China Resources Enterprise
ANALYSIS OF CORPORATE STRATEGY
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?
Beer Analysis
 Beer
Retail Analysis
 Retail
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”: 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
Food and Processing Distribution Analysis
 Food and Processing Distribution
Acquisition-Based Strategy
Value
Creating
Drivers
Pursuit of
Market Power
Learn and
Develop New
Capabilities
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