REPUBLIC OF THE PHILIPPINES

BATANGAS STATE UNIVERSITY

COLLEGE OF ACCOUNTANCY, BUSINESS, ECONOMICS AND INTERNATIIONAL

HOSPITALITY MANAGEMENT
Gov. Pablo Borbon Campus
Rizal Avenue, Batangas City

Case 24 : “PepsiCo - 2009 by John and Sherry Ross”

In Partial Fulfillment of the requirements for the course

MGT 406 – Strategic Management

Submitted by :
Abrea, Justine – 85%
Dejoya, Kyla Nicole – 82%
Dimaano, Rhoy – 85%
Garana, Myela – 93%
Manibo, EJ – 80%
Magnaye, Katherine – 94%
Navarro, Angelica - * No contribution
Petrache, Katrina – 98%
Vilenna, Alexis – 94%

Presented to :
Mr. Joseph D. Mendoza

March 19th, 2021

 I. EXECUTIVE SUMMARY

PepsiCo is undeniably one of the most famous companies in the food and beverage industry. It
was formed in 1965 with the merger of the Pepsi-Cola Company and Frito-Lay, Inc. PepsiCo has
since expanded from its namesake product Pepsi to a broader range of food and beverage brands,
the largest of which included an acquisition of Tropicana Products in 1998 and the Quaker Oats
Company in 2001, which added the Gatorade brand to its portfolio.

But it underwent major changes during late 2000s with Ms. Indra Nooyi stepping in as the CEO
of the company in 2006. PepsiCo was one of the victims of the Great Recession in 2008
therefore it encountered many problems especially on the financial front. Furthermore, it faced
and is still facing major competitions in the food and bevarage industries. There’s also the
neverending threat of consumer’s change in taste and preferences. In relation to the problems
identified, key recommendations for the company were to focus on international expansion,
upgrade their product portfolio including healthy alternatives and to strengthen their position in
their local destination which is North America. Various models and tools like internal and
external matrixes, SWOT analysis and others were presented to futher justify those
recommendations.

II. STATEMENT OF THE PROBLEM

PepsiCo, contrary to popular belief, isn’t entirely dependent on their famed carbonated soft drink
called “Pepsi”. Historically, it started out as that when Loft candy purchased PepsiCo in the
1930’s and has enabled it to become a major player in the cola industry through low-cost
differentitaion strategy and ever since then, PepsiCo and Coca-cola has been involved in a head-
to-head battle which came to be labelled by people as the “Cola Wars”.

But these two primarly cola companies have significant differences, particularly in its product
portfolio. PepsiCo is defined in the 10k as “a leading global beverage, snack and food company.”
It is using three strategic business units of PepsiCo Americas Foods, PepsiCo Americas
Beverages, and PepsiCo International. This structure shows divisions along both product
categories and geographical locations.
And for a while, PepsiCo has established an extraordinary reputation both domestically and
globally, more on the former though. In fact, PepsiCo became the largest snack and beverage
company in 2007. So what changed?

PepsiCo began to experience a decline in revenues starting from 2009. Accoring to the report of
John and Sherry ross, first quarter 2009 PepsiCo’s net revenues of $8,263 million were down
$70 million from the same quarter in 2008. However, PepsiCo controlled costs by decreasing
cost of goods sold by $90 million. This resulted in a net profit of $1,141 million, which is $90
million less than last year’s first quarter. Second quarter PepsiCo results continued the downward
trend with beverage volume down 6 percent, Frito-Lay down 3 percent and Quaker down 4
percent. That was the main problem faced by the company and which CEO Indra Nooyi, the key
person of this case study, had to endure. The report of John and Sherry Ross presented Financial
statements of PepsiCo and its competitors. Moreover, they showcased reports on world demand
trends of the industries which PepsiCo is involved in – Non-alcoholic beverage, Savory snack
and Breakfast cereals. The conclusions presented in their report revealed the following main
issues/problems.

(I) Threat of future problems in the company’s overall revenues.

The financial statements of the company from 2006-2008 revealed negative trends.
Cost of sales and Long-term liabilities have increased. Net income has decreased
 from $5.6 billion to $5.1 billion. Furthermore, return on assets and inventory turnover
has dropped from 2007-2008.

(I) Change in customer tastes and preferences

People, particularly in North America, are starting to jump on the trend of making
well-informed and health-conscious choices with food and beverage. The idea of
healthy alternatives continue to penetrate the minds of consumers which resulted in a
decline of 0.4 percent in 2007 as consumers shifted from soft drinks to bottled water
and sports drinks. Even the markets of savory snacks and breakfast cereals are
mainky driven by consumer taste and health considerations.

(II) Strong competitors

Coco-cola, PepsiCo’s long time rival, is a force to be reckoned with. The financials
for Coca-Cola show a strong cash position of $4.979 billion and long-term debt of
only $2.781 billion. Additionally, it has a stronger international market compared to
PepsiCo. Coke generates most of its operating revenue outside the United States with
international concentrate sales accounting for 77 percent and U.S. sales 23 percent.
It’s line of business is highly concentrated on non-alcoholic beverages.
Kraft Foods, PepsiCo’s competition in food and snacks industry, is also rising. The
Kraft financials for 2008 show a 13.32 percent increase in net revenues over 2007 to
$42.201 billion.

The root cause of the downward trend in PepsiCo’s revenues was due to the Great Recession in
2008. In a nutshell, it was a period of strong decline in economic activity, with the United states
being the main victim of it all. From December 2007 to June 2009, the United States suffered
from this. It was the worst financial crisis in the US, leaving an impact on homes and businesses
in America and around the world. This has surely impacted PepsiCo because even though it has
an international division, most of its revenues are generated locally in North America. This poses
a problem for the country suffers from economic crisis.

Furthermore, nationally, the market has become health-conscious with people shifting from
bottled drinks and soft drinks to healthier alternatives such as tap water. Healthier options to
snacks like the introduction of products with less salt, sea salt, baked, zero trans fat, made of
vegetables, low carb, organic, hot, sweet, black, green, and with chili or cheese added. Some of
the new products are designed to compete on taste: others are designed to reflect a particular
consumer concern such as obesity or hypertension.

Other than that, PepsiCo still hasn’t fully tapped the opportunities it has on the international
market. They have to fully consider that the international markets for colas and snacks continues
to grow. In some countries, these have increased in double-digit figures.

With these facts in mind, Indra Nooyi has made the decision to revamp and add to the company’s
overall direction. She has come up with it a ‘nutritional strategy’ in which she emphasized
adding healthier offerings to the company portfolio. Her goal was to grow PepsiCo’s good-for-
you products such as oatmeal and fruit juices. She saw little chance for the company to grow
through sodas alone. She believes that this strategy in addition to focusing their existing product
lines in the international market instead of North America, will be the paveway to PepsiCo’s
strategy.

III. CAUSES OF THE PROBLEM

This part focuses on emphasizing and providing detailed analysis on some of the problems stated
above and its other contexts. This paper provides both external and internal analysis using
various models and strategic management tools.

 External Analysis
A. CPM – Competitive Profile Matrix
The above matrix reinforces the problem of PepiCo’s strong competitors. As it is shown, Coca-
cola is way ahead of PepsiCo and Kraft Foods, while it has garned a low total score, is definetly
catching up. In line with this, the following opportunities and threats are identified.

Opportunities

1. Increase in international market demand for colas, chips and breakfast foods

2. In 2013, the United States savory snacks market is forecast to have a value

of US$28 billion, an increase of 27.8 percent since 2008 and the compound

annual growth rate of the market in the period 2008–2013 is predicted to be

5 percent

3. Purchase smaller, successful developers of competing products

4. Healthy food snack is on the rise as consumers are shifting to healthy food

5. Teens are less conscious of health issues and still like sweet drinks

Threats

1. Regulation – FDA, Clean Water Act, etc. 2. Foreign exchange rates in current economy

3. Raw materials supplies – clean water

4. Changes in consumer taste

5. Health issues – more consumers are shifting to healthy food

6. Consumers switching to lower cost house brands for both snacks and beverages

7. Substitute products – other snacks, water, tap water, ready-to-drink, sports

drinks, etc.

8. Decrease in U.S. cola market

9. Reduction in buying power of large retailers

10. Strong direct (Coke) and indirect (Kraft) competition

 B. EFE – External Factor Evaluation

The above matrix showcases that the current strategies of PepsiCo is promising indeed,
especially because future prospects, facts and predictions are considered.

Considering the facts that PepsiCo is a larger and more diversified company than Coca-Cola and
the international markets for colas and snacks continue to grow and in some countries, these have
increased in double-digit figures, it would be such a huge lost if the company wouldn’t tap on the
opportunities it has in the international market and take measures to combat whatever threats in
has locally in North America.
  Internal Analysis

In relation to the financial information in John and Sherry Ross’ report, below are the analyzed
and identified strengths and weaknesses of PepsiCo.

Strengths
1. Name recognition both domestically and internationally.
2. Stronger than industry average in price to cash flow ratio
3. Strong marketing and promotion advertising campaigns
4. Reliable and established distribution channel management
5. Has diverse business units which reduces overall business risks
6. Recent reorganization
7. Owns more bottling companies than 10 years ago
8. Sales increased by approximately US$3.5 billion from 2007 to 2008.
9. Increase in net profit for the last consecutive years

Weaknesses

1. Short term liability of US$369 due in 2009

2. Increasing long term debt by US$3.6 billion from 2007 to 2008.
3. Increase in other liabilities by US$2.3 billion from 2007 to 2008.
4. Decline in carbonated beverages from 2006 to 2008.
5. Recent acquisition of companies could cost the company additional acquisitioncost along
with some internal negative synergies

Internal Factor Evaluation (IFE Matrix)

The above matrix results in a total score of 2.91. This indicates that PepsiCo has a strong internal
position which further entails that it has so many future opportunities and prospects to tap into.
They could adapt so many strategies that could improve their overall business, both locally and
internationally.

IV. DECISION CRITERIA AND ALTERNATIVE SOLUTIONS

Decision criteria are principles, guidelines, and/or requirements that are accessible when
organizations are making decisions. This can include detailed specifications and scoring systems
such as a decision matrix. These criteria could also be used to characterize or evaluate whether or
not a successful purchase decision has been made. Moreover, decision criteria takeaways
recommended possible solutions that will be considered to resolve existing problems and issues.
Generating decisions and alternative solutions that are best for the entire business really isn't an
easy task, since there are reasonable chances that will bring a negative or positive impact on the
industry.

This study showcases numerous decision criteria that enhance organization’s credibility to
handle occurring problems with its alternative solutions, advantages and disadvantages.
INCREASE IN SALES OR MAKET SHARE

Alternative solution: Develop different strategies such as advertisement.

Launching an advertisement: When a business has an advertisement, there is a good chance that
it will attract a lot of customers and that it will become more well-known in the industry. Having
different tactics, such as making an advertisement for their product, will require them to invest a
significant amount of money or take a significant risk in order to make a different strategy possible.

Pros

 Increased in Sales or Market Share. In this situation, having an advertisement would

encourage more consumers to appreciate their goods or services, giving the company more
opportunities to grow their consumer base and raise their revenue.

Cons

 Cost and Time. this has been a disadvantage in terms of time and expenses because they
must first spend a significant amount of time and money in developing various strategies.

IMPROVEMENT OF PRODUCTION

Alternative solution: Hired skilled people and have an extra machineries and equipment for the
production of your company.

Review your workflow: A business must determine if it has enough employees and if they are
capable of performing the tasks that must be completed, as well as ensure that the company's
machinery and equipment are in good working order in order for the company's results to be
satisfactory.

Pros

 Improvement of Production. By improving their production, they will also gain the
loyalty of a customer; they will be more enticed to avail of what a company offers because
they meet their standards when it comes to the things and services they want. Also, when
their production improves and they already have loyal customers they will no longer have
a problem with their company's revenues in the future.
Cons

 Cost and Time. It may be stated that cost and time are disadvantages, since a company
must constantly check if the equipment and machine to be used are in good working order,
and if there is harm, it must be replaced again so that the end result is better, and when it
comes to time, it will take a long time to find an appropriate and professional person so
that the person who will produce the product is the one who requires it.

INCREASE IN CUSTOMER’S SATISFACTION

Alternative solution: Satisfied your customer on what products or services you offer.

Give what is the best: A customer needs to be satisfied with what the company has to offer so
that they can give their loyalty, so that they can be enticed to come back here to avail again. Give
the best product and services that your company offers.

Pros

 Increase in Customer Satisfaction. Consumer loyalty is one of a company's needs

because once they are satisfied with what you offer; they may want to avail it again. It
might also be a way for your company's loyal customers to spread the word about your
goods and services to their acquaintances.

Cons

 High expectations from Customer. Once a customer is satisfied with the offer provided
by a company, they can still have high standards about the products and services of a
company.
 Customers who prefer the products you offer before there is a change in the products.
When there is a change in the products offered by a company but the customers prefer the
old product, they may no longer be enticed to avail the services or products you offer
because the company has lost the ones they prefer.
DESIGN OF GOODS AND SERVICES

According to Richmond, V. P., & McCroskey, J. C. (2009), organization is an organized

collection of individuals working interdependently within a relatively structured, organized, open
system to achieve common goals. The existence of the enterprisers is useful in providing goods
and services to society. When deciding a particular design for products and services, the
organization must develop and implement product strategy that meets the marketplace's demands
with a competitive advantage. In this strategic management decision area, the goal is to match
goods and/or services, organizational capability, and inflationary pressures and preferences.

The PepsiCo offering a broad array of choices for healthy, convenient, and fun nourishment,
reducing our environmental impact, and fostering a diverse and inclusive workplace culture with
a new approach to segmenting its product line: fun-for-you products such as Pepsi, Doritos, and
Mountain Dew; better-for-you products such as Baked Lays and Propel water, with levels of fat,
sodium, and sugar in line with dietary-intake recommendations; and good-for-you products such
as Gatorade, Quaker oatmeal.

The decision criteria should be visible and applicable to the dilemma that somehow this study
is attempting to solve. For this solution, the criteria are as follows:

1. Employee morale
2. Cost
3. Return of investment
4. Risk level

Pros

 High morale of employee. Employee morale is positive or strong when workers feel
positive about their work environment and think they can address their most tremendous
role and vocational needs.
 Increase customer satisfaction. If the product drives customer satisfaction,
the customer has product buying motivation that helps the firm to increase its sales.
 Variety product. Satisfies a broad spectrum of customer preferences. Once one company
promotes their product, it encourages others to do the same.
Cons

 Increasing cost in develop new product. Improvements to a product lead to an increased

risk of loss, as well as a high possibility of failure.
 Customer perception of new product (is it a good or bad?). Any interaction your
company has with consumers must have a positive AND negative impact on their
perceptions.

SIMILARIY TO AN EXISTING ORGANIZATION PRODUCTS

While making a relevant decision, allowing the group to do brainstorming with regards to
logic circuits is typically advantageous. Because the criteria remain measurable, this helps to
assure buy-in for the decision. The most thrilling moment in business world is that you can
encounter companies that are selling the same products and services. It is challenging to introduce
goods that are rare / infrequent in the market. Same as organization, competitors have strategies
and criteria to consider in making decisions.

Apparently, there are still numerous alternative solutions and ways so that you might
outshine your opponent.

1. Find and then solve your customer’s pain points. One approach to outsmart your rival is
to address the needs of your shared target audience than they can. The owner can possibly
use different ways (ex. Through surveys or questionnaires) on how to find the customers
want while using their products and services. After identify a customer’s pain points, the
company can solve them by discussing the issues and asserts someone in the organization
that can work it out. Also, it is necessary to focus on company’s efforts on trying to provide
solutions to customer’s issues than wasting time in the competition.
2. Find a niche in the market via storytelling and specialization. Similar to the first way,
finding niche in the market via storytelling and specialization is a long-term effort.
Storytelling is a great activity to introduce your products. Specialization leads to a
competitive and profitable company. A niche market is predictable, and the prospects are
far more easily exploited.
 3. Set competitive pricing. The firm can set prices that are affordable to customers.
To determine the ideal price point, you need data of what your competition's goods or
services are priced at. Company should conduct a research of different opponents that offer
best value. After that, you can easily distinguish if the prices are very valuable.
4. Provide a great customer service. Ensuring quality and memorable customer service is a
great approach to increase customer loyalty and put yourself except perhaps the
competition.

Pros

 Company easily gains customer’s attention.

 Higher marketing effectiveness. It is possible if the firm will be able to devote greater
resources to acquired its target market.
 High-profit margins. Companies can offer at high prices and earn high profit margins since
there is little competitive pressure. They provide exclusive products, inflicting customers to
be willing to pay premium prices.
 Loyalty of consumers. Companies have a higher probability of satisfying their customers.
They specialize in meeting customers' needs and wants. The success of exploiting the
market leads to a stronger relationship between customers and the company and brand.

Cons

 Difficulties in sending out a survey to customers. There are situations that customers
didn’t respond to any surveys.
 Company might receive fake reviews, lack of verification that leads to false data.
 Low economies of scale. The market has few customers with more specific demands and
needs that’s why firm has difficulty in lowering average cost by means of increasing sales
and production volumes.

THREATS OF SUBSTITUTES

PepsiCo products could be substituted based on consumer preferences and other

variables. Like Coca-Cola, substitutes for PepsiCo products are bottled water, fruit juices, sports
drinks, coffee, and tea. Some of them like bottled water and sports drinks are increasingly popular
with the trend towards the health-conscious consumer. There are a growing number and varieties
of water and sports drinks that appeal to different consumer’s tastes. These are advertised as
healthier than soft drinks.

According to Joe Leech (2019) there are several reasons why soft drinks like PepsiCo is bad
for everyone’s health. These are the following:

(a) Sugary Drinks Do Not Make You Feel Full and Are Strongly Linked to Weight Gain
(b) Large Amounts of Sugar Are Turned into Fat in Your Liver
(c) Sugar Drastically Increases Belly Fat Accumulation
(d) Sugary Soda May Cause Insulin Resistance — a Key Feature of Metabolic Syndrome
(e) Sugar-Sweetened Beverages May Be the Leading Dietary Cause of Type 2 Diabetes
(f) Sugary Soda Contains No Essential Nutrients — Just Sugar
(g) Sugar May Cause Leptin Resistance
(h) Sugary Soda May Be Addictive
(i) Sugary Beverages May Increase Heart Disease Risk
(j) Soda Drinkers Have a Higher Risk of Cancer
(k) The Sugar and Acids in Soda Are a Disaster for Dental Health
(l) Soda Drinkers Have a Drastically Increased Risk of Gout
(m) Sugar Consumption Is Linked to an Increased Risk of Dementia

Because of these reasons, among customers who maintained a healthy living choose to
purchase healthy drink than soft drinks. In addition, soft drinks can be substitute to coffee.
Specialty blend coffees are also becoming more popular with increasing number of stores that offer
different flavors to appeal to all consumer markets.

In order to overcome the threat of substitutes, organizations have to frame strategies in a

way to counter attack and for survival. Here are some alternative solutions:

1. Product Differentiation. Differentiation may be introduced in the form of price, quality,

performance, features, durability, reparability, and style, etc. Using such a differentiation
strategy allows you to create innovative, better-featured, and one-of-a-kind products.
Product differentiation fits the standards of customers through an evolutionary manner.
 2. Brand Image and Loyalty. Based on the article written by Sujatha Trivikram (2016),
many companies are surviving due to the brand image and loyalty. It can potentially form
a strong bond between company and customers.
3. Special Offers. Offering some promotional discounts may help to stop the switchovers and
make customers trustworthy to the products. These promotional strategies can come in the
form of discounts, one-for-one deals, gifts, special packages, trail purchases, and so on. It
facilitates organizations in creating value for their products.
4. Proper Research. Market research enables businesses to know their customers'
expectations and needs, as well as the threats posed by substitute products. Market research
enables businesses to create innovative, higher-value products and services.

Pros

 Loyalty of consumers.
 Low switching costs.
 Customers will meet their expectations.
 Special offers can lead to numerous consumers.

Cons

 High performance of substitutes considered a strong force.

 High availability of substitutes.
 Decrease profitability because consumers can choose to purchase the substitute instead of
the industry's product.

V. RECOMMENDED SOLUTION, IMPLEMENTATION AND JUSTIFICATION

Recommended Solutions

Although PepsiCo. faces issues/problems such as change in customer’s preferences or

strong competitors we cannot deny that PepsiCo is still currently a strong worldwide leader in the
food and beverage industry. Throughout its growth, it has stayed true to its mission and objectives,
while becoming a dominant force within the United States as well as abroad. Here are some of
recommended solutions in order to avoid facing such difficulties and problems:
  PepsiCo should continue using cost leadership as its primary generic competitive
strategy. This generic strategy focuses on cost minimization as a way to improve
PepsiCo's financial performance and overall competitiveness. For example, to
compete against Coca-Cola products, PepsiCo offers low prices based on low
operating costs.
 Pepsi should focus on both product quality and marketing for making its customers
its loyal fans. Its product portfolio includes more nutritious products and healthy,
zero calories' beverages. For it will create more loyal customers from all parts of
the globe, that will become a key strength despite many competitors.
 PepsiCo should continue its agressive growth strategy, utilizing concentric
diversification
 PepsiCo should continue its agressive growth strategy, utilizing concentric
diversification where possible in order to grow into emerging market segments and
also achieve meaning ful expansion into international markets. In the North
American market, PepsiCo should increase profit margins by means of vertical
integration strategy, acquiring bottlers and other players in the value chain. In the
future, the company can also consider horizontal integration, inorder to grow its
overall dominance in the food and beverage industry.

Implementations

Known throughout the world for quality products and customer care, Pepsi Co should make
no major strategic changes to its plan. However, like in any business situation there are areas that
Pepsi Co can improve upon. Here are some strategies of implementations.

 For PepsiCo American Beverages, the management should take a defensive stance in the
carbonated beverage categories. They need to defend and grow its market share against
Coke-cola. At the same time, the non-carbonated beverage group should take a strong
offense to expand PepsiCo's product offerings to grow market share.
 PepsiCo International needs to focus their product offerings and cost control of its
manufacturing processes. The international division needs to answer the flavors desires of
many different cultures.
  PepsiCo should expand into markets and market segments that they are currently not in,
such as Asia, India, and South America, in order to expand their market share at the global
level and to increase their overall revenue.
 PepsiCo should do market surveys of their target market segments in order to analyze the
existing brand awareness in the marketplace.
 PepsiCo should cut their expenses and purchase smaller companies that offer healthier
drinks and snacks. Utilize theexisting distribution channel for promoting the new line and
use penetration pricing strategies to gain market share rapidly and against the competitors.
 PepsiCo should position themselves on the cutting edge of the health trend in the
marketplace by increasing funds for R&D in order to research potential new product ideas.
Funding should be increased significantly and then the ROI on the positioning should be
analyzed after multiple quarters of study.

Justifications

 SWOT analysis
The recommendations presented above is in line with the identified strengths, weakness,
opportunites and threats of the PepsiCo Inc. A SWOT analysis is prepared in order to pinpoint
and come up with strategies in relation to those mentioned characteristics.
To sum it all up in a concise manner, PepsiCo is to adapt strategies that

- Lessen their financial burden

- Expand their operations in the international market
- Takes measures that can strengthen their position in North America through vertical
integration
- Increases the inclusiveness of their target markets
- Promotes their healthy agenda/alternatives to the emerging health-concious consumers

VI. EXTERNAL SOURCING

- The following sources refers back to the identified problems that PepsiCo faced,
particulary in the financial side due to the economic crisis that happened

(2008, Forbes) Pepsi Challenged

https://www.forbes.com/2008/10/14/pepsico-beverages-closer-markets-equity-
cx_lal_1014markets35.html?sh=30b4619b2d2b&fbclid=IwAR3QdsNv3Xu6VvgcakGGD-
_CTPgYf94Xutnk6Um6vbBokyqjczw-b0mw6hc

(2009, Amadeo) The Great Recession of 2008.

https://www.thebalance.com/the-great-recession-of-2008-explanation-with-dates-4056832

(2008, The New York Times)

https://www.nytimes.com/2008/10/14/business/worldbusiness/14iht-pepsi.4.16948270.html

- The next following sources refers back to the recommendations proposed, particulary in
relation the Indra Nooyi’s (the CEO of PepsiCo) nutritional strategy.

(Pepsico.com) Our Nutrition Story

https://www.pepsico.com/brands/nutrition?fbclid=IwAR3QvyJzlG3K3xmG_kU67jv1PDENYu9
NpDlz4FS_lhs1ldAKo74E1CzSkN4

(2011, Baurelein) PepsiCo Chief Defends Her Strategy to Promote 'Good for You' Foods.

https://www.wsj.com/articles/SB10001424052702303627104576412232408827462