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Strategy assignment on Pepsi Co

Words : 2500
    You are required to read the case “PepsiCo’s Strategy” and write a report addressing the following tasks:
    Critically analyze the directions of strategic development followed by PepsiCo over different periods.
    Assess the reasons for PepsiCo’s decision to use acquisition strategies as a means to achieve strategic competitiveness.
    Using the suitability, acceptability and feasibility criteria, undertake an evaluation of the strategic options of PepsiCo.
    PepsiCo’s Strategy
    PepsiCo was the world’s largest snack and Beverage Company, in 2014, with net revenues of approximately $66.7 billion. The company’s portfolio of businesses in 2015 included Frito-Lay salty snacks, Quaker Chewy granola bars, Pepsi soft-drink products, Tropicana orange juice, Lipton Brisk tea, Gatorade, Propel, SoBe, Quaker Oatmeal, Cap’n Crunch, Aquafina, Rice-A-Roni, Aunt Jemima pancake mix, and many other regularly consumed products. The company viewed the lineup as highly complementary since most of its products could be consumed together. For example, Tropicana orange juice might be consumed during breakfast with Quaker Oatmeal, and Doritos and a Mountain Dew might be part of someone’s lunch. In 2015, PepsiCo’s business lineup included 22 $1 billion global brands.
    The company’s top managers were focused on sustaining the impressive performance through strategies keyed to product innovation, close relationships with distribution allies, international expansion, and strategic acquisitions. Newly introduced products such as Mountain Dew KickStart, Tostitos Cantina tortilla chips, Quaker Real Medleys, Starbucks Refreshers, and Gatorade Energy Chews accounted for 15 to 20 percent of all new growth in recent years. New product innovations that addressed consumer health and wellness concerns were important contributors to the company’s growth, with PepsiCo’s better-for-you and good-for-you products becoming focal points in the company’s new product development initiatives. |In 2014, PepsiCo’s nutrition business accounted for about 20 percent of the company’s net revenue.
    In addition to focusing on strategies designed to deliver revenue and earnings growth, the company maintained an aggressive dividend policy, with more than $53 billion returned to shareholders between 2003 and 2012. The company bolstered its cash returns through carefully considered capital expenditures and acquisitions and a focus on operational excellence. Its Performance with Purpose plan utilized investments in manufacturing automation, a rationalized global manufacturing plan, reengineered distribution systems, and simplified organization structures to drive efficiency. In addition, the company’s Performance with Purpose plan was focused on minimizing the company’s impact on the environment by lowering energy and water consumption and reducing its use of packaging material, providing a safe and inclusive workplace for employees, and supporting and investing in the local communities in which it operated. PepsiCo had been listed on the Dow Jones Sustainability World Index for seven consecutive years and listed on the North America Index for eight consecutive years as of 2014.
    Even though the company had recorded a number of impressive achievements over the past decade, its growth had slowed since 2011. In fact, the spikes in the company’s revenue growth since 2000 had resulted from major acquisitions such as the $13.6 billion acquisition of Quaker Oats in 2001, the 2010 acquisition of the previously independent Pepsi Bottling Group and PepsiCo Americas for $8.26 billion, and the acquisition of Russia’s leading food and beverage company, Wimm-Bill-Dann (WBD) Foods, for $3.8 billion in 2011.
    Company History
    PepsiCo, Inc., was established in 1965 when Pepsi-Cola and Frito-Lay shareholders agreed to a merger between the salty-snack icon and soft-drink giant. The new company was founded with annual revenues of $510 million and such well-known brands as Pepsi-Cola, Mountain Dew, Fritos, Lay’s, Cheetos, Ruffles, and Rold Gold. PepsiCo’s roots can be traced to 1898 when New Bern, North Carolina, pharmacist Caleb Bradham created the formula for a carbonated beverage he named Pepsi-Cola. The company’s salty-snack business began in 1932 when Elmer Doolin, of San Antonio, Texas, began manufacturing and marketing Fritos corn chips and Herman Lay started a potato chip distribution business in Nashville, Tennessee. In 1961, Doolin and Lay agreed to a merger between their businesses to establish the Frito-Lay Company. During PepsiCo’s first five years as a snack and beverage company, it introduced new products such as Doritos and Funyuns, entered markets in Japan and eastern Europe, and opened, on average, one new snack-food plant per year. By 1971, PepsiCo had more than doubled its revenues to reach $1 billion. The company began to pursue growth through acquisitions outside snacks and beverages as early as 1968, but its 1977 acquisition of Pizza Hut significantly shaped the strategic direction of PepsiCo for the next 20 years. The acquisitions of Taco Bell in 1978 and Kentucky Fried Chicken in 1986 created a business portfolio described by Wayne Calloway (PepsiCo’s CEO between 1986 and 1996) as a balanced three-legged chair. Calloway believed the combination of snack foods, soft drinks, and fast food offered considerable cost sharing and skill transfer opportunities, and he routinely shifted managers among the company’s three divisions as part of the company’s management development efforts. PepsiCo strengthened its portfolio of snack foods and beverages during the 1980s and 1990s with the acquisitions of Mug Root Beer, 7-Up International, Smart food ready-to-eat popcorn, Walker’s Crisps (United Kingdom), Smith’s Crisps (United Kingdom), Mexican cookie company Gamesa, and Sun chips. Calloway added quick-service restaurants Hot-n-Now in 1990; California Pizza Kitchens in 1992; and East Side Mario’s, D’Angelo Sandwich Shops, and Chevy’s Mexican Restaurants in 1993. The company expanded beyond carbonated beverages through a 1992 agreement with Ocean Spray to distribute single-serving juices, the introduction of Lipton ready-to-drink (RTD) teas in 1993, and the introduction of Aquafina bottled water and Frappuccino ready-to-drink coffees in 1994. By 1996 it had become clear to PepsiCo management that the potential strategic-fit benefits existing between restaurants and PepsiCo’s core beverage and snack businesses were difficult to capture. In addition, any synergistic benefits achieved were more than offset by the fast-food industry’s fierce price competition and low profit margins. In 1997, CEO Roger Enrico spun off the company’s restaurants as an independent, publicly traded company to focus PepsiCo on food and beverages. Soon after the spinoff of PepsiCo’s fast-food restaurants was completed, Enrico acquired Cracker Jack, Tropicana, Smith’s Snack food Company in Australia, SoBe teas and alternative beverages, Tasali Snack Foods (the leader in the Saudi Arabian salty-snack market), and the Quaker Oats Company.
    The 2001 Acquisition of Quaker Oats
    At $13.9 billion, Quaker Oats was PepsiCo’s largest acquisition and gave it the number-one brand of oatmeal in the United States, with more than a 60 percent category share; the leading brand of rice cakes and granola snack bars; and other well-known grocery brands such as Cap’n Crunch, Rice-A-Roni, and Aunt Jemima. However, Quaker’s most valuable asset in its arsenal of brands was Gatorade. Gatorade was developed by University of Florida researchers in 1965, but it was not marketed commercially until the formula was sold to Stokely-Van Camp in 1967. When Quaker Oats acquired the brand from Stokely-Van Camp in 1983, Gatorade gradually made a transformation from a regionally distributed product with annual sales of $90 million to a $2 billion powerhouse. Gatorade was able to increase sales by more than 10 percent annually during the 1990s, with no new entrant to the sports beverage category posing a serious threat to the brand’s dominance. PepsiCo, Coca-Cola, France’s Danone Group, and Swiss food giant Nestlé all were attracted to Gatorade because of its commanding market share and because of the expected growth in the isotonic sports beverage category. PepsiCo became the successful bidder for Quaker Oats and Gatorade with an agreement struck in December 2000, but the merger would not receive U.S. Federal Trade Commission (FTC) approval until August 2001. The FTC’s primary concern over the merger was that Gatorade’s inclusion in PepsiCo’s portfolio of snacks and beverages might give the company too much leverage in negotiations with convenience stores and ultimately force smaller snack-food and beverage companies out of convenience store channels. In its approval of the merger, the FTC stipulated that Gatorade and PepsiCo’s soft drinks could not be jointly distributed for 10 years.
    Acquisitions after 2001
    After the completion of the Quaker Oats acquisition in 2001, the company focused on integration of Quaker Oats’ food, snack, and beverage brands into the PepsiCo portfolio. The company made a number of “tuck-in” acquisitions of small, fast-growing food and beverage companies in the United States and internationally to broaden its portfolio of brands. Tuck-in acquisitions in 2006 included Stacy’s bagel and pita chips, Izze carbonated beverages, Netherlands based Duyvis nuts, and Star Foods (Poland). Acquisitions made during 2007 included Naked Juice fruit beverages, Sandora juices in the Ukraine, New Zealand’s Bluebird snacks, Penelopa nuts and seeds in Bulgaria, and Brazilian snack producer Lucky. The company also entered into a joint venture with the Strauss Group in 2007 to market Sabra - the top-selling and fastest-growing brand of hummus in the United States and Canada. The company acquired the Russian beverage producer Lebedyansky in 2008 for $1.8 billion, and in 2010 it acquired Marbo, a potato chip production operation in Serbia.
    In 2010 and 2011, the company executed its largest acquisitions since the 2001 acquisition of
    Quaker Oats. In 2010, PepsiCo acquired the previously independent Pepsi Bottling Group and PepsiCo Americas for $8.26 billion in cash and PepsiCo common shares. The acquisition was designed to better integrate its global distribution system for its beverage business. In 2011, it acquired Russia’s leading food and beverage company, Wimm-Bill-Dann Foods, for $3.8 billion. The combination of acquisitions and the strength of PepsiCo’s core snacks and beverages business allowed the company’s revenues to increase from approximately $29 billion in 2004 to more than $66 billion in 2013.
    Building Shareholder Value in 2014
    Three people had held the position of CEO since the company began its portfolio restructuring in 1997. Even though Roger Enrico was the chief architect of the business lineup as it stood in 2007, his successor, Steve Reinemund, and Indra Nooyi, the company’s CEO in 2007, were both critically involved in the restructuring. Nooyi joined PepsiCo in 1994 and developed a reputation as a tough negotiator who engineered the 1997 spin-off of Pepsi’s restaurants, spearheaded the 1998 acquisition of Tropicana, and played a critical role in the 1999 IPO of Pepsi’s bottling operations. After being promoted to chief financial officer, Nooyi was also highly involved in the 2001 acquisition of Quaker Oats. Nooyi was selected as the company’s CEO upon Reinemund’s retirement in October 2006. Nooyi had immigrated to the United States in 1978 to attend Yale’s Graduate School of Business, and she worked with the Boston Consulting Group, Motorola, and Asea Brown Boveri before arriving at PepsiCo in 1994. In the eight years under Nooyi’s leadership, PepsiCo’s revenues had increased by nearly 90 percent, and its share price had grown by 50 percent.
    In 2014, PepsiCo’s corporate strategy had diversified the company into salty and sweet snacks, soft drinks, orange juice, bottled water, ready-to-drink teas and coffees, purified and functional waters, isotonic beverages, hot and ready-to-eat breakfast cereals, grain-based products, and breakfast condiments. Most PepsiCo brands had achieved number one or number two positions in their respective food and beverage categories through strategies keyed to product innovation, close relationships with distribution allies, international expansion, and strategic acquisitions. The company was committed to producing the highest-quality products in each category and was working diligently on product reformulations to make snack foods and beverages less unhealthy. The company believed that its efforts to develop good-for-you and better-for-you products would create growth opportunities from the intersection of business and public interests. PepsiCo was organized into six business divisions, which all followed the corporation’s general strategic approach. Frito-Lay North America manufactured, marketed, and distributed such snack foods as Lay’s potato chips, Doritos tortilla chips, Cheetos cheese snacks, Fritos corn chips, Grandma’s cookies, and Smartfood popcorn. Quaker Foods North America manufactured and marketed cereals, rice and pasta dishes, granola bars, and other food items that were sold in supermarkets. Latin American Foods manufactured, marketed, and distributed snack foods and many Quaker-branded cereals and snacks in Latin America. PepsiCo Americas Beverages manufactured, marketed, and sold beverage concentrates, fountain syrups, and finished goods under such brands as Pepsi, Gatorade, Aquafina, Tropicana, Lipton, Dole, and SoBe throughout North and South America. PepsiCo Europe manufactured, marketed, and sold snacks and beverages throughout Europe, while the company’s Asia, Middle East, and Africa division produced, marketed, and distributed snack brands and beverages in more than 150 countries in those regions.
    Frito-Lay North America
    As of 2015, three key trends that were shaping the industry were convenience, a growing awareness of the nutritional content of snack foods, and indulgent snacking. A product manager for a regional snack producer explained, “Many consumers want to reward themselves with great-tasting, gourmet flavors and styles. . . . The indulgent theme carries into seasonings as well. Overall, upscale, restaurant influenced flavor trends are emerging to fill consumers’ desires to escape from the norm and taste snacks from a wider, often global, palate.” 1 Most manufacturers had developed new flavors of salty snacks such as jalapeno and cheddar tortilla chips and pepper jack potato chips to attract the interest of indulgent snackers. Manufacturers had also begun using healthier oils when processing chips and had expanded lines of baked and natural salty snacks to satisfy the demands of health-conscious consumers. Snacks packaged in smaller bags not only addressed overeating concerns but also were convenient to take along on an outing. In 2013 Frito-Lay owned the top-selling chip brand in each U.S. salty-snack category and held more than a 2-to-1 lead over the next-largest snack-food maker in the United States. Frito-Lay’s 36.6 percent market share of convenience foods sold in the United States was more than five times greater than runner-up Kellogg’s market share of 6.9 percent. Convenience foods included both salty and sweet snacks, such as chips, pretzels, ready-to-eat popcorn, crackers, dips, snack nuts and seeds, candy bars, and cookies. PepsiCo’s Performance with Purpose goals applied to all of its business units. Frito-Lay North America’s (FLNA’s) revenues increased by 3 percent during 2013, but its net revenue increased by 4 percent and its operating profit increased by 6 percent. The division’s management believed that growth in snack foods remained possible since typical individuals, on average, consumed snacks 67 times per month. On average, consumers chose Frito-Lay snacks only eight times per month. To increase its share of snack consumption, FLNA was focused on developing additional better-for-you (BFY) snacks like Baked Cheetos and Doritos packaged in smaller portion sizes. Between 2008 and 2013, improving the performance of the division’s core salty brands and further developing health and wellness products were key strategic initiatives. The company had eliminated trans fats from all Lay’s, Fritos, Ruffles, Cheetos, Tostitos, and Doritos varieties, marketed a wide variety of gluten-free products, and was looking for further innovations to make its salty snacks more healthy. The company had introduced Lay’s Classic Potato Chips cooked in sunflower oil that retained Lay’s traditional flavor but contained 50% less saturated fat. Good-for-you (GFY) snacks, such as Flat Earth fruit and vegetable snacks, offered an opportunity for the company to exploit consumers’ desires for healthier snacks and address a deficiency in most diets. Americans, on average, consumed only about 50 percent of the U.S. Department of Agriculture’s recommended daily diet of fruits and vegetables. Other GFY snacks included Stacy’s Pita Chips, Sabra hummus, salsas and dips, and Quaker Chewy granola bars. In 2013, FLNA manufactured and marketed baked versions of its most popular products, such as Cheetos, Lay’s potato chips, Ruffles potato chips, and Tostitos Scoops! tortilla chips.
    Quaker Foods North America
    Quaker Foods produced, marketed, and distributed hot and ready-to-eat cereals, pancake mixes and syrups, and rice and pasta side dishes in the United States and Canada. The division recorded sales of approximately $2.6 billion in 2013. The sales volume of Quaker Foods products decreased by nearly 1 percent annually between 2011 and 2013 with Quaker Oatmeal, Life cereal, and Cap’n Crunch cereal volumes competing in mature industries with weak competitive positions relative to Kellogg’s and General Mills. Sales of Aunt Jemima syrup and pancake mix and Rice-A-Roni rice and pasta kits also declined between 2011 and 2013. Quaker Oats was the star product of the division, with a commanding share of the North American market for oatmeal in 2013. Rice-A-Roni also held a number-one market share in the rice and pasta side-dish segment of the consumer food industry. More than one-half of Quaker Foods’ 2013 revenues was generated by BFY and GFY products.
    Latin American Foods
    PepsiCo management believed international markets offered the company’s greatest opportunity for growth since per capita consumption of snacks in the United States averaged 6.6 servings per month while per capita consumption in other developed countries averaged 4 servings per month and in developing countries averaged 0.4 serving per month. PepsiCo executives expected China and Brazil to become the two largest international markets for snacks. The United Kingdom was estimated to be the third-largest international market for snacks, while developing markets Mexico and Russia were expected to be the fourth- and fifth-largest international markets, respectively. Developing an understanding of consumer taste preferences was a key to expanding into international markets. Taste preferences for salty snacks were more similar from country to country than were preferences for many other food items, and this allowed PepsiCo to make only modest modifications to its snacks in most countries. For example, classic varieties of Lay’s, Doritos, and Cheetos snacks were sold in Latin America. In addition, consumer characteristics in the United States that had forced snack-food makers to adopt better-for-you or good-for-you snacks applied in most other developed countries as well.
    PepsiCo operated 50 snack-food manufacturing and processing plants and 640 warehouses in Latin America, with its largest facilities located in Guarulhos, Brazil; Monterrey, Mexico; Mexico City, Mexico; and Celaya, Mexico. PepsiCo was the second-largest seller of snacks and beverages in Mexico, and its Doritos, Marias Gamesa, Cheetos, Ruffles, Emperador, Saladitas, Sabritas, and Tostitos brands were popular throughout most of Latin America. The division’s revenues had grown from $7.2 billion in 2011 to $8.4 billion in 2014 and accounted for 11 percent of 2014 total net revenues.
    PepsiCo Americas Beverages
    PepsiCo was the largest seller of liquid refreshments in the United States, with a 24 percent share of the market in 2013. Coca-Cola was the second-largest nonalcoholic beverage producer, with a 21 percent market share. Dr. Pepper Snapple Group was the third-largest beverage seller in 2013, with a market share of 8.9 percent. Private-label sellers of beverages collectively held an 8 percent market share in 2013. As with Frito-Lay, PepsiCo’s beverage business contributed greatly to the corporation’s overall profitability and free cash flows. In 2013, PepsiCo Americas Beverages (PAB) accounted for 32 percent of the corporation’s total revenues and 26 percent of its operating profits. The PAB division’s $1 billion brands included Gatorade, Tropicana fruit juices, Lipton ready-to-drink tea, Pepsi, Diet Pepsi, Mountain Dew, Diet Mountain Dew, Aquafina, Miranda, Sierra Mist, Dole fruit drinks, Starbucks cold-coffee drinks, and SoBe. Gatorade was the number-one brand of sports drink sold worldwide; Tropicana was the number-two seller of juice and juice drinks globally; and PAB was the second-largest seller of carbonated soft drinks worldwide, with a 29 percent market share in 2014. Market leader Coca-Cola held a 40.5 percent share of the carbonated soft-drink (CSD) industry in 2014. Carbonated soft drinks were the most consumed type of beverage in the United States, with industry sales of $20.4 billion, but the industry had declined by 1 to 2 percent annually for nearly a decade. The overall decline in CSD consumption was a result of consumers’ interest in healthier food and beverage choices. In contrast, flavored and enhanced water, energy drinks, ready-to-drink teas, and bottled water were growing beverage categories that were capturing a larger share of the stomachs in the United States and internationally.
    PepsiCo’s Carbonated Soft-Drink Business
    Among Pepsi’s most successful strategies to sustain volume and share in soft drinks was its Power of One strategy, which attempted to achieve the synergistic benefits of a combined Pepsi-Cola and Frito-Lay envisioned by shareholders of the two companies in 1965. The Power of One strategy called for supermarkets to place Pepsi and Frito-Lay products side by side on shelves. The company was also focused on soft-drink innovation to sustain sales and market share, including new formulations to lower the calorie content of non-diet drinks.
    PepsiCo’s Noncarbonated Beverage Brands
    Although carbonated beverages made up the largest percentage of PAB’s total beverage volume, much of the division’s growth was attributable to the success of its noncarbonated beverages. Aquafina was the number-one brand of bottled water in the United States. Gatorade, Tropicana, Aquafina, SoBe, Starbucks Frappuccino, Lipton RTD teas, and Propel were all leading BFY and GFY beverages in the markets where they were sold.
    PepsiCo Europe
    All of PepsiCo’s global brands were sold in Europe, as well as its country- or region-specific brands such as Domik v Derevne, Chjudo, and Agusha. PespiCo Europe operated 125 plants and approximately 525 warehouses, distribution centers, and offices in eastern and Western Europe. The company’s acquisition of Wimm-Bill-Dann Foods, along with sales of its long-time brands, made it the number-one food and beverage company in Russia, with a 2-to-1 advantage over its nearest competitor. It was also the leading seller of snacks and beverages in the United Kingdom. PepsiCo Europe management believed further opportunities in other international markets existed, with opportunities to distribute many of its newest brands and product formulations throughout Europe.
    Asia, Middle East, and Africa
    PepsiCo’s business unit operating in Asia, the Middle East, and Africa manufactured and marketed all of the company’s global brands and many regional brands such as Kurkure and Chipsy. PepsiCo operated 45 plants, 490 distribution centers, warehouses, and offices located in Egypt, Jordan, and China and was the number-one brand of beverages and snacks in India, Egypt, Saudi Arabia, United Arab Emirates, and China. The division’s revenues had declined from $7.4 billion in 2011 to $6.7 billion in 2014, while its operating profit declined from $1,210 to $1,080 over the same period of time.
    Value Chain Alignment between PepsiCo Brands and Products
    PepsiCo’s management team was dedicated to capturing strategic-fit benefits within the business lineup throughout the value chain. The company’s procurement activities were coordinated globally to achieve the greatest possible economies of scale, and best practices were routinely transferred among its more than 200 plants, over 3,500 distribution systems, and 120,000 service routes around the world. PepsiCo also shared market research information with its divisions to better enable each division to develop new products likely to be hits with consumers, and the company coordinated its Power of One activities across product lines. PepsiCo management had a proven ability to capture strategic fits between the operations of new acquisitions and its other businesses. The Quaker Oats integration produced a number of noteworthy successes, including $160 million in cost savings resulting from corporate wide procurement of product ingredients and packaging materials and an estimated $40 million in cost savings attributed to the joint distribution of Quaker snacks and Frito-Lay products. In total, the company estimated that the synergies among its business units generated approximately $1 billion annually in productivity savings.
    Pepsico’s Strategic Situation in 2014
    For the most part, PepsiCo’s strategies seemed to be firing on all cylinders in 2015. PepsiCo’s chief managers expected the company’s lineup of snack, beverage, and grocery items to generate operating cash flows sufficient to reinvest in its core businesses, provide cash dividends to shareholders, fund a $15 billion share-buyback plan, and pursue acquisitions that would provide attractive returns. Nevertheless, the low relative profit margins of PepsiCo’s international businesses created the need for a continued examination of its strategy and operations to better exploit strategic fits between the company’s international business units. The company had developed a new divisional structure in 2008 to combine its food and beverage businesses in Latin America into a common division.
    Also, the company’s international businesses were reorganized to boost profit margins in Europe and Asia, the Middle East, and Africa. However, more than five years after the reorganization, the performance of the company’s international businesses continued to lag that of its North American businesses by a meaningful margin. Some food and beverage industry analysts had speculated that additional corporate strategy changes might also be required to improve the profitability of PepsiCo’s international operations and to help restore previous revenue and earnings growth rates. Possible actions might include a reprioritization of internal uses of cash, new acquisitions, further efforts to capture strategic fits existing between the company’s various businesses, or the divestiture of businesses with poor prospects of future growth and minimal strategic fit with PepsiCo’s other businesses.
    Source: Gamble, J., & Thompson, A. A. (2011). Essentials of Strategic Management: The Quest for Competitive Advantage. New York, McGraw-Hill Irwin.


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