Case Study Analysis – Globalization[I.B.

]
Pepsi’s Entry Into India

Presented By –
Pratin Korgaonkar (25)
Tarun Kundnani (27)
Ashima Mahajan (29)
Renuka Medhekar (31)
Manan V. Mehta (33)
Roopali Mohite (35)
 Overview / Outline Of The Case
“Convincing India that it needs Western junk”
 Pepsi’s long held will to enter India

 Protests ……to…….Commitments

 Promises are meant to be broken..!!!!

 Foreignexchange crisis….to…..Liberalization –
Pepsi Reacts

 Pepsi Goes to Farming-finally

 Criticism…….. To………Appreciation
 Why Should A Company Opt For
Globalization?
 A well-designed global strategy can help a firm to gain a
competitive advantage. This advantage can arise from the
following sources : -
 Efficiency
 Economies of scale from access to more customers and
markets
 Exploit another country's resources - labor, raw
materials
 Extend the product life cycle - older products can be
sold in lesser developed countries
 Operational flexibility - shift production as costs,
exchange rates, etc. change over time
 Strategic
 First mover advantage and only provider of a product to
a market
 Cross subsidization between countries
 Transfer price
 Risk
 Diversify macroeconomic risks (business cycles not
perfectly correlated among countries)
 Diversify operational risks (labor problems,
earthquakes, wars)
 Learning
 Broaden learning opportunities due to diversity of
operating environments
 Reputation
 Crossover customers between markets - reputation and
brand identification
 Why Pepsi Wanted to Enter India
 The major market for PepsiCo, the US, seemed to be
reaching Saturation levels.

 India was a lucrative destination since its Vast

Population offered a Huge, Untapped customer base.

 Increasing Urbanization had already familiarized

Indians with Leading Global Brands.
 Ways To Enter A Foreign Market
 The decision of how to enter a foreign market can have a
significant impact on the results.
 Expansion into foreign markets can be achieved via the
following four mechanisms:
 Exporting
 Licensing
 Joint Venture
 Direct Investment
 Exporting
 Exporting is the marketing and Direct sale of
Domestically-Produced goods in Another Country.
 Since exporting does not require that the goods be
produced in the target country, No Investment in
Foreign Production Facilities is required.
 Most of the Costs associated with exporting take the
form of Marketing expenses.
 Exporting commonly requires coordination among
four players:
 Exporter
 Importer
 Transport provider
 Government
 Licensing
 Licensing essentially permits a company in the target
country to use the property of the licensor.
 Such property usually is intangible, such as trademarks,
patents, and production techniques.
 The licensee pays a fee in exchange for the rights to use
the intangible property and possibly for technical
assistance.
 Because little investment on the part of the licensor is
required, licensing has the potential to provide a very
large ROI.
 However, because the licensee produces and markets the
product, potential returns from manufacturing and
marketing activities may be lost.
 Joint Venture
 There are five common objectives in a joint venture:
 market entry ,
 risk/reward sharing ,
 technology sharing ,
 joint product development ,
 and conforming to government regulations.

 Other benefits include Political Connections and

Distribution Channel Access that may depend on
relationships.
 Such alliances often are favorable when:
 the partners' strategic goals converge while their
competitive goals diverge;
 the partners' size, market power, and resources are small
compared to the industry leaders; and
 partners' are able to learn from one another while limiting
access to their own proprietary skills.
 The key issues to consider in a joint venture are –
Ownership , Control , Length of Agreement , Pricing ,
Technology Transfer , Local Firm Capabilities &
Resources and Government Intentions.
 Foreign Direct Investment
 Foreign direct investment (FDI) is the direct ownership of
facilities in the target country.
 It involves the transfer of resources including capital,
technology, and personnel.
 Direct foreign investment may be made through the
acquisition of an existing entity or the establishment of a
new enterprise.
 Direct ownership provides a high degree of control in the
operations and the ability to better know the consumers
and competitive environment.
 However, it requires a high level of resources and a high
degree of commitment.
 Problems / Hurdles Faced By Pepsi To
Enter India in 1980s
 Late 1980s, India had a closed economy and government
intervention in the corporate sector was quite high.
 The letter (written by George Fernandes – Janata Dal)
 Anti - Foreign Sentiment
 The import of the cola concentrate.
 The use of a foreign brand name (Pepsi) was not allowed
as per the regulatory framework.
 Relationships with government officials often were
necessary to succeed and contracts may not be well
enforced by the legal system.
Analyzing Macro-environment:
A. Social Sector : Company had great opportunity in India as it
analyzed that lot of social unrest had plagued Punjab, though there
was healthy agriculture sector, many of the youngistan were getting
engaged in Terrorism.
B. Legal Sector: Indian economy was a closed one. There were many
strict law which prevented FDI’s to enter the country and this was a
concern were PepsiCo was in need to work on there strategies.
C. Economic Sector: Tariff rates were increased to almost 87% till
1989. The Indian market perceived a foreign investment, one of the
factors that can help them boost their economy.
D. Political Sector: Indian political system was unstable in terms of
its policies and not in term of continuation of same party in power.
E. Technological sector: Technology flows from the advanced
countries to the developing world through the MNC, JV,
technological alliances, licensing and franchising.
 Pepsi’s strategy to sell itself to Indian
Government.
 Pepsi came up with New Proposal with commitment of -
 Agricultural Revolution
 To create many employment opportunities.
 That would tempt many of the terrorists to return to
society.
 Promises That Helped Pepsi Enter
 The company would focus on food and agro-processing and
only 25% of the investment would be directed towards the
soft drink business.
 The company would not only bring advanced food
processing technology to India, but also provide a boost to
the image of products made in India in foreign market.
 Foreign brand name would not be used.

 Half of the production would be export and the export

– import ratio would be 5: 1 for the period of 10 years
(80% of the exports to be of food products
manufactured by the company and 20% of the exports
to be of food products by another companies)

 Creation of jobs for 50000 people across the nation , of

which 25000 were to be in Punjab.
 An agriculture research center would be established.

 Despite the protest Pepsi food Ltd. Venture was

cleared in 1988.

 Pepsi(36.89%) came up with joint venture with

PAIC(36.11%) and Voltas India Ltd(24%).
 Pepsi’s Reaction To Liberalization

 Post Liberalization , Pepsi was not focusing on generating

employment in agriculture sector and instead 50% of their
employees were engaged in concentrate and bottling
business.

 In 1994 , it bought off its partners in the venture like

Voltas sold its stake completely and reduced PAIC stake
to less than 1%.
 Established a wholly owned subsidiary Pepsico Holdings
India Pvt. Ltd. (PHI) - completely devoted to soft drink
business.

 Also Pepsi changed its cola’s name from ‘Lehar Pepsi’ to

‘Pepsi’

 In 1995 , Pepsi sold its tomato paste plant to Hindustan

Lever Ltd. (HLL)
Promises That Company Did Not Adhere To . . . .

 The company had promised to provide jobs to 50000

people , but by 1991 it had employed only 783 as direct
employee, but by 1992,this figure increased to 909 and by
1996 it rose 2400.

 Pepsi also failed to adhere to its commitment to export 50%

of its production.

 Its exports to fruit/vegetable based products was negligible.

 Pepsi began exporting products such as Tea , Rice and
Shrimp.

 In addition it exports Glass Bottles , Leather products,

and even Champagne. Critics pointed out these
products has also been exports from India and Pepsi
was deliberately not meeting its export obligation.

 A team of government officials visited company plant

and found that Pepsi had not made any efforts to
export 40% of goods it manufactures.
 Contract Farming Initiatives Undertaken
By Pepsi
 PepsiCo's Tomato Farming project was primarily
responsible for Increasing India & PepsiCo's Tomato
Production.
 Production increased from 4.24 million tones in 1991-92
to 5.44 million tones in 1995-96 due to the Use of High
Yield Seeds.
 Pepsi offered its contract farmers Advanced Equipments
such as Transplanters and Seeding Machines to help
them carry out their task Efficiently and Speedily.
 Pepsi imported the Superior Technology from China and
transferred it to the farmers in Punjab and Gujarat as a
result the Yield Per Hectare improved form 1 tones to
3.5 - 4.5 tones.

 Other Agri-programs also had been successful because of

its unique Laboratory-Farm-Factory approach.

 Also , Contract farming had been encouraged by Pepsi

for Potatoes , Basmati Rice and Groundnuts.
 Companies Rationale behind Contract Farming Initiative

 In 2000, company‘s export added up 3 billion.The item

exported included food, basmati rice, gaur gum and soft drink
concentrated.
 Pepsi met the soft drink requirements of many of its plants
World wide through its Indian operations.

 Use of Shelled Nuts to Export to European Confectionaries,

Salters and Roasters.
 Also part of the production were used for export to Far East
and to manufacture the Peanut Butter for export.

 Pepsi had done so much for countries agriculture sector

although it was not bounded to do so after change in regulatory
framework.
 Why Do Companies Go for Overall
Development of Target Economy

 Brand Image - Reputation, Goodwill

 Government Support to the company
 Overall Dependency on the company
 Increase in Consumer’s Disposable Income
VARIOUS WAYS IN WHICH
THE ECONOMY CAN BE
IMPROVED.
Developing countries infrastructure
facilities to attract FDI.

Improving logistics.

Outsourcing.
Conclusion
 Learnings / Implications From the Case

 Understand the kind of strategy a multinational

company develops to enter highly regulated
economies that have immense market potential.

 Analyze the importance of formulating and selling a

business proposal in such a manner that it becomes
attractive to the regulatory authorities of a foreign
country.
 Appreciate how and why a company changes its
strategies in tune with changes in the regulatory
environment of a foreign country.

 Understand the role big private sector corporations

can play in the development of the economies in
which they operate, and the financial and social
implications of doing so.