A Global Mining Giant Xstrata plc - Case Study Example

Contents list: Contents Contents 1. Summary: 2 2. Introduction: 2 3. Product/company audit: 3 3 Mission ment, values and beliefs 3 3.2. Thecompany 5 3.2.1. The management 5 3.2.2. The people 6 3.2.3 The assets 7 3.2.4 Financial health 8 3.2.5 Boston matrix and Product Life Cycle 8 4. Market audit: 10 4.1 SWOT Analysis 10 4.2 Market Overview (NOW) - sector trends, customers, buying etc. 12 4.2.1 PESTLE implications 12 4.2.2 Market overview (THE FUTURE) 14 4,2,3 Marketing objectives and strategies 14 4.2.4 3-year forecast and budgets 15 Reference: 16 1. Summary: Xstrata is a global mining giant based out of Switzerland and has operations in 18 countries spread over 5 continents. This report aims at demystifying the concepts of Marketing Management with the help of a real life case study. The chosen company is Xstrata plc. It is a global mining giant based out of Switzerland and has operations in 18 countries spread over 5 continents. This report analyzes the present business model of Xstrata and offers a proposed roadmap for the future by looking into its future activities and growth potential. 2. Introduction: Xstrata is an internationally renowned mining company with its headquarters at Zug in Switzerland. It is world's fourth largest producer of copper. Xstrata is a member FTSE 100 Index and listed on both the London Stock Exchange and the SWX Swiss Exchange. Glencore is a 40 percent stakeholder of Xstrata. It started operation in the year 1926 as an infrastructure and electricity projects concern in the land of Latin America. In the beginning of its life span, it diversified into mining and disposed of its non-core business. In the recent past, Xstrata doubled in size after the takeover of Australian copper, zinc and coal miner MIM Holdings. However it lost to the world's biggest mining company, BHP Billiton in a bid for another Australian miner, WMC Resources. In the year 2005, Xstrata acquired 19.9 percent stake in a diversified Canadian mining company producing copper, nickel, aluminum and zinc called Falconbridge Limited. Later in 2006 it purchased the remaining 80 percent of Falconbridge. The last year Xstrata Coal, based in Sydney successfully acquired Anvil Hill Coal Mine from Centennial Coal Company. At present Xstrata caters to seven major international markets viz., copper, coking, coal, thermal coal, ferrochrome, cooking coal, thermal coal, nickel, vanadium and zinc. It has also ventured into the platinum group metals business and other more popular metals like gold, silver, cobalt and lead. (Xstrata plc, 2008 A) 3. Product/company audit: 3.1. Mission Statement, values and beliefs Xstrata strives to grow and further diversify its portfolio of metals and mining businesses. Xstrata values its each and every stakeholder be it shareholders and employees or customers and vendors. It aims at delivering industry-leading returns to its shareholders, better work environment and incentives to its employees, superior product and efficient service to its customers and genuine partnership with vendors and other stakeholders. For a long-term viability it is extremely crucial for organisations to encourage integrity, co-operation and transparency in work. Business ethics both on a macro and micro level is important to restore the health of the organisation and its employees. Value creation takes place only when all the individuals of an organisation work together towards a common goal. As a corporate mission Xstrata endeavor to grow and create value over the long term by operating in an ethical and transparent way. Among the many strategic objectives, the most important and crucial ones for Xstrata can be identified as: Managing a striking portfolio of assets. Keeping an unwavering focus on growth of the organisation by timely identification of opportunities for value creation. Like any other company, finance plays a very important role in Strata's future growth and expansion plans. Thus as a strategic step they maintain and enhance their financial strength and discipline with time. Portfolio optimization, delivery of capital, operational efficiencies and cost reductions are of much importance to Xstrata. In today's world sustainability is a major issue. Keeping this mind Xstrata maintains high standards of health, safety and environmental safety. Xstrata actively encourages its employees and authorize them with decision-making power. This helps increase the productivity and efficiency of the employees and the organisation on the whole. As already seen Xstrata puts in maximum efforts to ensure that there is transparency in the day-to-day operations. (Xstrata plc, 2008B) 3.2. The company 3.2.1. The management Xstrata's corporate structure comprises five global commodity businesses and a technology business. Each of the businesses are autonomous in their operation and management. Unlike other players in the industry, Xstrata has entrusted maximum responsibility and authority to its commodity business. One of the main reasons behind a company's success is its management. No matter how sound financial and resource base a company has, the ultimate fate of the company rests in the hands of the managers. Xstrata by entrusting more responsibility on the commodity business units have ensured that there is strong sense of local ownership. The top corporate managers are empowered and incentivised to address site-specific challenges and seize opportunities. Ownership enables the managers to take sound decisions and steps. The head office in Zug, Switzerland and a corporate office in London, UK support the commodity businesses of Xstrata. (Xstrata plc, 2008C) With a series of bulky acquisitions Xstrata developed from a small player into a big one in the mining industry. Xstrata operates on a large scale in approximately eighteen countries of the world. The commodities markets are spread over Australia, Argentina, Brazil, Canada, Chile, Colombia, the Dominican Republic, Germany, Jamaica, New Caledonia, Norway, Papua New Guinea, Peru, South Africa, Spain, Tanzania, the United States and the United Kingdom. (Xstrata plc, 2008D) 3.2.2. The people Xstrata understands that it is the people who make the company. Even an excellent business plan or model can fail if the company does not have efficient and the right people to carry it out. Teamwork is vital for the growth and development of any company. A company's success lies in a able team that strive to work together in harmony towards a common goal. However it often is the task of the management to persuade and utilise team in increasing productivity. When employees are empowered, they automatically take responsibility for the processes and perform. Happy employees are the biggest assets of any organisation. (Martinez M.N., September 1997) Xstrata employs approximately 56,000 people, including contractors. The huge pool of employees is headed by a team of extremely talented and focused executive and non-executive directors. Among the many a few important names are that of Mick Davis, the Chief Executive Officer, Trevoe Reid, the Chief Financial Officer and Santiago Zaldumbide, the Executive director of Xstrata. Though directors are the brain behind every new strategic move of the company, it is the executive managers who take care of the day-to-day functioning of the company. (Xstrata plc, 2008E) Xstrata is thus headed by a robust board comprising seven non-executive directors and three executive directors. Five out of seven non-executive directors are independent from the management of the organisation. The other two non-executive directors Willy Strothotte, the Chairman and Ivan Glasenberg are directors of Glencore International. (Xstrata plc, 2008F) 3.2.3 The assets Xstrata has judiciously built up its mineral reserve base and it presently sitting on huge reserves of minerals in all its sectors. Following is a brief description of the mineral reserves and assets of Xstrata. Chrome- 46 million metric tonnes of proved and 20 million tonnes of probable reserves Vanadium- 39 million metric tonnes of proved and 10 million tonnes of probable reserves PGM(Platinum Group Metals)- 4 million metric tonnes of proved and 24 million tonnes of probable reserves Coal - 2700 million metric tonnes of proved reserves. Nickel - 70 million metric tonnes of proved reserves. Zinc - 94 million metric tonnes of proved reserves. (Xstrata plc, 2008G) 3.2.4 Financial health Xstrata has a sound financial base. Through strategic planning they ensure that the commercials are in place and the financial health of the company is restored. Additionally, Xstrata does not have any major debt to pay till 2011. 3.2.5 Boston matrix and Product Life Cycle Boston Matrix is a very popular marketing concept used for product portfolio planning. Xstrata has a range of products and thus needs to maintain a portfolio of products. It involves proper allocation of investment among the different products for activities like promotion and development. The Boston Matrix help analysing the products and services by comparing the percentage of sales of the products in the market and the rate of growth of their sales. If a product has a large marker share but is no longer growing, it falls under the cash cow section of the matrix. Additional investment in such products generates little or no extra profit. A product that has a huge market share but unlike cash cow is growing at a fast pace falls under star. A problem child or question mark has a small market share and needs considerable investment to make it grow. Lastly, a product can be classified under dog if it has a small market share that is not growing. A dog is of little value to most companies and a decision must be taken whether to continue investing in it. (The Boston Matrix, n.d.) Xstrata has a balanced portfolio with products falling under almost all the sections of the Boston Matrix. It focuses on its star products and the funds generated from cash cows are invested in turning problem children products into stars products. The cash cows of Xstrata, arguably, are the Ferrochrome and Coal divisions. These markets are highly matured markets with a stable growth rate. The growth rates of these markets are dependent of a range of economic and political factors, and these markets are highly cyclical in nature. Xstrata is the market leader in both these two markets, and enjoys a steady growth rate. Growth in these sectors is primarily powered by brown-field expansions and new acquisitions of completely developed assets. The non ferrous metals like the Lead, copper and the Zinc divisions represent the 'dog' component of Xstrata as per Boston matrix. These are highly stable, matured markets and the growth will come from increased consumption from existing customers and not from new usages of these metals. New generation metals like Aluminium and PGM(Platinum Groups Metals) represent star component of Xstrata. These metals are being increasingly used in new industries, and are experiencing higher growth rates. (Xstrata plc, 2008H) 4. Market audit: 4.1 SWOT Analysis SWOT analysis is used by companies across the globe as a tool of strategic management. SWOT comprises the internal factor analysis and external factor analysis. The strengths and weaknesses form the internal factors while opportunities and threats from the external factors. Strengths: One of the most important strengths of Xstrata has been its proven ability to identify undervalued or underperforming mineral reserves, acquire them, and integrate its acquisitions. Xstrata has aggressively yet judiciously identified and acquired undervalued or underdeveloped assets, and integrated them with its main operations thereby extending its efficient mining abilities over newly acquired reserves. This has helped Xstrata increase operational efficiencies, thereby increasing its return on investment. Xstrata also derives its strength from higher technological knowhow, robust financial state and a well proven organisational structure. Finally, the strong financial health of the company has helped it get capital at low cost, thereby increasing its return on investment. (Xstrata plc, 2008I) Weaknesses: One of the most prominent weaknesses is its non-dominant market ownership is a few non-ferrous metals like copper and nickel. Another major weakness of Xstrata is its almost total dependence on a few select economies for its growth. For example, Xstrata is highly dependent on emerging economies like China and India and their booming economy for driving its growth. In case these select economies fail to maintain the growth momentum, Xstrata will be severely affected. (Xstrata plc, 2008J) Opportunities: Mining and exploration is a highly capital intensive sector, and hence there has been a natural process of consolidation through mergers and acquisitions. After the disintegration of the Soviet block and the opening up of a large number of Latin American and Asian countries, there are a number of mining and exploration entities are now open for joint ventures, outright purchase or mergers. This presents a significant opportunity for Xstrata. Threats: Xstrata faces all the normal threats that any business enterprise may face, namely, acts of god, natural calamities and period of global economic slowdown. However, the financial strength of Xstrata highly dependent on exchange rates, environmental regulations and other political and economic regulations. Additionally, Xstrata also faces all threats specific to the mining industry- shortage of trained industry professionals, high cost of labour and other raw materials like energy and water. (Xstrata plc, 2008K) 4.2 Market Overview (NOW) - sector trends, customers, buying etc. The global economy has seen a gradual but massive shift in its growth engine. While growth in the previous decades were powered by a booming US and EU economies, the present market growth is largely driven by China, and to some extent, India and other South Eastern Asian countries. Additionally, there has been a greater integration of global trade with other emerging economies of South America and Africa. (Xstrata plc, 2008K) 4.2.1 PESTLE implications Factor Construct Effect on the company Political Present in as much as 18 countries, many of which do not have a stable political climate. -3 Economic There has been a massive slowdown in the world economy and EU-its primary market. -3 Social Xstrata caters only industrial clients, and hence is primarily insulated from social trends. 0 Technological Mining technology is witnessing new innovations and this will help Xstrata mine more minerals from existing reserves, and also make erstwhile unviable reserves viable. 3 Legal As mentioned earlier, Xstrata is present in 18 different countries spread across all 5 continents. New legal developments might be detrimental to Xstrata. For example, in South Africa, it had to take new community development initiatives due to new regulations. -2 Environmental Mining causes large scale destruction of local habitats, and hence there have been significant restrictions on mining activities. Additionally, changed environmental regulations may lead to increased operational expenditure. -3 4.2.2 Market overview (THE FUTURE) In the present scenario, Xstrata's performance is subject to a lot of uncertainties, including, fluctuations in foreign exchange, changes in political/financial/environmental regulations, downturns in the global economy etc. However change in consumption centres is perhaps the most tectonic change. In the last few decades the consumption centre has shifted from EU and North America to Asia and Russia. Xstrata has to refocus its marketing efforts to cater to the new markets. 4,2,3 Marketing objectives and strategies There are has been a major shift in the epicentres of world economy and accordingly, these new epicentres of world economic growth have become the primary engine that is driving growth. Emerging countries like Brazil, Russia, India and China have become major consumption centre of primary metals, energy and coal. Accordingly, Asia has emerged as the second most important market for Xstrata, right after EU. Additionally, there has been a massive round of consolidation in Iron and steel industry- Xstrata's most important client sector. These consolidated entities have stronger bargaining power. Additionally, a lot of global steel making companies are opting for captive coal/ore mines, thereby directly competing with Xstrata's offerings. Accordingly, Xstrata has to take a two pronged strategy towards these new market dynamics: 1. Concentrate more marketing efforts in these emerging economies. Apart from being one of the biggest consumers of Xstrata's products, these economies are also growth at a very fast pace. Hence, it is very important for Xstrata to develop its marketing base in these regions. Consolidate, acquire or buy out smaller mining players. Given that Xstrata's customer industries like Iron and Steel sector is going through consolidations, it is important for Xstrata to reach scales where it will be able to negotiate with its clients on equal terms. (Gardner S., April 2008) 4.2.4 3-year forecast and budgets Xstrata, as per its de-risking policies, constantly looks out for underdeveloped or undervalued mining assets. Xstrata, over the last 20 years, has grown significantly through inorganic route, and plans to continue the same way. Additionally, it is investing heavily in brown-field expansion. This has resulted in a massive pipeline of projects. The total value of projects in pipeline is a massive $30 billion. An amount of $12 billion, equivalent to about 15% of the enterprise value of Xstrata, has been approved. These new investments are expected to drive the growth in volume to more than 12% per annum for the next 5 years. (Xstrata plc, 2008K) Reference: Gardner S., (April 2008), Mining may enter super-consolidation: Xstrata CEO, retrieved 15 December 08, from http://www.reuters.com/article/innovationNews/idUSN1016697020080410 Martinez M.N., (September 1997), Charles Nielson relishes new focus on importance of people - Texas Instruments' VP and director of worldwide human resources - Society for Human Resource Management: Award for Professional Excellence, HR magazine, retrieved 15 December 08, from http://findarticles.com/p/articles/mi_m3495/is_n9_v42/ai_20098920 The Boston Matrix, (No Date), The Oxford University Press, retrieved 15 December 08, from http://www.oup.com/elt/catalogue/teachersites/oald7/wotm/wotm_archive/boston_matrixcc=global Xstrata plc., (2008A), Xstrata At A Glance, History, retrieved 15 December 08, from http://www.xstrata.com/corporate/group/history Xstrata plc, (2008B), Xstrata At A Glance, Mission & Strategy, retrieved 15 December 08, from http://www.xstrata.com/corporate/group/mission Xstrata plc, (2008C), Xstrata At A Glance, Structure, retrieved 15 December 08, from http://www.xstrata.com/corporate/group/structure Xstrata plc, (2008D), Xstrata At A Glance, Locations, retrieved 15 December 08, from http://www.xstrata.com/corporate/group/locations Xstrata plc, (2008E), Management, retrieved 15 December 08, from http://www.xstrata.com/corporate/management Xstrata plc, (2008F), Governance, retrieved 15 December 08, from http://www.xstrata.com/corporate/governance Xstrata plc, (2008G), Financial Reports & Results, retrieved 15 December 08, from http://www.xstrata.com/investors/reports Xstrata plc, (2008H), Annual Report 2006, retrieved 15 December 08, from http://www.xstrata.com/annualreport/2006/page29 Xstrata plc, (2008I), Annual Report 2007, retrieved 15 December 08, from http://www.xstrata.com/annualreport/2007/page23 Xstrata plc, (2008J), Annual Report 2007, retrieved 15 December 08, from http://www.xstrata.com/annualreport/2007/page17 Xstrata plc, (2008K), Annual Report 2007, retrieved 15 December 08, from http://www.xstrata.com/annualreport/2007/page23 Xstrata plc, (2008K), Annual Report 2007, retrieved 15 December 08, from http://www.xstrata.com/annualreport/2007/page17 Read More