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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

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China resources enterprise

China Resources Enterprise



  • Problem

  • SWOT Analysis –Overview

  • Business Level Strategy

    - Focused geographical

    - Differentiation

    - Related- link

  • Acquisition- based Strategy

  • Recommendation


  • 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


  • 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?

Business level strategy
Business-level strategy

  • Focused differentiation with related linked strategy

Business level strategy1
Business-level strategy

Source: CRE 2010 Annual Report

Business level strategy2
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 strategy3
Business-level strategy

  • Differentiation strategy in each business unit

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

  • 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

  • -Brand Promoton Campaign : “The Great Expedition” (勇闖天涯) more customer interactionattracted many customers due to its story (not actual taste)

  • SWOT –Weakness- Thin profit margin (Chinese: price-sensitive)[$2 per hectoliter, compared with $50 to $80 in Europe and the U.S]

  • SWOT –Opportunity

    - Enlarged 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

  • SWOT –Threat- cost of production: raw materials, rent, utilities

    - increasing M&A cost

  • Five Forces

    • Rivalry with existing competitors

      “Tsingtao”: great brand recognition, 15% of domestic market share

      “Bud Light”: “Snow” outsold [Source: Pluto Logic]

    • 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 Analysis

  • Regional leadership on a multi-format business platform

Retail analysis2
Retail Analysis

Retail analysis3
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 analysis4
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
Beverage Analysis


Pacific Coffee

Beverage analysis3
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 analysis4
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
Food and Processing Distribution Analysis

  • Ng Fung Hong

    Strength: premium food quality

  • vertically integrated meat supply system

    - lower operational costs

    - Allow quality tracking : control both food quality &food safety -- create value to customers

    - brand building & consumer loyalty

    - Widen operating margin ---higher investment return

    - Build core competence to ensure continual growth

  • Remain in competitive position in the market ( 5 forces)

Food and processing distribution analysis1
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

  • 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

  • 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

Business level strategy4
Business-level strategy

  • Related linked: SBU Form of Multidivisional Structure

    - share some resource: distribution channels in different business units

Food and retail
Food and retail

  • Development of self-owned retail stores and launchedmore 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
Beverage and retail

  • Holders of Pacific Club Card enjoy discount in supermarkets operated by CRE

    - sharing of marketing resources


  • Strategy to be No.1

    - encircling the cities from rural areas - moving up-market

    - promotion and branding strategy

Source: DataMonitor

Acquisitions in 2010
Acquisitions in 2010

  • Acquisition of the Jialinshanproject marked the Group’s expansion into the mineral water sector.

  • Acquired 80% interest in Pacific Coffee (Holdings) Limited from Chevalier Pacific Holdings Limited.

  • Ng Fung Hong won the bid to acquire a 60% stake in Jiaxing Food & Meat Co., Ltd.

Pursuit of market power
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 power1
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 power2
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
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 capabilities1
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 capabilities2
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 capabilities3
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 capabilities4
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
Risks of Acquisition Based Strategy

  • Integration Challenges

    • Financial systems

    • Control systems

    • Building effective working relationships

Risks of acquisition based strategy1
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 strategy2
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 strategy3
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


  • 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


  • locating supermarkets in self-owned or partially-owned property development projects



  • 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


  • Product

    - product quality improvement and innovation

  • Promotion

  • Increase brand awareness : superior product quality

  • Price: set a premium price

  • Place: Market expansion in China

  • Continue joint venture and acquisition with large food and processing companies