Pepsico versus The Coca-Cola Company?

Most of you probably guessed Coca-Cola. And to be fair, if we’re talking about the sale of soda, then the trademark red-and-white Coca-Cola cans far outsell Pepsi around the world. This began in the 19th century, when an American pharmacist created a syrup made from alcohol, cocaine, and kola nuts, which he named “French Wine Cola.” (What that had to do with France is a mystery, although it may have had something to do with the bottle.)

But as I write this, Pepsico currently employs 100,000 more employees than The Coca-Cola Company and earns an average of 25% more profit year after year. In fact, Pepsico surpassed its competitor decades ago. How? By subtly tweaking its business model.

To understand just how Pepsico has become the silent leader in agribusiness (go check Wikipedia to see if I’m bluffing—I’ll wait), you first have to understand just what business model innovation is.

STRATEGIC INNOVATION

The definition of “innovation” has changed in so many ways over time. The dictionary will tell you it has to do with the idea of newness—specifically the introduction of an innovative idea in any given domain.

For me, the best definition of the idea is one Michael Porter spoke about in an interview on strategic innovation:

“It’s the capacity to link and integrate activities across the whole value chain and to achieve complementarities across many activities. It’s where the way you do one thing allows you to do something else better.” – Michael Porter

Innovation is a company’s ability to link its value chain together. It is important to remember that when we excel in one area, we can also extend that ability to shine brightly in other areas of expertise, too. Understanding this is what leads to innovation, and that new area of expertise becomes an offshoot of our business model.

FOUR KEY QUESTIONS 

As I’ve written about before, innovation in business can be expressed via three ways: products, processes, and business models. The first two represent 90% to 100% of our current investment in innovation, which leads little room to innovate when it comes to our business model.

If my experience over the years has taught me anything, it’s that most managers—especially in SMEs—do not have the tools required to inject innovation into something as conceptual as a business model. Many don’t even really understand the ins and outs of their business model in the first place. Instead, of course, they work to add innovation to their products and processes, which are much more tangible and easier to control. And yet innovating a business model not only has the greatest potential for success, it is often a requirement for a company’s survival!

To get started on this path, you first have to think about four key questions:

Business Model Innovation

 If you’re familiar with the Business Model Canvas, these four questions encompass a number of ideas:

Business Model Canvas

To get started on the path to the strategic innovation of your business model, it’s essential that you understand what your business model is in the first place!

PEPSICO

 Let’s get back to Pepsico and how they innovated their business model. From a purely product point of view, Pepsico mainly sells blue soda cans and bags of chips. That is its product offering. But from a business model perspective, the multinational is first and foremost a company that optimizes shelf space. That is their value proposition.

Let me try to sum this up for you. In the 1960s, Pepsico decided to ask itself these very important questions: What do our consumer want (who) and what are we good at (what)? As it turned out, consumers wanted a snack to eat with their soda, and they wanted to buy both products in the same place. Pepsico also discovered that they excelled in delivery logistics as well as occupying shelf space across the U.S. The result of this analysis? Pepsico fused with Frito-Lay, reinvented their business model, and climbed from second to first position on the soda-pop charts.

In time, the company became one of the most logistically successful companies in the world, as well as one of the most profitable in the agribusiness—without ever really having to innovate their key products.

55 MODELS

 I’ve used this simple but powerful example as a way to illustrate a bigger point. This kind of innovation doesn’t have the same sex appeal as, say, the launch of the first iPhone or Uber app. But few companies are of the same caliber as Apple or Uber. What’s more, innovating your business model can add enormous value to your company, no matter its size or specialty. It’s not only start-ups and multinationals that can benefit from innovation!

If you feel like you’ve already gone over your business model, I encourage you to take a look at a brilliant 2014 study from the University of St. Gallen, which lists 55 business-model types. Two to three additional types have been added since then. Your company currently meets the criteria for at least one or two of these business models—leaving you with 53 more models to find inspiration from!

If you don’t know how to get started but want to explore how to make innovation work for you, a few Design Thinking workshops on the Business Model Canvas, as well as an analysis of your company environment, will help get you started on the right foot.  

Sources:

Gassmann, O., Frankenberger, K., Csik., M., The Business Model Navigator, University of St. Gallen (2017)

Steve Blank – Innovation Lab Interview

Michael Porter – Strategic Innovation

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