PepsiCo Strategic Case Analysis: Growth and Restructuring

Introduction and Company Overview

PepsiCo is the world's largest snack and beverage company. It has enjoyed the enviable position of market leader in the convenience food industry with a 21% market share, while its nearest competitor, Kraft Foods, held only an 11% share. PepsiCo manufactures, markets, and sells sweet and salty snacks, carbonated and non-carbonated beverages, and products produced from oats and other grains. The company had a ten-year record of increased net revenue and net income and paid shareholders a growing annual dividend. More recently, PepsiCo's stock price declined, most likely due to the U.S. financial crisis of late 2007 and throughout 2008.

PepsiCo determined that it might need to restructure its snack and beverage business to improve overall profitability and reverse the downturn in its stock price. Specifically, it sought to improve the profitability of its international business by capturing strategic fits between its various brands and products.

In 2008, PepsiCo reorganized from four operating companies — Frito-Lay North America, PepsiCo Beverages North America, PepsiCo International, and Quaker Oats North America — into three divisions with six reporting segments. This organizational change combined Frito-Lay North America with Quaker Foods North America and the food and snack businesses in Latin America into a new PepsiCo Americas Food division. The Latin America beverage division was moved from PepsiCo International to become part of the PepsiCo Americas Beverage division. PepsiCo's International division became responsible for all manufacturing, marketing, and sales of products outside of North America and Latin America. The three new divisions included six reporting segments: Frito-Lay North America, Quaker Oats North America, Latin American Foods, PepsiCo Americas Beverage, UK and Europe, and the Middle East, Asia and Africa.

Core Problem and Internal Assessment

Pepsi's management was faced with a declining stock price. While many of the contributing factors were beyond Pepsi's control, management recognized the company's strong performance record and believed the new corporate structure would capitalize on synergies across and within divisions and brands. Pepsi's management also believed that shifting responsibility for Latin America to the PepsiCo Americas Beverage division would provide the international team with an opportunity to improve market share and reduce operating costs. With these structural changes and an improved focus on international business, Pepsi believed it would be able to reverse the decline in its stock price.

PepsiCo's Strengths

Managers at PepsiCo know how to grow their businesses. This growth was achieved through large and small acquisitions, new product development, responsiveness to consumer and retailer needs, and expansion into new markets. Additionally, PepsiCo's breadth and depth of brands and products allow for customized offerings by region. Its "Power of One" strategy worked to share the benefits of all three divisions to improve the company's bottom line. Implementation of this strategy also brought consumers and retailers into the product development process and enabled the co-creation of improvements in distribution.

PepsiCo's Weaknesses

In the carbonated beverage industry, Pepsi faces strong competition from Coca-Cola. Pepsi experienced market share loss: its 31.1% share of the carbonated beverage market in 2007 was significantly outpaced by Coca-Cola's 41.6% share that same year. PepsiCo has fought back with new brands and strategies to improve local distribution, and has focused its soft drink innovation efforts on improving the nutritional properties of its beverages. An additional weakness in the beverage division is the ten-year limitation on co-distribution of Gatorade and PepsiCo's soft drinks — a condition attached to FTC approval of PepsiCo's merger with Quaker Oats, intended to reduce the combined company's control over distribution channels.

PepsiCo also has lower profitability and higher production costs in its international division compared to its North American businesses, a weakness that may be a factor in the declining stock price.

McKinsey 7-S Analysis

The McKinsey 7-S model is a methodology for assessing the alignment between a company's strategy, structure, systems, shared values, style, staff, and skills in order to maximize shareholder value. The framework can be used to improve company performance, examine the likely effects of future changes, align departments and processes during a merger or acquisition, and determine how best to implement a proposed strategy. This section reviews all seven factors within PepsiCo. Note that for some variables, the source case document provided limited or no information.

Strategy

PepsiCo has focused on a growth strategy and market leadership across all snack food and beverage categories. Its strategic pillars include product innovation, close relationships with distribution allies, international expansion, and strategic acquisitions. PepsiCo is responding to consumer demand for healthier foods and beverages with better-for-you and good-for-you products. Products launched under this initiative have generated positive returns and are increasingly contributing to PepsiCo's total revenues.

Structure

PepsiCo's structure is organized by product and geography. The recent restructuring is intended to improve coordination in its international business. Moving the Latin America business into the newly formed PepsiCo Americas Food and Americas Beverage divisions reduced the geographic scope of the International division, allowing PepsiCo International to focus more narrowly on improving revenue and decreasing operating costs.

Systems

The source case provided no direct information about PepsiCo's internal systems, though it did discuss improvements in distribution processes. PepsiCo's financial reporting can be identified as a strong organizational attribute, providing leadership with information for strategic decision-making. The new organizational structure, with its six reporting segments — Frito-Lay North America, Quaker Oats North America, Latin American Foods, PepsiCo Americas Beverage, UK and Europe, and the Middle East, Asia and Africa — gives management performance information at the level of individual brands and specific geographic regions.

Shared Values

PepsiCo appears to emphasize the cross-pollination of best practices between its divisions. Management also prioritizes the integration of acquired companies' product lines, distribution systems, and production capabilities.

Style, Staff, and Skills were not addressed in the source case study.

Conclusion

PepsiCo demonstrates strong financial performance, and conditions are favorable for expansion and growth across its three divisions. The company has a strong and stable base from which to grow. Ongoing product innovation helps retain existing loyal customers while creating trial and purchase habits in new markets and among consumers with evolving tastes. Continuing on a growth strategy, defending its market position in the carbonated beverage category, and improving results in the international marketplace should result in increased customer satisfaction and lower production costs. In turn, these outcomes will create additional shareholder value and support a recovery in the company's stock price.