Performance with purpose the promise of pepsico

PepsiCo’s Indra Nooyi: Performance with Purpose “PERFORMANCE WITH PURPOSE is not how we spend the money we make, it’s how we make the money,” says PepsiCo CEO Indra Nooyi.1 As chief executive officer (CEO) of PepsiCo, Nooyi is one of the world’s most powerful business leaders. A native of Chennai, India, Nooyi holds multiple degrees: a bachelor’s degree in physics, chemistry, and mathematics from Madras Christian College; an MBA from the Indian Institute of Management; and a master’s degree in public and private management from Yale University. Prior to joining PepsiCo in 1994, Nooyi worked for Johnson & Johnson, Boston Consulting Group, Motorola, and ABB. She is not your typical Fortune 500 CEO, though: She is well known for walking around the office barefoot and singing—a remnant from her days in an all-girls rock band in high school. It should come as no surprise, therefore, that Nooyi has been shaking things up at PepsiCo, a company with roughly $67 billion in annual revenues, some 271,0 employees worldwide, and business interests in more than 180 countries. She took the lead role in spinning off Taco Bell, Pizza Hut, and KFC in 1997. Later, she masterminded the acquisitions of Tropi- cana in 1998 and Quaker Oats, including Gatorade, in 2001. When becoming CEO in 2006, Nooyi declared PepsiCo’s vision to be Performance with Purpose: Performance with Purpose means delivering sustainable growth by investing in a healthier future for people and our planet…. We will continue to build a portfolio of enjoyable and healthier foods and beverages, find innovative ways to reduce the use of energy, water and packaging, and provide a great workplace for our associates…. Because a healthier future for all people and our planet means a more successful future for PepsiCo. This is our promise.2 In particular, Performance with Purpose has three dimensions:

1. Human sustainability. PepsiCo’s strategic intent is to make its product portfolio healthier to combat obesity by reducing sugar, sodium, and saturated fat content in certain key brands. It wants to reduce the salt and fat in its “fun foods” such as Frito-Lay and Doritos brands, and to include healthy choices such as Quaker Oats products and Tropicana fruit juices in its lineup. Nooyi is convinced that if food and beverage companies do not make their products healthier, they will face stricter regulation and lawsuits, as tobacco companies did. Nooyi’s goal is to increase PepsiCo’s revenues for nutritious foods from $13 billion (approximately 20 percent of the net revenue) today to $30 billion by 2020.

Frank T. Rothaermel prepared this MiniCase from public sources. This MiniCase is developed for the purpose of class discussion. It is not intended to be used for any kind of endorsement, source of data, or depiction of efficient or inefficient management. All opinions expressed, all errors and omissions are entirely the author’s. Revised and updated: July 14, 2015. © Frank T. Rothaermel.Page 433

2. Environmental sustainability. PepsiCo has instituted various initiatives to ensure that its operations don’t harm the natural environment. The company has programs in place to reduce water and energy use, increase recycling, and promote sustainable agriculture. The goal is to transform PepsiCo into a company with a net-zero impact on the environment. Nooyi believes that young people today will not patronize or want to work for a company that does not have a strategy that also addresses ecological sustainability.

3. The whole person at work. PepsiCo wants to create a corporate culture in which employees do not “just make a living, but also have a life.” Nooyi argues that this type of culture allows employees to unleash both their mental and emotional energies.

PepsiCo’s vision of Performance with Purpose acknowledges the importance of corporate social responsibility and stakeholder strategy. Nooyi is convinced that companies have a duty to society to “do better by doing better.” She subscribes to a triplebottom-line approach to competitive advantage, which considers not only economic but also social and environmental performance. CEO Nooyi declares that the true profits of an enterprise are not just “revenues minus costs" but “revenues minus costs minus costs to society.” Problems such as pollution or the increased cost of health care to combat obesity impose costs on society that companies typically do not bear (externalities). As Nooyi sees it, the time when corporations can just pass on their externalities to society is nearing an end.

The external environment in the soft drink industry, however, has become much more challenging. In the past decade, sales of carbonated soft drinks dropped some 15 percent, reaching the lowest per capita level since 1986. Consumption of bottled water, in contrast, is up some 10 percent since 2013 and predicted to surpass consumptions of carbonated soft drinks in 2017. Energy drinks such as Monster or Red Bull are continuing to grow by double digits in the United States and overseas, making it the hottest category in the soft drink industry.

PepsiCo’s archrival Coca-Cola Co. continues to concentrate on its core business in soda and other nonalcoholic beverages. The full-calorie Coke remains America’s most popular soda, as more and more people abandon artificial sweetened sodas (number two is PepsiCo’s full-calorie cola and number three is Diet Coke). To enhance PepsiCo’s strategic focus, critics of Nooyi propose splitting PepsiCo into two standalone companies. One would focus on beverages (Pepsi, Gatorade, Tropicana); the other would focus on snack foods, several of which such as Lay’s or Doritos have become multibillion-dollar brands. This move would unlock additional profit potential, the argument goes, because the well-performing snack food business would no longer need to subsidize underperforming beverages. For the time being, Nooyi has decided that PepsiCo creates more value when both the beverage and snack foods division are together in one corporation, rather than split into two companies.

Although PepsiCo’s revenues have remained flat over the past few years, investors see significant future growth potential. Over the last three years, PepsiCo has outperformed Coca-Cola by a relatively wide margin. During this time period, PepsiCo’s stock appreciation was more than 32 percentage points higher than that of Coca-Cola (see Exhibit MC3.1). With better than expected financial results, Nooyi certainly stands vindicated after years of criticism. Despite opposition, she stuck by her strategic mantra for PepsiCo—Performance with Purpose—and appears to be reaping the rewards.

DISCUSSION QUESTIONS

1. What “grade” would you give PepsiCo CEO Indra Nooyi for her job performance as a strategic leader? What are her strengths and weaknesses? Where would you place Nooyi on the Level-5 pyramid of strategic leadership (see Exhibit 2.4), and why? Support your answers.

2. The first few years after Indra Nooyi took over as PepsiCo’s CEO and implemented Performance with Purpose, the company underperformed its archrival Coca-Cola Co. by a wide margin. What should a strategic leader do if his or her vision does not seem to lead to an immediate (financial) competitive advantage? What would be your top three recommendations? Support your arguments.

3. Do you agree with Indra Nooyi’s philosophy that “performance and purpose are intimately linked and you can’t do one without the other”? Support your arguments.

4. PepsiCo’s investors require the company to grow about 5 percent or $3.5 billion a year. PepsiCo’s top line, however, remained flat for the last few years. Where would future growth for PepsiCo come from?