PepsiCo Diversification Strategy of 2008 - Case Study Example

Paper Title: CASE STUDY OF PepsiCo DIVERSIFICATION STRATEGY OF 2008 [Name of Student] [Name of Affiliate Institution] Diversification strategy is a means by which companies and business firms broaden their market base by expanding on the number of products going into the market. The main aim is to increase their sales by getting into new markets and making new products (Ansoff 1957). Firms that have matured and have stable profits and intend to increase their sales and profitability direct their growth into new environments or products through production and marketing strategies. These firms diversify to related or unrelated businesses which are a different approach from market penetration, product development and market development in marketing. The reasons why firms diversify are many and varied and may range from excess production that may find newer market beyond the current market boundaries, distribution of risk for example when an ice cream producing company decides to venture into hot chocolate in order to be in business during winter as well. In such a case the company diverts its production due to season changes and the need to be in business during such seasons. The other reasons may be to extend the reputation of the brand to other market and to also make new customers (Stimpert & Duhaime 1997; Ansoff 1957; Amit & Livnat 2006). PepsiCo is company which was started in 1965 through a merger of Pepsi Cola and Frito lay (PepsiCo.inc). The business then grew to greater heights making more products in the market. The company has been growing since with a large market share in the global market. The diversification path that PepsiCo took is the horizontal diversification path. In horizontal diversification path, the firm ventures into new products which are still in the confines of the company know-how. This is to mean that for PepsiCo, which is in the food industry, they engaged in new products which are still in the food industry. PepsiCo did so by product and market diversification. In product diversification, PepsiCo engaged in products and products markets which are related in them (Pils 2009). This is shown in the company engaging in a threefold synergy of fast food, beverage or soft drink and thirdly snack foods. PepsiCo was able to invest in many companies like KFC (Kentucky Fried Chicken) which is a fast food, and Quaker foods among many other companies. This is what they referred to as the power-of-one. Market diversification involved moving away from the North American market to other markets globally. The advantages of this horizontal diversification are lofty and range from financial, to market share, to increase in stock and top management controls. PepsiCo was able to take advantage other products that are well renowned in other markets and have a good share in the market. A good example is the sale of beverages in line with Frito-Lay products in large supermarkets in what is referred to as product diversification synergies. The second advantage was increased sales and profits with diversification of market. There was increased international expansion to other global markets without necessary having to start from scratch. Many managers prefer to use an existing market to increase sales of their products than start from scratch and therefore PepsiCo was able to enjoy the benefits of the power-of –one strategy. Another benefit was the strategic acquisition of companies that were beneficial in the expansion. Thirdly there was increased product innovation and lastly there were closer relations with the distribution sector to have their responses on consumer purchase in what was dubbed as “innovation summits” (Pills 2009; Peng 2005). The overall business strategy that PepsiCo is applying is the one retailer alliance strategy. In this strategy, PepsiCo obtained or acquired several companies in order to enjoy the synergies that come with the power of working together of huge companies together. The firm acquired companies and strategized on the sale of the products together instead of each product alone. PepsiCo was able to be the overall decision maker in the sale of all the products produced by all the companies that it had acquired and this way the profits were increased. The ultimate goal of PepsiCo was to be able to maintain or sustain if not make better the performance it has achieved since its restructuring. Part of the restructuring had involved four key areas which included strategic acquisition, good relationship with distributors, product innovation and growth into bigger international market. In all their products the approach was to produce products that fit the needs of the customers. There has been increasing change towards healthy eating and therefore the approach included more healthy products like less saturated oils, packaging smaller sizes and reduction on indulgent snacking habits by creating salty snacks. Strategic fits are a combination of company’s products and resources with an aim to make a strategic approach in the market towards successful competition and profitability. According to Truch and Bridger (2002), a good strategic fit needs to have a good knowledge (Chorn 1991)orientation as well as a good strategic orientation. The firm should use information and its success factors in combination towards the best fit possible. PepsiCo’s business and product portfolio present a good strategic fit which basically involved use of brand plus product fit. Acquisition of brands that had high esteem with products towards strategic business is what PepsiCo was geared towards. The PepsiCo’s nature of business is food and beverage industry which go hand in hand. While PepsiCo products may be selling well in North America, this may not be the case in other markets and therefore the approach towards taking advantage of well established products in other markets works towards a possible expansion of sales and profits. Food and beverages ideally accompany each other and can go hand in hand if marketed together. The products give a large choice base and encourage consumers to have a large variety for their preferential needs. Those seeking better health have their needs catered for while those avoiding too much junk have lesser packages. The company has a large opportunity to base their business on and maximize on the profits of some products like Gatorade which had the highest sales. Value chain is an approach by any business in the line of production and distribution towards adding the quality of sales from a given product or production by interacting with other businesses (Rudich 2010). There are three value-chain match ups that aid PepsiCo’s success. They include product diversification and the advantage is convenience for customers and the ability of the company to meet up this need, secondly the awareness of the nutritional content of snacks and hence making of good-for-you and better-for-you products and lastly salty snacks dealing with indulgent snacking (Byrnes 2010). This gives the company superiority in food production and a competitive advantage or niche in the market (Porter 1996). This has been achieved through smaller packaging in order to encourage people to snack in smaller quantities, the use of sunflower oil to produce chips and reduce on the use of saturated fats, the multigrain and flour tortilla Tostitos varieties which are rich in fibre and has also addressed the deficiency in diets through addition of nutrients to some snacks (Krell 1996). This is driven by the awareness among consumers on health issues that come with snacks and the desire to want to have a healthy body. Therefore consumers are more aware of the caloric content in snacks and know what is the right threshold of fats, carbohydrates etc. The power-of-one strategy is another kind of value chain where in supermarkets, certain products were to be placed side by side like Pepsi and Frito in the supermarket. The advantage of this is that since Frito has got a better competitive advantage as a product, then it adds the value of Pepsi when placed together. Thirdly the power of one by acquiring companies that serve in three areas which include fast food, snack food and beverage was a value chain intended to help sell beverages with food at the same time and convince customers to pick more than two items at the same time from the fast food of the supermarket. However it failed because of competition in the fast food industry. Rotation of the managers among the three companies in order to better their skills and share also was a value addition strategy. A company may be run by the same CEO throughout but alternating means they can share ideas and have a better view of running the company which is more of an organizational structure approach. The question of whether PepsiCo achieved by acquisition of other businesses is a factor of the bidding and merging to work together (Shelton 1985). PepsiCo achieved through product and market acquisition by acquiring companies that aided in value addition of their drinks. Zott and Amit (2008) suggest that market strategy and business model is a mix not substitute. First the products made by these companies were mostly doing well in the market and helped to increase the sales of Pepsi beverages into the international markets where the company had poorer sales on average. Therefore placing products together to be bought hand-in-hand in the shops or in the fast food café allows for increases in sales of the “lesser” product. Lesser product here means the product that is being added value to by another whose sales are better in that particular market. Secondly PepsiCo also enjoyed the higher sales offered by products from the newly acquired companies and also the ability to not start from scratch in sales of their product in new markets. It is easier to sell a product by taking advantage of the existing market of a given product because that way the product can have leverage through the already existing product. The advantage of horizontal diversification is that in horizontal diversification other companies still get to bring in the profits even as the company enjoys the benefits of using them as channels for sale of their product. The sales may become better but if they don’t, there is opportunity to prevent the company from running the same way and maintaining the same amount of sales throughput. Competitive advantage means exceeding customer expectation, which goes beyond just being better than the rest (IMA 1996). PepsiCo did exactly that by responding to customer needs through summits and production of products tailor made to consumer needs. In conclusion PepsiCo strategized to grow in a competitive market by acquiring businesses that gave the company a better niche. The company acquired diverse businesses in a horizontal path of diversification and this way the company was seeking a value chain that strengthened it among its competitors and also gave it more profits. 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