ANALYSIS OF CORPORATE STRATEGY China Resources Enterprise

ANALYSIS OF CORPORATE STRATEGY

China Resources Enterprise

Problem

Recently restructured companies assets

Low margins CRE operating margin: 1.5% (2009 FY) Sector average: 3.1%

Desire from investors for higher profit margin

Acquisitions currently a very important part of CRE’s strategy

Problem

CRE has yet to improve its margins through an acquisition based strategy

Should CRE continue acquisition based growth strategy or focus on fine-tuning their core business against the risks?

Business-level strategy

Focused differentiation with related linked strategy


Focused Geographical market: domestic Chinese market

- leverage its strength : good understand of Chinese Market

- better serve the segment

- local/regional competitors : focus on more narrowly defined competitive segments: offer same source of differentiation at lower price

- cannot tap the advantages of using global strategy: increased market size, ROI, economics of scales and learning


Differentiation strategy in each business unit

Beer Analysis

Beer - " 雪花 Snow“SWOT – Strength

-Single largest beer brand in Chinese Mainland- Market leader position further consolidated by acquisition of Kingway in Feb 2011- US $40m investment in Technology-Marketing Campaign “The Great Expedition” (“勇闖天涯” )

SWOT –Weakness- Thin profit margin (Chinese: price-sensitive)

[$2 per hectoliter, compared with $50 to $80 in Europe and the U.S]

SWOT –Opportunity -focus from supply-driven to demand small bottles like imported beers

- enlarge customer group : younger, higher imcome, more urban customers

- Chinese robust economy - Chinese twelfth five-year plan

SWOT –Threat- cost of production: raw materials, rent, utilities

Five Forces Rivalry with existing competitors“Tsingtao”: 15% of domestic market share

“Yanjing”: sales volume (5m tons target) lower than “Snow”

Bargaining power of customersHigh market reputation and strong customer loyalty “The Great Expedition” (“勇闖天涯” )

Bargaining power of suppliersMany breweries in China

Potential EntrantsHard to gain a share in this competitive market

Product Substituteseach brand is different

Retail Analysis

Retail N0. 1 in the supermarket in the Chinese

MainlandNational retailer Generated 51% of revenues Acquired a hypermarket chain in northern,

north-western, north-eastern and central Chinamulti-format retailer and operates supermarkets,

hypermarkets and convenience storesVanguard, Suguo, Ole, Vango, CR Care, VivoPlus,

Voi_la!, Chinese Arts and Crafts

Retail Analysis

Five Forces Rivalry with existing competitors Multinational retailers such as Wal-mart, Tesco,

Carrefour expand their operations in second and third tier cities

They are expected to open 12-20 new stores each year according to PwC

Bargaining power of customers switching cost is moderate and is decreasing with growing experience in the market

Retail Analysis

Bargaining power of suppliersrather low for small suppliers such as small farming businesses

higher for international brands like P&G as they have international brand awareness

Potential EntrantsHigh cost to entry due to the need to set up new distribution channels

Competitors may retaliate with price war or bad publicity Product SubstitutesRetailing could be bypassed by internet shopping therefore eliminating hypermarkets and supermarkets

Traditional stores offering human contact are an alternative

Beverage Analysis

C’estbon C’estbon means ‘it is good’ in French 3 product lines: purified water, mineral water and

nutrition fruit juice Bottled water is famous for its safety Enjoys a leading position in Guangdong province

Fruit juice ‘O PA’ is the first stress-relieving drink in mainland Satisfies the need of specific segment of customers

Beverage Analysis

Pacific Coffee Acquired by CRE in 2010 Provides great quality coffee and beverages, a

comfortable environment and plenty of complementary food choices

Provides addition value by pay attention to every details

Targets customers with higher income

Beverage Analysis

Five Forces Rivalry with existing competitors“C’estbon”: Master Kong, Wahaha, Coca-Cola and Nestle

Pacific Coffee: Starbucks and Gourmet Maste Bargaining power of customers

“C’estbon”: LowPacific Coffee: High

Bargaining power of suppliersPacific Coffee: High

Potential EntrantsChina beverage industry is attractive to the potential entrants

Product SubstitutesCarbonated drinks, energy drinks and tea

Food and Processing Distribution Analysis

Ng Fung Hong

- vertically integrated high quality meat supply system- control both food quality and food safety from upstream

to downstream segments of the supply chain- Value chain system create value to customers - Remain in competitive position


Five Forces Rivalry with existing competitorsstrong brand recognition --- raised the reputation Bargaining power of customers monopoly in live cattle market in HK low Bargaining Power of Customers and product

substitutes Potential Entrants monopoly in live cattle market in HK low Potential Entrances


risk of diluting perceived differentiated features

- customer’s dissatisfaction of price increase of beef- price increase is not justified by perceived increase in

quality


Related linked: SBU Form of Multidivisional Structure

- share some resource: distribution channels in different business units

Food and retail

Development of self-owned retail stores and launched more than 120 meat counters and stores

Shanghai, Hangzhou, Nanning, Shenzhen and Ningbo, etc,

Leveraging the strong “Ng Fung” brand name and efficient supply chain

Acquisition-Based Strategy

Value Creating Drivers

Pursuit of Market Power

Learn and Develop

New Capabilities


CRE has potential to further increase market power as a result of their related linked strategy

Proper execution will allow CRE to reduce the costs of its primary and support activities

CRE can further employ vertical integration via vertical acquisitions


Vertical Integration Food, beer and beverage divisions provide inputs for CRE’s

retail business segment

CRE can increase their market power using an integrated model R&D, processing & distributing, storage, wholesaling,

retailing

Limitations of vertical integration Outside supplier may produce the input at a lower cost Changes in consumer demands create capacity imbalance

and coordination problems


Horizontal Acquisitions CRE can integrate its own assets that complement

their core competency Key driver to top-line growth and market share Ex. Strengthening retail position by acquiring

supermarkets

Expand geographical coverage in the northern and central areas of mainland China Help CRE further establish its network of primary

activities Ex. CRE recent push to acquire breweries in these

locations

Learn and Develop New Capabilities

Goal: Develop and exploit economies of scope between CRE’s businesses

Broaden knowledge base and leverage CRE’s core competences

Create value by pursuing Operational and corporate related acquisitions


Acquisitions to create operational relatedness CRE can leverage its existing primary activities

- Distribution systems- Sales networks

Also facilitate their support activities- Purchasing practices- Bargaining power

Has potential to improve existing profit margin Increased revenues Decreased costs


Limitations to acquisitions to further operational relatedness Organizational integration may fail to create synergies

Success is dependent on CRE’s ability to integrate acquisitions into a cohesive structure that will allow sharing of activities to take place efficiently

Important that HQ implements controls to foster sharing of activities between related divisions


Enhancing corporate relatedness through acquisitions

Transferring CRE’s core competences to an acquired business- CRE has expert local market knowledge and a

sophisticated distribution system

Transferring core competences of core business to CRE- Possible targets should include companies that can

transfer cost saving related core competences to CRE


Downside of pursuing a combination operational relatedness and corporate relatedness acquisition based strategy

Cost of organization and compensation structure could be expensive leading to further decrease in CRE’s profit margins

Risks of Acquisition Based Strategy

Integration Challenges

Financial systems

Control systems

Building effective working relationships


Inability to achieve synergy Ideally want acquisitions to create economies of scope

and share resources to benefit the company

Must focus on rational evaluation of private synergies- Business is worth more managed by CRE than by itself

Transaction costs- Due diligence fees (lawyers, investment banks,

accountants, etc)- Managerial time to evaluate target firms, complete

transaction- Transaction costs < expected synergies


Too much diversification CRE could begin to rely on acquisition activities to replace

innovation

Managers may focus solely on financial performance of a business segment rather than strategic controls to evaluate business performance

CRE may be getting to big Managers may implement more bureaucratic control to

manage combined firm’s operations

Hinders innovation


Managers overly focused on acquisitions Large managerial cost associated with acquisitions

- Searching for viable acquisitions- Completing due diligence process- Preparing for negotiations- Managing the integration process

Diverts attention from other matters that are necessary for long-term competitive success, such as identifying ways to drive cost-efficiencies

Recommendation

Documents

ANALYSIS OF CORPORATE STRATEGY China Resources Enterprise