The history of Pepsi-Cola starts in 1896 in the town of New Bern in North Carolina, USA in a drugstore owned by the pharmacist Caleb Bradham. He came up with many recipes of new drinks to be served at the soda fountain of his drugstore.
Brad ham aim was to create a drink both delicious, healthy, aiding digestion and boosting energy. It would be free of impurities and it should not contain any strong narcotics. Eventually one of his drinks became very popular and the customers started to call it Brad’s drink. This was the beginning of Pepsi-Cola’s story and later, Brad ham’s vision was turned into a mission for the future company.
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In 1905 Pepsi started with bottling franchises and registered its trademark in Canada and Mexico in 1908. At the same time the U.S. government enacted the Pure Food and Drug Act prohibiting substances such as arsenic, barium, uranium, etc. in food and beverages. Consequently, many soft drink manufacturers, including Coca-Cola, had to change their formulas. Pepsi exploited the situation against their main competitor Coca-Cola, by claiming that they already met federal requirements.
Distribution was modernized with motor vehicles and started to promote its products using famous public figures like Barney Olfield, an automobile race pioneer who endorsed Pepsi.
In the 1920’s and 1930’s the company experienced financial difficulties and went bankrupt twice in 1923 and 1931. In 1931 the company was sold and Charles G. Guth took over the presidency commanding a reformulation of the syrup recipe.
Few years later Walter S. Mack, Jr. was elected president and the company became a modern marketing company by using comic strips and Hollywood movie stars to advertise its products.
In 1959 Pepsi entered the former Soviet market in Moscow and acquired Mountain Dew in 1963 making it the second best selling drink ever produced by the company.
1.2 The Emergence of a Global Company
In 1965, the company expanded and grew significantly through the merger of Pepsi-Cola, operating in the beverage industry and Frito-Lay in the snack food sector.
The following year, the newly formed PepsiCo entered the Japanese and Eastern European markets. In 1974 Pepsi opened its first production plant in U.S.S.R. and was the largest soft drink selling brand in American supermarkets.
Afterward, PepsiCo substantially diversified its portfolio by acquiring Pizza Hut, Taco Bell and formed PepsiCo Food Service International (PFSI) to focus on overseas development of restaurants. In 1980 PepsiCo signed a joint venture agreement with the Chinese authorities but the project was never developed properly.
Then Pepsi became the indisputable number one in the soft drinks industry with revenues of $7,5 billion and more than 137 000 employees. The company was seen as a leader in advertising when they used a space station for promotional events.
In 1986 the corporation was reorganized and decentralized by transferring its beverage operations under PepsiCo Worldwide beverages and the snack food sector under PepsiCo World wide Foods.
In 1996 Pepsi entered the Internet “boom” by creating an ambitious “worldwide” web site surpassing all expectations and was copied in numerous ways.
Subsequently, the company converted its bottling sector into a publicly traded company, the Pepsi Bottling Group (PDG).
In August 2000 the company was involved in one of the most significant transaction in the beverage and food industry through its merger with Quaker Oats and the addition of top products to its portfolio such as Gatorade beverages.
Recently, Pepsi made the headlines by signing a “skyrocketing” agreement with Britney Spears to promote its new marketing campaign and products.
2.2 Observations throughout History
Pepsi-Cola is still second in the carbonated drinks market and remains in the shadow of Coca Cola in terms of market share, perception and image. However, Pepsi’s insightful marketing techniques (comic strips, television ads etc…) prevented a fall of its position in the beverage industry.
From 1965, by using diversification techniques and brand management, the company was able to increase its volume of sales and get a stronger market position. Nowadays, Pepsi’s carbonated beverages division clearly remains behind the snack division in terms of profitability and share percentage of operation earnings. [1] Our impression is that the profits of the snack division help create the illusion that the beverage sector is as successful as the management wishes it to be. [2]
We observed a definite inferiority complex towards Coke that initiated the main motor in the company’s top management philosophy. As Roger Enrico wrote in his book about cola war, Pepsi’s strategy was heavily focused in gaining a better position in the beverage industry by finding new ways to differentiate from Coke and to take advantage of strategic alliances in the market. [3]
2.3 Core Competencies
A question is raised by acknowledging the above mentioned facts: how to beat your competitor if you cannot offer a “better” product. For Pepsi, the answer is efficiency, innovation in marketing techniques and customer responsiveness. Using less input in the value chain of its primary activities, Pepsi is able to be more efficient and to attain a lower cost structure.
Moreover, PepsiCo built its competitive advantage mainly by achieving greater economies of scale in the sectors of communication, distribution and bottling thus reducing production costs.
STRATEGY USED BY PEPSI
Marketing and Customer Responsiveness
The aim of the new marketing strategy developed by Enrico was to sharpen the image of Pepsi. It also contained a specific message directed to young people using extensive advertising campaigns on TV and radio. As an example, Pepsi’s innovative marketing was showed to the world when in 1996 it first recorded a commercial in space.
Furthermore, Pepsi kept the consumer’s perception waiting by acquiring Mountain Dew, and creating Pepsi blue. Improving the quality of the company’s product offering is consistent with achieving customer responsiveness, as is developing new products with features that existing products lack. Pepsi blue was in fact not as successful as hoped, yet the product aided in the overall perception of the brand Pepsi-Cola.
2.3.2 Branding Equity
Brand loyalty is a buyers’ preference for the products of incumbent company. A company can create brand loyalty through continuous advertising of brand and company names, patent protection of products, product innovation achieve through its research and development programs and emphasis on high product quality and good after-sales services. It is effective influence in the way in which people perceive the product or the company. By creating feelings of warmth, affection and belonging to a product, a firm is able to relate brand to human personalities. [4]
People prefer to buy brands as they give them personal means and judgment and they offer a quick and clear guide to a variety of competitive products.
In the beginning of the 1990’s PepsiCo management decided to create a proprietary model applicable to all major PepsiCo brands, both domestically and globally focusing on cross-category brand and product specificity. The goal was to have a single definition of brand equity applicable to every product.
A second goal was to strike a balance between sensitivity (the ability to detect real equity changes) and stability (the absence of spurious or short-term fluctuations). The marketing and research management of PepsiCo as well as some of its consumers were interviewed to find out the attributes that contributed to a favorable brand-consumer relationship across product categories and make comparisons with key competitors like Coca-Cola in the soft drinks sector.
PepsiCo deployed the Equitrak brand equity model to track its major brands on a global scale in 1997, following its success in the USA. [5] By late 1999, PepsiCo had created a brand database consisting of over 6,000 Equitrak brand equity “scores”.
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2.3.3 Reducing Costs
One example illustrates how Pepsi is always trying to find new ways of reducing costs and increase efficiency. Service technicians for The Pepsi Bottling Group Inc. (PBG) in the U.S. used to generate 3 million pieces of paper per year while making routine repairs to soda fountains and vending machines. But after a yearlong rollout of wireless handheld computers, that paper mountain has completely disappeared.
The new system, built around a rugged computer allows PBG to maintain a virtual inventory of parts on each technician’s truck that’s linked to a database accessible by the company’s eight call centers, A dispatcher can quickly determine whether one of 700 Pepsi technicians equipped with the Sidearm has the right kind of part needed for a pending job thus increasing customer responsiveness and effectiveness of after-sales service.
Another way of reducing costs was by investing into the new Computer system “Generation Net”. Following from this was the “PepNetSystem” which serves both, lower cost and customer responsiveness. This resulted in a more efficient communication system.
In order to understand the marketing strategy of one company it is very important to analyse the environment it is operating within. The analysis of the environment has a few very important aspects that clearly illustrate how a company like Pepsi has managed to stay in business for such a long time. To analyse this clearly, a general rule can be applied to PepsiCo.
Cyclical Corporate Strategy
If we look at the Pepsi-Cola Company from the outside, there has been a certain amount of repetitiveness in its development. By following the trends and focusing on how to lower the price as much as possible, they managed to create a successful company. By investing in the development of the bottling and distribution sector, Pepsi found their balance in the market. [6]
Then in 1920’s Pepsi-Cola Company failed because they didn’t concentrate enough energy on branding. Within a few years Pepsi was declared bankrupt twice. By the end of the 1930’s the company was reorganized from inside and the marketing policy drastically changed. Major investment was now directed towards making people more familiar with the product.
After acquiring Mountain Dew, new sources of financing and revenue opportunities were needed because the acquisition was not an instant success. Therefore, in 1965 Pepsi merged with Frito Lay. [7] In the 1980’s the decreasing sales in the beverage market induced the industry to adjust with more aggressive marketing strategy and new products. In fact, Coke marketed a new cola formula, whereas Pepsi persisted with promotional efforts and improved customer responsiveness to increase sales volume.
Key Factors for Success
To analyze the external environmental impacts, we have to look at the company as an organism that is constantly interacting with its customers, partners, suppliers and competitors. When Pepsi-Cola was created, the management was looking for the recipe for success that would also be matched with the creation of a unique name and logo. Thus, the whole “cola war” story was the driving force of every change Pepsi implemented in its business strategy.
The creators of Pepsi decided to use the same colors and lettering as Coke, simultaneously promoting and expanding the same product. [8] In the short run, the strategy worked and allowed Pepsi to take advantage of Coke’s previous business innovation. However, in the long run, Pepsi would have to build its own reputation and to differentiate itself from its rival.
Basically at that time, Pepsi focused on achieving lower cost production in its bottling and distribution units. [9] Therefore, the promotion of their products was put aside by the result of this strategic choice. The financial crisis commanded important changes with regards to innovation. From being a follower, Pepsi became the leading innovator.
Pepsi-Cola previous experience revealed that the management did not put much attention on their external reputation. Moreover, as a leading company, Pepsi had to be consistent and convinced about their strategy as opposed to follow the competitor’s strategy.
General Influences
In this section, we will focus on four elements: political, economical, socio-cultural and technological environment.
3.4.1 Political Environment
PepsiCo is a global corporation. For the company that has substantial involvement in the world economy, it is not surprising that PepsiCo has been implicated in many political scandals. In 1991 PepsiCo entered into a joint venture agreement with Myanmar Company that had ties with the junta challenging the government in place in Burma. When the country was being torn apart by internal military conflicts, the scandal erupted and Pepsi was suspected of financing the junta. Subsequently, there was a boycott of all Pepsi products and the situation alerted the international community because of the human rights violations perpetrated by the junta. [10]
Economic Environment
The economical segment is the second element to be analyzed. It is indisputable that PepsiCo is one of the worldwide leaders in the snacks and beverage industry. All available information made it clear that PepsiCo is a profitable corporation. The fact that they had some crises means they are apt to change in the modern market. This segment of the company was already explained before and will be discussed in the next chapters as well so we won’t elaborate further here.
3.4.3 Socio-cultural Environment
Turning to the socio-cultural element PepsiCo was always researching new ways to approach its customers. The involvement in the humanitarian actions is necessary for the image of international corporations. The other aspects are much more interesting since they are more recent. As it was already mentioned, the main consumer group for Pepsi is teenagers. It was just a matter of time before the company entered with its policy to market them within the educational system. Some see it as bad thing, whereas some support it. It is a fact that there are good and bad elements, but nevertheless this progress cannot be stopped.
Technological Environment
Last, but not least, technology. What kind of technology are we talking about? Technology that makes the drink and the one that makes the drinks containers. Externally there is a small problem, which has the potential to develop. The problem is with plastic waste. This is already a huge problem in the U.S. and it is becoming an issue in Europe as well. The fact that plastic packaging is the cheapest and most practical material is not a good enough reason anymore. The larger market is demanding new solutions.
The second problem is even more recent: how is the beverage produced and what are the ingredients used? Biological awareness will soon reach the point when the ingredients and their production will have to be transparent to the consumers. Bioengineering is target enemy number one in the 21st century. Will Pepsi be lucky in this area, as it was with drugs at the beginning of 20th century?
YEAR
2000
2001
Company
NET REVENUES
NET INCOME
NET REVENUES
NET INCOME
In billions of dollars ($)
PepsiCo
(Beverages with snacks)
20,144 $
2,183 $
26,935 $
2,662 $
PepsiCo Beverages International
5,095 $ = 25% of PepsiCo
0,55 $
10,440 $ = 39% of PepsiCo
1,04 $
Coca-Cola Company
20,458 $
3,691 $
20,092 $
3,696 $
COTT
0,99 $
0,025 $
1,99 $
0,399 $
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Pepsi’s Corporate and Business-level Strategies
4.1. Responding to Conflicting Demands: The Environmental Challenge
Nowadays, globalization is a trend which drives the world towards a converging common market by the force of technology. The result is a new commercial reality – the emergence of global markets for standardized consumer products on a previously unimagined scale in production, distribution, marketing and management. The global corporation operates with resolute constancy – at low relative cost – as if the entire world were a single entity: it sells the same things everywhere.
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Consider the case of Coca-Cola and Pepsi-Cola, which are globally standardized products sold everywhere. Both successfully cross multitudes of national, regional, and ethnic taste buds trained to a variety of deeply ingrained local preferences of taste, flavour, consistency, effervescence, and aftertaste. In many markets, both sell well. [11] Commercially, nothing confirms this as much as the success of Pepsi-Cola in Moscow.
4.2. Business-level Strategy
Business strategy refers to the plan of action that strategic managers adopt to use a company’s resources and distinctive competencies in order to gain a competitive advantage over its rivals in a market or industry. [12] To this extent, decisions in relation with business-level strategy should address customer’s needs and product differentiation, customer group and market segmentation and distinctive competencies.
5.2.1. PepsiCo Beverage Industry
5.2.1.1 Customer needs, Responsiveness and Product Differentiation of Pepsi-Cola
People don’t drink large quantities of soft drinks because they have to. Nowadays, they choose more soft drinks because they want to become part of the “American way of living” and because companies like Pepsi encourage people to do so. PepsiCo do it with print advertising, coupons in newspaper, signs at stadiums and billboards on highways, eye-catching displays in supermarkets and convenience stores, catchy jingles in radio advertisements. In the cola war, television commercials have become increasingly important.
As one famous chief executive officer of Pepsi-Cola Company pointed it out:
Image is critical to our company’s success. After making sure that our products are as good as we know how to make them, sharpening our image is the most important thing we do. The distinction between soft drinks being not universally appreciated, giving Pepsi an image that could never be confused with Coke was critically central to our strategy. [13]
5.2.1.2 Market Segmentation USED BY PEPSI AT INTERNATIONAL LEVEL
For the last 40 years, Pepsi has positioned itself as the “leading edge” soft drink and called its consumers the “Pepsi Generation”. Pepsi-Cola marketing campaigns are heavily targeted towards the young consumers. For example, Pepsi-Cola North America has introduced Pepsi Blue, a blue-colored, berry-flavored extension of its trademark Pepsi this summer. Teens with the highest propensity to switch brands were targeted by the Pepsi Blue Crew, which engaged in a summer-long program interacting with teens. This new product wave reflects the strategy shift for these companies. During the past six to eight years, there has been strong growth in the non-carbonated beverage market . [14]
Pepsi-Cola is an established brand at the mature stage of its product life cycle. [15] Sales of beverages target younger and younger people, with schools and universities being one highly competitive marketplace for Pepsi exclusive marketing agreements. To this extent, creative marketing has been the focus of Pepsi’s business strategy. Huge advertisement contracts, like the “The Choice of a New Generation” commercials with Britney Spears and packaging changes indicate that Pepsi is using market awareness to create competitive advantage. Thus, as emphasized previously, competitive advantage is stronger in a segment than in broader market. [16]
5.2.1.3 Distinctive Competencies
As was pointed out in our internal analysis, the Pepsi brand and its differentiation from other brands (i.e. Coke) through effective marketing has been central to its business strategy. The originality and creativity of its marketing matched with a desire to be a strong competitor in every market place made Pepsi’s business strategy very successful. This is reflected in the marketing costs reported in the 2001 Annual Report. Selling, general, administrative, advertising, promotional programs and other marketing activities costs were $1.7 billion in 2001 and 2000 and $1.6 billion in 1999 compared to Research and development costs of $206 million in 2001, $207 million in 2000 and $187 million in 1999. [17]
Insightful human resources management have also helped PepsiCo to gain competitive advantage in foreign markets. European and Japanese managers are better trained than Americans to deal with cross-cultural relationships. PepsiCo have realized the need for global understanding and experience among their managers. To this extent, they have instituted screening, selection and training programs geared to identify young managers, early in their careers, for global operations. [18]
5.2.1.4 Customer Group
Many examples emerge as we analyse the customer group that Frito-Lay are targeting. For instance, in line with the PepsiCo strategy of market segmentation is the launch of a line of snacks targeted specifically at Hispanics, currently the fastest growing ethnic group in the United States. This product lineup offers distinctive flavors and textures that are both appealing and familiar to Hispanic consumers. Frito-Lay conducted extensive consumer testing in four key markets (Miami, New York, Los Angeles, Houston) to determine the snack flavors and textures with the strongest appeal among Hispanics. The complete line of products will be distributed in key urban markets including several Southwest cities. [19] Perhaps this should also be done for the beverage sector. Their emergence into the developing markets is hindered by the dislike for the Pepsi-cola taste, particularly in Asia.
5.3 Corporate-level Strategy
Corporate strategy is concerned with an organization’s basic direction for the future: its purpose, its ambition, its resources and how it interacts with the world in which it operates. [20] This concept refers to the resources of an organization in relation to its external environment, the prime purpose being the value added to what supplies are brought into the organization and then distributed among the stakeholders. The principal concern of corporate strategy is identifying the business areas in which a company should participate in order to maximize its long-run profitability.
Interestingly, Coca-Cola at one time pursued a diversification strategy. Coca-Cola once owned Columbia Pictures and a wine-producing business. However, Coca-Cola came to the conclusion that diversification dissipated rather than created value, and, in recent years it divested its diverse business and refocused on a single operation. They have done this because there are clear advantages to concentrating on just one business area. [21]
However, for Pepsi the story is a quite different. PepsiCo has adopted a policy of diversification by structuring itself into three major divisions: beverages, snack food and restaurants. Although in separate markets, the three operate in the same industry, namely leisure food. It seems that PepsiCo have chosen this approach in order to allow for an overlap between the value chain of its divisions. This is advantageous in that it can be used to bring down costs or even increase customer loyalty across product line.
Focus on the leisure-food markets means that PepsiCo is in a position to take advantage of similar activities across business units. Take food production, all restaurants have to produce food from raw materials, as do the snack producers; businesses within PepsiCo’s portfolio are in a position to create a competitive advantage by realizing greater economies of scale and cross utilization of technologies. Consequently, when two or more business units share resources such as manufacturing facilities, distribution channels, advertising campaigns and R & D costs, each business unit has to invest less in the shared function. [22] . Moreover, there are opportunities for competence leveraging through brand names and shared finance.
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5.3.3 PepsiCo Bottling Group Strategy
PBG became an independent, publicly traded company in March 1999. PepsiCo retains an equity interest in PBG of about 40 percent.
As an independent entity, PBG benefits from a much sharper definition of its role and is able to execute its business strategy more effectively on a local market level. PepsiCo’s can focus on what it does best now, which is developing its powerful brands and the world-class marketing programs. PBG’s focus is on superior sales execution, customer service, merchandising and operating excellence.
PepsiCo provides new product development, advertising, marketing, sales and promotional support to PBG and other Pepsi bottlers. The company manufactures and sells soft drink concentrate syrup to PBG and other Pepsi-Cola bottlers. Afterwards, PDG produce the final product by combining the concentrate syrup with other ingredients to manufacture and package the beverages.
In fact, The Pepsi Bottling Group Sales Team works on the front line of a fiercely competitive global battle, dealing with the most important people in their business – the customers. The team works with customers, new and existing, to grow the highly profitable beverage business armed with one of the most powerful trademarks in the world. Their sales approach focuses on fact-based selling and expert advice – offering “total beverage solutions,” not just successful day-to-day transactions. PBG Sales provides a demanding, fast-paced environment in an intensely competitive industry, where growth equals opportunity. [24]
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Moreover, in terms of sales, the executives consolidated the Quaker and Tropicana warehouse sales forces. The new organization is capable of calling directly on the headquarters of virtually all of their major customers-including club stores, supermarkets, and convenience store chains. These factors combined not only save time, space and manpower, but also enables the companies to benefit from the relationships already established, connections and arrangements that each one formerly had with certain retailers. In fact, the merger met all cost-saving expectations for it raised cost-cutting goals to $400 million annually, from $230 million. [25]
Is their current structure flexible enough to enable them to compete in the emerging markets? They have a structure based on a Global Product-Group Structure, with slight variations. PepsiCo still doesn’t market all its products internationally and thus only needs sub-divisions for Frito-Lay and Pepsi-Cola/beverages. This is a definite weakness in Pepsi-Cola. Pepsi-Cola needs to take a strong lead in the international market and it needs to have an international structure that facilitates this.
Currently, Pepsi-Cola is marketed in North America through its North American division. Internationally, Pepsi-Cola is marketed through PepsiCo Beverages International – along with all other beverages that PepsiCo has acquired. What is needed for Pepsi-Cola to emerge as the popular beverage in the emerging markets is separate subdivisions that concentrate on specific areas, traditions and trends.
At present, Pepsi-Cola is being marketed through PepsiCo Beverages International with the help of leading local marketing firms in certain countries that they wish to exploit. PepsiCo has realised that it needs very specific strategies based on the local area. It would be ridiculous to assume that the American marketing of a young, hip Pepsi would come across well in the new markets of the Czech Republic, Hungary, Poland, Slovakia and Russia. Here the use of local marketing firms is paramount to implementing a successful strategy to “fit” the lifestyles and traditions of those countries.
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6.4 PepsiCo Within the US
Within the U.S. Pepsi-Cola has almost the same leverage as Coca-Cola:
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