PEPSI'S CORPORATE AND BUSINESS-LEVEL STRATEGIES

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KINGSTON UNIVERSITY

BUSINESS STRATEGY COURSE

CASE STUDY ON

PRESENTED TO

DR KENT SPRINGDAL

BY

BIRAN, KEVIN, KIRAN, NASEER AND MAYA

TABLE OF CONTENT

  1. The History of Pepsi
  1. The Foundations of Pepsi
  2. The Emergence of a Global Company

  1. Internal Analysis
  1. Introduction
  2. Observations throughout History
  3. Core Competencies
  1. Marketing Customer Responsiveness
  2. Branding Equity
  3. Reducing Costs    

  1. External Analysis
  1. Introduction
  2. Cyclical Corporate Strategy
  3. Key Factors for Success
  4. General Influences
  1. Political Environment
  2. Economic Environment
  3. Socio-cultural Environment
  4. Technological Environment
  1. Specific Influences
  2. The Co-operators
  3. The Importance of being aware of the Environment

  1. Pepsi’s Corporate and Business-level Strategies
  1. Responding to Conflicting Demands: the Environmental Challenge
  2. Business-level Strategy
  1. PepsiCo Beverage Industry
  1. Customer needs, Responsiveness and Product Differentiation to Pepsi-Cola
  2. Customer Group
  3. Distinctive Competencies
  4. Market Segmentation
  1. Corporate-level Strategy
  1. Human Resources Management
  2. Mergers, Acquisitions and Positioning
  3. PepsiCo Bottling Group Strategy

  1. Company Structure
  1. Structure of PepsiCo
  2. The Multidivisional Organisation Structure
  1. How the Structure has developed
  2. The Structure should follow the Strategy
  1. Internal Structure of PepsiCo
  1. Management and Employees
  2. Benefits and Rewards
  3. Association with Minorities
  1. Social Commitments
  1. Conclusions
  1. PepsiCo within the U.S.
  2. Global PepsiCo
  1. PepsiCo emerging globally
  2. Action Plan for the Emergence of Pepsi-Cola as Market Leader in the Global Market
  3. Recommendations
  1. The Strategic Process of PepsiCo
  2. Recommendations

  1. SWOT Analysis
  1. Strengths
  2. Weaknesses
  3. Opportunities

      6.4. Threats

  1. Recommendations

1. The History of Pepsi

1.1 The Foundations of Pepsi

The history of Pepsi-Cola starts in 1896 in the town of New Bern in North Carolina, USA in a drugstore owned by the pharmacist Caleb Bradham. He came up with many recipes of new drinks to be served at the soda fountain of his drugstore.

Bradham aim was to create a drink both delicious, healthy, aiding digestion and boosting energy. It would be free of impurities and it should not contain any strong narcotics. Eventually one of his drinks became very popular and the customers started to call it Brad’s drink. This was the beginning of Pepsi-Cola’s story and later, Bradham’s vision was turned into a mission for the future company.

In the beginning, the business remained small and based on operations conducted within its immediate territory. By 1898 the drink was renamed Pepsi and given its first logo and patented trademark. By 1902 the popularity of Pepsi transformed the company into a fully-fledged business.

New Bern Weekly Journal published the first newspaper advertisement and the bottling system was improved with the addition of five-gallons kegs to six ounce bottles and a marketing slogan: “Exhilarating, Invigorating, Aids Digestion”.

In 1905 Pepsi started with bottling franchises and registered its trademark in Canada and Mexico in 1908. At the same time the U.S. government enacted the Pure Food and Drug Act prohibiting substances such as arsenic, barium, uranium, etc. in food and beverages. Consequently, many soft drink manufacturers, including Coca-Cola, had to change their formulas. Pepsi exploited the situation against their main competitor Coca-Cola, by claiming that they already met federal requirements.  

Distribution was modernized with motor vehicles and started to promote its products using famous public figures like Barney Olfield, an automobile race pioneer who endorsed Pepsi.

In the 1920’s and 1930’s the company experienced financial difficulties and went bankrupt twice in 1923 and 1931. In 1931 the company was sold and Charles G. Guth took over the presidency commanding a reformulation of the syrup recipe.

Few years later Walter S. Mack, Jr. was elected president and the company became a modern marketing company by using comic strips and Hollywood movie stars to advertise its products.

In 1959 Pepsi entered the former Soviet market in Moscow and acquired Mountain Dew in 1963 making it the second best selling drink ever produced by the company.

1.2 The Emergence of a Global Company

In 1965, the company expanded and grew significantly through the merger of Pepsi-Cola, operating in the beverage industry and Frito-Lay in the snack food sector.

The following year, the newly formed PepsiCo entered the Japanese and Eastern European markets. In 1974 Pepsi opened its first production plant in U.S.S.R. and was the largest soft drink selling brand in American supermarkets.

Afterward, PepsiCo substantially diversified its portfolio by acquiring Pizza Hut, Taco Bell and formed PepsiCo Food Service International (PFSI) to focus on overseas development of restaurants. In 1980 PepsiCo signed a joint venture agreement with the Chinese authorities but the project was never developed properly.

In 1984 Roger Enrico CEO of Pepsi-Cola made history by signing a lucrative advertisement contract with Michael Jackson to produce two of most eagerly-awaited television commercials featuring the famous slogan: “The Choice of the New Generation”.

Then Pepsi became the indisputable number one in the soft drinks industry with revenues of  $7,5 billion and more than 137 000 employees. The company was seen as a leader in advertising when they used a space station for promotional events.

In 1986 the corporation was reorganized and decentralized by transferring its beverage operations under PepsiCo Worldwide beverages and the snack food sector under PepsiCo World wide Foods.

In 1996 Pepsi entered the Internet “boom” by creating an ambitious “worldwide” web site surpassing all expectations and was copied in numerous ways.  

Subsequently, the company converted its bottling sector into a publicly traded company, the Pepsi Bottling Group (PDG).

In August 2000 the company was involved in one of the most significant transaction in the beverage and food industry through its merger with Quaker Oats and the addition of top products to its portfolio such as Gatorade beverages.

Recently, Pepsi made the headlines by signing a “skyrocketing” agreement with Britney Spears to promote its new marketing campaign and products.

2. Internal Analyses

2.1 Introduction

In this section, our analysis will focus mainly on Pepsi-Cola resources, capabilities, and competencies to effectively create competitive advantages. First, it is of evidence to mention a major characteristic of the product namely that the taste of the Pepsi is a standardized one. Consequently, is it is not a technically fastidious task to produce the drink; there are not many opportunities for innovation and improvement of the product itself. Consequently, the product quality is not a major concern and does not constitute value added for the company.

In fact, new technologies or research efforts can hardly produce any changes or innovations regarding Pepsi’s drink. Nevertheless, Pepsi has to build on customer responsiveness especially on the packaging, image and price of the product.

In other words, the main efforts are directed towards marketing, promotion and distribution and much attention is paid to increase attention in customer response time. To this extent, brand management and brand promotion of reputation for quality are meant to develop core competences that are perceived by customers as providing benefits and thus, create competitive advantage.

2.2 Observations throughout History

Pepsi-Cola is still second in the carbonated drinks market and remains in the shadow of Coca Cola in terms of market share, perception and image. However, Pepsi’s insightful marketing techniques (comic strips, television ads etc…) prevented a fall of its position in the beverage industry.

From 1965, by using diversification techniques and brand management, the company was able to increase its volume of sales and get a stronger market position. Nowadays, Pepsi’s carbonated beverages division clearly remains behind the snack division in terms of profitability and share percentage of operation earnings.  Our impression is that the profits of the snack division help create the illusion that the beverage sector is as successful as the management wishes it to be. 

We observed a definite inferiority complex towards Coke that initiated the main motor in the company’s top management philosophy. As Roger Enrico wrote in his book about cola war, Pepsi’s strategy was heavily focused in gaining a better position in the beverage industry by finding new ways to differentiate from Coke and to take advantage of strategic alliances in the market.

2.3 Core Competencies

A question is raised by acknowledging the above mentioned facts: how to beat your competitor if you cannot offer a “better” product. For Pepsi, the answer is efficiency, innovation in marketing techniques and customer responsiveness. Using less input in the value chain of its primary activities, Pepsi is able to be more efficient and to attain a lower cost structure.

Moreover, PepsiCo built its competitive advantage mainly by achieving greater economies of scale in the sectors of communication, distribution and bottling thus reducing production costs.

2.3.1 Marketing and Customer Responsiveness

The aim of the new marketing strategy developed by Enrico was to sharpen the image of Pepsi. It also contained a specific message directed to young people using extensive advertising campaigns on TV and radio. As an example, Pepsi’s innovative marketing was showed to the world when in 1996 it first recorded a commercial in space.

                   

Furthermore, Pepsi kept the consumer’s perception waiting by acquiring Mountain Dew, and creating Pepsi blue. Improving the quality of the company’s product offering is consistent with achieving customer responsiveness, as is developing new products with features that existing products lack.  Pepsi blue was in fact not as successful as hoped, yet the product aided in the overall perception of the brand Pepsi-Cola.

2.3.2 Branding Equity

Brand loyalty is a buyers’ preference for the products of incumbent company. A company can create brand loyalty through continuous advertising of brand and company names, patent protection of products, product innovation achieve through its research and development programs and emphasis on high product quality and good after-sales services. It is effective influence in the way in which people perceive the product or the company. By creating feelings of warmth, affection and belonging to a product, a firm is able to relate brand to human personalities.

People prefer to buy brands as they give them personal means and judgment and they offer a quick and clear guide to a variety of competitive products.

In the beginning of the 1990’s PepsiCo management decided to create a proprietary model applicable to all major PepsiCo brands, both domestically and globally focusing on cross-category brand and product specificity. The goal was to have a single definition of brand equity applicable to every product.

A second goal was to strike a balance between sensitivity (the ability to detect real equity changes) and stability (the absence of spurious or short-term fluctuations). The marketing and research management of PepsiCo as well as some of its consumers were interviewed to find out the attributes that contributed to a favorable brand-consumer relationship across product categories and make comparisons with key competitors like Coca-Cola in the soft drinks sector.

PepsiCo deployed the Equitrak brand equity model to track its major brands on a global scale in 1997, following its success in the USA. By late 1999, PepsiCo had created a brand database consisting of over 6,000 Equitrak brand equity "scores".

Results from each tracking wave are distilled and formally presented to senior PepsiCo executives and country managers. Comparisons are made between PepsiCo brands, competitive brands, and other global brands by country over time. This presentation, supplemented with other competitive data, is used to focus managerial attention on how PepsiCo brands and marketing programs are performing towards their competitors.  We imagine that this was a successful method of understanding consumer behaviour and also to project the caring Pepsi-Cola image.

        

2.3.3 Reducing Costs

One example illustrates how Pepsi is always trying to find new ways of reducing costs and increase efficiency. Service technicians for The Pepsi Bottling Group Inc. (PBG) in the U.S. used to generate 3 million pieces of paper per year while making routine repairs to soda fountains and vending machines. But after a yearlong rollout of wireless handheld computers, that paper mountain has completely disappeared.

The new system, built around a rugged computer allows PBG to maintain a virtual inventory of parts on each technician's truck that's linked to a database accessible by the company's eight call centers, A dispatcher can quickly determine whether one of 700 Pepsi technicians equipped with the Sidearm has the right kind of part needed for a pending job thus increasing customer responsiveness and effectiveness of after-sales service.

Another way of reducing costs was by investing into the new Computer system “GenerationNet”. Following from this was the “PepNetSystem” which serves both, lower cost and customer responsiveness.  This resulted in a more efficient communication system.

3. External Analysis

3.1 Introduction

In order to understand the marketing strategy of one company it is very important to analyse the environment it is operating within. The analysis of the environment has a few very important aspects that clearly illustrate how a company like Pepsi has managed to stay in business for such a long time. To analyse this clearly, a general rule can be applied to PepsiCo.  

        

3.2 Cyclical Corporate Strategy

If we look at the Pepsi-Cola Company from the outside, there has been a certain amount of repetitiveness in its development.  By following the trends and focusing on how to lower the price as much as possible, they managed to create a successful company. By investing in the development of the bottling and distribution sector, Pepsi found their balance in the market. 

Then in 1920’s Pepsi-Cola Company failed because they didn’t concentrate enough energy on branding.  Within a few years Pepsi was declared bankrupt twice. By the end of the 1930’s the company was reorganized from inside and the marketing policy drastically changed. Major investment was now directed towards making people more familiar with the product.

After acquiring Mountain Dew, new sources of financing and revenue opportunities were needed because the acquisition was not an instant success.  Therefore, in 1965 Pepsi merged with Frito Lay.  In the 1980’s the decreasing sales in the beverage market induced the industry to adjust with more aggressive marketing strategy and new products. In fact, Coke marketed a new cola formula, whereas Pepsi persisted with promotional efforts and improved customer responsiveness to increase sales volume.  

Following these cyclical changes in the marketing policy of the firm (every 20 years there is a huge turn over), one could conclude that this is the time for PepsiCo’s to readjust. The circumstances underlying the merger with Quaker Oats are significant.  Nowadays, the market is rapidly changing and it’s becoming saturated. The entrance into potential new markets is more complex than ever consequently, the only way for the company to expand is by gaining market share by mergers or strategic alliances. Furthermore, the marketing strategies in foreign markets like China and India are experiencing problems in customer responsiveness. Currently, the beverage sector is following a trend of continuous launch of new products in order to attract new customers. In this sense, the challenge for Pepsi is to be able to sustain such a trend and conversely, to remain a leader in their market.

3.3 Key Factors for Success

To analyze the external environmental impacts, we have to look at the company as an organism that is constantly interacting with its customers, partners, suppliers and competitors. When Pepsi-Cola was created, the management was looking for the recipe for success that would also be matched with the creation of a unique name and logo. Thus, the whole “cola war” story was the driving force of every change Pepsi implemented in its business strategy.

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The creators of Pepsi decided to use the same colors and lettering as Coke, simultaneously promoting and expanding the same product.  In the short run, the strategy worked and allowed Pepsi to take advantage of Coke’s previous business innovation. However, in the long run, Pepsi would have to build its own reputation and to differentiate itself from its rival.

Basically at that time, Pepsi focused on achieving lower cost production in its bottling and distribution units. Therefore, the promotion of their products was put aside by the result of this strategic choice. The financial crisis commanded important changes ...

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