PEPSICO DIVERSIFICATION

STRATEGY IN 2008

Anung TriningrumHerlyn Febrinasari

Company Profile Pepsico

• PepsiCo is one of the most big multinational company in the world which produced beverages and foods

• Established in 1965 from the merger of two big companies, which is Pepsi Cola Company (1898) and Frito Lay, Inc (1932).

PEPSICO CORPORATE HISTORY

• 1898, Caleb Bradham created formula to make Carbonation drinks and he called this as Pepsi Cola• 1965, PepsiCo Established• 1977, PepsiCo acquired Pizza Hut• 1978, acquired Taco Bell • 1986, acquired Kentucky Fried Chicken • 1990, Wayney Calloway acquired Hot-n-Now• 1992, acquired California Pizza kitchen• 1993 acquired East Side Mario’s, D’Angelo Sandwich Shops,

and Chevy’s Mexican Restaurant• 1980 and1990 acquired Mug root beer, 7UP International,

Smart Food Popcorn , Mexican Cookie company, Gamesa, Sunchip

Four Major Divisions of Pepsi’Co

(before the strategy change)

Frito LayPepsiCo Beverage North America

Pepsico International

Quacker Oats

Problem Statements

1. What is PepsiCo’s corporate strategy? Briefly identify the business strategies that PepsiCo is using in each of its consumer business segments in 2008.

2. What does a 9-cell industry attractiveness/business strength matrix displaying PepsiCo’s business units look like?

3. Does PepsiCo’s portfolio exhibit good strategic fi t? What value-chain match-ups do you see? What opportunities for skills transfer, cost sharing, or brand sharing do you see?

4. Does PepsiCo’s portfolio exhibit good resource fi t? What are the cash fl ow characteristics of each of PepsiCo’s four segments? Which businesses are the strongest contributors to PepsiCo’s free cash fl ows?

PepsiCo’s Diversification StrategyProduct innovation

Pada tahun 2007 , meningkatkan performa divisi salty brands dan kemudian peningkatan produk-produk yang sehat. Perusahaan tersebut telah menghilangkan lemak jenuh dari semua Lay’s, Fritos, Ruffles, Cheetos, Tositos dan varietas varietas Doritos dan mencari inovasi-inovasi untuk membuat snack asin yang lebih sehat.

Acquisitions• Acquisitions made by PepsiCo is the acquisition of

products related to diversification. Particularly in research and Development and sales and marketing activities

• Close relationship with distributors : Helped distribution of newly launched snacks and isotonic drinks

International ExpansionThe Power of Onecreating an efficient marketing, PepsiCo introduced the

product in one website. Beside that, in terms of sales, PepsiCo entered into sales by combining them with complementary products

Diversification Strategy

• Identifying Cross businesses strategy fits along the value chain to achieve synergy run business with the acquisition of Quaker Oats

• There are some identification could be applied:-R & D and technology activities-Distribution activities-Sales and marketing activities

PepsiCo Acquisition• The acquisition of fast-food restaurants including : Pizza Hut,

Kentucky Fried Chicken, and Taco Bell. Acquisitions made by PepsiCo is a related acquisition.

• In 1980 -1990an acquired Mug root beer, 7UP International, Smart Food Popcorn ready to eat , Mexican Cookie company, Gamesa, Sunchip And this acquisition made by PepsiCo for a related product diversification.

• In 1992 PepsiCo acquired the Ocean Spray and Lipton which introduced a ready-to-drink tea’s (1993), Aquafina and Frappuccino ready-to-drink coffes (1994).

• Acquisitions after 2001, Quacker Oats and PepsiCo have begun to focus on their product including food, snacks, and beverages.

• 2006 and 2007 acquired the Flat Earth, which also is one kind of related acquisition.

1. Frito-Lay North America

How PepsiCo provide convenience to its customer over time with its product.

Going abreast with the more conscious about nutritional and healthy content.

improve the performance of the division’s score salty brands and further developing health and wellness product as a key strategic action.

They offered fruit and vegetable snacks which is deficientcy in most diets

2. Pepsico Beverages North America

PepsiCo use “Power of one” which is a strategy for supermarkets to place Pepsi and Frito –Lay products on shelves.

improve the local distribution, the information flow coming from retailer through “Innovation Summits”.

enhanced the nutritional properties of soft drink with attempt to develop new types pf sweeteners that would lower the clorie content of nondiet drinks

offered healthier beverages like –flavor and vitamin enriched water (for non carbonated Beverages Brands)

3. PepsiCo International

PepsiCo sale of beverage in international market utilize using “Power of One Strategy “ with a modification for snack foods international to suit the different form country to country.

4. Quaker Foods North America

PepsiCo tried to enhance the quality of product while diversifying the product’s categories withhot and ready to eat cereals, pancake mixes and syrup, and rice and pasta side dishes

EVALUATING THE DIVERSIFICATION STRATEGY OF PEPSICO1.Evaluating Industry Attractiveness2.Evaluating Business Unit Competitive Strength3.Checking the competitive advantage potential of cross-business STRATEGIC FIT4.Checking for Resource Fit5.Ranking the performance prospects of business units and assigning a priority for resource allocation6.Crafting New Strategic moves to improve overall corporate performance

IndustryAttractivenes

s

Measure Weight PepsiCo North America

PepsiCo International Frito-Lay Quaker Oats

Market Size and growth rate 0.1 10/1 10/1 8/0.8 8/0.8

Intensity of Competition 0.25 3/0.75 3/0.75 4/1 6/1.5

Emerging Opportunities and Threats

0.1 7/0.7 5/0.5 5/0.5 6/0.6

Cross-Industry Strategic fits 0.2 7/1.4 8/1.6 7/1.4 7/1.4

Resource Requirements 0.1 8/0.8 7/0.7 6/0.6 6/0.6

Seasonal and Cyclical Influences 0.05 10/0.5 9/0.45 5/0.25 5/0.25

Societal, Political, Regulatory, and Environmental Factors

0.05 4/0.2 5/0.25 6/0.3 5/0.25

Industry Profitability 0.1 9/0.9 9/0.9 7/0.7 8/0.8

Industry Uncertainty and Business Risk

0.05 7/0.35 7/0.35 6/0.3 7/0.35

Overall Attractiveness Score 6.6 6.5 5.85 6.55

Competitive Strength

Competitive Strength/Market Position WeightPepsiCo NA Pepsi Co

IntlFrito Lay

Quaker

1. Relative market share 0.15 7/1.05 9/1.35 9/1.35 4/0.6

2. Cost relative to competitor cost 0.20 4/0.8 8/1.6 5/1 3/0.63. Ability to match or beat rivals on key attributes 0.05 6/0.3 8/0.4 6/0.3 4/0.24. Ability to benefit from strategic fit from sister business 0.20 9/1.8 9/1.8 9/1.8 8/1.65. Bargaining leverage with suppliers and buyers 0.05 7/0.35 6/0.3 7/0.35 7/0.35

6. Brand image reputation 0.10 9/0.9 7/0.7 8/0.8 10/1

7. Competitive valuable capabilities 0.15 8/1.2 7/1.05 7/1.05 8/1.2

8. Profitability relative to competitors 0.10 8/0.8 7/0.7 8/0.8 10/1

Overall Competitive Strength Scores 1.00 7.2 7.9 7.45 6.55

Nine-Cell Matrix

Strategic Fits

• PepsiCo portfolio does exhibit good strategic fit• PepsiCo’s management team was

dedicated to capturing the strategic fit benefits within the business line up throughout the value chain

• share marketed research information to better enable each division to develop new product

Strategic Fits – R&D

Core product’s pepsico is food and beverages product. Since acquired Quaker Oats (QO) that product innovation is health product, is food diet containing. So with this acquisition, PepsiCo is also developing other products from different business units to create a product that contains elements of diet. R&D’s pepsico doesn’t need long time research, PepsiCo can use the results of research that has been used QO to adopt in other products. So it result sinergy in R&D and can reduce cost.

Strategic Fits – Distribution

Before acquiring QO, QO is a great food company. Already have a strategy, good value chain and also high revenue. Moreover, they also have good distribution channels. By acquiring QO, PepsiCo gained an advantage in terms of distribution of products they would do. Through distribution channels that already exist in QO, so pepsico can distribute their products well and there are new distribution channel from QO.

Strategic Fits – Sales and Marketing

With the same distribution channels, then sales and marketing can be merged. For example, only with a similar promotion for all business units of PepsiCo with just one website. therefore it can save marketing costs. Moreover, to increase sales, it could use a cross-subsidy system.The market share line unit can be supported with other products. Example for food product sales, can be combined with the drinks. So that sales of all units can be achieved.

Strategic Fits & Value Chain Match Ups

1. Skills transfer• Routinely shared valuable expertise for

instance when Pepsi Co acquired Quaker foods • Technical and technological know how was

shared among 230 plants, 3600 distribution systems, and 120, 000 service routes

• Shared market research information during power of one retailer strategy

Strategic Fits & Value Chain Match Ups

1. …

2. Cost savings• Achieved economies of scope by combining related

activities among the divisions.

• Quaker Oats integration – $160 mill in cost savings

by sharing product ingredients and packaging

materials.

• $40 mill. in cost saving by joint distribution of

Quaker snacks and Frito Lay products.

• Combination of Gatorade and Tropicana distribution

saved $ 120 million by 2005

Strategic Fits & Value Chain Match Ups

1. …2. …

3. Brand Sharing

• Global name brand recognition of PepsiCo

helped introduced its snacks business around

the world

Cash Flow Characteristics

KFC & PIZZA HUT

SPIN OFF

Strongest Contributor

• Revenues per Segment

(PepsiCo’s 2008 10K Report)

Resource Fit

FinancialPepsiCo’s portfolio exhibit good resource fit. Overall business’s situation is good. There is no Cash Hogs and Dog. Non Financial Transferring skills and competencies (R&D, technology, and information)

Conclusion

There is no cash hogs which will erode all of the cash flow using to fund their expansion, or no Dog which also hurt the cash flow of PepsiCo. All of business units are in its good condition, they can generate enough cash flow for themselves and also for supporting other operating activities. With the company’s business portfolio’s growth and more than sufficient cash-flow

Strategic Fit Cost Reduction Economic of scope

Recomendation

Pepsico can continue its acquisition, in the country that still has a low market share.PepsiCo can strengthen its bargaining power through vertical integration.

THANK YOU