PepsiCos Competitive Advantage - Essay Example

PepsiCo’s competitive advantage and strategic position in the past 5 years Introduction PepsiCo Inc, founded in 1965 through the merger of two companies – Pepsi-Cola and Frito-Lay, had only a few products at that time but today it is one of the world’s largest food and beverage companies, with 2008 annual revenues of more than $43 billion (Reuters, 2009). Pepsi maintains its hold in four dominant industries. Apart from being the second largest soft drink bottlers in the world, Pepsi is also the world leader in the salty snacks division. The group has another division known as Tropicana Products which is the world leader in juice sales. It has also entered the ready-to-eat cereals market with the acquisition of Quaker Foods North America. However, the recent Cola-wars forced the company to change its strategy and look beyond the carbonated drinks. The company has undergone massive restructuring and found healthier alternatives to meet the challenges that globalization posed (Jonash, Koehler, Onassis, 2007). 2. Strategic Direction The purpose of a true strategy is to master the business environment by understanding and anticipating the actions and strategies of the competitors. Competition is intense in markets without barriers. Competitive advantage that a firm has must be such that it is difficult to duplicate. In other words, a must have some differentiating factor. According to Greenwald and Kahn (2005) the three factors that generate competitive advantage include customer captivity, proprietary technology and economies of scale. Pepsi’s strategy demonstrates a deep understanding of markets and identifying unmet customer needs, identifying existing and potential internal capabilities that could be used to leverage differentiation, clustering innovation opportunities around a strategic platform and investing in innovation and executing on the strategic growth platforms and the opportunities (Jonash, Koehler, Onassis, 2007). Pepsi has entered emerging markets which have opened up their economies. Thus PepsiCo has been following a differentiation strategy, which according to Johnson and Scholes, seeks to provide products or services unique or different from those of competitors in terms of dimensions widely valued by buyers (Business Strategy, 2002). 2.1 Organic Growth Organic growth refers to the long-term strategy of the company, apart from enhancing its core strength and vitality (Porter, 1979). Although Pepsi has been concentrating on the core growth but in the past five years it has continues to pursue its strategy of growth through acquisition. As a long-term strategy, PepsicCo had entered the sports drinks market through the acquisition of Quaker Oats or the Gatorade brand. In 2008, to challenge their main competitors, namely, Coke, PepsiCo acquired Britain’s V Water, adding a new front to the war over vitamin-enhanced bottled water (Reuters, 2008). This is likely to increase its market share and besides, it demonstrates the company’s consciousness of the strengths of the competitors and the business environment. Pepsi has entered into another deal with Anheuser-Busch, the US subsidiary of the worlds largest brewer. This global alliance could eventually threaten Coke’s position as the world’s largest beverage company as this alliance is expected to cut costs by combining their purchases of office supplies and computers (Birchall, 2009). Coke focuses on soft drinks and hence this alliance has given a new dimension to the growth strategy of Pepsi. 2.2 Market and Product development Pepsi took the challenge of investing in health-oriented drinks even though their core brand stood for salty snacks and sugary drinks. The company had a clear vision and could achieve and sustain leadership through innovation. To understand the unmet needs they invest time in knowing the customer. Pepsi had realized in late 1990s that the food and beverage industry was experiencing a major shift and that health and obesity were major consumer concerns. In response to this, Pepsi had created a new platform around health and wellness and today there are more than 250 PepsiCo products that contribute to healthier lifestyles (Jonash, Koehler, Onassis, 2007). These have grown more than two-and-half times since 2005. Pepsi broadened its business outlook and decided to look beyond the carbonated drinks. They could detect a growing consumer demand for drinks other than the sparkling variety (Strategic Direction, 2007). This is how Gatorade dominates the sports drinks market and its Aquafina in the bottled water segment. They have enjoyed first mover advantages due to their innovative approach. Health consciousness has impacted the consumer tastes and the company responded quickly to the changing needs. 2.3 Localized approach In the non-alcoholic beverages sector, local strategic factors have been important in fighting competition. Pepsi has been able to withstand the challenges of globalization. The products they sell have well established global identities. Its relative competitive position varies across national markets. Pepsi had initially ignored the local nature of the markets it entered. When Pepsi was the leader in Venezuela, its position was challenged by Coca-Cola. They could achieve economies of scale in advertising, sales, distribution and support as they depended on the local bottler and distributor. Pepsi’s strongest competitor globally is Coke and Pepsi realized that its competitive advantage must be defended by one local market at a time (Greenwald & Kahn, 2005). Transformational change and adaptation is the key to survival. They have set up pace in corporate acquisition especially as their Tropicana has attained success. They try to respond to the local market needs and sensitivities but they have not always been successful as in the case of India where the brand image suffered extensively (Strategic Direction, 2008a). 2.4 Product innovation To give a boost to its Gatorade brand that has seen sales dipping, Pepsi has decided to launch a new line-up of products. They will be introducing fruit-flavored beverages containing vitamins, nutrients, protein and liquid energy shots (Cordeiro, 2009). Recognizing that consumers are replacing soft drinks with tap water, which led to the sales dip of Gatorade, Pepsi immediately invested in research and development. Science will continue to drive the innovation of this brand and they expect that this will help them increase penetration and frequency. They realize that most of the demand for the drinks comes from the athletics and hence they make use of a new zero-calorie sweetener so that they can market these products as naturally sweetened. Pepsi has also introduced innovation in packaging keeping in mind the impact of its existing packaging on the environment. They have introduced new packaging for its Aquafina bottled water brand that uses 50% less plastic than a similar bottle PepsiCo introduced in 2002. They also propose to eliminate the standard cardboard base pad from the Eco-Fina 24-pack by 2010 (Just-Drinks, 2009). 2.5 Methods of development As per the Ansoff Matrix (Annexure I) there are four possible product-market combinations and an organization can decide on its growth and expansion strategy. Companies can use generic or alternative strategies to grow and develop and PepsiCo clearly opted for an alternative approach – through diversification. It is the most risky of the four growth strategies as it requires both product and market development. Organizations choose this strategy if the high risk can be compensated by expectation of high returns. It allows a company to have a strong foothold in the industry, which PepsiCo has been able to achieve. 2.6 Discussion PepsiCo had been experiencing a downturn but it could turn this into an opportunity for growth, resurgence and regroup. It is today one of the best managed companies in the world. Their unique perception and identification of opportunities led them to growth through innovative strategies. PepsiCo’s direct and major competitor remains Coke in the carbonated drinks sector although in the other beverages and the snacks sector they have several indirect competitors. Pepsi realized that consumer tastes, preferences and lifestyles have changed and they have been quick to ascertain the customer needs. This fueled innovation of products and they shifted their focus to health and wellness. PepsiCo followed the product-differentiation strategy as defined by Porter. They brought about difference in not just the product but even in the packaging and promotional activities. They decided to have healthy alternatives and this led to innovation. PepsiCo has achieved this through uniqueness or improvements in products and competence-based approaches. PepsiCo has been able to achieve sustainable advantage because: 1. It could clearly identify and anticipate customer 2. Understand the competitors 3. Develop appropriate strategies based on the organization’s purpose and aspirations. In addition, they had the localized approach and always have been alert to local demands and market conditions. They are sensitive to the local market conditions. Over the years Pepsi has build global brands and several platforms of growth. Their products are complimentary, for instance, the snacks are consumed with soft drinks and many consumers purchase both these products together. Over the past five years they did not have to change their strategic direction because they had always been following the strategy of differentiation and innovation. They focused on product and packaging innovation. However, their competitive advantage did suffer for some time but they could recoup the losses as they moved beyond the carbonated drinks sector. They could take over their closest rivals, Coke, by introducing several innovative products to their already wide range of products. They have amply demonstrated their ability to accept challenges and the ability to ride out business cycles (Brooker, 2006). Changes in Corporate and Functional strategies PepsiCo has seen several upheavals, joint ventures, alliances and challenges over a period of time. These have helped the company develop insights and learn to do even better. Their corporate mission and vision itself is one of growth and perseverance. Adopting a future orientation comes naturally to Pepsi now. Its choice of mergers and acquisition has given it a stronger foothold in emerging markets. Pepsi’s tie up with Starbucks implies that they have captured the bottled coffee market and the acquisition of Sobe has given them a strong presence in the emerging New Age drinks markets (Strategic Direction, 2007). In its snacks division, it has a presence of 16-strong brand portfolio. Frito lay was relatively unknown but today has 60% of the snacks market share in the US. There are four factors that drive the internationalization process – the market, the cost factors, the competitive forces and the government factors. Globalization has been an external driver of growth, expansion and change. Globalization has led to intense completion which has fueled growth and innovation. The market drivers conform to Porter’s Diamond Model as demand has been affected due to changes in the lifestyle of people. Very often companies base their decision on Porter’s Diamond Model which ash been represented below: Source: Wonglimpiyarat (2006). Demand conditions: Lifestyles have changed and so has consumer tastes. Pepsi collects data and to gain shopper loyalty insights and consumer purchase dynamics to develop new strategies (Decuypere, 2007). They train their front line people in the negotiation skills, category knowledge and building long-lasting relations. They remove the shopper barriers in collaboration with the retailers. For this, they identify the relevant sales drivers, put focused efforts behind the sales drivers and develop joint business plans with the retailers. Before they launch a new product, they study the shopping behaviour and the consumption pattern including why people do not buy. Based on these insights they develop their promos, their distribution, the range, the prices and the visibility. Factor conditions: Factor conditions are inputs that have to be upgraded from time to time. Developing insights and putting them into action has been an internal driver that has influenced Pepsi’s strategies. PepsiCo is a convenience focused company as the major contribution comes from convenience foods (Decuypere, 2007). As the markets have evolved, Pepsi no more puts the Customer/Channel in the centre of business. They have realized that they must have trade leadership and brand focus. The organization also found that there are five building blocks to growth. They thus drove insights into action, they built winning relationships, they employed advantaged selling systems, employed innovative strategies and developed sales talent. Thus these together comprise their internal and external drivers for growth. To gain greater insights into how the consumers respond to the products and the brand, Pepsi developed diagnostic abilities by employing the EquitrakTM brand equity model. They are now able to obtain a detailed analysis of the brand’s rise or fall relative to the competitors (Strategic Direction, 2002). As an ongoing strategy Pepsi analyzes data and makes comparisons between PepsiCo brands, competitive brands and other global brands by country over time. This helped them understand how broad and deep is the brand’s awareness. Communication can be a differentiator and this has been recognized by the management at PepsiCo. They are aware of a strategic approach to communication. The communication process at Pepsi supports the businesses and the brand building efforts (Argenti, Howell & Beck, 2005). Communication is an integral part of the process and the messages articulate the strategic direction of the company. PepsiCo believes in diversity. They have created environment in which every associate regardless of gender, ethnicity, sexual orientation, and physical ability feels valued and wants to be a part of the growth of the company (Ortiz, 2006). Diversity was practiced in the organization even in the past as the past management associates 1% of the company’s 8% growth in 2004 to diversity-inspired products. Even currently the employees are encouraged to showcase their diverse cultures and promote an inclusive environment. Related and supporting industries Pepsi’s past experience and acquisition had taught them that sugary drinks were insufficient to sustain and healthy alternatives are essential for growth. Investor expectations demanded earnings which meant that top-line growth and consistence had to be maintained. Corporate acquisition had to be in line with this strategy. They had to adjust to the competitive landscape and they started competing against Nestle and Kraft by introducing salty snacks (Strategic Direction, 2008). Growth at Pepsi has always been through innovation which has been the centerpiece of their competitive strategy. Innovation has been the single greatest driver of growth for PepsiCo and its products. They have always strived to do what they have been doing better by focusing on their core strengths, investing aggressively in big opportunities, and managing the cash flow. They learnt from past experience that chasing growth without the right direction can be destructive and comes with a high price. Firm strategy, structure and rivalry Rising energy costs and other economic pressures have become the norm and the company believes that it has to unify its strands in order to sustain growth. Hence the “Power of One” initiative is meant to strive for greater cohesion (Strategic Direction, 2007). They have the biggest logistics operations in the world. Their focus on continuous improvement can be found in its UK distribution system, especially the one at Leicester which operates round the clock to handle in excess of 17 million packets of crisps everyday. They were facing operational problems in linking the two sites but having learned through experience they now ensure that they have undertaken a thorough study and prepare themselves for any eventuality. As Super Bowls became popular, their in-store displays showed people watching the game while munching Lays chips and slurping on a Diet Pepsi (Brooker, 2006). This was an initiative towards their “Power of One” approach which speaks of the company’s ability to use their products, services and talents in a cohesive manner. This is a strategic growth driver as in targeting customers the “Power of One” makes perfect sense. Pepsi has managed to get the right people on board, make the right acquisition, and develop the right partnerships and these have helped them to get the message across about its future intentions. They have created the maxim “Performance for purpose” which highlights the organization’s commitment towards sustainable growth - towards its workforce, towards health eating, towards the environment and the bottom line (Strategic Direction, 2008). The company is trying to eliminate the image that big is always bad. One of the steps taken towards changing this perception is the investment in technology at the Frito-Lay manufacturing centre that saves them $55 million a year. The company also realizes the potential that exists in the emerging international markets such as Russia and China. They recognize that consumers in different countries have different needs and hence have developed some core range to suit individual markets. They foster the values of loyalty and commitment among their employees because they believe that people can achieve almost anything once these values can be embedded in them. The management is aware that nothing works better than leading by example. The driver for sustainable growth has been due their maxim, “Performance for purpose”. As there has been a decline in the sales of bottled water due to social and environmental concerns, Pepsi changed its strategy towards ethical and responsible marketing practices. This demonstrates their fore sightedness and preparedness for eventualities. Their ad campaigns for bottled water include charitable ties. PepsiCo is using celebrities such as Matt Damon to endorse the Ethos bottled water especially since Damon has taken the H20 clean water initiative (Girard, 2008). This will be sold through PepsiCo and Starbucks North American Coffee Partnership joint venture. They have decided to donate 5 cents from every bottle sold towards helping children round the world to gain access to clean water. They have used celebrities even in the past to endorse their products. Strategic alliances have been one of the drivers for growth at PepsiCo. It has entered into an agreement with Calbee of Japan to produce and sell snacks items in Japan. This alliance is a step towards the strategy to accelerate top-line growth (Reuters, 2009). This is an opportunity to diversify their portfolio by offering products that reflect both Western and Japanese dietary cultures. This would provide excellent growth opportunities to both the organizations. In the process they also satisfy the unmet customer needs and expectations. The strategy benefits expected from this alliance include leadership in major snacks categories, world class research and development capabilities, an enhanced manufacturing, sales and distribution network and efficient procurement process. Their internal drivers include Talent Sustainability Strategy provides an inclusive environment with an increasing female and minority representation in management ranks (PespsiCo. Inc, 2009). They integrate people with disabilities into the workforce which can provide meaningful opportunities and better quality of life to these employees. To meet their continued innovation and growth, they need people who can understand the needs of international and diverse markets. In the US they promote a culture where everyone feels that they have an opportunity to contribute and succeed. In the emerging economies they focus in recruiting and retaining women workforce. A study of PepsiCo and its strategy reveals the power of its plan for resurgence (Brooker, 2006). Pepsi operates within a detail-driven industry where a single percentage point in the market share can make a big difference. Pepsi has been able to master this game. The management team at Pepsi is strong and this combined with their ability to anticipate consumer demands gave them the competitive edge. When Coke offered the consumers an inexpensive product during the recession which would not hit the consumer pockets, Coke could not envision the emerging consumer preference for other soft drinks such as water or sports drink. Coke could not also anticipate that Pepsi would dominate the soft drink and snack market. Based on their past performance and failures, Pepsi could build and plan for the future and this was possible because of the leadership at Pepsi. They enjoyed the first mover advantages in several segments such as the bottled water and the sports drinks. The company had the ability to move with every shift in consumer tastes. Its business strategy focuses on growth through product innovation, consumer base expansion and mergers and acquisition. They have been able to meet the challenges and sustain growth because of the ability to meeting unmet consumer needs, the ability reduce the company’s impact in the environment through water, energy and packing initiatives, and the ability to support its employees through diverse and inclusive culture. Diversity has been one of their main drivers as PepsiCo demonstrates diversity in products and in their management of human talent. They are no more a beverage company but a food company that also sells beverages (Brooker, 2008). Conclusion Profit in the soft drink industry has been steady but there was a period of deceleration in the market which affected the major players such as Coke and Pepsi. However, in the past five years Pepsi has been able to bring about major shift in its strategy leading to its global leadership. It is more a carbonated drinks company but a food company that also sells beverages. The external drivers of growth have been the forces of globalization, the competitive rivalry in the industry, the changing consumer demands. Its internal drivers have been its ability to recognize and anticipate the shift in the mindset of the people, the diversity inclination in is talent management and product innovation and the ability to introduce innovations products. This differentiation strategy requires accepting challenges and taking risks, which Pepsi has been able to leverage and take advantage. References Argenti, PA. Howell, RA. & Beck, KA, 2005, The Strategic Communication Imperative, MIT SLOAN MANAGEMENT REVIEW, Spring 2005. Birchall, J, 2009, Pepsi strengthens ties with Anheuser, Financial Times, London (UK): Oct 15, 2009. pg. 16 Brooker, K. 2006, The Pepsi Machine, Retrieved online 25 October 2009 from http://money.cnn.com/magazines/fortune/fortune_archive/2006/02/06/8367964/index.htm Business Strategy, 2002, Bases of strategic choice. Retrieved online 25 October 2009 from http://www.usq.edu.au/course/material/MKT3002/docs/files%20from%202002/51110%20-%20Lecture%207%202002.ppt Cordeiro, A. 2009, Pepsi Turns to Innovation to Boost Gatorade-Trademark Filings Offer Glimpses Into What Beverage Company Has Planned For Its Iconic Sports Drink, Wall Street Journal. (Eastern edition). New York, N.Y.: Oct 21, 2009 Decuypere, T. 2007, Trade Development Serving the Shopper with Passion for Growth, Retrieved online 25 October 2009 from http://www.retailinsights.be/uplfile/Pepsico.pdf Girard, R. 2008, Coke and Pepsis New Marketing Strategy: Pull at Your Heart Strings, AlterNet. Retrieved online 25 October 2009 from http://www.alternet.org/water/79741/ Greenwald, B. & Kahn, J. 2005, All strategy is Local, Harvard Business Review. Retrieved online 25 October 2009 from http://www.rblock.com/images/All_Strategy_Is_Local.pdf Jonash, R. Koehler, H. & Onassis, I. 2007, The power of platforms, Business Strategy Series. vol. 8, no. 1, pp. 26-34 Just-Drinks. 2009, North America. 8-12 Ortiz, P. 2006, Historic Change: Indra Nooyi to Be CEO of PepsiCo, DiversityInc. Retrieved online 25 October 2009 from http://www.diversityinc.com/content/1757/article/637/?Historic_Change_Indra_Nooyi_to_Be_CEO_of_PepsiCo PespsiCo. Inc. 2009, Talent Sustainability, Retrieved online 25 October 2009 from http://www.pepsico.com/Purpose/Sustainability/Talent-Sustainability.html Porter, ME 1979, How competitive forces shape strategy, Harvard Business Review, March-April 1979 Reuters. 2008, PepsiCo buys UK vitamin water brand V Water, Retrieved online 25 October 2009 from http://www.reuters.com/article/BEVNON/idUSWNAS080820080430 Reuters. 2009, PepsiCo and Calbee Announce Strategic Alliance to Make and Sell Food Products in.... Retrieved online 25 October 2009 from http://www.reuters.com/article/pressRelease/idUS95028+24-Jun-2009+PRN20090624 Strategic Direction. 2002, PepsiCo keeps the fizz in its brand equity, Strategic Direction. vol. 18, no. 10, pp. 15-17 Strategic Direction. 2007, The great PepsiCo fightback, Strategic Direction. vol. 23, no. 7, pp. 17-20 Strategic Direction. 2008, Smoothie operators, Strategic Direction. vol. 24, no. 9, pp. 13-16 Strategic Direction. 2008a, Pepsi versus Coke: an unhealthy obsession? Strategic Direction. vol. 24, no. 1, 6-8 Wonglimpiyarat, J 2006, The dynamic economic engine at Silicon Valley and US Government programmes in financing innovations, Technovation, vol. 26, pp. 1081–1089 Annexure I Ansoff matrix Read More