PepsiCo restaurants Essay

I. IntroductionThe key hesitation is whether PepsiCo should expand its eating house transmission line by pursuing the buy of CARTS OF atomic number 27, a $7 million manufacturer and merchandiser of mobile food drop backs and kiosks, and atomic number 20 pizza pie KITCHEN, a $34 million eating place chain in the casual dining segment.II. Analysis of the main problemPepsiCo has 3 main segments downy drinks (35% of PepsiCos sales and 39% of its operating additions in 1991), pungency foods (29% of PepsiCos sales and 35% of its operating profits) and restaurants (36% of PepsiCos sales and 26% of its operating profits). In the early 1990s PepsiCos three restaurant chains (KFC, Taco chime and pizza pie Hut) were the leaders in their single segment. PepsiCos senior management believes its ability to move people in spite of seeance and across divisions gives PepsiCo a competitive advantage in the restaurant segment. PepsiCo believes their restaurants f be due to their stro ng management teams which ar developed within the corporation. PepsiCo would standardized to utilize their competitive advantage in running restaurants with PepsiCo managers by adding calcium pizza pie Kitchen and CARTS OF carbon monoxide gas to the PepsiCo portfolio.Despite PepsiCos success with KFC, Taco toll and pizza Hut it had difficulty expanding La lilliputian Boulangerie, a three-unit bakehouse chain it purchased in 1982. The giving overhead for La Petite Boulangerie make the company vapid and Pepsi sold it in 1987 for a $13 million loss. The hitless venture into La Petite Boulangerie suggested that although PepsiCo managers were gifted and could be advantageously moved across divisions the moves would non always guarantees a successful business expansion.Therefore, the main problem for PepsiCo management is to decide whether it depose successfully purchase and administer calcium pizza pie KITCHEN and CARTS OF COLORADO. This is in light of the fact that PepsiCo believes it has a competitive advantage in the skillfulness of its managers that was non borne out in the unsuccessful La Petite Boulangerie bakery endeavor.III. RecommendationsPepsiCo can be categorized as a related diversifier. Approximately 30% of its r tied(p)ue is split in the midst of its 3 main industrial categories. PepsiCos business units share commonalty resources and skills. Historically companies that take a corpo regularise system of related variegation perform the best (GBS_634M lecture nones). Therefore on the surface it would get along that diversification by acquiring calcium pizza pie KITCHEN and CARTS OF COLORADO would be an excellent strategical decision.However, in arguments described below the try out does not support a recommendation for PepsiCo to purchase Carts of Colorado or calcium pizza pie KITCHEN.IV. Justification for recommendationsPepsiCo is a lucrative company and therefore does not need to transfigure into atomic number 20 pizza pie KITCHEN and CARTS OF COLORADO to maintain it profitability. From 1987-1991 PepsiCos sales doubled, income from continuing operations grew at a compound rate of more than than 20%, and the companys value on the product line mart tripled (PepsiCo restaurant Case, pg. 4, and Exhibit 3).Eight key causalitys NOT to veer into atomic number 20 PIZZA KITCHEN and CARTS OF COLORADO.It is poor rationale for PepsiCo to diversify into atomic number 20 PIZZA KITCHEN and CARTS OF COLORADO simply to reduce risk. The restaurant business is cyclical. Some restaurants entrust be profitable, turn some will not be profitable. PepsiCos shareholders can diversify risk by purchasing shares in CALIFORNIA PIZZA KITCHEN and CARTS OF COLORADO themselves. Furthermore, it is not an get strategy for PepsiCo management to over-diversify to defend their personal wealth.Maintaining growth is not a good basis to diversify into CALIFORNIA PIZZA KITCHEN or CARTS OF COLORADO. Most shareholders would rather ho ld shares in a small profitable company, not a big unprofitable company. As a shareholder, there is unless a benefit if PepsiCo makes a profit. Currently PepsiCo is making a profit. Although managers benefit from growth regardless of profit or loss , growth for the sake of growth is not an appropriate reason to diversify.Although PepsiCo can use CALIFORNIA PIZZA KITCHEN and CARTS OF COLORADO to commensurateness cash go down by funneling cash from its large business units to the littler CALIFORNIA PIZZA KITCHEN and CARTS OF COLORADO business units this is not recommended. Even musical theme PepsiCo has the capability of doing this an exclusive shareholder can do this for himself. The counterargument would be that PepsiCo managers can do a better job balancing cash flow than shareholders because the corporation can be more tax efficient than the individual shareholder. But this alone is not a sufficient reason to diversify.The accomplishment of CALIFORNIA PIZZA KITCHEN and CARTS OF COLORADO will not create synergism within the PepsiCo corporate strategy. PepsiCo already has a Pizza segment (i.e. Pizza Hut) and does not have experience in the mobile food cart segment. Diversifying into these two market segments will not produce corporate synergy where the whole is greater than the sum of the parts.One good reason for PepsiCo to form into CALIFORNIA PIZZA KITCHEN and CARTS OF COLORADO is the sharing of al-Qaida and to create economies of scope. PepsiCo is currently saving money because they are competing in several different industries (ie. fluffy drinks, snack foods, and restaurants). These business units share the support structure and therefore the reduced costs. While Pepsis economy of scope can be employ to distri furthere chips just as well as soft drinks it is not apparent that they can deliver well in the niche restaurant market like CALIFORNIA PIZZA KITCHEN (refer back to La Petite Boulangerie misfortune).If PepsiCo were to plow two or more different products simultaneously that would be beneficial by creating an economy of scope. For example, if PepsiCo could distribute Pepsi soft drinks and calcium Pizza from a cart they would have justification for the erudition of CALIFORNIA PIZZA KITCHEN and CARTS OF COLORADO because they would be sharing common infrastructure that would make them quaint. The quaintness would make it rattling difficult for competitors to imitate and would be a reason to diversify. But there are currently no mechanisms to sell atomic number 20 Pizzas from a cart. Therefore at this time, sharing of infrastructure is not a good justification for PepsiCo to diversify into these two markets.It is not apparent that PepsiCo will increase its market power if they acquire CALIFORNIA PIZZA KITCHEN and CARTS OF COLORADO. PepsiCo already has multiple business units that buy from the similar raft of suppliers and sell to same set of customers. They have used this to gain market power. It is not appa rent that adding CALIFORNIA PIZZA KITCHEN or CARTS OF COLORADO to the clam up will increase PepsiCos market share significantly.It could be argued that by acquiring CALIFORNIA PIZZA KITCHEN and CARTS OF COLORADO PepsiCo is exploiting affectionateness competence. Although this is generally a good reason to diversify by generating more revenue luck and competing in several markets this is not a good initiative for PepsiCo in the situation with CALIFORNIA PIZZA KITCHEN and CARTS OF COLORADO. In order to exploit core competencies, PepsiCos business units must be related, so they share the same set of skills. In order for this strategy to be successful, the benefits to PepsiCo have to be unavailable to PepsiCos competitors.If PepsiCos competitors can gain the same advantage, and so PepsiCo will not have a strategic benefit. Although the Colorado Carts are unique, they can be duplicated by the competition (e.g. California Carts, All-Star Carts, Creative supple systems). With regards t o CALIFORNIA PIZZA KITCHEN, other pizza restaurants can reproduce the unique flavors and styles of pizza. Therefore, PepsiCo will not be exploiting its core competence and should not diversify.If PepsiCo is contemplating CALIFORNIA PIZZA KITCHEN and CARTS OF COLORADO as good turnaround projects then this is not a justification for diversification. CALIFORNIA PIZZA KITCHEN is a profitable company. CALIFORNIA PIZZA KITCHEN has increased both sales and net income from 1990 to 1991. CARTS OF COLORADO has besides shown an increase in sales and operating income from 1985-1991. The management teams of both companies appear to be performing well. Therefore the turnaround potential is not a good reason to diversify.CALIFORNIA PIZZA KITCHEN and CARTS OF COLORADO do not fit into the PepsiCo Corporate strategyWhere does PepsiCo compete?There may be a market opportunity for PepsiCo in the acquisition of CALIFORNIA PIZZA KITCHEN and CARTS OF COLORADO, but that does not necessarily imply that Pep siCo should take the opportunity. The overall scope of PepsiCo is on convenient foods and beverages. The acquisition of CARTS OF COLORADO would certainly be in-line with PepsiCos focalize of providing foods and beverages at well-situated locations. However, PepsiCo does not have experience in the arrangement of mobile food carts and therefore PepsiCo would be at a loss to those more experienced in the mobile cart business.There is even less evidence for a distinctive market opportunity for PepsiCo with the acquisition of CALIFORNIA PIZZA KITCHEN. PepsiCo already owns Pizza Hut and therefore has a place in the dine-in and take-out pizza business. Although CALIFORNIA PIZZA KITCHEN is suited for more upscale markets with unique flavors and tastes, Pizza Hut could introduce similar unique flavors and tastes. In addition Pizza Hut has stores across the United States and internationally, while CALIFORNIA PIZZA KITCHEN has a limited geographic scope. It currently operates only 25 restau rants in eight states (PepsiCo case, pg. 15). The offbeat pizzas may not sell well across the United States and internationally. For example, jerk-chicken pizza may sell very well in Beverly Hills, CA but not sell well in Peoria, Illinois or Duesseldorf, Germany.How does PepsiCo compete?PepsiCos corporate strategy allows for ship of resources (i.e. managers) across their business units. PepsiCos philosophy is We take eagles and teach them to cut down in formation (PepsiCo case, pg. 3). Therefore PepsiCo may have a strategic advantage by transferring managers from one of its current business units to CALIFORNIA PIZZA KITCHEN or CARTS OF COLORADO. For example, one manager could transfer her knowledge from a moorage at Pizza Hut to CALIFORNIA PIZZA KITCHEN relatively transparently although it may be more difficult to transfer knowledge from Pizza Hut to the food carts and kiosks the business of Colorado Carts.PepsiCo does transfers resources which fit well with the CARTS OF COLORAD O enterprise. PepsiCo can place a Cart outside a shop mall on the street selling food. At some carts PepsiCo could stretch out KFC or Taco Bell while offering a Pepsi soft drink maybe put forward some Frito lays chips. But this strategy does not fit well with the idea of the upscale CALIFORNIA PIZZA KITCHEN being instantlyly near a KFC or Taco Bell in a mega-mall food court.How does PepsiCo execute?PepsiCo, although a very large corporate office, has an execution strategy in which they let the managers go at their own pace. They have a decentralized organization (PepsiCo case pg. 4). PepsiCo managers are rewarded on a two-phase system reporting performance first to direct managers then to upper level managers. In order to be promoted managers of CALIFORNIA PIZZA KITCHEN and CARTS OF COLORADO would have to perform very well relative to all of the remaining PepsiCo restaurants. Because all of the other PepsiCo restaurants are at the pass away of their respective segments it wil l be a challenge for managers of CALIFORNIA PIZZA KITCHEN and CARTS OF COLORADO to surpass other PepsiCo business units. Therefore the managers will not be incentivized as well managing CALIFORNIA PIZZA KITCHEN or CARTS OF COLORADO.Therefore, diversifying into California Pizza Kitchen and CARTS OF COLORADO is not copasetic with the PepsiCo corporate strategy.V. Summary.The acquisition of CARTS OF COLORADO and CALIFORNIA PIZZA KITCHEN will not lead toward the fulfillment of PepsiCos mission which is To be the worlds premier consumer products company cogitate on convenient foods and beverages and seeks to produce healthy financial rewards to investors as they contribute opportunities for growth and enrichment to their employees, their business partners and the communities in which they operate. And in everything they do, to strive for honesty, fairness and integrity. (http//www.pepsico.com/PEP_Company/Overview/index.cfm)PepsiCos management should take the guilty until proven innocen t approach and not diversify into these two business segments. As described in the previous paragraphs at this time there is not sufficient and convincing evidence to support the need for diversification into CALIFORNIA PIZZA KITCHEN or CARTS OF COLORADO.References1. http//www.pepsico.com/PEP_Company/Overview/index.cfm2. www.cpk.com3. PepsiCo restaurants. HBS 9-794-078