Definition of the Issue The PepsiCo-2005 case study has several issues revolving it. It has the internal issue that PepsiCo has not been able to consistently meet its growth goal of 15+ percent annual increase in earnings for the last 10 years. Its external issues consist of its products as reaching maturity stage industry wise and its divisions, except Frito-Lay North America (FLNA), fail to rank highest in its respective market segments. Division wise, the company holds a large share of each respective market, but over-all the company sustains a flat growth rate and fails to meet its growth goal.
In respect to this, it can be seen that the real issue in this case is the need of a strategy to sustain a compound annual growth rate (CAGR) in earnings per share of 15 percent per year. This paper aims to develop a three-year strategic plan for PEPSICO that can best ensure this growth through this decade. II. Objectives The paper’s objectives include designing of alternatives that may aid its development for a sound strategy in response to the issue through a quantitative analysis.
The paper would also include an analysis of each alternative. From the generated alternatives, the paper would focus on one that would seem to best apply to the given circumstances. The paper also includes a potential problem analysis to aid in strengthening the strategy’s defenses and enables the company to predict and anticipate future issues. III. S. W. O. T. Analysis Strengths PepsiCo has several strengths that enabled them to be the third-largest food and beverage company in the world. The first strength is being a diversified company.
This allowed them to earn more, and in times when a particular division fails to gain a substantial amount of revenue, it can be balanced by the other strong divisions of the firm. Having a large market share due to diversification is also advantageous to the company since when its PepsiCo Beverages North America (PBNA) division decreased its market share, the revenues continued to go up. Secondly, having a well-built distribution channel is also a great strength, since it is important that your customers have easy access to your product in order for it to turn into sales.
Another strength is the company’s ability to respond quickly to emerging trends and issues such as health and environmental issues and the development of the “PEPSI Generation”. Lastly, the company’s strong strategy of penetrating the international market is also a strength and they did this by focusing more on the emerging markets. Weaknesses The main weakness that can be seen in PepsiCo is its focus. Due to its diversified products, it tends to have divided concentration on each division (unlike Coke and Kellogg’s wherein they focus on one product line).
This weakness tends to lead to less market shares of each division. Opportunities One of the opportunities that can be quickly seen is the company’s efforts in penetrating the emerging markets of PepsiCo International (PI). Instead of focusing in already developed markets, PI has focused on emerging markets such as China, India, Eastern Europe, and Russia. Doing so gives the company a better grip on an opportunity to grow and increase market share than by competing with Coca-Cola on already matured markets.
One strategy of PepsiCo is introducing a Pepsi Generation theme for the product, they aim to appeal to the younger generation and make them lifelong Pepsi drinkers. We see opportunities in this area since the possibilities of designing new trends are endless. This lets them appeal to long-time drinkers as well as sway new ones. PepsiCo also sees the opportunity in surfacing issues like, health and environmental, and by quickly responding to these concerns at hand, they appeal to the consumers first before any other company does and this may also lead to greater market share.
They have opportunities in this area since they have the company has the capability and the mindset to respond to such issues fast with creative ideas. Threats The competitors are the company’s threats. Each of PepsiCo’s division has its close competitors. It has been observed that most of their competitors are single-product line companies, giving them a more direct handle of the industry. PepsiCo will have to compete with these strong competitors head on in order to maintain its market share. If PepsiCo is not careful enough, its competitors may eat its market share.
Emerging health/environment issues are also posing as threat to PepsiCo. More Consumers are starting to eat and live healthy, but as we can see majority of PepsiCo’s products are not healthy (junk food and soft drinks). IV. Alternative Generation •The first alternative is to create a permanent merger with Pepsi beverage and Cadbury Schweppes. Pepsi has a 31. 7% market share while Cadbury Schweppes has 14. 5% and together they have 46. 2% which beats Coca-Cola’s 43. 1% market share. This merger and infusion of powers was made to hopefully be able to topple Coca-cola.
Coca-Cola is the most popular soft drink in the world and creating this merger would be a challenge and a threat to them. This alternative would also leave the other divisions as they are since Frito-Lay and PepsiCo International (PI) continue to have remain on top and contribute much of the profit. We have thought of dropping Quaker Foods because it is the division with the least contribution of profits but we thought otherwise because Quaker Foods is newly acquired and is currently in adjustment period.
It is slowly picking up momentum as consumers are looking for healthier food and Quaker Foods is the division of PepsiCo giving that to them. •The second alternative is to make strategic plans for each division. For Pepsi Beverage, it would be best to acquire Cadbury Schweppes. This is different from a merger because by acquiring it, Pepsi can control it totally. Merging would mean being partners. By acquiring Cadbury Schweppes, Pepsi would be able to choose which of their (Cadbury Schweppes’) products they (Pepsi) can keep and Pepsi would also have a big chance of getting Cadbury Schweppes’ market share or at least a significant part of it.
Pepsi can also implement Product Development to respond to the emerging trends. Quaker Foods should continue to concentrate on expanding their market share. Being relatively new under PepsiCo, they must continue to familiarize themselves with the market and later on introduce more health products to the consumers as this is the emerging lifestyle trend. A product and packaging development will also be done as we plan to appeal to a larger target market. For Frito-Lay Foods, its best to plan for them to go for unrelated diversification.
Since it is a product-based business, a strategy includes creating a service-based business like a convenience store that would offer Frito-Lay products and other PepsiCo products as well. This is a new venture for PepsiCo and it could turn out to be a success once again. V. Conclusion and Recommendation After taking into account the different internal and external issues that were mentioned in the case, it is easy to identify the main problem/issue of PepsiCo and that issue is its incapacity to reach its growth goal, which is to sustain a compound annual growth rate (CAGR) in earnings per share of 15 percent per year.
Upon careful analysis of the company’s strengths, weaknesses, opportunities & threats, two alternatives were drawn to address and solve the said issue. The first alternative focuses on having Pepsi Beverage, a division of PepsiCo, permanently merge with one of its competitor; Cadbury Schweppes to be able beat Coca-cola, the current leader in carbonated beverage drink, out of the first spot. The alternative will allow PepsiCo to increase its equity base, obtain the customer of Cadbury, and increase the resource of the firm because of the merger.
The main drawback with this alternative is that there is no assurance that a competitor will agree to certain terms of the merger because there is conflict of interest like on how profits should be distributed and management selected once the merger occurs. On the other hand, the second alternative focuses on one of PepsiCo’s major strength, which is being a diversified company. Unlike the first alternative, this one takes into account all the divisions of PepsiCo in formulating the strategic plan to solve the main issue.
Also unlike the first alternative, which suggests a merger of Pepsi Beverage & Cadbury Schweppes, this one instead proposes an acquisition of Cadbury. Having the same benefits as a merger, the firm is much better off with an acquisition because in the long run PepsiCo is better off paying a large sum of money (acquisition price) rather than having to share profits with additional stockholders (dividends). It is therefore recommended that the second alternative be pursued over the first alternative because this takes advantage of the strength PepsiCo inhibits by being a diversified company.
It is believe that this alternative would help PepsiCo in reaching their growth goals. VI. Potential Problem Analysis It would be a big problem for Pepsi Beverage if Cadbury would not agree to sell their company to them. There is a need to make a new strategy if such happens. Another potential problem is that if the new product developed by PepsiCo would not click to the market. Time, money and effort in developing such product would be put to waste. Doing these strategies might also result in a decline in market share just like what happened to Coke when they changed their formulation.
Loyal customers might not like these moves which might make them not patronize PepsiCo products anymore. A probable solution for this problem is to invest in better R & D of the product, to reduce the risk of this problem from happening. A potential problem could exist regarding the trend now on healthier food. If the trend now on healthier food goes the other way around, the demand for healthy food declines affecting the sales of such products. Quaker Foods would greatly be affected because its products are healthy foods.
Quaker Food division might not be able to reach the desired profit of the firm. Once this happens a possible solution for this problem is the defensive strategy, divestiture. If Quaker Foods do not produce adequate profits then it is time to sell it and move on. The unrelated diversification on Frito-Lay Foods might produce a problem for the firm that is if the planned service business fails. If it does not click, all time, money and effort put forth on the project will be of waste. R & D for the planned diversification is still the best solution to reduce the risk of the problem from happening.