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Competitive Strategy

Geoff Crossley CEO, Eurocash Food Service & Gas Stations Group Director, Investor Relations

October 2009, Poznan

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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

Illustrate how to apply basic concepts

Get some interaction with you

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7,0 6,0

Eurocash Market leader consolidating a fragmented sector

Eurocash Group sales and market share evolution
6,5* 20% 18% 16%

EUROCASH GROUP Self-financing, net cash position Relatively limited credit exposure Central head office synergies Experienced management team 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
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5,0 4,0 3,0 6,0% 2,0 1,0 0,0 2003 2004 2005 2006 1,3 2,3% 1,5 2,6% 1,7 2,8% 3,8

4,7

14% 12% 8,7% 10% 8% 6% 4% 2% 0%

PLN bn

6,9%

2007

2008

Eurocash Group pro-forma sales

Share in wholesale FMCG market

Wholesale market key players (2008)

Other 60,3% Eurocash Group 8,7% Makro-FMCG (C&C)* 6,2% Emperia** 6,0% CEDC (A) 5,3% Selgros (C&C) 3,9% Ruch (T)***E 3,5% Lekkerland (T) E Kolporter (T) E 3,6% 2,5%

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

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Outlook for 2009

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
Sources of future growth

Cost & price leadership

Strict cost control and focus on productivity gains Low CAPEX

LFL and market share growth

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

Low exposure to credit sales No debt cash + unutilized credit lines available Stable earnings and focus on cash (negative working capital)

Delikatesy Centrum: 80+ new franchise stores (new regions) McLane: more sales to gas stations development of food service KDWT: growing non-tobacco impulse

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Phases in recent memory of working life The changing context for Strategy formulation
Postwar to 60s 70s, Oil-shock 80s 90s 00s?

Business Context General growth Common Market Job was for life Business trends Diversify Divisionalize

Discontinuity Uk led privatisations Different impact Defeat of unions depending on energyintensity of industry
Portfolio Planning First use of Pc.. Resource allocation Outsourcing Productivity thru People Arrival of Private Equity in Europe

Collapse of Soviet Union Europe 92 open borders EU enlargement, Euro Oil at 9 USD Financial deregulation

Securitisation Leverage Bubbles Oil at 140 $ Crashes

Globalisation, emerging mkts Start of Venture Capital in EU ????? Technology-based productivity growth Cost cutting Operational excellence

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XXI st Century Competitive Context

Decreasing Scale effects

Falling barriers to competition

Supremacy of Knowledge Assets & Skills

Company

More exigent customers & microsegmentation

Technological Progress

Compression of Time and Space

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Europe in the Era of Total Competition Porters Themes :

1.

Distinguishing Strategy from Operational Effectiveness

2.
3. 4. 5. 6.

Shaping Industry Structure

Choosing a Distinctive Competitive Position Positioning and the Value Chain Trade-offs Continuity in execution

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Determinants of Company Performance

Operational Effectiveness

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

Eliminating waste and achieving greater output from existing resources Stimulating continuous organisational improvement Executing closer to the productivity frontier

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Determinants of Company Performance

Operational Effectiveness

Strategy

Creating a unique
and sustainable competitive position Transforming or redefining competition in the industry

Improving operational effectiveness preoccupies companies a lot of the time ..but Companies must shift their attention to strategy to secure long-run success

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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

Industry Structure

Relative Position Within the Industry

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Determinants of long term sector profitability

Threat of subtitute Products/services

Petrol Convenience Stores

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,

Bargaining Power, Suppliers Tobacco and beer/ strong alcohol producers

Rivalry between existing competitors

Bargaining power of Oil Cos

Threat of new entrants Emperia LogPol

Use of Bid dynamics and contractual service penalties

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Positioning and Segmentation

Customer Group (Needs, Accessibility)

Value Chain (Activities)

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

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Actionable segmentation: basic principles

Clients Occasions Dimension A? Consumers Products Needs Geographical areas Services Competitors Transactions Channels

Dimension B?

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

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

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Positioning and Segmentation

Customer Types / Purchase Occasions
Competitor A Competitor B

Product / Service Varieties

Competitor C

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

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Positioning and the Value Chain

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

Support Activities

Human Resource Management

(e.g. Recruiting, Training, Compensation System)

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

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

M a r g After-Sales Service
(e.g. Installation, Customer Support, Repair)

Inbound Logistics
(e.g. Data Collection, Material Storage, Customer Access)

Operations
(e.g. Component Moulding, Branch Operations, Underwriting)

Outbound Logistics
(e..g. Order Processing, Warehousing, Report Preparation)

Marketing & Sales

(e.g. Sales, Proposal Writing, Advertising, Trade Shows)

i n

Primary Activities

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

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Positioning and Competitive advantage - Eurocash service to Petrol Chains

Positioning choice: which group of clients to serve? which range of products to offer? what mix of Value(price/non-price)

Groups of clients,Needs,

Value Chain (Activities))

Lower Cost

Buying Power Logistic cost 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) ?

Competitive Advantage

Service level All in one truck E-invoice Error reduction

Differentiation (Non-Price Value )

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Positioning and the Value Chain Eurocash Petrol Stations service Long term advantage depends on the complementarity of multiple activities that exceed specific skills or resources

Firm Infrastructure

Support Activitie s
Inbound Logistics

Human Resource Management

Technology Development Procurement Marketing & Sales Operations AfterOutbound Sales Logistics Service M a r g i n

Primary Activities

McLanes particular mix

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

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Positioning - IKEA, Sweden Customer Group (Needs, Accessibility)

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

Value Chain (Activities)

Low-priced, modular, ready-toassemble designs In-house design of all products Wide range of styles in huge 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

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Complementarities at IKEA
Staff Productivity
Limited Sales Staffing High traffic store layout designed for impulse purchasing Suburban locations with large parking lots

Customer Behaviour
More impulse buying

Explanatory catalogues, informative labelling and displays

Most items in inventory

Self-selection from warehouse; self-assembly

Self-transport by customers

Ample inventory on site

Modular Kit Concept

Knock-down kit packaging Modular designs

Low Manufacturing Cost

In-house design focused on cost of manufacturing Ample year-round stocking

Ease of transport and assembly

Increased likelihood of follow-on purchase 100% sourcing from long-term suppliers

Increased variety with ease of manufacturing

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Positioning Tradeoffs - IKEA, Sweden

IKEA
Low-priced, modular, ready-toassemble designs - no custom options Centralised, in-house design of all products Furniture design and manufacture driven by cost Wide range of styles in huge warehouse stores Self-selection / Large inventories

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 Medium sized furniture showrooms Low inventories / order placement typical

Suburban locations with large parking lots

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

Urban / suburban locations

Product information provided by store sales personnel

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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 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

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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 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

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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

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

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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 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

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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 Competencies instead of strategies Flexibility instead of continuity Sloppy, incoherent implementation

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Final Words of advice

Watch macro-economic game-changers: build your own memory for later dj 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

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

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Thank you for your attention!

www.eurocash.com.pl

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