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Analysis of PepsiCo’s Organizational Structure in the Face of Competitive Forces and Industry Environment
Using the Five Forces framework (Porter, 2008/1979) with industry related research, I will provide an analysis of PepsiCo Inc’s organisational structure, focusing on its effectiveness within the company’s current external environment.
Rivalries (strong): PepsiCo has posted current financial results ($1.31 per share/ $19.5 billion revenue) that exceeded estimates with a retail space undergoing changes and a declining market for soda drinks (Trefis, 2018). Unsurprisingly, the Coca Cola Company continues to be PepsiCo’s main competitor, however as suggested by Smithson (2017) “there are other factors that determine the influence of competitive rivalry” adding that other significant environmental factors are: high aggressiveness of firms (strong), the number of firms (strong) and low switching costs (moderate).
The food and beverage industry are believed to be aggressive in marketing and innovation (Smithson, 2017), and rivalries are intensified as costumers can consider and purchase other options readily. In addition, PepsiCo has merged with ‘Frito-Lay’, acquired ‘Quaker Oats’ and ‘Tostitos’ to compete in the food space (Wiener-Bronner, 2018), which means that the number of companies in competition with them has increased, whereas the Coca Cola Company in contrast remains committed to beverages.
With that said, I agree with Caroline Levy (cited in Wiener-Bronner, 2018), an analyst who stated that PepsiCo neglected focus on cola while exploring other areas. This is notable in my opinion as ‘Beverage Digest’ noted that carbonated soft drinks generated $81 billion in 2016 in the United States and Canada alone, surpassing water ($23 billion) and athletic drinks ($9.4 billion). I also agree with Caroline that addressing this by increasing marketing for their core products, using ‘nostalgia’ focused marketing as stated by PepsiCO CEO Indra Nooyi (cited in Wiener-Bronner, 2018).
Bargaining ability of customers (strong): Environmental factors that produce the bargaining ability of PepsiCo’s customers are: Low switching costs, high access to product information and high availability of substitutes (Smithson, 2017). Consumers have access to information easier than ever to make informed decisions between products as mentioned earlier, and substitutes give buyers even more reasons to stay away from the PepsiCo brand if they choose. I agree with Smithson’s (2017) assertion that customer satisfaction should be a primary focus in this regard.
Bargaining ability of suppliers (weak): The negotiating ability of the supply companies who work with PepsiCo is affected from these environmental factors: high overall supply, low forward integration of suppliers and moderate size of individual suppliers (Smithson,2017).
‘High overall supply’ aligns with Porter’s (2008/1979) first barrier to entry listed as an advantage, as a “firm that produce at larger volumes enjoy lower costs per unit because they can spread fixed costs over more units, employ more efficient technology, or command better terms from suppliers” (Porter, 2008/1979), and PepsiCo certainly applies to this definition. In my opinion, continuing to benefit from this advantage can help with profit losses from external issues. These external factors negatively affect the suppliers’ influence on the company even though some of them are moderately sized or large firms (Smithson, 2017).
Threat of replacement product (strong): Environmental factors can contribute to the strong threat of replacement products against PepsiCo such as: high performance of substitutes, low switching costs and the high availability of substitutes.
In this area, the equally affordable, quality options that already exist on the market (juices, teas) with better ingredients in my opinion are logical outside factors to consider. PepsiCo has certainly taken initiative with this, as “evolving tastes and sugar taxes have encouraged brands like Coke (KO) and Pepsi (PEP) to invest in healthier alternatives” (Wiener-Bronner, 2018). However, PepsiCo has indicated that profit losses were partially due to focusing too much marketing on healthier brands (Lombardo, 2018).
Threat of new entrants (moderate): I agree with Smithson (2017) that PepsiCo has an aspect of “moderate” customer loyalty which provides a level of protection from new entrants, and brand development has high financial costs that are difficult to match. For example, Porter (2008/1979, p.80) referred to Pepsi and entrants after stating “when new entrants are diversifying from other markets, they can leverage existing capabilities and cash flows to shake up competition, as Pepsi did when it entered the bottled water industry”.
References
Lombardo, C. (2018) ‘Coca-Cola, PepsiCo try new ways to combat soda slump’, The Wall Street Journal, Available at: https://www.wsj.com/articles/c
Porter, M. E., (2008/1979) ‘The Five Competitive Forces That Shape Strategy’, Harvard Business Review, January: 23-41 (R0801E).
Smithson, N. (2017) ‘PepsiCo five forces analysis (Porter’s Model)’. Panmore Institute. Available at: http://panmore.com/pepsico-fiv
Trefis Team (2018) ‘Pepsi’s focus on diversifying drinks portfolio to help steady beverages revenue’. Forbes Investing. Available at: https://www.forbes.com/sites/g
Wiener-Bronner, D. (2018) ‘Why Coke is winning the cola wars’. CNN (Money). Available at: http://money.cnn.com/2018/02/2
