Business Ethics Experiential Learning Exercise based on the group questions answer the individual part 1. Individual read-outs of questions 1 and 2. 2

Business Ethics Experiential Learning Exercise based on the group questions answer the individual part

1. Individual read-outs of questions 1 and 2.

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Business Ethics Experiential Learning Exercise based on the group questions answer the individual part 1. Individual read-outs of questions 1 and 2. 2
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2. Team agrees on the main issues of the case.

3. Team discusses possible underlying causes.

4. Team agrees on internet research project— What industry is the company in? What are the topics that should be investigated? Who will do what? By when?

5. As you do your research, be thinking about how you would address the underlying causes of the problem faced by the company.

6. Individual Requirement: At this point, what do you think your group could have outlined better?

7. Individual Requirement: What is the largest challenge your group has experienced and how was it addressed or is being addressed?

100-150 word for each individual questions For the exclusive use of J. DORSETT, 2019.
9 -3 1 4 -0 5 5
REV: DECEMBER 21, 2015
JOSEPH L. BADARACCO
MATTHEW PREBLE
PepsiCo, Profits, and Food: The Belt Tightens
Indra Nooyi, CEO of the food and beverage company PepsiCo, had emphasized adding healthier
offerings to the company’s portfolio since her arrival in 2006. Her goal was to grow the company’s
“Good-for-You” product category (with items such as oatmeal and fruit juices) to a $30 billion business
by 2020.1 “With everyone’s focus on health, products that are nutritiously good, or nutritionally better
than anything else out there, are a huge opportunity,” Nooyi explained in 2011. 2 With roughly onethird of the U.S. adult population obese, Nooyi’s strategy was also in line with a growing recognition
that excess sugar consumption contributed to serious health problems.3
However, Nooyi and PepsiCo faced criticism not only for this strategy, but for the company’s
financial results—particularly that of its stock price—which lagged its competitors (see Exhibit 1 for
stock price comparisons with competitors, and Exhibits 2a through 2f for PepsiCo’s and select
competitors’ financials). PepsiCo’s U.S. beverages business had struggled, and some believed that
Nooyi’s strategy drew attention away from PepsiCo’s major brands.4 It appeared at times in the early
2010s that her job was at risk.5 While PepsiCo’s board publicly vouched for Nooyi and PepsiCo’s
strategy, it was also said to be disappointed at the lack of potential successors within PepsiCo’s top
management.6
PepsiCo’s efforts to develop healthier foods had won it few friends among health advocates. “The
best thing Pepsi could do for worldwide obesity would be to go out of business,” one academic
remarked.7 Others pointed to apparent duplicity as PepsiCo fought, through industry trade groups,
against regulations, taxes, and other initiatives aimed at reducing obesity. 8 Comparisons were made
between the food and beverage industries and the tobacco industry in their lobbying efforts.9
Fundamental questions remained about how Nooyi would lead PepsiCo. As the company grew in
international markets, and as obesity became a larger concern in the developing world, should it sell
its high-earning core brands there or focus on designing new, more healthful products? What were
PepsiCo’s responsibilities to its consumers? Like tobacco companies in the late 20th century, food and
beverage companies could be targeted with health-related lawsuits. How should Nooyi protect against
this risk? Nooyi also had to decide what her strategy should be for the coming years. Should Nooyi
invest in the core products such as Doritos and Pepsi-Cola that had made it successful in the first place,
or push through with her vision of PepsiCo’s future? Was it possible for PepsiCo to succeed with a
focus on nutritious foods, considering its broad product portfolio and competitors eager to take market
share away from the company?
Professor Joseph L. Badaracco and Case Researcher Matthew Preble (Case Research & Writing Group) prepared this case. This case was developed
from published sources. Funding for the development of this case was provided by Harvard Business School and not by the company. HBS cases
are developed solely as the basis for class discussion. Cases are not intended to serve as endorsements, sources of primary data, or illustrations of
effective or ineffective management.
Copyright © 2013, 2014, 2015 President and Fellows of Harvard College. To order copies or request permission to reproduce materials, call 1-800545-7685, write Harvard Business School Publishing, Boston, MA 02163, or go to www.hbsp.harvard.edu. This publication may not be digitized,
photocopied, or otherwise reproduced, posted, or transmitted, without the permission of Harvard Business School.
This document is authorized for use only by JAMES DORSETT in 2019.
For the exclusive use of J. DORSETT, 2019.
314-055
PepsiCo, Profits, and Food: The Belt Tightens
In response to mounting criticism, Nooyi launched a strategic review to answer some fundamental
questions in late 2011. What was the right balance in terms of investments and management focus
between PepsiCo’s major brands, such as Pepsi-Cola and Doritos, and its healthier offerings? Was it
possible to succeed with a focus on nutritious foods, considering its broad product portfolio and
competitors eager to eat away at its market share? How long could Nooyi accept subpar performance
while developing the Good-for-You category?
America’s Obesity Problem
Nearly 36% of adults and 17% of children in the U.S. were obese. 10 Obesity occurred when a person
developed excess body fat from consuming more calories than he or she used. (Obesity differed from
being overweight, which could come from muscle, water, or bone weight, as well as body fat.)11 Obesity
increased a person’s risk of developing serious health conditions, including heart disease, type 2
diabetes, high blood pressure, stroke, and certain cancers.12 Medical treatment for obesity-related
diseases cost nearly $150 billion annually. 13
Obesity rates had increased in the U.S. from the late 20 th century through the early 2000s. In 1990,
no state had more than 15% of its adult population classified as obese. 14 By 2010, no state had a
population where less than 20% of adults were obese, and many states had rates above 30%.15 Multiple
causes were given for this rise, including more sedentary lifestyles, food choices, and portion sizes. The
U.S. Centers for Disease Control and Prevention (CDC) dismissed the idea that some individuals had
a genetic predisposition toward obesity, as “[g]enetic changes in human populations occur too slowly
to be responsible for the obesity epidemic.”16
Drinks high in sugar were correlated to obesity, and as one observer noted, “it’s no surprise that
America’s rising thirst for sugar-water has paralleled the epidemic rise of obesity and type 2
diabetes.”17 Approximately half of all U.S. adults drank at least one soda per day, and the average
American drank 50 gallons of soda annually. 18 The American Heart Association recommended that
women consume no more than 100 calories per day, and men no more than 150 calories per day, from
added sugar—one 12-ounce (oz.) soda had 130 calories.19 The United States Department of Agriculture
listed soda as an empty calorie product—a food with little or no nutritional value.20 (See Exhibit 3 for
a comparison of the nutritional content of various foods and beverages.)
Scientific evidence increasingly pointed toward drinks with added sugar or artificial sweeteners as
contributors to obesity. “It is estimated that sweetened beverages account for at least one-fifth of the
weight gained between 1977 and 2007 in the U.S. population,” one study found.21 Another study
conducted on children found that “[f]or each additional serving of sugar-sweetened drink consumed,
both body mass index . . . and frequency of obesity . . . increased after adjustment for anthropometric,
demographic, dietary, and lifestyle variables.” 22 The study came to the conclusion that “consumption
of sugar-sweetened drinks is associated with obesity in children.” 23 Another team of researchers tied
sugary drinks to 180,000 deaths globally each year (133,000 from diabetes, 44,000 from cardiovascular
disease, and 6,000 from cancer).24
Studies were also conducted on sugar addiction. In one experiment, rats were given cookies and
plain rice cakes and then allowed to “self-dose” with cocaine, and the rats who liked the cookies best
were also the heaviest cocaine users.25 “It has been found that the criteria for substance dependence are
similar to that for food dependence. . . . When we looked at our animals, we observed that foods with
properties which are more appealing, such as those high in sugars and fats content, are preferred and
engender addictive-like responses,” said one academic.26 Another team of researchers worked with
rats on sugar addiction.27 “If bingeing on sugar is really a form of addiction, there should be long2
This document is authorized for use only by JAMES DORSETT in 2019.
For the exclusive use of J. DORSETT, 2019.
PepsiCo, Profits, and Food: The Belt Tightens
314-055
lasting effects in the brains of sugar addicts. . . . Craving and relapse are critical components of
addiction, and we have been able to demonstrate these behaviors in sugar-bingeing rats in a number
of ways,” explained another academic.28
Some blamed the food and beverage industry for contributing to the obesity problem, with one
individual describing “a conscious effort—taking place in labs and marketing meetings and grocery
store aisles—to get people hooked on foods that are convenient and inexpensive.”29 For example, one
specialized consulting firm was tasked with researching various combinations of a new Dr. Pepper
soda.30 The consultants taste-tested 61 different flavor combinations on almost 4,000 people.31 Each
participant was asked a detailed set of questions, and the firm was thus able to create a report on
precisely how the new product should taste and be made to draw in consumers.32
PepsiCo
PepsiCo formed in 1965 via the merger of the Pepsi-Cola Company (which owned the Pepsi and
Mountain Dew beverage brands) and Frito-Lay, Inc. (the makers of the Fritos, Lay’s, Cheetos, Ruffles,
and Rold Gold brand snack foods).33 Over time, the company introduced and acquired other wellknown brands, including Doritos, Tostitos, Walker’s, Quaker, Gatorade, Aquafina, and Tropicana. The
company had once owned quick-serve restaurants, including the Pizza Hut, Taco Bell, and Kentucky
Fried Chicken restaurant chains, all three of which it sold off in 1997.34
The company had 22 mega-brands in 2011 that each topped $1 billion in global sales.35 Its leading
mega-brands, in order of sales, were Pepsi-Cola, Lay’s, Mountain Dew, Gatorade, and Tropicana. 36
PepsiCo further segmented its products into the categories of fun-for-you (such as Doritos); better-foryou (diet sodas); and good-for-you (Quaker oatmeal).37 The company’s net revenues were evenly split
between its food and beverage offerings (its beverage products contributed 52%).38 PepsiCo divided
its operations into four segments (see Table A). The U.S. was PepsiCo’s primary market, responsible
for half of its total net revenues.39 (See Exhibit 4 for PepsiCo’s historical financials by segment.)
Table A
PepsiCo’s Revenues and Operating Profit by Segment
2012
% of net revenues
% of operating profit
Source:
PepsiCo Americas
Foods
PepsiCo Americas
Beverages
PepsiCo Europe
PepsiCo Asia,
Middle East, Africa
35%
51%
34%
30%
20%
11%
11%
8%
PepsiCo, 2011 Annual Report, p. 7, http://www.pepsico.com/annual11/downloads/PEP_AR11_2011_Annual_
Report.pdf, accessed August 2014.
The Making of a Manager
Nooyi was born in Madras, India (modern-day Chennai), in 1955 to a family that pushed her to
succeed.40 Her grandfather in particular had a lasting impact: “First [he taught me that] if you are given
a job to do, do it really well. You must consistently ask yourself ‘Have I done it to the best of my ability?’
Second, he taught me to be a lifelong student. Don’t ever think you’ve arrived, and remember that
what you don’t know is so much more than what you do.” 41 One observer noted that college friends
described Nooyi as “a tough and independent team player whose first taste of business was managing
college magazine advertising.”42
3
This document is authorized for use only by JAMES DORSETT in 2019.
For the exclusive use of J. DORSETT, 2019.
314-055
PepsiCo, Profits, and Food: The Belt Tightens
Nooyi earned an undergraduate degree and an MBA in India and joined a British textiles
company.43 Nooyi left to join Johnson & Johnson as a local area product manager for a sanitary pad
brand.44 One observer described the obstacles she faced in this job: “At that time, not only could such
a product not be advertised in India, but many retailers shied away from stocking sanitary pads.”45
Nooyi wanted to continue her education and attended the Yale School of Management.46 “It was
unheard of for a good, conservative, south Indian Brahmin girl to do this. It would make her an
absolutely unmarriageable commodity after that,” Nooyi later recalled.47 She graduated with a degree
in public and private management and worked for the Boston Consulting Group (BCG) for six years
on corporate strategy.48 “I don’t think I could have gotten here without a strategy consultant
background because it taught me inductive thinking. It taught me how to think of the problem in micro
terms but also to zoom out and put the problem in the context of the broader environment and then
zoom back in to solve the problem,” Nooyi remarked of her time with BCG. 49
She then spent four years at Motorola, which she joined as the business development executive
responsible for the automotive and industrial electronic group, and left as vice president and director
of corporate strategy and planning.50 Nooyi then moved to the industrials company Asea Brown Boveri
(ABB) as senior vice president of strategy and strategic marketing. 51 She worked closely with the CEOs
of both companies on corporate strategy.52
Nooyi joined PepsiCo as senior vice president of strategic planning in 1994 and became senior vice
president for corporate strategy and development in 1996.53 “Indra can drive as deep and hard as
anyone I’ve ever met . . . but she can do it with a sense of heart and fun,” remarked former PepsiCo
CEO Roger Enrico.54 She played a key role in the decisions to sell PepsiCo’s restaurants and bottling
operations.55 This was a difficult time for her: “I’d sit in meetings and try to be real macho and
dehumanize these decisions. . . . Then I’d go into my office and close the door and shed a few tears,
thinking, God, why can’t I just be building.”56 However, Nooyi was also behind decisions to move the
company in new directions, and PepsiCo acquired the Tropicana and Quaker (which owned Gatorade)
companies during her time in strategic planning.57 These acquisitions were driven by her
understanding that health and nutrition were increasingly important to consumers. 58
Nooyi became president and CFO in 2001 under CEO Steve Reinemund.59 Reinemund described
Nooyi’s “sharp talent for turning insightful ideas and plans into reality.”60 When Reinemund retired
in 2006, Nooyi was chosen as the new CEO. 61 The move was hailed by analysts.62 One observer noted
how Nooyi’s background differentiated her from other CEOs: “Unlike people in operations and sales,
who have to worry solely about meeting quarterly-earnings targets and expanding existing markets, a
corporate strategist must position the company for markets that don’t exist yet, and may not for another
20 years.”63
Commitment to Nutrition
Nooyi’s strategic decisions reflected her belief that consumer demand was shifting toward healthier
foods. She also saw little chance to grow through sodas alone.64 “What’s been happening in this
category forever: we, Pepsi, would push like hell to get a program with the [retailer], we’d spend
everything, and get a tenth of a point of market share. . . . The next period, Coke would come along,
push like hell, and gain a tenth. This was a zero-sum game. The cola category was profitable, but didn’t
grow profits,” she remarked.65 Instead, Nooyi saw opportunity in both making its existing snack and
beverage products healthier through R&D, and in transforming the company’s portfolio to include
healthier items: “Reduce the salt level, but don’t give up on taste. Reduce the fat levels. Reduce the
sugar levels. Take the zero calorie products and nudge consumers to buy more of that. . . . Take the
4
This document is authorized for use only by JAMES DORSETT in 2019.
For the exclusive use of J. DORSETT, 2019.
PepsiCo, Profits, and Food: The Belt Tightens
314-055
good-for-you products and make them great tasting so people never have to compromise taste for
health or health for taste,” Nooyi said. 66
Shortly into Nooyi’s tenure as CEO, PepsiCo launched Performance with Purpose, its plan for
sustainable growth built on three sustainability “pillars”: human, environmental, and talent (see
Exhibit 5).67 Under this plan, PepsiCo would increase the number of products based on healthy foods
such as whole grains, fruits, and vegetables.68 PepsiCo also planned to cut sodium by 25% and
saturated fats by 15% in some foods and markets by 2015, and sugar in some beverages and markets
25% by 2020.69 The company planned to include nutritional information on all packaging by 2012, and
to stop selling drinks high in sugar in schools by 2012.70
Nooyi made two significant hires early in her tenure: that of Derek Yach, an epidemiologist and
former World Health Organization (WHO) official, as PepsiCo’s director of global health policy, and
Dr. Mehmood Khan, who had once served as director of the Mayo Clinic’s diabetes, endocrinology,
and nutritional clinical trial unit, as chief scientific officer.71 Yach recalled that in his first meeting with
Nooyi, “[s]he said, ‘I want you to do exactly what you were doing at the WHO [developing dietary
guidelines], and do it here for us at PepsiCo.’” 72
Nooyi invested heavily in R&D.73 PepsiCo reformulated some products and launched new ones by
identifying a product’s unique taste and then replacing ingredients without changing taste. 74 For
example, PepsiCo created a salt with less sodium but a similar taste and used it on potato chips in the
U.K.75 PepsiCo also looked to reduce sugar or find replacement sweeteners for beverages.76 Tropicana’s
Trop 50 brand fruit juices used a sweetener from the stevia plant and had 50% less sugar and calories
than regular fruit juice.77 PepsiCo launched Pepsi Next in early 2012, claiming it had “real cola taste
with 60% less sugar.”78
PepsiCo added to its nutrition portfolio through acquisitions and partnerships. In early 2011,
PepsiCo became the majority owner of the Russian food company Wimm-Bill-Dann, a food and
beverage company with dairy and juice products, for $3.8 billion. 79 In 2012, PepsiCo partnered with
the German dairy company Theo Muller Group on a U.S. joint venture called Muller Quaker Dairy.
The joint venture’s $206 million yogurt plant was scheduled to open in mid-2013.80
Analysts noted that the market was wary of the nutrition focus.81 However, these same analysts
thought that “Pepsi will experience solid payback on nutritional initiative spending, given the large
size and strong growth potential of the nutrition category.” 82 The Access to Nutrition Alliance (an
initiative partly funded by the Bill and Melinda Gates Foundation) gave PepsiCo good marks for its
work: “PepsiCo has a clear focus on nutrition and health in its growth strategy. . . . While a significant
portion of its product portfolio consists of soft drinks and snacks, the company has undertaken
meaningful efforts to diversify its offerings and improve its nutrition practices.” 83
The Food and Beverage Industries’ Actions to Address Obesity
PepsiCo’s competitors took similar steps in the face of rising obesity rates and shifting consumer
demands. Soda consumption rates in the U.S. had fallen since 2005.84 In 2006, the Coca-Cola Company
(Coca-Cola), the Dr. Pepper Snapple Group (DPS), PepsiCo, and the American Beverage Association
(ABA), along with the Alliance for a Healthier Generation (formed through a partnership between the
American Heart Association and the William J. Clinton Foundation), agreed to limit the types of
beverages available in schools.85 A progress report issued in early 2010 showed that while carbonated
soft drinks accounted for nearly 40% of beverages these firms placed in U.S. schools in 2004, they

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