BHP Billiton Strategic Choices - Case Study Example

Name Class Unit Introduction Strategic management goes beyond coming up with a strategic plan (Eden & Ackermann, 2013). Analysis of BHP Billiton case and strategic report gives several strategic concepts. The core strategic management concept in BHP Billiton case is the achievement of competitive advantage (BHP Billiton, 2014). The analysis shows strategic issues that BHP Billiton is addressing to attain competitive advantage includes; demergers, operational efficiencies, diversification, human resource management and socially responsible behaviours. This essay will analyse strategic management of BHP Billiton through critically analysing the core strategic management concepts in the case and strategic issues management have to address. This will be achieved by carrying out external and internal environmental analysis and review strategies that led to BHP Billiton strategic growth. Finally, the essay will carry out an assessment of BHP Billiton’s 2014 decision to split. External analysis Industry BHP operates in an industry with a strong demand for their commodities. This has made the mining and oil industry to record profits over the years. Emerging economies have been a major boost to the industry. BHP Billiton has been depending on China growing consumption due to industrialisation. Metal and mining industry is capital intensive for the company to meet the market demand. This implies that it takes several years to come up with a supply that will lead to reduced prices. The increased demand by China is a great opportunity for BHP Billiton (Connolly & Orsmond, 2011). Porter 5 forces analysis Porter 5 forces analysis will help in determining the competitive external environment that faces BHP Billiton. Bargaining powers of the buyers The purchasing powers of the buyers are low to moderate in the industry. BHP Billiton has the capability to pass labour, shipping and other costs to buyers in most of their products. There are low supply and high demand in most of the company products. The high demand for the company products is driven by the developing countries such as China. With the emerging economies, there is high demand for materials due to infrastructure being set up. This makes it possible for BHP Billiton to set high prices without losing customers. BHP Billiton is in an industry where there are no substitutes for most of their products. The availability of few substitutes for the BHP Billiton products reduces buyers bargaining power. Due to the company ability to create long-term relationship with buyers, they have been able to achieve more powers (Connolly & Orsmond, 2011). The situation has lowered the bargaining powers of the buyers. Bargaining power of suppliers Suppliers have high powers as compared to BHP Billiton. The company have faced a strong impact of bargaining power of the suppliers in shipping costs, energy, materials and labour. The overall costs for the suppliers have been increasing. There are few substitutes for the suppliers that have given them a higher bargaining power. Mining industry requires replacement of parts for the machinery that in some cases faces a shortage. The mining industry has been facing labour shortage. There is few experienced staff in the mining industry making suppliers of labour more costly. The costs of exploration have been rising as well as the labour costs (Connolly & Orsmond, 2011). Threat of new entrants Threats of new entrants are very low. The industry is capital-intensive making it hard for new entrants. There is also a shortage of idle capacity of the natural resources. The shortage leads to high barriers to entry for a new firm. For the new entrants, the quality of resources and location is inferior compared to BHP Billiton’s. BHP Billion have been able to acquire the best geographical locations for their operations. For new entrants, it will take long time to have a comparable infrastructure to BHP Billiton (Floris, Grant & Cutcher, 2013). It will also take a long time for the new entrants to train workers and come up with adequate supply to the market. Several companies have made entry to Africa, China and India resources, despite this; they have low capability compared to BHP Billiton. The threat of new entrants from China and India is low (Shankleman, 2009). BHP Billiton have cost advantage in relation to its size and established customer relations. For a new entrant, attaining the size of BHP and establishing customer relations will take a long time. The products in the mining industry require high access to distribution channels. New entrants will face a challenge to establish distribution channels hence difficult to operate. Threats of substitutes BHP Billiton faces a low threat of substitutes. This is not a major challenge since there are few substitutes for BHP Billion raw materials products. The available substitutes are uneconomical hence cannot substitute BHP Billiton products. BHP Billiton has been able to diversify their resources becoming the largest natural resources company globally (BHP Billiton, 2014). BHP Billiton is thus in a strong position to deal with any substitutes that enter the market. This is due to large portfolio reserves. Competition rivalry The industry has a strong competitor’s rivalry. This is experienced as mining and oil firms compete for the natural resources globally (Ballard & Banks, 2003). The competition is also based on qualified workers. This has led to an increase in labour costs. The competition in the industry has led to high costs of transportation of materials due to rivalry of securing access. Despite the high competition, the industry is still profitable. Competitors The top three competitors in the industry are; Alcoa Inc., Rio Tinto Limited and Vale S/A. Alcoa Inc. have been able to expand through acquisition with recent being Alcan Inc. other competitors are; Anglo American and Companhia Vale do Rio Doce (Brown et al., 2011). Internal analysis Resources BHP Billiton is a leading resource company with vast investment. The organisation has vast investments in minerals, oil, gas and metals located in different areas globally. The company have invested in diversified assets which gives them a competitive advantage. BHP Billiton has been able to retain their position as the top supplier of uranium, silver lead and copper BHP (Billiton, 2014). Escondido mine gives the company the position of largest copper supplier globally. The company have earned 3rd position in nickel production and one of the largest iron ore producers (Billiton, B. H. P., 2008). This is a major source of competitive advantage in the industry. Financial performance BHP Billiton has delivered strong financial performance over the years. Over the past years, the company have increased their capital to the investors. Over the last year, the company revenue increased by 2% to US$67.2bilion (BHP Billiton, 2014). The company recorded an increase in share price by 4% to 121 US cents. The company net operating cash flow was at US$25.4. The company had an attributable profit of US$13.8 billion and underlying EBIT of US$22.9 billion (BHP Billiton, 2014). Financial analysis of BHP Billiton shows a strong financial management that have led to great financial results. The company have been able to achieve excellent financial results while at the same time executing other functions. The Strong financial position gives BHP Billiton a competitive advantage. Value chain BHP value chain is another source of competitive advantage. Through the “The BHP Billiton Way”, the company have been able to excel in their value chain activities. The supply chain is one of the major cost drivers and managing it successfully helps BHP Billiton to save a lot of revenues (O'Shannassy, 2008). This is through managing the supply chain, distribution marketing, sales and operations. SWOT analysis Strengths BHP is a highly diversified natural gas company with a large portfolio of assets. This gives the company a strong market position. The company is the largest supplier of Uranium and copper globally. In Escondido Chile, BHP has the world largest copper mine (Billiton, 2008). The company have been ranked 3rd globally in nickel production. Over the years, BHP has been able to give superior financial returns. This is evidenced by 2014 strategic report. The company dividends are strong as evidenced in the strategic report. BHP Billiton is operating in a market that has few substitutes as well as less competitive. This gives the company a better position (BHP Billiton, 2014). The company sustainable operations have enabled them to gain trust from community and other stakeholders. Weakness The company faces problems in finding qualified human resource in the mining sector. The mining sector has been facing shortage of staff. Recruiting and training new staff in the mining industry is costly. The company has been operating non profitable assets which lead to an increase in operating costs. The non-core assets have led to need for demerger (BHP Billiton, 2014). Suppliers in the mining industry have high bargaining powers as compared to the company. This leads to high costs of labour, machine parts and other equipment. BHP Billiton has some of their operations in volatile countries which expose them to risks (BHP Billiton, 2014). Opportunities BHP Billiton can use technology to enhance their marketing. New media provides a great opportunity where BHP can reach new markets for their extensive assets (Barney, 2007). The company commitment to greenhouse gas reduction will enable them achieve sustainable development (BHP Billiton, 2014). Due to dependency in transport for their bulk products, BHP Billiton can invest in the transport companies. This will help the company to reduce their operating costs. Threats With the rising costs of major supplies, BHP Billiton faces a major threat. The cost of labor and rising inflation in their area of operation has been a major threat. The company operations in some areas pose a risk due to political instability and terrorism. BHP Billiton faces a threat from changing rules and regulations. Environmental impacts of mining have threatened global mining operations. The company is supposed to ensure that their operations are environmental friendly to avoid high fines and damage to public relations. With unpredictable global economy, BHP Billiton faces a threat of economic slowdown. The company has been mostly dependent on Chinese economy (BHP Billiton, 2014). A slowdown in Chinese economy can adversely affect their operations. The competitors in the industry have been very aggressive which poses a threat to BHP Billiton. The company must ensure that their diversification strategy does not affect their revenue. Strategies implemented by BHP Billiton which have led the company to remarkable growth and its current level of performance Strategic management involves strategy formulation, implementation and evaluation. The main aim of BHP Billiton has been profit maximisation through gaining a sustainable competitive advantage (Barney, 2007). BHP have been utilising their strong diversification strategy to gain a competitive advantage. The company strategy is based on sustainable diversified commodities and cost reduction. BHP Billiton has diversified their resource portfolio that gives them a competitive advantage. According to Priem & Butler (2001), the resource-based theory asserts that organisation competitive advantage lies on their internal resources. These are unique resources that a firm own that gives them a competitive advantage (Barney & Clark, 2007). In internal resources, BHP Billiton has strong corporate governance. This has led to corporate strategies that have given the organisation a competitive advantage. There is a strong relationship between the shareholders and board that leads to greater accountability. The agency theory proves the importance of strong relationship between agents and shareholders (Freeman, 2010).. This ensures that there is success in the organisation. The company remuneration policy is reviewed regularly. This ensures that the organisation can achieve its strategy. This is based on the human resource theory that stresses the importance of human element in an organisation (Bartlett & Ghoshal, 2013). The company aligns their remuneration to performance. BHP Billiton strategies have given the company a competitive advantage in the market. This is through strategic management and appreciating the roles played by diversification. Assessment of BHP Billiton’s 2014 proposed Demerger The decision by BHP Billiton to split BHP Billiton through demerger is a great move. This will enable the company to simplify their portfolio and enhance their capability of creating value for shareholders. The company diversification strategy has led to ownership of 41assets globally. Despite the importance of diversification to the company profitability, it’s important to look at the assets that are highly profitable. It’s also important to note that the demerger will not significantly reduce the company diversification advantage. Based on 2014 strategic report, 19 assets brought 96% of the group EBIT (BHP Billiton, 2014). The demerger will give BHP Billiton the capability to concentrate on their core assets. Focusing on core assets will give BHP Billiton capability to minimise operational costs. A reduction in operational costs leads to an increase in margins and enhanced growth. BHP Billiton will be able to come up with a new company that will be able to benefit from assets and strategy (BHP Billiton, 2014). In this case, the demerger will lead to an increase in shareholders’ value. Demergers lead to an increase in shareholders wealth in most cases (Singh, Bhowal & Bawari, 2009). The organisation will be able to eliminate the noncore assets and focus more on core assets that are a source of competitive advantage. Through demerger, there will be a reduction in information loss as the organisation becomes smaller (Breen, 2005). Research has proved that demergers lead to capital market improvements. The company can attract new investors. The organisation is also able to enhance corporate governance and achieve organisational improvement (Panda & Rao, 2012). This will enable BHP to sustain their competitive advantage in coming years. Conclusion and Recommendations BHP Billiton has been able to sustain competitive advantage over the years through their diversification strategy. The organisation has dominated the industry through their vast amount of resources. The barrier for new entrants is high giving the company a competitive advantage. Financial performance and value chain management are a great strength for BHP Billiton. The main sources of competitive advantage are diversification, human resource management and corporate strategies. The decision to split into two through demerger is very appropriate. Through demerger, BHP Billiton will be able to create value for the shareholders. Costs of managing a large portfolio of assets are very high and should be reduced through demergers. It’s evident that the core assets are the main source of revenue. After the demerger, the company can increase their investment in the core assets. There will be an overall organisation improvement that will give the organisation a sustainable competitive advantage. Due to high labour and suppliers costs, BHP Billiton has to focus more on cost containment. Managing costs will enable the organisation to achieve strategic growth and increase profits. Costs of Value chain management should be lowered further for the company to be more competitive. References Ballard, C., & Banks, G. 2003, “Resource wars: the anthropology of mining,” Annual review of anthropology, Vol.32, no.1, p.287-313. Barney, J.B. 2007, Gaining and sustaining competitive advantage, (3rd edition). Upper Saddle River, NJ: Pearson Education. Barney, J. B., & Clark, D. N. 2007, Resource-based theory: Creating and sustaining competitive advantage. Oxford: Oxford University Press. Bartlett, C., & Ghoshal, S. 2013, “Building competitive advantage through people,” Sloan Mgmt. Rev, Vol.43, no.2.p.34-41. BHP Billiton, 2014, Strategic Report 2014, Viewed 13th April 2015, http://www.bhpbilliton.com/home/investors/reports/Documents/2014/BHPBillito nStrategicReport2014.pdf BHP Billiton, 2014, 2014 Annual General Meetings, Viewed 13th April 2015, http://www.bhpbilliton.com/home/investors/reports/Documents/2014/140925_20 14AnnualGeneralMeetingsChairmansLetter.pdf Billiton, B. H. P. 2008, BHP Billiton Our Businesses: Worsley Alumina. BHP Billiton. Breen, M. 2005, “How to manage a demerger,”Accountancy, Vol.135, no. 1340, p. 70-71. Brown, T. J., Bide, T., Walters, A. S., Idoine, N. E., Shaw, R. A., Hannis, S. D., ... & MacKenzie, A. C. (2011). World mineral production 2005-09. British Geological Survey. Connolly, E., & Orsmond, D. 2011, The mining industry: from bust to boom. Economic Analysis Department, Reserve Bank of Australia. Eden, C., & Ackermann, F. 2013, Making strategy: The journey of strategic management. Sage. Floris, M., Grant, D., & Cutcher, L. 2013, “Mining the Discourse: Strategizing During BHP Billiton's Attempted Acquisition of Rio Tinto,” Journal of Management Studies, Vol.50, no.7, p.1185-1215. Freeman, R. E. 2010, Strategic management: A stakeholder approach. Cambridge University Press. O'Shannassy, T. 2008, “Sustainable competitive advantage or temporary competitive advantage: Improving understanding of an important strategy construct,” Journal of Strategy and Management, Vol.1, no.2, p.168-180. Panda, B., & Rao, P. H. 2012, “Corporate Restructuring: Demerging Impact,” SCMS Journal of Indian Management, Vol.9, no.1, p.80-88. Priem, R. L., & Butler, J. E. 2001, “Is the resource-based “view” a useful perspective for strategic management research?” Academy of management review, Vol.26, no.1, p.22-40. Shankleman, J. 2009, Going global: Chinese oil and mining companies and the governance of resource wealth. Woodrow Wilson Center: Washington. Singh, R., Bhowal, A., & Bawari, V. 2009, “Impact of Demerger on Shareholders’ Wealth,” Enterprise Risk Management, Vol.1, no.1, p.44-58. Read More