Introduction
Every organization is expected to undertake strategic analysis to determine its market position as well as its current and anticipated performance. Through the application of different environmental analysis tools, managers are able to determine the strong and weak points of an organization. One of the activities carried out by organizations is scenario analysis.
Scenarios are used to map the future based on uncertain and predetermined elements. These elements are explored with the aim of helping an organization to seek solutions to some of the foreseen problems which may have an effect on the company. The purpose of the current essay is to undertake a scenarios analysis and offer their respective strategic responses in respect to PepsiCo Company.
The first task involves the development of three future scenarios and strategic responses for PepsiCo. Scenario one predicts no major future changes scenario in the external environment. Scenario two predicts negative future changes in the external environment.
Scenario three predicts positive future changes’ in the external environment. The second task of the essay involves evaluating the contribution of scenario planning to effective management.
Introduction to the PepsiCo Company
PepsiCo Company is a multinational company whose headquarters are in Purchase, New York (Berch, Montoya & Sawayda 2010, p.1). The multinational company operates in the drinks and beverage industry. The company which was formed as a merger between Frito-Lay Inc and Pepsi-Cola is a major competitor of the Coca-Cola Company.
PepsiCo has a presence in 200 countries across the globe. Some of the areas where it has subsidiaries include Africa, Asia, Middle East, Europe, and Australia, among others. Globally, the company is second after Coca-Cola in the food and beverage industry.
Over the years, the company has undergone several mergers and acquisitions which have promoted its success and presence in the international markets. Through M & A, the company has been able to diversify in its areas of production. For example, PepsiCo product base has expanded to increase products like snacks and foods (Berch, Montoya & Sawayda 2010, p.1), PepsiCo competes with Kraft Foods.
The company has diversified its product mix where majority of the product mix are foods and the rest are beverages. Both carbonated and un-carbonated beverages are available although the carbonated beverages no longer dominate the market.
Despite the success of the company, it has in the recent past been involved in challenging situations like environmental problems such as pollution and disposal of its biodegradable wastes (Berch et al. 2010, p.8)
Rationale for its selection
PepsiCo Inc is a large US company which controls about thirty six percent of the US’ drinks market (Berch et al. 2010, p.1). The company operates in an industry that is greatly affected by season. For example, most of the drinks are drunk seasonally and more so during summer.
As a result, the company has to undertake a scenario analysis in order to determine its current and future operations. Furthermore, the company is normally faced with stiff market competition from Coca Cola, the number one market shareholder.
Following the recent global market financial crisis it is imperative to acknowledge that PepsiCo was financially affected by the crisis. According to a case analysis by Berch and colleagues (2010), the operations of PepsiCo in the beverage industry has been faced with a lot of controversies.
For example, the company has been accused of engaging in price wars with its main rival Coca Cola, contamination, and false labeling of its products. To remain relevant in the industry, there is need for PepsiCo to undertake a scenario analysis which would assists in strategic management.
Scenario Analysis
Scenario analysis has been described as the process by which several informed, alternative, plausible and “imagined alternative future environments in which decisions about the future may be played out, for the purpose of changing current thinking, improving decision making, enhancing human and organization learning and improving performance” (Chermack 2004, p15).
In this case, environmental scanning is an essential process which enables the success of scenario planning or analysis. Different factors in the external environment are considered in the process.
To better conduct scenario analysis, SWOT and PESTEL analytical tools have been adopted. On the one hand, the PESTAL analytical tool looks at the external environment on which the organization operates.
Some of the elements analyzed include economic, political, technological, legal, social, and environmental factors that could have an impact on an organization. On the other hand, the SWOT analysis is normally concerned with the future opportunities available to an organization, as well as the threats that such a company may anticipate in the future.
Scenario 1: no major future changes
Competition in the beverage and drinks industry is not expected to change a lot in the future. Since the inception of the PepsiCo, its major competitor has been the Coca-Cola Company in as far as drinks are concerned (LTONEWC FIASCO 2005, p.34).
On the other hand, Kraft Foods has been the major competitor of PepsiCo in the food snacks industry (Marketing Teacher Ltd, 2012). The current competition in these two industries is less likely to intensify hence the trend can be classified as stagnant.
For instance, a new entrant into the industry would normally be required to have substantial amounts of capital and infrastructure. This creates stronger market entry barriers which prohibits other companies from entering the market.
As a result, competition is not expected to increase greatly as the two companies enjoy some kind of monopoly. The company has a strong brand which ensures that the company stays competitive in the market.
Although other companies like Nestle and Groupe Danone may try hard to compete, the brand of PepsiCo is a worldwide brand, well known and diversified brand (Marketing Teacher Ltd, 2012). With more than 60 brands, the company is well placed in the beverage and food industry. As such, other brands from emerging companies are less likely to influence the drinks and the food snacks industry.
Scenario 2: negative future changes
One of the major negative effects that PepsiCo is expected to encounter in the future is the government regulations and laws. These could either be from the political or the legal environments. In the 21st century, there is an increased awareness on the environmental changes, health and safety issues.
In the future, laws and regulations related to the three fields are likely to change, thereby affecting the operations of PepsiCo negatively (Marketing Teacher Ltd 2012). For example, environmentalists and communities have been complaining on the environmental damages Pepsi has especially in India (Berch et al. 2010, p.6).
Pepsi has been accused of using chemicals in its products which jeopardizes the health and the safety of human beings. If the government imposed bans or restrictive measures on Pepsi then the company is likely to lose the second largest market in Asia after China.
This will definitely affect the company operations, market share, and sales negatively leading to lose. The changes in laws could also be future changes in taxation requests, tax rates and ecological laws. All these will negatively impact the company.
A memorable incidence is when the company was accused of using pesticides in its bottled water drinks (Berch et al. 2010, p.6). As a result, the company was partially banned in five Indian states.
This is an indication of the excepted laws and regulations regarding the environment, safety, and the health of the customers. With these noticeable incidents, the company is faced to face the same bans in different countries if it engages in similar unethical issues in the future.
Environmental laws are aimed at ensuring environmental conservation, and these are also expected to rise in the near future. As such, PepsiCo may be affected negatively bearing in mind that the company’s products are developed and packaged in plastic bottles which are non-biodegradable.
For example, Aquifina is a bottled water drink packaged in plastic bottles. Upon use, people discard the plastic containers anywhere thus causing environmental contamination. So far, international environmental watchdogs have been calling for the ban of these plastics as they cause landfills and other pollution-related problems (Berch et al. 2010, p.10).
Other emerging concerns on laws and regulations are the labeling of water containers. For example, although labeling laws are not very strict in the United States, countries in the Middle East and Asia have strict relations which are expected to increase in the future.
Scenario 3: positive future change
Increased market base: PepsiCo has the likelihood of witnessing an increase in its market base in the future. This is because the company has diversified its operation through the incorporation of bottled water and snacks. So far, the company has a presence in two hundred countries in the world.
In 2009, the company announced its plans to expand in countries with already existing operations (Berch 2010, p.3). Through the use of its adoptable expansion strategy, the company is expected to continue expanding in the years to come.
Some of its brands like the Cola diet have been increasing in terms sales and popularity. This increase has been necessitated by the fact that people have become self conscious on their health and well being. As the awareness continues to take place, the brand will catch many people.
As such, its market share will increase as its customer base increases. With a broad product base, the company will expand its market share. The diversification of the company’s products to include foods and snacks has prompted its future increase in market base at present and in the future.
According to Berch et al. (2010, p.7) the company is on the verge of developing health products and health foods. For example, the company has been planning to invest over USD 10 billion to support the production of healthy snacks. This trend will have positive future changes on the market base of PepsiCo.
This is based on the fact that many people are becoming health conscious which represents a new untapped market. In the future, the company expects to reap over USD 30 billion in this new market (Berch et al.2010, p.7).
Healthier PepsiCo snacks which incorporate the demands of the health conscious customers are more than likely going to expand the market for PepsiCo. The current collaboration with researchers from Mayo Clinics and the WHO promises to develop new healthier products which will see the market of expand its market share.
The bottled water and food snacks have a perfect market in the US which is anticipated to get the attention of consumers (Marketing Teacher Ltd 2012). As such, the sales of the organization are anticipated to increase and so is its market share. The company has also been experiencing high returns from the diet Cola. With the trends continuing the same as they are, the company will experience an increase in market share in different parts of the globe.
Proposed strategies for the scenarios
The negative scenario of change in the regulations and laws regarding aspects of environment, health, and safety will definitely have negative effects if the company does not put into place strategic mechanisms. The company will have to set a legal team which oversees that all the ethical and legal regulations in different countries are followed.
In the process, it will ensure that the mentioned accusations are not witnessed in the future. In case of changes in the operational laws and regulations, the company will have to comply with the set rules and regulations. By following the laws and regulations, the company will be able to keep off from legal battles and bans. As such, its operations will continue to be operative.
Health, safety, and environmental laws are increasing and are expected to increase in the near future. PepsiCo will have to carry tests on its products before entering in the market to avoid the repetition of past incidents in India.
The strategy will ensure that the company does not get a bad reputation, calling back of products and face bans in major markets. Environmental conservation initiatives could be taken in future to conserve the environment. In order to solve these ethical related dilemmas, it is necessary that PepsiCo takes “different levels of government into account, as well as the concerns of NGOs” (Berch et al. 2010, p.6).
This strategy will involve all the stakeholders and deal with any negative repercussions. Furthermore, the company could carry thorough stakeholder orientation with the aim of discovering ethical course of action and avoid the uncalled bans.
The company can develop biodegradable PepsiCo drinks bottles which would ensure environmental safety and avoid similar incidents to the one faced in India in 2006. This would reduce environmental pollution and ensure safety. Additionally, the dream machine project currently present in US could be initiated in other countries.
This would encourage customers to discard their products wastes in a more planned manner which ensures conservations. On the issue of labeling the drinks bottle, the company needs to follow the regulatory laws and regulations in every country.
Positive changes are expected in the future in the external environment in which PepsiCo operates. The market share for PepsiCo may increase in the future given that people are becoming health conscious. To accommodate the anticipated positive change, the company has invested a lot in research and development.
Therefore, the organization should continue to invest in R & D in order to come up with products that can accommodate the expected changes in the future. Furthermore, the organization has already started collaboration with WHO and Mayo clinic to develop snacks and foods which are health conscious.
The same has been done on the drinks sector. In the future, the same processes are required to continue to meet the anticipated changes.
Contribution scenario planning make to effective strategic management
To begin with, strategic management has been described as the process by which organizations manage the relation with the current environment while aligned to the organization mission (Sung 2004, p.12). It can also be defined as the manner in which a balance is maintained between strategies and the internal activities to manage the external environment.
Therefore, to achieve the definition and the purpose of strategic management, scenario planning has to be carried out. This ensures that the relationship between the organization and the changes anticipated in the future is monitored. With the changes exhibited in the external environment, managers depend on the scenario planning to plan future planning of the organization.
One of the major benefits associated with scenario planning is the ability to help an organization information center from repeating past mistakes (Schoemaker 2011, p.43). As such, the organization’s strategic management team thrives to develop ways of mitigating the anticipated future negative scenarios.
For example, PepsiCo scenario planning will assist the organization avoid past mistakes related to ethical issues and regulations. When an organization knows the anticipated change, it carries out up-front investment. As such, an organization avoids unnecessary thinking of the anticipated future problem change like laws and regulations.
This saves the company time, energy, and costs that would result from the anticipated change if it was not carried up-front. As part of strategic management, planning prepares an organization from possible changes (Schoemaker 2011, p.43).
As such, a company like PepsiCo would be in a position to reduce overexposure. Uncertain risks associated with resources and capitals are reduced if scenario planning is carried out in advance.
The investment of the present and the future depends heavily on scenario planning for efficient and effective decision making process (Van Der Heijden 2011). Strategic decisions made by the strategic management team should depend on facts and collected data on external environment.
As a result, the decision making process is improved since the management is aware of the possible future external environment changes (Schoemaker 2011, p.43). Managers are assisted as they are made to think in a certain systematic way.
For example, through scenario planning, managers are provided with the possible predetermined changes which a manger cannot ignore or reject. Compared to the traditional method of decision making, scenario planning is much better and effective process (Schoemaker 2011, p.43; Van Der Heijden 2011).
Uncertainties resulting from different variables are easily adjusted at the same time without any difficulties. Issues of imperfect reasoning and bias by the managers are overcome through the use of this method.
Scenario planning influences strategy development positively. For example, the management is forced to think beyond the current position and situation of the company. This enables the company to focus on the future of the company.
Van Der Heijden (2011) adds that the process of planning energizes the management system of an organization. Attention is paid while the top management team is making decisions. Unlike in the traditional way of decision making and management, using the results of scenario planning enables the management to justify the operation on a single line or department (Schoemaker 2011, p.43).
Scenarios provide contexts in which decisions are passed down the chain of command. Through the provision of a context for decisions and decision making, the communication process in an organization is improved. The decisions made are well communicated through set up channels which define the direction of an organization.
Monitoring of weak signals and recognizing them until they are fully coalesced enhances corporate perception. For example, a company is enhanced to effectively incorporate any changes no matter how small it may be. This creates a corporate attitude that ensures that all problems have to be solved.
As a result, strategic management process is improved. Van Der Heijden (2011) note that the commitment by a company to scenario planning makes it become part of the organization language. The reason behind this is the way in which a complex inter-disciplinary reality is transferred in effortless manner.
As part of the strategic management, an organization has to ensure that it educates its managers to make quality scenarios. Consequently, the organization is in a better position to make realistic decisions both in the present and in the future of the company.
‘Stretching mental model’ is achieved which is used by planners to determine the driving forces of an organization in respect to the business environment (Van Der Heijden 2011). In reference to the case study, PepsiCo would be in a position to know the drivers of its business in respect to the business environment.
Leadership is an essential tool in strategic management which coordinates the different tasks of an organization. Van Der Heijden (2011) has advised that scenario planning acts as a leadership tool. Scenario process or planning reinforces the interests of the management.
Consequently, the managers become involved in the process of developing scenarios in occasional basis thus improving their leadership qualities. As the process continues, managers get more involved in the process of generating scenarios which becomes contextual and influential tool.
Ideas are easily communicated enhancing development of projects. According to organizational theory, the external environmental creates pressure on the internal environment of an organization (Fuhs n.d, p.6). The different pressures on the organization can be determined through the use of scenario planning.
The claim can be supported by the views of Van Der Heijden (2011) who adds that the scenarios analysis which was first carried out more than 35 years ago at Shell have enabled the company deal with any external pressures. Because of the benefits associated with the process, Shell has been carrying scenario planning even to-date.
The purpose of scenario planning is to “envisage alternative views of the future in the form of distinct configurations of key environmental variables” (Grant 2003, p.494). Therefore, scenario planning enables organizational managers to get on thinking and have the available mental models of thinking changed to accommodate the specified changes.
As a result, managers and strategic analysts are able to synthesize different knowledge coupled with sharing of information. Russell (2005, p.11) note that managers and team players are able to discuss the possibilities of the future in relation to the stated scenario.
This allows the management to solve the problems and note the possibility of the anticipated future outcomes (Russell 2011, p.11). It should be noted that scenario planning does not give alternatives to the anticipated changes from the external environment. Chermack (2004, p.15) note that scenario planning is more of the intended outcomes of the external factors than offering alternatives.
Conclusion
In summary, scenario planning is an essential undertaking which plays an integral role in strategic management. In reference to the essay, PepsiCo which is a MNC is more prone to changes and pressures from the external market hence the need for scenario analysis.
Essentially, with increased competition and changes in laws and regulation on the areas of environment, health, and safety, the organization is required to carry scenario analysis. Based on the analysis, the major negative changes in the future are change in the environmental, safety, and health related laws and regulations.
These may reduce the sales and market share of the organizations. News markets segments are a positive change which PepsiCo is more likely to depend on in the future. However, the current competition trends are not expected to reduce or increase as the market has strong entry and exit barriers.
The major benefits associated with scenario analysis/planning is enabling leadership and effective decision making process which aids in strategic management of an organization. Others include creation of effective communication of decisions from management to other departments in an organization.
It also allows the development of the ‘stretching mental model’ which allows better thinking among the managers. As a result, corporate perception is enhanced which enables coalesce of weak points. Lastly, the leadership of an organization is developed as the managers develop the attitude of scenario planning. This promotes the process of strategic management in an organization.
Reference List
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Grant, R. M. 2003, ‘Strategic Planning in a Turbulent Environment: Evidence from the Oil Majors’, Strategic Management Journal, vol. 24, no. 6, pp. 491-517
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