IPME-LIB 738.6 App 05899 & HARVARD |BUSINESS|SCHOOL 9-194-107 Frito-Lay, Inc.: A Strategic Transition, 1980-1986 "In the food industry,” a senior executive at Frito-Lay explained, “the retailers are slowly becoming more pporveful than the manufacturers. As this plas out, if won't be enough just fo know our business. We have fo Jowow theirs as well, The manufacturers who ae important to the store will win. ‘There is no single sustainable competitive atoantage inthis business. I can’t think of single thing that can't be duplicated. What we try to ‘to is compete with class. We pui a good mix of product onthe shelves; we oul-execule our competition; and we try to be “blue-chip” in every aspect of our business, There's a whole book to be written on the strategic advantage of execution. It's nota few big ideas; it's « whole series of lite things that add up to superiority.” Industry and Company Background Since Herman Lay began store-door delivery of Lay’s potato chips and Frito’s corn chips in 1932, Frito-Lay, Inc,, had grown to be the most powerful competitor in the over $6 billion salty snack industry. By 1986, Frito-Lay claimed 40.6% market share across its product lines and market segments. Acquired by PepsiCo in 1965, the company became its largest profit contributor in 1981 (See Exhibit for a financial summary and Exhibit 2 for a market summary.) Frito-Lay was a highly respected competitor within the industry. From management of its supplier network to its direct salesforce delivering product in distinetive red and white tracks, Frito- Lay was well-known for excellence in execution. But, by the 1980s, the company’s goal of paying a rminimum of two visits per week to every customer had become a logistical nightmare. In the mid- 19608, 5,000 salespeople sold 30 to 40 products; by 1986, more than 100 produets were sold by 10,000 salespeople. (See Exhibit 3.) Leo Kiely, senior vice president of sales and marketing, explained the dynamics of the business: We operate in a business that is simple in concept but complex in execution. We deliver our products through our own distribution network to diverse supermarket chains, small groceries, and convenience stores, Once packaged, our products have a 35-day shelf life. At the end of that time, the product was considered stale and was discarded. Traditionally it took almost two weeks to move product through our distribution channel. The process of moving product through this pipeline became vastly complicated when you consider that we sell billions of bags of hundreds of products, which may be promoted at various times throughout the year. rofasorLyndo M.Appleat prepared IMs eae a he bss forces ruin, Case ne not intended f sere as edonementy ounces of Pray ato aston of eect rife management Copyright © 1994 President and Flows of Harvard College. To onder copie or request permisin to reprodce ate, cll-SOD545.7685, Wale Harvard Business School Pulsting, Boman, MA. 16, or goto Mp//wwew ephanverdads, Ne past of his pustatn may BC ‘produce stored ins retseal sitar, used in sponse or tmpsted tm any fot or by any mesne—viseronie, mech photocopying, eordng or therwse—wihou th person of Haeacd Busnes Schlass.107 Frito-Lay Inc A Strategic Transition, 1980-1986 Frito-Lay products varied by product category (.g,, corn chips, potato chips), brand, flavor, bag size, and promotional characteristics. Sales volume varied greatly around base volumes according to promotions and time of year. Summer was the high-volume sales season, and it was not uncommon for sales of potato chips to double or triple over the Fourth of July holiday promotion, A Frito-Lay marketing director described the effects of promotions, Increased sales from promotion lift are one of the major ways we can grow our business. About half of our sales are made to supermarkets, where we promote about 40% of our business. About 80% of our management time is spent trying to understand promotion performance. We know from experience that lift occurs; however, it has historically been very. difficult not only to project the magnitude of the lift (60 that we can supply the right amount of Product), but also to estimate the impact of the promotion on profit, not just sales dollar volume, To complicate the picture even further, we also need to understand the impact of a promotion on our customers. Before they will allow us to run a promotion in their stores, they must be convinced that they too will make a profit, ‘The US. snack market was fragmented with many small, regional competitors when entrepreneurs Herman Lay and Elmer Doolin started separate snack food firms in the early 1900s. By the late 1950s, the two firms owned or distributed more than 18 regional brands, including Fritos corn chips, Lay's and Ruffles potato chips, Rold Gold pretzels, and Cheetos cheese snacks. After expanding their operations separately, they joined forces in 1961, set up headquarters in the Dallas, Texas, atea, and stepped up their growth plans, By the time PepsiCo acquired the company, Frito- Lay boasted 46 USS. plants, more than 150 domestic distribution centers, and a listing on the New York Stock Exchange. ‘The organization that PepsiCo acquired was highly decentralized. It had grown largely through acquisition of small regional companies, which remained intact after each acquisition. A consulting company, hired in 1968 to help integrate the snack food and beverage divisions, recommended a centralized, functional structure for Frito-Lay to enable it to capitalize on economies of scale in purchasing, manufacturing, distribution, and marketing. The basic structure remained in place until the mid-1980s, (See Exhibit 4.) D. Wayne Calloway, CEO and president of Frito-Lay, explained: What we had in the early years was a very decentralized business comprised of many small, regional potato chip companies. Even the manufacturing plants were managed on a regional level. During my first tour of duty at Frito-Lay in the late sixties and early seventies, one of my chief tasks was to help reorganize the company and install centralized planning and control systems. Calloway pointed out that Frito-Lay was organized into geographic sales centers, or zones: ‘The zones were financially {and operationally] autonomous in the 1960s. But by 1980, we hhad here in Dallas seven functional departments, which set policies for the entire company. For instance, our brand management marketing structure assured national consistency across the company. Frito-Lay was extremely profitable during the 1960s and 1970s, dominating the salty snack market with almost 50% share overall. According to Michael Jordan, who was senior vice president of operations during the 1970s and was CEO during much of the 1980s; We were a very successful company during the 1960s and 1970s. Our centralized structure provided us with economies of scale, efficiencies, and control that our small, regional ‘competitors could not match. Our strategy was to create a quality product and provide excellent customer service through the efforts of our well-trained and well-compensatedFrito-Lay, Ines A Strategic Transition, 1980-1985 asexo7 10,000-person direct salesforce. We relied on geographic expansion to fuel our growth strategy. Our highly centralized structure also helped us to control costs and manage complexity. Senior management managed a single P&L and assumed responsibility for all profit-and-loss decisions. Functional operating plans and the budgets needed to accomplish them were set in the corporate office, and the major responsibility of managers in the field was to manage to that plan. We leveraged our size by simplifying the business to a national pattern and by focusing our efforts on a minimum number of national, high-leverage, well-executed marketing and product initiatives. This led us to practice what I call “black box management.” We put money, programs, and people in one end and got sales, share, and profitability out the other. But, in the late 1970s, Frito-Lay began to see its traditional growth options evaporating. Its geographic expansion had blanketed the nation, its products were sold in more than 300,000 retail outlets, and there was little new territory to conquer. Attempts to introduce major new national products (brands with $100 million or more in annual sales) had met with marginal success, and. established regional and new national competitors, including Anheuser Busch, Borden, and Procter & Gamble, were exerting increasing competitive pressure. Sales growth slowed from the heady 15%- 20% of the 1970s to 3%-4% in the early 1980s. “When we saw that the sales growth had slowed, we were surprised,” explained Charlie Feld, vice president of management information systems (MIS) beginning in 1981. ‘The machine that had churned out 18% growth year after year had hiecoughed. We were doing the “right” things but they weren’t working. The aircraft carrier that we had built had to be refitted asa PT boat. AAs they struggled to make sense of the business downturn, different executives at Frito-Lay presented different views of what had made the company so successful during the 1970s.1 “The focus of this business is on execution and marketing contro,” said Bill Korn, senior vice president of sales and marketing at the time, “But if you look around my office, you'll see I have no files of any sort. 1 run my part of the business with only eight exhibits even though we make almost 170,000 sales calls per day.” Calloway countered: Yes, but formal controls aren’t the whole story. The worst sin anyone can commit at Frito- Lay is to fail to communicate, You may have noticed that [ have most of the vice presidents within easy reach on this floor—that’s no accident, I think our primary business strengths are distribution and sales. The fact, however, that these areas are subject to rapid change means top management must be involved in the details of the business. That’s why we insist on weekly reporting at a minimum. Sales reports are distributed every Friday morning. Manufacturing variance reports arrive each Monday morning. This company is a paper generator, and management has t0 pick clear, simple ‘measures or it will get buried? The heart of Frito-Lay is consistency. The Frito-Lay display in Joplin, Missousi i identical to the one in Waltham, Massachusetts. In fact, the tony that the display is stocked in Joplin is the same as the way itis stocked in Waltham. (See Exhibit 5 for a summary of Frito-Lay’s formal planning and control system in 1980.) "the quotesin this setion were made inthe late 197s by Frito-Lay managers. 2 The sales and manufacturor’ reports were prepared manually by corporate snff who collected handwritten and verbal reports rom each plant manager and distibution center manager.ae107 Frito-Lay, Ince A Strategie Transition, 1980-1986 John Cranor, vice president of marketing, continued: ‘We have to be consistent, We're talking about a business where we served 300,000 outlets, last year, each one on an average of two to three times per week. We move almost four billion product units annually The Frito-Lay section of a high-volume supermarket exhausts its inventory, or "turns," ‘more than 100 times a year. A particularly well accepted brand might turn once a day in such store. We manage all this with a maximum 35-day shelf life on our products and sell half of ‘our volume of goods for cash. You'd better have consistency and contzol in that kind of an environment, or the whole thing will get away from you in a week. “No, no, no!” said Jack Demarco, vice president of sales. “All our home office controls and consistency are great. But the real reason this place works so well is that we run our salesforce like an amy. They're good, they're disciplined, and they're effective on the street.” Tom Peters and colleagues defined their impression of Frito-Lay's success during the 1970s in their book, In Senrck of Excellence. (See Exhibit 6 for a description of the stoze-door delivery system commented on in the book and Exhibit 7 for a sample of the detailed procedures in each salesperson’s Route Book, which the salesforce called “The Bible.”) What is striking about Frito is not its brand-management system, which is solid, nor its advertising program, which is well done. What is striking is Frito’s nearly 10,000-person salesforce and its 99.5% service ley i js mean? Ttmeans that ++ There are magic and symbolism about the service call that cannot be quantified. . .. The system succeeds because it supports the route salesperson, believes in him (or her] and makes Him [or hel fool essential to Is suecesn ‘There are about 25,000 emoyees in ie company Those who are not selling live by the simple dictum SD Strategic Introspection In the late 1970s, Frito-Lay began to formulate a new strategy that would enable it to meet the challenges of a faster-paced, more competitive environment, The vision started in the sales organization, wher n led a team of sales, marketing, and MIS professionals in defining the The report 1 of recommendations which were focused towar of decision-making authority on promotions a Leo Kiely explained: We're trying to move away from the rigid rules of the national pattern and the “must carry” lists. It is a sledgehammer approach. With regionalization and micromarketing, we can increase sales by 10% to 15% without adding any new outlets. 5 Thomas J. Peters and Robert Waterman, [a Serrh of Excellence (Haeper le Rovs, 1982), pp. 164-65, 7Falto-Lay, Ines A Strategie Transition, 1980-1986 we? Kiely was describing a new approach to trade development. Because of the high margins and ‘turns in snack food, this product category was a very profitable use of shelf space for the store owner. (One manager explained: “Adding four feet of shelf space in dog food gets you $500 a month in additional sales. In snack food, that number is $4,000 a month. Unfortunately, there's a limit to how muuch real estate a store can devote to snacks.” With a dynamic or regionally optimized produet mix, management believed it could move more product through its existing shelf space and make more money for both the customer and Frito-Lay. Distribution channel options would be expanded to meet the varied requirements of individual customers, and new product development would be markedly increased, enabling the company to focus on smaller share, regional as well as national, brands. “We can’t wait for only the $100 milion brands to achieve our goals,” one manager explained. “Instead, we'll also have to have the $20 million [regional] brands to make it.” “In the 1970s, our normal product development cycle was three to four years,” another manager commented, “In the future, we need to cut that time in half.” As the Ideal Sales Organization report was circulated throughout the top management team, the operations area also began its own series of studies. Prior to 1980, manufacturing was considered to bbe a necessary, but not a strategic, component of the business. Marketing was considered the true “powerhouse” where strategy was defined, while sales operations were considered to be a strategic resource for the execution of strategy. One manager commented that the approach to manufacturing at that time could be summed up as “Don’t screw up.” The result was that manufacturing primarily concentrated on ensuring the efficiency of day-to-day operations, rather than defining long-term ‘goals or strategies. In the early 1980s, as competition and decreasecl demand eroded pricing freedom, a new emphasis ‘on cost control provided the impetus for manufacturing to begin to rethink how it did business While the initial focus was on productivity improvement and cost control, in 1982 manufacturing senior management embarked on a strategic planning process to identify the "Ideal Frito-Lay Manufacturing Organization” of the future. A team composed of the top manufacturing executives— the senior vice president of manufacturing, the five area manufacturing vice presidents, and the vice presidents of quality, industrial engineering, and employee relations—met together fo answer the question: “If we built a new Frito-Lay plant within the next few years, what would we want it to look like?” The group began by developing a mission statement, a charter, and a set of beliefs about the role of manufacturing at Frito-Lay. From these efforts came a general set of strategic goals for manufacturing operations—to operate at the lowest cost, while maintaining the highest quality and being both flexible and innovative. With these goals in mind, the group redefined manufacturing operations using a popular organization development methodology, which included five areas of assessment: (1) define the primary tasks needed to accomplish the goals of the organization; (2) define the product, process, and information technologies needed to perform the tasks; (3) define the human resource expertise and skills needed; (4) establish an organization structure that groups individuals into work units and develop effective communication and management systems for coordinating and controlling operations; and (5) establish a mechanism for evaluation and renewal. Using this approach, the group defined a set of organization design principles to guide implementation of its new manufacturing strategy. These principles emphasized “people” as the key resource for achieving manufacturing competitiveness in the future, In 1983, the principles were applied at several existing manufacturing locations and at a new plant builtin Casa Grande, Atizona ‘See Garvin and Mille, Frito-Lay, Inc: From Manufacturing fo Operations Strstagy, HBS, 690-06,sie107 Frito-Lay, Ines A Strategic Transition, 190-1986 ‘While there was some evidence of success within isolated manufacturing facilities, most agreed that the most lasting and widespread contribution was the development of a formal program for establishing linkages between manufacturing and the rest of the company. Called the “Point Person” system, each member of the manufacturing strategy team was responsible for regular contacts with an individual in another function, such as marketing, sales, or engineering, ‘The system improved understanding and facilitated communication between manufacturing and the other functions. The final area of activity that influenced the development of the strategic vision for change at the ‘company concerned the development of the necessary information technology (IT) infrastructure to support the new strategy and emerging organization design. Jordan summarized the thinking of senior management at that time: “We recognized in the late 1970s and early 1980s that we needed to manage in a much more differentiated, focused, and time-sensitive manner to meet the increasing ‘competition in the industry. But to manage the added complexity and speed we would need more accurate, focused, and timely information. During this same time it also became apparent to all of us, that access to this type of information was a limiting factor that was preventing us from reacting to the rapidly changing marketplace.” Until the 1980s, the information, perspective, and expertise needed to manage the complexity and speed of the business resided primarily in the heads of Frito-Lay’s senior management team, all located in offices next to one another on the same floor in corporate headquarters. The ability to simplify the business to a national pattern and to reduce the pace of decision making to fit within a yearly planning cycle enabled them to make both strategic and operating decisions for the entire organization. A comerstone of the “Ideal Sales Organization” report was the need for a handheld computer (HEC) device that would enable the field salesforce to collect data on every sales transaction for every customer. (See Exhibit 8.) The data would be fed into computers at corporate headquarters over standard telephone lines each evening where they would form the basis for the development of a new corporate information infrastructure, which, when integrated with external market information from supermarket scanners, would be used to enable the new micromarketing strategy. In addition, the HHCs would automate much of the routine paperwork performed by the salespeople and would provide them with up-to-date, detailed information on each customer. By eliminating routine, nonvalue-added work, the company hoped to free up time so thatthe salesforce would then be able to use the information to implement a customized sales approach with each customer. Pilot efforts in Mesquite, Texas, and in Minneapolis had documented efficiency improvements of at least one-half hour per day for each driver. Furthermore, because each salesperson “bought” the contents of his or her truck each morning, accounting errors were charged directly to take-home pay. In 1985, out-of-balance was $4 million nationwide and growing. This was a source of extreme frustration for salespeople and sales management. It was not uncommon for a salesperson to be disputing up to $500 with the corporate sales service personnel. After implementation of the pilot, a salesperson in Mesquite, Texas, commented: The sales cals go faster, the end-of-day process is a snap, and my wife and I don’t have to spend an hour every night going over the paperwork to make sure I did all the multiplication right. When we have problems with the handheld computers, no one wants to tell headquarters for fear they might take them away from us! Finally, the HHC was seen as a necessary tool to manage the added complexity of the sales process that would result from the micromarketing approach. One of the most compelling benefits of the project was that it replaced the existing sales transaction processing system. Because each of Frito-Lay’s retail customers was serviced on an average of twice a week, the sales transaction volumeFitorLay, Ines A Strategic Transition, 1980-1986, asia was huge. With the product list growing, transactions were also becoming more and more complex. Each sales transaction for a charge customer now required two tickets reflecting approximately two hundred line items, and these were in addition to end-of-day and ordering paperwork. Further, the complexity increased geometrically when special promotions were applied. To capture the transactions, Frito-Lay had installed optical scanners in 1974. Feld estimated: It would take 1,200 or 1,300 keypunch operators to handle our current transaction volume. Today we do it with 5 scanners and 40 correction operators. The bad news is that IBM has stopped manufacturing the scanners. By 1988, we won't be able to get them repaired. We ‘knew we needed an alternative, and the handheld computer appeared to be the ideal solution, The scanners processed 1.7 million documents per four-week period. This transaction volume included sales tickets for all charge customers, salespeople’s orders, and daily activity reports. Itdid not include detailed sales information on up-and-down-the-street customers who typically paid in ‘cash. Each salesperson summarized the cash transactions on one line of his or her daily report, as shown in Exhibit 9 “We had the idea for the HHC back in the late 1970s," Korn explained, "but at the time the technology just didn’t exist.” We approached large computer manufacturers, but they were not interested in helping us with the R&D. We finally found a Japanese firm that was interested in partnering with us on theidea. They offered to develop a prototype for us to test the concept, without requiring: us to commit to a large capital investment. We estimated that the cost of a full-scale rollout of the HIHCs would be approximately $40 million for the hardware and software. Monte Jones, director of sales systems development, summarized the project's cost/benefit justification: @ _kecosts us $12 million per year to run our current system, With the handheld computer, the annual operating costs would inerense by only $3 millon, The differential is a small pre to pay, considering the long-term strategie benefits we expect to achieve. ‘The effective use of the HEC was expected to result in two and a half hours per route per week of time saved pricing the tickets and completing end-of-day paperwork. Sales management was committed 19 using this time to drive an additional $20 million in anmwal sales to cover [the increase in] operating costs. As Korn proceeded with pilot studies to test the feasibility of the new HHC prototype, it became clear that the MIS organization was not up to the task. During the 1970s, four MIS managers had been hired to “fix information system problems.” Between 1978 and 1981, the MIS budget grew from S4 million to $18 million, but management was hard-pressed to identify the added value that came from those investments, The HHC project floundered for lack of IT management skills. In April 1981, Charlie Feld was hired by the senior management team to provide the MIS leadership organization in crisis: low morale contsibuted to a turnover among MIS professionals that exces 40% per year and an average seniority that was less than two years, aging software created maintenance nightmares, and a large backlog of system requests resulted in disgruntled users who had begun to develop and run their own stand-alone systems, Shortly after he arrived, Feld hired an TT consulting firm to benchmark the current IT organization and systems, (See Exhibit 10.) Feld spent the early 1980s upgrading the skills and expertise of the MIS professional staff and consolidating and updating the technology and systems within the company’s data center. By late 1984, he was ready to tum his attention to the HHC project, which had progressed very little over the 794.107 Frito-Lay, Ince A Strategic Transition, 1980-1956 past three years. The strategic importance of the HHC project increased dramatically in eaely 1985, when Korn replaced Jordan as president of Frito-Lay? (See Exhibit 11 for a summary of management succession during the 1980s) Implementing the Ideal Sales Organization Vision Upon assum for the company: fact that the HHIC would not be available for several years. Restructuring the Field Sales Organization Executing the micromarketing strategy required that the field salesforce begin t mae promstion and product mix decisions that were forme I ‘mid-1980s, large supermarket chains accounted for 75% of the company’s profits.) In early 1985, he embarked on one of the first major restructurings of the company since the early 1970s—a process the company called “segmentation.” Before segmentation, each salesperson was responsible for serving all of the snack outlets on his or her route—both grocery stores and “up-and-down-the-street” accounts. The salesforce was compensated with a base salary plus commission, which was based on sales dollar volume, regardless of customer type. Because the majority of the commission came from the large supermarket accounts, the salesforce concentrated its attention on them. “Some of the guys were making $40,000 or more in those days,” a salesperson remarked. “There was a three-month waiting list to get a job at Frito-Lay.” ‘Under segmentation, the salesforce was divided into two groups: route and supermarket. The route drivers focused attention on the up-and-down-the-street accounts, while the supermarket drivers focused attention on the large supermarket accounts. The work of the route drivers was essentially unchanged. They continued to perform both sales and merchandising activities. (Sales activities included working directly with the store managers to negotiate shelf space and ensure that Frito-Lay products received favorable display within the store. Merchandising activities included restocking the shelves and checking for, and removing, stale product.) But the work of the supermarket drivers changed dramatically. While they continued to perform the merchandising activities, a new position, called a key account manager (KAM), was created to assume responsibility for the sales activities for the large accounts, Decision authority on local promotions and product mix was passed down to the KAMs, The KAM position was staffed by high-potential field sales employees and staff from corporate marketing. (See Exhibit 12 for an organization chart after segmentation.) Sjordan was transferred to PepsiCo corporate headquarters as executive vce president and chief nants officer. The HHC, which was considered a key too or providing detailed market information, was not scheduled for rollout to the sslaeforce unl ealy 1987,Faito-Lay, Ines A Strategie Tran on, 1980-1986 196-107 In addition to the change in their work, segmentation also changed the compensation of both supermarket and route drivers. The route drivers continued to receive 5% of sales dollar volume, But in an attempt to balance the higher sales volumes of large accounts, the supermarket merchandisers were paid $05 per bag sold, regardless of the unit price, While the intent of segmentation was to focus attention on the two primary distribution channels while establishing parity in route and supermarket compensation, as implemented, it reduced the take-home pay of most of the salesforce. To soften the impact, the company promised to make up the difference for a year andi to make partial payments for two additional years. The new supermarket routes had different appeal in different parts of the country. In the Southwest, where Frito-Lay held an 80% share of the salty snack market, experienced salespeople asked for the merchandiser positions despite the view by most that the job was much less interesting, and challenging than it had been previously. In most other regions, however, drivers with seniority eagerly accepted the convenience routes. In the words of one, “What I liked about this job was the people, Why would I trade my route for a day full of bickering with supermarket receivers? They couldn’t pay me enough to do that.” Another route salesperson commented, “Segmentation was a isaster. When it first came out, they sent around a human relations guy to talk to us about it. He said he would hold meetings every quarter to help us work out the bugs. He got such an earful of problems at the first meeting that he never came back.” A salesperson in another part of the country remarked, “Several guys walked off the job right then. I didn’t because I couldn’t match the pay anywhere else. If 1 could, I'd leave tomorrow.” A supervisor added, “They talk about Service to Sales, but a program like this tells us what they really think of us.” Despite the implementation difficulties, Korn persevered with the segmentation program. In 1986, he commented: Segmentation isa critical first step in our strategic repositioning. It allows one segment of the Frito-Lay salesforce to focus as never before on supermarkets, the largest and fastest- growing distribution channel, Meanwhile, other members of the route salesforce can concentrate on more complete coverage of the smaller account customer channel. In 1986, we knew that these smaller accounts represented about 80% of our account base but only 25% of our profits. We had very little information on them, and our salesforce had traditionally neglected them in favor ofthe higher-volume large accounts. The salesforce turnover was used as an opportunity to hire more college-educated salespeople and to fine-tune the route structure, By late 1986, segmentation extended up to the level of the vice president of field sales, and 6,000 of the 10,000 salespeople were operating under segmentation. The remaining 4,000 worked in rural areas, where segmentation was not feasible. Increasing the Rate of New Product Development and Shortening Cycle Times During the same period, the company also moved ahead with an unprecedented stream of new roduct introductions. Dori Reap, director of planning in 1986, explained: "New products were the Biggest news for Frito-Lay in 1986. With real growth in the salty snack market of only 3%-4%, new products were an avenue toward reaching our growth goals.” The company had almost 100 products in 1985 and intended to expand its line to 400 by 1990. ‘The expansion of product development included extensions to existing lines and new snack categories. Some of the extensions were targeted as regional products (eg, Frito Chili Cheese Corn Chips for the Southwest). Inaddition to the larger number of new products, Korn also sought faster product introductions. Bill Elston, vice president of manufacturing, remarked194107 Frito-Lay, Ines Steategie Transition, 1980-1986 Before 1986, a three- to four-year product introduction cycle was normal for us, During 1986, management asked us to turn a “hat trick” by simultaneously introducing Stuffers, Rumbles, and Toppels from R&D to full-scale production in 14 months. We made a significant investment in manufacturing facilities before we had any firm test-market results, The investment in new manufacturing facilities was consistent with the company’s efforts to improve productivity. Of 40 plants, 25 were “core mixing plants,” which focused on high-volume brands such as Doritos, Fritos, and Lay's potato chips. Elston continued: The impact of product proliferation was that we needed more single-focus facilities. Running new products into existing plants was disruptive. Frito-Lay had the volume to build single-focus plants; it's a competitive advantage for us. Problems Surface By the end of 1986, problems with the implementation of the micromarketing strategy were beginning to surface, Lacking access to the information to support their decisions, and motivated by an incentive system that rewarded sales dollar volume rather than profitability, the key account managers used their newly granted decision powers to make promotion and product mix decisions that, while personally beneficial, were not beneficial for the organization. Profitability declined in 1986 by 14.5% on a 6% growth in sales, On November 25, 1986, a Wall Sireet Journal headline reported: President Quits at PepsiCo's Largest Unit Korn’s resignation was announced as part of a major reorganization of PepsiCo’s snack food business. Domestic and international snack food divisions were combined to form PepsiCo Worldwide Foods under Michael Jordan. PepsiCo reported that it had combined the international and domestic snack food businesses to give it “global strike capabilities.” Overseas markets were expected to grow faster than domestic markets for several years, and PepsiCo held only about 10% of, the $5 billion international snack food market in 1986, As he assumed control of the newly formed PepsiCo Worldwide Foods, Jordan wondered how he could return the domestic business to its previous profitability level in the short term, while moving forward with the changes required to ensure long-term viability. rT‘9961 UH paxmmboy {Sap waaNID patsy Ayomaoyy ses ST see 9 we cwiz ese sso'101 woo mrs TE wo ws sens wrse woe wvS2 THR ORE swe wieez wz B vn YN sto sag eon 3095 we ERY cose” LUFERY TS rc wows Mose mie sdog a soe se yond Suneiodg, see cess BOE sors ote 690 ese so'62 10 yng am 30%» se sonny e209" seset 016 e5¥6 ore WN vw ‘oss 110, ove ee6e vee ewe rd 508 ose ayoxt Buyer vewe — ove'z — zoore = ouer2, «= weetzwun'2 oR 908 see sono aero ish eis Sata vvwe eve seee e162 vor 098 aid ny saevs 71085 Ouoey ewe sure ruse stv ww vn ‘esse 16, 0206 = wasew bye 169 veo ora este voor yor Bueno Boers —-LSGO'RS §— OBIS —GSERLS OSHS RUOTS = eeUSS |e Heees Ozer Is sarang, - ORG SOS GA a OT (suorre up Gwurng jepueULY -AeT-omNg/opIdeg Lapa94107 Frito-Lay, Ines A Steategle Transition, 1980-1986 Exhibit? Market Summary ($ in millions) r= “1980! Potato chips S775 $909 $1,118 $2209 $2,814 $2,850 Comfort chips 367 488 728 4,192 4248 1,924 Extruded snacks? 12 185 242 328 380 487 Pretzels 130 133 175 248 268 289 All others 182 150 187 13931418 4.8968 Total salty snacks $1545 $1895 $2,490 $5829 $5,824 © $4,770 r 1076-1060 comples tam onan, Tomes, *etLay, Ineoiparsted(k)* HES Cae a. Batt, Dears 1082-088 compo tom Stack Fooa gazing anu aus (Jone sue) category primey sori of chess eta, Frito-Lay, Inc.: Market Share (%) a ine OE Potato chips a3 30.8 38.7 Cornfotilla chips 35.0 703 eet Cheese curlstballs 51.6 518 878 1 1676-1080 compl tom Sonoma, Tomas, FetoLay, nsorperatad (A). HOS Cace No. S210 Pears 1082-908 not alte, Market Summary TauraScudder 3.1 RIRNabisco 3.4 ‘aura Scudder 1.7 Borden 30 Planters 17 RIRNobisco 14 Lays 28 Laura Scudder 13 Borden 6 Snyders 20 Blue Bell 10 Bachman 5 Seyferts 18 Bachman _8 Granny Goose 3 Total ier Total 82 ‘Total a7 Frito-Lay 367 Frito-Lay 785 Frito-Lay 829 Total Salt Cheese CurlyBalls. Snacks jidor ‘Planters “RIR Nabisco 12.4 Bachman Snyders 6.5 RIR Nabisco 25 Borden Bachman 6.2 Laura Scudder 22 Laura Scudder 22, Reisman 50 Bachman 20 RR Nabisco a Keebler 39 Snyder Lz Total isa Total 340 Total ig Frito-Lay 578 FiltoLay 142 FitoLay 458 Source: “FitoLay Incorperated A)" Bonoma,T HBS Case NB 582-10 oasod on pound share wmsiowsouedns 000 = os -stonpord esesyo pu ‘do ey ‘sdiyo woo ‘sduyo ojeoyod yuose ‘syonpoud 8109 +55}0n ayo: sod 809 sang Bsr a anion union ‘sos uoneuedsueiL puunon203 itt rss was omy | suoneiea aes Taio Tamconmem) [Amasvodsou 8 shop ex (en se “om nous) shene1 shop 800 stepe-t step ez = cone pay" te i810 s¢z_(Sosnoysrem ronpost 2100 52) ‘sasnolaeys oF 0861 ‘s5220544 Buy ~ Oooo BESosoo) _ onpoud 3109 $2) ‘shuord Suumseynucey OP ayoq slag oMposg [uORIpeS], — € aqIYX,ase107 FeitoLay Ines A Strategie Transition, 1980-1986 Exhibit 4 ceo! President sv sve ve svP Salestaktg Finance Administration! | Operations ve come Salos Marketing ve ve ve w Purchasing |j | Manufacturingl} | Logistics ve Director™ Zone Marketing ©) @ anager Division Sales @a) Manager ‘Associate Region Sales Brand ttgrs (138) G0, Manager Assistant District Sales Brand tears. (5) couojoy S968) syabvey unog, ©0401) “doy dojenog weld [330] ron | 0 [ees [my [ar an [Rew ady [ea [| Buneisdo renuuy 996 Ueg SuNeadg enuUy appk> Suu ALO — saya. covet1 covet 26ers pue cemueg onoesoyy “wos yoding wew6euEyL,"O yoda: euoyiofoy yequon quasaida: sojai!o popeysuon, 286 Too\9s ssoutna prea ‘uoneUOSSI TIC!OD p auerandun ‘ons9 O oO]; oO O O° O O = ads mpon pein oitze nen ome ena poyiad 101d 404 ejup jS0D i rom Ln ‘SpoHied 499Mh-INO4 g} 1204 9361 twoshs SuuorUoPy aouwwnsoyreg Key OM (panunuos) snqnKXaFito-Lay, Ines A Stategie Transition, 1980-1985 19407 Exhibit Frito-Lay’s Store-Door Delivery System, 1980 Frito-Lay’s sales and distribution activities revolved around its “store-door” delivery system, In the carly hours of the moming, salespeople loaded their trucks with snack food products and began their routes. Their job was to call on existing customers and to line up new accounts. They convinced customers to allocate shelf and end-cap space to Frito-Lay products, and they handled regular account maintenance by restocking shelves and removing stale products, They introduced new products to customers and informed them of promotions. Most of the salespeople worked from warehouses (that is, a warehouse manager ordered and received product from manufacturing). The salespeople stocked their trucks from the warehouse supply. Approximately 40% of the salespeople, operating from “bin locations,” worked in rural areas ‘where the routes were long and geographically dispersed. Rather than setting up warehouses, Frito- Lay shipped product directly to the salesperson's home or designated storage space. Customers were divided into two types: supermarkets and “up-and-down-the-street” accounts. ‘The supermarkets were predominantly large chains, and up-and-down-the-street accounts were small eash customers. The latter inchuded everything from 7-Eleven franchises to bowling alleys and laundromats. Most of the accounts were serviced twice weekly. Although the time for a sales call varied according to the size of the account, a typical up-and-down-the-street call could be completed in about 45 minutes, not including transportation time. For small customers, the vast majority of the time was devoted to compiling the customer's order from the truck and placing product on the shelves. Supermarkets ordered in case lots; stocking shelves consumed most of the salesperson’s time for these customers, For customers with especially strong sales, the salesperson often left “back- stock” The store personnel would then be able to replenish the shelves between sales calls. To make the stocking activity more routine and to enable substitute drivers to take over routes for vacation and sickness, the “national pattern” was used. It dictated the arrangement of products on the shelves, with a specific place for each product and package size. 7wse107 Fato-Lay, Ines A Stategie Transition, 19801986 Exhibit7 Sample of the Route Sales Procedure Book—"The Bible” bar Chena To be an effective Frito-Lay salesperson, you must have an orgenized method of calling on your accounts. ‘You also need (o know a number of facts about each account. + Type of establishment + Where itis located + How often itis serviced + Wit diy) you service (he conunt Frito-Lay provides a tool to meet the above needs. Its called a Route Book, Your District Sales Manager will provide you with a separate route book foreach day ofthe weel Each route book contains a number of Route cardsFrito-Lay Inc A Strategic Transition, 19801986 sew Exhibit 7 (continued) Sample of the Route Sales Procedure Book—"The Bible” ‘The route cards are placed in the route book in the order |) of your calls, l For each call you make on a particular day there is a separate route card Let's look at a route card and take note of the information which it provides, (See attached.) Course 5 will go into detail regarding how the information entered on a route card is obtained. For now, just try to become familiar with the layout of the route card. © Itprovides information about the account and days of service. @ Itis a record of information about the products that an account uses. Note that the products are grouped by price. @ Itcontains information about our display, important names, limitations, and where to enter the account. @ The salesperson uses this section to enter any other necessary information about the account. @® The back of the route card provides a sales history and action plans which need to be taken to build sales. Its quite clear that a route card is a valuable tool for the salesperson. Big/Little Money Maker Route Cards Each route book will also include special green-colored route cards used to solicit inactive Big/Little accounts. ‘They are called Big/Little Money Maker route cards, rr194-107 Frito-Lay, Ines A Strategie Transition, 1980-1986, Exhibit 7 (continued) Sample Route Card [Gem Gee] SEES Source: “Frito-Lay, Incorporated (A), HBS No. 582-110. 20Frito-Lay Ines A Stategie Transition, 1980-1986 Exhibit § (On-Truck Equipment for the Handheld Computer (HHO) Salesperson checks notebook for standard customer ordor quantities. Picks product and loads truck. Fills out consignment order form. 6:00 am.—On the Route-For Each Store: Checks shelves and removes siales. Fills out sales ticket, Entors stales as credits on sales tickets. Compiles order irom stock on truck. ‘Checks in with store receiver.® Puts product on shelves. Calculates total order price, applying promotional prices, ‘whore necessary, Collects order price, usually in cash, from store manager. 4:00 p.m.-At the Warehouse: Tums in sales tickets and fills out “end-ol-day" report, Paperwork sent to sales administration for soanning. 6:00 p.m.-At Home: Roviows eales tokets to make cure caloulations ware correct. Same, Same. Enters consignment order Into computer. Samo. Enters order quantity in computer. Enters stale in computer, Printer prints pick Ist. Salesperson pulls order from stock on truck, same, Same. “Confirms” order on the computer. Printer produces sales ticket. Same. Connect HHC to a modern.» Sales transaction data sent to corporate computer. Price, product, and promotion information sent from ‘corporate computer to HC, Relax ‘The check-inprocsss involved the salespersons courting alo the em inthe ordain Wont of he store receiver. tue ‘ensuring delivery of exactly what was shovin on the order, "a modem isa computer doves that enables data from a computer tebe sent to another computer over a telephone line, aase107 Exhibit 9 Sales Ticket Used by the Salesforce, 1986 Frito-Lay, Ines A Stategie Trasition, 1980-1986Frito-Lay, Ines A Strategic Transition, 1960-1986 apia07 Exhibit 9 (continued) Sales Ticket Used by the Salesforce, 1986 L Bat L ean BB. were SSE — oma L Bee We sepgge iNaaenmumentooner lene re 2ae107 28 Exhibit 10 Frito-Lay, Inc.: Consultant Study Results, 1982 Information Technology Expendiures Ve, Saloe Information Technology Expenditures as a Percentage of Sales og arcane capacity in PSExhibit 10 (continued) Frito-Lay, Inc: Consultant Study Results, 1982 (continued) Quality Assessment of MIS-developed Applications Weighted Systems Quality Functional [= Quality Rating Technical 0 20 40 60 80 100 Rated by end users. > Rated by mis Percentage of Applications Developed Outside the Centralized MIS Area Research & Development Engineering Manufacturing Marketing Employee Relations Distribution Finance Sales Purchasing 11107 29107-26 Exhibit 10 continued) Frito-Lay, Ine: Consultant Study Results, 1982 (continued) Experience Level of MIS Professionals Hardware Processing Mode Median fi Median Month Months Experience Experience of Frito-Lay of Mls Personnel Frito-Lay MIS Personnel Micros —‘Time- Transaction- Database Database Mini Sharing Processing Batch On-tineExhibit 10 (continued) Frito-Lay, Ine Consultant Study Results, 2982 (continued) Programmer Analyst Senior Programmer Analyst Analysts Project Manager Median Years System Development and Programming Experience Hl benchmark BD Fetoray ase107 27.Exhibit 10 (continued) Frito-Lay, Inc Consultant Study Results, 1982 (continued) MIS Resource Spending Mix Technology Personnel fe 19721073 “1978 1976 1076 978 1970 ‘enchmark % of MIS Resources Spent on Development vs. Maintenance & EnhancementFrito-Lay, Ines A Strategie Transition, 19804986 194-107 Exhibit 11 Management Succession during the 1980s A eee ee ee ea Calloway Calloway Jordan, Sales/Marketing | Beeby Korn Demarco Operations Jordan Jordan ONeal Finance ‘Katon ‘Baton Vacant Taman Ewing Ewing Costello Messane Resources Management | Basso Feld Feld Fela Information Services 28asea07 30. Exhibit 12 Organization Chart after Segmentation sve sve sve. sve sv aD Salesatkag Finance |Aarinistrato Operations