Analyzing Acquisition based strategy
CRE positioning themselves has recently positioned themselves as a pure consumer play with the goal of becoming China’s largest consumer goods company o How? Disposing of non-core assets and re-investing proceeds in core businesses o Company has been pursuing organic growth and a related acquisition based strategy o Major goal is to improve profitability while actively expanding presence in the Chinese market
Restructuring Activities o Downscoping
 Asset swap with China Resources (Holdings) Company Limited
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Increased CRE’s cashflow
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Enhanced CRE’s portfolio of core business
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Increasing number of hypermarkets
 CRE sale of its stake in Esprit China to Esprit and CK Calvin Klein to China
Resources Textile
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Enabled CRE to focus on market leadership in core consumer businesses by channelling resources to these areas
 How has these activities contributed to CRE’s value?
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Managerial effectiveness increases because the firm has become less diversified, allowing top management to better understand and manage remaining businesses
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Produces long-term positive effects due to the increased emphasis on strategic controls derived from concentrating on the firms core business o No Downsizing: human resource capital continues to be a challenge for CRE’s growth
 Avoid laying off key employees as it might lead to a loss of core competencies
Investing in Core Assets o Creating Corporate level value: Businesses in the portfolio are worth more under the management of the company then they would be under any other ownership o Firms incur development costs and monitoring costs when acquiring new companies , the ideal portfolio balances these costs and benefits o CRE Acquires 80% of Pacific Coffee from Chevalier Pacific
 How does it create Corporate Level Value (synergies)?
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Co-location of CRE’s retail stores and PCC stores
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Creates differentiation in CRE’s existing stores o Formation of JV’s for the non-alcoholic beverage business in Greater China
 Synergies
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Leverage CRE’s existing distribution network
 Potential Long-term benefits
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Accelerated development of leading non-alcoholic beverages
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Enhanced new product development capability

CRE’s is developing a Related Linked Diversification Strategy o Less than 70% of revenue comes from the dominant business and there are only limited links between businesses
CRE’s is creating value by pursuing Operational Relatedness based diversification strategy o Sharing a primary activity (distribution, sharing input in manufacturing, sales networks) and a support activity (purchasing practices)
 Increased bargaining power due to multi-format retail model and established as a strong player in their respective businesses (market leader) o Downside: ties among CRE’s business create links between outcomes
 Eg. If demand for beer is down, it may not generate sufficient revenues to cover the fixed costs o Horizontal acquisitions (CRE’s current strategy) resulting in sharing activities and resources create economies of scope that have the potential to produce higher returns o This suggests that gaining economies of scope by sharing activities across a CRE’s business may be important in reducing risk and in creating value o Also, more attractive results are obtained when a strong corporate head office facilitates it o Value is only created through CRE’s acquisition strategy if it allows the company to increase revenues or reduce costs when implementing their business level strategy o Organizational integration is vital in order to share activities across businesses to achieve synergies. Success will be based on CRE’s ability to integrate these acquisitions into a cohesive structure that will allow the sharing of activities to take place more efficiently. It is important that central HQ implement controls to foster the sharing of activities between related divisions for success to occur
Corporate Relatedness Acquisitions: Transferring of Core Competences o Creates value in 2 ways
 Expense of developing core competences has already taken place in one of the firms core businesses, transferring this competence to a second business eliminates the need for that business to allocate resources to help develop it
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Acquisition based strategy for firms that have already developed core competencies in a certain region o Eg. JV with Kirin
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Could lead to higher profit margins
 Resource intangibility across businesses create immediate value
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Eg. Local knowledge of Chinese market across businesses
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CRE acquiring 21.37% in Kingway Brewery Holdings in HK o Immediate advantage market scope in HK o Should CRE move managers into new positions to transfer core competency?
 Core competency seems to be knowhow of distribution and localized market
 Also, managers may not want to move if they are an expert in their business
Pursuit of Market Power

o CRE can create market power through multi-format retail model
 CRE operates supermarkets, hypermarkets and convenience stores in order to enable the company to cater to varied market segments o Vertical integration
 Food and beverage divisions are integral parts of the supply chain
 CRE can be viewed as an integrated supply supplier with presence in integrated
R&D, processing, storage, logistics, wholesaling and retailing
 Leads to higher quality control , safety controls and contributed to overall brand
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Helps CRE’s distribution reputation in wholesale market
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Provide variety of food supplies with large sourcing capacity
 Provides benefits of flexibility to adapt to changing consumer tastes
 Limitation of vertical integration
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Outside supplier may produce the product at a lower cost
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Internal transactions from vertical integration may be expensive and reduce profitability relative to competitors
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Changes in consumer demand create capacity balance and coordination problems o In vertical integration, CRE may integrate their operations, producing and selling their products by using company businesses as well as outside sources o Market power is gained when firm develops ability to save on its operations, avoid market costs, improve product quality
Combo: Operational Relatedness & Corporate Relatedness o Cost of organization and compensation structure is expensive o Broad and deep knowledge about customers and help CRE develop its core competency o Could be eating away at profit margins
Horizontal acquisitions o Result in higher performance when firms have similar characteristics such as strategy, managerial styles, resource allocations o Only works when company integrates own assets that complement newly combined firms core competency o Allows CRE to enter new market and strong competitive position; overcoming entry barriers and gain immediate access to market
 Eg. CRE strengthened its market position in the retail segment by acquiring a supermarket with 81 stores o Allows to expand geographical coverage in the northern and central areas of mainland
China
 Eg. Hypermarket acquisition from parent company
 Eg. Acquisition of Anqing Beer Company, Liaoning Songling Brewery Group
Company Limited and Shandong Hupo Brewery
 Increased geological diversification will help CRE establish its network of distributers’ and retailers’

o Chinese retail market is highly fragmented and the top players have been gaining market share o Ability to continue to pursue horizontal acquisitions to further establish itself as a national player to drive top-line growth
Vertical acquisitions o Newly formed firm controls additional parts of the value chain o CRE on the look out to further leverage its integrated business model
Integration difficulties o Melding two cultures linking different financial and control systems, building effective working relationships and resolving problems regarding the status of a newly acquired
 This is a risk if CRE`s pursues an aggressive acquisition based strategy
Inability to achieve synergy o Created by economies of scope and by sharing resources o Private synergy: created when combining and integrating the acquiring and acquired firms assets yield capabilities and core competences that could not be developed by combining and integrating assets with another company o Keep in mind indirect costs
 Managerial time to evaluate target firms, complete transaction, loss of key managers and employees o CRE has been facing higher costs compared to its peers
 Two possible reasons
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Synergies have yet been realized in recent horizontal acquisitions
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No such synergies available
Too much diversification o Scope created by diversification causes managers to rely on financial rather than strategic controls to evaluate business performance o Acquisitions may become substitutes for innovation leading to performance issues
CRE Managers overly focused on acquisitions o This takes time (and big opportunity cost)
 Searching for viable acquisitions
 Completing due diligence process
 Preparing for negotiations
 Managing the integration process o Diverts attention from other matters that are necessary for long-term competitive success, such as identifying ways to drive cost-efficiencies
CRE may be getting too Large o Managers may implement more bureaucratic control to manage combined firm’s operations o This leads to standardized managerial behaviour preventing innovation o Because of innovations importance to competitive success, the bureaucratic controls resulting from a large organization can have detrimental effects on firm performance o Stifling innovation may be detriment when attempting to improve profit margins

For Recommendation Section o Select the ‘right’ target o Avoid paying too high of a premium o Effectively integrate the operations of the acquiring and target firms o Retaining target firm’s human capital is foundational to efforts by employees of the acquiring firm to fully understand the target firm’s operations and capabilities on which those operations are based
Effective acquisitions (for recommendation) o See table 7.1 in textbook o With complementary assets, the acquiring firm can maintain its focus on core businesses and leverage the complementary assets and capabilities from the acquired firm o Targets should be selected and ‘groomed’ by establishing a working relationship prior to