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									                                                FIAne – 020220A – GCro - P0




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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          Eurocash – Market leader consolidating a fragmented sector
         7,0                                                                                                                       20%
                                      Eurocash Group sales and market share evolution                                       6,5*
                                                                                                                                   18%
         6,0
                                                                                                                                   16%                         EUROCASH GROUP
         5,0                                                                                              4,7                      14%

         4,0                                                                             3,8                                       12%        Self-financing, net cash position
PLN bn




                                                                                                                            8,7%   10%
         3,0
                                                                                        6,0%
                                                                                                         6,9%                      8%         Relatively limited credit exposure
         2,0                                                       1,7                                                             6%

                                                                                                                                              Central head office synergies
                                             1,5
                       1,3
                                            2,6%                  2,8%                                                             4%
                      2,3%
         1,0
                                                                                                                                   2%

         0,0                                                                                                                       0%         Experienced management team
                      2003                  2004                  2005                  2006             2007               2008

                               Eurocash Group pro-forma sales                              Share in wholesale FMCG market

                                                Wholesale market – key players (2008)
                                                                                                                                            Strategies in place to be leader in :
                                                                               Eurocash Group           Makro-FMCG
                           Other
                           60,3%
                                                                                    8,7%                  (C&C)*
                                                                                                           6,2%
                                                                                                                                          C&C in small/medium cities
                                                                                                                 Emperia**
                                                                                                                   6,0%
                                                                                                                       CEDC (A)
                                                                                                                                          Franchise systems, nationwide
                                                                                                                         5,3%
                                                                                                                      Selgros (C&C)       Impulse and Convenience for
                                                                                                                           3,9%
                                                                                                                                            Traditional Shops and Gas Stations
                                                                                                                      Ruch (T)***E
                                                                                                                          3,5%
                                                                                                             Lekkerland (T) E
         Source: Rzeczpospolita 500, Polityk a 500, GfK Polonia, company data, own estimates
                    * Makro FMCG turnover estimated at app. 60% of Makro total
                                                                                               Kolporter (T) E
                                                                                                   2,5%
                                                                                                                  3,6%
                                                                                                                                          Food Service and HoReCa
                   ** 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
            Cost & price leadership                              Sources of future growth


            Strict cost control and                            LFL and market share growth
          focus on productivity gains

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


                                                              Delikatesy Centrum: 80+ new
         Low exposure to credit sales
                                                              franchise stores (new regions)

         No debt – cash + unutilized                        McLane: more sales to gas stations
            credit lines available                             development of food service

       Stable earnings and focus on cash
                                                          KDWT: growing non-tobacco impulse
           (negative working capital)

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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     • Discontinuity        • Uk led privatisations   • Collapse of Soviet Union      • Securitisation
•Common Market      • Different impact     • Defeat of unions        • Europe 92 open borders        • Leverage
•Job was for life   depending on energy-                             • EU enlargement, Euro          • Bubbles
                     intensity of industry                           • Oil at 9 USD                  • Oil at 140 $
Business trends                                                      • Financial deregulation        • Crashes
•Diversify          • Portfolio Planning  • First use of Pc..        • Globalisation, emerging mkts
•Divisionalize      • Resource allocation • Outsourcing              • Start of Venture Capital in EU • ?????
                                          • Productivity thru        • Technology-based productivity
                                            People                     growth
                                          • Arrival of Private       • Cost cutting
                                            Equity in Europe         • Operational excellence




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XXI st Century Competitive Context



                              Falling barriers to
                                 competition          Supremacy of
      Decreasing Scale
                                                    Knowledge Assets &
           effects
                                                          Skills




                                Company



         More exigent
      customers & micro-                            Compression of Time
        segmentation            Technological          and Space
                                  Progress




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Europe in the Era of Total Competition
Porter’s Themes :




     1.   Distinguishing Strategy from Operational Effectiveness
     2.   Shaping Industry Structure
     3.   Choosing a Distinctive Competitive Position
     4.   Positioning and the Value Chain
     5.   Trade-offs
     6.   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




                                                        Relative Position
           Industry
                                                           Within the
           Structure
                                                            Industry




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 Determinants of long term sector profitability                 Petrol Convenience Stores

                                     Threat of subtitute   • High Street outlets with location
Slowdown, Wholesale consolidation                          • Fast Food outlets
                                     Products/services
Rivalry of Category specialists,                           • Supplier direct delivery
Regional and Full-range players,                           • Outsourced Chain Operators




     Bargaining Power,                Rivalry between                  Bargaining power
         Suppliers                  existing competitors                   of Oil Cos


  Tobacco and beer/ strong
     alcohol producers                                                  Use of Bid
                                                                      dynamics and
                                                                        contractual
                                       Threat of new                 service penalties
                                         entrants


                                           Emperia
                                           LogPol

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Positioning and Segmentation



        Customer Group
                                                         Value Chain
            (Needs,
                                                         (Activities)
         Accessibility)




             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




                                        Dimension B?
 Needs                                                                          
         Geographical areas

  Services
             Competitors                                              


 Transactions                                                              


                Channels

      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




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  Positioning and Segmentation

Customer Types / Purchase                                              Competitor B
       Occasions

            Competitor A


            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


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

                                                Human Resource Management
    Support                               (e.g. Recruiting, Training, Compensation System)
    Activities
                                                      Technology Development
                            (e.g. Product Design, Testing, Process Design, Market Research, Material Research)
                                                                                                                            M
                                                               Procurement
                                           (e.g. Raw Materials, Advertising Space, Health Services)                          a
                                                                                                                                 r
                                                                                                                                 g
                   Inbound            Operations           Outbound            Marketing               After-Sales           i
                   Logistics                               Logistics            & Sales                  Service            n

                    (e.g. Data            (e.g.           (e..g. Order          (e.g. Sales,          (e.g. Installation,
                    Collection,        Component           Processing,            Proposal                Customer
                     Material           Moulding,         Warehousing,            Writing,             Support, Repair)
                     Storage,            Branch              Report             Advertising,
                    Customer           Operations,        Preparation)         Trade Shows)
                     Access)          Underwriting)




                                                       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?                                                Value Chain
 what mix of Value(price/non-price)
                                          Groups of
                                       clients,Needs,                              (Activities))


       Lower Cost                 Buying Power
                                  Logistic cost
                                                     • Are Petrol Chains interested only in
                                                       minimised Bid Prices ? (other factors
                                  Service level        only “Nice to have”) ?
      Competitive                                    • Are factors reducing Total cost for the
       Advantage                                       Client relevant? Is “Lowest Total Cost” a
                                  All in one truck
                                  E-invoice            relevant Strategy for the Wholesaler?
                                  Error reduction    • Is there scope for a Value-Added Service
                                                       Strategy, (implying a price premium) ?
    Differentiation
  (Non-Price Value )


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Positioning and the Value Chain                              Firm Infrastructure
Eurocash Petrol Stations service                           Human Resource Management
                                   Support
                                   Activitie                Technology Development                  M
                                   s                           Procurement                             a
        Long term advantage                                                                                 r
                                               Inbound                                                      g
           depends on the                      Logistics
                                                                            Marketing                   i
                                                                              & Sales                  n
         complementarity of                                 Operations
                                                                                      After-
        multiple activities that                                    Outbound           Sales
                                                                    Logistics         Service
       exceed specific skills or
              resources                                      Primary Activities

      McLane’s 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                             Value Chain
           (Needs, Accessibility)                       (Activities)
   IKEA focuses on young, price sensitive,   – Low-priced, modular, ready-to-
   first-time buyers                           assemble 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                                         Customer Behaviour
                                      High traffic store layout
              Limited Sales                                                       More impulse
                                       designed for impulse
                 Staffing                                                           buying
                                            purchasing


Explanatory catalogues, informative             Suburban locations with                                Most items in
      labelling and displays                       large parking lots                                   inventory


                      Self-selection from                         Self-transport by       Ample inventory
                   warehouse; self-assembly                          customers               on site




              Modular Kit Concept                                      Low Manufacturing Cost

              „Knock-down‟ kit            Modular designs                          In-house design
                 packaging                                                        focused on cost of
                                                                                    manufacturing
                                                                                                               Ample year-round
 Ease of transport and                            Increased likelihood of                                         stocking
      assembly                                      follow-on purchase

                                                                                              100% sourcing
                    Increased variety with ease                                               from long-term
                         of manufacturing                                                        suppliers



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Positioning Tradeoffs - IKEA, Sweden
                      IKEA                      Typical Furniture Retailer
 •   Low-priced, modular, ready-to-         •   Higher priced, fully assembled products
     assemble designs - no custom               - some customization of fabrics, colours,
     options                                    finishes
 •   Centralised, in-house design of all    •   Furniture purchase and merchandising
     products                                   only
 •   Furniture design and manufacture       •   Primary design and manufacturing focus
     driven by cost                             on image / style / materials
 •   Wide range of styles in huge           •   Medium sized furniture showrooms
     warehouse stores
 •   Self-selection / Large inventories     •   Low inventories / order placement
                                                typical
 •   Suburban locations with large          •   Urban / suburban locations
     parking lots
 •   Extensive information in the form of   •   Product information provided by store
     catalogues, do-it-yourself videos,         sales personnel
     explanatory ticketing, and assembly
     references
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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 the creation
                              of a different position
     Strategy is a race to
                             where competitors are
      one ideal position
                               unable or unwilling
                                    to compete



                               Long-run advantage
                                    depends on
    Key success factors
                                complementarities
     or core capabilities
                              across many activities
    determine the winner
                             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 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


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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