Analyzing PepsiCo's FDI Strategy in the Mexican Market

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Business Organisations and Environments in a Global Context
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Table of Contents
Introduction................................................................................................................................3
Background Information on Pepsico..........................................................................................4
Background Information on the Business Environment in Mexico...........................................5
Analysis of the Business Scenario.............................................................................................8
Demand Supply Scheme..........................................................................................................10
Conclusion................................................................................................................................12
Recommendations....................................................................................................................13
Reference List..........................................................................................................................14
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Introduction
The different external and internal factors of the business environment play a crucial role in
influencing the overall business functioning of the organisation. The different organisation
functioning is the specific area irrespective of their size and scope are influenced by the
several factors. The company subjects the expansion need of a company to the factors, which
could play a crucial role in developing a strategic plan for action. The report focuses to
elaborate the plans for Pepsico to expand their business activity in country Mexico through
FDI route to enhance their market capitalisation. The report with the use of the PESTEL
analysis and Potters Five Force theories focuses to evaluate the different factors affecting the
business environment of the company. The report help to identify strategies to overcome
constrains and help the company successfully expand in the country Mexico.
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Background Information on PepsiCo
The company PepsiCo founded in the year 1898 has been in operation for over 120 years in
the economy. The company posted revenue of $ 64661 million for the year 2018 with an
operating profit of over $ 10620. The company holds a host of subsidiaries to create a
portfolio ranging from beverages to energy dinks to food products. The diverse portfolio of
the company gives it a huge market capitalisation in the global market
(Pepsico.com, 2019). The major competitor of the company being Coca Cola often indulges
in business rivalry to maintain their market share in the different economies of the world. The
company employs over 267000 employees all around the world. The company listed on the
NASDAQ has for the consecutive 46th year has paid dividends to its shareholders. The
comparison with its competitors shows a very marginal difference in the growth over the
years. The same could be better illustrated in the graph given below.
Figure 1: Growth Chat of PepsiCo with its Competitors
(Source: Duprey, 2018)
The company for over 120 years has through its aggressive marketing strategies and
innovative communication plans been able to expand its business considerable. The company
to further expand its market share in the Mexican economy.
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Figure 2: PepsiCo Market share in Mexico
(Source: Statista. 2019)
The company with its focus in the four pillars of strategy has devised a plan to invest $4
billion in the Mexican economy through its FDI route and focus to expand its food and
innovative agricultural intake in the country (Foodbusinessnews.net. 2019).
Background Information on the Business Environment in Mexico
To elaborate the macro factors, which could affect the business functioning of PepsiCo, are
evaluate with the help of the PESTEL analysis.
Political The political conditions of the country are very un-harmonious and
sometime create a very difficult situation of the business
organisations operating under the boundaries of the country. The
Federal Government of the country regulates the overall law and
policies of the country. The country incorporates 31 states but it is
observed that the law of employment and taxes vary considerably in
different states. This sometime creates a hurdle for company like
PepsiCo to manage a stable and structured organisational structure
in the country. The variable tax system also creates a hurdle in
pricing the products of the company to maintain uniformity in the
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prices throughout the country. The country ranks a dismal 138 out
of 180 nations in the list of corruption perception index. This
creates a very unfavourable sentiment in the global business
community. The country is plagues with corruption and poor
political conditions (Rose-Ackerman and Palifka, 2016).
Economical The Mexican economy for long has been tainted with the
malpractices of the different illegal business of the country. The
country has posted a GDP of $1.223 Trillion for the year 2018
(Product, 2019). The inflation rate for the year is 4.8%, which is a
moderate rate as the company is considered an upper middle-
income company (Statbureau.org, 2019). The country has posted a
very marginal trade deficit of $4 million and the major trading
countries for the country are the USA, European Union, and
Canada. The country has over 44% of its population under the
poverty line (IMF, 2018). This provides a good platform for the
company to expand the business in the country to benefit from the
cheaper labour cost as compared to other countries in the region.
Social The country has a very rich culture and enjoys a decent literacy rate
of over 94% (Statista, 2019). The high level of poverty and poor
social conditions and standard of the country delivers a slow
growing economy. The country having difference in law in different
states gives the employees a un favourable work culture. The poor
social condition and lower per capita income provides the company
with low cot labour but reduces the scope for revenue growth in the
local market. The social standard of the company enhance its
market share with low prices products.
Technological The low literacy and poor social life make the company very subject
to poor technology penetration in the economy. The scope to
adopting or introducing new technology is very high. In Mexico
over 85 million people and is projected to grow at 68% by the year
2019. This shows a very big potential for technological
development in the country (www.statista.com, 2019). The company
PepsiCo has spend huge sums on training and development to make
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the employees skilled to become productive on the new
technological advanced machineries. The low technological
penetration of the country slows the overall level of productivity of
the country. The company showing the potential for rapid expansion
for technology has been attracting new investment in the segment
further reducing the prices for such investments. The company
incorporates state of the art technology to generate the most of the
capacity of the economy to garner higher revenue for operational
efficiency.
Environmental The environment concerns have become a global concern and
Mexico is not spared from the others. The rapid urbanization and
industrialization has led to creation of sever environmental concern
for the country. The capital city Mexico city boost an average
179mg per cubic meter of suspended particulates, which is way
more than the WHO’s permissible limit (Corrosion-doctors.org,
2019). This high level of pollutions has entailed the country to
incorporate several laws to maintain a sustainable environment for
the economy. The company PepsiCo incorporate a very green
production process and focuses to enhancing its farming
procurement. The companies R&D wing constantly develops new
high yielding variety of farming products. This has helped the local
agricultural sector to incorporate the modern technologies and
enhance its productivity considerably.
Legal The legal system of the country has been becoming very complex
with time. The Environment and Climate Change Law 2019, and
Employment and Labour law 2019 has constrained the overall
functioning of the businesses in the country (Romero and Ruiz,
2019). The country has very strongly taken up the objective to
modernise overall legal framework of the country (Macher and
Mayo, 2015). The new changes are restricting the scope of free
functioning of the organisation as compared to earlier.
Table 1: PESTLE
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Analysis of the Business Scenario
 Porter’s five forces
Porter’s five forces is a framework through which a company can identify which competitive
forces exist in the market that influences an enterprise. Through this approach, the economic
factors are derived so that the level of market attractiveness and competitive intensity is
revealed for better direction (E. Dobbs, 2014). In the case of PepsiCo, the framework has
been illustrated.
Competitive Rivalry (strong force) – In the beverage industry there is an intense level
competition present with companies such as Coca Cola, 7up, Miranda and others in the
international market. These companies provide similar competitive pricing such as £1.22 for
each of the small 500ml variant bottle of the company. In order to raise sales of their products
in the market, these companies initiate temporary discounts, television and online
advertisement contests and other marketing strategies (Marina et al., 2014).
Supplier Power (weak force) - The suppliers of PepsiCo maintains a fortified relationship
with the company, this is because these individuals are highly reliant on the business. Since
PepsiCo has a very goodwill and brand value, the probability that the suppliers will have a
long-term organisational relation with whom they can perform frequent business transaction
is elevated. In such a scenario, even if the company provides low rates of margin, it is
acceptable for the suppliers as they are able to stay in the market longer.
Buyer Power (strong force) - Since are several competitive players as stated above, it is
clear that for the buyers, the rate or cost of switching to another product is relatively low. In
addition to that, consumers have high access to competitive information and products because
of which they can alter what they buy at any moment. In such a scenario, for PepsiCo, they
should provide discounts, small gifts and other facilitates in order to retain consumers (Hill et
al., 2014).
Threat of Substitution (strong force) - In regards to PepsiCo there are substitutive products
such as ice tea, cold coffee, sparkling water, coconut water and others in the market. All of
the mentioned products acts as the driving force that makes PepsiCo perform higher and look
more into aspects such as big data and others that increase the research capability (Lasserre,
2017). In addition to that switching to these products is sometimes cheaper as the level of
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cost involved is lower (in the case of tea and sparkling water the prices fall to as far as half a
pound)
Threat of New Entry (moderate force) - At a small scale, a new business has a high chance
of entering the beverage market, this is because per unit cost of creating a new drink is very
low. However, when wishing to expand the scale of the enterprise and trying to provide the
product to several stores, then the higher investment is required. In this regard, the level of
investment is considerately high as reserves for aspects such as land, product transportation,
and aspects are required (Ansoff et al., 2018).
All of the above, it can be seen that there are several aspects pose a negative factor against
the company. In order to combat these aspects, strategic thinking and reserve allocation are
required so that a better market share can be captured within Mexico. For instance, in order to
lower the impact of the substitutions in the market and expand sales. The company must
arrange higher funds so that marketing efforts can be increased.
In addition to that, in order for the company to retain consumers and lower the degree of
consumer power, the company can launch Corporate Social Responsibility activities. The
power of the consumer here refers to the consumers’ ability to shift to another brand and
leave PepsiCo. Mexico is a mega diverse ecological country owing to which there is high
biodiversity present within the premises. The company may initiate aspect such as
environmental development campaigns, green awareness strategies and other aspects through
which a company can attain higher loyalty of the consumer base (Unit, 2015).
The way in which the company can utilize its foreign direct investment (FDI) is by
purchasing manufacturing land in places such as Cancun, Tulum, and other. All of these
locations are prime locations that would help the company to reach consumer markets faster
and beat competitors. Furthermore, utilizing FDI in such a manner would help diversify the
investment mix of enterprise that would bring in higher dividends for the shareholders (Cadle
et al., 2014).
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Figure 1: Poters’ five force
(Source: Cadle et al., 2014)
Demand Supply Scheme
The Demand Supply Scheme is also called the Demand and Supply Equilibrium. This
Equilibrium illustrates the balance, which a company attempts to create in the market. This
framework expands on how much quantity the consumers want and how much the company
is able to provide (Kagel and Roth, 2016). This is considered the optimal scenario, as the
consumers are willing to pay the highest amount for a specific product. In accordance with
the number of products wanted, the company attempts to develop a more streamlined
operation. Here higher numbers of employees, more research and different leadership
approaches are practiced. Inside this framework, two axes are there, one is the X-axis for
Quantity and another is the Y-axis for Price, which is present (Cooter and Ulen, 2016)
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Figure 2: Demand and Supply Equilibrium for PepsiCo
(Source: Mankiw, 2014)
In the particular case of PepsiCo, in order to raise the demand quantity for an enterprise and
products, higher marketing efforts might be needed. The company can take the help of
strategies such as celebrity endorsement, shocking content, online posting boost methods and
other strategies within Mexico. All of such ways will enable the company to come into the
eyes of the consumers more and make them more inclined towards buying their products. In
addition to that, since Mexico is an emerging nation, the company can plan open to new
products and services. The company may develop a new product such as extra sweet, extra
fizz and other variations of Pepsi into the market. All of these factors accumulatively will
raise the probability of sale and the likelihood that the demand scale will elevate (Mankiw,
2014).
Once the demand increases, the company will be required to increase its supply scale as well.
PepsiCo can perform this by producing a large batch of 50,000 extra sweet and fizz product
in its first manufacturing cycle. In order to elevate and establish supply growth, the company
will be required to invest in a new land, purchase better machines, and employ more
subordinates as well. In addition to that, technological developments such as automation can
be performed within Mexico. This will assist the company to raise its level of quality and
produce more uniform units, so that consumers do not get any discrepancies.
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Finding balance between the supply and demand, FDI plays an important role as well. As
with more investment is provided in foreign countries, the likelihood of the consumers
noticing a new company is high. Furthermore, FDI can help PepsiCo adopt new technological
avenues through which the progress rate of the company would be more (Marina et al.,
2014).
In the figure provided above (1), it can be seen that Q indicates the optimal point at which the
company can provide the most number of commodities. Similarly, P indicates the best price
at which the consumers are willing to provide to PepsiCo for the products introduced. Since
the population of Mexico is over 12 million, PepsiCo has a large consumer market to work
with. Therefore, the equilibrium can be implemented well if the target audience is identified
through segmenting, targeting, and positioning (hhs.gov, 2016).
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