Pepsico's Diversification Strategy
Abstract
PepsiCo has built a strong empire that has given it dominance throughout much of the world as a provider or snack foods and beverages. As it has worked to build its market share, PepsiCo has made many key decisions – some positive and some negative. It has also gone through a number of changes including the acquisition and subsequent divestiture of several fast food chains.
This paper focuses on the process that all companies should follow to help determine whether the industry they are in demonstrates sufficient attractiveness and whether their current business units have sufficient competitive advantage.
In 1965, Pepsi-Cola and Frito-Lay combined forces to create a new company that could capitalize on the combined strengths of the two companies. Almost immediately, the company used this new synergy to create such new snack products as Doritos and Funyuns, both or which have proven to be successes. In addition, PepsiCo entered new markets including Japan and Eastern Europe. However, the company also had its share of crucial missteps – principal of which was entering into the fast food industry. With the purchase of Pizza Hut, Kentucky Fried Chicken and Taco Bell, PepsiCo was well on its way to building a proverbial three-legged stool. The CEO at the time, Wayne Callaway, believed that this new structure would bring the company success and referred to the three legs of the stool as being snack foods, soft drinks and fast food. He believed that there would be significant cost savings and skills transfer with this new approach. While there may have been many advantages to this new structure, it became clear by 1996 that the advantages did not outweigh the burden that it placed on the company in terms of decreased margins and the drain on the vital resources of the company. PepsiCo promptly divested itself of the fast food restaurants and focused more on developing the snack food and beverage segments of its company. In an effort to
PepsiCo has built a strong empire that has given it dominance throughout much of the world as a provider or snack foods and beverages. As it has worked to build its market share, PepsiCo has made many key decisions – some positive and some negative. It has also gone through a number of changes including the acquisition and subsequent divestiture of several fast food chains.
This paper focuses on the process that all companies should follow to help determine whether the industry they are in demonstrates sufficient attractiveness and whether their current business units have sufficient competitive advantage.
In 1965, Pepsi-Cola and Frito-Lay combined forces to create a new company that could capitalize on the combined strengths of the two companies. Almost immediately, the company used this new synergy to create such new snack products as Doritos and Funyuns, both or which have proven to be successes. In addition, PepsiCo entered new markets including Japan and Eastern Europe. However, the company also had its share of crucial missteps – principal of which was entering into the fast food industry. With the purchase of Pizza Hut, Kentucky Fried Chicken and Taco Bell, PepsiCo was well on its way to building a proverbial three-legged stool. The CEO at the time, Wayne Callaway, believed that this new structure would bring the company success and referred to the three legs of the stool as being snack foods, soft drinks and fast food. He believed that there would be significant cost savings and skills transfer with this new approach. While there may have been many advantages to this new structure, it became clear by 1996 that the advantages did not outweigh the burden that it placed on the company in terms of decreased margins and the drain on the vital resources of the company. PepsiCo promptly divested itself of the fast food restaurants and focused more on developing the snack food and beverage segments of its company. In an effort to
References: Thompson, A.A., Jr., Strickland, A.J.,III., Gamble, J.E. (2010). Crafting and Executing Strategy: The Quest for Competitive Advantage, (17th Edition). New York: McGraw-Hill/Irwin Website: www.coca-cola.com Accessed 6/6/09 Website: www.pepsi.com Accessed 6/6/09