1. China Resources Enterprise
ANALYSIS OF CORPORATE STRATEGY

2. 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

3. 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?

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

5. 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

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

7. 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 -Marketing Campaign “The Great Expedition” (“勇闖天涯”)

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

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

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

11. Five Forces Rivalry with existing competitors
“Tsingtao”: 15% of domestic market share
“Yanjing”: sales volume (5m tons target) lower than “Snow”
Bargaining power of customers
High market reputation and strong customer loyalty “The Great Expedition” (“勇闖天涯”)
Bargaining power of suppliers
Many breweries in China
Potential Entrants
Hard to gain a share in this competitive market
Product Substitutes
each brand is different

12. 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

13. 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

14. 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

15. 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

16. 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

17. 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”: Low
Pacific Coffee: High
Bargaining power of suppliers
Pacific Coffee: High
Potential Entrants
China beverage industry is attractive to the potential entrants
Product Substitutes
Carbonated drinks, energy drinks and tea

18. 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

19. Food and Processing Distribution Analysis
Five Forces
Rivalry with existing competitors
strong 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

20. Food and Processing Distribution Analysis
risk of diluting perceived differentiated features
- customer’s dissatisfaction of price increase of beef
- price increase is not justified by perceived increase in quality

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

22. 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

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

24. 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

25. 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

26. 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

27. 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

28. 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

29. 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

30. 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

31. 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

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

33. 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

34. 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

35. 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

36. Recommendation