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 Beverage

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

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