China Resources Enterprise

ANALYSIS OF CORPORATE STRATEGY

China Resources Enterprise

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 NestlePacific Coffee: Starbucks and Gourmet Maste

Bargaining power of customers“C’estbon”: LowPacific Coffee: High

Bargaining power of suppliersPacific Coffee: High

Potential EntrantsChina beverage industry is attractive to the potential entrants

Product SubstitutesCarbonated 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