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GCE JUN 2006 : (A2 2) Objectives and The Business Environment , People in Organisations, Accounting and Finance, Marketing and Operations Management

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ADVANCED General Certificate of Education 2006 Business Studies Assessment Unit A2 2 Module 1 to 5 Objectives and The Business Environment, People in Organisations, Accounting and Finance, Marketing and Operations Management A2T21 assessing [A2T21] THURSDAY 1 JUNE, MORNING TIME 1 hour 40 minutes. INSTRUCTIONS TO CANDIDATES Write your Centre Number and Candidate Number on the Answer Booklet provided. Answer all questions. INFORMATION FOR CANDIDATES The total mark for this paper is 80. Quality of written communication will be assessed in all questions. Figures in brackets printed down the right-hand side of pages indicate the marks awarded to each question or part question. ADVICE TO CANDIDATES You are advised to take account of the marks for each question in allocating the available examination time. This is a synoptic paper in which you are expected to demonstrate your understanding of the connections between the different elements of Business Studies. A2T2S6 2022 Read the information below and answer the questions that follow. Diversified PepsiCo steals some of Coca-Cola s sparkle Coca Cola s Dominance 1 In October 1996 Coca-Cola was firmly winning the battle against a struggling PepsiCo. CocaCola s chairman Roberto Goizueto dismissed PepsiCo as a spent force. As they ve become less relevant, I don t need to look at them very much any more. Changing Fortunes 2 Eight years later everything had changed. PepsiCo s share price had doubled while that of Coca-Cola had fallen from what it was in 1996. One of the reasons for this reversal of fortunes was the death of Roberto Goizueto in 1997 and the resulting management upheaval, but this was only half of the story. PepsiCo became one of the best performing companies in the food and drinks industry with tactics that had increased sales by 45% and net profits even more. Diversification 3 Part of PepsiCo s success was a result of its diversification strategy. Coca-Cola concentrates solely on drinks whereas the biggest part of PepsiCo s business is not cola but the Frito-Lay snack food business which merged with PepsiCo in 1965. Other developments included the acquisition of 7-UP International and Mug Root Beer in 1986 and the formation of the Lipton Tea Partnership in 1992. Only two thirds of PepsiCo s drinks volume is carbonated soft drinks, compared with more than 80% of Coca-Cola s. 4 Coca-Cola s tactic of concentrating solely on drinks appeared to be working up until 1996 but this was before there was a decline in brand loyalty and an increase in health conscious consumers. 5 The Frito-Lay merger provided PepsiCo with corporate growth through its success in the snack food industry and the sales of non-carbonated drinks such as water and juices helped to offset the slump in cola sales. These factors manifested themselves into a growth in earnings that were a third greater than Coca-Cola s in 2004 and a sales growth that was four times higher at 8%. In addition Coca-Cola s drinks volume remained stable in North America compared to PepsiCo s increase of 3%. The position was well explained by Tom Pirko, the President of Bevmark, a drinks consultancy, who stated If it is raining in one part of business, the sun is probably shining in another . PepsiCo s Position 6 PepsiCo is the world s fourth largest food and drinks company, ranking behind Nestle, Kraft and Unilever. Its sales in 2004 were more than $29bn ( 15bn) compared with Coca-Cola s $22bn ( 11.4bn). This scale and diversity strengthens the group s position in the retail market. Its 16 brands each generate more than $1bn of annual revenue, ranging from Doritos crisps to Aquafina water. It owns 6 of the 15 top selling food and drink brands in the United States supermarkets more than any other company. This has given PepsiCo the ability to dictate terms to the supermarkets. Coca-Cola s products however, are in less parts of the supermarket and as a result it has less bargaining power. A2T2S6 2022 2 Organisation Structures 7 Another major difference between the two organisations is the way that they are organised and run on a day-to-day basis. Coca-Cola s high rise offices in central Atlanta are known as the Kremlin because of the political intrigue and bureaucratic culture that exists within them. By contrast, PepsiCo s headquarters are located in a leafy town outside New York and have the feel of a university campus. The offices are located in a low rise building set in 160 acres of parkland, open to the general public. Health Concerns 8 Although PepsiCo appears to be in a strong position, it knows that it cannot be complacent. One of the biggest challenges facing them is consumer concern in North America and Western Europe about health. The European Commission is threatening to ban the advertising of food and drinks to children and the United Kingdom is considering a plan to put red warning labels on unhealthy products. In the United States, McDonalds is facing a law suit from consumers and analysts believe that producers such as PepsiCo could also become targets. Although PepsiCo has attempted to introduce healthy products, the majority of its goods remain high in sugar, fat or salt content. 9 Steve Reinemund, the chairman and chief executive of PepsiCo, believes that the situation should be seen as an opportunity rather than a threat for companies who are willing to consider producing healthier products. PepsiCo itself has introduced its own labelling system in the United States to identify healthier products. These labels are monitored by an independent board of health experts and already almost 40% of PepsiCo s sales come from products that bear the Smart Spot label. To support this strategy, most of the organisation s research and development effort is focused on healthy products and the aim is to have at least half of all new products meeting the Smart Spot criteria. 10 PepsiCo s image is also helped by the inclusion of Quaker Oats and Tropicana juices as part of its portfolio of products. The healthy images of these products help to offset the unhealthy image of Pepsi-Cola and Frito-Lay. It is interesting to note that Coca-Cola had also considered buying Quaker Oats when it was for sale, but the proposal was rejected by Coca-Cola s nonexecutive directors. International Developments 11 Another challenge that faces PepsiCo is the opportunity that exists to strengthen its international presence. In 2004, only a third of its revenues came from outside the United States and Canada compared with 70% of Coca-Cola s. PepsiCo s international strategy has changed since the 1990s when it tried to compete in Coca-Cola strongholds such as Germany, Japan, and South America. Its international business is now dominated by snacks and concentrates on two main markets, the United Kingdom and Mexico, which together, generate 40% of their overseas sales. Further expansion plans are focused on emerging markets such as China and India where competitors are not yet established. Its international strategy appears to be working well. International sales in 2004 were the fastest growing part of the company and operating profit was up by a quarter. A2T2S6 2022 3 [Turn over 12 There is however a threat to PepsiCo s plans for the international market as a result of the anti-American sentiment around the globe, caused by the war in Iraq. Research carried out by Global Market Insite, a research company, has found that one in five Europeans plan to avoid buying products closely associated with the United States. PepsiCo however, feels that it is less American than other organisations such as Coca-Cola and McDonalds. In addition, many of its products such as Walkers crisps in the UK and Kurkure lentil snacks in India are viewed as local. Despite this, some analysts argue that the most effective way for PepsiCo to increase its presence in the international market would be to merge with another global consumer product giant such as Nestle, Kraft, Unilever or Danone. Although Steve Reinemund says that he has no plans for such a large deal, he does not rule one out. The Future 13 Despite the current success of PepsiCo, the organisation is bracing itself for a renewed battle with Coca-Cola. Coca-Cola has recently appointed Neville Isdell, a Coca-Cola veteran, as the new Chief Executive. He has promised to restore Coca-Cola s status by spending an additional $400m on marketing each year. 14 Both companies are launching a series of similar new products Coca-Cola are introducing lime-flavoured Coke in an attempt to maintain customer sales in the carbonated drinks market. Tom Pirko of Bevmark, believes that PepsiCo will continue to lead the way, arguing that PepsiCo s greater flexibility will continue to be an advantage. PepsiCo has a young, vibrant, optimistic culture that encourages its people to move fast and take risks. At Coca-Cola, the people always seem to be 10 to 15 years older . Steve Reinemund however, says that his winning culture has evolved as a result of dealing with an enormously powerful competitor that has made them stronger . 15 It will be interesting to see what happens in the future and who will triumph in the food and drinks industry. Source: Adapted from A better model? Diversified Pepsi steals some of Coke s sparkle Andrew Ward, Financial Times 28th February 2005 1 Evaluate PepsiCo s strategy of continuing diversification. [20] 2 Evaluate the impact of PepsiCo s decision to introduce healthy products into its range. [30] 3 Evaluate Coca-Cola s prospects of winning the battle against PepsiCo. [30] Permission to reproduce all copyright material has been applied for. In some cases, efforts to contact copyright holders may have been unsuccessful and CCEA will be happy to rectify any omissions of acknowledgement in future if notified. SP (NF) T20063/1

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Additional Info : Gce Business Studies June 2006 Assessment Unit A2 2 Modules 1to 5: Objectives and The Business Environment, People in Organisations, Accounting and Finance, Marketing and Operations Management
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