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Today’s News

This article discusses Pepsi's corporate strategy, including its challenges, diversification efforts, acquisitions, and geographic expansion. It also explores the benefits and types of diversification that Pepsi has pursued. Additionally, the article covers M&A activity and the justification behind it. The international diversification of Pepsi's business and alternative corporate strategies are also discussed.

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Today’s News

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  1. Today’s News • Pepsi’s challenges • Spun-off restaurants • Acquired Tropicana • Pepsi Bottling IPO • Disney -- Retail stores • Baby merchandize • White goods • Paint • AT&T • Spin-off or sell Consumer Long Distance unit • Maxtor acquires Quantum HDD unit

  2. Corporate Strategy Single Business Product Line Expansion Q: What businesses are we in? How did we get there? Geographic Expansion/ Vertical Integration Diversification Related / Unrelated

  3. Diversification and Poker J 8 3 8 K 2 10 7 Q 4 7 4 J 3 3

  4. Why Diversify?? Division Sales ($) Q1 Q2 Q3 Q4 1994 Industry Growth (%) 1993 1994 1995 1996 1997 1998

  5. Benefits of Diversification • Reduce earnings volatility • Minimize risk • Move firm into attractive industries • Prolong “life” of firm • Improve long-term performance • Capture synergies and strategic “fit” between businesses • Steer corporate resources

  6. Types of Diversification • Vertical • Horizontal • Related • Unrelated • Global

  7. Evaluation of Diversified Firms • Identify present corporate strategy • extent and type of diversification • geographic scope • new acquisitions • recent divestitures • mode of new business entry

  8. Evaluation of Diversified Firms • Reveal contextual position of corporate portfolio BCG Growth-share Matrix Hi Industry Growth Rate Lo < 1.0 1.0 > 1.0 Relative Market Share

  9. Evaluation of Diversified Firms • Reveal competitive position of corporate portfolio - G.E. Industry attractiveness/business strength matrix H Industry Long Term Attractiveness M L Str. Avg. Weak Firm’s Competitive Position

  10. Diversified Inc. HQ Bus. 1 Bus. 2 Bus. 3 Growth Size Remote Env. Growth Size Remote Env. Growth Size Remote Env. $ $ $

  11. Entering New Businesses • WHY? • Does business fit? • Financially • Strategically • Culturally • If not in this business today, would we want to get into it now? • HOW? • Acquisition • Internal start-up • Joint ventures

  12. Why M&A Activity? • Intensifying competition • Global markets • Growth in new industries • NOTE: • 20% of all-time corporate mergers have occurred within last 18 months

  13. Justifications • Attractiveness test • Industry factors • Core competencies • Strategic position • Cost of entry test • Buy outstanding shares • Cash • Contributions to merger or JV • Better off test • Synergies, econ. of scale/scope • Consolidation of resources, activities • Competitive advantage?

  14. Why MBC’s “Should” Outperform SBC’s • Economies of Scope • Intangible assets - brand • Consolidate operations • Efficient Resource Allocation • MBC as “internal” capital market • Increased Size • Lower cost of capital • Increased market power

  15. Why MBC’s Actually Underperform SBCs • Why does stock price of acquirer always go down? • Diseconomies of Scope • Leadership - bureaucracy • Capital Allocation • Democratic process • Cross-subsidization (e.g., AT&T) • Misaligned Incentives • Too short-term • Underdeveloped Corporate Strategy

  16. International Diversification • WHY? • slow domestic growth (earnings risk?) • intense domestic rivalry • no overseas competition • intense overseas competition • HOW? • Exporting • Franchising • Joint ventures • Wholly-owned subsidiaries • Greenfield (internal development) • Mergers & Acquisitions

  17. Alternative Corporate Strategies • Portfolio “juggling” ... • Evolutionary Approach • Corporate Transformation • Sudden Redefinition

  18. Portfolio Managers • Turnaround • restore competitiveness to poor performers • New advantages created within portfolio • Retrenchment • narrow scope of portfolio • “stick to your knitting” • Restructuring • add new businesses / divest poor performers

  19. Evolutionary Approach:Leveraging Competence • Performance culture (3M, ABB) • Business system replicator (Gillette) • Capability leverager (Nike) • Valuator (Berkshire Hathaway) • Inventor (H-P, J&J) • Synergy capturer (Kraft-Genl. Foods) • Cost squeezer (Sunbeam)

  20. Disney: Capability Bundling Toy Story • Films • Videos • Network TV • Cable TV • Hotels • Cruise lines • Merchandise • Brand licensing • NEW … Retail Stores Theme Park TV Show Food Items Merchandise

  21. Corp. Transformation • Choosing new businesses • Planned Surprises • Change business portfolio (Monsanto) • Change global portfolio (CitiBank) • Capability bundling (Disney) • Industry consolidation (Chrysler) Total Return MTC Biotech (38%) S&P Chemicals (18%) 1994

  22. Transformation • Nokia • 1989: Diversified electrical conglomerate • 1993: 87% telecom focus Total Return Nokia Motorola S&P Eriksson 1993

  23. Sudden Redefinition • Competitive/performance crisis • Massive immediate corporate portfolio change • Deregulation • Patents • Foreign competition • M&A in same/related industries

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