FIAne – 020220A – GCro - P0

Competitive Strategy

0

Geoff Crossley

CEO, Eurocash Food Service & Gas Stations

Group Director, Investor Relations

October 2009, Poznan

FIAne – 020220A – GCro - P1

Objectives today

� Give you a brief introduction to Eurocash

� Share a personal view of the changing context we strategize in

� Sum up the teachings of Prof.M. Porter of Harvard Business School

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� Sum up the teachings of Prof.M. Porter of Harvard Business School

� Illustrate how to apply basic concepts

� Get some interaction with you

FIAne – 020220A – GCro - P2

Eurocash – Market leader consolidating a fragmented sector

1,31,5

1,7

3,8

4,7

6,5*

2,6% 2,8%

6,0%6,9%

8,7%

2,3%

0,0

1,0

2,0

3,0

4,0

5,0

6,0

7,0

2003 2004 2005 2006 2007 2008

PLN

bn

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

20%

EUROCASH GROUP

� Self-financing, net cash position

� Relatively limited credit exposure

� Central head office synergies

� Experienced management team

Eurocash Group sales and market share evolution

2

Source: Rzeczpospolita 500, Polityk a 500, GfK Polonia, company data, own estimates* Makro FMCG turnover estimated at app. 60% of Makro total

** Emperia - wholesale sales only; *** Ruch: non-press FMCG; C&C – Cash&Carry; D: Direct delivery; T: Tobacco; A: Alcohol; E: estimated data

2003 2004 2005 2006 2007 2008

Eurocash Group pro-forma sales Share in wholesale FMCG market

Ruch (T)***E

3,5%

Lekkerland (T) E

3,6%Kolporter (T) E

2,5%

Selgros (C&C)

3,9%

CEDC (A)

5,3%

Emperia**

6,0%

Makro-FMCG

(C&C)*

6,2%

Eurocash Group

8,7%Other

60,3%

Strategies in place to be leader in :

� C&C in small/medium cities

� Franchise systems, nationwide

� Impulse and Convenience for

Traditional Shops and Gas Stations

� Food Service and HoReCa

Wholesale market – key players (2008)

FIAne – 020220A – GCro - P3

Outlook for 2009

Cost & price leadership Sources of future growth

Strict cost control and

focus on productivity gainsLFL and market share growth

„Our strong balance sheet allows us to look at 2009 as a year of opportunity,

when weaker market participants will face real challenges”

Luis Amaral CEO

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Low CAPEX Cash&Carry: 6-8 new stores p.a.

Low exposure to credit salesDelikatesy Centrum: 80+ new

franchise stores (new regions)

No debt – cash + unutilized

credit lines available

McLane: more sales to gas stations

development of food service

Stable earnings and focus on cash

(negative working capital)KDWT: growing non-tobacco impulse

FIAne – 020220A – GCro - P4

Phases in recent memory of working life

The changing context for Strategy formulation

Postwar to 60s

Business Context

•General growth•Common Market

70s, Oil-shock 80s 90s

• Discontinuity• Different impact

• Uk led privatisations• Defeat of unions

• Collapse of Soviet Union• Europe 92 open borders

00s?

• Securitisation• Leverage

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•Common Market•Job was for life

Business trends

•Diversify

•Divisionalize

• Different impact depending on energy-intensity of industry

• Portfolio Planning

• Resource allocation

• Defeat of unions

• First use of Pc..

• Outsourcing

• Productivity thru

People

• Arrival of Private

Equity in Europe

• Europe 92 open borders• EU enlargement, Euro• Oil at 9 USD• Financial deregulation

• Globalisation, emerging mkts

• Start of Venture Capital in EU

• Technology-based productivity

growth

• Cost cutting

• Operational excellence

• Leverage• Bubbles • Oil at 140 $• Crashes

• ?????

FIAne – 020220A – GCro - P5

XXI st Century Competitive Context

Falling barriers to Falling barriers to competitioncompetition Supremacy of Supremacy of

Knowledge Assets & Knowledge Assets & SkillsSkills

Decreasing Scale Decreasing Scale effectseffects

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CompanyCompany

TechnologicalTechnologicalProgressProgress

Compression of Time Compression of Time and Spaceand Space

More exigent More exigent customers & microcustomers & micro--

segmentationsegmentation

FIAne – 020220A – GCro - P6

Europe in the Era of Total CompetitionPorter’s Themes :

1. Distinguishing Strategy from Operational Effectiveness

2. Shaping Industry Structure

3. Choosing a Distinctive Competitive Position

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3. Choosing a Distinctive Competitive Position

4. Positioning and the Value Chain

5. Trade-offs

6. Continuity in execution

FIAne – 020220A – GCro - P7

Determinants of Company Performance

• Functional (e.g., marketing, production) excellence

• Eliminating waste and achieving greater output from existing resources

Operational

Effectiveness

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• Stimulating continuous organisational improvement

• Executing closer to the productivity frontier

FIAne – 020220A – GCro - P8

Determinants of Company Performance

Strategy

• Creating a unique and sustainable competitive position

Operational

Effectiveness

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– Improving operational effectiveness preoccupies companies a lot of the time

– ..but Companies must shift their attention to strategy to secure long-run success

competitive position

• Transforming or redefining competition in the industry

FIAne – 020220A – GCro - P9

Competitive Strategy

– The central goal of a firm is superior long-term return on investment

– The fundamental unit of strategic analysis is the industry

– Company performance results from two distinct causes

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Industry

Structure

Relative Position

Within the

Industry

FIAne – 020220A – GCro - P10

Determinants of long term sector profitability

Threat of subtitute

Products/services

Rivalry between Bargaining Power, Bargaining power

• High Street outlets with location

• Fast Food outlets

• Supplier direct delivery

• Outsourced Chain Operators

Slowdown, Wholesale consolidation

Rivalry of Category specialists,

Regional and Full-range players,

Petrol Convenience Stores

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Threat of new

entrants

Rivalry between

existing competitors

Bargaining Power,

Suppliers

Bargaining power

of Oil Cos

Emperia

LogPol

Tobacco and beer/ strong

alcohol producersUse of Bid

dynamics and

contractual

service penalties

FIAne – 020220A – GCro - P11

Positioning and Segmentation

Customer Group

(Needs,

Accessibility)

Value Chain

(Activities)

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Positioning is the simultaneous choice of

� which group of customers to serve,

�which array of product varieties to offer, and

�the particular mix of value (price and non-price) to deliver

FIAne – 020220A – GCro - P12

Actionable segmentation: basic principles

Dimension A?

Dim

en

sio

n B

?

ClientsClients

OccasionsOccasions

ConsumersConsumers

ProductsProducts

Geographical areasGeographical areas

NeedsNeeds

ServicesServices

CompetitorsCompetitors

TransactionsTransactions

���

� ��

�

��

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TransactionsTransactions

ChannelsChannels

� Chosen dimensions must be exhaustive – Demographics – Situational– Behavioural � Requires intuition to map primary dimensions

� Must produce differentiated segments that are actionable– Recognizable clients groups– Needs versus observable discriminating characteristics

� Facilitates understanding of needs, how to serve� Allows segments prioritisation

��

FIAne – 020220A – GCro - P13

Positioning and Segmentation

Customer Types / Purchase

Occasions

Product /

Service

Varieties

Competitor A

Competitor B

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Varieties

•Positioning choices show in the particular configuration of activities adopted

•Essence of strategic positioning: making choices that are different from those of rivals

•Competition occurs primarily in the areas of overlap

Competitor C

FIAne – 020220A – GCro - P14

Positioning and the Value Chain

Firm Infrastructure(e.g. Financing, Planning, Investor Relations)

Human Resource Management(e.g. Recruiting, Training, Compensation System)

Technology Development(e.g. Product Design, Testing, Process Design, Market Research, Material Research)

Inbound

Logistics

Operations Outbound

Logistics

Marketing

& Sales

After-Sales

Service

M

arg

in

Procurement(e.g. Raw Materials, Advertising Space, Health Services)

Support

Activities

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– Companies are collections of discrete activities, in which competitive advantage resides– Discrete activities are often complementary– Positioning choices are reflected in an internally consistent configuration of activities

(e.g. Data

Collection,

Material

Storage,

Customer

Access)

(e.g.

Component

Moulding,

Branch

Operations,

Underwriting)

(e..g. Order

Processing,

Warehousing,

Report

Preparation)

(e.g. Sales,

Proposal

Writing,

Advertising,

Trade Shows)

(e.g. Installation,

Customer

Support, Repair)

Primary Activities

FIAne – 020220A – GCro - P15

Positioning and Competitive advantage - Eurocash service to Petrol Chains

Groups of

clients,Needs,

Lower Cost

Value Chain

(Activities))

Buying PowerLogistic cost

Positioning choice:

� which group of clients to serve?

� which range of products to offer?

� what mix of Value(price/non-price)

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Differentiation

(Non-Price Value )

Competitive

Advantage

Service level

All in one truckE-invoiceError reduction

• Are Petrol Chains interested only in

minimised Bid Prices ? (other factors

only “Nice to have”) ?

• Are factors reducing Total cost for the

Client relevant? Is “Lowest Total Cost” a

relevant Strategy for the Wholesaler?

• Is there scope for a Value-Added Service

Strategy, (implying a price premium) ?

FIAne – 020220A – GCro - P16

Positioning and the Value ChainEurocash Petrol Stations service

Firm Infrastructure

Human Resource Management

Technology Development

Inbound

LogisticsOperations

Outbound

Logistics

Marketing

& Sales

After-

Sales

Service

M

arg

in

Procurement

Support

Activitie

s

Primary Activities

Long term advantage

depends on the

complementarity of

multiple activities that

exceed specific skills or

resources

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– Hi volume in common producers gives buying power– Full-range means bigger drop and greater Warehouse

throughput– Multi-temp allows consolidation of chilled and frozen volume

with ambient – Common, hi volume skus means better use of space and capex– Use of technology to make life simple ties the client– Multi-client back-office dilutes cost to serve

Primary Activities

McLane’s particular mix

FIAne – 020220A – GCro - P17

Positioning - IKEA, Sweden

Customer Group(Needs, Accessibility)

Value Chain

(Activities)

IKEA focuses on young, price sensitive, first-time buyers

– Low-priced, modular, ready-to-assemble designs

– In-house design of all products

– Wide range of styles in huge warehouse stores

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warehouse stores

– Self-selection / Large inventories

– Extensive information in the form of catalogues, do-it-yourself videos, explanatory ticketing, and assembly references

– Long hours of operation

– Suburban locations with large parking lots

– Self-transport

FIAne – 020220A – GCro - P18

Complementarities at IKEA

Staff Productivity Customer Behaviour

Limited Sales

Staffing

High traffic store layout

designed for impulse

purchasing

Explanatory catalogues, informative

labelling and displays

Self-selection from

warehouse; self-assembly

Suburban locations with

large parking lots

Most items in

inventory

More impulse

buying

Self-transport by

customers

Ample inventory

on site

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Modular Kit Concept Low Manufacturing Cost

‘Knock-down’ kit

packagingModular designs

Ease of transport and

assembly

Increased variety with ease

of manufacturing

Increased likelihood of

follow-on purchase

Ample year-round

stocking

In-house design

focused on cost of

manufacturing

100% sourcing

from long-term

suppliers

FIAne – 020220A – GCro - P19

Positioning Tradeoffs - IKEA, Sweden

IKEA Typical Furniture Retailer

• Higher priced, fully assembled products

- some customization of fabrics, colours,

finishes

• Furniture purchase and merchandising

only

• Primary design and manufacturing focus

on image / style / materials

• Low-priced, modular, ready-to-

assemble designs - no custom

options

• Centralised, in-house design of all

products

• Furniture design and manufacture

driven by cost

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on image / style / materials

• Medium sized furniture showrooms

• Low inventories / order placement

typical

• Urban / suburban locations

• Product information provided by store

sales personnel

driven by cost

• Wide range of styles in huge

warehouse stores

• Self-selection / Large inventories

• Suburban locations with large

parking lots

• Extensive information in the form of

catalogues, do-it-yourself videos,

explanatory ticketing, and assembly

references

FIAne – 020220A – GCro - P20

Complementarities and Competitive Advantage

– The presence of complementarities make competitive advantage far more sustainable than advantages arising from discrete activities or “competencies”

• Rivals must match a whole array of activities and the way they are

integrated

• Complementarities amplify the competitive penalty of small shortfalls in matching individual activities

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matching individual activities

• Achieving complementarities is difficult organisationally

– Strong complementarities also elevate the tradeoffs between positions

– Complementarities also allow organisational structure and management process to be better aligned with strategy

FIAne – 020220A – GCro - P21

Why Companies Fail to Choose Strategies

Economic

– The need to choose is not understood• Operational effectiveness is confused with strategy• Better productivity creates the illusion that the best of all worlds is possible

– Choice appears to constrain sales growth

– Choice limits flexibility

Organisational

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Organisational

– Stalemate between factions / functions within the organisation who are championing different objectives

– Organisational incentives punish choices but tolerate mediocrity (if the competitors are doing it . . .)

– Denying tradeoffs is seen as motivating greater organisational improvement

FIAne – 020220A – GCro - P22

Strategic Mindsets

Strategy is a race to

one ideal position

Strategy is the creation

of a different position

where competitors are

unable or unwilling

to compete

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Key success factors

or core capabilities

determine the winner

Long-run advantage

depends on

complementarities

across many activities

that transcend (and give

value to) discrete

capabilities or resources

FIAne – 020220A – GCro - P23

Strategic Continuity and Continuous Improvement

– Strategic continuity over sustained periods contributes strongly to sustainable competitive advantage

• Reinforces identity with customers and channels

• Builds truly unique capabilities and skills

• Sharpens understanding of tradeoffs

• Fosters strengthening of complementarities

• Facilitates improvements in operational effectiveness

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• Facilitates improvements in operational effectiveness

– Strategic continuity must be combined with continuous improvement in implementation

– There is often a tension between achieving sustainable advantage and maintaining the flexibility to respond to any structural change

FIAne – 020220A – GCro - P24

Fundamental Errors in Competitive Strategy-M. Porter

– Operational effectiveness instead of strategy

– Ignoring or only reacting to industry structure

– “Best of all worlds” instead of tradeoffs

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– Competencies instead of strategies

– Flexibility instead of continuity

– Sloppy, incoherent implementation

FIAne – 020220A – GCro - P25

Final Words of advice

Watch macro-economic game-changers: build your own memory for later déjà vu moments

– Use of Debt, health of Balance sheet,

– Relative interest rates, Exchange rate swings

– Opening of Trade Barriers

– Drivers of the price of Oil... Etc

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Watch for the Herd instinct of managers

� All Rush into new markets, then overcapacity results, and withdrawal

� Blind copy of their home business model, not adapting to new country

� Corporatist , not entrepreneurial

� Prone to buzzwords and fads- form your own view.

� Nothing stays the same: When in doubt, steer with your Values and a simple check-list

FIAne – 020220A – GCro - P26

Thank you for your attention!

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