OPERATIONS AND TECHNICAL STRATEGY

Present Strategy

Roger Enrico the CEO of PepsiCo  (1996-2001)  got involved in  restructuring PepsiCo’s business portfolio. Company had 3 business segments restaurants, beverages and snack foods. Enrico found that there are number of fairly serious problems at PepsiCo. The company’s beverage business began to fall behind Coca Cola (competitor) by a growing margin  in both domestic and international markets. The restaurant’s business was declining and profit margins were narrowing.

Amid of all these problems Enrico developed a restructuring strategy, which is as follows:

•  Related Diversification:

The restaurants limited investment in the company’s snack food and beverage business and severely impaired the corporation’s overall operating and profit margins. Considering these facts the restaurants which included Pizza Hut, KFC and Taco Bell were eliminated from the company’s portfolio of business and the three main restaurants were spun off as an independent publicly traded company , the divestitures was completed with a creation of Tricon Global Restaurants. Company was focusing on related diversification and spun off business unit which were unrelated to the core business of beverages and snacks.

• Maintenance  of one Culture: PepsiCo ‘s new strategy was to maintain a single culture which is dominant and which was Frito-Pepsi culture.
• Acquisitions for Related Diversification: PepsiCo as part of its new restructuring strategy acquired Borden food’s snack mix of  candy coated popcorn and peanuts Cracker Jack, Tropicana from Seagram Company (orange juices) and Quaker Oatmeal the number one brand of hot cereals. Company had its own distribution network to promote these products and to increase the availability of these products.

 Outsourcing of Bottling Operations:  company spun off  more than 50% of its bottling operations around the world and gained a 1million$ gain on theinitial public offering. This was done so that the company could be more focused and specialized in the development of new products and marketing programs to support them.

• Value Chain alignment between PepsiCo Brands and Products to maintain economies of scope and to gain competitive advantage:

The recent strategy was to achieve annual cost savings by reorganization of activities in the value chain of the company’s snack and beverage businesses. This included combined corporate worldwide procurement, combination of Gatorade and Tropicana hot fills, joint distribution of Quaker snacks and Frito Lays products and synergies between Frito Lays international and PepsiCo beverages.

 All this resulted in tremendous growth of PepsiCo, as it became the second largest food products company inUnited States. Company was diversified into salty and sweet snacks, soft drinks, orange juice, bottled water, ready to drink teas and coffees, nutraceutical and isotonic beverages, hot and ready to eat breakfast cereals. All these brands held number one or tow positions in their respective food and beverage categories. PepsiCo is operational globally and all the divisions are competing in  domestic and international markets.

Thus these are the above-mentioned steps, which are undertaken by the current management to exploit the opportunities and to restructure the company.

• Rationale underlying recent divestures

1.Divesting of Restaurant business:

PepsiCo’s competitive success in its 3 industries was due to its ability to create a distinctive image and to develop innovative and tasty new products. The inclusion of quick service restaurants was the most distinctive characteristic of PepsiCo ‘s business portfolio. Company formed the largest restaurant conglomerate in the world, KFC, Pizza Hut and Taco Bell, collectively had worldwide sales of $11.5 billion in 1995. Company had the strategy of acquiring established market leaders but later it also acquired small, relatively unknown companies.

This industry was appealing because the changing demographic factors like two income families increase in the number of households made up of singles mad eating out an attractive alternative. US fast food sales grew at an annual rate of 6% between 1990-1996 but this also lead to increased competition and price wars.

 PepsiCo decided to spin off the restaurant business for the following reasons:

External Factors:

• Increased price competition and market saturation. There was growing numbers of fast food restaurants with an increased reliance on value meals to increase the volume at the expense of margins.
•  There was scope in the international market but there were number of risks associated with entering international markets. Local government restrictions, international taste preferences, site development costs and unavailability of qualified suppliers all posed entry barriers in the international market.
• In 1996 attractiveness in global fast food industry declined.

Internal Factors:

• Restaurant business severely impaired investment and overall operating and profit margins in the company’s snack and beverage business
• Restaurant business required expertise in the operating side of the business like customer service, quality of product and value equation. PepsiCo lacked this culture.
• 2.Spinning of Bottling Plant: :

 Company spun off more than 50% of its bottling operations around the world and gained a 1million$ gain on the initial public offering. This was done so that the company could be more focused and specialized in the development of new products and marketing programs to support them.

 Determine the competitive advantage potential of any value chain relationship and strategic fits among existing business:

1.Firm’s infrastructure:

 General Management: Enrico 56 year old CEO of the company retired in 2001 , he was succeeded by Steve Reinemund  who joined PepsiCo in 1984 as a Chief of the Pizza Hut business.

Finance: PepsiCo was the fifth largest food and beverage company in the world. Value of its shares improved from about 30$ annually in 1997 to over 45$ in late 2001.

Strategic planning:  PepsiCo was operating in three businesses, beverages, snacks and restaurants. Enrico the CEO of PepsiCo (1996-2001) proposed to spin-off the restaurant business, as it had nothing to do with the snack and beverage business of the company. The restructuring of the company laid emphasis on related diversification in cereals and juice industry.

2.Human resource development: The best managers of the company were rotated from positions in one business unit to assignments in the other two business segments to promote the transfer of skills, practices, know-how and innovative ideas from one business to another. It kept the managers’ thinking fresh and innovative and developed the skills of the employees.

3.Technological development: PepsiCo is restructuring its value chain activities by combining the snacks and beverage’s manufacturing process. This would result in achieving economies of scope and will give the company competitive advantage. It had its own agriculturists who helped guide the farmers / suppliers of potatoes  about the agricultural techniques .  It had its own proprietary agro technology.

4.Procurement: PepsiCo has also developed a sophisticated value chain alignment tracking process that utilizes online scorecards. These cards are updated monthly to track over 130 individual projects designed to capture synergistic benefits and to record the supplies of each product. Company was starting off with combined procurement of all its business products for ingredients and packaging materials which would result in an estimated $160 million in cost savings by 2005.

Key Success Factors for PEPSI

• Global Expansion

There are more chances for the companies to sell their products in new markets likeEast Asia,North AmericaandEurope, and also inNorth Africacompanies have a big market to cater.

• Control Over Distribution And Production

The distribution channels and the production should be optimized in such an efficient way that whenever there is a required demand, it should be fulfilled on time basis.

• Advertising

Introducing renowned celebrities in the advertisements of beverage ads  is one of the leading factors for the companies to succeed in the market.

• Health Consciousness

Most of the people are health consciousness about their health and light beverages is a growing market for this segment.

SOCIO - ECONOMIC REPORT

CAMPAIGNS OF PEPSI-CO THAT MADE AN IMPACT FOR THEIR SOCIO-ECONOMIC ASPECTS: 

. We Are Aggressively Building New Capabilities

PepsiCo has historically been managed as a loose federation of countries and regions. This organizationalstructure fostered an entrepreneurial culture in the company, not necessarily a culture of global efficiency. Starting in 2010 and accelerating in 2012, we began to modify our global operating model, balancingindependence and scale, to become a globally networked company. Our in-country and regional teams are empowered to serve their markets, but through global groups and functions, we are harmonizing our efforts across the world around brand building, innovation and the management of our supply chain. Our new model already has begun to yield results. Our global categorygroups are guiding regions to rationalize their brand portfoliosand focus the bulk of our spending behind 12 global brands. We arecontinuing to increase the caliber of our global marketing talent andimplementing global campaigns for our iconic global brands, beginning with “Live for Now,” the first-ever global positioning campaign for brand Pepsi. In 2012, “Live for Now” engaged millions of consumers through music, sports, social media and other consumer touch points. In December, we announced a unique creative collaboration with 17-time Grammy Award winning singer Beyoncé to work with us on creating content to engage

Pepsi consumers around the world. Our brand equity scores are steadily improving, and we are just getting started.

Our innovation efforts also have improved substantially. Back in 2007, we invested to rebuild our R&D capability in the company. We brought in outstanding talent and created new long-term research capabilities. We increased our investment behind natural sweeteners, disruptive processes, packaging and nutrition platforms. We are also teaching our people how to leverage R&D in intelligent ways to create platforms for growth rather than just one-off line extensions. We also have taken other major actions to drive innovation. In 2012, for the first time in PepsiCo, we created a design capability in the company. Our goal is to use design in the early stages of innovation efforts to create memorable products and experiences for our consumers. We also have put in place a common stage-gate process to facilitate data-driven decision making. We created the capability to lift and shift ideas across the various countries within PepsiCo.

Examples include the launch of Lay’s “Do Us A Flavor Campaign” in the U.S. after its success in Europe, Asia, South America and Africa; our continued expansion in the cookie and biscuits category in Brazil, Argentina, the Middle East and the Philippines, building on the strengths of our Gamesa-Quaker business in Mexico; and the success of Quaker Yogurt Bars in the U.S. after their development in Canada. Thanks to all these initiatives, at the end of 2012, innovation from products launched in the past three years accounted for approximately eight percent of our net revenue. Going forward, we intend to continue to leverage R&D to help us develop more breakthrough innovation that delivers true incremental growth and is sustainable. To drawfrom creative expertise in every corner of the world, in 2012 we opened new R&D centers in Shanghai, China; Hamburg, Germany; and Monterrey, Mexico.

Our global supply chain group has been working on best practice transfer across our enterprise, bringing in breakthrough thinking from external sources to lower our costs and create more capacity and flexibility in our supply chain. We are rigorously analyzing, auditing and benchmarking the performance of our facilities and using what we learn to strengthen our manufacturing, distribution and go-to-market capabilities around the globe. Our environmental sustainability agenda, which includes water, energy and packaging reductions, has helped us decrease our costs while conserving natural resources.

All of these actions, plus scores of others, have enabled us to double our historic productivity run rate starting in 2012, leading to a $3 billioncost take-out over three years.

We have reduced our cash conversion cycle by nine days in 2012 and also found ways to reduce our net capital spending from 5.5 percent of net revenue in 2010 to 4 percent of net revenue in 2012, which is consistent with our long-term capital spending target of less than or equal to 5 percent of net revenue.

Going forward, we are well on our way to harmonizing our global processes, master data and IT systems to increase visibility across the company, ensure compliance with all our initiatives, easily measure our progress and speed up decision making. We intend to be one of the most efficient food and beverage companies in the world.

 We Are Building a Second-to-None Team and Culture

In recent years, with our transformation actions, we truly have asked a lot of all our associates. It is their passion, resilience and talent that have made our progress possible.

To nurture and grow our associates, enabling them to lead PepsiCo into the future, we have implemented award-winning talent and leadership development initiatives. We also have been recruiting executives from outside our industry to infuse fresh thinking and bring new capabilities to our team. I’m especially proud of the work we have done as a company to build a strong team of current and future female leaders. As we continue to focus on developing world-class talent and teams, PepsiCo was recognized in 2012 by the Great Place to Work Institute, which ranked us as one of the “World’s Best Multinational Workplaces.” In addition, ChiefExecutive magazine ranked PepsiCo as one of the “Best Companies forLeaders” in 2012.

One area that deserves mention is the great courage and humanity demonstrated by our associates. In 2012, whether it was in response to Hurricane Sandy in the U.S., the flooding in the Philippines, political unrest and transition in Egypt or other country-specific events, our teams have demonstrated an unwavering commitment to our consumers, customers and communities while delivering our performance goals. There are countless stories, and I wish I could tell them all in tribute, because I am truly proud of our associates and humbled to be their leader. 

---------------------------------------------------------------------------------------------------------------------------------------------------------Building a Second-to-None Team and Culture (cont’d)

Celebrating Diversity, Fostering Inclusion

As a company doing business in more than 200 countries and territories, diversity and inclusion have never been more vital to our success. Being as diverse as our consumers enables us to understand, firsthand, how to meet their needs. A safe and inclusive workplace that values different perspectives builds employee engagement, fosters creativity and fuels innovation. The vignettes below offer but a few examples of how PepsiCo both supports and benefits from diversity and inclusion.

Growing the number of women leaders

We are committed to increasingthe number of women leaderswithin PepsiCo through recruitingand development initiatives around the world. In our Asia, Middle East and Africa sector, for example, the percentage of newlyhired or promoted executives who are women exceeds 50 percent.Tailored programs enable progress:In Saudi Arabia, we have constructed workplaces that respect local customs while enabling women to work and advance. Our Saudi teamincludes 25 women hired in 2011and 2012 in both management andfront-line roles.

Taking a stand for equality

As a global company, PepsiCo works in countries with a broad array of laws and regulations. Regardless of where we operate, PepsiCo takes great care to respect the diversity, talents and abilities of all. At PepsiCo, we define diversity as all the unique characteristics that make up each of us: personality, lifestyle, thought processes, work experience, ethnicity, race, color, religion, gender, gender identity, sexual orientation, marital status, age, national origin, disability, veteran status, or other differences.

Recruiting veterans to our company

Our efforts to recruit U.S. militaryveterans to PepsiCo have earned us a place on the G.I. Jobs ranking ofTop 100 Military Friendly Employers. Only the top two percent of thousands of eligible companies make the Top 100 ranking. On the 2013 list, PepsiCo is the only food and beverage company in the top 50. Creating opportunities for differently-abled people Our PepsiCo Mexico Foods as well as our Middle East business exemplify how PepsiCo creates opportunities for differently-abled people.

Both of these businesses have developed strong track records for hiring and developing the talents of people with hearing impairments. The accomplishments of these associates are a source ofpride for our entire company.

Supporting our localcommunities

Honoring Our Associates

Every day, PepsiCo associates show their passion for the business. During challenging times, our associates have demonstrated great courage. When Hurricane Sandy brought terrible devastation to the Eastern U.S., teams of

PepsiCo associates worked tirelessly to help communities in New York and New Jersey.

In the Philippines, when heavy monsoon rains and a typhoon caused flooding in Manila, our associates took action, providing aid to those in need.