General Environment of Food and Beverage Industry:

Answer 1: General Environment of Food and Beverage Industry:

Demographic segment:

     Food and Beverage industry is one of the world’s largest industries. Actual figure of turnover of this industry is hard to predict as many local and small scale food products vendors and retailers exist in the market. Some of the major food and beverage industries exist in market are PepsiCo Inc., General Mills Inc., Kraft Foods Inc., The Coca-Cola Company, Dr. Pepper Snapple Group Inc. and Nestle S.A. (Gottas, M., IBISWorld, 2011 & Kaczanowska, A., IBISWorld, 2010).

     Here food and beverage industry is further segmented in to bottled water industry, fruit juice and functional beverages, snack food production industry and carbonated soft drinks (CSD) industry.

     According to Kaczanowska, A. bottled water industry was declining since last five years at an annual rate of 1.6% and 3.9 % year on year decline in 2010. This decline may be due to tap water awareness among consumers and fall of disposable income of consumers. However this industry is expected to grow at an annual rate of 1.9% by the year 2015. Major companies in bottled water production are Nestle SA, PepsiCo. Inc and Coca-Cola Company (IBISWorld, 2010).

     Another sub industry is fruit juice and functional beverage industry which includes products like fruit juice, ready to drink coffee, tea and flavored water. Major players are PepsiCo. Inc. and Coca-Cola Company. As consumers are becoming health conscious, the demand for fruit juice and functional beverage has been increased since 2006 at an annual growth rate of 10.4%. The expected annual growth of this industry is projected to be 0.5% from 2011-2016 (Kaczanowska, A., IBISWorld, 2011).

     Snack food industry is comprised of potato chips, corn chips, pretzels, popcorn and other dry similar products. This is one of the biggest sub industries under food industry. Snack food with carbonated drinks often known as “junk food” which means no significant diet value or the food adversely affect the health of consumer. Even though there is no significant value of diet, this industry has expected annual growth rate of 4.2% since 2006-2011 and is expected to grow at 2.1% per year till 2013. Frito Lay North America possesses about half of this industry revenue (Gotaas, M., IBISWorld, 2011).

     Carbonated Soft drink industry is comprised of various ingredients with carbonated water. Major Competitors in this industry are Coca-Cola Inc. and PepsiCo. Inc. The expected annual growth rate of this industry is expected to decline till 2011 at an annual growth rate of 7.1 % and expected to continue declining at an annual growth rate of 2.0% from 2011-2016 (Kaczanowska, A., IBISWorld, 2011).  

     The customers of these industries include wholesale distributors, grocery and convenience stores, mass merchandisers, membership stores, authorized independent bottlers and food service distributors like hotels and restaurants. In USA, Wal-Mart is the largest customer of carbonated soft drinks holding 12% of total 2010 sales (PepsiCo. Inc., Hoovers, 2011).

     The Consumers are those who consume the products manufactured by the food industry companies. In other world, consumers are customers who buy these products from retailers, convenience stores or from any location. Any food industry company designs its products considering consumer taste and age. For instance the biggest groups of junk food consumers are teenagers and children.

     Most of the snack food and carbonated water manufacturers operate globally. Coke and Pepsi are the leading brands globally.

     Above industries currently passing through various life cycle stages. For example, bottled water and snack food industries are passing through mature stage, juice and functional beverage industry is passing through growth stage whereas, carbonated industry is facing decline stage and expected to continue till next five years (2011-2016). The main reason of declining or decrease in revenue is assumed to be fall in disposable income in US in this economic downturn and health consciousness among consumers (Gotaas, M., IBISWorld, 2011 & Kaczanowska, A., IBISWorld, 2011).  

Economic segment:

      Economic segment shows average earning and growth rate of particular industry and future expected growth rate and earnings. The carbonated water industry and bottled water industry showed declined over the previous five years where as juice and functional beverage and snack food production industry showed increased growth rate and will continue to expand in nearby time.

     The Expected growth of bottled water, snack food and carbonated soft drinks industries is expected to remain lover over USA GDP for a short period of time in future (expected till 2016). The factors behind the decrease in revenue generation and the decline in GDP are, change in consumer demands and increase in health awareness among consumers. Fruit and functional beverage industry got significant increase in demand. Consumers asking more for green and herbal tea and ready to drink coffee products. The price of fruit juices is three to four times higher than carbonated soft drinks, it is being considered by consumers.

     Table 1 shows the market share, revenue and profit, annual growth rate and GDP growth of particular industry within USA. It gives clear prediction that which industry is going to perform well in nearby future and which industry is declining.

      

Table 1: Market share and Economic figures of Food & Beverage Industries:

Industry	Revenue US $ B	Profit US $	Annual Growth Rate	Annual Growth Rate	Expected growth over USA GDP
Bottled Water	5.8	441.8 M	- 1.6 %  (2005-2015)	1.9 %  (2010-2015)	Lower
Fruit Juice & Functional Beverage	27.0	6.1  B	10.4 %    (2006-2011)	0.5 %  (2011-2016)	Lower
Snack Food	28.4	5.9 B	4.2 %    (2006-2011)	2.1 %  (2011-2016)	Little High
Carbonated Soft Drinks	17.0	2.5 B	- 7.1 %   (2006-2011)	-2.0 %  (2011-2016)	Lower

Sources: (Gottas, M., IBISWorld, 2011 & Kaczanowska, A., IBISWorld, 2011).  

Political / Legal Segments:

     All these industries follow rules and regulations of the countries where they are operated.

PepsiCo. Inc. added business and political segment under their business risk factors, stating, “Our financial performance could be adversely affected if we are unable to grow our business in developing and emerging markets or as a result of unstable political conditions, civil unrest or other developments and risks in the markets where we operate.” (PepsiCo., Annual report, 2010).

     During the year of 2003 and 2006, both PepsiCo. and Coca-Cola came under fire when India’s non-government body, The Centre for Science and Environment (CSE) - revealed in their research that both PepsiCo and Coca-Cola’s drink contain harmful residues of pesticide that can be harmful for consumption (Kannan, S., 2006). The Supreme Court of India also asked Coca-Cola to reveal their 120 years old formula to government (O’Connor, A., 2006). At that time the government of India had only set standards of pesticides for bottled water but not for soft drinks. During that particular time, the sale of Pepsi and Coke reduced by 50% in following two weeks of period. Also Pepsi and Coke like western products always on point of cult political leaders who see western food product as threat to India’s heritage.

     Further factors that could adversely affect the industry are, import and export restrictions and foreign ownership restrictions etc. This could affect performance and competition (PepsiCo., Annual report, 2010).

Sociocultural Segment:

     As the industries operates globally, sometimes mergers and acquisitions of foreign firms require expanding business. At that time, it becomes necessary for company to retain its key employees, understanding cultural background, adjusting work environment to maintain balance in the company. Also company needs to focus on development of products which can competes local brands and products. For instance, Asia-Pacific region where people consume lemon juice and coconut water in pure form, such drinks create challenge for soft drink manufacturers.

Technological Segment:

     Technology is a key factor to improve business and development. It is very important to maintain technological updates. Failure to do so is a business risk as per PepsiCo. Inc. (PepsiCo., Annual report, 2010).   

     Food industry also depends on technology use. So companies operating food business hires technological companies to set up servers and data center. Also software engineers are hired from Information Technology provider companies. Technology is being used in manufacturing and bottling plants and to maintain financial accuracy and efficiency. Also updating technology in bottling divisions significantly increased production, this may have negative impact on employees who may get laid off due to machinery updates at manufacturing plants.

Global Segment:

     Globalization aspects vary among industries. For instance, carbonated soft drink industry has more chances of global expansion than any other food industry. Juice and functional beverage industry and bottled water industry fall under moderate chances because of transportation of water or materials that are too heavy. For bottled water manufacturer, there is no company can shift entire water resources from one country to another. Thus the bottled water manufacturer must rely on local water sources where it operates; further the sources of water are not equally clean at different location so it may require different plant and treatment at every place. Hence globalization of bottled water industry is not so easy. Snack food industry also needs to serve in different countries with different products. For instance, any chips or dry snacks manufacture can’t sell meat flavored products in market like India where people consume potato chips and other dry snacks during their religious fast and festivals.

     General environment reflects threats and opportunities of food and beverage industry as:

Table 2: Threats and opportunities in food and beverage industry

Threats	Opportunities
·         Decreasing Consumer disposable income reduce selling of “junk food” ·         Health awareness among consumer has adversely affected CSD industry ·         CSD industry facing difficulty to compete with global local drinks ·         Snack food and CSD industry is not so prominent outside North America, specially in Asia-Pacific regions	·      Asia-Pacific region is vast and open for snack food and beverage industry ·      Bottled water industry has chances to grow outside North America due to low competition in foreign market ·      Fruit juice and functional beverage industry is growing more rapidly than any other parallel industry. Allowing franchises in foreign market will increase market share and revenue

Key Success Factors:

     All the four industries listed (bottled water, fruit juice & functional beverages, snack and carbonated soft drinks) possess key success factors which are (Gotaas, M., IBISWorld, 2011 and Kaczanowska, A., IBISWorld, 2011):

Ability to adapt to change:

     The company which can adapt new technology and adapt new consumer trends according to demand and can shift according to global demand and diversity will likely to emerge as rising sun in the industry. The toughest industry is of carbonated soft drinks (CDS) which faces tremendous competition at home country as well as globally.

Product marketing:

     “The one who speaks can sell the plum” is the Indian proverb use to describe the importance of marketing. Marketing is the essential un-detachable element in selling a product. Aggressive marketing is required to compete in market. Coca-Cola and PepsiCo both are very aggressive in cola wars for marketing their products.

Strong Distribution Network:

     Strong distribution network enables company to make product available to maximum number of consumers. For instance wholesale retailers, grocery and convenience stores are the sources where consumers buy food products.

Product Differentiation:

     The industry has very wide product portfolio which gives consumer control over product selection and suggestion.  Also degree of product differentiation gives company advantage over competitors.

Brand Name:

     Consumers look for branded product when other options available. Sometimes branded products are costly but also creates the quality stamp for consumer, hence consumer go for branded product. Brand names like Coca-Cola and Pepsi can have significant competitive advantage over their competitors.

Economies of scale and scope:

     Economies of scale and scope are concerned with product price and its production cost. Manufacturers can minimize marginal cost by ordering raw materials in bulk and switching production to multiple products hence expanding multiple products in portfolio give economic advantage.

Table 3: Weighted Industry Attractiveness Scores

Industry Attractiveness Measures	Importance Weighted	Bottled Water Industry		Fruit Juice and Functional Beverage Industry			Snack Food Industry		Carbonated Soft Drinks Industry
		Rating	Score	Rating	Score		Rating	Score	Rating	Score
Market size and projected growth rate	0.25	2	0.50	8		2.00	6	1.50	1		0.25
Intensity of Competition	0.20	2	0.40	4		0.80	3	0.60	1		0.20
Emerging opportunities and threats	0.10	5	0.50	5		0.50	3	0.30	2		0.20
Cross-industry strategic fits	0.05	4	0.20	4		0.20	3	0.15	2		0.10
Resource requirements	0.05	3	0.15	3		0.15	4	0.20	1		0.05
Seasonal and cyclical influences	0.10	5	0.50	4		0.40	3	0.30	1		0.10
Societal, political, regulatory and environmental factors	0.10	4	0.40	4		0.40	3	0.30	2		0.20
Industry Profitability	0.10	2	0.20	9		0.90	8	0.80	6		0.60
Industry uncertainty and business risk	0.05	3	0.15	5		0.25	4	0.20	3		0.15
Sum of assigned weight	1.00
Overall weighted industry attractiveness score			3.00			5.60		4.35			1.85

Source: (Thompson, A., A., Jr., Strickland III A., J., & Gamble, J., E.2010)

Answer 2: Weighted Industry Attractiveness Scores’ Analysis

     Industry attractiveness score is the quantitative method to analyze which industry is more attractive and which industry is less attractive. It gives clear idea to investors to invest in the particular industry. Industries measured here are, bottled water industry, fruit juice and functional beverage industry, snack food industry and carbonated soft drinks industry.

     The quantitative method considered variables like market size and growth rate, competition, emerging opportunities and threats, cross-industry strategic fits, resources and seasonal cyclic influences, industry profitability and business ricks. The importance weighted assigned from 0.5 (minimum) to 0.25 (maximum) considering higher the score more importance of variable. The sum of importance weighted is 1.

     Attractiveness score measured by assigning numerical scale 1 to 10, where 1 = lowest attractiveness whereas 10 = most attractiveness. The score derive by multiplying importance weighted with assigned rank, for instance:

Variable                               Importance weighted        Rank              Score

Intensity of Competition               0.20                     ×      2          =         0.40

Source: (Thompson et al., 2010)

     In Table 3, the highest weighted is given to market size and projected growth rate. The highest score achieved by fruit juice and functional beverage industry followed by snack food industry. This score assigned based on previous five years market growth rate and future projection for next five years. Also the revenue considered to assigned weight to each industry as depicted in chart 1. The soda water industry showed negative growth rate and also predicted to declining growth rate in future, it assigned least attractiveness score.

     The intensity of competition is high in carbonated soft drink (CDS) industry followed by bottled water industry and snack food industry. Fruit juice industry also not competition proof but it’s a new emerging industry so it has less competition compared to other three industries. Hence again fruit juice and functional beverage industry stand first in achieving industry attractiveness score.

     Emerging opportunities for bottled water and fruit juice industry are more outside US market. Further, the products are easy to sale and could get competitive advantage of organic product; hence it has more opportunities, whereas CDS and snack food industry is much susceptible to foreign market behavior. For instance in Asian countries snack food and CDS products considered as “junk food” and consumers not buying those products as frequent as in US. So the industry attractiveness score is less for CDS and snack food industry.

     Cross industry strategies and resources requirements are more common in beverage industry where bottling industry / suppliers are common for beverage industry. Also printing industry which prints labels for bolted products shares common value chain. Hence for beverage industry its resources are much common and value chain is matching. But for CDS industry suppliers and value chain partners may differ because of requirements are little bit more than simple bottling industry. Hence it’s little bit on side to share common resources and value chain; hence CDS is least attractive industry for the considered variables.

     Seasonal cyclical influences are more in CDS and fruit juice and functional beverages industry. For example consumers utilize or buy more CDS and juice products in summer rather than in winter. In USA CDS and fruit juice sale remains continue even at low rate in off season whereas in Asian countries like India, selling of CDS products declines at significant level. Also the fall in disposable income in USA affected selling of beverage industry. Consumers are becoming more aware about using filtered and tap water hence bottled water industry has been suffering a lot. In addition to that, consumers are also looking towards health conscious products like diet tea, green tea, herbal tea, protein juices and more hence it’s also rand death bell for CDS industry. Seasonal factor is less volatile in bottled water industry hence it has chances to grow overseas followed by fruit juice industry (Gotaas, M., IBISWorld, 2011 and Kaczanowska, A., IBISWorld, 2011).

     PepsiCo operates its industries outside USA too. So no industry is proof to social-political impact. PepsiCo’s CDS industry suffered in Indian market when non-government agency showed pesticides residues in their bottled drinks in 2006 (Kannan, S., 2006). The selling dropped by 50% during following two weeks in 2006.Further western CDS drinks and junk foods are always hotshot for cult politicians in India who  oppose many times those products to save heritage of India. Hence volatility is more in CDS and snack food industry makes it less attractive for future investment where as fruit juice and functional beverages can get advantage of healthy products. So once again fruit juice and functional beverage industry ranked first in industry attractiveness score.

     Business risks are attached with every industry. Several business risks associated with PepsiCo Inc. are; demand for products, damage to reputation, trade consolidation and loss of key customer, social-political impact, changes in regulatory legal environment and more. The most volatile industry for business risk is CDS which faces many government standards and regulations. It is crucial for CDS industry to maintain minimum level of certain elements in their products. Hence CDS industry becomes less attractive on rating scale.

     Drawing the conclusion, industry with a rating score below 4, is less attractive where as score around 3 to 1 shows poor performance of industry and least attractiveness. Fruit juice and functional beverage industry stands first with overall industry attractiveness score with 5.60, followed by snack food industry, bottled water industry and carbonated soft drinks industry with attractiveness score of 4.35, 3 and 1.85 respectively.

     In the nutshell, PepsiCo should focus more on fruit juice and functional beverage industry and should market their products overseas. Other industries being more volatile and less attractive, PepsiCo should walk with new trend, as consumer demanding healthy products, fruit juice and protein juice products are new to the market and growing rapidly. CDS is a common industry; anyone can make soda at home with soda machine, but protein juice not easy to get at home. PepsiCo should focus on this fast growing industry.

Table 4: Weighted Competitive Scores for a PepsiCo. Inc.’s Business Units

Competitive Strength Measure	Importance Weight	Bottled Water Industry of PepsiCo		Fruit Juice and Functional Beverage Industry of PepsiCo		Snack Food Industry FLNA Unit		PepsiCo’s Carbonated Unit
		Rating	Score	Rating	Score	Rating	Score	Rating	Score
Relative Market Share	0.25	2	0.50	7	1.75	9	2.25	8	2.00
Cost Relative to competitor’s cost	0.20	6	1.20	9	1.80	9	1.80	7	1.40
Ability to match or beat rivals on key product attributes	0.05	3	0.15	8	0.40	7	0.35	6	0.30
Ability to benefit from strategic fits with sister businesses	0.05	5	0.25	5	0.25	3	0.15	4	0.20
Caliber of alliances	0.10	6	0.60	7	0.70	8	0.80	9	0.90
Brand image and reputation	0.15	5	0.75	6	0.90	8	1.20	9	1.35
Profitability relative to competitors	0.20	3	0.60	9	1.80	8	1.60	6	1.20
Overall weighted competitive strength score	1.00
			4.05		7.60		8.15		7.35

Source: (Thompson, A., A., Jr., Strickland III A., J., & Gamble, J., E.2010)

Answer 3: Analysis: Weighted Competitive Strength Score of PepsiCo Inc.’s business units

     PepsiCo. Inc., food and beverage global giant operates under main three divisions which are PepsiCo Americas Foods (PAF), PepsiCo Americas Beverages (PAB) and PepsiCo International (PI). First two operates in North Americas where as for remaining all other PepsiCo’s food and beverage product included under PepsiCo International. Further these divisions divide in to six segments (divisions) as follows:

·         Frito-Lay North America (FLNA)

·         Quaker Foods North America (QFNA)

·         Latin American Foods and snack businesses (LAF)

·         PepsiCo Americas beverages (PAB)

·         Europe and

·         Asia, Middle East and Africa (AMEA)

      Such a diversified business unites further divided with four industries for example;

FLNA included with snack food industry, non-carbonated water bottling included under bottled water industry, non-carbonated but other than bottled water beverages included with fruit juice and functional beverage industry and soda products included under carbonated soft drinks industry.

     Weighted competitive strength assessment of individual units of PepsiCo Inc.               (Table 4) shows how each unit is strong enough to its market position or compared to its respective industries.

     Weighted competitive strength assessment of PepsiCo Inc. performed by considering variables like market share, cost structure of products related to its competitors in particular industry, ability to beat rivals, caliber of alliances, brand image and profitability. The importance weighted points ranking from 0.05 to 0.25 showing less important to more important variable and strength score is calculated by assigned ranking multiplied by importance weighted.

     Market share of PepsiCo’s business units varies. For instance in the bottling industry which includes both carbonated and non-carbonated drinks, shares different market share. The formula shows how to calculate market share of PepsiCo Inc. (Thompson et al., 2010). Market share is derived from IBISWorld reports 2010-2011.

Calculation of market share:

Market share of PepsiCo Inc. in bottled water industry calculated as: 

Market share of PepsiCo. Inc / Market share of largest rival

= 12.9 % / 40.2 % = 0.32

(i) Bottled water (non-carbonated water) business unit of PepsiCo Inc.

     Bottled water industry is mostly captured by PepsiCo’s one of the major competitor in Nestle S.A. with market share of 40.2 % followed by Coca-Cola Company with the market share of 15.8% where as PepsiCo Inc. scored 3^rd. PepsiCo’s market share is 0.32 compared to its biggest rival. PepsiCo’s bottled water industry portfolio is like a peanut to Nestle and Coca-Cola. Nestlé’s holds about 10 brands in bottled water industry where as Coca-Cola holds three. PepsiCo has only Aquafina.

Source: (Kaczanowska, A., IBISWorld, 2010).

     Base on the market hare the bottled water industry, PepsiCo awarded strength rating 0.50 (0.25 × 2 = 0.50). Since market share does matter and shows unit volume, its importance weighted is 0.25.

     PepsiCo leads in fruit juice and functional beverage industry as well as in snack food industry; the strength score achieved in both industries by PepsiCo is 1.75 and 2.25. FLNA makes PepsiCo Inc. largest

(ii) Functional beverage business unit of PepsiCo Inc.

Source: (Kaczanowska, A., IBISWorld, 201q1.

     PepsiCo’s fruit juice and functional beverage has products like SoBe, AMP Energy, Naked Protein juices, Tropicana juices, Gatorade and more where as Coca-Cola has brands like Vitamin Water, Smart Water, Powerade, Odwalla and few more where as another market rival Dr. Pepper has brands like Welch’s, Hawaiian Punch, Snapple and few more.  PepsiCo possesses market share of 1.89 compared to its biggest rival Coca-Cola Company, or we can say Coca-Cola has 0.52 (about half) of the market share that of PepsiCo.

(iii) FLNA (Snack Food) business unit of PepsiCo Inc.

Source: (Gotaas, M., IBISWorld, 2011).

     In snack food industry, PepsiCo’s FLNA’s market share is 9.30 compared to its rival Kraft Foods Inc. and General Mills Inc.

(iv) Carbonated Soft Drinks Market Share of PepsiCo Inc.

Source: (Kaczanowska, A., IBISWorld, 2011).

     Coca-Cola is the major player in the CSD industry, but do you know who is on second position? PepsiCo? The answer is NO! PepsiCo replaced by Coca-Cola’s own brand Diet Coke and replaced Pepsi from second position (Esterl, M., 2011). PepsiCo possesses 35.4% market share where as its biggest rival Coca-Cola has 43.7 %. Compared to Coca-Cola, PepsiCo’s market share is 0.81.

     Based on market share, all four industries of PepsiCo awarded weighted competitive score of 0.50, 1.75, 2.25 and 2.00 respectively.

     PepsiCo’s cost cutting effectiveness is good in fruit juice and snack food division as they have major market share and wide range of product portfolio. Furthermore, FLNA’s chips and other snack products are cheaper than Kraft’s or General Mills’ brands. The best places to compare cost of rivals are grocery stores and retailers. An individual product can be found and compared, for instance FLNA’s chips start from 0.99 ¢ where as General Mill’s chips starts above $ 1. Bottled water and CSD industry don’t enjoy this competitive advantage.

     Further, PepsiCo’s motto, “Performance with Purpose” (PepsiCo Inc. Annual Report, 2010) makes it able to beat rivals. The motto specifies the delivery of sustainable growth and more healthy products to consumers. This attributes reflects in PepsiCo’s beverage and food industry.

Also the value chain and strategic alliances is a greater advantage for PepsiCo Inc. As some of the industries like bottled water, fruit juice and CSD share common suppliers or independent bottlers’ chain, the operations of this industry run parallel. Snack food and CSD industry achieved higher competitive strength in alliances where as strategic fit, bottled water industry and functional beverage industry achieved higher strength. 

     PepsiCo Inc. has about 19 mega brands worth of US $ 1 billion. From 19 mega brands, 7 belong to CSD, 8 from FLNA, 1 from bottled water and 3 from fruit juice and functional beverages. CSD is the most popular brand among all industry and most common worldwide from PepsiCo’s portfolio. As a strong brand portfolio, CSD gained highest competitive strength score where as bottled water stood last. Even though bottled water industry has only one brand “Aquafina”, it’s a well known brand among consumers.

      Finally, rapidly growing fruit juice and functional beverage industry of PepsiCo showed more profitability and growth rate compared to any other industry of its own, whereas FLNA stood second.

      Concluding weighted competitive strength assessment, snack food industry of PepsiCo Inc. i.e. FLNA stands first with overall score of 8.15, followed by fruit juice and functional beverage industry, CSD and bottled water industry score 7.60, 7.35 and 4.05 respectively.

Further it’s clear from the net revenue figures from PepsiCo inc. that PAF is the strongest division of PepsiCo Inc., followed by PAB and PI.  (PepsiCo Inc., Annual Report, 2010).

          

     In the final verdict, PepsiCo has strong portfolio of snacks and functional beverage products, also the company’s financial position is sound to sustain industry rivals. However PepsiCo needs to focus on bottled water industry and declining CSD industry. Expanding bottled water portfolio through acquisitions of other small companies can raise market share for PepsiCo and aggressive marketing may bring back Pepsi’s market position which it lost against Diet Coke. 

Answer 4:

Chart 1: Nine cell industry attractiveness-competitive strength matrix of PepsiCo Inc.

The Circle size of industry reflects the revenue generated by the business units in US $.

          High priority for resource allocation

          Medium priority for resource allocation

          Low priority for resource allocation

Source: (Thompson, A., A., Jr., Strickland III A., J., & Gamble, J., E.2010)

 

   The nine cell matrix used to indicate strategic position of each business units of the company with respect to related industry, indicating the attractiveness and weighted competitive strength score. Industry attractiveness score is plotted on the vertical axis and competitive strength score is plotted on horizontal axis. For PepsiCo Inc’s. business unites, attractiveness score is divided as, 0-2 low attractive, 2-4 medium attractive and more than 4 - high attractive. Likewise, weak competitive strength is assigned range of 0-3, average competitive strength from 3-6 and high competitive strength from 6 onwards. Each business unit of PepsiCo Inc. is plotted on the nine cell matrix according to overall attractiveness score and total weighted competitive strength score and shown as colored circle shape. The circles size reflects the revenue generated by particular business unit of PepsiCo Inc. For instance PepsiCo’s bottled water division generated US $ 841 in the year 2009, fruit Juice and functional beverage generated US $ 6470 in the year 2009, FLNA (snack food) generated highest revenue of US $ 13, 224 and CSD of PepsiCo generated US $ 3,480.

     On the nine cell matrix, fruit juice and functional beverage unit and FLNA unit of PepsiCo stand first and showing high resource allocation. Whereas bottled water industry showed medium attractiveness score and average competitive strength. The CSD business unit of PepsiCo is least attractive but has strong competitive strength.

     The last two business units are losing charm in the industry attractiveness. Factors like fall in disposable income of an individual, consumer awareness about using tap water and more health awareness among consumers may be the reason why they declining their charm.

From the nine cell matrix it’s clear that PepsiCo can allocate more resources to fast growing industry of fruit juice and functional beverages whereas CSD and bottled water industry need strong marketing and backup strategy. The paradigm shift in the market robbed charm of carbonated soft drinks industry. PepsiCo should allocate more attention to backup declining business units. The fast growing business units also require little more resource allocation which will give more competitive advantage to the PepsiCo Inc.

Answer 5 PepsiCo’s Power of One strategy

     PepsiCo has three main divisions, PAF which includes snack food products, PAB which includes carbonated soft-drinks, bottled water, fruit juices and other functional beverages and third, PI- which includes both snack foods and beverages products outside North America. The enriched portfolio of PepsiCo includes 19 megabrands and number of similar products. PepsiCo’s beverage division can have advantage of bottling suppliers. PepsiCo merged with Pepsi Bottling Group (PBG) and the Minneapolis-based PepsiAmericas. This merger gave PepsiCo control of 80 percent of its bottling network (Kaplan, A., 2010).

Also PepsiCo’s study showed that when consumer eats snack food, he or she looks for a beverage product too. PepsiCo identifies it as Power of One strategy (PepsiCo Inc., Annual Report, 2010).

     How PepsiCo applies this strategy in its value chain? It can be understood by an example like; displaying snack food product along with soft drinks can increase the chances of sell. For instance grocery stores or food retailers like Pricerite who is one of the major distributors of PepsiCo products, it could be find both snack food and beverage products arranged nearly. The following chat explains PepsiCo’s Power of One strategy.

  

Chart 2: PepsiCo Inc’s Power of One Strategy

Source: (PepsiCo Inc., Annual Report, 2010)

     Under its Power of One strategy, PepsiCo wants to integrate combination of both snack food and beverage product through marketing and merchandising and. Further to sustain mutually beneficial relationships with key customers and suppliers is very important. PepsiCo also believes to create value for customers and retailers. To increase economies of scale, PepsiCo offers combination of products or sometimes offering “tow for one price” boost the profit during summer. PepsiCo wants to maintain its Power of One strategy for every division it operates. The Power of One empowers PepsiCo to understand consumer needs and helps to understand changing trends.

Answer 6: Recommendations

     The Food and Beverage giant recorded revenue of US $ 53.83 billion and net income of US $ 6.34 billion in the year 2010 (PepsiCo Inc., Annual Report 2010). Financially the company performed very well. The highest earning business unit of PepsiCo is PAF followed by PAB and PI. However PepsiCo’s strong market position, its CSD business unit is lag behind Coca-Cola. Currently Coca-Cola’s two CSD products are on number one and number two position, Pepsi comes third (Esterl, M., 2011). Also PepsiCo’s healthy beverages cost more than its market rivals. For example Naked Protein juices are excellent in quality and also one of the best selling juice products in the market but it’s more expensive than regular fruit juice PepsiCo needs to focus on several strategies to sustain strong market position with sustainable financial condition like:

1. The company can select broad differentiation strategy because the product portfolio of the company is enriched with number of snack foods and beverage products. The company has already tested differentiation in functional beverages so it would be easy for it to enter in more differentiation. A unique test of product plays a major role in success of the product (Thompson A., A., Jr., et al., 2010).

2. Controlling cost of organic food and beverage by resource allocation: Fruit juice and functional beverage is the fastest growing unit of PepsiCo. Due to fall in disposable income and health consciousness among consumers, CSD segment shrieked. Allocation of resources from either segment would be helpful to boost growth of other segment. For instant, allocation of CSD production and distributive resources to fruit juice and functional beverages will increase the productivity of later segment and effective distribution resources reduce the market shelf time, hence the fruit juice and functional beverage products’ per unit cost would be lower.

3. Setting Price for products: PepsiCo’s FLNA products indicate price tag whereas PAB’s products are subjected to charged different price. PAB’s products don’t have set price so it gives competitive advantage to wholesalers and retailers, so the low price strategy of wholesalers can’t be understood by consumers. If PepsiCo set particular price for its PAB products the sellers will get equal opportunity to sell the products and consumers would be able to buy it from anywhere as same price. This kind of practice does exist in India where manufacturer must display maximum retail price (MRP) of the product which consumer will pay. 

4. Consolidation of poor performing business units. CSD business industry is on oxygen, carbon dioxide itself proven fatal for this industry. PepsiCo should reduce attention from carbonated soft drinks and should allocate its resources to either snack food or fruit juice and functional beverage industry.

References

Esterl, M. (2011, March 7). Diet Coke Wins Battle in Cola Wars. The Wall Street Journal. Retrieved on May 01, 2011 from http://online.wsj.com/article/SB10001424052748703899704576204933906436332.html

Gotaas, M. (2011. April). Snack Food Production in the US. IBISWorld Industry Report 31191. Retrieved on May 02, 2011 from http://0-www.ibisworld.com.helin.uri.edu/industryus/default.aspx?indid=271

Kaczanowska, A. (2010, December). Bottled Water Production in the US. IBISWorld Industry Report 31211b. Retrieved on May 02, 2010 from http://0-www.ibisworld.com.helin.uri.edu/industryus/default.aspx?indid=286

Kaczanowska, A.(2011, March). Carbonated Soft Drink Production in the US. IBISWorld Industry Report 31211a. Retrieved on May 02, 2011 from http://0-www.ibisworld.com.helin.uri.edu/industryus/default.aspx?indid=285

Kaczanowska, A. (2011, March). Fruit Juice & Functional Beverage Production in the US. IBISWorld Industry Report 31211c. Retrieved on May 02, 2011 from http://0-www.ibisworld.com.helin.uri.edu/industryus/default.aspx?indid=287

Kannan, S. (2006, August 2). Pepsi and Coke under fire again. Retrieved on May 01, 2011 from http://news.bbc.co.uk/2/hi/5239758.stm

Kaplan, A. (2010, April 19). The Power of One. Retrieved on May 02, 2011 from http://www.pepsico.com/Article/The-Power-of-One04192010.html

O’Connor, A. (2006, August 5). Coke and Pepsi told to spill secrets or face ban. The Sunday Times. Retrieved on May 02, 2011 from http://www.timesonline.co.uk/tol/news/world/asia/article700663.ece

Our Operations. PepsiCo Inc. Annual Report 2010. Retrieved on May 01, 2011 from

http://www.pepsico.com/Download/PepsiCo_Annual_Report

      _2010_Full_Annual_Report.pdf

PepsiCo, Inc. Profile. (2010). Retrieved on May 01, 2011 from Hoovers Academic Database.

Thompson, Jr. A., Strickland III, A. & Gamble, J. (2010). A Nine-Cell Industry Attractiveness-Competitive Strength Matrix: Diversification. Crafting and Executing Strategy. 17 (e). (p. 264-265). McGraw Hill Publication, USA

Thompson, Jr. A., Strickland III, A. & Gamble, J. (2010).Weighted Competitive Strength Assessment: Diversification. Crafting and Executing Strategy. 17 (e). (p. 261-263). McGraw Hill Publication, USA.

Thompson, Jr. A., Strickland III, A. & Gamble, J. (2010).Weighted Industry Attractiveness Scores: Diversification. Crafting and Executing Strategy. 17 (e). (p. 258-261). McGraw Hill Publication, USA.