Pepsi Company 2014 Diversification Strategy - Essay Example

Pepsi Company Diversification Strategy al Affiliation) Background Information Pepsi Co, Inc, was founded 50 years ago as a merger between a snack company (Frito-Lay) and a soft drink global giant (Pepsi Cola). At that time, its product portfolio included Mountain Dew, Pepsi Cola, Fritos Lay’s Cheese, Rold Gold, and Ruffles. Before the merger, Pepsi Cola had been existence for approximately 67 years (Gamble, 2014). Pepsi Cola was established in 1898 when a renowned pharmacist came up with a formula for carbonated drink that he named Pepsi Cola. Frito-Lay (the Salty Snack business) was established in 1932 as a manufacturing and distribution business for potato chips. Introduction Pepsi Company is one of the largest beverage and Snacks Company worldwide registering net revenue of approximately $66 billion in the year 2013. In 2014, its product portfolio was made up of over 20 global brands of snacks and beverages. However, most of these products are highly complementary. For instance, the Lipton Brisk tea can be consumed together with the Quaker Oatmeal as breakfast. The paper will explore Pepsi Co, Inc diversification strategies responsible for its continued growth. Part 1 PepsiCo corporate strategy PepsiCo is divided into six business segments. The Frito-lay North America, the Latin American Foods, the Quaker food North America, PepsiCo Europe, PepsiCo Americas Beverages and the PepsiCo Asia and Africa (Gamble 2014).Each of the company business segments employs three key strategies to enhance its competitiveness in the beverage and snack industry. These strategies included global expansion, product innovation, and strategic alliance. Global Expansion PepsiCo has expanded most of its operation internationally through acquisition and mergers. This strategy has offered the company great business advantage due to the access to already established infrastructure and competencies in the foreign market. More importantly, through this strategy the company does not need to start from scratch and thus it reduced the overheads and direct cost. Product and Market Innovation By employing a broad range of innovative product development initiatives, PepsiCo has been in a position to launch new products on a yearly basis. Moreover, each year the company opened up a new plant in various locations both locally and internationally. PepsiCo enrolled popular celebrities to endorse it brands internationally. Strategic Alliances PepsiCo formed strategic alliances with huge corporations on a global scale. In China, PepsiCo partnered with Tingy, a Chinese beverage giant to capture the growing Chinese beverage market. Other PepsiCo joint ventures include the Strauss Group (America), Tata (Indian) and Almara (Saudi Arabia). The strategic alliances adopted by PepsiCo are a key component of its corporate strategy (Gamble, 2014). Part 2 Strategy Evaluation of PepsiCo In evaluating the portfolio of PepsiCo, there are five steps involved. In the first step, the current strategy of the company is identified. Next, the long-term attractiveness of the industry under which the company operates is then evaluated. The third step involves evaluating the competitive strength of each of the company’s business units. Finally, the cross-business strategic fits are then identified (Gamble, 2014). Each of the strengths evaluated in the third step are counterchecked to determine if they match the requirements. The Present Corporate Strategy PepsiCo has extensively diversified its operations both locally and internationally by employing the three strategies discussed in part one. The company formed strategic alliances with huge corporations in various countries in an attempt to claim a share of beverage and snack market. Over the years, the company has continued to expand its product mix that currently account for over 15% of its net annual growth. It introduced new products that promote healthy living every year; this has contributed immensely to its impressive growth (Gamble, 2014). PepsiCo recent move to boost its business was partnering with Strauss group. Each of PepsiCo six business units is allocated resource on the basis of its net revenue. Pepsi Americas Beverage ranks the first in terms of net revenue and therefore, it is allocated the highest amount of resources followed by Frito-Lay North America Industry Attractiveness PepsiCo operates in two main industries locally and internationally: beverage and snack industry. The company has a huge market presence in the beverage industry. The Coca-Cola Company is PepsiCo main competitor in the beverage industry. However, the company has the highest product portfolio in the snack industry compared to beverage. The acquisition of Quaker Oats greatly expanded its portfolio in this industry (Gamble, 2014). Rating (1-10) Weighed rating Measures Weight Soft drinks Salty snacks Bottled water Soft drinks Salty Snacks Bottled water Growth rate 0.15 1 5 6 0.15 0.75 0.6 Market size 0.1 6 5 4 0.6 0.5 0.4 Resources 0.1 5 4 3 0.5 0.4 0.3 Degree of risk 0.05 3 5 6 0.15 0.25 0.3 Industry profitability 0.05 7 6 4 0.35 0.30 0.2 Strategic fit 0.15 6 5 4 0.90 0.75 0.3 Opportunity/threats 0.05 1 5 3 0.05 0.25 0.15 Social and political 0.5 1 4 5 0.5 0.2 0.25 Intensity 0.3 2 7 4 0.6 0.21 0.12 Total 1.0 3.8 3.61 2.5 PepsiCo nine-cell industry attractiveness/business strength matrix strong average Weak 10 High Medium Low 1 Strong Average weak Narrative Summary Based on the matrix, all PepsiCo’s business divisions are relatively attractive. The reason that makes these brands strong is the company dedication to research and development, their established brand name, and the fact that they offer a broad variety of products (Gamble, 2014). Whether it is a beverage or a healthy snack, PepsiCo has greatly diversified their product; thus, providing great options for all demographics. PepsiCo has a great reputation since it has continued to provide quality products. In the longrun Pepsi soft drink may experience a fall in its market share to other refreshments. Competitive Strengths of Each Business Unit Based on the financial records, Pepsi Americas beverage commands the greatest market share and more profitable compared to other business segments. Although, this unit still faces stiff competitions from rival companies such as Coca-Cola, through strategic alliance and acquisition Pepsi America has been able to gain the upper hand (Gamble, 2014). Cross Business Strategic Fit Based on the case study, it is clear that PepsiCo portfolio portray a good strategic fit. The company has successfully managed to expand its product mix beyond carbonated drinks. PepsiCo has also been successful in the cereal foods, health drinks, salty snacks and several other different products. Despite the fact that the product mix might appear overstretched, PepsiCo has successfully managed to maintain a top ranking for its products in each of their respective category (Gamble, 2014). Part 3 Measures of Financial Performance Profitability 1. Net profit margin= profit/sales revenue In the year 2013, Pepsi sales revenue stood at $66,415,000,000 while the net profit was $6,740.000, 000.Therefore, its net profit margin is computed as follows: 11,158,000,000÷66,415,000,000= 16.8% At the end of the year 2013, PepsiCo generated 10.1% for every dollar of sales. Therefore, this indicates that it was able to meet its operation costs inclusive of all indirect cost (Gamble, 2014). Liquidity 1. Current ratio =current asset/current liabilities The total current asset as at the end of the year 2013 was $22,203,000,000 while the current liability was 17,839,000,000. Therefore, the current ratio of PepsiCo is computed as follows: 22,203,000,000÷17,839,000,000= 1.2446 The current ratio of PepsiCo in 2013 lies between the required range (1.2 to 2.0). Therefore this indicates that the company liquidity position is sufficient (no excess cash or excess inventory) 2. Acid test ratio Acid test ratio=current assets excluding inventory/current liabilities 22,203,000,000-3,409,000,000÷17,839,000,000= 1.054 The quick acid test is a more rigorous liquidity test that indicates if a company has enough assets (excluding inventory) to meets its short-term liabilities. A ratio of 1.054 indicates that PepsiCo cannot cover all its short-term liabilities without selling its inventory. Dividend payout ratio Dividend payout ratio = Dividend declared/net income In the year 2013, PepsiCo declared a cash dividend of $2.24 per common share and had a net income of $4.37 per common share. Therefore, the dividend payout ratio is computed as follows: 2.24÷4.37= 51% In 2013, PepsiCo paid 51% of its earning to the shareholders and reinvested the remaining 49% in growth, debt payment and the remaining portion was placed in reserves as retained earnings. With a high payout ratio, PepsiCo share prices are unlikely to increase rapidly. Part 4 Suggested Strategic Action PepsiCo executives should continue with its aggressive expansion of the company brand globally with an aim to dominate to soda market in the international market. In the United States, the best strategy the company should employ to compete with its key rival (Coca-Cola) is the vertical integration (Gamble, 2014). The strategy will help the company build stronger ties with retailers across the country. Moreover, PepsiCo should fortify its other brands of soda. It should reintroduce Miranda to compete with Fanta (Coca-Cola brand) in the US market. Pepsi should change its organization structure to focus more on other markets rather than the North America. As a result, this will help enhance its international growth and its profitability. PepsiCo should increase its investment spending on research and development and buy out companies that have a high dividend payout ratio and those with a good portfolio fit (Gamble, 2014). Reference Gamble, J. E., (2014). Crafting and executing strategy: The quest for competitive advantage: Concepts and cases: PepsiCo’s Diversification Strategy in 2014. (Vol.19). McGraw-Hill/Irwin. Read More