Pepsi's Entry into India: A Lesson in Globalization
The case discusses the major strategies adopted by Pepsi Co (Soft drinks & snack food major) to enter the Indian market in the late 1980s. Initially the company found it very hard to sell itself to the Indian government as the Indian economy was highly regulated. So to lure Indian government Pepsi Co made promises of working towards enrichment of the rural economy Punjab by getting involved in the agricultural activities. Pepsi Co also made several promises to make its proposal look very attractive to the Indian government. The case also highlights the criticism faced by the company. Its failure to keep many of the promises after it started the operations in India, invited wrath of many politicians & activists. The case also discusses how liberalization of Indian economy helped Pepsi Co & how they used it to their own benefit. Lastly, the case also talks about the contract farming initiatives taken up by Pepsi Co since the 1990s & analyzes the strategies used by the company to enter the Indian market.
1. Why do companies like Pepsi need to globalize? What are the various ways in which foreign companies can enter a foreign market? What hurdles & problems did Pepsi face when it tried to enter India during the 1980s?
The companies like Pepsi need to globalize because their domestic markets are getting saturated. The external environment can have serious implication on the profitability of a company. The changes in markets (in this case saturation of domestic market), changes in consumer behavior (decreasing health consciousness) led Pepsi to search for new markets. In such cases companies prefer markets of emerging countries where there are less educated people who are easy to persuade to use their product. PepsiCo was also encouraged by the fact that increasing urbanization had already familiarized Indians with leading global brands. Hence Pepsi entered India. India at that time had a huge population which was a huge untapped market of bottom of pyramid segment. So Pepsi knew once it taps this market it would earn huge profits & also it would make its entry in the nearby countries easy.
When companies are looking to enter foreign markets they can have various collaborative arrangements with the domestic companies operating in those countries. It mainly depends on how cash-rich the foreign company is & how much risk it is willing to take. Companies who are cash-rich & willing to take risk use the Greenfield investment approach wherein they start everything from scratch. Companies who are risk averse prefer collaborative arrangements like Joint Ventures, Strategic alliances, Licensing, Franchising etc. This reduces the need of initial capital. Having a domestic partner reduces the risk as through the domestic partner foreign companies can learn the know-how of the processes followed in the country. It also allows them to connect with the consumer better thereby increasing the local responsiveness for the companies own product. In case of Pepsi, it collaborated with RPG (R P Goenka) Group initially to persuade the Indian government, an effort which ended prematurely. But Pepsi did not sit back as it continued its effort. Finally in the year 1988, Pepsi started a joint venture with Punjab Agro Industrial Corporation (PAIC, a body established by the Punjab government) and Voltas India Ltd. (a company owned by the business house of Tatas) While PepsiCo held 36.89% other venture's stake, PAIC and Voltas held 36.11% and 24% stakes respectively. The company launched the soft drinks business with great fanfare and an elaborate multi-media advertising campaign in 1989. So Pepsi’s strategy to make the state government itself its partner worked in its favor & it proved to be a huge success.
At the time when Pepsi decided to enter Indian market, the Indian economy was heavily regulated. Coca cola found...
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