The operations of the PepsiCo Company
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Published: Mon, 5 Dec 2016
The report based on the operations of PepsiCo was done in the satisfaction of a Dynamics of Strategy Assignment. The company original location is in the United States of America but the company also operates in countries globally ranging from large emerging countries, the “BRIC countries”: Brazil, Russia, India and China to the small Caribbean Islands.
PepsiCo, initiated as Pepsi: a carbonated cola drink in the beverage industry initiated in 1968 and has continued to expand since. The company has expanded through diversification and acquisitions into both the food and beverage industry. The company has been analyzed in terms of its internal and external environment and strategic opportunities for improvement has been proposed.
PepsiCo’s mission “Our mission is to be the world’s premier consumer products company focused on convenient foods and beverages. We seek to produce financial rewards to investors as we provide opportunities for growth and enrichment to our employees, our business partners and the communities in which we operate. And in everything we do, we strive for honesty, fairness and integrity.”
PepsiCo’s 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.”
PepsiCo, one of the most diverse and leading companies in the food and beverage industry initiated as Pepsi Cola in 1898 producing only cola beverages. In 1965, the company took the step to merge with another company, Frito Lay, in the food industry to form the company as the name is today, PepsiCo. PepsiCo controls 103 billion litres in market volume in the US beverage industry and concurrently a UDS $321billion in market value.
PepsiCo with competitors in both the food and beverage industry, focused on international growth and further diversification. PepsiCo is the second largest beverage producer in the world and the world’s leader in its Frito Lay division in the food (salty snacks) industry. PepsiCo has numerous competitors in both the food and beverage industry: CoCa Cola, Kraft Foods, Unilever, and Nestle. PepsiCo expanded its production initially from Pepsi, a cola beverage to diversifying to water (Aquafina), Quaker Oats in the cereal and snack industry to juices and energy drinks such as Gatorade.
The company further acquired and formed joint ventures increasing its product line to teas and root beers. The company acquired and formed joint ventures, along with the purchase of famous restaurant chains such as Kentucky Fried Chicken. PepsiCo currently focuses on growth through Performance with a Purpose: to improve the performance of the company, human and talent sustainability as they move towards being more environment friendly.
The assignment seeks to review and analyze the external and internal environment, evaluating whether the company is in strategic fit or drift. When this is determined, the researcher would assess the feasibility, acceptability and suitability of the proposed strategic option of growth in emerging markets. The researcher would then go on to recommend a detailed implementation plan of the chosen strategic option in terms of new product development.
Evaluation of the External Environment
The evaluation of the external environment was undertaken through the use of various tools which analyses conditions, entities, events and factors of the environment in which PepsiCo operates. The tools used by the researcher were the PESTLE analysis, Porter’s Five Forces, the 3 C’s and the Industry Life Cycle. This analysis of each tool was embarked on to determine how the activities of PepsiCo are influenced by the macro environment and whether the company is in strategic fit.
“PESTLE Analysis is a tool that could aid organizations making strategies by helping them understand the external environment in which they operate now and how they will operate in the future.”
In all markets PepsiCo has entered, the government has intervened to some extent, where they were confronted with several political barriers to entry, adhering to laws and regulations. These issues increased, as the company expanded its operations and portfolio. PepsiCo was further affected when the economic downturn negatively impacted on their financial statement as costs fluctuated. Despite this, PepsiCo was granted approval for investment into the company.
Cultural and demographic aspects, social factors also affected the operations of PepsiCo which include a shift towards healthier lifestyles. PepsiCo has kept up-to-date with technological advancements by introducing the most recent improvements to machinery in the industry. They have implemented modern media methods to increase brand awareness, allowing them to being innovative, reduce costs and improve quality.
PepsiCo faces legal challenges where there were bans placed on advertising in some countries. In some countries the governments have reduced the awarded contract previously set at a term of five years to one year. PepsiCo has decided to go “green” and be environment friendly, focusing on water, climate changes, agricultural and packaging change. They have initiated to reduce their utility consumption.
“Michael Porter provided a framework that models an industry as being influenced by five forces.”
Porter’s five forces is a framework used by the researcher to determine the competitive intensity of the macro environment in which PepsiCo operate. Considering PepsiCo is one of the dominants in the food and beverage industry there is little room for new entrants to create competitive pressure. Due to capital, market knowledge and experience, PepsiCo has the absolute advantage in terms of cost which would deter new competitors.
PepsiCo with the advantage of high bargaining power of suppliers are able to identify, differentiate and substitute inputs. If the suppliers have greater influence on the industry, then PepsiCo would have to pay high prices for the raw materials. PepsiCo allows the buyers a strong bargaining power so that they could maintain the number of buyers they have and attract new ones. Buyers may have greater influence on PepsiCo since there are numerous substitutes for its products.
The threat of substitutes which exists within the beverage and food industry is a major issue for PepsiCo, where a price change can prove futile for the company. PepsiCo is fortunate since although there are substitutes for the products there are no close rival, with a diversified portfolio that links directly to PepsiCo at all product levels. This, a strength to the company gives them the competitive advantage of operating in the industry.
“The 3C’s Model is a business model which offers a strategic look at the factors needed for success”
The researcher would use the 3C’s model to measure the differences between the actual and the perceived quality of the company’s product portfolio, helping to assess the importance of the brand name PepsiCo.
Market dominance of certain products such as Frito Lay and Gatorade has been a success since PepsiCo would have increased market share. PepsiCo can maintain this dominance by obtaining control of their brand through patenting. The company can further seek other measures to maintain this success, through innovation by improving existing products.
PepsiCo segments its market and goals are directed towards consumers since it is the consumers who the company depends on for revenues and profits. PepsiCo portrayed them as the “New Generation” or the “Pepsi Generation.” PepsiCo has even adjusted its portfolio by improving existing products and developing new ones to meet current trends in the market: a healthier lifestyle.
Although PepsiCo is dominant in some products in the market they still need to focus on its competitors’ strategies and techniques. Coca Cola, leader in the beverage industry enjoys the largest market share for carbonated soft drinks. Smaller competitors use strategies to allow them to remain in the market and their size, although smaller than PepsiCo to gain competitive advantage.
PepsiCo is in the mature stage of the Industry Life Cycle in the food and beverage industry. This tool with knowledge of past and current market trends are used to predict future trends and potential entrants or threats that may arise in the market. PepsiCo maintains its position by using techniques such as diversification strategies and developing products towards current trends and market development.
Critical Assessment of Strategic Resource Capabilities
The researcher undertook an analysis of PepsiCo’s internal environment, comprised of the organization’s resources, capabilities and competencies. This assessment helped to determine whether the company is in a strategic fit or drift. Several tools such as the SWOT analysis, the VRIO framework and the Key Success Factors were used.
PepsiCo has the second highest market share in the beverage industry but have always had and continues to maintain a strong brand image. The company had the advantage since with their diversified portfolio; they were able to create an image for not only for their cola beverage but for all their products. Due to this PepsiCo encountered additional revenue for growth and was able to invest in technology with helped them to benefit from economies of scale.
Despite PepsiCo’s many strengths they had their fair share of weaknesses. The company has limited themselves with their diversified portfolio since they have concentrated mostly in North America. This could prove that they are not fully utilizing their resources available to them globally especially in emerging countries. This weakness can be converted to an opportunity where it can be used as a strategy towards growth. Further opportunities may emerge where PepsiCo can further diversify through new product development, improvements to old products and acquisitions, towards changing demand, a healthier lifestyle. PepsiCo faces challenges from competitors and the declining economy could also prove as a threat where there is sluggish growth of the economy.
PepsiCo with a strong internal work culture, an intangible resource, is structured toward the company’s “Performance with a Purpose” to encourage professionalism and personal development while subsequently having fun. Ideas and comments are most welcomed by the management team. Young employees are given the chance to embrace early responsibility, to accept risks and make some decisions allowing them to develop and become prospective leaders. PepsiCo also focuses external culture where they give back to communities.
Geographic location has impacted on the internal culture of PepsiCo where culture is altered towards employees in different regions. The strategic location of the company also helps to improve the distribution of products. At some locations, PepsiCo use to their benefit government incentives to decentralize their operations. This helps to reduce operating costs.
Brand imagery, reputation and high employee morale plays a huge role in increasing goodwill of PepsiCo. This intangible asset could lead to a positive impact on the financial statements. Despite the negative outlook from the financial statements due to the economic storm and currency fluctuations, the company was able to achieve growth in 2008. Although numerous government bodies planned to increase taxes for snacks and cola beverages and PepsiCo had a high short term debt, they continued to invest for long term prospects.
“VRIO framework is an internal tool of analysis in the context of businesses. VRIO is an acronym for the four question framework you ask about a resource or capability to determine its competitive potential: the question of Value, the question of Rarity, the question of Imitability (Ease/Difficulty to Imitate), and the question of Organization (ability to exploit the resource or capability).”
PepsiCo was able to add value to their manufacturing process through innovation and efficiency in all resources: Culture/HR, Location, Brand Image, Goodwill and Financially. All these resources are aligned, organized and exploited by PepsiCo. Culture/HR is the only resource of PepsiCo which can be identified as rare and not possessed by competitors. Although Goodwill is not rare, it is not easily duplicated by customers, hence is imitable and has a sustained competitive advantage. Despite this, if given sufficient time, money and resources all of PepsiCo’s other resources such as location, brand image and financial prosperity can be emulated, referred to as having a competitive parity.
Key Success factors necessary for the success of PepsiCo in the market is that they should continue their use of celebrities in their advertising campaign. This would help to lure customers toward the product. The company can focus on widening their distribution channels as they expand their portfolio. This would help inject additional revenue into the company.
PepsiCo is in a strategic drift to the extent where there is minimal innovation to develop new products. The company prefers to obtain products through mergers and acquisitions, since these products would have been established already and it reduces PepsiCo’s risk of a failing product. The disadvantage of this is that the brand names of the acquired products are standardized. When PepsiCo acquire these products, they continue to trade under their original name and not the name of the company, such as Gatorade. Another drift of the company is where they fail to have optimal utilization of all their resources. Their advertising campaigns do not include a wide target market. Although the company serves approximately 86% of the world’s population, their advertising is mostly positioned towards the North American markets.
Despite the strategic drift of PepsiCo, the company is in a strategic fit due to their strong Culture and Human Resources. This is clearly practiced within the goals of the company “Performance with a Purpose.” This is advantageous to them since the management team ensures they are practice of good work culture, factors that are rare and cannot be imitated easily. The culture of this organization contributes to standardized operations which lead to high quality of the products, giving them the competitive advantage. Another factor which contributes to PepsiCo’s being in a fit is that the company has a diversified portfolio with no other single company in the food and beverage industry directly competing with PepsiCo’s range of products allowing them to sustain their competitive advantage.
PepsiCo’s most recent objectives in their sustainability report is being accomplished and puts the company in strategic fit where they are moving towards meeting the needs of the changing demand towards healthier products. This not only increase revenue but creates a strong brand image and gives the company the competitive advantage. Another object from PepsiCo’s sustainability report which puts them in a fit is their drive towards going green by reducing utility consumption, the labels in their packaging and usage of plastics. The company currently takes into consideration Green Initiatives, such as building codes when entering new markets. Despite of having few strategic drift issues which cannot be ignored, PepsiCo continues to maintain their competitive advantage in the changing markets and is in a strategic fit.
Discussion of Strategic Option
PepsiCo, since established in 1898 has grown into a vast well established organization with a diversified portfolio. The company has achieved this through all factors in the Ansoff Matrix, allowing them to be the world’s largest food and beverage company. The company has achieved and continues to achieve growth through improvement, diversification of their product portfolio, entering new markets and through new product the development.
Through extensive research into PepsiCo, the researcher found PepsiCo has experienced a drastic fall in sales in recent times as a result of the global economic recession and due to changing consumer demands. CEO of the company, together with management has proposed to introduce new products to combat this predicament so that the company can maintain their market status and continue to achieve growth. Through profound investment and innovation, PepsiCo is targeting emerging markets: BRIC countries.
In keeping with PepsiCo’s mission grounded on “Performance with a Purpose,” their goals of Human Sustainability, and their current proposal, the researcher has chosen new product development as a growth strategy towards the improvement of the future strategic direction of the organization.
By this route the company would
Porter’s Five Forces Model
Hierarchy of Resources
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