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China Resources Enterprise
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  1. China Resources Enterprise ANALYSIS OF CORPORATE STRATEGY

  2. Content • Problem • SWOT Analysis –Overview • Business Level Strategy - Focused geographical - Differentiation - Related- link • Acquisition- based Strategy • Recommendation

  3. 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

  4. 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?

  5. CRE Limited, SWOT Overview

  6. Business-level strategy • Focused differentiation with related linked strategy

  7. Business-level strategy Source: CRE 2010 Annual Report

  8. 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

  9. Business-level strategy • Differentiation strategy in each business unit

  10. “ Snow” Advertisement

  11. Beer Analysis

  12. 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

  13. 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

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

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

  16. 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

  17. SWOT –Threat- cost of production: raw materials, rent, utilities - increasing M&A cost

  18. 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

  19. Retail Analysis • Regional leadership on a multi-format business platform

  20. Retail Analysis

  21. Retail Analysis

  22. 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

  23. 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

  24. Beverage Analysis C’estbon Pacific Coffee

  25. Beverage Analysis

  26. Beverage Analysis

  27. 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

  28. Beverage Analysis • Potential Entrants China beverage industry is attractive to the potential entrants • Product Substitutes Carbonated drinks, energy drinks and tea

  29. Food and Processing Distribution Analysis

  30. 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)

  31. 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

  32. Bargaining power of suppliers: Low • Many product sources

  33. 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

  34. 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

  35. 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

  36. Business-level strategy • Related linked: SBU Form of Multidivisional Structure - share some resource: distribution channels in different business units

  37. 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

  38. Beverage and retail • Holders of Pacific Club Card enjoy discount in supermarkets operated by CRE - sharing of marketing resources

  39. Beer • Strategy to be No.1 - encircling the cities from rural areas - moving up-market - promotion and branding strategy

  40. Acquisition-Based Strategy

  41. Source: DataMonitor

  42. 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.

  43. 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

  44. 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

  45. 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

  46. 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

  47. 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

  48. 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

  49. 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