Profit Maximization Strategies: Pepsi Inc.

Profit Maximization Strategies: Pepsi Inc.

       PepsiCo Inc. operates in the food and beverage industry, which has fierce competition as well as ever-changing consumer demands. The company is the second dominant carbonated soft drink manufactures after Coca Cola Company (KQ). However, it poses a significant threat to its close rival KQ in the competition to rule the market. The two companies have played it hard for the entry and survival of other competitors due to their reputation and worldwide operations. According to Zhang (2019), Pepsi Company (PEP) was founded in 1986, and it is in operation to date, which means it has more industry experience to fight against other competitors who threaten to outsmart it. Additionally, the company has various strategies to reduce expenses so that it can maximize profits without increasing the prices of its products. An example of such strategies is reducing the cost associated with packaging by integrated with bottling company Dr. Pepper bottlers.

Nevertheless, the company had a variety of products ranging from soft drinks of different flavors to snacks, which adds extra profit as a compliment, since many people take them jointly with drinks. However, even though it enjoys a significant market share, the company should keep an open eye to the competitors and the industrial changes to observe the health factor of its operations. On that note, consumers are keen on healthy living; hence the company should move with such changes such as the production of less sugary products.

Product Demand and Consumer Behavior

The company should observe the product demand as it goes hand in hand with consumer behaviors, which, on the other hand, affects the profitability of a company. More so, PEP managers should analyze the market to evaluate the benefit of increasing product prices or quality in conjunction with the game theory considering what its competitors are doing (Baye & Price, 2016 p 35). For example, if PEP increases the price of Diet Pepsi and KQ fails to increase the price of Diet coke, then most consumers will shift to Diet coke. The table below shows the price-setting strategies concerning market changes.

For the company to maximize profit, it should settle at the price where the marginal cost equals the marginal revenue. Hence, when the product price is above marginal cost, the firm can only increase the profit by increasing quantity, on the contrary, if the price is below the marginal cost, to increase profit means decreasing the quantity.

Further, if the company decides to raise the price and quantity is likely to make more profit in the short run, but that cannot last for long; hence, in the long run, it may either reduce the output or end up making losses. However, this may not always be the same case if the company invest much in advertising since at that time consumer do not follow any trend because they end up buying products without much analysis, which is a mechanism to increase company’s profitability.

Nevertheless, when the company raises price/output, it changes the dollar magnitude in that in the short run, the demand will go down and rise in the long run.

The graph shows that when the price increases in the short run, the demand reduction is high since many consumers find it hard to cope with it, hence shift to competitors, especially in a competitive market.

The graph shows that a higher increase in price has a low impact on product demand. That means, 5% increase in price will have a little impact on demand in the long run compared to the short run where it has a considerable fall. Perhaps, managers should observe such changes to decide when to increase prices or supply and when to reduce. For example, they can opt to increase the price when they want to clear old stock to avoid further losses associated with damaged or expired products.

Production and the Organization of the Firm

PepsiCo Inc. has a pronounced market share with overwhelming returns. The company has continued to increase its productivity through the adoption of new technology. Additionally, the company is moving with the technology such as e-commerce and mobile apps to reach and expand its distribution channels, in that retails as well consumers are using such technology to place orders as well as search for available products. Thus the company should capitalize on it as a marketing strategy. To win more market share, the company made several acquisitions. For example, in 1998, it acquired Tropicana, a move that increased the company’s revenue as well as won more customers, especially those who were loyal to Tropicana. The company has a diversified product that ensures every customer gets their preferences may it be a drink or snacks. More importantly, the company has engaged in health matters. For example, in the year 2018, PEP made about 44% of products of below 100 calories contents. On that note, the company vision 2025 is to ensure over 75% of its products are of low salts and fat contents. The PEP should use it will be a counter plan of the health accusation to avoid negative impacts, such as consumer rejection or its competitors taking advantage to outsmart it (Srikanth, Donthireddy & Makkena, 2018).

Nevertheless, the company should take advantage of the porter’s five forces approach to analyze its position and future strategies to continue enjoying its market share as well as maximize profitability. 1. Competitive rivalry: PEP face significant competition from KQ, which keeps the other on toes such that if either company relaxes, the other capitalizes on such mistakes to win more customers. Both companies have a good reputation and serve a wide range of products and consumers, meaning the competition is high. Additionally, their products are similar. For example, when PEP produced Diet Pepsi, KQ produced Diet coke, which makes it hard for one to win customers of the other. Therefore, the company should be alert and find other value-addition services such as unique logistics services to add an extra coin. 2. Suppliers’ power: PEP does not hold the supplier’s powers since its rival KQ gives them options. Therefore, the company should have strategies to win reliable and cheap suppliers who cannot fail the company, not forgetting that supplies in the food industry are quite unstable (Rothaermel, 2016). For example, if the supplier supplies low-quality products that will harm the company, which may result in significant loses. 3. Buyers’ power: PEP and KQ product are much similar, which gives consumers alternatives. Therefore, the company should liaise with retailers who are in close contact with consumers to collect their views about the company’s products to identify areas to improve as well as areas to capitalize on while retaining the customers. According to Baye & Price ( 2016 p 35), factors such as an increase in product prices may make consumers shift to competitors who have reasonable prices. 4. The threat to substation: PEP should always keep open eyes on KQ and other companies so that when they produce a substitute product, they can as well follow suit, otherwise, their customers will shift to competitors.  5. New entrants’ threat: although PEP and KQ have more experience in the industry as well as powers to regulate new entrants, the technology has made it easy for investors to invest in various sectors. Therefore, the company should not relax but move with technology to solidify its position.

In conclusion, PepsiCo Inc. has solidified its position in the market, though it should keep watch on its rival Coca Cola company. Consequently, profit maximization lies at the point where the prices equal marginal cost. Thus the company should consider it as well as the demand and consumer behavior when increasing/reducing the supply to maximize profit. Additionally, it should consider capitalizing on advertising, which leads the consumer to go against the law of demand. More so, porter’s five forces play a crucial role in the success of a company; hence the PEP managers should analyze it adequately to take advantage of its strength to solve its weakness. However, the company should move with the technology, which has opened doors for new entrants; otherwise, the new entrants will divide its market share. Further, the food and beverage industry is health-conscious; hence the company should put up measures to improve on such matters.

Reference

Baye, M., & Prince, J. (2016). Managerial Economics & Business Strategy. (9e ed.). McGraw -Hill Education.

Rothaermel, F. T. (2016). Strategic management: concepts (Vol. 2). McGraw-Hill Education.

Srikanth, A., Donthireddy, C., & Makkena, K. D. (2018, October). Improvising Downtrend

Product Using Conjoint Analysis: A Special Analysis on Mirinda of Pepsico. In ICRTEMMS

Conference Proceedings (Vol. 546, No. 549, pp. 546-549). Swarna Bharathi Institute of

Science and Technology.

Zhang, Z. (2019). Risk Analysis of Two Leader Drink Company: PepsiCo and Coca-Cola. Asian

Business Research, 4(3), 42.