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TEACHING NOTE
CASE 21
PepsiCo’s Diversification Strategy
Overview
PepsiCo was the world’s largest snack and beverage company with 2013 net revenues of approximately
$66.4 billion. The company’s portfolio of businesses in 2014 included Frito-Lay salty snacks, Quaker
Chewy granola bars, Pepsi soft drink products, Tropicana orange juice, Lipton Brisk tea, Gatorade,
Propel, SoBe, Quaker Oatmeal, Cap’n Crunch, Aquafina, Rice-A-Roni, Aunt Jemima pancake mix, and many
other regularly consumed products. Gatorade, Propel, Rice-A-Roni, Aunt Jemima, and Quaker Oats products
were added to PepsiCo’s arsenal of brands through the $13.9 billion acquisition of Quaker Oats in 2001. PepsiCo
underwent a major portfolio restructuring initiative that began in 1997, and from 1997 to 2011, the company had
increased revenues and net income at annual rates of 7 percent and 12 percent respectively. In 2010, PepsiCo
acquired the previously independent Pepsi Bottling Group and PepsiCo Americas for 8.26 billion, and Wimm-
Bill-Dan, Russia’s leading food and beverage Company, for $3.8 billion. Although the company had impressive
achievements over the past decade, its growth began to slow in 2011.
Through 2013, the company’s top managers were focused on sustaining the impressive performance that
had been achieved since its restructuring through strategies keyed to product innovation, close relationships
with distribution allies, international expansion, and strategic acquisitions. Newly introduced products such
as Mountain Dew KickStart, Tostitos Cantina tortilla chips, Quaker Real Medleys, Starbucks Refreshers, and
Gatorade Energy Chews had accounted for 15%-20% of all new growth in recent years. New product innovations
that addressed consumer health and wellness concerns were important contributors to the company’s growth,
with PepsiCo’s better-for-you and good-for-you products becoming focal points in the company’s new product
development initiatives. .
In addition to focusing on strategies designed to deliver revenue and earnings growth, the company maintained
an aggressive dividend policy, with more than $53 billion returned to shareholders between 2003 and 2012.
The company increased its cash returns through carefully considered capital expenditures and acquisitions
and a focus on operational excellence. Its Performance with Purpose plan used investments in manufacturing
automation, a rationalized global manufacturing plan, reengineered distribution systems, and simplified
organization structures to drive efficiency. Additionally, the company’s Performance with Purpose plan was
focused on minimizing the company’s impact on the environment by lowering energy and water consumption
and reducing its use of packaging material, providing a safe and inclusive workplace for employees, and
supporting and investing in the local communities in which it operated. PepsiCo had been listed on the Dow
Jones Sustainability World Index for seven consecutive years and listed on the North America Index for eight
consecutive years as of 2013.
in 2014*
*Portions of this teaching note was developed by Professor David L. Turnipseed, University of South Alabama. We are most
grateful for his insight, analysis and contributions to how the case can be taught successfully.
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Even though the company had recorded a number of impressive achievements over the past decade, its growth
had slowed since 2011. In fact, the spikes in the company’s revenue growth since 2000 had resulted from major
acquisitions such as the $13.6 billion acquisition of Quaker Oats in 2001, the 2010 acquisition of the previously
independent Pepsi Bottling Group and PepsiCo Americas for $8.26 billion, and the acquisition of Russia’s
leading food-and- beverage company, Wimm-Bill-Dann (WBD) Foods, for $3.8 billion in 2011.
PepsiCo’s strategies appeared to be doing well in 2014. PepsiCo’s chief managers expected the company’s
lineup of snack, beverage, and grocery items to generate operating cash flows sufficient to reinvest in its
core businesses, provide cash dividends to shareholders, fund a $15 billion share-buyback plan, and pursue
acquisitions that would provide attractive returns. Nevertheless, the low relative profit margins of PepsiCo’s
international businesses created the need for a continued examination of its strategy and operations to better
exploit strategic fits between the company’s international business units.
PepsiCo developed a new divisional organization structure in 2008 which combined businesses in Latin America
into a common division. Also, the company’s international businesses were reorganized to boost profit margins
in Europe and Asia, the Middle East, and Africa. However, more than five years after the reorganization, the
performance of the company’s international businesses continued to lag that of its North American businesses
by a meaningful margin. Some food and beverage industry analysts had speculated that additional corporate
strategy changes might also be required to improve the profitability of PepsiCo’s international operations and to
help restore previous revenue and earnings growth rates.
Suggestions for Using the Case
This case is ideal for opening the module on corporate diversification strategies. The case teaches well because
the majority of students are likely to be regular consumers of PepsiCo’s products. Class debate should center on
whether PepsiCo’s diversification strategy has contributed to increased shareholder value. Analysis of the case
data will lead students to conclude that PepsiCo’s top managers have built a fine collection of businesses capable
of delivering impressive earnings and cash flows. Students will recognize the success PepsiCo management has
achieved in exploiting strategic fit opportunities across business units, acquiring new businesses to strengthen
the overall quality of its business line up, and increasing revenues and earnings in international markets. The
issue in 2014 is how PepsiCo management should best deploy the company’s operating cash flows to support
further growth in revenues, earnings, and shareholder value. An additional issue for students to consider is
whether the addition of all the Quaker brands has enhanced PepsiCo’s competitive strength, proven to have good
strategic and resource fit, and helped boost PepsiCo’s overall performance.
The case contains ample data for students to prepare a 9-cell industry attractiveness/business strength matrix
and to go through the steps of analyzing a diversified company’s business portfolio that are described in Chapter
8. Following their analyses of industry attractiveness and business strengths, students are able to analyze
opportunities for economies of scope, cost-sharing and skills transfer across businesses, and examine the cash
flow requirements of the businesses included in the portfolio. Students will need to make recommendations
regarding what actions PepsiCo management should take to sustain the company’s growth and how it should
best utilize its free cash flows. Student recommendations should also include actions to improve strategic fit,
improve the overall healthiness of PepsiCo’s snacks and beverages, and further internationalize Gatorade and
Quaker Oats brands.
The assignment questions and teaching outline presented below reflect our thinking and suggestions about
how to conduct the class discussion and what aspects to emphasize.
To give students guidance in what to think about and what analytical tools to utilize in preparing the PepsiCo’s
Diversification Strategy in 2014 case for class discussion, we strongly recommend providing class members with
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To facilitate your use of study questions and making them available to students, we have posted a file of the
assignment questions contained in this teaching note for the PepsiCo’s Diversification Strategy in 2014 on the
instructor resources section of the Connect Library.
The assignment questions provided in the Student Edition of the Online Learning Center (OLC) are designed to
introduce students to use the tools and concepts in Chapter 8. Students are required to assess the attractiveness
of such food and beverage industries as soft drinks, bottled water, ready to drink teas and coffees, snack foods,
chilled juices, isotonic beverages, grain based snacks, flavored grains, ready to eat and hot cereals, and other
The Connect-based Exercise for the PepsiCo’s Diversification Strategy in 2014 Case. The auto-
graded exercise for the PepsiCo case requires that students answer a series of multiple choice questions
related to Assignment Questions 1-7. Question 8 is left as open ended question that allows students to fully
discuss recommendations for addressing strategic issues confronted by the company.
It should take class members roughly 35–45 minutes to complete the exercise, assuming they have done a
conscientious job of reading the case and absorbing the information it contains. All 7 questions in the PepsiCo
You may also find it beneficial to have your class read the Guide to Case Analysis that immediately follows Case
31 in the text. Students will find the content of this Guide particularly helpful if this is their first experience with
Video for Use with the PepsiCo’s Diversification Strategy in 2014 Case. There is an accompanying
0:49 YouTube video that you might want to show the class (or have students watch on their own). It is titled
You will find that this case works well for oral team presentations and for a written assignment outside of class.
Our suggested assignment questions are:
n Indra Nooyi has employed you as a consultant to assess PepsiCo’s diversified business portfolio in 2014
and to make recommendations as to what actions PepsiCo’s top management team should now take to
increase shareholder value to new highs. Your report should contain a 2–3 page executive summary of
n What is your evaluation of PepsiCo’s lineup of businesses? Has the company diversified into attractive
industries? What is the competitive strength of its business units? Do they have adequate strategic and
resource fit to contribute to increases in shareholder value? How should PepsiCo management best allocate
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Assignment Questions
1. What is PepsiCo’s corporate strategy? Briefly identify the business strategies that PepsiCo is using in each
of its consumer business segments in 2014.
2. What is your assessment of the long-term attractiveness of the industries represented in PepsiCo’s business
portfolio?
3. What is your assessment of the competitive strength of PepsiCo’s different business units?
4. What does a 9-cell industry attractiveness/business strength matrix displaying PepsiCo’s business units look
like?
5. Does PepsiCo’s portfolio exhibit good strategic fit? What value-chain match-ups do you see? What
opportunities for skills transfer, cost sharing, or brand sharing do you see?
6. Does PepsiCo’s portfolio exhibit good resource fit? What are the cash flow characteristics of each of
PepsiCo’s four segments? Which businesses are the strongest contributors to PepsiCo’s free cash flows?
7. Based on the preceding analysis, what is your overall evaluation of PepsiCo’s business portfolio in 2014? Does
the portfolio provide the company’s shareholders with an opportunity for above-average market returns?
8. What strategic actions should Indra Nooyi take to sustain the corporation’s impressive financial and market
performance? Should its free cash flows be used to fund additional share repurchase plans, pay higher
dividends, make acquisitions, expand internationally, or for other purposes? What other strategic actions
should be pursued by corporate level management?
Teaching Outline and Analysis
1. What is PepsiCo’s corporate strategy? Briefly identify the business strategies that
PepsiCo is using in each of its consumer business segments in 2014.
PepsiCo’s corporate strategy.
nBasic approach: related diversification (of highly complementary products)
nThe businesses are all concerned with consumer foods and beverages and share key success factors:
Common aspects of business strategy among PepsiCo’s divisions. All of PepsiCo’s businesses
compete on the basis of product differentiation and are attempting to build a differentiation-based competitive
advantage. For the most part, the differentiation is keyed to product features, image and reputation, heavy
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2. What is your assessment of the long-term attractiveness of the industries represented
in PepsiCo’s business portfolio?
It is important to recognize that, with the exception of a few Quaker products, PepsiCo has diversified into
convenience food and beverage industries rather than the broader processed foods industry. The recent
restructuring into geographic divisions provides a new lens through which to examine PepsiCo’s operations.
Students may suggest that snacks and beverages offer more growth potential and are more profitable than the
overall food and beverage industry based upon the case discussion of the snack food and beverage industries.
Students should notice from Exhibit 7 that none of PepsiCo’s divisions have outstanding growth rates – in
fact, Latin American Foods (CAGR = 8.02 %) and Europe (CAGR = .71) were the only two divisions with
TABLE 1. Industry Attractiveness Assessment for PepsiCo’s Businesses
(Scale 1 = very low attractiveness, 5 = average attractiveness, 10 = very strong attractiveness)
Unweighted/Weighted Ratings for Industries Represented in PepsiCo’s Portfolio
Attractiveness
Measure Weight
Soft
Drinks
Bottled
Water
Chilled
Juices
Isotonic
Beverages RTD Tea
RTD
Coffee
Salty
Snacks
Hot
Cereals
RTE
Cereals
Flavored
Grains
Other
Breakfast
Market size and
growth rate .20 8/1.6 8/1.6 6/1.2 8/1.6 7/1.4 2/.4 8/1.6 4/.8 4/.8 2/.4 2/.4
Industry
profitability .20 8/1.6 8/1.6 6/1.2 6/1.2 6/1.2 8/1.6 9/1.8 8/1.6 8/1.6 8/1.6 8/1.6
Intensity of
competition .25 6/1.5 7/1.8 8/2.0 10/2.5 9/2.25 9/2.3 9/2.3 9/2.3 5/1.3 9/2.3 8/2.0
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3. What is your assessment of the competitive strength of PepsiCo’s different business
units?
Students will have little trouble determining that PepsiCo has done an exceptional job of building a lineup of
businesses with strong competitive positions in their respective industries. The company holds number one
You may wish to point out that all businesses have built much of their strength on their product innovation
skills and marketing and promotion expertise and that PepsiCo’s marketing-related success has provided
the company with worldwide name recognition for most of its businesses and products. The company has
TABLE 2. Competitive Position/Business Strength Calculations
for Pepsico’s Business Units
(Scale 1 = very weak, 5 = average, 10 = very strong)
Unweighted/Weighted Strength Ratings
Strength
Measures Weight
Pepsi-
Cola Aquafina
Tropicana/
Dole/SoBe Gatorade
Lipton/
SoBe
Starbucks
Frappucino
Frito-
Lay
Quaker
Oatmeal
Quaker
Cereals
Rice-A-
Roni
Aunt
Jemima
Relative
market share .20 9/1.6 10/2.0 10/2.0 10/2.0 10/2.0 10/2.00 10/2.0 10/2.0 4/.8 10/2.0 10/2.0
Marketing and
promotion .20 10/2.0 10/2.0 8/1.6 10/2.0 8/1.6 8/1.60 10/2.0 6/1.2 4/.8 5/.80 5/1.0
Product
innovation
capabilities .15 6/.9 7/1.05 9/1.35 9/1.35 6/.9 6/.90 10/1.5 6/.9 3/.45 3/.45 3/.45
4. What does a 9-cell industry attractiveness/business strength matrix displaying PepsiCo’s
business units look like?
Construction of a 9-cell industry attractiveness/business strength matrix for PepsiCo using rigorous
methodology, requires students to calculate industry attractiveness ratings for each of the industries in which
PepsiCo competes and do competitive strength ratings for each of PepsiCo’s business units. These ratings
should then be used to plot the location of the bubbles on the 9-cell grid. Otherwise, students end up locating