Introduction
Increasing effects of globalization and the rising international business competition have prompted businessmen, organizations and corporations to rethink their global business strategy. International business strategies have become very important in the wake of increasing globalization, as well as, internationalization of established local companies as they attempt to increase their values in the market.
Corporations are adopting various strategies such as product standardization and differentiation, adaptation, as well as, product diversification to capture both the domestic and the international market. International business strategy refers to the business plans adopted by corporations and businesses in the global business environment to provide services and products consumers across the globe.
Corporations and businesses are therefore developing and adopting strategies which can meet their short and long-term goals. Most corporations have international partners at least at some levels of supply chain to help them overcome the complexities in the international business environment, and as a result, compete favorably in the international market.
PepsiCo Inc
PepsiCo Inc is among such corporations that apply several global strategies to increase its value in the international market, and to expand its market share. PepsiCo Inc has its headquarters in Purchase, Harrison, New York in the US. The company deals in manufacturing, marketing, as well as, distribution of beverages and grain-based snack foods among other products.
The company was first established in the 1890s in the state of Delaware and has since expanded over the years to become a multinational corporation. Its expansion has majorly been through mergers and acquisition.
The biggest merger was undertaken in 1965 between Pepsi-Cola Company and Frito-Lay Inc. to form PepsiCo. Inc.; this has become its brand name to-date. After the merger, the company’s headquarters was transferred from Manhattan, Delaware to Purchase, New York five years later.
Since 1970s, PepsiCo has expanded through acquisition of businesses within and outside of its core focus which has mainly been in beverage, as well as, packaged food brands. It has also exited some of its non-core functions business lines especially in 1997. In 1998, the company bought Tropicana brand together with all the products going by the name.
In 2001 Pepsi efforts to expand into the soft drink market saw it merge with Quaker Oats Company. Subsequently, in 2001, the company merged with to support the expansion of its sports drinks line and other brands, while also buying majority shares into Wimm-Bill-Dann Foods, a Russian dairy product company (Betsy, Dana & Guy 2010).
Today, it operates in North America, South America, Europe, Asia and Africa. It categorizes its global operations into four main divisions which include PepsiCo Americas Beverages, PepsiCo Americas Foods, PepsiCo Europe, and PepsiCo Asia, Middle East and Africa, with 36% of its products being beverages. The rest constitute food products.
PepsiCo Inc has several hundreds of brands in the market (PepsiCo Inc. 2010). Today, its products sell in more than 200 countries, and operate in more than 40 countries across the globe. Its last market division, Asia, the Middle East and Africa has to be exploited adequately to realize the full benefits of its global strategies.
Currently, its major countries of operations in the division include India, Pakistan, Saudi Arabia, Thailand, China, Russia and Philippines.
Planned investments in the United Arab Emirates
Among the countries the corporation is planning to expand its operations in is the United Arab Emirates. The company looks to developing countries to maintain its sales especially in Asia, where it already commands 26% market share in the beverage sector (PepsiCo Inc. 2010).
PepsiCo’S management seeks to achieve sustainable and consistent growth in profits of 15%. It therefore plans to expand its PepsiCo Beverages International into the country by the end of 2012.
The brands to be introduced into this market include Mountain Dew, Diet Pepsi, Mug brands, Gatorade, Pepsi Max and Tropicana Dew Slice, Pepsi One, sierra Mist, as well as Slice which are already doing well in the market (Gary Beene’s Pepsi, 2011).
Possible challenges in the United Arab Emirates
Regulatory challenges
PepsiCo Inc. is likely to experience several regulatory challenges. There are restrictions on new foreign companies which plan to set sup offices, as well as, conduct direct sales in the UAE. Among these regulatory challenges include climate change regulations in the country.
Environmental sustainability has become a critical global issue and the UAE government requires every company to develop plans on how it will achieve environmental sustainability before it is licensed and given permit to operate in the country.
The government requires every company to come up with a comprehensive, as well as, practical approach on how it plans to maximize energy usage, reduce water usage and decrease greenhouse gas emissions. PepsiCo’s production facilities are among the largest water consumers across the globe.
Water usage in the UAE is a big problem and as such the company needs to look for alternatives to avoid running into problem with authorities. The company’s energy use is also likely to meet tough regulatory challenges. Production of its plastic packages consumes billions of gallons of petrochemicals. Emissions reduction is a major focus of the UAE environmental legislations.
The government may only allow PepsiCo Inc to operate in the country under strict compliance to the environment regulations due to its high carbon emission. The government of UAE has also drafted strict laws governing waste management, which is likely to threaten PepsiCo’s usage of plastic bottles for packages.
The other regulatory challenge that it is likely to face is meeting the set safety standards put in place by the country’s ministry of health and the Bureau of UAE Standards to guide soft drink ingredients. The ratio of ingredients on each of its beverages has to be tested in the Bureau of UAE Standards laboratory to verify whether they meet the local standards.
The chemicals in the ingredients have to be within the tolerance limits for every product that the company produces to be allowed to operate in UAE. PepsiCo will be forced to meet the guidelines of the ministry of health which require beverage and food companies not to market or distribute foods and beverages which have high calories such as carbonated soft drinks to children.
These guidelines are also in the International Council of Beverages Associations regulations (Fredrix 2010).
The laws concerning credit repayment could also pose a major challenge to the company’s activities in UAE. In the UAE, any company that fails to pay its creditors within 30 days must file for bankruptcy; otherwise it faces bankruptcy charges, which is a criminal offense in the country. Loan repayments are also not flexible due to non-existent structured bankruptcy laws in the country.
Any company that fails to repay its loan within the stipulated time faces criminal sanctions. According to Arnold (2009) insolvency laws in the country are inefficient and therefore discourage investment into the country.
Furthermore, creditors acquire an average of $10.2 cents whenever a company in the country files for bankruptcy. It may take as long as five years to close a company in the country meaning that the cost of closing a company in the UAE is high (Arnold 2009).
As a requirement for every new foreign firm that enters UAE, PepsiCo will have to find a local sponsor for itself and its employees (New Zealand Trade and Enterprise 2009, 10). The sponsor in this case can be an institution within UAE or a UAE citizen who does not have to be involved in business. The company has to pay the sponsor to provide the lawfully required administrative functions.
The laws governing foreign company ownership in the UAE could also affect PepsiCo’s business structure. Should the company decide to establish its operations in the country to allow it conduct direct business, then it has to engage in a joint venture with domestic company or a UAE citizen, who must retain a minimum of 51% stake in the venture, as is required by law (New Zealand Trade and Enterprise 2009, 10).
Cultural Challenges
The cultural environment in the UAE is highly influenced by the Islamic religion, which forms the foundation for the culture of its people, and the laws governing business operations in the country.
Considering that Muslims are the majority population in the country, PepsiCo will be limited to manufacturing and distributing of soft drinks. It is against Muslim religion and culture to take alcohol (New Zealand Trade and Enterprise 2009, 11).
The Islamic religion requires that all Muslims attend prayer meetings five times a day. This is likely to interrupt smooth operations of the company’s activities. Besides, during summer, which occurs in July and August, many senior decision-makers in the country go on vacation due to extreme heat, as well as humidity, and therefore it is not possible to hold high-level business meetings.
This also happens during the period of Ramadan when business schedules are disrupted or shortened. During the same period, the company’s business is also likely to be affected since all Muslims fast from dawn to. Besides, nobody, including non-Muslims is allowed to eat or drink in public during that period (New Zealand Trade and Enterprise 2009, 11-12).
Economic Challenges
Availability of raw materials is likely to be the major challenge for PepsiCo in the UAE. Most of PepsiCo’s raw materials are agricultural products. However, the climatic conditions of the region do not favor agricultural production and therefore relies on imports for its agricultural raw materials and food products. This will increase the company’s cost of production since it has to import and transport raw materials.
The financial institutions in the UAE are not well established, and therefore are likely to be affected by external macro-economic shocks (Zogby 2011). This means that stock market collapse or even another banking crisis in the Middle East or in major world economies can highly damage its financial institutions.
This may affect the financial operations of PepsiCo in the country should such crisis occur. As a result, this will reduce the company’s economies of scale as the risks become a reality.
PepsiCo could also face labor challenges in the United Arab Emirates. Although UAE has population that can affectively supply labor to firms within the country, there are few experts as most of UAE nationals possess low levels of qualifications (Zogby 2011).
The percentage of UAE nationals who have high levels of education and experts in various fields are still low, and this means that PepsiCo will be forced to hire experts from abroad especially its executives. This could possibly increase the company’s labor cost and hence the cost of operation.
Besides, UAE government bans entry of citizens from specific countries such as Israel. It has also enforced quotas for employing young nationals (Zogby 2011). This could limit PepsiCo’s ability to choose talented and skilled employees from a wider demographic. Worse still, it is very difficult to fire UAE nationals for under-performance (Zogby 2011).
Competition is also another major challenge for PepsiCo while entering the UAE market. Major global beverage companies like Coca-Cola, Nestle and Cadbury are already operating in the UAE.
Achieving customer loyalty especially in a market that has been majorly dominated by Coca-Cola, its main rival, could be difficult considering that advertisements targeting UAE consumers have to be modest. It will therefore be forced to be more creative and innovative to capture the market.
PepsiCo’s plans to counter the challenges
In order for the company to meet the requirements of the UAE environmental regulations, it will have to adopt its “positive water balance” strategy similar to the one it applies in India to replenish its water usage in its manufacturing plants (Gunther 2007). It will also implement machinery that captures water naturally contained in some of its agricultural raw materials to offset its water needs.
It also plans to drop the production of its discretionary products like Aquafina in favor of water conservation (Gunther 2007). It will also establish a plant for recycling its beverage bottles and cans, as well as, recycling machine kiosks to meet the requirements of waste management by the government (Environmental Leader 2010).
The recycling kiosks will be stationed in public places such petrol and gas stations, public parks among other places. It plans to involve local NGOs to encourage community involvement in the program.
To further comply with the environmental regulations of the country, PepsiCo plans to deploy its green vending machines to reduce energy usage in its manufacturing plants, and therefore reduce carbon emission by a about 15% (Martin 2009).
In order to meet the ministry of health’s requirements, it plans to change the composition of the ingredients it uses to make its products so as to meet the nutrition needs of the country (Byrnes 2010).
The company also plans to make major acquisitions of some dairy and fruit farms in New Zealand, which is UAE’s trading partner to produce its agricultural raw materials. This would make it easier for the company to acquire raw materials since there are no duties charged on agricultural raw materials especially from New Zealand.
In order for the company to compete favorably in UAE, it will first enter the market by producing brands which are already doing well in Saudi Arabia. As part of its marketing strategy, the company plans to use public figures in UAE in its advertisement campaigns in the country.
In addition, it will also adopt brand names which the locals find easy to pronounce. Besides, it will only major on producing soft drinks to meet the cultural practices of the majority population.
PepsiCo’s entry level
Corporate strategy
PepsiCo can enter UAE through joint ventures, appointing a commercial agent, and authorization to a domestic firm through franchising agreement or licensing. Although PepsiCo can enter UAE market without establishing local offices within the country by contracting a commercial agent, it can better achieve its international expansion strategy through joint ventures with local beverage firms.
However, PepsiCo has to retain the services of a lawyer who is familiar with the local and the US laws and practices while drafting an agreement with the domestic company it chooses to deal with.
Joint ventures will enhance the company’s capabilities and enable it access complementary resources which it needs to achieve economies of scale (Elo 2009, 2). Using this strategy, it is able to bring its unique technologies and new products into the market cheaply and faster, and more reliably and efficiently as opposed to what it could achieve alone as a new player in the market.
Such partnerships will give PepsiCo certain position and status in the UAE’s business environment, as well as, its environs. This will allow the company to benefit from the networks already created and social capital by the local company to navigate in the environment (Beamish & Lupton 2009, 75).
Through joint ventures, PepsiCo will use the existing market position of the local company to establish its brands in UAE’s market. This corporate strategy will also provide the company with access to political connections as well as new market segments.
PepsiCo will enter production joint venture with local beverage companies in the manufacture of its products, and contract manufacturing joint ventures with other bottlers for the manufacture of its packaging bottles and cans. The venture will also include recycling.
Its strategy is to buy out its partners’ stake in the joint ventures in the near future after it establishes itself in the UAE market. In its operations, PepsiCo plans to integrate the expertise of foreign and local employees, and to bring in its technologies in the production processes.
Business level strategy
In order for PepsiCo to enter the already competitive beverage market in the UAE, it plans to adopt cost leadership strategy. This will enable it appeal to price-sensitive customers and the rest of consumers (Kedia, Kroll, Pringle, & Wright 1990, 23). This, it will achieve by offering same prices as those products already in the market for larger quantities of its products.
For the company to offer lowest prices for its products while still achieving high revenues on its investments, it will have to streamline the existing technology at the local company it enters joint venture agreement with in order establish manufacturing plants which enable it produce high volume output.
This will enable the company spread its fixed costs over a larger quantity of units of its products (Kedia, Kroll, Pringle, & Wright 1990, 23) to achieve lower unit cost. The distribution of these high outputs will be made possible by the existing distribution networks of the local partner.
Besides, the company’s strategy is to assume uniform taste and preference across the various regions within UAE, and therefore offer standardized products in high volumes. This means that it will limit customization of products that it sells in the country as much as possible. Besides, most of the joint venture’s expansion will be located in areas that attract low rents and wages paid to its workforce.
It will also institute competitive bidding for its supply and procurements to help it achieve low cost of operations. It also plans to purchase its raw materials in bulk to benefit from quantity discounts. These strategies will help the company maintain its low pricing strategy.
Functional level strategy
PepsiCo will adopt operations strategy as its functional level strategy so as to align it with its business level strategy since the latter majorly deals with reducing production cost. Operations strategy will enable the company add value to its products.
The strategy will give the company the capacity to meet the requirements of the governments, and satisfy consumers by adopting technologies that will enable it produce high quality products (Lewis & Slack 2001, 9). This will in turn give it an upper hand over some of its competitors and produce large quantities of products, and hence benefit from economies of scale.
According to this strategy, the company will have to consider the core capabilities of the joint venture, together redesign the mission and value of the partner company, and to consider the customers value, which in this case is their Islamic culture.
It will be able to take care of the government’s pollution concerns, and will also adopt new technologies, and invent new products to achieve competitive advantage over other beverage companies in the market. It will have to adjust its marketing strategies, workforce, technology and financial management to reflect the needs of the market.
Under this strategy, it will have to change the venture’s physical structures especially in the manufacturing plants to achieve high production volumes. This could involve the adoption of ERP systems. Automated equipment will help the company achieve efficient production and added value products.
Conclusion
Any company considering achieving successful international business strategy has to integrate various strategies and initiatives. The company has to consider its core capabilities, the opportunities available, its weaknesses, and the challenges it is likely to face while expanding its operation into a new market.
The company must devise ways of mitigating the possible challenges, and adopt strategies which are in line with its vision and mission for the target market.
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