Porter’s 5 Forces Analysis of PepsiCo

PepsiCo’s mission is to achieve higher customer satisfaction through the provision of world’s premier consumer products by focusing on convenient, affordable, delicious and complementary foods and beverages. The top management sustains impressive performance through strategies geared toward international expansion, strategic acquisitions, and close relationships with distribution allies and product innovation to address consumer health and wellness concerns. PepsiCo’s line of business involves to manufacture, market, and distribute beverages, grain-based snack foods and other products. The brands offered by the organization include “22 iconic, billion-dollar brands”, ”Good For You”, ”Better For You” and ”Fun For You”. PepsiCo operates in different valuable market segments that involve North America, Latin America, Europe, Africa, Asia and the Middle East. To achieve the greatest possible economies of scale, the management team focuses captures strategic-fit benefits throughout the value chain and in its procurement activities across the world. The shareholders’ value has been a great concern and more attempts made to deliver revenue and earnings growth through strategies such as acquisitions, capital expenditures and operational excellence.

The company’s generic competitive strategy involves broad differentiation as it is dedicated to provision of products and services that are unique from rivals such as Coca-Cola by applying techniques that are appealing to the broad spectrum of buyers. However, PepsiCo has adopted weak competitive grand strategies that include product development and conglomerate diversification. The company has diversified its product lines, distribution channels and the business operations to fit the strategy of the international business. The research and development team focus on designing new products by adopting more advanced technology and innovative solutions.

Strategic Issue

PepsiCo’s international expansion strategy yielded relatively low-profit margins which cannot meet the company management‘s expectations. The 2015 diversification strategy did not yield positive outcomes. The grocery items, the lineup of snack and beverage generated insufficient operating cash flows which affect the strategic plan of reinvesting, increasing share divided to the shareholders and pursuing further acquisitions. Nevertheless, the reorganization of its division structure does not boost revenue efficiently and thus, the situation necessitates PepsiCo to adopt other corporate strategies that will allow the company to achieve a maximum strategic fit with international divisions and good prospects of future growth. Therefore, what possible actions can lead to improvement of profitability of PepsiCo’s international operations as well as aid in the restoration of the previous revenue and earnings growth rates?

1. How can reprioritization of internal use of cash increase operational efficiencies and maximize shareholders’ value?

2. Can new acquisitions encourage growth through the provision of new ideas and perspectives of the different business units?

3. How can PepsiCo capture strategic fits between different lines of business both locally and internationally?

4. Divestiture of business unit and assets maintain the firm’s strategic focus and help in attaining a competitive advantage?

External Environment

Porter’s 5 Forces Analysis

Buyer Bargaining Power: the force is strong because the buyers always demand beyond expectations as they prefer availability best offerings at a price that is minimum. The customer base is small but powerful, especially when seeking for an increment in discounts and offers. Furthermore, the buyers are well-informed of the products, prices and costs of different sellers in the market through the internet increases the bargaining power.

Substitute Products: The force is strong because, based on consumer preferences and other variables, PepsiCo’s products can be substituted easily. Most substitutes are satisfactory and end-users enjoy brewed coffee products and real fruit juices rather than the Tropicana or Pepsi products. The costs of switching to these substitutes are relatively low and they are readily available in the grocery stores.

Threat of New Entrants: (Moderate). In the beverages and soft drinks industry, new entrants contribute to increased innovation and new strategies for doing things. However, there is increased pressure as the consumers can easily shift to the new firms. The corresponding level of protection which results from moderate customer loyalty allows the organization to remain strong. The high costs of brand development also deter the high rate of new entrants.

Rival among Firms: (Strong). The industry is characterized by aggressive firms such as Coca-Cola that focus on product innovation and improved marketing strategies that exert pressure on PepsiCo’s competitiveness. The competitors are equal in size and capability. Furthermore, the intensity of completion results from the regular launch of fresh actions by Coca-Cola that help in boosting business performance and market standing. It less costly for the buyers to switch brands.

Supplier Bargaining Power: (Weak force). The raw materials used by firms in the industry are easily available and can be sourced from a variety of suppliers. The good substitute inputs together with low switching costs allow industry members to switch to attract businesses. Therefore, the suppliers have minimal pricing power which results from high overall supply, weak force of forward integration and moderate size of the suppliers in the industry.

Key success factors of PepsiCo

1. Enhanced ability for improving production processes by applying advanced technologies that leads to higher manufacturing efficiencies. The company applies intranets and resource management software, stock control and streamlined warehousing to ensure improvement and expansion of the product range and process. Furthermore, the Internet of Things, cloud computing and nanotechnology help in streamlining relationships with suppliers and efficiency of business systems.

2. Increased accessibility to attractive and highly skilled suppliers who provide quality inputs conveniently. As a result, manufacturing unique goods that are customized to buyer specifications becomes easier.

3. Product innovation and global distribution capabilities that improve the performance features. This factor from the fact the brand name is well-known and has attained a higher global presence.

Industry Profile and Attractiveness

The market saturation particularly in the U.S. increase the probability of decelerating growth and thus, profitability will remain rather solid. Growth and increment will depend on the ability to diversify the product offerings. The key themes that the manufacturers should consider convenience, functionality, authenticity, health and wellness of the consumers. The larger players should focus on design innovative products that meet and exceed the market demand and expectations to remain competitive in the industry. The outlook of the beverage and soft drinks industry still remains favorable and moderately attractive for the current players especially Coca-Cola and PepsiCo who dominate the largest market share.

Company Situation

Financial Analysis

When determining the company’s financial performance in the industry, there is a need to consider four characteristics that include profitability, liquidity, solvency and activity. PepsiCo operates in a competitive industry and the main rivals include Coca-Cola, Reeds and Dr Pepper Snapple Group. The information obtained from the ratios can be used to determine financial stability or weakness of the company in comparison to the rivals in the beverages and soft-drink industry. As it will be explained in detail below, PepsiCo is in the growth stage.

Profitability:

PepsiCo’s ROA is lower than that of its primary competitor, Coca-Cola and includes 8.68% and 10.24% respectively. PepsiCo recorded a declining trend of its return on equity, but it surpassed Coca-Cola by 2%. However, investors may consider the rival because they expect more returns on investment. The gross profit margin is also high for PepsiCo but is not constant over the four years.

Liquidity:

PepsiCo’s short-term are readily available to reimburse off the short-term liabilities. However, as shown in Appendix, Coca-Cola’s liquidity position using the current ratio in 2014 was higher than PepsiCo that include 14:1 and 1.01:1 respectively. PepsiCo is performing better than Coca-Cola as its short-term positioning is high by 0.1.

Leverage: the solvency position for the long-term investment is significantly high for PepsiCo which implies that it can meet its long-term obligations. The debt to equity ratio was 3.018:1 in 2014. The company can also meet its interest payments with its EBIT on the debt accumulated. Coca-Cola had a maximum value of 19.306 in 2014 compared to PepsiCo’s value of 7.21. However, the firm can pay its interest expenses effortlessly and is safe to be doubted. The asset turnover ratio is 0.9 which indicates that the sales of the firm are strong enough to meet the value of the assets. From the inventory turnover ratio, the company has been recording excessive inventory over the past years which is harmful to the investors of the business.

Activity:

The Company’s average collection period deteriorated from 2011 to 2012 and 2013 to 2014 which included 38, 36, 37, 39 and 40 for 2011, 2012, 2013 and 2014. The firm has investment high amount of resources in the collection and management of inventory.

SWOT Analysis

Strengths: PepsiCo has a strong brand equity in the beverage and soft drinks sector as the brands are famous and most prominent. The brand valuation is 19.4 billion U.S. dollars and has a significant contribution to its very good distribution network across 200 countries worldwide. It has a high product portfolio performance with top selling brands despite the fact that it is ranked second after Coca-Cola. The firm also has an extremely loyal customer base who do not prefer shifting drinks because of the iconic taste from the soft drinks. Nevertheless, it has a clear target audience with valuable market segments in America, Europe and MENA.

Weaknesses:

PepsiCo faces strong competition from rivals and the primary competitor is Coca-Cola. The customers can easily switch which exerts more pressure on the company. The company has not diversified from the from food and beverage product line which may not be appealing in the future. Another weakness involves overdependence on the U.S. market for its major revenue as it has not more suitable products into the international markets. The company’s diversification strategy has not yielded the expected returns and thus the net revenue from international business is low.

Opportunities:

PepsiCo has increased growth potentials through acquisitions of smaller and related brands together with forming partnerships with companies such as Starbucks has a larger global presence and large customer base. Digitization of the supply chain management and applying IoT in the marketing strategies can enhance its expansion especially in the emerging where there is no stiff competition from the key players in the industry. The business diversification will foster the company’s efforts of market penetration into the developing countries.

Threats:

the reforms in the country have led to the economic slowdown which contribute significantly to the fluctuation in foreign currency exchange rates. PepsiCo faces threats from a legal and regulatory sector and the management should ensure compliance with the laws and policies fail to which subjects the company to a large amount of fines. The competitive pressures are also high due to strong rivalry in the food and beverage industry. The healthy lifestyles trend is a threat against PepsiCo’s products, many of which are seen as unhealthful because of their sugar, salt, or fat content.

Recommendations

Strategy Recommendations

Diversification its businesses as a way of minimizing the market risk exposure. The company will have to broadly restructure the business line-up with multiple acquisitions and divestitures. This step will allow the management of the company to pursue opportunities for leveraging cross-business value chain relationships into a competitive advantage. Furthermore, corporate resources can be steered into attractive business units through an establishment of outstanding investment priorities.

Further penetration in developing markets to generate more revenues. Market penetration will allow the organization to increase its growth of sales for the existing products and services and eventually gain significant market share in the global market. The company will have to apply aggressive advertising and media campaign that will help in positioning the brand in the early life-cycle.

Objectives

Under these recommendations, the key performance indicators to take into consideration include sales, financial stability, customer base, operational efficiency, and excellent marketing strategies and the main objectives are as highlighted below:

1. There should be an increment of sales growth of 18% in the next 3 years.

2. The gross profit margin should exceed that of Coca-Cola Company which is currently at 20.27%.

3. Increased operational cash by 235 in the first quarter of the following year after implementation of the generic strategies.

4. To retain a higher number of customers in the international market especially in developing countries.

5. Record a significant rise in the percentage of market share in the global market.

6. The order fulfillment time and employee satisfaction rating should exceed the expected value of 15.

7. The monthly website traffic should be more than 85% accompanied by a higher conversion Rate for Call-To-Action Content

Strategic Justification

Diversification and market penetration are the recommended strategic initiatives because they will lead to increased revenues which will be used to maximum shareholder value and enhance operations of other units which are still struggling to cope with the dynamically changing environment. The present business has growth prospects that are diminishing and the expansion opportunity will require leveraging the existing competencies and capabilities. Nevertheless, through diversification costs can be reduced and the company can gain a powerful brand name in other product lines.

Appendix

Figure 1: The Five-Force Model of Competition

Table 1: Sales growth

Year

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

Sales revenue

32562

35137

39474

43252

42232

57838

66504

65492

66415

66683

Sales growth %

_

7.91

12.34

9.57

-2.36

36.95

14.98

-1.54

1.41

0.40

Table 2: PepsiCo’s Financial Ratios

PepsiCo

Year

2012

2013

2014

Liquidity Ratios

Current Ratio

Quick ratio

1.090112

0.799345

1.125598

0.932339

1.018904

0.8499337

Leverage Ratios

Debt-to-Equity Ratio

Interest Coverage Ratio

2.332202

6.912125

2.17676

7.450055

3.0180647

7.2145215

Profitability Ratios

Return on Assets

Return on Equity

0.16.651

55.4846

8.9235

29.0117

8.86294

31.27548

Table 3: Coca-Cola’s Financial Ratios

Coca-Cola

Year

2012

2013

2014

Liquidity Ratios

Current Ratio

Quick ratio

1.095442

0.87283

1.244633

0.903995

1.142107

0.828443

Leverage Ratios

Debt-to-Equity Ratio

Interest Coverage Ratio

1.598107

29.74559

1.693032

24.78834

2.011125

19.30642

Profitability Ratios

Return on Assets

Return on Equity

27.4073

71.2072

13.0251

34.4613

10.2429

29.1402

Table 4: SWOT Analysis

Strengths

Brand equity

Product portfolio performance

Extremely loyal customer base

Strong distribution network

Clear target audience

Weaknesses

Stiff competition

Overdependence on the U.S. market

Reduced net revenue from international business

Limited business portfolio

Opportunities

Growth through acquisitions

Technological innovation in the distribution network

Business diversification

Market penetration in developing countries

Threats

Stronger dollar and fluctuation in foreign currency exchange rates

Healthy lifestyle trends

Aggressive competition

Legal and regulatory threats on environmentalism