BHP Billitons External Environment and Strategy - Assignment Example

BHP Billiton’s External Environment and Strategy Introduction An organisation’s external environment refers to the set of conditions outside the organisation that influences the organisation’s performance (Ireland, Hoskisson & Hitt, 2012, p. 48). Because of the factors in the external environment, this environment can affect the choices that the organisation makes as well as the strategy that the organisation adopts. Against this background, the purpose of this essay is threefold. First, the essay will analyse the external environment of BHP Billiton. BHP Billiton is a large Anglo-Australian natural resources company with operations in many countries across the world. Secondly, the essay will discuss the strategic options open to BHP Billiton based on the analysis of the organisation’s external environment. Thirdly, based on the strategic options that are available to BHP Billiton, a mission and objectives statement will be developed for the organisation going forward. This will be based on the 5 Qs model. Analysis of BHP Billiton’s external environment Organisations analyse their external environments to gather information that will help them to come up with a strategy (Ireland et al., 2012, p. 48). For instance, the conditions in the external environment determine whether an organisation should pursue a certain opening or take an action to avert an impending threat. The external environment of an organisation consists of both the general (macro) environmental factors and industry-specific environmental factors (Analoui & Karami, 2003, p. 74; Hubbard, Rice & Galvin, 2014, p. 66). As a result, the process of analysing the external environment involves two key things. First is the analysis of the “economic, political, legal, technological, socio-cultural, demographic, green environment and international” trends (Hubbard et al., 2014, p. 69). Second is the analysis of the organisation’s competitive environment (Analoui & Karami, 2003, p. 74), in which Porter’s Five Forces model is applied. The general environment: The macro environment model The most important factors of BHP Billiton’s general environment are as follows. Political factors BHP Billiton is an international resources company that is vulnerable to political risks in the some of the markets in which the company operates. Political factors can affect the company’s drivers such as operating licence, access to mining projects, and growth options. BHP Billiton has various projects in some countries that have some level of political instability such as the Democratic Republic of Congo, Kazakhstan, Mongolia and some countries in West Africa (Gordon, 2007, p. 11). The political risk factors of having operations in such countries include nationalisation, civil unrest, nullification of contracts due to change of government policy, terrorism and change of lease permits (Gordon, 2007, p. 11). Economic factors BHP Billiton is vulnerable to economic factors such as increases in exploration costs, energy costs, material costs, labour costs and operating costs. Increases in the aforementioned costs can adversely affect the company’s profitability, growth plans and development projects. The economic factors aspect is particularly important to BHP Billiton because the company relies on the prices of commodities. For instance, there has been a decline in prices of bulk commodities such as coking coal and iron ore since 2011 (Gorajek & Rees, 2015, p. 31). Socio-cultural factors BHP Billiton is subject to socio-cultural factors in its operations as well as in dealings with its stakeholders. These factors make it necessary for the company to provide support to local communities by investing in projects such as roads, schools and housing. Such projects are crucial for the company getting social approval. For instance, BHP Billiton has made efforts to enhance its standing in Chile by improving the working conditions of employees and investing in projects to improve the quality of life in Antofagasta, close to the company’s Escondida copper mine (Gordon, 2007, p. 13). Environmental factors Being a natural resources firm, BHP Billiton is subject to regulations and public policies concerning the environment. These include the Asia-Pacific Partnership on Clean Development and Climate, the Kyoto Protocol, recycling and renewable energy, clean emissions, and the European Union Emissions Trading Scheme (Gordon, 2007, p. 13). The company is responsible for the environmental situation in both present and previous drilling and mining operations. The company has invested significantly in land reclamation and decommissioning, which has an in impact on its profitability. Technology factors As a mining company, BHP Billiton relies on technical factors that ensure effective exploration, discovery and mining. The organisation is heavily reliant on the application of technology in its operations. Investment in technology is a critical expenditure and key strategic driver for the firm. Legal factors BHP Billiton faces a number of legal liabilities due to environmental damage. For instance, Brazilian authorities have required BHP Billiton and another mining company, Vale to pay $8.36 billion in penalties and compensation (Ker 2016). This follows the collapse of a dam managed by Samarco, a joint venture between the two companies, in November 2015, and the subsequent damage to the environment (BHP Billiton, 2016a; Robins, 2016). Industry environment: Porter’s Five Forces analysis Porter’s Five Forces analysis focuses on five forces that influence competition within an industry (Hill & Jones, 2010, p. 42). These are: (a) the threat of entry by prospective competitors; (b) the level of competition among established organisations within an industry; (c) the bargaining capacity of buyers; (d) the bargaining capacity of suppliers; and (e) the proximity of substitutes to the products that are produced in an industry (Hill & Jones, 2010, p. 42). These factors are analysed next. a) The threat of entry by prospective competitors The threat of entry by prospective competitors in the mining industry is moderate to low. This is because today there is a shortage or limited capacity of natural resources. This causes a notable barrier to the entry of new players in the mining industry. Also, the formation of alliances between BHP Billiton and other major players in the industry such as Vale reduces the threat of new entrants having a significant effect due to the well-established capacity of the major players (Chevalier-Roignant & Trigeorgis, 2011, p. 4). b) Level of competition among established organisations within the industry Rivalry among BHP Billiton’s competitors is high. This is because of the fact that mining companies across the world are in competition for access to limited natural resources. One of BHP Billiton’s main competitors is Rio Tinto, which is a large and well-established company (Grant et al., 2011, p. 3). Other competitors include Vale, Alcoa and Anglo American among others (Gordon, 2007, p. 17). c) Bargaining capacity of buyers Buyers’ bargaining power is modest to low. This is because in the various product lines that BHP Billiton offers, the company is in a position to pass along increases in price due to shipping and labour and production costs. This is attributed to the low supply and high demand for natural resources like uranium, metals and diamond, a situation that leaves many buyers mostly taking the price that is offered. d) The bargaining capacity of suppliers There is a relatively strong bargaining power of suppliers in regard to materials, labour, shipping and energy. As the company’s operations have increased, so have overall costs from suppliers, including equipment suppliers (Gordon, 2007, p. 15). e) Proximity of substitutes to the products that are produced in the industry The threat of substitutes in the mining industry is low. This is because there are not many alternatives for the products of the mining industry such as iron ore or uranium. For instance, in China, which is one of the major importers of iron ore (Yu & Yang, 2011, p. 63), the limited supply of scrap steel has meant that there is no substitute for steel (Hubbard et al., 2014, p. 438). This makes the country to continue relying on iron ore for steel production. Strategic options open to BHP Billiton As noted above, organisations analyse their external environments in order to collect details that will assist them in coming up with a strategy (Ireland et al., 2012, p. 48). The decisions that an organisation makes are also influenced by the organisation’s resources and competencies (Ireland et al., 2012, p. 48). Based on the analysis of BHP Billiton’s external environment, it can be seen that the organisation is operating in an environment that is subject to notable compliance requirements and high operating costs in terms of technology and labour. The environment is also highly unpredictable because of political instability in some countries where BHP Billiton operates and due to the decline in the prices of bulk commodities that has been experienced since 2011. In addition, although the threat of entry of new major players in the mining industry is low, BHP Billiton faces competition for the limited mineral deposits from other major mining companies such as Vale, Rio Tinto, Anglo American and Alcoa. Further, BHP Billiton faces the threat of high operating costs because of the relatively strong bargaining power of suppliers. Therefore, the options available to BHP Billiton to achieve growth include reducing operating costs, dealing with the risk caused by the Samarco dam disaster, and diversifying its products as well as the markets for the products. With regard to operating costs, a study of mining organisation executives that was conducted by Newport Consulting noted that cost management and cost control were the clear areas of focus in the years 2010-2011, with more than half of the respondents indicating that they were paying attention to reducing or closely managing their cost base (PricewaterhouseCoopers, 2015, p. 2). Clearly, BHP Billiton is one such organisation whose strategy should focus on reducing cost. In the wake of the decline in prices of commodities such as oil, coking coal and iron ore, there is need for BHP Billiton to focus its cost reduction efforts on reducing waste. This includes reducing non-essential spending and checking business cost drivers to improve accountability (PricewaterhouseCoopers, 2015, p. 2). For instance, Gordon (2007, p. 35) suggested that since BHP Billiton has one of the biggest bulk cargo shipping operations worldwide, an option to reduce cost would be to get more involved in the shipping supply chain by buying a shipping company. This would help the company reduce shipping costs. Another strategic option that is open to BHP Billiton is the opportunity to rebuild its image after the Samarco disaster that killed 17 people (Hermens, 2016). In addition to paying for the damages to the environment and compensating those killed and injured in the dam disaster, the company will have to invest in re-establishing safe and sustainable operations (Hermens, 2016). This will see to it that the company is not viewed as threat to the environment, a factor that can make its licences in various countries to be cancelled or reviewed, or cause the company to be denied operating licences in new markets. The result is that the company will earn a position as a responsible and caring firm. In terms of diversifying commodities and the markets for the commodities, there is need for new markets and new products that will have high market value in the new future. Although the prices of products such as iron ore are projected to continue being low due to low demand in major markets such as China, other commodities such as nickel are expected to fetch better prices (Hermens, 2016). In addition, countries such as Russia, Peru, Chile and those in Central Asia are expected to provide a market with long-term demand for bulk commodities. Therefore, BHP Billiton needs to look for a market for its commodities in these countries. Mission and objectives statement for BHP Billiton going forward According to Hubbard et al. (2014, p. 35), the essence of an organisation’s business strategy can be understood by providing answers to five questions, which the authors have dubbed the “5 Qs” of business strategy. The questions and their answers are addressed next. 1. “What amount of growth and level of profitability does the organisation seek?” BHP Billiton seeks to grow and increase it level of profitability by diversifying in terms of the commodities that it produces, the regions in which it operates and the markets that it targets (BHP Billiton, 2016b). 2. “What products and services does it plan to produce?” In addition to major products such as iron ore, metallurgical coal and coking coal, BHP Billiton intends to produce the following products. First is copper, which the company believes will be resilient against the decline in commodity prices. In addition, the company intends to intensify gas exploration and production since it believes that gas will be an important commodity as the world transits to a low-carbon economy (BHP Billiton, 2016c, p. 15). 3. “What customer and geographic markets does it plan to service?” The company is currently focused on serving customers and markets in Chile, Peru, and the United States through its current exploration for copper in the said regions. Marketing of products in Asia and America is mainly done through Singapore and the United States (BHP Billiton, 2016c, p. 6). 4. “What generic strategy does it plan to follow to position itself uniquely against competitors? BHP Billiton plans to use a uniquely diversified approach by intensifying the production of products that promise resilience in the future, such as copper and gas (BHP Billiton, 2016c, p. 53). 5. “What position in the industry does it plan to hold in the future?” The company plans to hold the position of a leader in the resources industry by owning and operating large, low-cost, long-lasting, and expandable upstream resources. It is also focusing on divestment as well as acquisitions to strengthen its position (BHP Billiton, 2016c, p. 13). Formulation of mission and objectives statement for the company Based on the answers provided to the questions in the “5 Qs” of business strategy above, the mission statement of BHP Billiton can be formulated as “Our mission is to be the leading provider of bulk commodities using technologies and practices that are friendly to our people and the environment”. This can be followed by the overall strategy of the company, which is “Our strategy is to own and operate large, long-life, low-cost, expandable, upstream assets diversified by commodity, geography and market” (BHP Billiton, 2016d). It is important to note that the two statements answer the following questions: “What is our business, and what should it be?” – which are the two questions that define an organisation’s mission (Baker, 2014, p. 93). Based on the mission statement, strategy objectives can be developed as follows: a) To work with our employees and support communities to ensure that we achieve combined financial, social and environmental objectives. b) To invest in technologies that will reduce our operating costs while helping us meet the current and future needs of the commodities market sustainably. c) To explore future market needs and diversify our products portfolio to meet the needs of the market. These objectives reflect BHP Billiton’s commitment to its financial objectives, people, the environment and future needs in terms of natural resources. Conclusion The analysis of BHP Billiton’s external environment shows that the organisation is faced with issues such as high operating costs, compliance requirements (legal and environmental), political risk in some areas of operation, fluctuation in the prices of the commodities that it produces, and high competition from other major players. From these issues, the options that are open for the company include reducing operating costs, re-establishing safe and sustainable operations, and diversifying its products and markets. Based on these options, a mission statement and objectives have been formulated to ensure that BHP Billiton’s strategy meets the company’s purpose in line with the changing nature of the commodities market. References Analoui, F., & Karami, A. (2003). Strategic management in small and medium enterprises. 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