Connor Hewitt, Isaac Hoehn, John Kronon, Xiaojin Liu, Madison Mead

MARK 4110
PepsiCo Case Study

1. What is PepsiCo’s corporate strategy? Briefly identify the business strategies that
PepsiCo is using in each of its consumer business segments –PepsiCo Beverages
North America, Frito Lay North America, PepsiCo International, and Quaker Foods
North America.

The corporate strategy of PepsiCo is to diversify the company’s product portfolio

into all kinds of categories within the snack, food and beverages industries. They are
doing this through product innovation and close relationships with distribution allies.
They are also expanding nationally and globally through external acquisitions and
mergers, and reformulating their products to be healthier.
l The business strategy of PepsiCo Beverages North America is to improve the
volume and market share in soft drinks by applying the unique strategy “Power of
One”, which focuses on local distribution through placing Pepsi and Frito-Lay
products side by side on shelves.
l The business strategy of Frito Lay North America is to develop “good-for-you” and
“better-for-you” products that are healthier snacks and provide multiple flavors to
its customers to create growth opportunities.
l The business strategy of PepsiCo International is to increase the volume of snacks,
beverages, and food outside North America by discovering new opportunities in
different markets and understanding the local consumer taste preferences.
l The business strategy of Quaker Food North America is to increase market share
through applying the “good-for-you” and “better-for-you” strategy in hot and
ready-to-eat cereals, pancake mixes and syrups, and rice and pasta side dishes in
North America.

2. What is your assessment of the long-term attractiveness of the industries

represented in PepsiCo’s business portfolio?

Factors that influence attractiveness of industries are market size, growth,

profitability, competitive structure, market diversity, and community risk. Very High-5,
High-4, Medium-3, Low-2, Very low-1.

1. Beverage Industry: Moderately Attractive (18)

Attractiveness Assessment Comment
Factor
Market Size 5 $30 billion

Growth 1 1.26% from 2006 to 2007

Profitability 5 PBNA contributes greatly to total profit means the high

profitability in this industry.

Competitive 1 Market is dominated by few companies

Structure

Market Diversity 5 Lots of market segments

Community Risk 1 No major risks

2. Snack Industry: Moderately Attractive (17)
Attractiveness Assessment Comment
Factor

Market Size 4 $15.9 billion

Growth 2 FLNA has the largest market share but sales growth
slowly, means the market grows slowly.

Profitability 4 FLNA contribute to 36% of total profit mean high

profitability in this industry

Competitive 1 Few companies dominate market, PepsiCo 21%.

Structure

Market Diversity 5 Lots of market segments

Community Risk 1 No major risks

3. Food Industry: Moderately Attractive (15)
Attractiveness Factor Assessment Comment

Market Size 4 Smaller than Beverage, about $20 billion

Growth 1 2% in 2007, and declined in some categories.

Profitability 4 Return far exceeds cost

Competitive Structure 1 Quaker Oats has 58% of market share

Market Diversity 4 Lots of market segments

Community Risk 1 No major risks

3. What is your assessment of the competitive strength of PepsiCo’s different

business units?

Overall, PepsiCo and its different business units are in a strong position. The
company has such a broad portfolio, which is a strength because the company has
leadership across many different product categories. The company’s domination of the
beverage and snack food industry has given them large revenues and large growth rates.
Within the different industries that Pepsi dominates, Pepsi has many internal strengths
that help them achieve such a high level of success. One of their major strengths is their
ability to continue to innovate and diversify their products. In 2007, one of Pepsi’s greatest
growth areas were their new better-for-you and good-for you products. Pepsi responded to
the growing consumer and government concern for healthier snacks and drinks, and
delivered different lines of products to appeal to this need. Adding these new products
allowed Pepsi to keep a close relationship with their distribution allies. Pepsi made their
distribution networks change one of their ingredients in snack foods to healthier oils to
help satisfy the “good-for-you” product.
Another strength of Pepsi read about in this case study was their “Power of One”
alliance strategy. Under the Power of One, Pepsi’s marketers and retailers collaborated in
stores and during off-site summits to devise tactics to increase consumer’s tendency to
purchase more than one product offered by PepsiCo during a store visit (Jennings, 68). This
is a value added activity for PepsiCo that gives them a competitive advantage in this
industry. This gave retailers the opportunity to share consumer-buying experiences with
the marketing team. Pepsi used this information to create new products and tailor their
marketing techniques. Power of One meeting also helped improve supply chain efficiency.
Pepsi was able to develop new shipping techniques that reduced “stock-outs” in retail
stores.
The new CEO also gives the company the ability to further expand internationally.
While PepsiCo already has an established position abroad, Indra Nooyi gives them the
opportunity to move into new markets like India. Nooyi emigrated to the United States in
1978 to attend Yale and started working with Boston Consulting group. Nooyi obviously
has close ties with India and is able to understand the dynamics of markets in India. Pepsi
will have to adapt their products to the taste of Indian consumers, but having Nooyi on
their team will definitely give them an advantage.
4. What does a 9-cell industry attractiveness/business strength matrix displaying
PepsiCo’s business units look like?

Summary of 9-cell matrix

While some are above others, all of PepsiCo’s 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. Does PepsiCo’s portfolio exhibit good strategic fit? What opportunities for skills
transfer, cost sharing, or brand sharing do you see?

Reflecting on the case study, it appears that PepsiCo’s portfolio exhibits good
strategic fit. When many think of PepsiCo they immediately think of the soft drink, Pepsi,
but this company has done an amazing job in terms of expanding their product mix beyond
soda. They also have been greatly successful with salty snacks, granola bars, cereal, health
drinks, pancake mix and many other different types of products. Although this product mix
might seem a stretched at first, this company has managed to keep their products at the top
of their respective product categories.
With such a wide variety of products, skill transfer and cost sharing are very
important to the company’s success. When producing similar products, such as soft drinks,
PepsiCo has taken every precaution to insure they are making this drinks as efficiently as
possible. When looking at a Pepsi dispenser, the customer is able to select any of their
products whether it is a carbonated soda or a fruit juice. These machines illustrate the fact
that the flavoring may be different, but the products overlap resources bringing the cost of
production down. Other ways PepsiCo has kept costs down and allowed for skill transfer
is, “through strategies keyed to product innovation, close relationships with distribution
allies, international expansion, and strategic acquisitions” (Jennings, 67). Their portfolio
has kept up with many trends over the years, such as becoming more health conscious.
This is not only demonstrated in their beverages by using less sugars and making smaller
portioned containers, but also within their snack foods by removing trans fats and baking
many of their foods instead of frying them.
In terms of brand sharing PepsiCo has also been able to make their product stand
out. One way they were able to do this is through acquiring successful fast food restaurants
such as Pizza Hut, Taco Bell, and Kentucky Fried Chicken. Taking a closer look into Taco
Bell, PepsiCo has been able to take on of their most successful chips, Doritos, and turn it
into a taco shell that has become one of the most popular items on their menu. Other ways
they have grown their brand is with the “Power One” retailer alliance. This program has
helped PepsiCo, come up with, “successful new products… recommended by retailers”
(Jennings, 68). This is an incredibly important concept especially when looking at their
overseas products. They have a global presence and are still able to cater to local taste,
especially within the United Kingdom, Asia, and the Middle East. Clearly PepsiCo has been
able to develop a strong product portfolio that will continue to thrive all over the world.

6. Does PepsiCo’s portfolio exhibit good resource fit? What are the cash flow
characteristics of each of PepsiCo’s four segments? Which businesses are the
strongest contributors to PepsiCo’s free cash flows?
PepsiCo’s portfolio also offers good resource fit. They have done a great job in terms
of breaking their company into four segments, Frito-Lay North America, PepsiCo Beverages
North America, PepsiCo International, and Quaker Foods North America. Frito-Lays brand
accounts for 29% of PepsiCo’s total revenue (Jennings, 73). As one of the snack food
branches within this company, it is imperative that they keep up with diet trends especially
as this division accounts for over 70% of salty snacks within the United States (Jennings,
73). This department focuses on three main areas, convince, nutritional content, and
indulgent snack foods. Reflecting on these areas, the company has started to use healthier
oils when producing chips, while also expanding their line of baked snacks. They have also
expanded their product flavors and started making baked fruits and vegetables in order to
grow their brand. Keeping up with health trends has truly improved consumption leading
to an increase in cash flow. Clearly the Frito-Lay North America is an important division
within PepsiCo.
In addition to the snack food side, PepsiCo Beverages, is an important segment to
the company. In 2006 they were the largest seller of liquid refreshments with a 26%
market share (Jennings, 77). Looking closely at this division, the carbonated soft drinks
created were the most-consumed type of beverage with a 48% market share (Jennings, 77).
One reason why PepsiCo was able to achieve such success was due to their “innovation
summits” where retailers shared their views on certain products. These meetings lead to
the creation of many well-established beverages such as SoBe Life Water. They also
catered to certain health trends by coming up with sweeteners that had less calories and
promoting bottled water such as Aquafina. The PepsiCo Beverages department has taken
many successful actions in growing the company.
The third branch of this company is PepsiCo International. By going overseas
PepsiCo was able to expand their brand image. By continuing their “Power of One” strategy
they were better able to cater to the different needs across the global. They discovered a
huge opportunity to increase cash flow within developing countries with noncarbonated
beverages. While the average consumption of soft drinks is 60 servings a month in the
United States, it was only 6 in developing areas. By targeting these locations, such as in the
Middle East, they were able to dominate the market by being the first ones there. The same
strategy goes for their snacks. In developing countries the average serving size for their
snacks is only 0.4 a month, dramatically lower than in the United States. Again, by
targeting these locations they have found great success, for example how Frito-Lay now has
over 75% market share in Mexico (Jennings 81). By expanding overseas, PepsiCo has
continued to experience great success.
The last segment of PepsiCo is Quaker Foods North America. This division is
responsible for many popular cereals, pancake mixes, and pasta sides. Focusing on cereal
they have 14% of the market share and face tough competition against Kellogg’s who has
30% (Jennings 82). This part of the company has found success in “better-for-you” and
“good-for-you” products. Together these four departments have made PepsiCo into the
profitable company it is today.

7. Based on the preceding analysis, what is your overall evaluation of PepsiCo’s

business portfolio in 2006? Does the portfolio provide the company’s shareholders
with an opportunity for above-average market returns?

Based on our analysis of PepsiCo’s portfolio in 2006, we have decided that PepsiCo
is a moderately attractive company. Our analysis shows that the food, snack and beverage
industries are all moderately attractive and allow PepsiCo the ability to maintain success
for the long-run because of the competitive landscape. All three of these industries are
rather large, coming in around $20 billion, $16 billion and $20 billion respectively. PepsiCo
will be able to maintain or grow within these industries in the long-run because of the
competitive structure. There are a few large players such as PepsiCo and Coca-Cola, which
hold a large market share, have extensive distribution networks, have strong consumer
recognition, and have diverse product offerings. The investment to enter this industry and
compete with these two players would be vast and unattainable. PepsiCo’s portfolio
provides shareholders with an opportunity for above-average market returns because
PepsiCo has such a strong grasp on market share, and also because of the high profitability
of their products. The diversity of their product portfolio will also be in their advantage,
having products that are selling well, compensating for products that aren’t selling very
well.

8. What strategic actions should Indra Nooyi take to sustain the corporation’s
impressive financial and market performance? How should it best use its free cash
flows of approximately $15 billion projected for 2007 through 2009?

Indra Nooyi must continue to innovate and provide alternative complementary

products throughout the company’s portfolio. PepsiCo must capture new customers with
innovative and complementary products while satisfying returning customers’ wants by
providing higher quality products at affordable prices with many varieties to chose from.
PepsiCo must continue to strengthen their relationships with distributors and retailers in
order to cut unnecessary costs while sustaining the company’s core values vision.
International expansion is extremely important for the short and long-term growth and
development of PepsiCo. To achieve the greatest economies of scale, PepsiCo must
continue to build plants, distribution systems, and service routes in main and developing
markets. Joint ventures are another route that has bred success for PepsiCo in the past and
must be considered in certain markets that the barrier to entry might be more difficult than
others. The acquisitions of other companies must stay within Pepsico’s overall corporate
strategy and not deviate from their core competencies. Pepsico’s acquisitions must remain
strategic in nature in order to gain more global market share, enter new or developing
markets with high economic growth potential, and continue to conduct high quality
research that serves as the backbone to PepsiCo’s profitable strategic decisions. Lastly,
PepsiCo must continue to develop their products in healthier processes. More and more
consumers domestically and internationally are health conscious. While people still enjoy
to snacks and drinks, healthier options have become their number one concern and will
purchase products that are healthier alternatives while maintaining the same quality and
taste that satisfies them.
PepsiCo has approximately $15 billion of free cash flows projected for 2007 through
2009. Indra Nooyi must continue expansion into new, developing and mature international
markets in order to grow PepsiCo’s company long-term. PepsiCo must focus some of their
cash flows to make a bigger footprint in China’s soft drink and salty snack market. As of
2006, PepsiCo only retained 36% of China’s soft drink market share and 16% of their salty
snack market share. China’s economy is growing rapidly and is becoming more and more
deregulated. PepsiCo must strike “while the iron is hot” in order to capture as much
market share and positing their products from long-term success in the Chinese market.
PepsiCo should also allot a significant amount of money for expanding and providing their
quality products to growing markets such as Russia, Brazil, and Latin America. While
PepsiCo has developed a strong stance in Mexico with 75% market share in salty snacks,
they can use this influence to couple snack and drink promotions to drive up soft drink
sales. The same can be said about Brazil and Russia, with 46% and 43% respectively in
salty snack market share, PepsiCo should advertise and couple complementary products
together on shelves like they have been doing in the United States in order for increased
sales and higher international market share. Joint ventures and strategic acquisitions must
continue to be prevalent within the PepsiCo company to extend their product reach around
the globe while providing jobs and contributing to the economic growth of the countries
they expand into. Also, continued market research, customer, distributor, and retailer
feedback, as well as efficient supply chain and logistical systems are essential. These
elements of business are put in place to sustain short-term market share and product
quality while building long-term market growth and innovation of products. Lastly,
continued investment into the United States market is mandatory. Indra Nooyi has done a
tremendous job for PepsiCo domestically and internationally. The funds needed in the
United States market should continue to be provided for acquisitions and anything Indra
deems necessary to the long-term success of PepsiCo.