Strategic Management/ Business Policy

1
Strategic Management/Business Policy
2
PepsiCos Restaurants

• Strategy Formulation
• Should PepsiCo acquire Carts of Colorado?
• A manufacturer and merchandiser of mobile food
  carts and kiosks
• Should PepsiCo acquire California Pizza Kitchens?
• A restaurant chain in the (upscale) casual dining
  segment.
• What purpose(s) is served by these acquisitions?

3
PepsiCos Restaurants

• Strategy Implementation
• How can PepsiCo manage their multi-business
  corporation?
• How can they achieve effective coordination among
  their business?
• Structures, systems, processes
• What are the limitation of autonomous business
  units when there are potential economies of
  scope?

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PepsiCos Restaurants

• Strategy Implementation
• Do the motivational and incentive benefits of
  autonomy via decentralization outweigh the
  economies of scope efficiencies that can be
  achieved by more centralized coordination?
• Under Wayne Calloway there were eight major parts
  to the PepsiCo organization (1) Pepsi-Cola North
  America (2) Pepsi-Cola International (3)
  Frito-Lay Inc., (4) PepsiCo Foods International
  (5) Pizza Hut Worldwide (6) Taco Bell Worldwide
  (7) Kentucky Fried Chicken Corporation and (8)
  PepsiCo Food Systems Worldwide.

5
PepsiCos Restaurants

• PepsiCo had three segments
• Soft drinks (35 of sales and 39 of operating
  profits in 1991)
• Snack foods (29 of sales and 35 of operating
  profits in 1991)
• Restaurants (36 of sales and 26 of operating
  profits in 1991)
• Together these three segments generated nearly
  20 billion in sales in 1991. Calloway viewed
  PepsiCo as having three flagships and explained
  that the company invested according to where it
  believed it could achieve the highest returns.

6
PepsiCos Restaurants

• Should PepsiCo acquire Carts of Colorado and/or
  California Pizza Kitchens?
• What value would these restaurants provide to
  PepsiCo?
• What value would PepsiCo provide to these
  restaurants?

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PepsiCos Restaurants

• California Pizza Kitchens
• Freshly prepared food
• Higher price
• Different skills required than Kentucky Fried
  Chicken, Pizza Hut and Taco Bell
• Pizza Hut acquired in 1977 for 300 million
• Taco Bell acquired in 1978 for 148 million
• KFC acquired in 1986 for 840 million
• Does it matter that PepsiCo has had little
  previous experience in casual (upscale) dining?
• Lack of current capabilities
• Enables the company to develop new capabilities
  in different rungs on a ladder

8
PepsiCos Restaurants

• California Pizza Kitchens
• Why California Pizza Kitchens?
• If the long-term demand for the casual (upscale)
  dining format is strong, then PepsiCo can learn
  about casual (upscale) dining and transfer the
  knowledge from this acquisition to PepsiCo.
• Thus, this investment could merely be the price
  of admission representing a necessary learning
  curve to position the company for growth options.
  This investment reveals a call option on
  follow-on investments. Todays investments can
  generate tomorrows opportunities.

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PepsiCos Restaurants

• California Pizza Kitchen
• Why California Pizza Kitchens?
• If California Pizza Kitchens is such a great
  idea, why doesnt PepsiCo just hire a couple of
  people and copy the concept?

10
PepsiCos Restaurants

• Carts of Colorado
• Issue of Market Size
• Carts of Colorados 8m sales will always be a
  rounding error at PepsiCo.
• However, the real market size is the revenue from
  non-traditional Points-of-Distribution
• Issue of First-Mover Advantage
• Possible preemption at some locations where only
  one supplier invited in (e.g., schools)
• Other locations, no clear first-mover advantage.

11
PepsiCos Restaurants

• Given PepsiCos strategic goals, where should
  California Pizza Kitchens and Carts of Colorado
  be placed in the PepsiCo organizational
  structure?
• Can PepsiCo learn from California Pizza Kitchens
  if it is kept independent?
• Will a vice-President of Restaurant Development
  be responsible for all new restaurant
  developments?
• If Carts of Colorado is independent does it have
  credibility? How will coordination be achieved?

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PepsiCos Restaurants

• Why doesnt PepsiCo have a Group VP of
  Restaurants?
• Tradeoff between economic efficiencies from
  coordination and the productivity gains and
  profit growth facilitated by an autonomous
  competitive culture that PepsiCo fosters.
• Potential cost savings (over 100 million)
• cost savings are 1/6 of restaurant operating
  income
• Savings from MIS, purchasing, etc.

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PepsiCos Restaurants

• Why doesnt PepsiCo have a Group Vice-President
  of Restaurants?
• Prior commitments and inertia
• If a Vice-President is chosen from one of the
  three restaurant presidents (Kentucky Fired
  Chicken, Pizza Hut, Taco Bell) the other two
  presidents will be disgruntled.
• Coordination costs may be high.
• Standardizing purchases may be difficult.
• Prior franchiser-franchisee commitments restricts
  PepsiCos ability to make corporate-wide
  coordination rules.

14
PepsiCos Restaurants

• Update
• PepsiCo made both acquisitions. In both cases
  they took a 51 ownership in the companies with
  agreements to buy out the rest over time,
  conditional on performance. They were left as
  independent companies reporting to a board made
  up of the family (for Carts of Colorado) and the
  founders (for California Pizza Kitchens), plus
  Ken Stevens and one or two restaurant presidents.

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PepsiCos Restaurants

• Update
• The idea for this organizational structure was to
  retain the entrepreneurial drive and incentives
  of the previous owners, who PepsiCo viewed as
  vital to the success of the companies.
• Carts of Colorado was encouraged to outsource its
  manufacturing and view itself as a design and
  manufacturing company.

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PepsiCos Restaurants

• Update
• California Pizza Kitchens, with funding from
  PepsiCo, has rolled out many additional stores
  nationwide. However, this is a transitional
  arrangement for the duration of the 5 year
  contracts, after which PepsiCo will own 100 of
  both companies.
• In 1995, the heads of the restaurant chains now
  report to Enrico.

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PepsiCos Restaurants

• The spin-off of PepsiCos restaurants to Tricon
  Global Restaurants was completed on October 7,
  1997.