Performance with Purpose at PepsiCo

I. Executive Summary

PepsiCo, under the leadership of CEO Indra Nooyi, delivered superior financial results while
creating mutual social and environmental values for multiple ecosystem stakeholders by
transforming its product portfolio into more healthful segments and reducing the negative
environmental impacts of its operations.

Over the 12 years of Nooyi’s tenure as CEO, measurable results included:

● Net revenue grew at an annualized rate of 5.5%, reaching $63.5 billion in 2017 while $79.4
billion was returned to shareholders in the form of dividends and share repurchases.
● PepsiCo stock outperformed both the Consumer Staples Select Sector Index and the S&P
500.
● PepsiCo’s portfolio of healthier options grew from about 38% of revenue in 2006 to roughly
50% in 2017.
● Water use by its operations was reduced by 25% from 2006 to 2018.

These results were achieved by creating a new corporate orientation which was called
“Performance with Purpose”. “Purpose” was defined as success in four strategic sustainability
pillars – Financial, Human, Environmental and Talent. This “purpose” was then embedded into
PepsiCo’s business model and operating model.

II. Purpose, Strategy and the Reinventing of PepsiCo’s Business Model

When Indra Nooyi was appointed in 2006 CEO of PepsiCo, the company’s performance was
lagging behind its competitors. Before coming up with a new strategy, she tasked a group of
senior executives to look outside. They identified several megatrends that helped shape PepsiCo’s
strategy:

1. Changes in the world’s demographics,

2. A preoccupation with health and wellness,
3. Scarcity of water and other natural resources,
4. Constraints created by global climate change,
5. The rise of consumer activism, and
6. A talent market characterized by shortages of key people.

Powered by these strategic insights, Nooyi and her executives asked three questions:

1. What innovations to the business model will be necessary?

2. What investments does the company need to make?
3. What talent does it need to develop or hire?

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As a result, Nooyi launched a new way of thinking about what PepsiCo should be about – in a
sense a new “Purpose” for the company. They call this new way of thinking and new direction
Performance with Purpose (PwP). It was based on four “sustainability” pillars which effectively
described the new corporate purpose and strategy combined:

1. Financial Growth - delivering superior financial returns;

2. Human Benefit - transforming the product portfolio by reducing the sugar, salt, and fat in its
products while dialing up more healthful, more nutritious foods and beverages;
3. Environmental Improvement - limiting its environmental impact by conserving water and
reducing PepsiCo’s carbon footprint and plastic waste; and
4. Talent Evolution - lifting people by offering new types of support to women and families
inside the company and in the communities PepsiCo serves.

Figure 1: Changes to PepsiCo’s Business Model

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III. Redesigning PepsiCo’s Operating Model

The new PwP Business Model had significant implications for PepsiCo’s Operating Model. The
following highlights a few of the important changes made.

1. Building new business capabilities

To execute PwP, PepsiCo had to build fresh capabilities in several areas, particularly in R&D
and product development. Nooyi created high-profile leadership positions and filled many of
them with outsiders. For example, she hired (1) Mehmood Khan, an endocrinologist at Mayo
Clinic and then the head of R&D for Takeda Pharmaceutical to be the Chief Scientific Officer
and (2) Mauro Porcini from 3M to be the Chief Design Officer. The positional power and
capabilities of these senior executives challenged the status quo and catalyzed change quickly.
Notably she did not appoint a Chief Sustainability Officer because she wanted the
responsibility for sustainability (financial, human, environmental and talent) to belong to
everyone.

2. Leveraging food science and new technologies

As part of PwP, PepsiCo's reclassified its products into three categories: "fun for you" (such as
potato chips and regular soda), "better for you" (diet or low-fat versions of snacks and sodas),
and "good for you" (items such as oatmeal). Corporate spending was moved away from junk
foods and into healthier alternatives, with the aim of improving the healthiness of even the "fun"
offerings. Leveraging food science and new technologies, PwP led to the reduction of salt,
sugar, and fat levels in all core products without any deterioration in taste.

3. Enhancing product packaging and manufacturing processes

Nooyi also focused on environmental concerns and sustainability, redesigning packaging to

reduce waste, conserving water, switching to renewable energy sources and recycling.
PepsiCo launched the first plant-based polymer packaging for its products some years ago.
They have developed new machines to produce more-healthful products (e.g. an extruder that
wouldn’t jam when whole grains were introduced). They also developed a tool called ReCon
(for “resource conservation”), a multistep process for precisely measuring water usage and
wastewater discharge in factories. The company has since developed similar tools for
greenhouse gases, solid waste, and electricity. In 2020, company-operated U.S. facilities
started using 100% renewable electricity.

4. Tying resource allocation to purpose

To align resource allocation with PwP, PepsiCo’s financial policy insisted on a sustainability
sign-off for every capital expenditure. Each proposal had to state what the sustainability impact
of the investment would be, what trade-offs were being made, whether it would meet PepsiCo’s
sustainability targets, how it would meet them, and if not, why not. The sustainability committee
reviewed every proposal, and if the project wasn’t given the green light, it went right back to the
drawing board. A percentage of the annual corporate budget was set aside in a sustainability
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 investment fund. It was used to subsidize or defray the costs of innovation. This enabled the
business units to experiment and test sustainability-related ideas without having to worry about
the internal rate of return that normally applied.

5. Aligning performance settings and reward & recognition

PwP-related goals were set for everyone, from senior executives and country heads all the way
down to mid-level managers. These targets were used to evaluate performance and help
determine annual bonuses.

To celebrate wins and showcase purpose-driven initiatives that are working, PepsiCo gave
global, regional, and national awards every year, even during the worst of times, lauding those
who had delivered on their PwP goals. This highly visible action helped keep people motivated.

6. Joining forces with other companies including rivals

In 2010, as part of Michelle Obama’s “Partnership for a Healthier America”, PepsiCo and
several other leading companies in the food and beverage industry created the Healthy Weight
Commitment Foundation. Its members promised to offer consumers low-calorie options by
reformulating products and shrinking serving sizes to remove 1.5 trillion calories from their
products by 2015. As it turned out, by 2012 they had surpassed that target by more than 400%.

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 Figure 2: Changes to PepsiCo’s Operating Model

Figure 3: PepsiCo also improved its portfolio of nutritious food and beverages through
acquisitions and joint ventures

Note: Prior to becoming CEO, Nooyi in her roles as SVP Corporate Strategy and Development and SVP & CFO,
oversaw the mergers and acquisitions of Tropicana and Quaker Oats. While these M&A’s could have negatively
impacted short-term performance, they had certainly improved PepsiCo’s long-term performance.

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IV. Anticipating and addressing challenges along the way

1. Securing Board of Directors support

Nooyi secured the critical support of her Board of Directors for PwP by showing them how the
megatrends analysis shaped PepsiCo’s strategy and how PwP would future-proof the
company. To hold Nooyi responsible for delivering on the purpose-led strategy, the board
realigned Nooyi’s compensation to be based on both PwP-related metric as well as financial
targets. By setting targets for the CEO, the board made itself accountable not only to
shareholders, but also to all stakeholders. The board’s support for PwP allowed Nooyi to fend
off an activist investor who bought an equity stake in PepsiCo in 2012 and demanded that the
company be broken up.

2. Localizing the execution of PwP

Although PwP must be common to all countries in which PepsiCo operates, each market has
the freedom to tailor the approach to its needs: freedom within a frame. Food and taste
preferences are culture-specific, and environmental problems are local. Nooyi tested PwP in
Mexico before rolling it across the global organization.

3. Overturning decisions that would have passed in the legacy culture

One of the teams in PepsiCo’s snack business, waking up to a growing demand for energy
foods, had decided to launch a caffeine-based snack. The team formulated a product,
identified a brand name, and designed the packaging and labels. Just days before the planned
launch, the product came to the notice of a senior executive who was not comfortable that the
company would introduce a highly caffeinated snack that children might consume. He stopped
its development, despite the costs that had already been incurred and in the face of enormous
internal pressure.

4. Learning to work with industry critics

To overcome the skepticism of NGOs that PwP was nothing more than window dressing, Nooyi
and her executive team needed to be proactive and listen to their critics. By presenting them
with facts and conclusions based on scientific data, they were able to persuade several
skeptical NGOs to work with the company.

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V. Mutual value created

Over the 12 years of Nooyi’s tenure as CEO, the company’s net revenue grew at an annualized
rate of 5.5%, reaching $63.5 billion in 2017 while $79.4 billion was returned to shareholders in the
form of dividends and share repurchases. PepsiCo stock outperformed both the Consumer
Staples Select Sector Index and the S&P 500.

During the same period, PepsiCo almost tripled its investments in R&D to expand its nutritious
offerings and minimize its environmental impact. The social and environmental results achieved
included:
● Its portfolio of healthier options in the “better-for-you” and “good-for-you” categories grew
from about 38% of revenue in 2006 to roughly 50% in 2017.
● It reduced water use in its operations by 25% from 2006 to 2018 and provided safe drinking
water to 22 million citizens in the communities it served.
● Women held 39% of senior management roles by 2018.

These results clearly demonstrated that PepsiCo was successful in creating financial, social and
environmental values for multiple stakeholders by embedding purpose in its business model and
core business processes.

Nooyi stepped down as CEO in 2018 and Ramon Laguarta became the new CEO. Under his
leadership and in the frame of “Winning with Purpose”, PepsiCo is aiming to use its scale, reach
and expertise to help build a more sustainable food system including circular design. The story of
co-creating mutual values for its shareholders, customers, consumers, employees, partners and
communities in its global ecosystem continues.

Figure 4: PepsiCo’s Performance relative to its competitors (source: www.barchart.com)

Note: We did not find consolidated global net revenue for Coca Cola.
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VI. Reflections by Indra Nooyi

September 2015:

“When I became CEO in 2006, I did a series of town hall meetings with employees. Few said they
came to work for a paycheck. Most wanted to build a life, not simply gain a livelihood. And they
were well aware that consumers cared about health and wellness. We realized we needed to
engage our people’s heads, hearts, and hands. We had to produce more products that are good
for you. We had to embrace sustainability. Purpose is not about giving money away for social
responsibility. It’s about fundamentally changing how to make money in order to deliver
performance—to help ensure that PepsiCo is a “good” company where young people want to
work.”

“Purpose doesn’t hurt margins. Purpose is how you drive transformation. If you don’t transform the
portfolio, you’re going to stop top-line growth, and margins will decline anyway. So we don’t really
invest in “purpose,” but in a strategy to keep the company successful in the future. If we hadn’t
tackled certain environmental issues, especially with water, we would have lost our licenses in
some countries.”

November 2018:

“Performance with Purpose is about the character of our company and managing PepsiCo with an
eye toward not only short-term priorities, but also long-term goals, recognizing that our success—
and the success of the communities we serve and the wider world—are inextricably bound
together. Today, it's more important than ever before to advance sustainability and profitability at
the same time, and I'm so proud to say that's what we've been doing for more than a decade.”

March 2020

“It’s now 14 years since Performance with Purpose was birthed. I look back at PepsiCo and am
proud of the company it is today and will be in the future. It has succeeded both commercially and
ethically. It has learned to balance the short term and the long term, carefully thinking through the
level and the duration of returns. A real sense of purpose is integrated into the company’s core
operations. So to anyone who doubts whether it’s possible to build such a company. It’s the only
way to make capitalism work for everyone.”

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VII. Reflections by PPIC

Using PepsiCo’s case story, we tested our hypotheses on what (a) organisational purpose, (b)
business model changes, (c) operating model changes, (d) design process and (e) design
participation strategy are required for an organization to co-create mutual values in support of a
world that works for all.

Hypothesized Essential Element What does the case story suggest about
this element

a. A purpose that goes beyond only We do not have clarity whether the company
shareholder and customer value. purpose was talked about or changed in this
case story. However, we infer from the data we
do have that when the Nooyi talked about the
financial, human, environmental and talent
sustainability pillars for PwP, we see a
purpose that does indeed incorporate the
needs of shareholders and customers BUT
also goes beyond to address some challenges
in the environment and society.

b. A Business Model that incorporates use of This hypothesis is affirmed by the mutual
the organization’s core competencies to values created that benefited shareholders,
profitably solve social, economic or customers/consumers, environment and
environmental challenges in their society.
ecosystem.

c. An Operating Model that supports The hypothesis that changes to the operating
model were required to implement the new
● execution of the business model business model is affirmed (e.g. new business
● a flourishing workplace capabilities, new technologies, changes in
governance, etc.)

We do not have sufficient data to affirm the

hypothesis that the new operating model must
support a flourishing workplace. However the
fourth pillar - “lifting people by offering new
types of support to women and families inside
the company and in the communities PepsiCo
serves” - seems to suggest that workplace
flourishing was on the radar.

d. A design process rooted in Appreciative Based on the data we have, this hypothesis is
Inquiry, Whole Systems Design (i.e socio- not confirmed. It is interesting to note that as
technical systems thinking) and Design part of PwP, Design Thinking was incorporated
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 Thinking. into the Design Office for product
development.

e. Significant and meaningful participation by Based on the data we have, it would appear
more than the usual suspects, in designing that a classical change management approach
the purpose, business and operating model. was used to drive change.

- For reimagining the company purpose,

participation was probably limited to senior
management.
- For reinventing the business model -
participation was probably also limited to
senior management.
- For redesigning the operating model,
participation was probably delegated to the
respective heads of function and down to
middle management.
- For driving the transformation, Nooyi relied
on an expanded leadership team consisting
of all the executives in the top two levels.
She made sure that she identified some
long-tenured PepsiCo executives and gave
them a central role in implementing PwP.

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VIII. References:

1. Becoming a Better Corporate Citizen, Harvard Business Review (March – April 2020)

2. How Indra Nooyi Turned Design Thinking Into Strategy, Harvard Business Review (September
2015)

3. Here’s how Indra Nooyi changed PepsiCo in her 12 years as CEO (August 2018)

4. PepsiCo Reports Significant Strides in Pursuit of Performance With Purpose 2025 Agenda
(November 2018) including short video

5. How Michelle Obama quietly changed what Americans eat (October 2016)

6. Indra Nooyi - Wikipedia

7. PepsiCo Mission and Vision

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