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Managerial Economics: Pepsi Cola Company Essay

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Updated: Sep 3rd, 2021

Enrico is contemplating changes that would have a wrenching impact on the Pepsi organization. What specific problems is he trying to solve? Don’t simply recite symptoms; dig down and identify the root economic issues

Roger Enrico, President, and CEO of Pepsi Cola are concerned about the following three problems in the company.

  1. Whether the conflict between the three divisions hinder the company to compete in the market;
  2. Whether the present structure is cost-competitive; and
  3. Whether the present organizational structure will be able to meet the challenge posed by the competitors;

Among the three problems identified by him the first problem relates to Human Relations, the second one relates to finance and the third one relates to operations and marketing. It is necessary to sort out all three problems to solve the present critical situation.

There is less cohesion between the three subdivisions of Pepsi Cola. A good organizational relationship is indispensable for the success of any business concern. The present structure of the company seems to be less cost-effective. The present decentralized setup requires individual managerial resources for each division. Every additional resource will add to the total cost structure. Over the years the company’s market share has increased marginally but profitability remains constant as evident from the given financial statements of the company. This shows that the company is not having an effective cost control system. For profitability to increase with the increase in the sales volume, the cost should be minimized accordingly.

Pepsi USA is the major marketing division of the company. They supply the concentrate for the bottling division and perform advertising and other marketing function. The responsibility to supply the bottled product rests with the bottling division. They have a complicated marketing setup and their margin is lower compared to Pepsi USA. Pepsi USA doesn’t have a direct relationship with the customers. But Pepsi Bottling Group takes continuous effort to maintain a good relationship with the customers. Therefore a proper reorganization should be done to solve the problem. Each division should be aware of its responsibility so that there will be less conflict in the future.

Each division should be considered as a cost center and the profitability of each division should be worked out separately. Centralization of activities may reduce the overall cost. In a centralized setup, there will be only one organization and one department for each function. For example, in the present case, there are separate marketing departments for the three divisions of the company. But when centralized a single department will carry out the whole marketing activities.

Roger felt that the present organizational structure cannot meet the challenges posed by the competitors since they had an organizational structure different from its competitors. Coca-Cola is the major competitor of Pepsi Cola who has a greater share in the market. To work out a revised organization Roger appointed a task force consisting of three divisional presidents and the vice president of the HR division. They had given two options for the reorganization of the company. They are fully decentralized and matrix organizations. The pros and cons of these two alternatives are discussed in the next portion.

What are the pros and cons of reorganizing around geographic regions? If you were forced to select one -full decentralization or matrix reorganization- which would you recommend and why?

The two options available for the company are full decentralization or forming a matrix organization. As per the new idea of full decentralization all three divisions will be brought under one umbrella. Only one superior authority will be there for each function. For example, the marketing head of Pepsi in Canada will manage the whole marketing function of his region Canada. This is the case with other functions of financing, HR, etc.

The second option is matrix organization. Under the matrix organization, the marketing function will be decentralized. There will be several regional heads for the marketing function. But the other functions will remain centralized. In short, this follows a mix of centralization as well as decentralization. An overview of the pros and cons of both options will help to understand the right choice for the situation.

Under a decentralized setup, there will be good efficiency of operation as every function will be managed by a single person. Responsibility can be easily identified because there is only one person to whom everybody is accountable. There will be good control over the situation. Duplication of activities is absent in the case of a fully decentralized setup. Though full decentralization has these merits it also faces certain demerits that prevent them from being applied in the organization. Full decentralization will be a hindrance for innovative ideas as there is only one person on the top for each function. Costing will be difficult in the case of full decentralization as the costing information of the whole company has to be managed at a single level.

Under the matrix organization, the marketing function is decentralized and the others are centralized. The major advantage of this method is that except for sales and marketing HRD and Finance would report to the corporate office. So there is no change in the traditional work culture of Pepsi which is a key factor in its success story. Sales and marketing are the major activities of the company. When it is decentralized it will lead to more freedom for regional managers. They can design their advertising strategies and sales incentives depending upon the region.

While comparing both the options it can be seen that the matrix method is much more advantageous. Full decentralization makes a drastic makeover in the organization whereas matrix organization doesn’t make a full change in the existing system. Thus if the system is changed to matrix organization employees will feel at ease as it is leading only to minor changes in the existing setup. The key function of the company is marketing and sales which when decentralized will give an extra competitive advantage to the company. Delivery and service are given great prominence in the new setup.

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