Fortescue Metals Group - the General Environment - Case Study Example

FMG Case Study Student’s Name: Instructor’s Name: Course Code and Name: Name of University: Date of Submission: FMG Case Study Introduction Established in the year 2003, Fortescue Metals Group (FMG), is seeking to become the ‘new force in iron ore.’ The goal of the company is to become the Pilbara’s lowest cost producer of iron core, by using large-scale infrastructure that is custom-designed as well as the adoption of high-tech technology. The company is actually new entrant in the forty billion dollar iron ore mining industry of Australia, and aims at challenging the leading local players namely; BHP Billiton and Rio Tinto. However, since its establishment in the year 2003, the company has become the Australian iron ore’s third largest supplier. In the year 2008, the company was in the National Mining awards as the ‘producer of the year.’ It the year 2009, it mined, processed, railed, and then shipped over twenty seven million tones of the product, more than forty five steel mill clients across China. Nevertheless, much of the success of the company has been greatly attributed to its ability in meeting the growing demand of China with a viable cost structure. The General Environment Demography For years, the majority of the immigrants originated from the British Isles, and the Australian people are still mainly of the Irish or British ethnic origin. In the year 2006 census, we find that the most commonly designated ancestry was the Australian at thirty seven percent, followed by the English at thirty two percent, the Irish at nine percent, Scottish at eight percent, Italian at four percent, German at four percent, Chinese at three percent and the Greek at two percent. The population of Australia had quadrupled since the stop of the First World War, much of the rise from immigration. Following the First World War and through to the year 2000, nearly six million of the population established themselves in the country as new immigrants, which means that about 2 out of every 7 people in Australia were born out of the country. Most of the immigrants are experienced, even though the immigration quota consists of categories for refugees and family members. It is projected that the population of Australia will be forty two million, by the year 2050. In line with several other developed nations, Australia is facing a demographic change or shift towards an aging population, with few individuals of the working group and more retirees. In the year 2004, the average age of the general population age stood at thirty nine years. A large number of the people of Australia, approximated at seven hundred and fifty nine thousand, eight hundred and forty nine live outside of the country. Economy The country has a market economy with low poverty rate and high GDP per capita. In mid-2011, there were about eleven million, four hundred and fifty thousand, five hundred individuals employed, with the rate of unemployment standing at five percent. Over the last decade, the rate of inflation has been standing at between three and four percent and the base interest of five to six percent. The service sector of the economy, which includes financial services, education and tourist accounts for nearly seventy percent of the GDP. The country exports agricultural products like wool and wheat; minerals like gold and iron-ore and energy in the forms of coal and liquefied natural gas, in large quantities (Kirk 2008, p. 417). The country’s largest export markets include New Zealand, USA, China, South Korea and Japan. Socio-cultural Australia presents a unique kind of culture that is a blend of several cultures that makes it more accommodative. The basis of the culture of Australia has been largely influenced by the Anglo-Celtic Western culture since the year 1788. Unique cultural features have also come up from the country’s Indigenous cultures and natural environment. The American common culture, since the mid-twentieth century, has had strong influence on Australia, especially via cinema and television. Some other influences on its cultures come from the neighboring Asian states and via large-scale immigration from the non-English speaking countries. Political-legal The government of Australia is growth-oriented and does anything to create favorable environment for both the local and foreign investors. The Australian government has largely tried to be friendly to the companies by providing the necessary support during their operations such as subsidizing costs of production, in order to reduce the burden on their side. Technology The country is fast growing in terms of technology and this is good news to the mining industry as it aims to involve state-of-the-art technology in the operations. Conclusion This actually presents an array of opportunities and threats. For Fortescue Metals Group, there is a large market for the products in New Zealand, USA, China, South Korea and Japan. However, this is likely to be negatively affected by the several crises being experienced in some of the country markets. The large government support for foreign investors is a major threat for the company as it is easy for some other companies, including foreign to enter the business and offer competition which is not healthy for the company. This blend of cultures in the country does not make it difficult for the company to hire workers as well as find the market locally as there is no rigid culture to hamper the company’s operations. Industry analysis Iron ore is the most successful and also the highest valued commodity export in Australia. All through the 1990s and late 1990s, this industry of mining played a significant role in both the global and Australia’s economy. Nonetheless, the change in the industry was particularly caused by the several movements and operations that resulted from globalization, which pushed the exports of Australia further than where they were. In the year 2007, the country produced about sixteen percent of the iron ore of the world and was placed in third position behind China at thirty two percent and Brazil at nineteen percent,’ according to the 2008, Minerals Council of Australia (Kingsley 2007, p. 26). Despite not being the largest producer, Australia is presently the world’s largest iron ore exporter in the world. The industry of steel is experiencing its worst demand slump since the 1974-1975 oil crises and the market of iron ore is definitely affected. The major reason for the slump in the demand of steel is a major input in the transport vehicle, mechanical engineering and construction industries, which are sectors that are among the seriously affected in the present global economic crisis. Iron ore’s price negotiations were once again drawn out and not wholly concluded at the time this case was written. The standard system of pricing is under serious attack and its future appears to be desolate. The use of finished steel products in the world fell in the year 2008 by one and a half percent to 1.1 percent. Competitor Analysis The worldwide industry of iron ore mining is famous for a quite closed market and price susceptibility, following the trends or patterns in the demand of steel and values of currencies. The production of iron ore in Australia represents about fifteen percent of the total world production, which makes Australia the third largest producer of iron ore in the world (Kingsley 2007, p. 26). Presently, the market dominants are BHP Billiton and Rio Tinto and Companhia Vale do Rio Doce, a Brazilian company, whereby collectively, they command a seventy eight percent of the seaborne trade of the commodity, exporting two hundred and ninety six, one hundred and seventy eight; and one hundred and twenty six million tones, respectively during the year 2007. While BPH, Vale and Rio Tinto have a diversified range of product and export metals around the world, we find that the FMG only produces iron ore and gives all its contracts to steel companies in China. The BHP Billiton and Rio Tinto do not principally operate in Australia and have conquered the region of Pilbara for the past forty years. The companies have used their ownership of the largest part of the Pilbara region’s rail infrastructure to continue their control of the industry. In an attempt of changing the balance of power between smaller and the larger companies in the region of Pilbara, the FGM has severally been before the court with the intention of being able to access the Robe and Hamersley rail lines of the Rio of south Dampier, and the Goldsworthy and Newman rail lines of BHP Billitoris running east and south of Port Hedland. Rio Tinto and BHP Billiton have also stood before the court claiming that such a move would curtail the effectiveness of their own mining works (Kingsley 2007, p. 26). A decision in favor of the company would have substantial effect on the resources industry. Contrary to BHP Billiton and Rio, we find that the infrastructure of FMG has not been declared to be an open system under the competition laws. This is really an added cost advantage for the FGM since access to its infrastructure cannot be controlled or regulated by the government. But instead, by the introduction of memorandums of understanding with their colleagues, the company avoids regulatory intervention, maintains control over the assets and gets rent for the access on the basis of its own cost assessments. Overall, The Company faces very stiff competition in the industry in the global stage, and this might impact its quest to become one of the biggest miners in the world. FGM tangible resources The company has reasonable finances according to its standards, even though not in the same level as its major competitors, as it highly depends on the Chinese market, thus not being in a position of raising external funds as expected from the Chinese investors (Kirk 2008, p. 417). It has an excellent organization system, as it has managed to systemize an intricate supply chain as well as handling a complex franchise system. The company has technological expertise, which enables it to utilize technology well in its operations. Generally, this is a good set of tangible resources. Intangible Resources The company also has excellent intangible resources that have enabled it to run smoothly. The company has a good brand that makes it to be recognized both in the domestic and international market. Its reputation, which saw it being named the third largest iron ore producer in Australia, has enabled it to have good relationship with the government. Moreover, it has well trained workers, including managers, which has enabled it to utilize or apply the state-of-the-art technology in its operations, thus improving productivity. Its management is of top quality with a well organized human resource that has put it in the world map. Capabilities Fortescue Metals Group has an outstanding set of capabilities with several operating at the level of core competencies. The company has a brand understanding as well as branding which creates the ability of being competitive in difficult mining industry. The brand understanding that is shown by the company exceptional and shows a nuanced appreciation of how to change a first world brand to a non-first world framework that is actually of world standard. It is essential beyond the Australian context. There are excellent training and motivational skills in the mining industry that leads to smooth operations in the highly competitive environment. There is also excellent utilization of technology by the company in its operations. The use of sophisticated technology by the company greatly helps it be cutting down costs, reducing time wastage and increasing the volumes of production, thus putting it at a better place to maintain its competitive advantage. The company has excellent marketing skills and knowledge that allow success of the mining industry. Since its inception, the company has been on a stiff development path that has enabled it to become a household name in the mining industry both in Australia and the world. The company has established close ties with some of the countries that are the biggest consumers of steel in the world. Furthermore, is has established close relationships with some of the biggest economies of the world, such as China, Japan and the United States of America, which implies that there is a guaranteed market for the commodities. This we can say that is a well calculated move or strategy by the company to ensure that it gets adequate market to improve its global standing or status while maintaining the bottom line. The company has also had some technological innovations in the mining process which has greatly improved efficiency as well as cutting costs. The company has also been in a position of handling the demanding government well by establishing good relationships, so as to enjoy a favorable environment of operations, as well as getting the necessary support. The company has also sufficiently been able to manage its supply chain well. Concluding Remarks Fortescue Metals Group is a company that is fast growing despite the fact that it is a new entrant in the industry of mining. It has been able to lay out strategies well to fight off competition from the big brands in the industry. At its rate or growth, it is only a matter of time before the company becomes a household name in the industry after surpassing its major rivals. The company has established strong ties with China which is the largest consumer of steel; this is a good move they are assured that there is a readily available market. The company should continue maintaining the good relationship with the government together with all the stakeholders in the industry so as to be able to enjoy a favorable environment for operations, as its aims at achieving or attaining its objective of becoming a major force in the iron ore industry in Australia and even worldwide while maintaining the bottom line. This is always the key to success for most companies. List of References Kingsley, N 2007, "Fortescue goes its own way". Railway Gazette International. Viewed September 9, 2011, Kirk, J 2008, "Fortescue opens the world's heaviest haul railway," Railway Gazette International, Viewed September 9, 2011, Read More