Rio Tinto Perspective Analysis - Case Study Example

ANSWERS FROM THE RIO TINTO IRON ORE WAR CASE PERSPECTIVE Name: Subject: Date: Introduction Rio Tinto Company is a leading mining industry in iron ore. The Rio Tinto case arose when four staff members of the company where arrested on 5th July 2009 while in the Republic of China. The staffs were arrested on accusations of espionage and bribery (Rio Tinto, 2012).However, charges were later dropped for the accused. However, issues of bribery where raised and the defendants later admitted receiving bribery. Is iron ore industry an attractive industry to invest in? From the Rio Tinto perspective, there are number of reasons that make investing in the iron ore sector attractive to possible investors. First, the Rio Tinto firm is located in a moderately complex surrounding in which it produces only a single product. , this sector according to the case has less competition making it very attractive for investors to invest in. Current statistics ranks Rio Tinto the second to Vale Company as the major world miners of the iron ore. Secondly, the iron sector offers a constant large customer base. The large customer base makes the sector attractive for investors since it provides a large market in the sector. The revenue generated from the iron ore sector is large making it a more suitable sector to invest in. Finally, there is a tendency of investors to indulge in buying shares from the iron ore industries as a way of investing due to the profit the area makes. This makes the activities of the industry more streamlined. Output and efficiency are increased due to the constant flow of capital from operations. For instance, the investors have invested in the industry over $15 billion to stream activities in the Pilbara. However, there are some reasons that make the sector unattractive to invest in as seen from the Rio Tinto case. There are major risks threats that make it unattractive and unsuitable area for investors (Rio Tinto, 2012). First, the falling commodity price of iron in the world market makes the sector unsuitable to invest in. Recent growth in the iron ore sector especially in the US, which reduced their prices has made the company’s executives lower their prices indefinitely. Secondly the slowing down of the economy of China also makes it unattractive to invest in. According to recent research on iron ore, 45% of the world’s steel is manufactured in China. Iron is a major component in the production of steel. Most of the iron element is exported to China to generate revenue (Janda, 2012, August 9). The current economic decline in China has made it risky and a threat to invest into the sector since the dependency levels of the Rio industry to China are high. It is estimated that 80% of the earnings of Rio Tinto mining industry comes from China. Finally, the increasing competition from the US companies has made it unattractive to invest in the sector. There has been an increase in the output of the iron ore from the US companies making the prices of the commodity fall eventually. The strategic groups evident in the Rio Tinto case. According to Short et al. (2007) industries are usually converged to different diverse strategic groups depending on their different strategic positions. Hatten explains that similar strategic gropes are formed in a particular sector by industries due some reasons i.e. if the firms have similar resources or even same strategies. The first strategic group is formed in the strategic position in the iron ore industry. From the case, various industries can be concluded to have similar strategic position thus forming a strategic group. For instance, BHP has a high product diversification and strategic geographic position in undertaking its activities. This is the same with the Rio Tinto, Alcan and Anglo industries. For instance, BHP and Rio are characterised by a mining that involves high packaging and engineering their commodities (Janda, 2012, August 9). This has made the companies have above-average performance compared to their compatriots i.e. Anglo and Alcan in the similar strategic group. Secondly the other strategic group as portrayed from the case is laid on the basis of resources and competencies. From the case, different firms had different valuation values of their basic resources. Alcan and Anglo were characterised by a significant few assets compared to BHP and Rio Tinto (Rio Tinto, 2012). According to recent research, the companies have a below $ 20 billion value of their assets. BHP and Rio formed a similar strategic group since their competencies and valuation of their resources was closely similar. A small gap has been evident in the evaluation of their assets (Fisher & Schnittger, 2015). For instance in 2013 BHP had an estimate of $45.7 billion value of its assets. This was slightly large to the $40.7 billion valuation of Rio Tinto assets. This scale can be used in determining the profit made by an entity. Finally the strategic group evident in the case was sorted basing on strategic choices of the different industries. For instance, Rio Tinto industry uses and incorporates three major strategies, according to the case. It incorporates sustainable-development, product-market and diversification strategies (Fisher & Schnittger, 2015). The product market of the firm involves in investing in large, competitive mines. This strategy is similar to that of Vale. The sustainable-development strategy improves the reputation of the industry making it acquire widened the market base. This is similar to the BHP Company as cited from the case. The diversification strategy provides an opportunity to develop the approaches to solving the companies’ challenges, especially in environment. From the case, BHP employs the same strategy in solving their human development problems. Dynamic capabilities of Rio Tinto industry The mining industry has a variety of capabilities to undertake as a way of increasing the sale of their commodity (Fisher & Schnittger, 2015). The mining has the potential to articulate various policies to add value to their existing commodity as a way of increasing demand. The following are the dynamic capabilities of Rio Tinto industry evident from the Rio case; Innovation and technology Exploration Their competitive strategic advantage 1. Innovation and Technology Rio Tinto has invested widely in the new technology as a way of encouraging more innovation to their commodity. Technology has been incorporated in the Research and Development (R&D) to add value to the existing iron element. From the innovation and technology perspective, the firm is capable of boosting the efficiency of their various activities. This will in turn reduce their operation costs as operations will be more streamlined due to the innovation of more efficient systems. The company is also capable of developing which can minimize environmental pollution using the new technology. 2. Exploration Since the asset portfolio of the Rio Tinto company is characterised by high-quality resources, the company has advocated for more exploration in search of quality fields. According to a recent study (2013) on the exploration strategies of Rio Tinto firm, various strategies that intensify exploration have been employed. Regional, deposit focus and the popular in-house approach strategies have been used to make the firm capable of exploring more. Various methods have been used to intensify the exploration of the firm for quality fields. The ‘brown-field’ and the ‘green-field’ methods have been used to explore more fields for iron ore mining. For instance, the ‘brown-field’ exploration method made it possible for Rio Tinto to discover a field in Pilbara region which is rich in iron ore. The field is capable of sustaining the ore mining for even over 20 years. This makes Rio Tinto mining industry to a 50% growth in their activities. 3. The strategic competitive advantage The industry has been capable of improving their strategies to be more competitive (Fisher & Schnittger, 2012). With the increasing demand of the Iron ore especially by the China government, the industry has come up with a competitive strategy that has consistently provided good results. The company has started a strategy that involves investing in large competitive mines or even businesses. The strategy is capable of turning Rio mining industry as a large economy of scale. This will in turn improve the competitive aspect of the mining industry against its competitors. The major core rigidities inhibiting Rio Tinto development There have been rigidities in some important aspects affecting the mining industry that has inhibited the Rio Tinto development. The industry has been viewed to stick to the old activities and policies that sometimes do not bore fruits to the firm. This section will highlight some areas where the industry is rigid (Janda, 2012, August 9). First Rio industry has been focusing on their long term-cost competitive mines that sometimes have been attributed to the decline in production of the company’s output. The strategy has been considered not environment-friendly. However, the company has been rigid in the strategy even after evaluating its disadvantages to both the mining industry and the environment. Secondly, the company have been rigid in their existing China market. However, there has been a decline in the economy of China (the major market for Iron ore) the company has not taken steps to shift their product to other markets. Instead, they have stuck to their current China market that may in turn inhibit the industries development. Thirdly, the industry is rigid to transform their current transformational structures. However, their current structure has been a success recently speculation on the future show there is a need to improvise new technology-oriented structures. This may inhibit the future developments of the company shortly. Fourthly, there has been no evidence portraying any changes of strategic drifts or even curve activities of the company. The CEO Tom Albanese has been emphasising the firm’s executives to stick to the current strategies and curve activities of the mining industry. He has been in the forefront to advocate for maintaining the current value of their assets. Scholars view it as a rigid perspective that may inhibit the growth and development of the industry (Fisher & Schnittger, 2012). Specialist have raised the need to employ more technology-oriented strategies and curve activities as a way of increasing output of the mining industries. Finally, the industry has been rigid in their overreliance of loans in funding their operations. This has left the company in a high debt crisis of around a staggering figure of $ 38 billion according to a recent Sydney survey (Janda, 2012, August 9). The high debt has been undermining the growth rate of Rio Tinto mining industry. The overreliance of loans has attributed the high debt due to their slow growth of the technology within the company. However, the company’s executives have been hesitant in using other ways to fund the operations of the industry. This rigidity may in turn inhibit the growth of the company. Conclusion The Rio Tinto case has portrayed important aspects concerning iron ore mining. The company has employed specific strategies that aim at keeping the cost of production low but increasing the revenue obtained (Fisher & Schnittger, 2012). Rio Tinto has incorporated various technologies as a way of increasing its output. Therefore, it can be concluded for a mining industry to develop there is need to focus on competitive strategies. References Fisher, B. S., & Schnittger, S. (2012). Autonomous and Remote Operation Technologies in the Mining Industry. BAEconomics. Government of Western Australia Department of Mines and Petroleum. (2012). Mineral Royalties . Harevy, B., & Brereton, D. (2015). Emerging Models of Community Engagement in the Australain Minerals Industry. Brisbane: University of Queensland. Hariharan, G., & Dodonova, D. (2015). The Iron Dragon: A Snapshot of Recent Trends in Chinese Steel Industry. ICA Institute. Chen, M. (2010, April 27). China.org.cn . Retrieved from Steel mills look to scrap as substitute for ore: Business Fundas. (2011, January 18). 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