In 2004, PepsiCo made the following changes to its organizational structure (Lynch, p. 575):
- PepsiCo Beverages International and Frito-Lay International were merged into one division, PepsiCo International, in order to use competitive positions of both product chains to create international strengths;
- Pepsi Cola North America and Gatorade/Tropicana North America were untied into PepsiCo Beverages
North America, in order to expand the success of PepsiCo non-carbonized and fruit beverages to the powerful distribution chain of Pepsi Cola and to improve the financial reporting issues.
As a result, PepsiCo managed to create new synergies by uniting the new brands and its well-known mature products. It managed to strengthen its international positions using the difference between the popularity of brands to draw the attention of customers to other PepsiCo products, and became a leader at the market of soft drinks by penetrating into the market niche of non-carbonized drinks. PepsiCo is also expanding into snack industry, and although Quaker Foods is still being a separate branch of the company, it has occupied its niche in the diversified product mix of PepsiCo. The changes of organizational structure allowed PepsiCo to build new marketing and research strategies, to reduce costs and to use existing competitive advantages to exploit the benefits of newly acquired divisions.
1. Why was PepsiCo essentially organized into North American and International divisions? Why were there some variations in this structure? Examining the organization structures outlined in this chapter, in which category would you put PepsiCo?
In 2001, organizational divisions of PepsiCo after acquisitions included North American and International Divisions for the company’s key product lines (beverages and snacks) since the positions of Pepsi Cola and Frito-Lay brands were particularly strong within North America, but their competitive position varied internationally from country to country, and from brand to brand (Jones, p. 11). Thus, the goals of marketing and R&D departments of these brands were quite different for North America and for international divisions.
International divisions of Gatorade/Tropicana and Quaker Foods were not created, since these products were not known outside the Americas. Instead of this, Quaker Foods International was combined with Frito-Lay International, and Tropicana/Gatorade international part was included into PepsiCo Beverages International. The former combination allowed to combine distribution networks of Frito Lay and Quaker Foods, and to create a cost-effective distribution (Gaughan, p. 165). Merged operations of international PepsiCo Beverages and Tropicana/Gatorade departments were expected to reduce costs on administrative structure and gave space for combining Pepsi-Cola brand, which was comparatively weak at the international market, with Tropicana brand (Lynch, p. 576).
The variations in PepsiCo organizational structure took part in 2004, when PepsiCo Beverages North America and PepsiCo International were created (Dubrin, p. 303). The idea to combine Tropicana/Gatorade and Pepsi-Cola departments in North America allowed PepsiCo to reach effectiveness in financial reporting and to combine branding of these products in order to gain leadership at the overall market of soft drinks. This solution also allowed to exploit the possibilities of the North American distribution chain more fully.
PepsiCo International emerged from PepsiCo Beverages International and Frito-Lay International. The primary goal of this change was to improve the positions of weaker brands with the help of stronger brands, as it appeared that international popularity of PepsiCo products is quite varied. In general, PepsiCo in 2001 has created a prototype of matrix structure: each product had its own division, and for the strongest products several divisions according to geographical factors were created. In 2004, some improvements to the matrix structure were made, which have strengthened the company and created synergies.
2. What benefits was the company seeking from its acquisitions? How did the change in organization structure contribute to such benefits? In order to achieve such benefits, what actions would have to be taken? Would they have any human consequences? If so, what?
PepsiCo is actively using all four market strategies defined by Ansoff: diversification, product development, market development and market penetration (Bachmeier, p. 18). The primary goal of the acquisitions was diversification (within North America), market development and penetration (internationally and partly in North America) and creation of new synergies between existing brands and new promising products. The primary goal of the acquisitions was powerful Tropicana/Gatorade brand. PepsiCo managed to acquire this company under the stipulation that they will also acquire Quaker Foods (Bachmeier, p. 15). PepsiCo managed to acquire Tropicana/Gatorade even though their main competitor, Coke, failed to accomplish agreement with Tropicana. PepsiCo selected to pay a high premium for the sake of future economies of scale, potential new synergies and interrelationships of brands.
PepsiCo has chosen an effective organizational structure – matrix structure – in order to fully use the benefits of the acquisitions. However, in 2001 the company developed the structure which was primarily focused on the existing products and did not integrate the new companies into the existing system correctly (Dubrin, p. 301). The whole structure lacked flexibility and, what is most important, did not allow to use the potential of acquisitions.
In 2004, PepsiCo created a new variant of matrix structure, which was created basing on the competitive advantages of all divisions. As a result, PepsiCo managed to strengthen international positions of all its brands, reduced costs and issues related to financing reporting in North American divisions and in fact became market leader at the soft drinks market, because the company could timely use the interest of customers to non-carbonized and healthy/fruit drinks. This was reached largely due to the synergies created by new organizational structure.
In order to achieve these benefits PepsiCo experienced a significant change in culture and leadership. The acquisition of new companies, with each of them having own corporate culture, values and advantages, causes changes in the whole organization. Organizational changes also reflect the changes of leadership style from rational (analytical) towards transactive (procedural) (Dubrin, p. 249). Indeed, the first structure of PepsiCo was created basing on formal analysis, and required the subordinates to follow the new strategy. The new structure provided more power to divisions related to newly acquired companies and was a result of mutual adjustment. To make the new divisions effective, the company had to give them more power. Within each division, the following actions should be done to achieve the benefits of acquisition: identification of critical tasks, mapping new tasks and people to existing operations of the company, identification of key areas for the organization, translating the strategies to the necessary levels of authority and establishing coordination between divisions in order to achieve organizational goals.
3. What lessons, if any, on strategy and organization structure can be drawn from the approach of PepsiCo in developing its new organization structure?
The example of PepsiCo shows both successful and unsuccessful decisions. The choice of matrix structure was perfect for a company with multiple products and multiple markets. At the same time, preliminary analysis of divisions at PepsiCo lacked depth, and as a result, the first variant of the structure did not yield the required results. It is likely that PepsiCo first developed a strategy, and then tried to align existing divisions with this strategy (Bachmeier, p. 13), without proper consideration of advantages, culture and goals of each division. Also, this is a high possibility that the decision about the organizational structure was made by top management, while for companies with divisional organization, according to Mintzberg, key part of organization are middle managers (Thompson and Strickland, p. 173). PepsiCo also should have taken into account leadership styles and strategies common for the newly acquired companies, and should have started restructurization efforts with developing and implementing a common corporate culture.
Thus, the example of PepsiCo shows that correct choice of organizational structure and acquisitions of strong brands do not yet guarantee market success and full use of the company’s potential. Strategy and structure should complement each other and proceed step by step, so that every change in strategy could be accompanied by appropriate adjustment of structure, culture and goals of the company, and vise versa, changes of strategy should be based on detailed analysis of the company’s structure, internal relationships and possible synergies.
Analysis of the case of PepsiCo acquisitions has showed that the choice of organizational structure and its implementation are quite different and depend on the nature of the company, its culture, values, goals and competitive position. In order to maximize the potential of the company, managers should link their strategy and structure, and ensure that there is a feedback and relationship between these organizational spheres. In addition to this, they should realize the connection between organizational structure and the culture of the company. Attempts to implement a proper structure without adjusting goals and leadership of the organization might result in an ineffective use of resources, or even lead to internal conflicts and losses. Chosen structure also determines the level where key decisions should be made (Lynch, p. 594), and failure to include this level in the decision-making process might result in distorted organizational structure, as it happened with PepsiCo in 2001. Overall, organizational changes should be implemented gradually, with detailed analysis following every step of transformation.
Bachmeier, Kristina. Analysis of Marketing Strategies Used by PepsiCo Based on Ansoff’s Theory. GRIN Verlag, 2009.
Dubrin, Andrew J. Essentials of Management. Cengage Learning, 2011.
Gaughan, Patrick A. Mergers, Acquisitions, and Corporate Restructurings. John Wiley and Sons, 2010.
Jones, Gareth R. Organizational Theory, Design, and Change. Prentice Hall, 2009.
Lynch, Richard L. Corporate strategy. Financial Times Prentice Hall, 2006.
Thompson, Arthur A. and Alonzo J. Strickland. Strategic management: concepts and cases. McGraw-Hill/Irwin, 2003.