In This Issue:
The Value of Back to Basics Despite Confusion about Risk
Many companies have been praising the value of risk taking. And, once again, we see a high profile example of a major corporation that is encouraging more risk taking. But, this particular example is interesting because there seems to be confusion about what is or is not risky business.
The example is discussed in the April 22-23, 2023 Wall Street Journal article titled “The PepsiCo Plan: Making It OK to Eat Chips” by Jennifer Maloney. The article reports, “When Mr. Laguarta became CEO (2018), PepsiCo’s annual revenue had been trending down over several years.” The article goes on to say. “When Mr. Laguarta took the reins, PepsiCo’s North American beverage business was anemic, after having shifted too much shelf space and marketing money away from Pepsi and Mountain Dew toward new products.” The article explains that PepsiCo was using “zero based budgeting, which requires managers to justify their expenses every year. As a result Pepsi had been underinvesting in its North American snacks business,” The article reported that a PepsiCo executive said, ”Frankly, we had not kept pace with brand building.”
In my view, what PepsiCo experienced is something companies must guard against when using zero based budgeting. Since zero based budgeting requires starting from zero and justifying all expenses, the process essentially requires companies to treat every expense like a start-up item. Thus, the very process of doing zero based budgeting has somewhat of a start-up-like emphasis. And, startups generally fail. This doesn’t necessarily mean that zero based budgeting will fail. But, it does mean caution should be exercised.
A potential serious pitfall is that zero based budgeting makes it too easy to suddenly stop something that the company did very well for a long time. This is risky because businesses succeed by building on strengths. Company strengths that have been honed over many years and are an integral component of the company’s success may be quickly shut down by a manager who may not see their importance during the zero based budgeting cost justification process.
Companies can be highly vulnerable to this pitfall because, over the last several years, there has been so much emphasis upon protecting against industry disruption, eliminating change resistant inertia, being more innovative, and even glorifying risk taking and failure. This can encourage companies to emphasize the new and extremely different at the expense of valuable elements of their current business. This appears to be what PepsiCo did. And, interestingly, a while back, major Pepsi competitor, the Coca-Cola Company, had also been encouraging risk taking to break away from what was said to be New Coke Syndrome, which was a reluctance to try new things for fear of another failure like New Coke.
Instead of encouraging so much risk taking, companies should be adding promising new areas selectively, while continuing to support existing elements of the business that have been driving success. In many cases, those success drivers will be something that the business has been doing for a long time, as is the case for consumer goods companies like PepsiCo, where spending for brand building has long been a critical element of the business.
So, it’s ironic that, according to the Wall Street Journal article, PepsiCo’s CEO “Mr. Laguarta says he came in emphasizing risk taking and decided to increase investments” in the company’s existing brands. I believe he clearly made a winning decision and, as the Wall Street Journal says, “During Mr. Laguarta’s tenure, sales growth has accelerated.” However, based on my 25+ years researching business success and failure patterns, this situation paints an unclear picture of the role of risk taking. In light of my research, Mr. Laguarta made a wise decision because he kept risk relatively low. He avoided high risk wildly new areas and instead focuses upon the company’s existing strengths, generally a much less risky path with greater success potential.
Yet, in today’s rapidly changing world, the business community has been bombarded with so many anti-status quo messages, that executives like Mr. Laguarta apparently perceive investing in the existing business as risky. Granted, the investment may entail social risk, such as concerns that others in the business community might not see it as a good decision during times of change. But, investing in an existing well-known brand, that isn’t dying, generally is not a risky move in terms of business risk. It is merely a going back to basics, which is generally a good move, unless the basic business is in such bad shape that it is on the verge of dying.
So, in conclusion, businesses need to identify strengths that drive their success. When pursuing new areas, they need to build on their strengths, generally avoiding high risk wildly different areas. If they overdo the new areas, going back to basics, as PepsiCo did, is often a wise move. Following such a strengths based approach will generally minimize risk and improve the chances for great success.
La Grange Park, IL