Corporate and environmental issues in PepsiCo's global supply chain

Pepsico Global Supply Chain

Corporate Issues in the PepsiCo Global Supply Chain

Company Background

Identification of Issues

PepsiCo's Competition

Environmental and Safety Issues

Association to Junk

In today's dynamic context, organizations strive to improve and maintain a highly competitive edge. They engage in operations to increase the quality of their products and services, they strive to increase customer satisfaction and employees' on the job satisfaction, and they also engage in corporate operations destined to lead to the development of the communities where the entities operate. All these actions have the ultimate scope of increasing and consolidating the market share and consequently the corporate revenues.

The specialized literature and the actual practice are filled with numerous examples of entities that have become the epitome of organizational success. The one thing these companies have in common is the immense desire to achieve the established SMART goals. And in support of this desire, they developed and implemented various strategies. But the courses of action taken by each and every one of these entities are no guarantee for success. In other words, Nike's success with outsourcing to Indonesia might turn into a failure if wrongfully implemented by Microsoft. Otherwise put, the strategies must be developed and implemented with strict consideration to an organization's unique features, characteristics, capabilities and demands, but also those of the environment and industry where the company activates.

A multinational which has managed to develop the most suitable and diversified strategies, all to ensure its international success is the Pepsi Cola Corporation, or PepsiCo. The present paper succinctly presents the basic information on the company, to then identify and analyze several value chain issues. It ends with personal and impersonal conclusions and recommendations.

2. Company Background

PepsiCo was founded in 1965 in New York, where it is still headquartered. They activate in the food and drinks industry and they operate worldwide. "PepsiCo is a world leader in convenient snacks, foods, and beverages, with revenues of more than $39 billion and over 185,000 employees. PepsiCo owns some of the world's most popular brands, including Pepsi-Cola, Mountain Dew, Diet Pepsi, Lay's, Doritos, Tropicana, Gatorade, and Quaker. Our brands are available worldwide through a variety of go-to-market systems, including direct store delivery (DSD), broker-warehouse, and food service."

There are a total of eighteen PepsiCo brands, each generating more than one $1 billion per annum. However, the star of the New York-based organization remains its soft drink caffeine beverage - the Pepsi Cola. The chart below reveals the estimated sales of each PepsiCo product line for the previous fiscal year:

The officials at PepsiCo have soon understood the need for diversification and have implemented it in various fields. For instance, they emphasize on the cultural and educational diversity of their staff members; also, they diversified the risks of their operations by simultaneously working with numerous business partners (all purveyors, intermediaries and franchisees) and ultimately, they have diversified their operations to sell numerous other items, in order to maximize the earnings and reduce the loses.

The corporate success was also due to the development of a highly efficient managerial system, based on four primary concepts: people satisfaction and employee motivation, strong brands, innovative products and powerful market approaches. The actual chart best revealing the business model at PepsiCo is presented below:

But in following their personal financial agenda, the organization has also listened to the needs of their shareholders and has made increased efforts to support the development of individuals and communities. PepsiCo's mission is "to be the world's premier consumer-products company focused on convenient foods and beverages. We seek to produce healthy financial rewards to investors as we provide opportunities for growth and enrichment to our employees, our business partners and the communities in which we operate. In everything we do, we strive for honesty, fairness and integrity."

3. Identification of Issues

However PepsiCo is generally perceived as a highly successful organization, which in fact they are, just like with every entity operating at international levels, criticisms has aroused. The most relevant issues facing the global chain of PepsiCo refer to the following:

the corporate actions have sometimes failed to protect the natural environment and have resulted in pollution and contamination; the most relevant case in this instance is India, where the PepsiCo products were even banned for a while the long standing competition with Coca Cola has dragged the company through corporate lawsuits and commercial espionage cases, all to affect the organizational reputation the diversification of their product palette, however an efficient approach, has made consumers associate the company with the highly unhealthy junk food industry; this was a significant problem moreover in the general context of a fight against unhealthy aliments the association with junk food has also been damaging in the immediate surrounding of schools, where parents have clearly stated their need and desire for their children to have access to healthy and rich in nutrients products finally, the association with junk has cost them a potential merger with giant Nestle, which then resulted in the creation of a negative PepsiCo image

PepsiCo was not well received in Israel, and the corporate officials did little to change the public perception; as a result, the primary market share within the country is still possessed by Coca Cola, to still attract the criticism of the American PepsiCo officials however there are large numbers of PepsiCo children customers, the parents are sometimes dissatisfied with the caffeine contained in the beverages and blame their children's sleeping disorders on the cola consumption the food and beverage company emphasizes on the strong corporate culture and on their ability to respect and integrate the staff members; however, in late 1990s, the plant in Burma was found guilty of some of the most severe breakings of human rights

The list of events with negative implications for the New York-based company is unfortunately longer than the current paper would allow. However, some of the most important issues affecting PepsiCo's global supply chain are detailed in the following section.

4. Analysis of Issues

4.1 PepsiCo's Competition

PepsiCo's competitive environment is an important issue affecting its international capabilities for numerous reasons, such as:

the company must invest large sums of money into product development and improvement in order to maintain a competitive edge

PepsiCo must always conduct market research and identify the strategies implemented by the competition in order to top these strategies and consolidate their position however watching and 'beating' the competition is a continuous action, it must not exceed in importance the primary goal of the company, that of satisfying their clientele and registering profits; the reason why this specification was made is that the decades-long fight against Coca Cola has sometimes resulted in negative impacts upon PepsiCo

The competitive landscape of the foods and drinks industry is highly dynamic and mostly determined by the various needs, wants and taste preferences of buyers. In 2007, the industry accounted for about 5% of the entire aggregate economic revenues, but is expected to decrease to 4% during the current year; the trend will maintain its course until 2012. The primary reason for the decline of the industry, however its risks are quite low, is given by an increasing inflation and a general price increase, which will ultimately result in reduced sales.

PepsiCo is currently struggling to defeat three primary actors in the industry: the Coca-Cola Company (the undisputed leader and PepsiCo's 'sworn enemy'), Dr. Pepper Snapple Group Company and finally, the Kraft Foods Company. The Coca-Cola Company produces over 400 beverage items in more than 200 countries and out of the five best sold soft drinks, four belong to Coca Cola (Coca-Cola, Diet Coke, Fanta, and Sprite). At the end of fiscal year 2007, the Coca Cola Company was employing an estimative 90,500 individuals and was retrieving an annual revenue of more than $28 billion.

Dr. Pepper Snapple Group is the second most important competitor of PepsiCo, and the third important player in the U.S. industry, after Coca Cola and PepsiCo. But what differentiates the two is the area they operate. In this order of ideas, whereas PepsiCo operates worldwide, Dr. Pepper only activates in North America, namely Canada, Mexico and the United States. Dr. Pepper Snapple Group ended fiscal year 2006-2006 with 20,000 employees and sales worth next to $6 billion.

A third PepsiCo competitor and a fourth important industrial presence within the United States is the Kraft Foods Company. "Kraft Foods is the U.S.'s #1 food company and #2 in the world (behind Nestle). Its North America unit makes the world's largest cheese brand (Kraft), owns the cookie and cracker business (Nabisco) and makes that slam-dunk favorite, Oreos. Its international business unit offers most of its U.S. brands, plus national favorites. The Oscar Mayer, Kraft, Philadelphia, Maxwell House, Nabisco, Oreo, Jacobs, Milka, and LU brands have revenues of at least $1 billion; more than 50 hit the $100 million mark. Kraft extricated itself from the haze of second-hand tobacco smoke when it was spun off from Altria in 2007; later the same year, it announced the sale of its Post Cereals business to Ralcorp." Fiscal year 2007 was ended with sales worth more than $37 billion and with a total staff number of 103,000 employees.

The Ongoing Battle against Coca Cola

PepsiCo and Coca Cola's endless disputes have been organized by the specialized literature under the syntax 'cola wars'. They generally received this name due to their intensity and their continuous occurrence, but also for the not always positive effects they had upon the two players. "Intense competition between Pepsi and Coca-Cola has characterized the soft-drink industry for decades. In this chess game of giant firms, Coca-Cola ruled the soft-drink market throughout the 1950s, 1960s, and early 1970s. It outsold Pepsi two to one. But this was to change. Then the chess game, or "war," switched to the international arena, and it became a 'world war'." concise presentation of the PepsiCo - Coca-Cola relationships along the times could be organized under the following mentions:

up until 1975, the Coca-Cola company was the undisputed leader, with a growth rate of 13% since 1976 up to 1978, Coca-Cola's growth rate had decreased to 2%; meanwhile, the Pepsi drink was becoming more and more popular the Pepsi advertising strategy aimed the baby boomers, and its association with youth and vitality ensured its success; this was the "Pepsi Generation" the "Pepsi Challenge" saw that consumers would test the Pepsi and Coke products and grade them based on taste; Pepsi was chosen as favorite and the corporate sales drastically increased;

in 1984, Pepsi's market share had increased to 18.8% (from 6%), and Coke's market share had decreased to 21.7% (from 24.2 in 1975) the Coca-Cola Company changed its chef executive officer, and the new CEO (Roberto Goizueta) implemented visionary ideas; he introduced the first change in taste - after 99 years of using the same recipe the strategy did not have the desired outcome, as the new taste was disliked by the consumers; but they rushed to the stores to purchase the older version, the classic coke, and thus the corporate sales increased significantly in 1988, PepsiCo owned a market share of 31% whereas Coca-Cola's market share had risen to 40%; this was within the United States by mid 1990s, the competition had taken an international turn, when Pepsi entered the Brazilian market, where Coca-Cola was already present the results of the venture were however disappointing as Pepsi failed to consolidate an international share; Coca-Cola on the other hand was doing extremely well worldwide; "The contrast with Coca-Cola was significant. Pepsi still generated more than 70% of its beverage profits from the United States; Coca-Cola got 80% from overseas" in late 1990s, the Coca-Cola Company encountered serious issues as some of their European operations were ceased, after the governments of France and Belgium had banned the products on contamination beliefs

Coca-Cola regained its status when they implemented an aggressive campaign; during the course of Coca-Cola's problems, Pepsi should have strengthened their position and would have as such been able to increase their market share; they however did not and no apparent gains were seen for PepsiCo as a result of Coca-Cola's difficulties soon after the banns in Europe had been lifted, PepsiCo accused the Coca-Cola Company of having "used its dominant market position to shut out competitors" the Italian authorities concluded their investigation by saying that the Coca-Cola Company had indeed engaged in antitrust actions in order to remove PepsiCo from the market; the response came quick and said that Pepsi was only looking for an escape goat for their poor performance

The competition between the two giants took up a lot of energy from both organizations, energy which could have been better invested in product development and improvement. And the actions implemented were not always friendly nor respectful and even more so, the situation created was often exploited. For instance, employees from both Coca-Cola and PepsiCo were reprimanded for consuming competing products during work; authorities were sometimes tired of the fiasco and ruled in overzealous manners; also, in search for more money, employees were caught trying to sell the secret recipes to the competition. "Stealing secrets and selling them to the highest bidder; informants giving information to the rival company; money transfers and arrests...sounds like a movie right? Wrong! This was the foiled plan involving Coca-Cola Company secrets being sold to Pepsi."

Another reason why the ongoing disputes between PepsiCo and the Coca-Cola Company represent an important corporate issue for the New York-based organization is given by the way the public perceives the two brands. Numerous studies have been conducted to capture the public response to Pepsi and Coke. A most relevant study in this sense is presented by Helen Fields in the U.S. News and World Report. "The researchers carried out several taste tests. Each subject tasted drinks in cups, then was loaded into an MRI machine [...] Sometimes the drinks were both anonymous, and sometimes only one of the two drinks was labeled -- but the other, secretly, was always the same soda as the labeled drink. They ran the "semianonymous" trial for both Coke and Pepsi, with different people. [...] When people didn't know what either drink was, they were equally likely to pick Coke or Pepsi as the favorite. But when one cup or one tube-squirt was labeled as Coke, participants preferred it to the other, unlabeled drink (even though both contained Coke). Oddly, the same was not true for Pepsi." As such, there is a general preference for Coke products, mostly because of previous experience with the Coca-Cola items and the strong corporate culture.

The strategies implemented by the two organizations also vary and to best understand this statement, take the case of the advertisements aired by each giant. The Coca-Cola Company chose to use regular people in their ads, whereas PepsiCo invested large sums of money into hiring international superstars, appealing to and attracting large numbers of customers. All in all, the historical disputes between the Coca-Cola Company and PepsiCo can be summarized in that the first was more classic, traditional and had an increased resistance to change; the latter on the other hand, had to continuously struggle for a better consolidated market share and implemented change and diversification as an ongoing process - this helped PepsiCo better adapt to the market requirements and ensured a leading position within the industry. However, the Coca-Cola Company remains the primary player and PepsiCo's number one competitor, threat and arch-rival.

4.3 Association to Junk

Junk food was once America's favorite aliment; it is still consumed in large amounts, but the concerns over obesity and unhealthy life styles increase dramatically. And it is likely for PepsiCo to be affected by this change generally because most of their products are junk food. Take the beverages for instance. The Pepsi Cola drink is extremely delicious, but it contains little nutrients and large amounts of sugar. In order to diversify their product offering, the organization has launched onto the market diet versions of the Pepsi Cola, but the difference is not that significant. Then, they launched other product lines, such as the Lays potato chips, which are loved by the population, but have a negative impact upon the health.

PepsiCo's association to junk food was their own choice and, due to its implications, it therefore represents a major corporate issue, which affects the organizational chain at a global level. This is generically because of the following reasons:

the contemporaneous society is more focused on healthy eating the population looks for aliments rich in nutrients and tends to reduce sugar from their daily diets reduction in carbonated drinks is also visible in the habits of those who wish to preserve their health parents used to be too busy to prepare the launches for their children and allowed them to eat fast food and junk food products; more recently however, they are becoming increasingly concerned with child obesity and want to have a better control over what their children are eating several parent organizations have requested that the junk food companies no longer be allowed to sell their products in the vicinity of schools, and such regulations could easily lead to financial loses for PepsiCo junk foods are also blamed for causing sleep disorders and Pepsi buyers could reduce their beverage consumption

Child obesity is an increasing problem for the American youth and, alongside with reduced time parents have to go out with their children or a preference for computer games rather than sports, an unhealthy diet of junk foods is a principal cause of overweight children. And junk food refers not only to the more than famous hamburgers or cheeseburgers, but also to the potato chips and the highly sweet and rich in sugar carbonated drinks - two of PepsiCo's primary revenue generating products. The issue has become so severe that parents have appealed to governments and requested that the fast food selling stores no longer be allowed to sell to their children. "The policy, which is voluntary and non-enforceable, decrees that companies like Coca-Cola and Pepsi will not sell regular soda, diet soda or sugary drinks in elementary schools. Regular soda will be sold in middle schools only after school hours and will be no more than half the vending machine selections at high schools. Beverage companies say that bottles of Coke and Pepsi will be replaced by healthier products like juice drinks, sports drinks and iced tea." The strategy has been developed three years ago, but significant results have yet to be observed. "Critics see the move more as a clever marketing ploy than a noble attempt to protect children. Nutrition activists, dieticians and groups representing concerned parents say the beverage association's policy will not change the status quo meaningfully and that the industry's changes do not go nearly far enough to restrict sales of unhealthy products."

Aside from obesity issues, the consumption of junk food and most importantly, the high levels of sugar and caffeine in the soda, the Pepsi Cola is prone to be reduced from the children's diets as it causes sleep disorders. In this order of ideas, more and more children suffer from insomnia due the large amounts of consumed caffeine in the cola sodas. Their problems materialize in having difficulties falling asleep, frequently waking up during the night and not being able to go back to sleep, and feeling tired in the morning. The classic Pepsi soda contains 38 milligrams of caffeine and the diet version contains 36 milligrams of caffeine and consuming either one of them before going to bed will alter the quality of the sleep. Foremost, constant consumption of cola-based beverages could easily generate long-term insomnias. Therefore, once again an issue arises in PepsiCo's global supply chain as the public is becoming increasingly conscious about the aliments they consume, and this consciousness could materialize in reduced sales and eventually financial losses for the manufacturer.

PepsiCo's product diversification, namely the introduction of the Lays potato chips as a PepsiCo brand has also affected the corporation's strategic abilities. From this particular instance, it once again represents a crucial organizational issue, affecting its international supply chain, corporate value and shareholder perception. To best understand the strategic implications, or, better put, the limitations incurred by the association to junk food, one should look at the discussed potential merger with Nestle.

In the spring of 2007, the two giants entered dialogues on a future merger - to create an international magnate. Both parties were interested in the sustainable advantages possessed by the other. PepsiCo for instance saw the merger as an opportunity to expand its global operations, moreover needed when next to 40% of their income still came from U.S. operations. However, the discussions failed to materialize for the simple reason that PepsiCo represented the epitome of junk food, whereas Nestle was striving to promote a healthier lifestyle through the manufacturing and selling of healthy products. It is also true that Nestle itself produces and sells junk food, but they do this a rather reduced scale and their revenues are not based on these items. With PepsiCo on the other hand, most of their profits are derived from the selling of cola sodas and potato chips. "PepsiCo's dependence on junk food for the bulk of its sales was a primary factor in derailing Nestle's intent to merge with the company. Nestle manufactures a fair amount of junk food too, but is not as dependent on soda and chips as a cornerstone of its business and feared that taking on such things would undermine their stated mission as a "healthful" company."

PepsiCo had itself engaged in some operations to make their products healthier, but these actions were quite limited and considered insufficient by the Nestle officials. The New York-based organization for instance, reduced the quantity of salt used for the making of some of their chips and agreed to keep their advertising for children at reduced levels; however, "it will still need to make a big acquisition to gain a strong foot-hold into the health trend."

Had Nestle not been put off by PepsiCo's dependence on junk food products, the merger would have resulted in the creation of the largest food and beverage industry, which would have opened new doors to international markets and increasing corporate revenues - ergo, PepsiCo's association with junk food compromised its strategic abilities and represents a corporate issue worth analyzing.

5. Conclusions

PepsiCo is the epitome of corporate success and their decades of tumultuous existence prove their great value. But as with any other multinational organization, critics are rather fierce and the allegations brought against the beverage giant are quite harsh. Due to the criticism received, but also the leadership and strategic mistakes made at one time or the other, the company is now faced with several issues in their global supply chain. The limitations are severe as they impact the organization's abilities to operate and succeed worldwide.

First of all, their never ending competition with world leader and arch-rival Coca-Cola Company has often resulted in large amounts of time, energy and money invested into ventures that did not stand many chances of success, all in the detriment of the PepsiCo loyal consumer.

Then, as most multinationals in search for more profits through reduced costs, the beverage producer outsourced manufacturing and bottling contracts to developing countries. Such an example is India, but here, they damaged the environment, they abused and contaminated the water resources and were even blamed for using pesticides in the water used to make the Pepsi sodas.

Finally, in the global context of an increased focus on healthy and rich nutrient products, PepsiCo relies heavily on producing and selling junk food and rich in sugar beverages. This has attracted the dissatisfaction of individuals and organizations alike.

6. Recommendations

Numerous recommendations could be made for the further development of PepsiCo, and one at the top of one's head could be a 180 degree turn in their product line in order to sell healthy items. However, considering the brand, expertise, customers, industry features and funds invested, such an alternative is not suitable. As such, each recommendation must be made while keeping in mind the issue to be resolved as well as the corporate resources and limitations.

Relative to the problem of fierce competition, PepsiCo should put aside its rivalry with the Coca-Cola Company and should focus more on the market demands. In this order of ideas, they should not copy and adapt the strategies implemented by the leader of the beverage industry, but they should constantly conduct market research and identify new trends and demands forwarded by the customers. Foremost, they should invest more in product development and improvement in order to satisfy customers' needs and wants even before they become aware of their existence.

In terms of environment and safety protection, the situation is quite clear: change is required and the organization must come to respect all regulations imposed by the environmental and federal organizations. Foremost, however this does not necessarily refer to environmental concerns, PepsiCo should realize that when entering a foreign country, they should respect the culture and ways of the hosting country and should not disregard it, such as they did with the water in India.

Finally, the recommendation is also quite simple in the case of association to junk food - change it! However, as it has been previously mentioned, this cannot be easily achieved, gradual and small changes could be implemented. For instance, it could start off by trying to develop a Pepsi formula that contains less sugar and less caffeine. I for one love the taste of Pepsi, but cannot drink caffeine - if they removed it, I would drink more Pepsi - I would represent an extra consumers and I am sure others would follow.