International Strategies

The last chapter in our book deals with International Strategies.  Needless to say, this was a very interesting chapter that had a variety of good information for one to learn about.  The first thing that is important to realize when looking at international strategies is that this kind of strategy is a diversification strategy.  It is something that can help a company gain access to new customers for current products or services, to help a company gain access to low-cost factors of production, to develop new core competencies, to leverage current core competencies in new ways, and to manage corporate risk.   However, it is important to realize that there are some risks that come along with this as well.  First off, the firms must have intent to learn, there must be a transparency of business partners, and there has to be receptivity to learning.   When looking at the risks, these can be narrowed down to financial and political risks.  Financial risks could definitely include things such as currency fluctuation and inflation, and political risks could include any environmental threat that would change the value of a firm’s resources and capabilities.

With all that being said, for certain firms, implementing an international strategy can definitely be a helpful tool.  The first example of this we can look at would include McDonald’s and their success throughout the world.  Some years back, McDonald’s found it appropriate to not only start operating in international countries, but to serve their food in a way that was wanted in that given country.  For instance, in India, where they do not eat beef, McDonald’s actually found a product that would meet their needs and still bring them profit.  When looking at Pepsi, our example is a bit different.  Pepsi’s main objective in regards to its international strategies is to utilize its service in places across the globe where their products would be a success.  They currently have officers specifically overlooking certain international operations, and they even go as far as acquiring firms in other countries in order to boost their profit and their operational efficiency.  An example of this would be from the previous blog post, where Pepsi acquired Russia’s OAO Wim-Bill-Dann, the leading dairy and juice producer in that country.   When looking at different products that they offer to a certain target market we see Pepsi’s Ice Cream flavor in Russia and the Ice Cucumber in Japan.  It is moves like these that show that Pepsi is willing to look at international diversification strategies in order to gain a competitive advantage over the rest of the market.  To further this, this is just a few of the things Pepsi has done internationally, but they are very active in many other countries just as they are here.  They’ve come to realize that their product is not only seen as fun, happy and great-tasting here in the United States, but all over the world.  With all this in mind, Pepsi has done a great job of utilizing its great talents and managerial experience by looking at all kinds of strategies to implement in order to boost the company to the top.  I’m positive that with things the way they are going, even with the economy the way it is right now, that Pepsi will be a market leader for years to come.  The question is, will they ever knock Coke out of the competition?

Flavors You Can’t Get Here: http://weburbanist.com/2010/05/02/global-cola-10-pepsi-cola-flavors-you-cant-get-here/

Why take less when Pepsi’s best?! : http://www.youtube.com/watch?v=MQfikxbS4zE

 

Merger and Acquisition Strategies

After reading through chapter 14, Merger and Acquisition Strategies, it is easy for one to pick up on a lot of relevant information regarding the topic.  Mergers and acquisitions seem like something that don’t happen all too often, but it actually wasn’t too hard to find a lot of information about.  In regards to acquisitions, this is something you see a lot with banks.  Bigger banks will buy out little banks to strengthen their company and make them grow.   To further this, I personally have been involved with a merger regarding two accounting firms merging together while I was working there in college.  Needless to say, there are a lot of risks and rewards that go with this process.  Lastly, a huge acquisition going on right now in today’s society would be AT&T acquiring T-Mobile.  This is absolutely huge for the cellular world because of the market share this now gives AT&T.  It hinders Verizon greatly and leaves Sprint in the dust. 

When looking at how this relates to Pepsi, we can actually find some examples of when Pepsi had a merger and when they had an acquisition as well.  But before looking at this, it is important to notate why a firm is motivated to engage in one of these activities.  The first thing that may come to mind is to reduce production or distribution costs.  This may be through economies of scale, vertical integration, through the adoption of more efficient production or organizational technology, through the increased utilization of the bidder’s management team, or through a reduction of agency costs by bringing organization-specific assets under common ownership.  To go along with this, it might be because of financial motivations.  This would include the firm wanting to gain access to underutilized tax shields, to avoid bankruptcy costs, to increase leverage opportunities, or to gain other tax advantages.  A firm may also want to gain market power in product markets or eliminate efficient target management.  Furthermore, a firm may find it vital to engage in one of these activities in order to ensure survival, to free up cash flow, because of agency problems, because of managerial hubris (the unrealistic belief held by managers in bidding firms that they can manage the assets of a target firm more efficiently than the target firm’s current management can), or because of the potential of above-normal profits.

Due to the amount of information we know about Pepsi, we know they are motivated by reaching above-normal profits while at the same time cutting costs by implementing certain strategies in order to compete with their rival Coke.  This comes into play with their acquisitions and mergers.  In regards to a merger they have recently had, this happened in 2009 when they merged with their bottling group in order to increase their earnings fifteen cents a share.  This is an example of tax shelters and financial motivations in reference to why they might engage in such an activity.  When looking at a recent acquisition, they acquired OAO Wim-Bill-Dann, one of Russia’s largest dairy and juice companies.  Their reason for doing this was to not only make themselves more profitable, but to strengthen their international presence in order to compete with Coke.  Will the Cola Wars ever end??!

Pepsi’s Acquisition: http://www.pepsico.com/PressRelease/PepsiCo-Completes-Acquisition-of-66-of-Wimm-Bill-Dann02032011.html

Pepsi Max is really good! : http://www.youtube.com/watch?v=7QKmhMBNVns&NR=1

Strategic Alliances

After diving into this chapter, I found the topic of strategic alliances very interesting.  But to better understand strategic alliances, it is appropriate to know its definition.   A strategic alliance exists whenever two or more independent organizations cooperate in the development, manufacture, or sale of products or services.  Many times, this tool is used to learn from competitors and to receive and give support and resources as well as giving the other company the opportunity to analyze the other’s strengths.  The problem with these in today’s day and age is that many companies just have themselves in mind and could truly care less about the other company when looking at the strategic alliance.  Respect and trust is a huge problem.  An example of this would be the strategic alliance between IBM and Apple, when at the very same time, they were in court against each other for patent and technology infringement.

When looking at Pepsi, they actually do have a strategic alliance termed a symmetric alliance which is an alliance in which all parties are seeking the same advantages from the alliance.  Their strategic alliance, which took place in 2006, is with Ocean Spray, and it gives Pepsi the right to market, bottle and distribute single-serve cranberry juice products in the United States and Canada under the Ocean Spray name.  They believe that they will both benefit from this because it will include opportunities for the development of new product innovations across multiple trade channels.  To further this, it helps Pepsi in the sense that it will make it more profitable and gives it even more diversification in a company that really loves diversification strategies.  Ocean Spray President and CEO Randy Papadellis said, “As the Ocean Spray cooperative moves to build its brand, we are seeking out alliances to reach consumers more broadly and powerfully than ever before. Were thrilled to re-establish our partnership with Pepsi and begin a fruitful, long-lived relationship with the world’s premier beverage and snack company.”

With all this being said, there are many ways to cheat in a strategic alliance, whether it’s adverse selection, moral hazard or holdup.  Adverse selection is when potential partners misrepresent the value of the skills and abilities they bring to the alliance.  Moral hazard is when partners provide to the alliance skills and abilities of lower quality than they promised.  Lastly, holdup is when partners exploit the transaction-specific investments made by others in the alliance.  Nevertheless, given the right intentions, this strategic alliance, just as any other, definitely worked and was beneficial to both parties. 

Read the announcement here: http://www.oceanspray.com/news/pr/pressrelease104.aspx

Ocean Spray is good too! : http://www.youtube.com/watch?v=EkC-mCEDiR0

Implementing Corporate Diversification

When looking over chapter 12, Implementing Corporate Diversification, the first thing that stood out to me in the chapter was the section on the board of directors.  The reason for this is because a good board of directors can do wonders for a company.  To go along with this, the success of the company hinges on good management.  This is something that Pepsi definitely has in my opinion.  With that being said, a board of directors can be described as the people in charge of a company that’s primary responsibility is to monitor decision making in the firm to ensure that it is consistent with the interests of outside equity holders.  These boards usually have around ten to fifteen people on it and it starts with the firm’s senior executive which is called the CEO.  Other positions that are notorious for being on the board include the CFO and other senior managers as well.  Lastly, the board is typically organized in several smaller committees.  Examples of this would be the audit committee, who is responsible for ensuring the accuracy of accounting and financial statements, a finance committee which maintains the relationship between the firm and external capital markets, and the nomination committee.  Below all of these entities, there would be managers consisting of corporate staff, division general managers, and shared activity managers.

In regards to Pepsi’s board of directors, theirs consists of their executive director along with eleven other outside directors.  Indra Nooyi is the current CEO who sits atop of the board.  Other members consist of Shona Brown (Senior Vice President-Google), Ian Cook (CEO-Colgate), Dina Dublon (Former CFO-JP Morgan), Victor Dzau (Chancellor of Health Affairs-Duke University), Ray Hunt (CEO-Hunt Consolidated), Alberto Ibarguen (CEO-John S. and James L. Knight Foundation), Arthur Martinez (Former CEO-Sears), Sharon Rockefeller (CEO-WETA Public Stations), James Schiro (Former CEO-Zurich Financial Services), Lloyd Trotter (Managing Partner-GenNx360 Capital Partners, and Daniel Vasella (Chairman of the Board-Novartis AG).  When looking at their committees, they consist of the nominating and corporate governance, the audit, and the compensation committees.  The nominating and corporate governance committee is made up of Mr. Hunt, Ms. Brown, Mr. Dzau, Mr. Martinez, Ms. Rockefeller, and Mr. Vasella.  The audit committee is made up of Ms. Dublon, Mr. Cook, Mr. Ibarguen, Mr. Schiro, and Mr. Trotter.  Lastly, the compensation committee is made up of Mr. Martinez, Ms. Brown, Mr. Dzau, Mr. Hunt, Ms. Rockefeller, and Mr. Vasella.  As mentioned before, it is very important to have a good board of directors.  Many of the matters they discuss and take care of are very pressing and are crucial to the success of the company.  This would consist of governing the organization by establishing broad policies and objectives; selecting, appointing and supporting the performance of the CEO; ensuring the availability of adequate financial resources; approving annual budgets; accounting to the stakeholders for the organization’s performance; and setting their own salaries and compensation.  With Pepsi’s strong leadership and board of directors, it’s no question why they are successful.

Pepsi’s Board of Directors: http://www.pepsico.com/Company/Board-of-Directors-and-Committees.html

It looks great too!: http://www.youtube.com/watch?v=2r0uXJPXeNY

Diversification Strategies

As notated earlier in my blogs, Pepsi definitely utilizes diversification strategies.  Known as a highly competitive market leader today along with Coke, Pepsi is known for its vast variety of products that truly offer different things.  One can start off by selecting from their various soft drinks, or one may look at their energy drinks.  You could look for something to munch on and look at their snack foods they offer as well or even their coffee drinks.  Nevertheless, Pepsi has done a great job of implementing a diversification strategy and making it work. 

When trying to find a motivation for implementing a diversification strategy, reasons would vary across the board.  However, in chapter 11, we learn many different reasons why a company may do so.  This would include but is not limited to operational economies of scope including shared activities and core competencies; financial economies of scope including internal capital allocation, risk reduction and tax advantages,; anticompetitive economies of scope including multipoint competition and exploiting market power; and employee and stakeholder incentives for diversification including diversifying employees’ human capital investments, diversifying the risk of nonemployee stakeholders and maximizing management compensation.   When looking at Pepsi, reasons to diversify would be evident in a few of these instances.  In particular, I would like to point out exploiting market power.  Due to its increasing rivalry with Coca-Cola, Pepsi has been doing everything in its power to win the Cola Wars.  This has been evident by their constant innovations including anything from expanding their operations to numerous countries to thinking of all kinds of different products to launch, whether it was a snack food, soft drink or something else. 

One last thing that really stood out to me in this chapter is core competence.  Core competence can be described as the collective learning in the organization, especially how to coordinate diverse production skills and integrate multiple streams of technologies.  These are a set of resources and capabilities that link different businesses in a diversified firm such as Pepsi through managerial and technical experience and wisdom.  It really makes a difference in some companies including Pepsi because experience truly can make a difference.  In a market that has two highly competitive companies, it takes great strategy and management to make the right moves in order to thrust itself forward.  Without the proper techniques, it would be very easy for one of these companies to fall behind.

This is a powerpoint that includes information regarding Pepsi’s diversification strategies in 2008:

http://www.scribd.com/doc/37051630/PepsiCo%E2%80%99s-Diversification-Strategy-in-2008

Michael J. Fox Pepsi Commercial! : http://www.youtube.com/watch?v=dpqZ4PiVtVU

Vertical Integration Strategies

When looking at Chapter 10, Vertical Integration Strategies, this is a chapter that is very appropriate in regards to Pepsi.  First off, it is important to understand what vertical integration is.  Vertical integration can be described as the number of stages in a product’s or service’s value chain in which a particular firm engages.  It is said that the greater this number is, the more vertically integrated a firm is.  The smaller this number is, the less vertically integrated the firm is as well.  To make this more clear, this is when a business expands into areas that are at different points of the same productions path; a way of expansion.  It allows a company to expand its operations to an extent that would take over something that could have been outsourced, for instance.  This is evident when Pepsi subsumed the Pepsi Bottling Group and PepsiAmericas.  Not only did this give Pepsi more freedom by negotiating with retailers on their own, but it also allowed them to stay away from publicly traded bottlers.  Another example of this within this industry is shown when Coca-Cola went after Coca-Cola Enterprises.  They were under the belief that if they got more control over certain things, whether it was manufacturing, distribution, or materials, that they would be more successful.  This would be because they would be saving money, and since they were in control, they believed that they would be operating more efficiently.

Pepsi believes this works best for them because it gives them the most flexibility and allows them to make decisions for themselves.  To go along with this, they really wanted more authority over distribution and with this implementation, they got exactly what they wanted.  With their management, they believe that their company can provide the results needed to keep the company flourishing.  Furthermore, Pepsi loves that they have more control over manufacturing, distributing, and materials.  However, a lot of companies steer away from having complete control.  It could definitely help or hurt a certain company, but either way, it’ll be interesting to see what Pepsi does in the near future in regards to all of this!

Coke Vs Pepsi!:

http://www.youtube.com/watch?v=EMo6o0BtFG8&playnext=1&list=PLCAAFE64E41705BB0

Tacit Collusion: Cooperation to Reduce Competition

Chapter 9, Tacit Collusion: Cooperation to Reduce Competition, really had a lot of good information throughout the whole chapter.  It explained all kinds of different terms such as competitive strategy, the different types of collusion, and industry structure to name a few things.  When looking at competitive strategy, this can be described as a strategy that seeks to gain superior economic performance by contending with other firms.  This leads into our discovery of the different types of collusion, which is when firms in an industry agree to coordinate their strategic choices to reduce competition in an industry.  Lastly, one thing that stood out was learning about industry social structure and industry culture.  Industry social structure refers to accepted norms of behavior and competition that often evolve in industries.  These norms are usually implicit and constitute what is called industry culture.  But to be more specific to this whole chapter and Pepsi, we will look at price leaders.

A price leader is a firm that sets acceptable industry prices or acceptable profit margins in an industry.  A price leader is often the firm with the largest market share, which helps create the order and discipline needed to make tacit collusion last over time.  To further this, a price leader can assist an industry by adjusting to higher or lower prices by defining industry standards for price or margin changes.  The funny thing regarding Pepsi in this scenario is that Pepsi is definitely a price leader in its market, but the same argument could be made for Coke.  With that being said, I believe that it is possible for both of these companies to be price leaders within the industry.  It has been demonstrated that one or both of these companies can make a move that will make the other one, and the rest of the competition as well, react.  With that being said, an example that can be made of this is when Pepsi recently increased prices a little bit in Saudi Arabia.  Coke saw its successes and decided to do the same thing.  This affected the rest of the industry because it had to make decisions about its prices as well in order to stay relevant. 

                Another thing that comes to mind when thinking about the price war is the contracts Coke has that Pepsi does not.  Think about when you go to a restaurant or when you see a vending machine.  A lot of the time, you see Coke products more than you see Pepsi products.  This definitely hurts Pepsi and allows Coke a lot of wiggle room.  The argument could even be made that they are the superior as the price leader in this industry.  Nevertheless, prices in their varying products go back and forth, and can be different in every store because of promotions and discounts.  With all this being said, I believe both Pepsi and Coke would be classified as price leaders in their industry today.  A lot of this is due to the great management they have, their organization efficiency, and their self-discipline, all points that are taught in chapter 9 as well.  Nevertheless, Pepsi and Coke, yet very different, are much alike!

Don’t Cheat Your Heart! : http://www.youtube.com/watch?v=TnXArm-NViI

Flexibility: Real Options Analysis Under Risk and Uncertainty

Chapter 8 deals with a lot of different terms, stemming from definitions such as flexibility and riskiness to name a few. When looking at flexibility, this is described as the ability to change direction quickly and at a low cost, given unanticipated changes in the competitive situation within which a firm is operating. A firm that is flexible is said to be a strong firm, and given Pepsi’s successes, it definitely has the ability to be flexible in its market. However, when looking at a risky decision, that is said to be when its future state cannot be characterized by a single point but rather must be characterized by a probability distribution of possible outcomes. With that being said, risk with the future value of an attribute of a firm can be different across companies. Coke can and probably is very different from Pepsi in this sense.

Some other things mentioned in this chapter that can be related to Pepsi would include options. An option is the right, but not the obligation, to buy or sell a specified asset at a pre-specified price on a pre-specified date. Options are something that are very common within the stock market, but also is something Pepsi deals with every day. Pepsi’s stock option plan for its employees is called SharePower. SharePower is a plan where once eligible, you receive stock options normally each year based on at least ten percent of your prior year’s earnings. These stockoptions also let you purchase shares of Pepsi stock in the future at a set price. Obviously, one would make money if the stock price goes up, and you stay with working with the company. Also, the longer you work, the more stock options you are allowed to get. Pepsi feels like this is a benefit to their employees because it allows their employee’s to share in their successes. If Pepsi does well, they are rewarded. However, to go along with all that, one may also look at pension plans, a 401k plan which allows you to save fifteen percent of your pay on a pre-tax basis and invest in any publicly traded stock, or a stock purchase program. As you can see, options are very visible even within the workplace and give you so many different decisions. One can have the option to defer, the option to grow, the option to contract, the option to shut down and restart, the option to abandon, and to the option to expand. The option to defer is where you can defer additional investment in a strategy until some later time whereas the option to grow allows you to enhance their ability to grow. The option to contract allows them to enhance their ability to get smaller and the option to shut down and restart literally lets you shut down and restart to be more valuable in the future. Lastly, the option to abandon allows you to abandon a specific strategy and the option to expand lets you expand beyond its current boundaries. Flexibility and options really can be a great source of sustained competitive advantage; something everything company reaches for. With the competition between Coke being so pertinent, Pepsi really does a good job of exploring different approaches in order to be the best.

View this! :

http://www.youtube.com/watch?v=40DykbPa4Lc

Product Differentiation

Chapter 7, Product Differentiation, really had a lot of good information regarding this strategy.  But before going on with how this chapter relates to Pepsi, it’s first important to understand what this strategy is.  Product differentiation is a business strategy whereby firms attempt to gain a competitive advantage by increasing the willingness of customers to pay for the products or services they sell.  They do this by altering the objective properties of those products or services they sell each and every day.  This comes into play for sure in the case of Pepsi.  When looking at Pepsi, people think of soda.  To further that a bit more, people might think of their other products they offer, but when Pepsi or Coke come to mind, it’s hard to really differentiate the two.  With that being said, Pepsi’s goal is to definitively differentiate itself from its competition.  Whether it’s coming up with different tastes, different products, or even different entities such as snack foods, Pepsi explores all of its options.  Pepsi does all it can to differentiate its products so it can remain a market leader and can continue to attempt to beat out Coke.  Their ability to innovate is truly a competitive advantage to them.

Another interesting point that is mentioned in the chapter refers to distribution channels.  It explains how linkages within firms can effect how a firm chooses to distribute its product.  For example, Coke and Pepsi distribute their drinks through independent bottlers.  These firms make the ingredients for the drinks and then ship them to the local bottlers, who pretty much finalize the product.  After this is done, this bottler has the right to distribute whatever brand it wants to a specific region.  On the other hand, a brand such as Canady Dry does something much different.  Canada Dry packages its product in several locations and then ships them to wholesale grocers who distribute them to the local grocery stores and outlets.  This is a great example as to why Canady Dry is strong within local grocery stores, but why they are not present in vending machines like Pepsi is.  Furthermore, I found it really interesting that since the vending machine market is dominated by Pepsi and Coke, that Canada Dry actually has to be purchased in order to get into a vending machine; something that doesn’t happen too often. 

Lastly, one other thing product differentiation does for a company is reduce the threat of rivalry.  In Pepsi’s case, this is a good thing due to its intense rivalry with Coke.   However, Pepsi has launched so many different products that really help its cause.  Some of these products include AMP energy drinks, Aquafina, Gatorade, Lipton, Mountain Dew, No Fear, Propel, Ocean Spray, Sierra Mist, Sobe, Frito Lay, and Doritos to name a few.  There are definitely numerous products that are offered, and to further this, these products are even broken down into flavor and are offered all across the world.  Pepsi has done a great job of spreading its company all across the world and to come up with so many different products that would gain interest from all kinds of customers.  If Pepsi continues to be innovative rather than worrying about price, I don’t think it’ll have any problems within its market.  It’ll be interesting to see where Pepsi goes from here!

http://www.youtube.com/watch?v=HZoXYiacIcg&playnext=1&list=PL1E740D7562E64571

Cost Leadership

After going through the cost leadership chapter today, the part that I enjoyed the most that I would like to relate to Pepsi would be its actual cost leadership strategy.  When looking at Pepsi and a cost leadership strategy, this would include focusing on gaining advantages by reducing its economic costs bellow all of its competitors.  Pepsi constantly finds itself competing with Coca-Cola in this sense, and furthermore, their strategy is to outperform Coca-Cola and everyone else by doing everything it can to produce and market goods and at a lower cost than everyone else in the market.  Furthermore, due to the lower costs, this allows them to sell more products, and in the long run, make at least the same level of profit as their competitors, or even do better than them as they have done before. 

When looking at Pepsi from a grand scheme, they really have a great reputation.  To go along with this, exercising and being successful with their strategies, including cost leadership, also hinges on competitive advantages.  A few competitive advantages that Pepsi has on its competitors include the following: nineteen food and beverages brands with sales that exceed one billion dollars; a great position of cash flow for customers; leading share positions across around thirty-five snack markets worldwide; flexible distribution of networks including direct-store-delivery and warehouse systems; an international hold on the market allowing them to capitalize on GDP and population growth as well as low per-capita consumption in developing markets; proven ability to meet the needs of its customers.  When looking at all of these characteristics, it really comes from great leadership and that stems from Pepsi’s organization structure.  To name a few of the positions, Pepsi has 6 CEO’s representing each one of its different divisions.  Indra Nooyi is the main chairman and CEO, John Compton is the CEO of PepsiCo America’s Foods, Massimo d’Amore is the CEO of PepsiCo Beverages Americas, Eric Foss is the CEO of Pepsi Beverages Company, Zein Abdalla is the CEO of PepsiCo Europe, and Saad Abdul-Latif is the CEO of PepsiCo Asia, Middle East and Africa.  As you can see, they have a ton of CEO’s, but leadership is something that Pepsi hinges its company on.  With leadership like this, strategies such as cost leadership can be implemented with confidence throughout the company.     

Watch here!:

http://www.youtube.com/watch?v=IXDSWhobbfc