Has Pepsi's CEO lost sight of Pepsi's true purpose?

A recent article by Geoff Colvin in Fortune Magazine entitled “Pepsi’s CEO faces her biggest challenge” claims that Pepsi’s CEO, Indra Nooyi, will face her biggest challenge yet this year as she tries to revamp Pepsi’s business strategy in order to save its falling stock and falling profits.

One of the major problems for Pepsi, as Colvin points out, is that Pepsi’s stock has been falling since Nooyi became CEO, whereas, in that same time period, Coca-Cola’s stock has increased by 40%. However, Colvin states that this is not a fair comparison because Pepsi’s stock was almost overvalued when Nooyi became CEO and Coca-Cola’s stock had been doing poorly.

A NASDAQ Stock Comparison Chart of The Coca-Cola Company and Pepsico from the time Nooyi became CEO

An even bigger problem that Pepsi faces is that in its primary product category, drinks, its products are being displaced in the world’s major market, North America. Although Pepsi had held the number 2 spot for years, after Coke, now Diet Coke holds the number 2 spot. This fact is very bad news for Pepsi since the carbonated drink industry, as Colvin explains, is very profitable due to its low capital requirements and high profit margins. When examining Pepsi’s situation, I can’t help but see the similarities to Toyota, as we discussed last week in class. To illustrate, both companies are losing market share in their primary markets and falling behind the competition.

To counteract some of these problems, Nooyi had tried to change Pepsi’s business strategy by changing its CVP. Nooyi did this by trying to emphasize the nutritious value in its products like Quaker oatmeal, and trying to emphasize the ‘fun-for-you’ or amusement value in its products like Mountain Dew and Fritos.

Recently, Nooyi announced some changes that she would be making to Pepsi’s business strategy. These changes include spending more on advertising and marketing, cutting costs and getting rid of ambitious profit goals.

Although she claims that this plan is going to take two years to be successful, Colvin believes that the next few months are make-or-break for her, and that if investors and the board do not see results within the next year, that will mean dire consequences for Nooyi.

Despite her attempts to fix Pepsi’s business strategy, she does admit that she has made mistakes. She was quoted saying, “I wish we had stepped up our overall brand support, especially in North American beverages, earlier.” This hesitation also relates to the Toyota case because similarly, Toyota hesitated when deciding to enter emerging markets which proved to be a major mistake for Toyota. Clearly, Nooyi’s situation proves that every strategic business move is crucial and that one mistake or hesitation could seriously injure a corporation.

As I read this article, I was constantly reminded of Montgomery’s article, “Putting Leadership Back into Strategy.” Nooyi’s situation is living proof of some of the claims that Montgomery makes about the importance of real business strategy that goes beyond a company’s financials and focuses on a company’s purpose. Perhaps, by Nooyi changing Pepsi’s CVP and focusing on other products, she has lost sight of Pepsi’s true purpose and as Montgomery says, “nothing is more important for complex corporate entities than a clear sense of purpose.” However, maybe if Nooyi takes Montgomery’s advice and finds Pepsi’s true purpose and creates value, then Pepsi will be able to reclaim some market share and find its way back to the top.

What is your opinion? Do you think that Nooyi should follow Montgomery’s guidelines or do you think that there is another way to fix Pepsi’s failed business strategy? If you were Nooyi, what would you do to revamp Pepsi’s business strategy?