PepsiCo's 1965 Merger: Beginning of a Global Beverage Giant - Essay Sample

Introduction

The parent company Pepsi Cola was officially founded in 1898 when Caleb Bradham, a businessman from North Carolina, came up with a beverage and marketed it in the name of Pepsi Cola to the pharmacy customers. Pepsi Co is the second-largest player in the global beverage industry. PepsiCo came to be in 1965 following the merging of Pepsi Cola and Frito Lay (Pepsi Co). During the time of the merging, the Pepsi-Cola product portfolio included mountain Dew, Diet Pepsi, and Pepsi-Cola. Frito Lay had Fritos corn ships, flavored snacks, Rold Gold pretzels, and Fritos corn chips. Pepsi Co was situated in Delaware, NewYork, at the time of incorporation. Competition from the international business is prompting companies to consider internationalizing their operations. The internationalization of the existing local companies has become a standard business strategy as companies strive to increase their value in the market. Pepsi company is among the current corporations that have considered applying various global strategies to capitalize on the value in the worldwide market. The company has expanded throughout since its incorporation, and it has developed to a multinational corporation. At present, the company sells its soft drinks to more than 200 countries.

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Pepsi as a Multinational Company

A multinational corporation carries out its operations from the home country and other countries around the globe. Just selling products to different countries of the world is not enough for a company to be regarded as a multinational enterprise. A multinational company manages operations from different countries. Further, the management of the various offices and plants from other states is controlled by the head office situated in the home country (Hennart, 2012, p.168). Pepsi is a multinational company as it has established operations in more than 40 nations throughout the globe (Pepsi Co, 2019). The company operates from its headquarters in the town of Harrison, New York United States. Among the major countries where the company has already established operations include Thailand, China, Russia, Philippines, Russia, India, and Saudi Arabia (Pepsi Co, 2019). Pepsi is involved in production activities including mixing of ingredients and bottling of products in the countries where it has established direct operations

Multinational companies also operate through a network of branches to manage production and marketing activities in different countries. Pepsi has managed to establish subsidiaries controlled from the main office through mergers and acquisitions. In August 2009, Pepsi offered $7 billion for the purchase of the two largest bottlers of the company products in North America. The two bottling companies were Pepsi Americans and the Pepsi Bottling Group (New York Times, 2009). The acquisition was completed in 2010, leading to the formation of a subsidiary fully owned by Pepsi Co. Pepsi also made another international acquisition in 2011 when it purchased two-thirds of shares in Wimm-Bill-Dann Foods, a food company from Russia (Reuters, 2010). Total acquisition of the Russian, Wimm-Bill-Dann Foods was completed in October the same year when Pepsi Co purchased the remaining 23% of shares, thereby becoming the largest company in the production and sale of food and beverages in Russia.

A key characteristic of multinational companies is continuous growth. Since the time of the founding of the idea behind the company by Caleb Braham in 1898, the company has consistently expanded its geographical coverage and even its product portfolio. In the fifty years that Pepsi has been operating in the beverages industry, individuals' lifestyles have varied, and Pepsi has evolved with them. The company's willingness to grow has contributed to the expansion of the company to a firm offering a collection of global brands such as Quaker, Pepsi, Tropicana, and Frito Lay (Pepsi Co, 2019). Today, Pepsi is comprised of six divisions, PepsiCo Beverages situated in North America, Quaker Foods North America, Frito Lay North America, Middle East, Latin America, North America, and Europe Sub-Saharan Africa and Asia.

OLI Analysis of Pepsi Co Entry to India

There are a variety of market entry strategies used by companies in venturing into new markets. The common techniques include strategic alliance, licensing, and exporting. There are other strategies, including commencing from scratch, acquiring a local company, or considering a joint venture. Often, the last three entry strategies require a large amount of capital and thereby recognized as foreign direct investment. An effective way of deciding on whether to consider entering an international market involves making an assessment using the Ownership Location and Internalization (OLI) model known by another name as the eclectic paradigm (Hennart, 2012, p. 168). A company requires all the three advantages to engage in foreign direct investment. The lack of any of these advantages requires a company to consider an alternative entry strategy to foreign direct investment.

Ownership Advantage

Ownership advantage is critical for companies entering international markets to overcome one of the most significant disadvantages, and that is the liability of foreignness. Ownership is about the possession of rare, hard to imitate, and valuable resources that provide a company some kind of competitive advantage over rivals. The inherent disadvantage that foreign companies face owing to their non-native status is the liability of foreignness. Ownership is all about the competitive advantages that a company can transfer abroad to offset the burden of foreignness (Stoian & Mohr, 2016, p. 1124). The major competitive advantages that Pepsi had as it entered India included the fair pricing of its products. Affordable pricing arising from low operational costs due to economies of scale allowed the customers to develop an interest in the company products. Also, Pepsi benefited from a strong brand image. The heightening of the wave of globalization in the 1980s had increased Indians' familiarity with the leading global brands in different sectors. Therefore, Indians knew Pepsi was already a leading company in the beverages industry. While strategy researchers have devoted considerable attention concerning a firm-specific capability as the only factor in enhancing a firm's competitive advantage, a company can still gain such capabilities from outside its boundaries (Mahmood, Zhu & Zajac, 2011, p.820). Multiplex network is an external capability used by the Pepsi company in gaining an edge in the Indian market. Network ties in business groups represent one crucial source of capability acquisition. Networks enhance company success in the process of research and development and even improves capability acquisition. In entering the Indian market, Pepsi realized the opportunity to join hands with leading companies in the company, including the RP Goenka group (Business Standard. 2014, p.1). Agro Product Export Limited was another company that was willing to join hands with Pepsi by importing concentrates from the company and selling products under the Pepsi label.

Location Advantage

Considering whether there exists some kind of location advantage in the area that the company is attempting to enter is a significant factor in the OLI framework. Owing to the liability of foreignness that a company is likely to encounter, ascertaining that there are geographical advantages in the area that the company wants to enter is vital when deciding whether to undertake foreign direct investment (Buckley & Strange, 2015, p. 238). The vast population in India provided a huge and untapped customer base for soft drinks. Research reveals that multinational corporations are now focusing on the untapped markets in the countries that are at the base of the economic pyramid but with the largest rate of growth in population (London & Hart, 2004, p.350). During the 1980s, soft drinks sales were only three bottles per individual on an annual basis in India compared to other emerging markets such as Thailand, where soft drinks consumption was at 38 bottles per individual on a yearly basis (Gupta & Neelesh, 2010, p.34). Even the neighboring country, Pakistan, had recorded an increase in soft drinks sales to 13 bottles per individual on an annual basis.

India provided a strategic location advantage for Pepsi at the time they were making attempts of entry starting in 1985 as Coca Cola had just exited the Indian market in 1978 due to problems arising from pressures from the Indian government. Following the exit of Coca Cola, the established companies to fit in the gap were just in their preliminary stages, a factor that made entry to the Indian market very desirable and promising to Pepsi. Upon exit of Coca Cola, the country decided to establish a local brand soft drinks company. Pure drinks were initially bottling and selling Coca Cola drinks across India in partnership with Coca Cola. Upon Coca Coca exit of the Indian market in 1978 (Gupta & Neelesh, 2010, p.31). Pure drinks, capitalized on the opportunity and began bottling and selling their own soft drinks brand "Campa Cola" (Gupta & Neelesh, 2010, p.30). Another company that ventured to soft drinks production upon the exit of Coca Cola was Thums Up. The desire to step in the shoes of the Coca Cola company convinced Pepsi to do everything possible to ensure they establish value chain activities in the country as such would ensure maximum profitability and quick coverage of the beverages market.

Internalization Advantage

Internationalization advantage is evident where it would be more attractive to engage in the value chain activity rather than leaving the operations to an external party. Outsourcing is common where local firms are better at what the company is doing and in situations where the local firms have in-depth market knowledge (Hennart et al., 169). The local firms lacked the capacity that Pepsi would require their partners to have. A high number of drinks manufacturers were doing it on a small scale (Gupta & Neelesh, 2010, p.36). The vast and untapped customer base available in India was a very lucrative opportunity for Pepsi, and covering such a vast and new market required Pepsi to have some control in the operations. Again, Pepsi was envisioning a situation where they would learn through continuous improvement and, in the long run, benefit from establishing permanent operations in the country, which would also add to the company profitability with time.

Liability of Foreignness and Pepsi Response

The OLI paradigm tends to be more concerned with tracking motivations for Pepsi in entering the Indian market. The model emphasizes more on the company's superior advantages. Though the competitive advantages owned by the company are assumed to be helping the company overcome foreignness, the importance of understanding the liability of foreignness is underemphasized in the OLI framework (Madhok & Keyhani, 2012, p. 27). Ideally, the burden of foreignness entails the additional costs that a company has to undergo relative to the domestic competition in the home country. Though India provided a chance for Pepsi to overcome the disadvantage of the saturated market in the United States, making an entry to India came with significant demands due to foreignness. At this juncture, I will analyze the challenges that Pepsi faced due to the liability of foreignness and the manner the company responded.

Extra Competition From Local Firms

Pepsi had to face increased competition from local firms upon entry to India. Pepsi was enjoying the place of the second largest beverage company in the United States when it was resolving t...