Executive Summary
The beverage industry faces high competition amongst the highly established industry players, which also command the global market. The buyer power is relatively average, as consumers do not have immense powers to drive prices lower.
The industry, however, lacks switching costs, which provides consumers with the freedom to determine their drink of choice. New entry threats are low as brand loyalty and brand name are critical factors that help to determine performance.
The existing industry players are well established. This requires significant capital for any new entrant to compete with them. The varying political and legal factors that manufacturers put up with in the global arena make it more challenging for business performance.
PepsiCo’s critical success factors include attaining competitive edge, expanded product portfolio, as well as strong corporate culture. Health concerns and technological advancements play a major role in driving changes within the beverage industry.
Increasing awareness about the health challenges posed by carbonated and other processed drinks is pushing buyers into adopting bottled water as an alternative. PepsiCo should consider sustaining a significant research and development strategy, to enable it to compete effectively with its rivals.
The short product life cycle in this industry requires an effective research and development strategy to ensure that new products are availed to the market at the opportune time.
Five Forces Analysis of the Industry
Buyer Power
In general, buyers enjoy an average bargaining power in the industry. While the manufacturers enjoy higher bargaining power for energy drinks, vitamin-enhanced beverages, and sports drinks, the buyers have an equally higher bargaining power in terms of the carbonated soft drinks.
There are no switching costs involved, which makes it difficult for industry players to lock in their customers. The non-carbonated drinks are marketed at premium prices, sometimes up to 75% higher than the carbonated soft drinks (Thompson et al., 2013).
Supplier Power
Suppliers have a low bargaining power in the industry. The industry has numerous suppliers who supply numerous other industry players, which reduces the overall bargaining power.
Additionally, some of the industry players, including PepsiCo and Coca-Cola, have elaborately established themselves (Thompson et al., 2013). This gives such firms immense bargaining power over the suppliers.
The elaborate establishment of these industry players also affords them the ability to pursue backward integration.
Competitive Rivalry
There are several large manufacturers in the industry, who strongly compete in the market with almost similar capabilities.
PepsiCo, Coca-Cola, and Red Bull, all have significant market shares in the US and the global market, which makes them great industry rivals (Thompson et al., 2013). All these companies offer products that are equally attractive in the market.
Threat of Substitution
The threat of substitution is low in the industry. There are fewer alternative drinks that buyers can acquire in place of carbonated drinks and the energy drinks.
Consumers seeking to acquire safely sealed, ready to drink beverages have to make up with products manufactured and processed by the industry players in one way or another (Thompson et al., 2013).
Threat of New Entrants
The beverage industry faces a low entry threat. The market relies on strong brand names, which requires a lot of time to establish.
Additionally, the leading industry players, including Coca Cola and PespsiCo, have elaborately established their operations and business across the globe (Thompson et al., 2013), which makes it costly for any new industry player to compete with them.
Macro Environmental Characteristics
Political Factors
Soft drinks manufacturers have a global market outreach, which has seen players establish operations in virtually all regions in the world. However, with different regulatory frameworks applied by different countries across the world, the manufacturers endure many challenges.
Global politics may also influence the manner in which foreign markets accept PepsiCo products (Hill, Hill & Jones, 2008).
With PepsiCo originating from America, foreign countries that do not support the American position and interest in the global politics may end up denying the firm access to its markets.
Economic Factors
The globalization phenomenon has transformed the world into a tiny village, where economic ramifications occurring in one region of the world affect the entire global economy.
The global economic crisis that began in the USA in 2008 spread across all economies in the world, thus slowing down market buying power in virtually all the countries of the world (Thompson et al., 2013).
Social Factors
A transformation of social lifestyles, especially in the USA, has seen many people consider leading healthier lifestyles than before.
With health experts raising concerns about the health implications involved when people consume carbonated and other processed drinks, most people abandoned such drinks (Lawrence, 2002).
Instead, people have been moving towards consuming bottled water as a healthier alternative. This poses a great threat to the soft drinks markets, as sales are most likely set to deteriorate.
Technological Factors
Technology is advancing at a fast pace, which is making it difficult for companies to keep pace with (Hill, Hill & Jones, 2008).
While adopting new technology is crucial in making operations more effective and thus cutting down on operating costs, the technology is short-lived is on the other hand short-lived.
This forces companies to spend more on acquiring the latest innovations in technology, which ends up driving operation costs higher.
Legal Factors
Different countries have their own food and drug administration laws, which may differ with those used in the USA, where PepsiCo originates.
Such regulations may involve restrictions on alcohol contents in drinks, or restrictions on ingredients used in the manufacture of particular soft drink brands (Thompson et al., 2013).
This may in turn force players to drop brands that fail to meet regulations that are applied in particular countries, or manufacture new brands altogether in order to continue serving certain foreign markets.
Environmental Factors
Businesses are continuously being compelled to ensure that their operations and activities do not pollute the environment. These new requirements are forcing firms to spend more in attempting to achieve environmentally friendly practices.
Beverage manufacturing companies, for instance, have to ensure that bottles and cans used in packaging their beverages are recyclable to achieve the required environmental standards (Hill, Hill & Jones, 2008).
These requirements, however, are a challenge to the manufacturers because this is not their core business area. The doubling up of business focus can potentially affect the ability to achieve desired business objectives.
Company Mission
PepsiCo’s mission in business is to emerge as the leading consumer products’ manufacturer that focuses on beverages as well as conventional foods in the world. The firm targets to offer investors with financial rewards, while providing growth and enrichment opportunities at the same time.
The achievement of honesty, fairness, as well as the integrity remains as PepsiCo’s main target in business (PepsiCo, 2013).
Key Success Factors
Competitive edge
PepsiCo requires enhancing its competitiveness in as far as the performance of other rival beverage manufacturers is concerned. As a critical player in the fast food industry as well, the firm has to ensure that it builds significant competitive edge with other fast food manufacturers.
To emerge as the leading consumer products’ manufacturer, PepsiCo has to look for ways of attracting new customers, which includes pursuing a differentiation strategy.
Expanded product portfolio
Providing investors with financial rewards, on the other hand, require that the company should expand its product portfolio to increase its profit potential.
With more products, the company will reduce its overall business risk. This, in turn, reassures the investors of stable and better returns sustained over longer periods.
Strong corporate culture
Maintaining high levels of honesty, fairness, and integrity calls for PepsiCo to build a strong corporate culture that will in turn sustain it. This entails training workers on good business practice and curbing high turnover rates.
Employees must be satisfied always to make them enjoy their roles, and act with honesty and fairness whenever they are transacting company business.
Drivers of Change and Industry Dynamics
Health Concerns
Changing social lifestyles play an influential role in determining industry trends and changes.
As consumers began shunning carbonated soft drinks in the mid 2000s, because of rising concerns over the health implications (Lawrence, 2002), a huge market for the energy drinks, vitamin-enhanced beverages, and sports drinks, was created.
However, with the huge popularity of these alternative beverages in the recent past, there have been growing health concerns over the dangers of consuming these beverage types.
Currently, most consumers have been shifting towards bottled water as a health precaution, which in turn also diminishes the market for the beverages.
Technology
Advancements in technology are changing the way in which industry players are conducting operations and business in general (Thompson et al., 2013).
As innovations continue to be witnessed, firms are transforming towards full mechanization and total computerization. This is set to increase efficiency and lower the cost of doing business even further.
Prices
The beverage industry in general is poised to register a rapid increase in prices. This phenomenon is more likely to be registered in the developing world, such as in India and China.
As the middle class population surges in these countries, the uptake of carbonated drinks is also likely to increase, thus pushing prices high (Lawrence, 2002).
Recommendations
PepsiCo should consider sustaining a healthy competitive edge in the industry to achieve market leadership. The industry is highly competitive, and the best alternative to remain the leader is to achieve differentiation.
An expanded product portfolio is also crucial in cushioning the business from poor market performance and scenarios. With a more expanded portfolio, PepsiCo will achieve higher profits, which will be significant in funding other important business ventures by the organizations.
The company must put strategic measures in place to help in supporting research and development activities.
With high competition and short periods of product maturity, only an elaborate spending in research and development will ensure that the company avails new and unique products into the market at the opportune time.
References
Hill, C. W. L., Hill, C. & Jones, G. R. (2008). Essentials of strategic management, 2nd edn. Mason, OH: Cengage Learning.
Lawrence, P. (2002). The change game: How today’s global trends are shaping tomorrow’s companies. London, UK: Kogan Page.
PepsiCo (2013). Our mission & values. Web.
Thompson, A., Peteraf, M., Gamble, J., & Strickland III, A. J. (2013). Crafting & executing strategy: the quest for competitive advantage: Concepts and cases. New York, NY: McGraw-Hill Education.