Pepsico’s Transformation

This article has some great points about changing a compay. It deals with Pepsico's tough turnaround after Roger Enrico took over in 1996.

"But Roger kept coming back to one essential truth. The opportunity was still there – the cash flow, the great people. None of that had changed. We just had to work smarter."

Top managers began to reassess every line of business, from products and prospects to customers and competitors. They concluded that beverages still held great promise, as did packaged foods. But the restaurants and the bottling division had to go because they were sapping profits. The spin-offs created two new companies – Yum Brands and Pepsi Bottling Group, which are both now publicly traded. (Pepsi still owns a large stake in the bottling company.)

The deals reinforced one of the lessons that Nooyi had learned over her career. "You have to think of a business like any investment. You have to know when to get in, but more important, when to get out. Getting out can be a lot tougher, especially if you develop an emotional tie to the business. But the world changes, and so should the models we apply to our businesses."

Just as important as rigorous analysis when restructuring a company is a compelling vision of the future, she said. "For a leader looking to initiate big changes, the challenge is to state the objective in a way that grabs people. You have to establish what I call True North, that point on the horizon that everyone's working toward."

That part about not developing emotional ties to the business is a big one. Too many executives today have their pet projects. Too many forget that you don't factor in sunk costs when making decisions about the future. It is human nature to want to finish something you started, but if the payoff isn't there because of market changes, competition, or whatever, you have to give it up, and ignore the money and emotions you have poured into the project.

Ultimately, businesses create wealth and improve society when they make a return greater than the cost of capital. Companies who can't do this are an economic drain, not an economic engine. Transformations, like Pepsico's, require a rational, emotionally detached analysis of the business. If you are a leader, you have to be able to make the tough decisions often required to turn your company around.