ANALYSIS OF CORPORATE STRATEGY
P r e p a r e d b y J e s s i c a C h o i , P h o en i x T i u , J a n e t Po o n , C a th y H o & T i m o t h y S a r g e a n t
China Resources Enterprise
Content
ProblemSWOT Analysis –OverviewBusiness Level Strategy
- Focused geographical- Differentiation
Corporate Level Strategy- Related- link
- Acquisition- based StrategyRecommendation
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?
C’estbon Pacific Coffee
Beverage Analysis
Beverage Analysis
Beverage Analysis
Strength- Largest packaged water
brand in Guangdong
Weakness- Insufficient production capacity for launching
new products
Opportunity- Fast-growing coffee
market- Emphasis on healthy
diet
Threat- High development Cost
- Keen competition
Beverage Analysis
Five Forces Rivalry with existing competitors
“C’estbon”: Master Kong, Wahaha, Nongfu & Coca-Cola
Pacific Coffee: Starbucks and Gourmet Master (Taiwan brand)
Beverage Analysis
Potential EntrantsChina beverage industry is attractive to the potential entrants
Source: Canadean
Beverage Analysis
Bargaining power of customers“C’estbon”: HIGH Pacific Coffee: LOW
Bargaining power of suppliersPacific Coffee: HIGH
Product SubstitutesCarbonated drinks, energy drinks and tea
“ Snow” Advertisement http://www.snowbeer.com.cn/
Beer Analysis
Beer Analysis
Beer Analysis
Beer - " 雪花 Snow“
SWOT – Strength China’s best-selling beer for 2009 in terms of sales volume Market leader position further consolidated by acquisition of
Kingway in Feb 2011 US $40m investment in Technology
Legend of quality: unified technological and
technical standards
Appointed again as the official beer for NPC and CPPCC
Beer Analysis
Customer-Focused
Royal- looking and extravagant
noble gold and jade inlaid and engraved vision
Focus shift from supply-driven to demand small bottles like imported beers
Beer Analysis
-Brand Promotion Campaign : “The Great Expedition” (勇闖天涯 ) more customer interaction attracted many customers due to its story (not actual
taste)
Beer Analysis
SWOT –Weakness- Thin profit margin (Chinese: price-sensitive)
[$2 per hectoliter, compared with $50 to $80 in Europe and the U.S]
Beer Analysis
SWOT –OpportunityEnlarged customer group :
younger, higher income, more urban customers high-end : Snow Draft, Snow Super Premium urban: Beijing
Chinese robust economy
Chinese twelfth five-year plan
Beer Analysis
SWOT –Threat
cost of production: raw materials, rent, utilities
increasing M&A cost
• “Tsingtao”: great brand recognition, 15% of domestic market share
• “Bud Light”: “Snow” outsold [Source: Pluto Logic]
Rivalry with existing
competitors
• High market reputation and strong customer loyalty“The Great Expedition” (“勇闖天涯” )
Bargaining power of
customers
• Raw materials + Packaging materials: hard to be replaced
Bargaining power of suppliers
• Hard to gain a share in this competitive marketPotential Entrants
• Taste specialityProduct Substitutes
Beer Analysis
Retail Analysis
Strength- 2nd largest retail
organization in China in Retail Asia Pacific top 500
awards- Multi-format business
platform
Retail Analysis
Regional leadership on a multi-format business platform
Weakness- Lower average sales per
store compare to competitors
Strength- 2nd largest retail
organization in China in Retail Asia Pacific top 500
awards- Multi-format business
platform
Retail Analysis
Average sales per store for hypermarkets format in 2009
Market Average CNY 163.4 millionCRE CNY 78million Carrefour’s Shanghai store CNY364 million
Retail Analysis
Weakness- Lower average sales per
store compare to competitors
Strength- 2nd largest retail
organization in China in Retail Asia Pacific top 500
awards- multi-format business
platform
Opportunity- Increasing urbanization
of China has expanded the consumption market
Threat- Keen competition from Carrefour, Tesco, Wal-
Mart
Retail Analysis
Retail Analysis• Multinational retailers such as Wal-mart, Tesco,
Carrefour expand their operations in 2nd and 3rd tier cities
• Will open 12-20 new stores each year according to PwC
Rivalry with existing
competitors
• switching cost is moderate and is decreasing with growing experience in the marketBargaining power
of customers
• rather low for small suppliers such as small farming businesses
• higher for international brands like P&G as they have international brand awareness
Bargaining power of suppliers
• High cost to entry due to the need to set up new distribution channels
• Competitors may retaliate with price war or bad publicity
Potential Entrants
• Traditional stores offering human contact are an alternative
• Internet shopping may eliminate hypermarkets and supermarkets
Product Substitutes
Food and Processing Distribution Analysis
Food and Processing Distribution Analysis
Ng Fung HongStrength: premium food qualityvertically integrated meat supply system- Remain in competitive position in the market ( 5 forces)
Food and Processing Distribution Analysis
Five Forces Rivalry with existing competitors: medium- the monopoly live cattle importer from China- strong brand recognition & reputation- Competitors: Local farms(limited supply), frozen meat
suppliers all over the world Bargaining power of customers & product
substitutes : medium to low monopoly in live cattle market in HK substitutes: local meats, chilled/ frozen meats Potential Entrants monopoly in live cattle market in HK
Bargaining power of suppliers: Low- Many product sources
Food and Processing Distribution Analysis
Weakness:
increasing cost of production ( raw materials) - pressure to raise the price of
risk of diluting perceived differentiated features:- customer’s dissatisfaction of price increase of meat price increase
is not justified by perceived increase in quality
Food and Processing Distribution Analysis
Food and Processing Distribution Analysis
Opportunities
- Economic growth in China: increasing pork consumption--- demand increase
- Market expansion in China: joint venture and acquisition --- penetrate into production, retailing and marine fishing
Threats
Hong Kong Pork Traders Call For End In Monopoly Imports:buyers urged the government to open up the live cattle market --- break Ng Fung Hong's monopoly
Food and Processing Distribution Analysis
Recommendation
1. Integrated cost leadership and differentiation strategy
Increase efficiency: Integrated value chain system:- Beverage: Manufacture the products by
themselves rather than by OEM factories- Beer: divest non-core beer brands (e.x 扎西德勒 ,
Singo) --- focus investing in core brand Flexible manufacturing system(FMS): Computer
controlled process--- flexible quantities--- product variety with low cost
- Food, Beverage and beer
Locating supermarkets in self-owned or partially-owned property development projects
Recommendation
Benefits:- Lower operational costs- Allow quality tracking --- create value to
customers - Widen operating margin ---higher
investment return- Build core competence to ensure continual
growth
Recommendation
2. Differentiation Product quality improvement and innovation
- Food: emphasis on its safe and high quality food products
- Beer: increase product mix to meet variety seeking of customers
Recommendation
- Beverage: Develop healthy drinks--- strength product portfolio --- offer health-conscious customers a wide range of products
2011 2012 2013 2014 20150
5000
10000
15000
20000
Estimation of juice sales from 2011 to 2015
$US
mn
Recommendation
Source: China Food and Drink Report
e.g. Co-location of CRE’s existing and expanding retail network and Pacific Coffee
More sophisticated lifestyle experience for customers
Increase profit margins
Recommendation
Benefits:- Customer loyalty: superior quality- Set a premium price- Food: justify high price
Drawback:- High cost : marketing research, new product
development
Recommendation
Focused Geographical market: domestic Chinese market
• leverage its strength : good understanding of Chinese Market
• better serve the segment• Less risky • ally with mission: China’s largest consumer
goods company
Benefits
• local competitors : focus on more narrowly defined competitive segments (same differentiation at lower price)
• cannot tap the advantages of using global strategy: (market size, ROI, economics of scales and learning)
Drawbacks
Recommendation
External environment •Increasing urbanization, GDP in China
•China’s twelfth 5-year Plan: boost domestic consumption ( minimum wage)
Attractive industry
•Retail, food, beverage (increasing demand)
Strategy formulation •Focus on regional Chinese market
•Expand in profitable 2nd tier markets substantially
Asserts and skills •Market leadership : better equips the company to effectively participate in the vibrant Chinese
markets•Good understanding of Chinese Market
Strategy implementatio
n
•Products: the famous •Price : premium price•Place: 2nd tier area •Promotion: advertisements---riase brand awareness
Growing urbanization
Increasing GDP per capita
Business-level strategy
Related linked: SBU Form of Multidivisional Structure
- share some resource: distribution channels in different business units
Beverage and Retail
Holders of Pacific Club Card enjoy discount in supermarkets operated by CRE
- sharing of marketing resources
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
Recommendation
Development of centralized customer base system
retail: membership card--- get customer profile & preference---used in product development for food and beverage
Centralized IT system - sharing of updated information and
technology: R&D - monitor IT system: drive cost efficiency - economies of scope
Current Corporate Level Strategy
Restructuring Activities
Quality Expansion Platform
Leverage CRE`s existing core competences to create synergistic combination
Market leadership and improved profit margins
Examples of Key Acquisitions in 2010
Acquisition of the Jialinshan project marked the Group’s expansion into the mineral water sector Synergy: Diversifying product offerings
Acquired 80% interest in Pacific Coffee (Holdings) Limited from Chevalier Pacific Holdings Limited Synergy: Differentiating retail markets
Acquisitions in meat processing sector Synergy: Expanded operations in slaughtering,
storage, trading and increased CRE market power
Acquisition-Based Strategy
Value Creating Drivers
Pursuit of Market Power
Learn and Develop
New Capabilities
Pursuit of Market Power
Market
Power
Vertical Integratio
n
Vertical Acquisitio
nsHorizontal Acquisitio
ns
Learn and Develop New Capabilities
Exploit economies of scope
Leverage CRE’s Core Competenc
es
Operational and
corporate related
acquisition
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
Inability to achieve synergy
Too much diversificatio
nCRE may be
getting to big
Managers overly
focused on acquisitions
Recommendation
Highly fragmented Chinese retail market Great Opportunity for M&A to enhance market
leadership
Keys to a Successful Acquisition
Complementary Assets
• Target firm has complementary assets to leverage CRE`s business
• High probability of synergy and competitive advantage by maintaining strengths
• Ex. Acquisitions to enhance product new development, leverage CRE`s distribution network
• Acquire firms who have a core competence in maintaining high profit margin
Keys to a Successful Acquisition
Acquisition is Friendly
• Leads to faster and more effective integration and lower premiums
• Targets should be selected and groomed by establishing a working relationship prior to acquisition
• Use cooperative strategies before acquisition to see if `fit` is right
• Use of JV`s and competitive strategic alliances
Keys to a Successful Acquisition
Avoid Paying too high of a premium
• Rational M&A
• Only acquire firms with strongest complementary assets
• This will avoid expensive restructuring in the future
• Use strong bargaining power to drive down the cost of M&A
Keys to a Successful Acquisition
CRE Maintains emphasis on R&D and innovation
• Maintains long-term competitive advantage
• Maintain CAPEX program in R&D and innovation
• Do not let acquisition replace innovation
• Continue to invest in supply chain management initiatives to improve profit margins
Keys to a Successful Acquisition
CRE manages change well and is flexible and adaptable
• Faster and more effective integration facilitates achievement of synergy
• Facilitate merging of two corporate cultures
• Friendly acquisition is vital
• Retrain target firm`s human capital by CRE in an effort for the target firm to fully understand CRE`s operations and capabilities
Conclusion
Establishing Market
LeadershipM&A is the growth
engine
Quality Expansion• New Product
Development
Regional expansion
Improving Profit Margins
Leverage supply chain to generate
efficienciesR&D + Innovation
to drive cost efficiencies
Acquisitions to help improve margins
Appendix I: Deal Activity (2007- 2011YTD)
Source: DataMonitor
Appendix II: Deal Activity Type
Source: CRE 2010 Annual Report
Appendix III: Turnover by Segment
Appendix IV: Geographical distribution of the group’s retail network
Appendix V: GDP by province
Rank Province/ municipality Per capita consumption expenditure of urban
households1 Shanghai 20,9922 Beijing 178933 Guangdong 16,8584 Zhejiang 16,6835 Tianjin 14,8016 Fujian 13,4517 Jiangsu 13,1538 Inner Mongolia 12,3709 Liaoning 12,32510 Chongqing 12,144
Source: National Bureau of Statistics, PRC
Appendix VI: Top 10 provinces/ municipalities in terms of per capita consumption expenditure of urban households, 2009