ANALYSIS OF CORPORATE STRATEGY

China Resources Enterprise

Content

ProblemSWOT Analysis –OverviewBusiness Level Strategy

- Focused geographical- Differentiation - Related- link

Acquisition- based StrategyRecommendation

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?

CRE Limited, SWOT Overview

Strength WeaknessMarket leadership better equips the company to effectively participate in the vibrant Chinese markets

Store productivity significantly lower than the competitors

Inorganic expansion to further establish a dominant market position

Lower margins

Integrated business model

Opportunity Threat

China’s twelfth 5-year Plan Rising minimum wages will increase operational costs

Robust Chinese economy

Business-level strategy

Focused differentiation with related linked strategy

Source: CRE 2010 Annual Report

Business-level strategy

Business-level 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

Business-level strategy

Differentiation strategy in each business unit

“ Snow” Advertisement http://www.snowbeer.com.cn/

Beer Analysis

Beer Analysis

Beer - " 雪花 Snow“SWOT – Strength

-China’s best-selling beer for 2009 in terms of sales volume - Market leader position further consolidated by acquisition of Kingway in Feb 2011- US $40m investment in Technology

-Legend of quality: unified technological and technical standards

- Appointed again as the official beer for NPC and CPPCC

Customer-Focused -Royal- looking and extravagant noble gold and jade inlaid and engraved vision -Focus shift from supply to demand small bottles like imported beers

-Brand Promotion Campaign : “The Great Expedition” (勇闖天涯 ) more customer interaction attracted many customers due to its story (not actual taste)

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

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

SWOT –Opportunity - Enlarged customer group :

younger, higher income, more urban customers high-end : Snow Draft, Snow Super Premium

urban: Beijing - Chinese robust economy

- Chinese twelfth five-year plan

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

- increasing M&A cost

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

“Bud Light”: “Snow” outsold [Source: Pluto Logic] Bargaining power of customersHigh market reputation and strong customer loyalty “The Great Expedition” (“勇闖天涯” )

Bargaining power of suppliersRaw materials + Packaging materials: hard to be replaced

Potential EntrantsHard to gain a share in this competitive market

Product Substitutestaste speciality

Retail Analysis

Regional leadership on a multi-format business platform

Retail Analysis

Retail Analysis

Strength- 2nd largest retail

organization in China in Retail Asia Pacific top 500

awards

Weakness- Lower average sales per

store compare to competitors

Opportunity- Increasing urbanization

of China has expanded the consumption market

Threat- Keen competition from Carrefour, Tesco, Wal-

Mart

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

C’estbon Pacific Coffee

Beverage Analysis

Beverage Analysis

Beverage Analysis

Strength- Largest packaged water

brand in Guangdong

Weakness- Insufficient production capacity for launching

new products

Opportunity- Fast-growing coffee

market- Emphasis on healthy

diet

Threat- High development Cost

- Keen competition

Beverage Analysis

Five Forces Rivalry with existing competitors

“C’estbon”: Master Kong, Wahaha, Nongfu & Coca-Cola

Pacific Coffee: Starbucks and Gourmet Master (Taiwan brand)

Beverage Analysis

Potential EntrantsChina beverage industry is attractive to the potential entrants

Source: Canadean

Beverage Analysis

Bargaining power of customers“C’estbon”: HIGH Pacific Coffee: LOW

Bargaining power of suppliersPacific Coffee: HIGH

Product SubstitutesCarbonated drinks, energy drinks and tea

Food and Processing Distribution Analysis

Food and Processing Distribution Analysis

Ng Fung HongStrength: premium food qualityvertically integrated meat supply system- lower operational costs- Allow quality tracking : control both food quality

&food safety -- create value to customers - brand building & consumer loyalty- Widen operating margin ---higher investment return- Build core competence to ensure continual growth- Remain in competitive position in the market ( 5 forces)

Food and Processing Distribution Analysis

Five Forces Rivalry with existing competitors: medium- the monopoly live cattle importer from China- strong brand recognition & reputation- Competitors: Local farms(limited supply), frozen meat

suppliers all over the world Bargaining power of customers & product

substitutes : medium to low monopoly in live cattle market in HK Substitutes: local meats, chilled/ frozen meats Potential Entrants monopoly in live cattle market in HK

Bargaining power of suppliers: Low- Many product sources

Weakness: - increasing cost of production ( raw materials)

--- pressure to raise the price of- risk of diluting perceived differentiated

features: customer’s dissatisfaction of price increase

of meat price increase is not justified by perceived

increase in quality

Opportunities- Economic growth in China: increasing pork

consumption--- demand increase- market expansion in China: joint venture and

acquisition --- penetrate into production, retailing and marine fishing

Threats-

Hong Kong Pork Traders Call For End In Monopoly Imports:buyers urged the government to open up the live cattle market --- break Ng Fung Hong's monopoly

Business-level strategy

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

Beverage and retail

Holders of Pacific Club Card enjoy discount in supermarkets operated by CRE

- sharing of marketing resources

Beer

Strategy to be No.1 - encircling the cities from rural areas - moving up-market - promotion and branding strategy

Acquisition-Based Strategy

Value Creating Drivers

Pursuit of Market Power

Learn and Develop

New Capabilities

Source: DataMonitor

Acquisitions in 2010

Acquisition of the Jialinshan project marked the Group’s expansion into the mineral water sector.

Acquired 80% interest in Pacific Coffee (Holdings) Limited from Chevalier Pacific Holdings Limited.

Ng Fung Hong won the bid to acquire a 60% stake in Jiaxing Food & Meat Co., Ltd.

Pursuit of Market Power

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

Pursuit of Market Power

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

Pursuit of Market Power

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

Learn and Develop New Capabilities

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

Learn and Develop New Capabilities

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

Learn and Develop New Capabilities

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

Learn and Develop New Capabilities

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

Risks of Acquisition Based Strategy

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

Risks of Acquisition Based Strategy

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

Risks of Acquisition Based Strategy

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

BeerRaise avg. selling prices in certain strong regions to cover the increase in beer production materials - divest non-core beer brands - increase product mix - fine tune selling prices in certain regions - lift sales volume of premium beer

Retaillocating supermarkets in self-owned or

partially-owned property development projects

Recommendation

BeverageDevelop healthy drinks

More people aware of healthy life style Healthy drinks can be charged a higher premium

2011 2012 2013 2014 20150

5000

10000

15000

20000

Estimation of juice sales from 2011 to 2015

$US

mn

Source: China Food and Drink Report

Food

Product- product quality improvement and innovation Promotion- Increase brand awareness : superior product

qualityPrice: set a premium price Place: Market expansion in China- Continue joint venture and acquisition with

large food and processing companies