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Essay Instructions: PepsiCo is a world leader in convenient snacks, food, and beverages. Founded in 1965 with the merger of Pepsi-Cola and Frito-Lay, the organization has delivered significant and consistent business growth over the past 40 year. In 2007, the organization posted a 12 percent growth in net revenues of $39 billion, with 18 megabrands that generated more than $1 billion each in annual retail sales. Some of these were Pepsi-Cola, Mountain Dew, Lay’s potato chips, Doritos, Quaker Oats, Gatorade, Aquafina, Tropicana, and Walkers crisps. PepsiCo’s iconic brands are available in nearly 200 counties and generate sales at the retail level of more than $98 billion.

Using the above information as a reference, answer the following:



1. Discuss how PepsiCo uses its talent to sustain a competitive advantage in the marketplace.

2. Discuss three key elements of PepsiCo’s career growth model.

3. Discuss three key elements of PepsiCo’s talent management model.

4. Discuss the challenges that PepsiCo faces related to its talent management system.

Essay Instructions: annual report analysis on pepsico answering the following questions. With a table of contents.

1.Who are the firm?s auditors? Do they provide a clean opinion on the financial statements?
2.Have there been any subsequent events, errors and irregularities, illegal acts, or related-party transactions that have a material effect on the financial statements?
3.Describe the trend in total assets and total liabilities for the years presented.
4.What are the company?s three largest assets for the most recent year presented?
5.What are the company?s three largest liabilities for the most recent year presented?
6.What types of stock does the company have? How many shares are there outstanding for each type of stock for the most recent year presented?
7.Does the company use the single-step or multiple-step income statement or a variation?
8.Does the income statement contain any separately reported items in any year presented, included discontinued operations or extraordinary items? If it does, describe the even that caused the item. Hint: there should be a related footnote.
9.Describe the trend in net income over the years presented.
10.Does the company have other comprehensive income? If yes, what is the nature of the transaction(s)?
11.Does the company use the indirect or direct method of the cash flow statement?
12.What is the trend in cash from operations for the years presented?
13.What are the 2 largest items included in cash from investing activities?

Essay Instructions: The paper is PEPSICO CASE ANALYSIS,

I will be sending you:

1) The Pepsi case, you have to read it and then write the case analysis.

2) The paper OUTLINE that you must follow in writing the paper.

3) The financial ratios equation in order to do the financial ratios of Pepsi.



EXTREMELY IMPORTANT NOTES:

_ You MUST follow each step in the outline as it is mentioned.

_ You do not need online sources or outside sources, especially NO WIKIPEDIA. EVERYTHING you need is in the case.

_ 12 fonts, Times new roman, double space.

There are faxes for this order.

Essay Instructions: You are to write a 2-page paper. Do Not Use Outside Sources. You are to **Summarize the Key Points and Address the Issues in the Case. **


Pepsi-Cola U.S. Beverages (A)
It was a late December evening in 1987. As he leaned back in his chair, Roger Enrico, president and CEO of PepsiCo Worldwide Beverages, thought again about the report on his desk. Several months ago, recognizing that the regional consolidation of supermarket chains and an increase in the number of Pepsi-owned bottlers were fundamentally changing the way Pepsi did business, Enrico and his top managers had decided to form a task force to investigate possible changes in the organization of Pepsi’s domestic soft drink business. The task force consisted of the three divisional presidents from Pepsi USA, Pepsi Bottling Group, and the Fountain Beverage Division, along with the director of personnel (see Exhibit 1 for an organization chart). Their recommendations were contained in the report that Enrico had just finished reading for the second time.

Despite Pepsi-Cola’s strong performance, the report called for a major reorganization of the USA soft drink business. Although there were some short-term cost benefits to be achieved, most of the supporting logic for such a sweeping change was based on the task force’s assumptions about the requirements for success in the future.
As he thought about the report, Enrico considered the next day’s meeting with the task force and his upcoming meeting with Wayne Calloway, chairman of PepsiCo. What course of action should he recommend? If a reorganization were necessary, which of the proposed alternatives was best? How would Pepsi be affected? When and how should changes be implemented? During the past several months, Enrico had, of course, developed some ideas of his own, but he wanted to hear the task force’s presentation before he made up his mind.

PepsiCo, Inc.
In 1987, PepsiCo, Inc., operated in three, principal worldwide businesses: soft drinks, snack foods, and restaurants. Major soft drink brands included Pepsi, Diet Pepsi, Slice, and Mountain Dew. Frito-Lay, PepsiCo’s snack food division, manufactured and marketed such well-known brands as Lay’s Potato Chips, Frito’s Corn Chips, and Doritos Tortilla Chips. Pepsi’s restaurant chains included Pizza Hut, Taco Bell, and Kentucky Fried Chicken. For the year ending December 27, 1986, the company reported operating profits of $680 million on sales of $9.3 billion.
PepsiCo had a sharply defined corporate culture. According to an internal company document, the culture was shaped by the nature of its business as well as by management design: Pepsi has created a results-oriented, competitive, energetic working environment that puts a premium on style and individuality; [Pepsi] has a distinctive
culture, filled with stimulation, demanding of personal responsibility, and offering great reward for those able to seize opportunity. [Pepsi] is fluid, lean, open, and unbureaucratic. And the overall tone is, regardless of age, youthful. Managers were given responsibility and autonomy early in their careers. They were encouraged to take risks. In the words of Donald Kendall, the retired CEO of PepsiCo, “If you go through your career and never make a mistake, you’ve never tried anything worthwhile.”1 Managers were guided by the dictum that those who rise to the challenge are promoted. Change was regarded as an opportunity to excel, not as a threat. As a result, Pepsi had “the country’s most sophisticated and comprehensive system for turning bright young people into strong managers.”2 Of course, there were losers as well as winners at PepsiCo. The manager who was not getting results was soon gone. According to one mid-level vice president, Pepsi would “never be nor should [it] be a warm and cuddly environment.”3 From headquarters to the local level, informal work systems abounded at Pepsi. Things were rarely written down: communicating by written memo was seen as a last resort, and procedural manuals were virtually nonexistent. Instead, managers were expected to use the phone and face-toface meetings to get work done. Thus, Pepsi had a reputation for making essential decisions quickly and moving ahead more aggressively than its competitors. Although this approach sometimes produced mistakes others might avoid, it also gave the company a significant competitive edge in key moves such as the “Pepsi Challenge,” the launch of Slice, and package innovation.


U.S. Soft Drink Operations
In 1986, the soft drink side of PepsiCo contributed 39% of both sales and profits. U.S. operations accounted for 80% and 61% of total beverage dollar sales and profits, respectively. Enrico presided over this business. Reporting to him for domestic operations were three separate operating divisions: Pepsi USA, Pepsi Bottling Group, and the Fountain Beverage Division. Each division had its own geographic and operating structures, maintained separate strategic planning, marketing, and sales departments, and used different budgeting and accounting systems. Moreover, there was little interaction or coordination among them. The result was three distinct operating cultures.

Pepsi USA. Pepsi USA had long been Pepsi’s core business. Pepsi USA was designed to create a marketing umbrella for the company’s soft drinks and to sell soft drink concentrate to the Pepsi-Cola bottling network. The bottlers then carried out production, distribution, marketing, and sales at the local level (see Exhibit 2).4

Essentially a marketing organization, Pepsi USA was responsible for generating national marketing campaigns and helping bottlers implement them locally. The division was organized functionally, but marketing played a dominant role. Using a brand management system, a headquarters marketing staff of 112 developed broad marketing strategies and national advertising campaigns. In its field marketing offices, 86 Pepsi USA employees worked directly with bottlers to help them implement headquarters’ plans and to develop local marketing plans. The field staff also provided technical assistance to the bottlers for both production and financial management. Pepsi USA’s finance group managed concentrate billing and promotional allowances for the approximately 419 bottlers, both franchised and company owned, which constituted Pepsi USA’s customer base. In 1986, Pepsi USA contributed $938.6 million of sales and more than half of the net operating profit after tax (NOPAT). (See Exhibit 3 for financial information for each of the three divisions.) According to a senior Pepsi USA executive, the division had “the world’s simplest balance sheet.” Revenues were derived from the sale of concentrate to the bottling network. Costs depended
primarily on how much money was spent on advertising and trade promotion. Since every sale of concentrate added to profits, Pepsi USA focused its efforts on increasing the total sales volume of Pepsi products and therefore the total sales of concentrate. Although simple in concept, Pepsi USA’s objectives were difficult to execute. They required
the creation of exceptional national marketing campaigns (e.g., “The Pepsi Challenge” and the widely publicized Michael Jackson campaign of 1984) as well as the management of cooperative advertising and incentives to boost bottler volume. Franchise bottlers were independent business people who owned the right to bottle Pepsi products in their respective territories forever, so Pepsi USA put a high premium on its managers’ negotiating skills.

Because of Pepsi USA’s high visibility within the company, its position as the most profitable of the three businesses, and its publicized success against Coke, Pepsi USA managers were proud of their division. It was Pepsi USA that had developed the company’s prominent marketing campaigns and created the long-term strategic marketing direction for Pepsi-Cola. In a large, national advertising campaign like the Jackson commercials (Michael was paid $5 million), $100,000 was considered a small commitment. Pepsi USA had big ideas, worked with big people, and counted big numbers. Moreover, many of PepsiCo’s most successful leaders had come from the franchise side of the business, and Pepsi USA managers were highly sought after by executive recruiters. Pepsi USA alumni included Enrico, Robert Beeby (now president of Frito-Lay), and John Sculley who left PepsiCo to become president of Apple Computer, Inc. Nevertheless, managers in other areas of Pepsi-Cola characterized Pepsi USA executives as “glitzy with little depth.” Although managers from Pepsi USA excelled at marketing and bottler relations, they had considerably less-detailed operating experience than did their counterparts in the other two U.S. beverage divisions. Because of the size of Pepsi USA’s business and the enormous profitability of concentrate sales, its managers also enjoyed job levels and pay that, in many cases, equaled or exceeded those of their Pepsi Bottling Group counterparts who had significantly more operational and supervisory responsibilities. With both bonuses and performance evaluations based on the volume of concentrate sold to all bottlers, the division’s managers were driven to boost Pepsi market share and volume sales at all costs. Pepsi USA got the first pick of people and offices and
employed the highest proportion of MBAs.


Pepsi Bottling Group (PBG). PBG was the operating side of Pepsi-Cola’s domestic business. It consisted of a national organization of company-owned bottling franchises. PBG bottlers bought concentrate from Pepsi USA, then bottled, sold, and distributed Pepsi products within their franchise territories. PBG had begun as a “bottler of last resort” when Pepsi found itself unable to find a competent franchisee to run one of its bottler territories. By 1975, it was a separate division of Pepsi Worldwide Beverages and grew rapidly between 1975 and 1986 (see Exhibit 4). Although most of this growth was a result of the acquisition of franchised bottlers, PBG had also increased sales and
profits in its existing bottling units. By year-end 1986, if PBG had been a separate company it would have ranked one hundred twenty-fifth on the Fortune 500. Furthermore, by then, Pepsi owned and operated more than 30% of its entire USA bottling network. The nature of PBG’s business was fundamentally different from that of Pepsi USA, and it accounted for its managers’ “grease-under-the-fingernails” stereotype. Whereas Pepsi USA concentrated its efforts on the “big picture” of achieving high profits by increasing national sales of concentrate, PBG focused its efforts on mastering the local details of production, tactical advertising, in-store displays, pricing decisions, and managing a complex, store-door delivery system. On a day to- day basis, PBG sales managers were responsible for keeping delivery trucks on the road, selling to retailers, controlling shrinkage, setting up in-store displays, and dealing with unions. As one PBG manager observed, you never know when you’ll get to work in the morning and find that your truck drivers are on strike or that a big customer wants your advertising bid by noon. There is no time for in-depth analysis—you have to make a lot of quick decisions every day. PBG’s finance group handled the accounts of more than 10,000 retail and fountain outlet customers serviced by the company-owned bottlers. The group also managed concentrate payables and promotional allowance accounting with Pepsi USA. Bottling was a capital-intensive business involving bottling plants, distribution warehouses, and delivery trucks. With gross margins half those of Pepsi USA, PBG counted pennies per case. It became even more cost conscious as pressure from Coca-Cola resulted in severe price competition in many of PBG’s key markets. As a former PBG vice president of sales and marketing reported: “We’ve had no pricing increases for five years, and in many markets prices actually went down.

Within that time frame, however, our profitability has actually improved, and the only way to do that is by being ruthless on costs.”5 During its early years, PBG was organized geographically and was plagued by unprofitable operations and by ineffective, “turf-minded” managers in several of the independent franchise bottlers it had been forced to purchase. According to Craig Weatherup, president of PBG, “Until the early 1980s, PBG was tagged as a second-class-citizen—it had a ‘loser’ image. We were the afterthought to Pepsi USA and took cheap shots from any franchise bottler who wanted to take them.” In the late 1970s, however, PBG’s management structure was reorganized along functional lines and its management upgraded by transferring successful managers from Frito-Lay, hiring people from outside Pepsi, and conducting intensive training programs. By 1986, PBG had developed many strong managers, skilled at running bottling operations. PBG was considered a first-class operating company within the soft drink industry. Throughout the 1980s, for example, it outperformed the franchised bottlers in sales and market share growth. Unfortunately, the legacy of having been a loser did not die easily. PBG had finally been successful, but many managers within PBG felt they were “not fully appreciated.” Whereas Pepsi USA typically hired MBAs from top schools, PBG tended to hire 250 to 300 undergraduates per year, principally from large state universities. These people filled positions in operations and distribution and began to work their way up in the PBG hierarchy. By 1986, PBG employed more than 15,000 people in its U.S. operations. A typical PBG regional manager had 750 people reporting to him or her. Performance evaluations and bonuses were based primarily on net operating profits and a return-on-assets (ROA) calculation. Increased volume meant little to local managers if they couldn’t cover costs. As Weatherup was fond of telling his managers, “The measure that ultimately counts is PROFITS. I assure you that without NOPAT performance the rest, in the long run, doesn’t count.”

Fountain Beverage Division (FBD) While Pepsi USA and PBG focused on Pepsi sales in supermarkets, the fountain business had largely been ignored by Pepsi executives prior to 1978. Historically, Coca-Cola had dominated the fountain market and controlled both the McDonald’s and Burger King accounts. In fact, Coca-Cola’s fountain business was said to be six or seven times larger than Pepsi’s and extremely profitable. In contrast, Pepsi’s fountain business performed erratically and was an insignificant profit producer until the mid-1970s. In 1978, Pepsi created Fountain Beverages as a separate operating division in order to improve fountain sales. Fountain Beverage was responsible for the sale of all Pepsi products not sold in bottles and cans. Principal customers were restaurant chains and convenience stores that mixed syrup6 with carbonated water on-site for immediate consumption by the customer. Between 1978 and 1986, FBD was the fastest-growing division of PepsiCo. From virtually a “standing start,” FBD sales by yearend 1986 had grown to $473 million with NOPAT of $26.8 million. National accounts included Pizza Hut, Taco Bell, and Kentucky Fried Chicken. In addition, FBD succeeded in winning the Burger King account from Coca-Cola in 1982 in addition to important parts of Hardees’ and Wendy’s franchisee
business. Although smaller than Pepsi USA and PBG, FBD incorporated elements of both its bigger colleagues. FBD serviced two types of customers: (1) franchised and company-owned bottlers and (2) national accounts. FBD’s relationship with bottlers was similar to Pepsi USA’s. Bottlers handled local, smaller fountain sales and were supported by FBD with funds for advertising and trade promotions. Like PBG, which negotiated contracts directly with regional supermarket customers, Fountain Beverage handled direct customer negotiations and pricing for large, national customers. Because of FBD’s weak customer base and humble beginnings, it was essential for the division to develop sales expertise. “I like to think of our salespeople as Green Berets,” stated FBD president John Cranor. “We’re a smaller division and don’t get the attention of Pepsi USA or PBG. Our sales force is small in number, but they’re the best. They travel light and have little support staff, but they get the job done.” Many of the 200 or so salespeople had come to Pepsi as “experienced hires” from the sales forces of large, consumer products companies like Procter & Gamble and Johnson & Johnson. FBD’s marketing department consisted primarily of transfers from other parts of Pepsi. FBD hired few people directly from undergraduate or graduate schools. Its culture was that
of a small company that had to struggle to succeed in the shadow of Coke’s huge fountain beverage business.

Interaction among the Three U.S. Soft Drink Divisions
There was relatively little interaction among these three autonomous divisions. Historically, Pepsi management had encouraged the divisions to go their separate ways in the pursuit of profits and market share. For example, while they were offered Pepsi USA’s marketing programs, PBG maintained an independent marketing department and developed its own strategic plans, which would then be implemented by the PBG bottlers. At the same time, the marketing staffs at Pepsi USA and FBD each would create plans for their own sales efforts. Indeed, the other two division presidents would first be exposed to the third division’s plans when they were invited to sit in on each other’s strategic reviews with Enrico. Because Pepsi USA’s main goal was to boost concentrate sales volume, FBD’s to increase the number of fountain outlets, and PBG’s to maximize the net operating profit of its bottling operations, their strategic plans often had conflicting objectives. In addition, professional rivalry, PepsiCo’s winner’s culture, and the independent divisional reporting structure resulted in little communication among the various marketing, sales, and finance groups within each division. Despite PepsiCo’s corporate emphasis on rotating its key managers among divisions, most of the managers within U.S. beverages had spent their entire Pepsi-Cola careers within a single division. Competition and independent thinking can be healthy. In fact, many observers pointed to Pepsi’s success in PBG and FBD as evidence of these benefits. But they can also produce ineffectiveness and costly redundancy of people and effort. Such problems were especially apparent in the field. For example, Pepsi USA developed a retail marketing plan for Slice, whereby in return for running an end-aisle display for four weeks a bottler would offer store managers a VCR and a cents-off coupon in their weekly newspaper supplement. Pepsi USA presented this program to both PBG and franchised bottlers for implementation at the local level by the bottlers’ sales force. At the same time, PBG’s marketing department, seeking to emphasize Slice’s 10% real fruit juice content, developed a separate Slice marketing plan. PBG’s plan consisted of a point-of-purchase Slice/real fruit display for the produce section of supermarkets. Customers were offered a discount on fruit when they bought Slice. PBG and Pepsi USA were convinced of the superiority of their own plans and the result was that the trade had the choice of either marketing plan. In the end, the trade preferred the Slice-with fruit plan. This left Pepsi USA with a surplus of VCRs and the company with the burden of having to manage both programs. Conflict between PBG and Pepsi USA was exacerbated by the pride of ownership felt by each marketing department; each believed its own marketing plan was the best. Other problems arose in the coordination of local marketing issues. In Southern California, for example, Pepsi managers were unable to resolve pricing issues. Competition with Coca-Cola was
particularly intense in this region, and many supermarket chains crossed both PBG and Pepsi USA territories. Because of the separation of PBG and franchised bottlers at the local level, all pricing decisions were referred up the respective chains of command to be settled at headquarters in Somers, New York. This process could take days or even weeks. Large supermarket chains seldom tolerated such delays. When preparing for a chain wide Labor Day circular, for example, a chain merchandising manager might call sales representatives from local PBG and franchised bottlers to request that Pepsi’s “best deal” be the soft drink featured in this key ad piece. In many cases, the supermarket chain demanded responses in a matter of hours. A further concern to Enrico was the fact that Pepsi’s bottling system was increasingly dominated by a relative handful of multi-franchise bottlers, not the 400-500 independents that once made up its bottler network. The combination of PBG plus the 10 largest franchisees constituted more than 70% of the company’s case sales. And Enrico was convinced that, over time, PepsiCo
might own and operate as much as two-thirds of its entire bottler network. This shift, of course, had already significantly affected the sales task in each of Pepsi’s operating units, since there were fewer independent bottlers to service and they were a less important force. Ultimately, Enrico, himself, was often called on to resolve disputes and spearhead coordination simply because no other mechanism was available. Since all three divisions reported directly to him, he had to become personally involved in relatively minor issues. Although this coordination was not unduly time-consuming, Enrico felt there had to be a better way to bring it about.
Trends in U.S. Supermarket Retailing
Historically, three major chains—A&P, Safeway, and Kroger—had dominated grocery retailing. Gradually, since the mid-1970s, the “big three” had yielded their leadership to more aggressive, flexible regional competitors. Since roughly 1980, mergers and acquisitions within the supermarket industry have resulted in fewer, larger regional retail chains. Within these regional chains, in turn, the trend was toward fewer, larger stores and centralized decision making. A typical chain, for example, could demand one centralized purchasing contract and drop shipment to stores in 15 different franchised bottling territories. In addition, with the growth of supermarket power, Pepsi was forced to give more and larger discounts in the quest for special promotions and crucial end-aisle displays. Price and trade promotions, not advertising, dominated battles for sales volume and took up an increasingly larger portion of system wide costs.


Competition and Coca-Cola Enterprises
As Enrico thought about the possible reorganization of Pepsi’s domestic soft drink business, he also reflected on the recent activities of Coca-Cola. Pepsi had not been the only soft drink concentrate producer buying parts of its franchised bottling network. Between 1979 and the fall of 1986, the Coca-Cola Company had assisted in the transfer of ownership or the financial restructuring of most of its U.S. bottler network. During this time, certain bottlers were acquired by Coke and others were resold to buyers believed to be most competent to manage and develop those operations. Coke’s stated policy was that “a stable, well- financed bottler system with long-term growth objectives is in the best interests of both the Coca-Cola Company and the bottlers of its soft drink products, whether or not the Coca-Cola Company has an ownership interest in any such bottlers.” In the summer of 1986, CCE, a wholly owned subsidiary of the Coca-Cola Company, bought out two large U.S. bottlers to become the largest Coke bottler in the world. Shortly thereafter, Coke offered 51% of the equity of CCE to the public and raised approximately $1.2 billion. Moreover, by making CCE a separate entity, Coke emphasized its belief that concentrate production/marketing and soft drink bottling were fundamentally different businesses that needed different capital structures and management systems. The result of these changes, as well as Coke’s historical evolution, meant that Coca-Cola’s approach to the marketplace differed significantly from Pepsi’s. Coke’s company-owned bottler network was only a small part of its overall system, whereas PBG was Pepsi’s dominant bottler. Coke sold its fountain syrup directly to users such as McDonald’s, while Pepsi sold and delivered through its bottler network (except for sales calls on large chain restaurant operators).
Enrico’s Concerns
Enrico was a classic example of PepsiCo’s fast-moving culture. During his 15 years with the company, Enrico had served in five operating divisions, including Frito-Lay, International Foods, International Beverages, PBG, and Pepsi Cola-USA. His first general management assignment was as president of Frito-Lay in Japan in 1974 when he was 30 years old. In 1983, he succeeded Sculley as Pepsi’s top beverage general manager. Enrico was widely regarded as one of PepsiCo’s most creative marketing minds. He was the prime mover behind major marketing thrusts such as the launch of Slice, Michael Jackson’s tour, and the introduction of “Pepsi Free.” Enrico had two other talents that helped him become a successful PepsiCo general manager, according to Michael Feiner, Pepsi Cola’s personnel vice president: Roger is extremely good with numbers, so he doesn’t make the big mistakes that many pure marketing types do. He understands the stakes on his big decision, and how costs will behave when he shifts directions. He’s very bottom-line oriented. In addition, Roger is a natural leader of people. Somehow, whenever he is involved in a group, Roger emerges as its spokesman. Not because he shouts loudest or tries to dominate the discussion. In fact, he’s a careful listener. But he asks enough probing questions, and offers enough ideas for action, that somehow— usually over time—the group responds by proposing a solution that Roger seems to have had in mind all along. But during the process the proposal has become the group’s idea—not Roger Enrico’s. According to Weatherup, “Roger is a fun person to work with because he’s constantly searching for better ways to do things. Around Roger, something is always happening, and no one has a chance to get complacent.”
Over a period of several months in 1987, Enrico had been probing the nature of Pepsi- Cola’s divisional organization in the United States. He had three major concerns:
1. Were the divisional conflicts and coordinating delays hurting Pepsi’s ability to compete in a marketplace that increasingly required nimble reactions to local competitive thrusts?
2. Was the present structure cost competitive or was Pepsi’s divisionalized structure making it a high-cost competitor?
3. Did the present three-divisional structure represent an effective organizational alignment in light of the changes taking place in the grocery trade and the competitors’ (and Pepsi’s) bottler networks?

In typical Enrico fashion, he began to bombard the presidents of Pepsi USA, PBG, and FBD with questions about the organization and its viability in the changing soft drink market. After several months of interrogation, the division presidents decided to grab the initiative from Enrico. According to Enrico, “They were scared I’d do something drastic.” During the summer of 1987, they proposed that a task force be created to explore the need for a major organizational change in Pepsi’s combined USA operation. Enrico commented, “Despite my concerns, I wasn’t sure that what we were doing was wrong—or even that it could become wrong in the near future. After all, most of our vital signs were excellent. On the other hand, I sensed a certain amount of arrogance developing, which I felt could freeze us in place, and make us vulnerable to the changes that were occurring in our competitive environment. So I decided to start probing to see whether my key associates—Craig, John, Ron, and Mike—shared my visceral concerns.”

The Task Force
In response to the suggestions of his three key subordinates, Roger Enrico created a task force, consisting of the three division presidents, Mike Feiner (his personnel vice president), and an outside facilitator. The purpose of the task force was to study the idea of reorganization and make recommendations to correct the coordination problems (see Exhibit 6 for a profile of the key task force members).
By October, the task force concluded that conditions warranted a reorganization of Pepsi- Cola’s U.S. organization along geographic lines. Under the proposal PBG, Pepsi USA, and FBD would be combined and subsequently divided into separate geographic units. According to the task force members, they considered, but quickly discarded, the possibility of preserving the three separate divisions. They felt the present structure was simply too top heavy, centralized, and narrowly focused to be effective in the future. At the local level, the field marketing, retail sales, and fountain channel management, now being performed separately by managers from each of the three divisions, would be combined. Two structural options were put forth: (1) the full decentralization of operating authority, or (2) a matrix organization with functional managers at the area level (see Exhibits 7 and 8). Appendix A discusses how the two options would work at the retail level.

Option 1: Full Decentralization. Under this plan, four regional presidents would report to the newly created head of domestic operations. Reporting to each regional president would be five or six area general managers who would be responsible for all of Pepsi’s soft drink operations (franchise, company-owned bottlers, and fountain sales) within their respective areas. Under each area general managers would be functional managers in charge of retail sales, on-premises (i.e., fountain) sales, field marketing, manufacturing, distribution, finance, and personnel. Decentralization would meet the need for stronger local authority and enable the company to be more responsive to local market concerns. The area would speak with one voice on all budgeting and strategy issues and, the area
general manager would have the authority to make all final decisions affecting his or her area. The general manager would have full profit-and-loss responsibility, and his or her bonus would be tied to the local area’s success. Moreover, this system would be an excellent proving ground for the type of general manager the company would need as it moved from being a concentrate and marketing organization to a fully integrated soft drink company.
On the other hand, there was concern about entrusting the organization’s success to a low-level general manager. The new structure would combine, into one position, managerial elements from all three of the previous divisions. For example, under the old system, a “retail manager” played a different role in each of the three divisions. In Pepsi USA, a retail manager worked with bottlers and, through the bottler, with the retailer. In PBG, a retail manager was a bottler, working directly with retailers. A retail manager in FBD dealt strictly with fountain sales. Now, within a
more limited geographic area, one person would be responsible for all Pepsi sales through retail outlets in his or her territory. Opponents of the plan saw this approach as too risky.

Option 2: Matrix. The other option was a matrix organization in which sales and marketing functions would be decentralized through regional presidents, while operations finance, and human resources would remain centralized with a dotted-line report to the regional presidents (see Exhibit 8). Under this organization, each region would be divided into five or six areas, but there would be no area general manager. Instead, a group of seven functional managers would jointly coordinate actions at the area level. This team would agree on area budget and profit targets, and each individual’s bonus would be based 50% on individual performance and 50% on the area’s success.
Proponents of this option emphasized that the functional expertise that had made Pepsi so successful over the past decade would be retained since each key function—except Sales—would report to the same Headquarters VP as before. The plan would, supporters claimed, help overcome the parochialism of Pepsi USA, PBG, and FBD, while forcing coordination at the local level to achieve local marketing objectives. They also felt this option offered more flexibility and less disruption than the more drastic move to full decentralization. Nevertheless, several concerns remained. Detractors of this proposal wondered if a “seven-headed general manager” would be able to make decisions in a timely fashion. Pepsi, as a company, detested committees as “dark alleys down which good ideas are
led to be strangled.” How would this team be able to agree on budgets, goals, and day-to-day operations without a strong general manager at the area level? Would Pepsi be able to create 24 such teams that would be both effective and efficient? Finally, would this hybrid system allow for the proper development of the new breed of general managers Pepsi felt it needed as it continued to acquire franchise bottlers and shifted its base business?
The Decision
As he sipped on yet another Diet Pepsi, Enrico wondered what he would recommend to Calloway after the next day’s meeting. It seemed clear from the task force report that his division presidents favored reorganization. Yet he still had several questions. Under either proposal, Enrico would have to choose a leader for the new organization. He
had three general managers, all highly competent and career-minded. All three had served successfully in two or three PepsiCo divisions before being promoted to their present positions. What skills would the new GM require and which of the three executives best matched these requirements? How would selecting one of the three men to run the new organization affect the others? In Pepsi’s win/lose culture, what message would his choice send to the rest of the people in Pepsi’s domestic soft drink business? Would it be better to pick someone from Frito-Lay or Pepsi
Cola International and avoid making a difficult choice? Similarly, either proposal would demand a reshuffling of Pepsi’s U.S. operations. Approximately 300 of Pepsi’s 500 senior managers in the United States would need to develop new skills and learn new responsibilities. Many executives would have to relocate. What impact would
such a massive undertaking have inside the company and in the marketplace? How well would Pepsi USA, PBG, and FBD come together? Each division was fiercely proud of its independence and its ability to contribute to Pepsi’s success. The task force estimated that relocations would cost about $15 million, but consolidating the three divisions within each area would reduce general and administrative expenses by $20 million per year for U.S. beverage
operations. He wondered how his role would change under the new organization. For example, would he have a stronger or weaker role as head of Worldwide Beverages? Would he still be involved in major marketing programs, or would he have to extract himself from the operating substance of the Pepsi USA Company? Enrico was well aware of the potential negative impact of a major reorganization of the USA business, including the disruption of local management, breaking down three distinctive work environments, and the inevitable slippage as managers and salespeople learned new jobs. Yet—like the task force—he was convinced that there were no easy fixes to the problems of maintaining the separate operating divisions. And, if a change were needed, he felt Pepsi-Cola was in a stronger position than it might be if it waited until the case for change became irrefutable. Not everyone, of course, agreed with the case for a major reorganization. However, the makeup of the task force ensured substantial top-level support for a change if one were made. Assuming reorganization was called for, which option made the most sense? The fully decentralized model, while a radical departure from the present functional structure, seemed to be
the “cleanest” alternative. There would be one person in each area that would be in charge. The matrix structure, on the other hand, was an opportunity to retain most of Pepsi’s hard-won functional excellence. But it depended on cooperation among seven different area managers. Was the matrix model a logical intermediate step away from the present organization, or was it a half-baked attempt to change that was bound to fail?
Finally, Enrico thought about the origins of the current divisional structure. FBD, for example, was created in 1978 because fountain sales were not getting the attention needed to grow the business. Moreover, when the bottling operations were a part of the franchise division, they, too, suffered because they were franchise management’s lowest priority. In fact, neither bottling nor fountain beverages had ever contributed significantly to Pepsi’s earnings when they were buried in franchise operations. Would the new organization be able to keep the same degree of focus on the three essentially different parts of the soft drink business? If not, could the present organization be
adjusted to accommodate the changes in the competitive environment? Had the task force, in its enthusiasm for change, glossed over other ways to eliminate some of the problems without resorting to such a radical reorganization? It was late when Enrico grabbed his coat and packed his briefcase. He knew that making the decisions to go forward with the reorganization was only part of what lay ahead. If he decided to go ahead with one of the two proposed options, how would the change be implemented? With the United States representing 80% of Pepsi-Cola’s worldwide dollar sales, this was no small consideration. As he walked to his car, he thought of the issues the task force would have to consider:
•?Would it be more effective to start with a pilot area and gradually roll our across the entire United States?
•?Would it be better to announce the new organization and then work out the key details (i.e., job specs, controls, staffing, pay, etc.), or should these be developed prior to the announcement?
•?How should the new organization be staffed? For example, should he pick the four Division Presidents and let them do the rest? Should he place any limitations on geographic moves, or encourage them to pick the best qualified
manager wherever he or she was located?
•?What kind of communications program was needed to “sell” the reorganization and minimize the business disruption?
As he drove out of the parking lot, Enrico could not stop thinking about the morning’s meeting. He still had a long night ahead of him, and tomorrow promised to be an interesting and pivotal day for Pepsi, himself, and the task force.

How the District Level Organizations Would Work
(Existing vs. Proposed Options)
At the district level, Pepsi’s existing organization consisted of three separate sales forces: (1)
Bottling, (2) Franchise, and (3) Food Service. Each reported to a headquarters Sales VP through a hierarchy of field-based sales managers. To support these three sales forces, the other key operating functions had district level
managers for finance, HR, operations, and distribution—each reporting to a functional VP at headquarters. Thus, at the district level, the three divisions were essentially free-standing companies serving a discrete distribution channel (e.g., bottlers, direct retail customers, and food service outlets). Under the Fully Decentralized option, the local general manager would supervise all functions in his/her district. The area general manager would be responsible for sales, cost management, and profits for an assigned geographic area. The functional managers would report to the area general managers and the division presidents. The four zone presidents would function like regional company presidents, except that they would be expected to work together and to work with corporate functional VPs to present a coordinated front to the marketplace. Under the Matrix option, all of the functional organizations, except sales, would be unchanged from before. They would continue to be supervised by functional vice presidents located in Purchase. But they would be expected to work closely with their sales counterpart at each level, as well as with one another. The sales departments, however, would function quite differently than before. The Bottler and Franchise sales forces would be supervised by one area retail sales manager and on-premise sales by another. The retail sales manager would be designated as the principal coordinator in each district, and would be responsible for coordinating sales efforts with production, finance, human relations, distribution and local marketing. But he/she would not be the line boss of these functions. The four division presidents would each have direct responsibility for all sales and marketing in their zones, and they would have the primary responsibility for seeing that the other functional groups were supporting Pepsi’s sales and marketing activities in their zones. Under either option
they would be dealing with one set of functional departments, instead of the three sets that currently existed. Although they would not be general managers in the same sense as the fully-decentralized option, the division presidents would be the dominant Pepsi managers in their assigned territories under the matrix organization.