Pepsico’s Diversification Strategy

Abstract PepsiCo has built a strong empire that has given it dominance throughout much of the world as a provider or snack foods and beverages. As it has worked to build its market share, PepsiCo has made many key decisions – some positive and some negative. It has also gone through a number of changes including the acquisition and subsequent divestiture of several fast food chains. This paper focuses on the process that all companies should follow to help determine whether the industry they are in demonstrates sufficient attractiveness and whether their current business units have sufficient competitive advantage.

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In 1965, Pepsi-Cola and Frito-Lay combined forces to create a new company that could capitalize on the combined strengths of the two companies. Almost immediately, the company used this new synergy to create such new snack products as Doritos and Funyuns, both or which have proven to be successes. In addition, PepsiCo entered new markets including Japan and Eastern Europe. However, the company also had its share of crucial missteps – principal of which was entering into the fast food industry. With the purchase of Pizza Hut, Kentucky Fried Chicken and Taco Bell, PepsiCo was well on its way to building a proverbial three-legged stool.

The CEO at the time, Wayne Callaway, believed that this new structure would bring the company success and referred to the three legs of the stool as being snack foods, soft drinks and fast food. He believed that there would be significant cost savings and skills transfer with this new approach. While there may have been many advantages to this new structure, it became clear by 1996 that the advantages did not outweigh the burden that it placed on the company in terms of decreased margins and the drain on the vital resources of the company.

PepsiCo promptly divested itself of the fast food restaurants and focused more on developing the snack food and beverage segments of its company. In an effort to not repeat this sort of mistake, PepsiCo must be diligent to constantly re-evaluate its products and structure to make sure that they are still in line with its core business and that substantial benefit is offered to justify the demands on the company’s resources. To do this, two main models are utilized. First, the industries that PepsiCo is engaged in must be assessed to determine if they provide sufficiently attractive attributes.

According to Thompson, Stickland and Gamble, three prime questions must be answered in order to determine the attractiveness. 1. Does each industry the company has diversified into represent a good business for the company to be in? 2. Which of the company’s industries are most attractive and which are least attractive? 3. How appealing is the whole group of industries in which the company has invested? Thompson et al utilizes a simple matrix to assess various factors that help guide to a conclusion regarding these questions.

The matrix rates responses to subjective data in an effort to create a measurable method to evaluate an industry’s attractiveness. This matrix has been added below with the data for the snack food and beverage industries. Because of the similar nature of these industries, many of the figures are identical. Thompson et al states that the overall weighted attractiveness score must be higher than 5. 00 for an industry to be deemed attractive. Currently, both of PepsiCo’s main industries present attractive potential for the future.

One of the main factors increasing the score for both industries is the market size and projected growth rate. As PepsiCo provides food and drink products, the growth of both industries is closely tied to the net birth rate of the markets served. In addition, the industry has expanded greatly as new international markets are introduced to snack foods and beverages. Other factors which increased the attractiveness of these industries are the economies of scale that are often achieved which help to boost the profitability of market participants and the unlikelihood of disintegration of the industry.

Although seasonality exists to some extent in the beverage industry, the 2008 10K for PepsiCo states that this only affects which beverages are purchased as consumer preference changes between cooler and warmer months. Although a similar variance is noted in the snack food industry, general snack food sales increase during major holiday months. The CEO states that “taken as a whole, seasonality does not have a material impact…” Other items on the matrix were assessed based on information gained from various sources including the websites of Coca-Cola (felt to be the closest competitor) and PepsiCo as well as their respective SEC 10K filings.

Based on the information gained, PepsiCo has now focused its business on two synergistic industries with strong potential. In order to assess the attractive degrees of competitive strength and good long-term earnings potential of PepsiCo’s business units in these industries, a similar matrix is utilized. Of the more important factors in this matrix are the relative market share held by each of the business units in their respective industries, the business unit’s ability to keep costs lower compared to competitors and maximize results from such items as brand image, bargaining leverage and benefits from strategic fits with sister businesses.

Below is matrix of the various business units within PepsiCo and their competitive strength measure. Since its original purchase, Quaker Foods has provided significant benefits to PepsiCo including the addition of Gatorade to the product lineup. A significant market share was established with this product during the 1990s as it increased its revenues by 10% each year with no significant threats from other market participants. In addition, Quaker Foods provides an arsenal of other leading products that command significant market share including Quaker oatmeal, various cereals, Rice-A-Roni products and Quaker granola bars.

These factors have largely contributed to the success of PepsiCo. Frito-Lay has also offered significant contributions to PepsiCo. A clear benefit is PepsiCo’s ability to use the 90% market share for Frito-Lay products to demand shelf space for other PepsiCo beverages that currently receive a lackluster market share. Finally, over the years, PepsiCo has built a very strong brand image and reputation across North America. This has served PepsiCo well as it has gained its footing and moved into international markets.

However, as can be seen on the chart above, PepsiCo is still faced with a much lower level of brand recognition in many foreign countries as demonstrated with the poor performance of the beverage segment in Chile. As PepsiCo looks forward into the future, it should remember to focus on the need to develop this brand recognition throughout each market that it enters. As the brand recognition improves overseas, many of the other factors impacting PepsiCo overseas will also improve.

Domestically, PepsiCo should continue to look for opportunities to maximize synergies with other companies either through strategic alliances or through acquisition or merger. This will help the company to further its market share and improve its ability to take advantage of such cost saving moves as consolidated distribution, etc. References Thompson, A. A. , Jr. , Strickland, A. J. ,III. , Gamble, J. E. (2010). Crafting and Executing Strategy: The Quest for Competitive Advantage, (17th Edition). New York: McGraw-Hill/Irwin Website: www. coca-cola. com Accessed 6/6/09 Website: www. pepsi. com Accessed 6/6/09

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