1. China Resources Enterprise
ANALYSIS OF CORPORATE STRATEGY

2. Content Problem SWOT Analysis –Overview Business Level Strategy
- Focused geographical
- Differentiation
- Related- link
Acquisition- based Strategy
Recommendation

3. 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

4. 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?

5. CRE Limited, SWOT Overview
Source (Datamonitor)
Strength
Weakness
Market 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

6. Opportunity
Threat
China’s twelfth 5-year Plan
Rising minimum wages will increase operational costs
Robust Chinese economy

7. Business-level strategy
Focused differentiation with related linked strategy

8. 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

9. Business-level strategy
Differentiation strategy in each business unit

10. “ Snow” Advertisement

11. 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 US $40m investment in Technology
-Legend of quality: unified technological and technical standards
- Appointed again as the official beer for NPC and CPPCC

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

13. -Brand Promoton Campaign : “The Great Expedition” (勇闖天涯) more customer interaction attracted many customers due to its story (not actual taste)
advertising campaign focused on outdoor adventure sports such as whitewater rafting and mountaineering and which targets younger, higher-income customers
2005 exploration Brahmaputra Canyon, Yangtze River Quest 2006, 2007, frontier expedition, polar exploration since 2008, the activities of its physical geography of the inaccessible way of the unique challenges and concerns raised on the natural environment industry attention.

14. SWOT –Weakness - Thin profit margin (Chinese: price-sensitive) [$2 per hectoliter, compared with $50 to $80 in Europe and the U.S]

15. - Chinese robust economy - Chinese twelfth five-year plan
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

16. SWOT –Threat - cost of production: raw materials, rent, utilities
- increasing M&A cost

17. 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 customers
High market reputation and strong customer loyalty “The Great Expedition” (“勇闖天涯”)
Bargaining power of suppliers
Raw materials + Packaging materials: hard to be replaced
Potential Entrants
Hard to gain a share in this competitive market
Product Substitutes
taste speciality

18. Retail Analysis Retail
N0. 1 in the supermarket in the Chinese Mainland
National retailer
Generated 51% of revenues
Acquired a hypermarket chain in northern, north-western, north-eastern and central China
multi-format retailer and operates supermarkets, hypermarkets and convenience stores
Vanguard, Suguo, Ole, Vango, CR Care, VivoPlus, Voi_la!, Chinese Arts and Crafts

19. 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 new stores each year according to PwC
Bargaining power of customers
 switching cost is moderate and is decreasing with growing experience in the market

20. Retail Analysis Bargaining power of suppliers Potential Entrants
rather low for small suppliers such as small farming businesses
 higher for international brands like P&G as they have international brand awareness
Potential Entrants
High cost to entry due to the need to set up new distribution channels
 Competitors may retaliate with price war or bad publicity
Product Substitutes
Retailing could be bypassed by internet shopping therefore eliminating hypermarkets and supermarkets
 Traditional stores offering human contact are an alternative

21. Beverage Analysis
C’estbon
Pacific Coffee

22. Beverage Analysis Strength Weakness Opportunity Threat
- Largest packaged water brand in Guangdong
- Extensive distribution channel
Weakness
- Insufficient production capacity for launching new products
Opportunity
- Fast-growing coffee market
- Emphasis on healthy diet
Threat
- Keen competition
- High development Cost

23. 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”: HIGH
Pacific Coffee: LOW
Bargaining power of suppliers
Pacific Coffee: HIGH

24. Beverage Analysis Potential Entrants Product Substitutes
China beverage industry is attractive to the potential entrants
Product Substitutes
Carbonated drinks, energy drinks and tea

25. Food and Processing Distribution Analysis
Ng Fung Hong
Strength: premium food quality
vertically 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)

26. 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

27. Bargaining power of suppliers: Low
Many product sources

28. customer’s dissatisfaction of price increase of meat
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

29. 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

30. 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

31. Business-level strategy
Related linked: SBU Form of Multidivisional Structure
- share some resource: distribution channels in different business units

32. 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

33. Beverage and retail
Holders of Pacific Club Card enjoy discount in supermarkets operated by CRE
- sharing of marketing resources

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

35. Acquisition-Based Strategy
Value Creating Drivers
Pursuit of Market Power
Learn and Develop New Capabilities

36. 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

37. 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

38. 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

39. 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

40. 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

41. 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

42. 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

43. 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

44. Risks of Acquisition Based Strategy
Integration Challenges
Financial systems
Control systems
Building effective working relationships

45. 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

46. 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

47. 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

48. Recommendation
Beer
Raise 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
Source: CRE Financial report 2010

49. Recommendation Beverage Increase the production capacity
Manufacture the products by themselves rather than by OEM factories
Pro: the supply chain become more vertically integrated
Con: costly
Develop healthy drinks
More people aware of healthy life style
Healthy drinks can be charged a higher premium

50. Food Product - product quality improvement and innovation Promotion
Increase brand awareness : superior product quality
Price: set a premium price
Place: Market expansion in China
Continue joint venture and acquisition with large food and processing companies