BHP Billiton Strategic Management - Case Study Example

BHP Biliton Strategic Management Name Class Unit Introduction BHP Billiton analysis portrays core strategic management concepts. The concepts identified from the case can be explained through profit maximization, resource-based theory and human resource-based theory (Cole, 2004). The organisation management, strategic issues are demergers, diversification and human resource management. This report conducts a strategic analysis of the BHP Billiton case and the company 2014 strategic report. The analysis is based on strategic management concepts in the case, impacts of external and internal environment factors on the company, and reviews the strategies that have led to remarkable growth in the company. The report will also assess the company decision to the demerger and recommend strategies that will sustain its success. Finally, the report will recommendations based on the issues identified in the case and implications of the analysis to BHP Billion, mining industry and economy. External analysis BHP Billiton and the competitors in the industry have benefitted a lot from the high demand for their commodities globally. The prices for the commodities were highest in 2006 which led to the company recording high profits. The strong growth in developing nations such as China and India has led to high demands. The demand is driven by the developing countries and industrialized nations. The industry is highly attractive due to high-profit margins. Metal and mining industry involves high spending on capital in order to have a capacity that can satisfy the market demand (BHP Billiton, 2014). Thus, increasing the capacity takes years which implies that an increase in supply that can lead to a reduction in prices is highly unlikely. An Increase in supply requires high costs in the industry. PEST analysis To have a greater insight in BHP Billiton, PEST analysis is crucial. The analysis will enable to see the impacts of the factors on the company strategic drivers. Political BHP Billion has its operations on a global scale. This makes the company be exposed to various political risks in its countries of operations. The company operations are in Australia, South Africa, Democratic Republic of Congo, Kazakhstan and Mongolia among others. In some of the countries of operation, there is a high risk of civil unrest, nationalization and terrorism among other risks. Governments determine the task rates which adversely affects the operations. An Increase in tax poses challenges making uncertainty in profit projections (BHP Billiton, 2014). Economic The global economy growth has an effect on the company performance. With the moderate growth of the world economy in 2014, the BHP Billiton was able to sustain their profits (BHP Billiton, 2014). The growth of the emerging markets has been able to boost the company earnings. BHP Billiton has been very dependent on the Chinese economy. China economy demands more than 40% of their products. The company has been confident on the outlook for the Chinese economy, which provides a major market. The company commodity prices are dependent on the health of the global economy. Change in the global economy has an impact on demand. When there is a weakness in the global economy, demand for the commodities fall leading to a rise in supply and decline in prices. Social factors BHP Billiton is affected by social-cultural factors in their operations. The company has a strong social corporate relationship that enables them to have a strong relationship with the community. In most countries, mining requires social approval. The company has committed themselves to sustainability. This is through improving health and ensuring safety to people in their operations. The company ensures that there is no occupational injury or illness. Through strategic risk management, the organisation has been able to protect the communities and their assets (Cole, 2004). The company addresses health risks in their areas of operations. This ensures that workers and communities in areas that the company operate are not affected by the diseases (BHP Billiton, 2014). BHP Billiton is expected to follow set regulations on the environment. This involves controlling the amount of GHG gas and ensuring their operations does not affect biodiversity. Technological BHP Billiton uses high technology in their operations. The company use modern equipment in exploration and discovery of mining as well as the energy assets (BHP Billiton, 2014). Investing in high technology has been a major asset to the company. This is due to the fact that it acts as a strategic driver for the organisation. Competitor environment BHP Billiton is in an industry that has a high rivalry among the competitors. Mining and oil companies have been competing for natural resources worldwide. The company principal competitors are; Rio Tinto (RTP), Anglo American (AAUK), Companhia Vale do Rio Doce (RIO) and Alcoa (AA). Among the competitors, BHP Billiton is the market leader. Key issues in the internal environment To conduct internal analyses, it will involve looking at the company’s value chain, financial performance, diversification and risk management. This will help in analyzing the organisation strategy. Strategic management involves the formulation of strategies, implementation and execution (Cole, 2004). An internal analysis will be used to determine the strategies set, their implementation and evaluation. The main focus is gaining a competitive advantage through strategic management. The company’s value chain is made of; operations, distribution, sales/marketing and service. In the supply chain, inventory management plays a significant role to reduce costs. The company works hard to have sustainable operations. This involves ensuring that both workers and the community are safe and healthy. The company financial results have been impressive showing an increase in profit. The company revenue was able to increase by 2% and a profit of US$13.8 billion in 2014 (BHP Billiton, 2014). Through a disciplined approach to capital management, the organisation has been able to maintain a strong balance sheet. BHP is highly diversified dealing with mineral and energy commodities. The company engages in both upstream and downstream activities. The company has operations in petroleum, copper, iron ore, coal, aluminium, manganese and nickel. The diversified approach in the market gives the company a competitive advantage (Priem & Butler, 2001). BHP Billiton has well-established risk management. This has ensured that the organisation has a strong shareholder’s value. This is also a source of competitive advantage for the firm. The organisation corporate governance is very strong (BHP Billiton, 2014). This enables BHP Billiton to have long-term value creation. Explanation and review of the strategies implemented by BHP Billiton which have led the company to remarkable growth and its current level of performance BHP strategy is based on operating a diversified exploration of resources at low cost and maximising shareholders’ value. Being consistent with their strategy has enabled the company to be a market leader. Through strategic management, BHP Billiton has been able to achieve a competitive advantage (Hill, Jones & Schilling, 2014). A competitive advantage is achieved when an organisation can carry out value creation better than the competitors (Barney, 2007). This is through the organisation structure, reduced production cost, experienced human resource and diversification (Priem & Butler, 2001). BHP strategies ensure that they reduce costs and pursue diversification. The company constantly reviews their strategy to ensure that it is in line with the changing environment. This is done through robust corporate planning (BHP Billiton, 2014). The company corporate planning is based on a high level of accountability, alignment with business and robustness. Sustainable operations are another strategy that has helped BHP Billiton to achieve high performance. This is through taking care of the health and safety of workers and community in their operations. The organisation also ensures that they enhance sustainable development in their host communities and have a strategic approach to climate changes. The company has a disciplined approach to capital management. To achieve a competitive advantage, the company concentrates on areas that they can enjoy economies of scale (Priem & Butler, 2001). Diversification approach is a vital strategy in gaining a competitive advantage. This has enabled profit maximization and a sustainable competitive advantage. An organisation competitive advantage is based on their unique resources and capabilities as explained by resource-based theory (Cole, 2004). This is evident in BHP operations where the company possesses unique resources and have the capability to enjoy economies of scale. The human resource theory looks at the importance of the workers in strategy execution and business success (Bartlett & Ghoshal, 2013). The company has a well trained human resource that have enabled in strategy execution. According to Bartlett & Ghoshal, (2013), the greatest asset of an organisation is people and BHP Billiton have realised this. The company recognises their human resource through well-drafted remuneration policy and ensuring that the workers are motivated. An assessment of BHP Billiton’s decision to split the company into 2 Demerging BHP Billiton is a great move for the shareholders. This is due to the fact that this move will simplify the company portfolio. The company demerger enables them to focus on the assets that are profitable. As stated in the report, the demerger will enable BHP Billiton to concentrate on 19 assets that brought 96% of the group EBIT in 2014 (BHP Billiton, 2014). The company will now concentrate on few assets and enhance their focus on upstream activities that are more profitable. This is a move that will lead to higher margins and enable the company to enjoy high growth. Demerger enables high return on investment if it is executed well (Panda & Rao, 2012). The proposed demerger does not affect the company position. Even after the demerger, BHP Billiton remains the largest global resource company with a diversified approach. Demerger can be viewed as a simplification that will enable the organisation to gain maximum benefit from the portfolio. The company’s core assets have the greatest expansion and have been growing fast. Assets such as alumina, coal, manganese, silver and zinc are in low resource endowment despite being competitive. The assets thus cannot benefit the company as the core assets. It’s important to note that demerger does not take the shareholders’ rights (Panda & Rao, 2012). All eligible shareholders can still have shares in the newly formed South32 (BHP Billiton, 2014). The investors also have more capability in accessing the company performance. Demergers are a major part of organisation reconfiguration. They help an organisation to refocus on managing diversification (Panda & Rao, 2012). Demergers are important in the renewal of organisation strategic direction. Research has proved that most mergers end up in a demerger. The new entities will be able to focus more on their independence growth paths (Panda & Rao, 2012). This will make the noncore assets not to compete with the core assets. Through demerger, it is clear that the shareholders will have a chance to determine their exposure to the core or noncore assets. The shareholders will also become more market aware. For South32, they will start having a positive cash flow on the noncore assets (BHP Billiton, 2014). This will enable them to expand in a manner that would not have been possible under BHP Billiton. The main drawback is the fact that the company is bound to lose part of its diversification. BHP Billiton has their major strength in diversification of assets which gives the company a competitive advantage. Demergers come with an initial cost to the organisation (Panda & Rao, 2012). This will impact the firm revenues as they implement demerger. Despite this, it is important to note that the benefits of demerger outweigh the disadvantages. The investors will be the main beneficiaries of demerger. Conclusion and recommendations Being a diversified natural resources company, BHP Billiton has been able to enjoy success in the market through well drafted and implemented the strategy. The company strategy must regularly be reviewed based on the changing environment. This will ensure that the company can maintain their position in the market. In order to focus more on their core assets, the company must carry out demerger. This will enable it to concentrate their efforts on key assets that will create value for the shareholders. Operating on noncore resources will undermine the business performance in the long run. The company must increase their investment in the core assets as they implement the plan for demerger. Despite this, it’s important to note that the prices of core assets can decline hurting the business. This calls for the BHP Billiton to enhance their risk management strategies. The company must focus more on their core competencies which include human resource, diversification and corporate management. This will ensure that they have a sustainable competitive advantage. The compensation offered must reflect work done as well as quality. This will ensure that the company eliminates waste in their value chain. The organisation must enhance their focus on empowering the employees so that they can attain their goals. Though demerger is preferred for BHP Billiton, the spin-off must be noticed. The company that will be formed is more similar to Billiton before the merger. There is a need to carry out more analysis before effecting the actual demerger. References Armstrong, M., & Taylor, S. (2014). Armstrong's handbook of human resource management practice. Kogan Page Publishers. Barney, J.B. 2007, Gaining and sustaining competitive advantage, (3rd edition). Upper Saddle River, NJ: Pearson Education. 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 Cole, G.A. 2004, Management Theory and Practice, (Sixth Edition).Thomson Learning United Kingdom. Hill, C., Jones, G., & Schilling, M. 2014, Strategic Management: Theory: An Integrated Approach. Cengage Learning. 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. Read More