China Resources Enterprise
ANALYSIS OF CORPORATE STRATEGY
Content
 Problem
 SWOT Analysis –Overview
 Business Level Strategy
- Focused geographical
- Differentiation
- Related- link
 Acquisition- based Strategy
 Recommendation
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
 Source (Datamonitor)
Strength
Weakness
Market leadership better equips Store productivity significantly
the company to effectively
lower than the competitors
participate in the vibrant
Chinese markets
Inorganic expansion to further
establish a dominant market
position
Integrated business model
Lower margins
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
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 - "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 shift from supply-driven to demand
small bottles like imported beers
- Enlarged customer group :
younger, higher imcome, 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”: 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
Raw materials + Packaging materials: hard to be replaced

Potential Entrants
Hard to gain a share in this competitive market

Product Substitutes
taste speciality
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
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 suppliers
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
Beverage Analysis
C’estbon
Pacific Coffee
Beverage Analysis
Strength
Weakness
- Largest packaged water
brand in Guangdong
- Extensive distribution
channel
capacity for launching new
products
Opportunity
Threat
- Fast-growing coffee market
- Emphasis on healthy diet
- Keen competition
- High development Cost
- Insufficient production
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
Beverage Analysis

Potential Entrants
China beverage industry is attractive to the potential entrants

Product Substitutes
Carbonated 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
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
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
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
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
 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
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