Rio Tinto's International Business Strategy - Coursework Example

Rio Tinto: International Business Strategy Table of Contents Rio Tinto: International Business Strategy 1 Table of Contents 1 Subject of International Strategy Analysis: The Rationale 3 Strategies: Internal Analysis 3 Strengths, weaknesses, Threats and opportunities: How things go well for Rio Tinto 3 Building a ground for bigger strategies 4 Strategies: Through out 5 Financial Analysis: Conflicts between profitability and liquidity 9 Strategies: External Analysis 11 Forces around: Strategies arise 11 Five forces to shape the strategies 13 Conclusion 16 Reference 18 Bibliography 21 Rio Tinto: An Overview of the Company Consisting of two globally recognized companies, Rio Tinto is a globally renowned mining group; one of them is Rio Tinto Plc, another one is Rio Tinto Limited. Rio Tinto Plc is a public company, listed in London, based in UK. Rio Tinto Limited has its corporate office at Melbourne and listed on the Australian Stock Exchange. The group, as a distinct economic entity, emerged by the joining of these two in a Dual Listed company structure. The group searches, mines and processes the mineral resources specifically the metals and minerals for making thousands of products used in everyday activities. The major products of this group include copper, aluminum, different energy products, industrial materials like borates, salt, talc etc and iron core. Sustainable development and growth are in the core of their operations. They are very much inclined to keep up their corporate responsibilities high. They dive for less impact on environment and the community it operates in. Their activities are spread around the globe, though the main activities happen in Australia and North America. Significant business regions include Asia, Europe, South America and South Africa (Rio Tinto, 2010). Strategically Rio Tinto takes a long-standing and conscientious approach towards its business. They always look forward to deliver better returns to their shareholders. They mainly concentrate on the development of the ore bodies of first class quality and developing those through efficient operation processes, using their competitive advantage, through business cycles. Subject of International Strategy Analysis: The Rationale The reason behind choosing this company for the project in International Business Strategy is quite palpable. This company operates globally with underlying earnings of $10.3 billion in the year of 2008, which was up by 38 percent than the past year. This is a group operating on dual listed company structure. The company has grown based on its operations as well as its values. During these many years, there had been different strategies for this company; but these were the means to dive for excellence and innovation. Strategies: Internal Analysis Strengths, weaknesses, Threats and opportunities: How things go well for Rio Tinto This company has a number of strengths of its own. The company has its operations globally and in such a way they have got access to the global resources for mining and better products. The company has got access to a number of quality resources, which is the best competitive advantage of this company to be ahead of their competitors. Another advantage is that this company always dives for better productivity; and for this they have got hold of the best technologies and operational systems; and hence higher profitability. The threat to this company is definitely the competitive environment, it is working in. Another could be the huge hike in commodity prices; the sales have been decreased for the same. This company definitely knows how to get over its threats and come out with opportunities. To be in a competitive advantage and still keeping up the leading position is not a simple way to carry on. This company has done the both by accessing new competitive advantages and improving its existing advantages. They always strive for better materials with cost effectiveness in their operation processes. In such a scenario, when the commodity prices are rising, those companies, which can move with cost effectiveness, would be more profitable to keep the prices for their products as low as possible. They may have few weaknesses in terms of some of the resources, technology or quality measurements; but they have always tried remove their weaknesses and make them as their strengths. They have done so by acquiring or consolidating with companies, which have the required resources, operational processes, technologies or quality measurements. The company frequently seeks new resources of competitive advantage for their business. They try to utilize this competitive advantage in a way, which would be difficult for their competitors to imitate. They try to get their materials from large scale mining operations with long life. This way they get the advantage of economies of scale. As they do their operations in large scale, the cost of the mining is much lower in this case. The group makes investments after a rigorous analysis of the prospective project; Projects, which are capable to create value, are chosen from a number of projects. They are mainly interested in adding values, not just increasing their market share. They are more inclined to have quality projects worldwide which are profitable opportunities for the future. Building a ground for bigger strategies The chronicle starts in the year of 1873. In that year the UK based Rio Tinto Company was established by a group of investors. The company was previously established to mining copper around Rio Tinto in Sothern Spain. After 32 years, in the year of 1905, Consolidated Zinc Corporation was instituted in Australia to treat zinc bearing mine waste a Broken Hill. After many years in 1962 RTZ Corporation emerged from the merger of the companies, the Rio Tinto Company and the Consolidated Zinc Corporation. At the same time, CRA Limited (Formerly known as Conzinc Riotinto of Australia Limited) was incorporated by a merger between the Australian interests of these two companies. The unity came in the month of December, 1995. Both the companies, as a single distinct entity, came under the direction of a common board of directors, although they separate shareholders are maintained in the two regions, UK and Australia. The strategy was all in place; the shareholders were in the same position, holding shares as a single body yet owning the assets of both the companies. After two years, in the month of June, the RTZ Corporation was named as Rio Tinto Plc and CRA Limited became as Rio Tinto Limited; together as Rio Tinto Group. Since the group merged in 1995, they have taken up developmental and global expansion measures as one of their main business objectives. Strategies: Through out Through out the life of this group, till date, there have been a lot of mergers and acquisitions; the strategy was to expand its business by acquiring other mineral interests. Major acquisitions include acquiring the major part of BP’s international mineral business in the year of 1989; precisely the Kennecott Utah Copper in the US, and BP's Australian coal assets. After 4 years, is has acquired the Nerco and Cordero's US coal mining businesses. It got hold of 70.7% shared in the New South Wales operations of Coal & Allied Industries. Through all these consolidations and acquisitions, this group was expanding its business worldwide as well as establishing its competitive advantage to support its business. Their aim was to have the hold of those units through which they would have better quality resources. In such a way they would have competitive advantage over their competitors and would be able to have sustainable growth and development through out. In the year of 2000, another acquisition took place. The group acquired the North Ltd and Ashton Mining; a rise of US $4 billion iron and aluminum ore, diamonds and coal assets have added more strength to the outstanding resource base of this company. The strategy was to get more production capacity as well as to get hold of some excellent resource bases. Whole of the strategy was to improve on their competitive advantage; be it in terms of production capacity or in terms of resource materials. In the year of 2001, Rio Tinto has sold back the North Forest products to Gunns Limited, which is Tasmanian based company. From this sale the company got $335 million as well as an option for Rio Tinto to acquire transferable carbon credits attained from the land taken over with North Forest Products. Using this strategy, the company has increased on cash amount, hence improving on its liquidity. Even through these sales, they have got enough cash which can be used to buy assets or improve on the existing asset bases; such a way they can improve their productivity and lessen their operation cost. So this is a strategy to improve their productivity and to perk up the financial condition of the company. In the year of 2001, Coal and Allied Industries acquired the Australian coal businesses of Peabody Group. Back in 1960, Coal and Allied Industries emerged from the merger of three different coal companies. Rio Tinto started acquiring their shares in 1977 and thereafter by the year 1991, the group was able to acquire 70% of this. From the year of 2004, the Rio Tinto Company is managing Coal and Allied Industry. In Australia, Coal and Allied Industries was one of the largest miners of coal in net production annually. With this acquisition Rio Tinto would be responsible for the coal production of about 55 tons in Australia. At the same time they were using opencut operation process which is known as the best cost-effective technique of extraction. The strategy behind the acquisition of the largest stake in Coal and Allied industry was to have better resources in coal mining and to hold of the better operation processes. Cost-effectiveness can be a way of to attain competitive advantage over its competitors. It can be strength of this company, through which Rio Tinto can attain a better position in the coal mining industry. The Pea-Body group, based out of US, is the largest coal producer in the world. It has contributed to round 9 percent of electricity generation in US as well as 2.5 % electricity generation world wide. The acquisition was financed from internal equity sources and a credit facility provided by Rio Tinto. By acquiring this company, Coal and Allied Industry, hence the Rio Tinto group would have the foot hold in US and as well as get hold of better resources of coal mining. In 2004, the company sold a number of their assets which were not so necessary for their business purpose. In the same year the capital expenditure reaches at the record level, for many projects in Australia. There was a cash inflow of US $1.8 billion into the company, when the company sold its second ranked assets. In the same year Rio shares rose by 0.8 percent, from $29 to $34.70. The cash inflow was put into buying some new assets and adding values to some other assets, which resulted in increased capital expenditure. The strategy behind the selling of its non-core assets to increase the productivity of its operation processes by having new and improved machineries. Striving for better productivity is another competitive advantage of this company. After three years, in the year of 2007, Rio Tinto acquired Alcan Inc, the Canadian aluminium producer in a total bid of US $38 billion. The acquisition is in line with the mergers and acquisitions across the metals and mining sectors world wide. These are also because of the impacts of rising commodity prices and amplified competition from the emerging markets. The strategy was to lead the aluminium industry, being a global leader in aluminium. Alcan is based out of Montreal, Canada; but its operations are spread globally with a large number of operations in North America and Europe. The company had a total production capacity of 3.5 million t/y aluminium. With this attainment, Rio Tinto would become the largest producer of aluminium on the globe; the fourth leading producer of alumina and the largest producer in bauxite. In the second half of the year 2008, Rio Tinto controlled Coal and Allied have increased their production of semi-soft coking coal to 1.3 million tones, Almost an increase of 39 percent than the last quarter in 2008. The reason behind this increase in capacity was mainly the recovery of demand from steel mills in that year (BusinessDay, 2010). Recent news is there is a strong demand for iron ore in China. So that is an opportunity for Rio Tinto to increase its capacity or make the full use of their capacity to use this opportunity at fullest. To make the full use of this increasing demand, in the first three months of 2009, Rio Tinto has already increased their production by 49pc (White, 2010). This has put this mining group in a strong position to use this increased production and enhance it further. The energy and mining sector has been the pioneer on Australian share market being the leading gainers. This has pushed the key indices to 15 month highs. Rio Tinto rises to $88 after gaining 99 cents (Janda, 2010). Rio Tinto has formed a panel which would seek for opportunities to conserve the usage of tyres at every phase. The reason which led Rio Tinto to form this taskforce was the recent global unavailability of heavy tyres. Their tyre strategy helped them to attain sustainable development with a reduction in green house gas emission which will contribute to the economic growth and the on going success of their operations. Their main objective is to meet profitability and sustainability at the same time. Rio Tinto has many strengths and weaknesses, as well as it has faced many threats. Some of the threats were from its competitors; some were from the economy and society it is operating on; but the company knew how to move on with the threats and transform them in opportunities, strategies were aligned in consent with that thought. Financial Analysis: Conflicts between profitability and liquidity Ro Tinto has always tried to maximize the value of the shareholders. If taken the average of he return on invest of this company for five years, it is way ahead of the industry. While the industry has a value of 5.21, the company has its average return on investment of 15.07. Even in the last year where the industry has negative return on investment (ROI), this company is high with positive ROI. The last year’s P/E ratio was more than twice of the industry value. The growth rate in dividend yield, since the last five years, has been 16.27 while the same for the industry was -0.50 (Reuters, 2010). This company has everything in place for their investors. Despite being involved in so many mergers and acquisitions, last year their pay out ratio has been almost six times than the industry average. Surely, they operate keeping in mind the value creation for their stock investors. For this industry, it is very much important to have access to capital whenever needed. No doubt, Rio Tinto has a number of investors to invest for their company. Their bondholders, though, must not be so happy with their financials. The company surely has a high profitability with an average net profit margin of 21.52, since the last five years; where the industry has negative profitability. Even in the last year of the company was able to make profits where the industry failed to do so. Still their liquidity position is quite low when compared to the industry. Quick ratio for the last quarter has been 0.23, against an industry value of 2.91. Current ratio has been 0.40 against 3.76, which is the industry average (Reuters, 2010). It seems that this company is not very inclined to have enough liquid assets in its portfolio. Long term debt equity ratio has been almost four times the value of the industry. This company has a huge debt burden on its shoulder. So, although the company is very much profitable, still the emotions of the bondholders can turn negative. So through their internal financial analysis, it seems, this company has certain strengths like high return on investments, high profitability and high dividends; and at the same it has some weaknesses as its liquidity position and debt equity ratio. Over burden of debt can become a threat for this company. And even in need they will not be capable enough to lay their hands on their liquid assets to pay off that debt amount. So it can emerge as a worst situation for this company. Rio Tinto should look at this matter with more concern. They are planning to sell off stakes in some of their assets. This sale would include some of their best copper mines and iron ores. Most of them are irreplaceable and unique assets which the company has been nurturing for years (Wighton, 2009). This strategy can put their sustainable growth and profitability in jeopardy. Their pay out ratio and dividend growth, both have been much higher than the industry average. They can lessen on their pay out ratio, cut on their dividend payment and capital investments to pay off these debts instead of selling of the best resources, they are having. This seems to be a better alternative for Rio Tinto to carry on. Strategies: External Analysis Forces around: Strategies arise Every organization operates in an environment where there can be many forces around which will force the company to shape up its strategies. The forces can be political, environmental, technical or legal. The company needs to align its strategies in line with these external forces around. In the month of October, 2004, Rio Tinto acquired Immersive Technologies Advanced Equipment Training Simulators. This was done to have access to better means of safety procedures. Since mid-2001, Rio Tinto business had been using these AE simulators of Immersive Technologies. The simulators were acquired as they were critical from the point of operation. In such a way they would be more capable with continuous safety upgrading. This will result in reduced maintenance cost and higher productivity, which are very much necessary to survive in this competitive environment and to have hold of advantages which will keep this company ahead of all its competitors. Rio Tinto has established a fund, named as Aboriginal fund. This fund was institutionalized back in the year of 1996. The strategy was to get into an active partnership with the aboriginal people in Australia (Rio Tinto, 2010). The fund is a mean, through which, Rio Tinto connects, supports and engages with these people and in turn the company will be blessed with the help of these people in their operational activities. Society has a great force to direct the strategy of any company. In the year of 2005, Rio Tinto’s employment strategy has helped them to make a difference. An indigenous Employment Strategy Team was emerged to take the responsibility to increase the number of indigenous employees with Rio-Tinto iron ore (Maritime Museum, 2009). This was important from social point of view. The company did it keeping in mind the sustainable development of the community and region it is working in. In the year of 2008, Federal Government has decided to cut on the amount of carbon emission by 60% over the subsequent 40 years. Rio Tinto has to do its operations keeping this in mind. Going for research and development they need to find out technologies and processes which could help them in lessening the amount of carbon emissions. Rio Tinto scientist has estimated that cost would be more for new and improved technologies (ABC News, 2008). So Rio Tinto needs to find out a way to keep up its cost efficiency while having less environmental impact. In the year of 2010, Rio Tinto is in its way to strike a collective deal with the rail workers in the iron ores. This was a result of fairer Industrial Relation laws in Australia. In this scenario the organization’s decision to negotiate with its union has changed (BusinessDay, 2010). The company has gone through many mergers and acquisitions; a few of them has faced political forces against them. Some of them faced legal forces specially the laws against creating monopoly through mergers and acquisitions. Rio Tinto operates in such an industry, where there can be a large impact on the environment around. Economical force is another force which is very much essential in determining a company’s strategy. Some incidents have been articulated above like a rise in commodity price or a demand increase in China. Rio Tinto has laid its strategies as per the economical condition. Five forces to shape the strategies Rio Tinto can change its strategies as per the powers of their buyers and suppliers, competitive rivalry among the competitors. Sometimes entry barriers as well as threat of substitutes can move the direction of any strategic activities. Integrity, honesty and sprite are the three pillars, from which Rio Tinto builds its base of compliance with global standards and regulations. They always look for innovative and efficient suppliers and contractors. These are the people who are strategically imperative to the sustainable success of Rio Tinto group. Rio Tinto procurement operating systems operate in a way that allow qualified suppliers with quality good and services; those suppliers who are capable enough to meet the requirement of this company. They have a policy of awarding hose suppliers who can make best offers in case of quality, service, technical abilities, safety and competitive pricing (RioTinto, 2010). The whole strategy behind such processes is that his company wants the best materials from the suppliers, so that they can provide the best deal to their customers. Rio Tinto’s operation is focused on customers. The profitability of this company tells how customer focus can add value to the company itself. They always try to align their production with the demand of the customers. To be in line wit the customer emotions, Rio Tinto has introduced price cuts to their products. China is the biggest buyer of iron ores; and they have much power in their hands. Just giving an example, in the year of 2009, Chinese were not signing the annual price contract as they were not satisfied with the price cut that Japan and the other mills have accepted. So it seems that a lot of negotiation takes place between the buyers and the sellers. It will not be wrong to say, that buyers have a certain amount of power in this industry. Mining industry surely has entry barriers. Access to the resources is quite restricted by distribution and government policies. Even specific exploration knowledge is necessary to be in this industry. More over this industry demand a large amount of investment for their machineries. A certain huge amount is needed in their research and development division. As getting resource on one’s own has got some obstacles, Rio Tinto’s strategy was to get hold of these resources by the means of mergers, acquisitions and as well as joint ventures. There is a competitive rivalry among the mining companies. These companies go through mergers and acquisitions to mainly kill competition as well as to have a better position in market. Both these companies can have their bird’s eye on a single company to acquire; rivalry starts from here. For an example, both these companies wanted to take over Alcoa, one of the largest aluminium groups. Even both the companies were about to move into consolidation; the market was about to turn in ‘monopolistic’ mode, which is very much dreadful for a competitive market. There was a survival strategy behind this deal. As per the Chinalco deal, China government owned Chinalco would have invested over $19 billion in the company, which is over burdened with debt. China would have gained a control over the global iron ore activities. As China is the biggest buyer of iron ores, that deal could be a threat to Rio Tinto. So the company walked away from this deal and move to BHP deal to have the necessary cash amount. This company always tries to acquire new competitive advantages to make its leap forward before its competitors. Rio Tinto even looks after the fact that their competitive advantage should not be imitated by their rivals. As the companies can have access to resources of different qualities, technologies; there is substantial amount of threat of substitutes in this industry. Here the substitutes can be better products in terms of quality or cost. So a substantial amount of capital needs to be invested in the research and development of this company. Rio Tinto is one of the biggest names in the world of mining. So it is very much obvious that the power of the suppliers is quite less for this company. This might be the reason which led the company to be so choosy about their suppliers. They want the best out of them; but at the same time they know that quality suppliers are at the heart of their operations. Productivity, efficiency and profitability can not be attained without the suppliers they are having; so they have a strategy of rewarding those suppliers whose materials and services meet the company’s specifications or needs. Rio Tinto knows how much important a customer is for this company. They always try to satisfy them with better quality products at a price cut; but then also, some big buyers, like China, demands more price cut on their products. The strategy, then, is to make the customers’ demands be changed as per the company. For an example, to survive China’ demands, Rio Tinto was about to move into a deal with another top power in mining, BHP Billiton. The underlying assumption was this move would force those Chinese buyers to accept the price cuts, as was accepted by the Japanese (Firoz, 2009). As getting access to the resources is quite tough in this industry, the companies are mainly dependent on mergers, acquisitions to get hold of the required best resources and technologies. So obviously rivalry is high in this industry. For the same reason entry barriers are also quite high in this mining industry; another reason is high capital requirement in this. Threat of substitutes is surely there; to have access to better resources, technologies, research and development are necessary to make these threats as its opportunities. Conclusion In this year also, Rip Tinto would be continuing to improve its strategies, hence its operations. As the market is getting recovered, they will be looking for increasing their production capacity. They will be seeking more opportunities for cost compression. For an example, additional savings for the raw materials like pitch, coke procurements are likely to come down in the second half of this year. In the year of 2010, Rio Tinto will continue to control its cash through capital budgeting, working capital management. Debt burden and deficient liquidity are two weaknesses of this company which can transform into threats to the group in coming year. Better governance and control over financials can be expected in near year (Rio Tinto, 2009). Reference ABC News. April 5, 2008. Carbon trading not enough, says Rio Tinto scientist. [Online]. Available at:http://www.abc.net.au/news/stories/2008/04/05/2208719.htm [Accessed on January 17, 2010]. ABC News. January 11, 2010. Resources lead shares to 15-month high. [Online]. Available at:http://www.abc.net.au/news/stories/2008/04/05/2208719.htm [Accessed on January 17, 2010]. BusinessDay. January 12, 2010. Rio union deal shows a new IR era: CFMEU. [Online]. Available at:http://www.businessday.com.au/breaking-news-business/rio-union-deal-shows-a-new-ir-era-cfmeu-20100112-m4kb.html [Accessed on January 17, 2010]. BusinessDay. January 15, 2010. Coal & Allied gets busy. [Online]. Available at: http://www.businessday.com.au/business/coal-amp-allied-gets-busy-20100114-ma5l.html [Accessed on January 17, 2010]. Firoz, S. A. June 15, 2009. Most would speculate that this move will force the Chinese mills to nod to the price cuts accepted by the Japanese. [Online]. Available at:http://www.financialexpress.com/news/rio-tintobhp-merger-is-a-survival-strategy/476293/ [Accessed on January 18, 2010]. IMMERSIVE TECHNOLOGIES. October 25, 2004. Rio Tinto Acquires Immersive Technologies Advanced Equipment Training Simulators. [Online]. Available at: http://www.immersivetechnologies.com/news/news/2004/news_2004_11.htm [Accessed on January 17, 2010]. InvestSMART. 2010. Coal & Allied Industries Limited (CNA). [Online]. Available at:http://www.investsmart.com.au/shares/asx/Coal-and-Allied-Industries-CNA.asp [Accessed on January 17, 2010]. Maritime Museum. March 20, 2009. Rio Tinto’s Indigenous Employment Strategy. [Online]. Available at:http://www.mwdc.wa.gov.au/assets/documents/document%20centre/sandy%20mcewan_riotintoies_final.pdf [Accessed on January 17, 2010]. Reuters. 2010. Financials. [Online]. Available at:http://www.reuters.com/finance/stocks/financialHighlights?symbol=RIO.L [Accessed on January 18, 2010]. Rio Tinto. September 20, 2009. Rio Tinto Alcan. [Online]. Available at:http://www.riotinto.com/documents/IR_Tour_Sept_2009_Phillip_Strachan_FINAL_WEB.pdf [Accessed on January 18, 2010]. Rio Tinto. 2010. Customers and suppliers. [Online]. Available at:http://www.riotinto.com/ourapproach/752_customers_and_suppliers.asp [Accessed on January 17, 2010]. Rio Tinto. 2010. Business overview. [Online]. Available at: http://www.riotinto.com/whoweare/business_overview.asp [Accessed on January 18, 2010]. White, G. January 15, 2010. Rio Tinto rises on back of Chinese iron ore demand. [Online]. Available at:http://www.telegraph.co.uk/finance/newsbysector/industry/mining/6989119/Rio-Tinto-rises-on-back-of-Chinese-iron-ore-demand.html [Accessed on January 17, 2010]. Wighton, D. February 12, 2009. Miner Rio Tinto's strategy looks full of holes. [Online]. Available at: http://business.timesonline.co.uk/tol/business/columnists/article5712322.ece [Accessed on January 18, 2010]. Bibliography Ryan, P. June 5, 2009. Chinalco deal falls over as BHP steps up. [Online]. Available at: http://www.abc.net.au/news/stories/2009/06/05/2590489.htm [Accessed on January 18, 2010]. Read More