Case 19: Pepsicos Diversification Strategy in 2008

1.

Pepsicos corporate strategy is to attain growth and long-term value through new product
innovation, related diversification, and strategic alliances and acquisitions. Pepsico
presented many new products such as Doritos and Funyuns. Pepsico also expanded into
isotonic beverages, salty and sweet snacks, flavored grains, chilled juices, RTD tea and
coffee, hot and RTE cereals, bottled water, and other breakfast foods. Pepsico has generated
several strategic alliances with distribution allies with its Power of One strategy. Pepsico
also focused on International expansion and strategic acquisitions as well as on product
reformulations to foster healthier products.
The company is structured into four business units: Quaker Foods North America, FritoLay North America, Pepsi International, and PepsiCo Beverages North America. All of these
divisions follow the parent company general strategy but they also have distinct features to
their business level strategy. All of the customer products try to attain competitive advantage
through a differentiation strategy known as Better-For-You or Good-For-You.

Quaker Foods North America, hot and RTE cereals, breakfast foods, rice
and pasta
Good-For-You products that are very healthy options
Better-For-You products that are healthier alternatives
Launch new oatmeal products

Frito-Lay, salty and sweet snack division

Improve the core brands by producing them healthier while
preserve superior taste
Product Innovation to create new healthy and tasty snacks

Pepsi International, all PepsiCos brands sold outside North America

Focused on growing market share
Adapt snacks to suite tastes of locals
Also enhanced the nutritional value of products

PepsiCo Beverages North America, carbonated and noncarbonated

beverages
Power of One Innovation Summits provides consumer insight
and recognizes supply chain issues
Product innovation of carbonated beverages focused on improving
the nutritional value
In noncarbonated beverages, the focus was on providing a large
amount of options for healthy drinks

2. My assessment of the long-term attractiveness of PepsiCos different units is demonstrated in

Table 1. The most attractive industries are salty snacks, soft drinks, and bottled water.

3. My assessment of the competitive strength of PepsiCos business units is demonstrated in

Table 2. The strongest SBUs are Pepsi, Frito-Lay, and Gatorade.

4. My 9-cell industry attractiveness/business matrix displaying all of PepsiCos business units is

demonstrated in Table 3.

While some are above others, all of PepsiCos business units are relatively attractive. The
reason that these brands are so strong is because of their dedication to R&D, their established
brand names, and the variety of products they offer to consumers. Whether it is soft drinks or
healthy food choices, PepsiCo has diversified their product set so much that they have
options for all different demographics. PepsiCo has developed such a positive reputation
because of their continual output of quality products. Soft drinks may see a decline in market
share to other refreshments in the long run.

5. PepsiCos portfolio does exhibit good strategic fit.

Cross business use of brand name

World known Pepsi brand name helps introduce new products and snacks

Cost savings along value chain

Achieved economies of scope by combining related activities among
divisions
The Quaker Oats integration shared product ingredients and packaging
materials within company
Joint distribution between Quaker snacks and Frito-Lay products.
Combination of Gatorade and Tropicana reduced production costs

Cross business skills allocation

Expertise shared between SBUs such as PepsiCo and Quaker
Technological skills shared among all production and distribution systems
Shared market research such as information gained during Innovation
Summits

6. PepsiCos portfolio does show good resource fit.

Businesses add to companys overall resource strengths and provide support for
the entire group.
Ability to pursue future acquisitions
Net income increases 12% annually
Continuous increases in dividends to shareholders
Ability to reinvest in core businesses
Ability to fund share buyback plan

Cash Flow Characteristics Pepsi and Frito-Lay:

Frito-Lay North America

o Operating Profit, 2007: $2845m
o Internal Cash Flow: $2845+$437= $3282m
o Accounted for 29% of total revenue and 36% of operating profit in
2007
o Accounted for 70% of the salty snack food industry in the US

PepsiCo Beverage North America

o Operating Profit, 2007: $2188m
o Internal Cash Flow: $2188+$302= $2490m
o Accounted for 28% of total revenue and 31% of operating profit in
2007
o Accounted for 26% of US market share in liquid refreshments

7. My general evaluation of PepsiCos business portfolio is that it is very strong and delivers the
companys shareholders with exceeding average returns. All of PepsiCos Strategic Business
Units are front-runners in their market and provide a solid cash flow for the company.

8. I think Indra Nooyi needs to tackle the below three strategic issues:

PepsiCos overdependence on the US market revenues

o Focus more on international markets with high growth potential
o Make strategic acquisitions in global markets to increase profitability

The current recession trend in PepsiCos stock price

o Rearrange product lineup, removing similar product offerings
o Chase hostile cost cutting within the entire company
o Accentuate Environmental Sustainability in all divisions

Low profitability in the international market

o Divest businesses with low cost-effectiveness

PepsiCos free cash flows should be used to pay higher dividends to share holders and to expand
internationally.