Case – Pepsi’s Entry Into India – A Lesson in Globalization| Ankur Sikka
PGDM – IBRoll No. 007|
A. NEED FOR GLOBALIZATION
Depending on the strategy that a company follows, there are three primary reasons a company like Pepsi engages in international business: 1. To Increase sales/ Sales Expansion
a. Economies of Scale
A company like Pepsi usually operates on the principle of Economies of Scale. In order to achieve a larger market canvas and operate on this minimum efficient scale of operation, it is very essential that the company covers more market and potential customers by moving from a saturated market to an unsaturated one. (E.g. Pepsi shifted its focus from saturated U.S. market to nascent Indian market in order to expand) b. To leverage International Product lifecycle
A product in one country maybe at a different phase of its lifecycle in another country and this difference can be exploited by a company to direct their product supply to a more demanding market. (E.g. Pepsi looked at the extremely low per capita consumption of soft drinks as a great opportunity to create a new growth phase for its soft drinks rather than exploiting the mature markets in other countries)
2. To acquire resources
a. Companies like Pepsi need a lot or resources at lower cost in order to have more profitability while keeping up with the demand for raw materials. These companies thus target those countries which can provide the production, extraction or cultivation of these resources at a much lower cost than the current ones (in operation) with minimal tariffs and other barriers. b. This also helps them to procure materials and components from other countries in case if sourcing from one country is badly affected due to certain reasons, thus allowing global sourcing.
3. Reducing Risk
c. Most of these companies tend to diversify when entering other countries in order to minimize their risk from factors such as political hurdles, differences in Industry cycle or simple geographic risk for that matter. d. It is also essential that risk due to existing rivals is minimized by investing into non developed areas so as to counter investing by competitors.
B. STRATEGIES TO ENTER FOREIGN MARKET
1. Direct and Indirect Exports – Possible when transportation costs and tariff barriers are low. It provides higher competitive advantage. (E.g. Pepsi in new proposal committed to export half of its production and maintaining export – import ratio of 5:1 for a period of 10 years) 2. Contract Manufacturing – (E.g. Pepsi entered into agreements with a few big farmers and began growing tomatoes through the contract farming route) 3. Joint Ventures – (E.g. Pepsi entered as Pepsi Foods Ltd. which was a venture between PepsiCo (36.8%), Punjab Agro Industrial Corporation (36.11%) and Voltas India Ltd. (24%)) 4. Licensing
5. Mergers and Acquisitions
6. Strategic Alliances and Turn Key Projects
7. Management Control and Wholly owned subsidiaries
C. HURDLES AND PROBLEMS FACED BY PEPSI DURING ITS ENTRY
1. Opposition by many political parties and factions (including a letter of non conformance by George Fernandes, General Secretary of Janata Dal, to President of PepsiCo) 2. Rejection of clause regarding the cola import
3. Prohibition to use foreign brand name
4. Lack of liberalization
5. Total ownership not allowed (100% FDI was not allowed) 6. Primary focus on development of Agricultural Sector
Strategies adopted by Pepsi
1. PepsiCo exploited the sensitive issue concerning the political and social problems to devise a new proposal that would fit with the existing ‘Politics’ and ‘Public Opinion’. 2. The new proposal gave a lot of emphasis to the effects of PepsiCo’s entry on agriculture and employment in Punjab. PepsiCo claimed that it would play a major role in the agricultural...