BHP Billiton and Strategic Choices - Case Study Example

BHP Billiton and Strategic Choices Name Tutor Unit Code Introduction BHP Billiton is a top multinational corporation in the diversified resources and mining industry. The company was formed out of a merger of Broken Hill Proprietary Company (BHP) from Australia and Billiton from the United Kingdom. The headquarters are located in Melbourne, Australia. The company has a dual listing as BHP Billiton Limited (Australian Securities Exchange (ASX)) and BHP Billiton PLC (London Securities Exchange (LSE)). The company’s main commodities include coal, iron ore, copper, manganese, titanium, aluminium, nickel, uranium, silver, oil and gas. BHP Billiton operates in 130 locations at 21 countries mainly in Australia, Southern Africa, and the Americas. The company has a market capitalisation of about $179 billion in 2014. Its revenues went up by 2 per cent to $67 billion in 2014, with a net profit of about $14 billion. It has a total workforce of about 124,000 people and contractors (BHP Billiton, 2015a). This report examines BHP Billiton’s strategic choices. First the report analyses the external followed by the internal environment factors. The report also analyses key strategies that have propelled BHP Billiton’s to its current success. This involves a discussion on the company’s core strategic management concepts. On the other hand, in 2014 BHP Billiton made public a decision to split, as it were before. So the report weighs in on the debate whether this is a right or wrong move. Finally there is a conclusion, recommendations and implications of BHP Billiton key strategic issues. External Analysis The external analysis captures variables from the market, industry and competitive forces. The external environment directly influences the company’s strategic choices. The commodities market is characterised by strong demand particularly from top developing economies of China and India. But as the manufacturing industry continues to shrink in these countries, the demand downstream is expected to fall. China announced that its economy is expected to grow slower this year at about 7.8 per cent after posting impressive growth rates of above 9 per cent in the recent past. The property sector slowdown in China is disposed to cut the demand for nickel and aluminium. But the demand for copper is expected to rise by about 6 per cent due to investments is new power lines and rail projects. The supply of metal commodities has been rising steadily to meet up the demand. This has led to high output in various parts of the world such as West Africa and Brazil. Also, Australia has been experienced a mining boom recently. As a result, the commodities prices have been badly affected. For instance, the price of iron ore in Australia has been plummeting from about $200 per tonne in 2011 to about $78 per tonne in 2014. The downward trend is expected to continue in 2015 to about $75 per tonne and the worst price is expected to be $70 per tonne in 2017. But in 202 the price is projected to stabilise around $75 per tonne (BHP Billiton, 2015a). Other metals including aluminium, silver, zinc and lead have been facing a similar fate. So the global mining and resources industry is projected to post a slow growth rate over the coming five years as a counter to the recent mining boom and high output. BHP Billiton is expected to benefit from the current weak Australian dollar exchange rate to the US dollar to boost its sales revenue. BHP Billiton’s financial feat is likely to be further affected by effects of climate change that may well reduce productivity. The nature of operations in the mining and resources industry have uncertain effects to the surroundings. The governments and non-governmental organisations are putting pressure on companies, particularly those involved in large gas emissions, to observe environmental sustainability rules. Some of the regulations include the Kyoto Protocol, the Asia-Pacific Partnership on Clean Development and Climate, the European Union Emissions Trading System, clean emissions, and production of more renewable energy. Responsibility for the environment is connected to the main strategic driver of operating licenses (BHP Billiton, 2015a). In fact, BHP Billiton has come under several legal fights pertaining to its environmental responsibility. This poses a key risk factor for the company. For example, BHP Billiton encountered legal charges due to the environmental damage caused at the Southwest Copper operations in Arizona. The company also lost a legal battle in Australia against Fortes-cue Metals Group in relation to rail network right to entry for two Western Australia iron ore mines, a key source of iron ore and top revenue earner. Besides, the company has to spend on social approvals by supporting local communities. In 2014, BHP Billiton investments to the community amounted to around $242 million. The health and safety of the workers has to be observed as well by creating a safe working environment. The mining and resources industry can well be analysed using Porter’s five force model (Porter, 1979). The threat of new entrants into the industry is low due to the high initial capital required. The customers have a low bargaining power due to the high demand against a low supply of products such as copper, aluminium, coal, iron ore, petroleum and potash. Suppliers have a strong bargaining power because of high switching costs. Rivalry among the competitors in the industry is strong. Companies such as BP, and Rio Tinto, among others compete with BHP Billiton for the limited natural resources across the world. And finally, the threat of substitutes is low because there are not many substitutes for the metal commodities. BHP Billiton faces strong competition from other mining and oil companies that compete for the limited natural resources across different continents. This is highlighted by a geographical overlap of mining activities across the different continents of the world. Competition is also seen in attracting and retaining the expert staff in exploration, infrastructure, transportation and construction. The main competitors are Alcoa, BP, Rio Tinto, and Anglo American. However, BHP Billiton is the market leader and has a low-cost and diversified strategy that has kept it at the top (Hanson et al., 2014). BHP Billiton Internal Analysis BHP Billiton has internal capabilities and competences that drive its success. Through “The BHP Billiton Way”, the company has continued to improve its internal efficiencies along the value chain. By handling bulk commodities and shipping activities, the company is able to realise cost savings and efficiencies in supply chain management. BHP Billiton has an efficient marketing business units that solely handles sales and marketing activities in key markets (Hollensen, 2001). The business unit is located in the strategic location of Singapore, which has an efficient port system for easy freight and distribution to other parts of the world. The company also one of the top ships owners and offers high-quality freight services. Marketing for oil and gas is handled in Houston, USA, which is in the right location to feed the demand in the region. Other marketers are distributed in14 cities around the world close to the customers (BHP Billiton, 2015a). The company has a total of about 124,000 employees and contractors. Therefore, there is a diverse and gender sensitive workforce who are also competitively remunerated. The employees’ skills are enhanced through training especially on the health and safety standards. Through the BHP Billiton Charter values and Code of Conduct, the company engages and effectively communicates with its employees. The company provides communication through various channels such as the internet, newsletters, email, and intranet (BHP Billiton, 2015a). The “Project River” provides BHP Billiton with a great opportunity in creating shareholder value now and in future. Energy trading and efficient transportation services provides additional opportunities for the company to incorporate supply chain operations for other companies and earn some extra revenue. The stable U.S, U.K, and Japanese markets continue to demand more resources for their industries and development. BHP Billiton Success Strategies Formulation and implementation of strong strategies has led BHP Billiton to its current success as a global leader in diversified resources. The company’s overall strategy is “to own and operate large, long-life, expandable, upstream assets diversified by commodity, geography and market”. BHP Billiton has put in place a long-term and vigorous planning process through which it develops and delivers its strategies (Gordon, 2007). BHP Billiton has differentiated itself through a diversified portfolio approach. Through business level diversification, the company has been able to hedge itself against uncertainties by reducing focus on just a few commodities. BHP Billiton has up to six business level units. The units are grouped according to the product categories: (1) Petroleum and Potash; (2) Iron Ore; (3) Copper; (4) Coal; and (5) Aluminium, Manganese and Nickel. The last business unit deals with marketing (BHP Billiton, 2015a). BHP Billiton has been able to adopt a low-cost strategy by endeavouring to control its costs as much as possible, this has enabled it to compete effectively with its rivals on profitability and growth (Hamilton & Webster, 2012). As a market leader, the company has worked had to maintain costs along its value chain activities. The company’s international exploration operations are carried out through Greenfield and Brownfield entry strategies. Through the Brownfield strategy, BHP Billiton has increased its resources reserve base that is expected to drive future growth. The company used the Greenfield investment strategy to enter the rich copper zones in Peru and Chile as well as the offshore oil and gas rich region of the Gulf of Mexico. Exploration operations call for massive investment in equipment and technology that take away a large chunk of the company’s revenues. In 2014, BHP Billiton spent a total of $15.2 billion on capital investments and exploration (BHP Billiton, 2015a). The strategies have been used to inform and drive the overall corporate strategy. The company also has continued to observe environmental regulations, particularly on climate change. Even as the company is involved in the exploration of oil from fossil fuels that is destructive to the environment, it has shown commitment to the impact on the effect. BHP Billiton has made investments in preparing for countering the physical impacts on the environment. Moreover, it has partnered with members in the industry, governments and NGOs to guarantee active responses to climate change. The company supports measures such as carbon pricing, low emission technologies, building resilience, and energy efficiency. It also has an appropriate risk management strategy focussed on the critical business functions, processes and activities (Gutterman, 2011). The company leads in uranium reserves through the takeover of WMC Resources of Australia. The group acquired Athabasca Potash in 2010. BHP Billiton also acquired Chesapeake Energy’s Fayetteville and Petrohawk Energy from the United States in 2011. Moreover, the merger between BHP Limited and Billiton PLC has yielded superior results by improving the company’s financial performance and resource base. As a result, its total market capitalisation has gone up from about $28 billion in 2001 to the current capitalisation of about $179 billion. The revenues have also been increasing on a year-on-year basis (Hill et al., 2015). Assessment of BHP Billiton Split On 19 August, 2014 BHP Billiton made public its decision to separate its assets through a demerger. In the past few years BHP Billiton Group has grown its business and investments. By separating into two separate entities, the BHP intend to effectively unlock shareholder value worth about $20 billion through a simplified structure. Therefore, this seems to be an effective approach to make the most out of the company’s assets. BHP has accumulated a lot of resources that need to be divested and this can be facilitated through a demerger. The business needs to be streamlined and give more focus to the four key promising business areas (Aluminium, Copper, Iron Ore, Petroleum and Potash). Other business areas such as manganese, nickel, lead, coal and zinc have underperformed and shown weak future potential and so have to be get rid of. The company’s CEO, McKenzie, states that a simple portfolio will be easier to manage through better “technical expertise” and “common systems”. This is a way of guaranteeing future productivity (BHP Billiton, 2015a). The demerger is also expected to drive the company’s overall strategy “to own and operate large, long-life, expandable, upstream assets diversified by commodity, geography and market”. Even though the deal is expected to cost an estimated $738 million, an expensive affair, it is disposed to come with more benefits with annual savings expected to be about $2 billion. The company’s portfolio will still be diversified and is expected to spawn greater productivity and financial performance (BHP Billiton, 2015a). Conclusion and Implications BHP Billiton has shown huge success and growth in the mining and resources industry. The industry is currently experiencing reduced demand that is expected to continue for the next five years. The economic outlook in China and India is showing a declining growth. But the US and U.K continues to grow at a modest rate. This is expected to impact the company’s productivity and financial performance with an expected slower growth rate. BHP Billiton also faces a challenge of getting enough qualified experts in the resources industry. But it has formulated and executed successful strategies that have led it to be a market leader in diversified resources. The 2001 merger has mainly worked. However, the plot for a takeover did succeed and the companies have proposed a demerger. This is intended to increase each company’s focus on its most competitive area. The company should implement the demerger as it is expected to come with much more benefits by focusing on the business units that have shown greater productivity and return on investment (Ryan, 2006). References BHP Billiton 2015a. “Value through Performance: Strategic Report 2014”, BHP Billiton Strategic Report, 2014. BHP Billiton 2015b. Business: global locations, viewed 13 April 2015, . Gordon, J.L. 2007. “BHP Billiton: strategic options”, MBA Business Policy Paper. Gutterman A.S. 2011. Business Level Strategy. Hamilton, L. and Webster, P. 2012. The international business environment. 2nd ed. Oxford University Press, Oxford. Hanson, D., Hitt, M.A., Ireland, R.D. and Hoskisson, R.E. 2014. Strategic Management Competitiveness & Globalisation. 5th ed. Cengage Learning: South Melbourne, Australia. Hill, C, Jones, G, and Schilling, M. 2015, Strategic Management: Theory, 11th edn, Cengage Learning, Stamford, CT. Hollensen, S. 2001. Global Marketing: A market-responsive approach, 2nd edition, Prentice Hall. Porter, M.E. 1979. “How Competitive Forces Shape Strategy”, Harvard Business Review, vol. 57, no. 2, pp. 137-145. Ryan, R. 2006. Corporate Finance and Valuation, Thomson Learning, London. Read More