PepsiCo Five Forces Analysis (Porter’s Model)

PepsiCo Five Forces Analysis, Porters, competition, bargaining power buyers, suppliers, threat, substitution, new entrants case study
A 1950s steel sign for Pepsi-Cola in Huntsville, Alabama. A Porter’s Five Forces analysis of PepsiCo shows that the business is under the major influences of competitors, consumers, and substitutes. (Photo: Public Domain)

PepsiCo’s global success is linked to its business capabilities, especially in overcoming the challenges shown in this Five Forces analysis. Michael Porter developed the Five Forces analysis model to determine the most significant external factors that influence firms. For PepsiCo to maintain its market position as the second biggest food-and-beverage company in the world, it must address the potential problems identified in this Five Forces analysis. PepsiCo also needs to continually adjust its strategies to effectively respond to the external factors significant in the food and beverage industry environment.

A Five Forces analysis of PepsiCo reveals that the company must prioritize the impacts of competition and the influences of consumers and substitutes. These forces shape PepsiCo’s strategies.

Overview: PepsiCo’s Five Forces Analysis

Because of the global nature of its business, PepsiCo faces varying external factors in its industry environment. However, the overall impact of these factors and the corresponding five forces are summarized as follows, with indicators of the strengths of their forces on PepsiCo:

  1. Competitive rivalry or competition (strong force)
  2. Bargaining power of buyers or customers (strong force)
  3. Bargaining power of suppliers (weak force)
  4. Threat of substitutes or substitution (strong force)
  5. Threat of new entrants or new entry (moderate force)

Recommendations. PepsiCo’s Five Forces analysis indicates that competition, the bargaining power of customers, and the threat of substitution are the issues most significant to the company. PepsiCo can improve competitiveness through aggressive marketing combined with product innovation. In such product innovation, PepsiCo must consider current market trends, such as environmentalism and healthy lifestyles.

Competitive Rivalry or Competition with PepsiCo (Strong Force)

The Coca-Cola Company is one of PepsiCo’s biggest competitors. However, this component of the Five Forces analysis shows that there are other factors that determine the influence of competitive rivalry. The following are the most notable external factors that create the strong force of competition against PepsiCo:

  • High aggressiveness of firms (strong force)
  • Low switching costs (strong force)
  • High number of firms (moderate force)

Most firms in the food and beverage industry are aggressive, such as in product innovation and marketing, thereby exerting a strong force on PepsiCo. Competitive rivalry is also strengthened because consumers can easily shift from one provider to another (low switching costs). In addition, PepsiCo competes with many other firms, including big ones like the Coca-Cola Company and a multitude of small and medium ones. This component of the Five Forces analysis shows that PepsiCo faces strong competitive rivalry as one of its most pressing concerns.

Bargaining Power of PepsiCo’s Customers/Buyers (Strong Force)

Consumers are among the top priorities in PepsiCo’s mission statement. The effects of customers on the firm’s industry environment are determined in this component of the Five Forces analysis. The external factors that lead to the strong bargaining power of PepsiCo’s consumers/buyers are as follows:

  • Low switching costs (strong force)
  • High access to product information (strong force)
  • High availability of substitutes (strong force)

As noted, consumers can easily shift from one firm to another. This condition strengthens customers’ ability to influence PepsiCo. In addition, consumers have extensive information for them to easily make choices between PepsiCo products and competing products. Also, substitutes give buyers even more reasons to stay away from PepsiCo products. Based on this component of the Five Forces analysis, PepsiCo must ensure customer satisfaction to maximize its revenues.

Bargaining Power of PepsiCo’s Suppliers (Weak Force)

PepsiCo must maintain profitable relationships with suppliers. This component of the Five Forces analysis covers the impact of suppliers on the company’s industry environment. The weak bargaining power of PepsiCo’s suppliers is based on the following external factors:

  • High overall supply (weak force)
  • Low forward integration of suppliers (weak force)
  • Moderate size of individual suppliers (moderate force)

The high overall supply increases PepsiCo’s options in acquiring raw materials, thereby reducing the bargaining power of suppliers. This power is also weakened because of the low forward integration, which limits suppliers’ control of PepsiCo’s supply chain. These external factors weaken suppliers’ influence on the company even though some of them are moderately sized or large firms. This component of the Five Forces analysis indicates that suppliers’ bargaining power are a low priority for PepsiCo.

Threat of Substitutes or Substitution (Strong Force)

PepsiCo’s products could be substituted, based on consumer preferences and other variables. The influence of substitution on the firm’s business and industry environment are examined in this component of the Five Forces analysis. The following external factors contribute to the strong threat of substitutes against PepsiCo:

  • High performance of substitutes (strong force)
  • Low switching costs (strong force)
  • High availability of substitutes (strong force)

Most substitutes to PepsiCo’s products are satisfactory. For example, consumers easily enjoy real fruit juices and brewed coffee products instead of drinking Pepsi or Tropicana products. In addition, PepsiCo consumers can easily shift to these substitutes, which are generally affordable. Also, most of these substitutes are widely available in grocery stores and other providers. Based on this component of the Five Forces analysis, the external factors make the strong threat of substitution a priority issue facing PepsiCo.

Threat of New Entrants or New Entry (Moderate Force)

PepsiCo must remain strong despite the possibility of new firms competing against it. This component of the Five Forces analysis covers the influence of new entrants or new firms on the food and beverage industry environment. The external factors that maintain the moderate threat of new entry against PepsiCo are as follows:

  • Low switching costs (strong force)
  • Moderate customer loyalty (moderate force)
  • High cost of brand development (weak force)

New firms threaten PepsiCo because consumers can easily shift from one company to another (low switching costs). However, through moderate customer loyalty, PepsiCo has a corresponding level of protection from new entrants. Also, the high cost of brand development makes it difficult for new entrants to directly compete against PepsiCo, which has one of the strongest brands in the industry. In this component of the Five Forces analysis, external factors make the threat of new entrants a secondary concern for PepsiCo’s management.

References
  • Burke, A., van Stel, A., & Thurik, R. (2010). Blue ocean vs. five forces. Harvard Business Review88(5), 28-29.
  • Dobbs, M. (2014). Guidelines for applying Porter’s five forces framework: a set of industry analysis templates. Competitiveness Review24(1), 32-45.
  • Grundy, T. (2006). Rethinking and reinventing Michael Porter’s five forces model. Strategic Change15(5), 213-229.
  • PepsiCo 2014 Annual Report.
  • PepsiCo Inc. (2012). PepsiCo Announces Strategic Investments to Drive Growth.
  • Roy, D. (2011). Strategic Foresight and Porter’s Five Forces. GRIN Verlag.
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