Previous Diversification Corporate Strategy.

University Degree Business and Administrative studies

Previous Diversification Corporate Strategy

In the decade between 1986 and 1996 innovative leadership created growth within PepsiCo adopted a policy of diversification by structuring itself into three major divisions: beverages, snack foods and restaurants. The Chairman, Wayne Calloway believe in the synergy and strategic fit opportunities because the similarity of each industry’s value chain and key success factors. The competitive success was to create a distinctive image and to develop innovative and tasty new products. He used to change the best managers to one business unit to another to promote the transfer of skills, practices and expertise in order to build stronger competitive capabilities. With this policy, he put Pepsi Cola b-unit as the world’s second-largest manufacturer of soft drinks and Frito-Lays captured the 50% of the salty snack food market and grew faster than industry. The most distinctive characteristic of PepsiCo’s portfolio was the inclusion of quick-service restaurants, the leaders Taco Bell, Pizza Hut and KFC and the lesser ones California Pizza Kitchen, Chevy’s, Hot’N Now, East Side Mario’s and D’Angelo sandwiches created the largest restaurant conglomerate in the world. The strategy was to acquire market leaders that had the biggest amount of the market share in the world or in the correspondent country and to acquire smaller ones but with a rapid period of growth. Because the market saturation, the company expanded to more “convenient” locations as shopping malls, sport stadiums or airports, but the competition pushed the prices down, reduced margins and it was necessary to expand to the International market what also supposed a big risk (currency fluctuations, local government restrictions, etc). With this situation, the Pepsi-Cola fall behind Coca-Cola growing margin in domestic and international markets, the Wayne’s resign and the new leadership of Roger Enrico in late 1996, responsible for the prosper of the three PepsiCo b-segments, it was time to change strategy. Enrico thought that the restaurant chain and its operating side of the business needed a restaurant culture and processes that had nothing to do with Pepsi-Cola or Frito-Lay. His idea is that PepsiCo could not have different cultures that were not contributing to each other but impairing the corporation’s overall operating and profit margins and decided to eliminate the company’s restaurant from the company’s portfolio. It did not make any sense that diversification given the moment situation in the market. The three major restaurant chains spun off as an independent publicly traded company and its lesser-known chains being divested before the spin-off.

To keep in the idea to diversify in the food and beverage businesses in order to share and contribute to each other as well to the group and try to get an increase in the share price, PepsiCo under the leadership of Enrico decided to make some strategic acquisitions:

· Cracker Jack: Enrico saw the product as natural fit with Frito-Lay’s product line and believed in the potential growth through Frito-lay’s direct-store delivery system. Cracker Jack turned a profit during its first year and increased sales to more than $100 million within two years of the acquisition.

· Tropicana: The ...

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· Tropicana: The acquisition was the largest ever undertaken by PepsiCo and gave the company the world’s largest producer and marketer of branded juices. It got the 71% of the market over Coca-Cola’s minute maid and PepsiCo’s distribution system was expected to increase Tropicana’s availability.

Although these acquisitions, the spin off of the company’s fast-food businesses, an IPO of its bottling operations and the acquisition of Tropicana, the stock price was not increasing. Then, another strategic decision was made;

· Quaker Oats: Quaker most valuable asset was Gatorade that was able to growth by more than 10 percent annually during the 1990’s with no new entrant to the isotonic beverage category posing a serious threat to the brand’s dominance. Its market share held near 85% throughout the 1990’s and in 2000 while over 100 new entrants to the category came and went. PepsiCo, Coca-Cola, Nestle and Danone were attracted to buy Gatorade, but PepsiCo became a successful bidder in December 2000 and authorized by the US Trade Commission in august 2001.

In 2001, PepsiCo became the second-largest food products company in the USA and was diversified into salty and sweet snacks, soft drinks, orange juice, bottled water, ready to drink teas and coffees, nutracetical and isotonic beverage, breakfast cereals, grain-based products and breakfast condiments. Many PepsiCo’s product became number one or number two positions in the food and beverage market.

Present Diversification Corporate Strategy

After Enrico finished his leadership, the new management team estimated that value chain alignment between PepsiCo brand and products would contribute to the improvement of operating margins. The joint distribution of Quaker snacks and Frito-Lay products expected to reduce distribution expenses, the symergies between Frito-Lay Int’l and PepsiCo Beverages Int’l combined cost savings and revenue increases by 2005 and by combining, administrative activities reduce corporate costs.

PepsiCo had developed a sophisticated value chain tracking process to capture synergistic benefits and maintain direct communication lines because the managers’ bonuses depend on achieving synergies.

Results in 2002

PepsiCo showed the following results:

• Reported earnings per share grew 26% and comparable earnings per share grew 14%, as it marked its 13th consecutive quarter of 13%-or-better growth.

• Division operating profit grew 11%.

• Volume and division net sales grew 4%.

• Return on invested capital rose more than 2 points to 28% on a comparable basis.

• Operating cash flow grew 27% to $3.3 billion, after capital spending and contributions to its pension plans.

• Repurchased 53.4 million shares of PepsiCo stock.

• Annual cost savings from the Quaker merger reached approximately $250 million, exceeding its target.

• Gained market share in all its key categories.

In terms of profitability the diversification, strategy has represented the following percentages in sales and operations earnings:

Division net sales contribution:

Quaker Foods North America: 6%

PepsiCo Beverages International: 8%

Gatorade-Tropicana North America: 15%

Pepsi-Cola North America: 14%

Frito-Lay International: 23%

Frito-Lay North America: 34%

Division operating profit contribution:

PepsiCo Beverages International: 5%

Quaker Foods North America: 9%

Gatorade-Tropicana North America: 11%

Frito-Lay International: 15%

Frito-Lay North America: 42%

Threats, Strengths and Challenges

Threats

•Product Cannibalization

–Separate Distribution Channel

–Segmentation on the basis of

•Time of the day

•Consumer Age group

•Availability

•Different Appeal

–Operational Focus – Orgn. Structure to support it

•Umbrellization: One brand surviving under a larger one, thus shielding inefficiencies

•Inviting competition from various directions

•Working with Retailers: With increasing clout can backfire.

Strengths

•Decentralized Structure will support growth

•Heavily positive working capital

Challenges

•Prioritizing Cash expenditure and Capital Expenditure

•Poor presence in Germany, Italy and Japan

Recommendations

PepsiCo can take some steps to strengthen its organization:

• Moved beyond the boundaries of its traditional product portfolios and ramped up activity at its convenient foods units to develop products that leverage the brand and distribution strengths of Frito-Lay and Quaker.

• Forged strategic partnerships with respected medical and fitness experts to address growing consumer interest in nutrition and wellness.

• Maintained and improved the great brands, the strong distribution, the innovation capabilities and the global experience.

• Established PepsiCo as the #1 refreshment beverage company in the United States and Canada — a goal already attained in measured channels in the United States.

• Growing Frito-Lay’s core salty snack business and expanding further into “convenient foods,” ( one pof teh leading principles in the company) while expanding its direct-store-delivery system.

• Leveraging the combined scale of the beverage and snack operations outside of the United States and Canada to dramatically extend the global capability.

• Implementing initiatives across PepsiCo that accelerate innovation improve operating effectiveness and cut costs to fuel growth.

Competitive in the marketplace.