 5.0 12.0

Conclusion: FP average: 16.0/4=4 CP average: -7.0/3= -2.33 SP average: -10.0/3= -3.33 IP average: 12.0/3= 4

17 PepsiCo Case Study Directional vector coordinates: x-axis: CP+IP: -2.33+4= 1.67 y-axis: SP+FP= -3.33+4 = 0.7

The Space Matrix FP

+7 +6 +5 +4 +3 +2 +1 0 0 -1 -2 -3 -4 -5 -6 -7 SP
PepsiCo, Aggressive

-7

-6

-5

-4

-3

-2

-1

+1

+2

+3

+4

+5

+6

+7

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BCG Matrix
Net revenues, profits and percentages by Divisions (2008) Net Revenue& Percent: Operating Profit and percent: $43,251 100% $7,942 100% $12,507 $ 1,902 $5,895 $10,937 $6,435 $5,575 28.9 4.3 13.6 25.2 14.8 12.8 $2,959 $582 $897 $2,026 $811 $667 37 7.32 11.29 25.5 10.2 8.3

Pepsico total Division 1.Frito-Lay North Amrica(FLNA) 2.Quaker Foods North America (QFNA) 3.Latin American Foods (LAF) 4.Pepsico Americas Beverages (PAB) 5.United Kingdom & Europe (UKEU) 6.Middle East, Africa, & Asia (MEAA)

Relative Market Share


High 1.0 High Medium 0.5 Low 0.0

+20 Industry Sales Growth Rate


Medium 0

STARS (quadrant II) 1 4

QUESTION MARK (quadrantI) 2 3 5 6

CASH COWS (quadrant III)

DOGS (quadrant IV)

Low

-20

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Suggested Strategies
After analyzing the SPACE Matrix, we can clearly see that Pepsico exists in the aggressive quadrant. This means that it is in an excellent position to use its internal strengths, to take advantage of external opportunities, to overcome internal weaknesses and avoid external threats. Different strategies can be conducted upon this analysis, such as market penetration, market development, product development, diversification and backward, forward, horizontal integration. In this case we are going to suggest two intensive strategies, product development and market penetration.
Intensive Strategies: 1-Product development: An important strategy that Pepsico should consider is Product Development where it should expand its product line, provide more organic or healthier products to satisfy all needs of the market. Especially that the trend is flowing towards healthy and low-calories food, thus having the ability to become ahead of its competitors in terms of innovation and staying up to date with the latest social trends. 2-Market Penetration: Taking into consideration that Pepsico has a broad target the company should then focus on cost leadership-differentiation. They should focus on increasing sales across all sectors of the business and not just certain divisions. This could be done by lowering their costs to the minimum and adjusting their marketing sales budget thus being able to lower their prices relatively to their competitors hence increasing their market share. Keeping themselves differentiated with their broad line of foods and beverages.

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References:
David, H, Strategic Management, Concepts and Cases, Pearson, 2010 Ross, John and Sherry, PepsiCo, 2009, Texas State University-San Marcos PepsiCo s official website: http://www.pepsico.com