PepsiCo: External Considerations
Overview
PepsiCo is popularly associated with its flagship product Pepsi Cola. While Pepsi Cola is a sizable portion of PepsiCo’s revenue stream, PepsiCo actually has significant revenue generated from a slew of other products and divisions such as PepsiCo Beverages North America, PepsiCo International, Frito-Lay and Quaker Foods North America (Overview, 2005). PepsiCo’s Pepsi Cola has long been second in market share to Coca-Cola and the competition between Pepsi and Coke has been the stuff of business school legend for many years. However, thanks to a series of strategic acquisitions and market entry moves internationally, PepsiCo as a company has finally overtaken Coke in overall market share and performance: “PEPSICO...has raced ahead of...Coke in overall growth rates. PepsiCo earnings last year surged 18% to $4.2 billion on revenues of $29.3 billion, up 8.5%...Coke's 11.5% earnings growth to...4.4% revenue growth to $22 billion for 2004” (Steiner, 2005, para.2). It could be said that PepsiCo has lost the cola battle but won the overall war with its archrival Coca-Cola Company. PepsiCo has done this by becoming a snack food and beverage Company with operations in more than 200 countries worldwide, over 143,000 employees both national and international and over $4 billion in revenues (PepsiCo, 2004, p.4). Increasingly, PepsiCo, as most other large MNCs have done, is relying on overseas expansion to fuel its future growth and earnings.
External Factors
PepsiCo’s strategic sights are set on international expansion. Steiner points out that Pepsi International became Pepsi’s largest division in 2004 and this trend is likely to continue (2005, para.3). Although the United States and more broadly, North America, is the world’s largest snack market, its growth is relatively flat (Flannery, 2004, para.4). These two strategic observations certainly lend much credence to an outward focusing strategy of growth and expansion. In fact, this appears to be the driving force behind PepsiCo’s overall strategic plan: international expansion. Even more specifically, PepsiCo seems intent on establishing dominance in the two major markets of China and India: “"China is a big prize," says PepsiCo's Asia president...As the Chinese have opened up in the past ten years, there's been an inherent demand for foreign products...”(Flannery, 2004, para.5). This global strategic orientation is reflected by the opportunities available in the marketplace and is one readily accessible to any company, such as PepsiCo, that is well-funded and has the research and marketing capabilities to manage a unified market entry campaign.
External Factor Evaluation WEIGHT RATING WEIGHTED SCORE
Opportunities
1. International and emerging markets hold much potential .15 1 .15#p#分頁標題#e#
2. There is a growing demand for better and faster convenience type foods .05 3 .15
3. Bottled water industry is in demand in all markets .05 1 .05
4. Demand for health oriented products is increasing in established and mature markets .15 4 .60
5. Sports and performance beverage industry is a hot growth market .10 3 .30

Threats
1. Some global backlash against American products .10 2 .20
2. Competitive pressure from both Coca-Cola and some local market mainstays in China and India .05 3 .15
3. Consolidation in the retail industry is having some effect on distribution networks and marketing agreements .05 2 .10
4. Exchange rate fluctuations .10 2 .20
6. Raw material and transportation costs are increasing .20 1 .20
TOTAL 1.00 2.10

Competitive Forces
Porter’s Five Forces model is an effective strategic evaluation tool to measure the effect certain competitive dimensions are having, and may have in the future, on a company’s main line of business (LOB). Proctor lists the five forces as being comprised of buyer power, supplier power, barriers to entry and threat of substitute products or services all in flux around an intangible, but very real competitive dynamic:
...identification of an organization’s competitors may not be as simple...as it might...appear. The most obvious competitors are those which offer identical products or services to the same customers...substitute products and services highlight the nature of indirect competition... Five levels of competition have been suggested: direct competition, close competition, products of a similar nature, substitute products and indirect competition. (2000, p.103)
For PepsiCo it is important to note that though the degree of rivalry it exhibits with Coca-Cola would be classified as high by even the most casual observer, on paper, because of the low market fragmentation in cola products in the major developed markets and the relatively few major companies, the degree of rivalry should be low. However, because PepsiCo has branched off into other LOBs and product lines, it has sought competitive rivalry across many market segments and this has increased the degree of competitive rivalry by geometric proportions.
Porter’s threat of substitutes is probably one of PepsiCo’s largest competitive dangers because as more products become available they exert continuous price pressure on the major companies, PepsiCo and Coca-Cola, to lower prices. Such price elasticity effects the growth models that PepsiCo has developed to satisfy shareholders: “...we know that our shareholders care most about our future. Given PepsiCo’s consistent record of growth...we’re asked is: How will you sustain growth? By taking our competitive strengths, and investing in them to create...value”(Sustainable, 2004, p.4). PepsiCo has made it a mandate to build its shareholder value based on ever-increasing global expansion. It actually intends to accomplish much of this growth in emerging markets and on the introduction of new products outside of its flagship Pepsi Cola product. One of the areas that PepsiCo has relied on to relieve some of this competitive pressure from substitute products are juice type beverages which it has long wielded as a premium, tough to enter segment: “...PepsiCo's Tropicana brand a 14-year head start in sewing up the premium market” (Sweney, 2005, para.3). Sweney points out that PepsiCo had the foresight to expand into such, at that time, niche markets which are only now becoming broad product categories with only a few real players. But, in keeping with Porter’s five forces model, entering the premium juice beverage market presents some barriers to entry that are not present in the cola market. These include, among others, access to fresh fruit products for raw material, higher risk of spoilage and shorter shelf life. Further, since these products are marketed as a premium product, competing on price is not much of an advantage. #p#分頁標題#e#
Finally, one of Porter’s other competitive force that bears much relevance to PepsiCo and the cola industry in general, is buyer power. Because there are few relatively large, international companies with the breadth and depth of PepsiCo and Coca-Cola, these two companies can truly demand that their suppliers accept the lowest conceivable margins possible.
Competitor Profiles
Competitor Profile Matrix PepsiCo Coca-Cola Company Kraft Foods
CRITICAL SUCCESS FACTORS WEIGHT RATING SCORE RATING SCORE RATING SCORE
Advertising 0.20 1 0.20 4 0.80 3 0.60
Product Quality 0.10 4 0.40 4 0.40 3 0.30
Price Competitiveness 0.10 3 0.30 3 0.30 4 0.40
Management 0.10 4 0.40 3 0.30 3 0.30
Financial Position 0.15 4 0.60 3 0.45 3 0.45
Customer Loyalty 0.10 4 0.40 4 0.40 2 0.20
Global Expansion 0.20 4 0.80 2 0.40 2 0.40
Market Share 0.05 1 0.05 4 0.20 3 0.15
TOTAL 1.00 3.15 3.25 2.80

The ratings in the Competitor Profile Matrix above are based on several market circumstances that are relevant to how PepsiCo is rated. Though PepsiCo is larger in volume than Coca-Cola, it lags Coca-Cola Company in their flagship cola product market share overall, and outside of the beverage division, PepsiCo is smaller than its chief snack and food product rival, Kraft Foods. Yet, as PepsiCo’s 2004 financial statement, Sustainable Advantage, states, PepsiCo is the world’s 3rd largest food and beverage company (2004, p.6).
PepsiCo: Strategic Considerations
Current Strategic Profile
,Because of Coke’s success at marketing partnerships and fountain drink agreements it has a huge advantage in this product category: “Coke...fountain sales, controlling nearly 70% of the segment...buoyed by the addition of the 16,000-unit Subway Restaurants chain. Fountain and institutional sales account for roughly a quarter of total soft drink volume” (MacArthur, 2004, para.3), PepsiCo has been forced to find other strategic measures to expand its market presence. It has done so largely by increasing its product offering, entering emerging markets and new product research. Currently, PepsiCo and Coca-Cola are battling for market share in almost every major emerging market. For example, beginning in 2003 Pepsi and Coke began going toe to toe in Thailand with opposing strategies to establish market dominance: Coke began championing its Fanta product as the beverage of choice for the young and old alike, while PepsiCo gambled on a new marketing campaign to expand Pepsi Cola (Mulchand, 2003). On the global front, Coke has earmarked $300 million for its international marketing efforts which follows the $160 million it spent the previous year (Hein, 2005). This new emphasis on global marketing campaigns has increased the degree of rivalry between these two major competitors to heights not seen before. Pepsi has answered by announcing in 2004 a new “mid-calorie product” that it intends to revolutionize the cola industry with: “The rumours that Coke and Pepsi...were developing mid-calorie colas had reached the level of dull roars by the time Pepsi announced...that it would be bringing out its version this summer under the brand name Pepsi Edge” (Elliot, 2004, para.3). Clearly, PepsiCo intends to compete on new product differentiation, increased marketing dollars and emerging markets. Yet, PepsiCo and its archrival Coca-Cola Company realize their days of competing on one product alone are over:#p#分頁標題#e#
Neither company has much to brag about. Both continue to see sales of their flagship soft drinks weaken. Pepsi-Cola and Coke Classic shares dropped 0.6% and 0.5%, respectively. Volume for the two brands fell 6.9% and 6.4%, as consumers turned to diet drinks, waters and non-carbonated beverages. (MacArthur, 2004, para.10)
In this case, because of the foresight PepsiCo had in diversifying its product base early on, it is better positioned to incorporate the market reality of smaller revenues being generated by Pepsi Cola. For its part, Coca-Cola has turned to nutraceutical products as a possible way to offset flagging interest in its core product, Coke (Coca-Cola, 2005, p.6). This is a strategic response due almost solely to the market initiatives made by PepsiCo.
PepsiCo Internal Factors
Key Internal Factors Weight Rating Weighted Score
Internal Strengths
1. Sound leadership with a long-term vision .10 4 .40
2. Strong product portfolio .10 4 .40
3. Advantages of operational scale .15 3 .45
4. Recent market successes .15 4 .60
5. Strong financial performance and ratios .20 3 .60
Internal Weaknesses
1. Some low margins in certain product categories .10 1 .10
2. Some poor performances by some of its divisions (Quaker) .05 2 .10
3. Some seasonal performance concerns .05 2 .10
4. Dependence on foreign markets for growth .10 1 .10
TOTAL 1.00 2.85

Strategic Recommendations
PepsiCo’s strategic options can be derived from an equation of its internal strength factors with its external strength factors. The observations resulting from this type of examination can provide the insight necessary to develop a strategy that is not only beneficial from a shareholder’s perspective but also operationally because it, presumably, is based on the strengths and core competencies attributed to the company.
Key Internal Factor Key External Factor Resultant Strategy
Sound Leadership & Strong Vision + International & Emerging Markets hold potential = Acquire Local Competitors in Emerging Markets
Strong Product Portfolio + Demand for Health Oriented Product is Growing = Increase Research & Development Budget
Recent Positive Market Performance + Sports and Performance Beverage is a Hot Growth Market = Funnel Revenue into this Product Marketing Plan

Strategic Outline
Since most of PepsiCo’s growth is already projected to originate from international markets in the years ahead, PepsiCo should develop a 5 year growth plan for the Asia Pacific Rim spearheaded by the China market. Considering PepsiCo already has a mammoth presence in China: “PepsiCo has since invested more than $1 billion in 40 joint ventures, some state connected, a few of them troubled. Today China is among the five fastest-growing markets for Pepsi”(Flannery, 2004, para.6); by maximizing this market presence, PepsiCo could use this momentum to capitalize on markets currently underperforming around the Asia Pacific Rim. This strategy is further enhanced by several major international events scheduled to take place in China in the coming years: the 2008 Summer Olympics and the 2010 World Expo. By increasing its profile in China and throughout the region, PepsiCo would be well-positioned to capitalize on its increased brand equity and marketing cachet to re-launch its product lineup in the all-important North American market. PepsiCo’s recent strong financial performances, illustrated below, have given it the resources requisite to introduce such an expansive regional and country marketing campaign:#p#分頁標題#e#

(Sustainable, 2004, p.2)
A successful Asian campaign built around the China market should have the following effect on PepsiCo’s financial profile:
Categories
*revenue given in millions 2004 Financial Performance 2010 Financial Performance (pro forma)
Total Net Revenue $29,261 $36,000
Total Operating Profit $5,259 $12,000
Net Income $4,004 $6,800
Earnings Per Share $2.32 $3.89
Capital Spending $1,387 $2,950

A five year project plan would contain the following major milestones:
Strategic Asia Plan Major Strategic Partnership with Olympic Entity Expanded Olympic Themed Product Packaging (all products) International Marketing Campaign Highlighting PepsiCo’s Olympic Sponsorship Asia-wide Marketing Campaign Illustrating PepsiCo’s Expo Sponsorship
11/30/2005 11/30/2006 06/30/2007 11/30/2007 11/30/2009

The marketing plan itself would be themed after China and highlight the depth of influence that that culture has had all across Asia and would tie in to the major international spectacles of the Olympics and the World Expo. The major Asian consumer societies: South Korea, Japan and Taiwan would all be highly marketed to showcasing their relationship with China and a new and highly individual Asian identity would emerge, introduced by PepsiCo. Finally, PepsiCo could take advantage of the Olympics to introduce an original sports-drink designed for the Asian but with Western tastes in mind.