BHP Billiton - External and Internal Environment, and Organizational Strategies - Case Study Example

Case Study Analysis: BHP Billiton Name: Tutor: Course: Date: Introduction The aim of this essay was to analyze the macro and micro-environment, and other strategic issues that affect the performance of BHP Billiton. In the external environment, PESTEL analysis considered are tax policy, inflation, demographic factors, emissions and pollution, and mining technology. Regarding internal environment, SWOT analysis assessed factors such as finance, approach to unions or labor agreements, high demand for energy, and reduction in Chinese demand for precious metals. Possible strategies were evaluated based on corporate, business and functional level decision implementation. The essay also assessed the effect of strategic decisions and recommendations to the organization. External environment External environmental factors affect the general performance and behavior of the firm since it relates to the industry and competitors. Voiculet, et al. (2010) observes that the actions of external environmental factors are direct or indirect, such as actions of competitors or changes in business climate respectively. The authors further assert that the meso and macro-environment sense the threats and opportunities existing as well as other potential success factors. PESTEL analysis is one of the most appropriate techniques to determine the external environment of an organization. In the case of BHP Billiton, tax policy is a legal and political aspect that affects the performance of the company. In 2014, the Australian government repealed carbon tax while in South Africa legislations are underway to introduce a carbon tax. Chilean parliament is also discussing the carbon pricing as part of a tax reform package. However, the company got a reprieve when its effective tax rate decreases from 35 percent to 31 percent hence increasing its attributed profit by 23 percent (BHP Billiton Strategic Report, 2014). Changes in tax policies may create trade-offs between efficiency and equity, but the ideal sense it to allocate resources across the sectors for a higher value economic use (Gale & Samwick, 2014). Regarding inflation, BHP Billiton experienced an overall reduction in Earnings before Tax (EBIT) by about $805 million in 2014. This accounted for more than 85 percent of total variance in South Africa, Chile, and Australia. Ashraf, et al. (2013, p. 16) notes that inflations worsen macroeconomic performance in a decentralized market economy by disrupting mechanisms of exchange. This view is also shared by Wijisekera (2012) who observed that high inflation undermines business confidence as it makes it difficult for organizations to calculate prices accurately and predict returns from investment. BHP Billiton will likely suffer from increasing levels of inflation in the medium term. Demographic trends in the current world show are increasing population especially in the emerging economies at 1.7 billion in the next 20 years (BHP Billiton Strategic Report, 2014). Demand for energy will increase, and that will be an advantage to copper sales. According to World Watch Institute (2015), a growing share of global consumers are in emerging economies with China and India constituting more than 362 million people, 20 percent of the global total. This implies that the future of BHP Billiton is great given the increasing potential to expand ranks of consumers who demand new connections to electricity. Emissions and pollution have a huge impact on climate change. BHP Billiton has invested heavily in technologies that have seen 1.7 million tons reduction in greenhouse gas emissions (BHP Billiton Strategic Report, 2014). According to Econation (2015), resources, materials and energy in use have indirect and direct impacts on the environment. Therefore, the responsibility for the direct and negative environmental effects of mining and extraction activities around the world belongs to BHP Billiton. Finally, concerning technology, BHP Billiton is keen on reducing emissions from fossil fuels through material investments in low-emissions adaptive technology. To support its business activities, the company has also invested in global information technology (IT) systems consisting of communications networks, applications and infrastructure (BHP Billiton Strategic Report, 2014). In strategic management theory, Blalock and Gertler (2009) assert that firms with small ‘technology gaps’ are close to the international best practice frontier, and more benefits compared to firms with significant gaps. In the current competitive environment, firms need leading-edge technologies to support and guide their decisions. By using the latest technology in its operational activities and knowledge management, the company gains sustained comparative advantage and distinctive capabilities over its competitors. Internal environment The internal environment of an organization constitutes elements within the organization that affect the management and organization as a whole. These include corporate culture that defines employee behavior, management changes, physical resources, technology, monetary resources and current employees. Duncan, et al. (1998) suggests that strategic decision makers require a systematic tool and technique to scan the internal environment of the organization. Based on SWOT (Strengths, Weaknesses, Opportunities, and Threats) analysis, BHP Billiton internal environment can be established. The company in 2014 had a market capitalization of $179 billion, credit ‘A’ rating and revenues of $67.2 billion, an increase of two percent. Its net operating cash flow also increased by 26 percent to $25.4 billion, while the total dividend per share also increased by 4 percent to 121 US cents (BHP Billiton Strategic Report, 2014). This strength has continued to project the company as financially viable and attractive to investors and lenders. The weakness of the company is in the security of its processes (Mintzberg, et al. 2010). The company is facing various security breaches such as cyber-crime resulting in corruption or disclosure of information, and theft of information on major contracts, non-public investment market communications and those relating to acquisitions and divestments. Security breaches are also expected to result in disruption of operations and misappropriation of funds. In terms of opportunities, high demand for electricity and the robust demand for refined copper metal have made the market remain broadly balanced. The prices will also be supported by an increase in demand from non-OECD countries as opposed to demand from OECD countries. According to Bayar and Ozel (2014, p. 2), electricity consumption and economic growth in the world is expected to grow by 93 percent to 39 trillion kilowatt-hours by 2040. Significant economic growth rates have been experienced in the past decades from emerging economies. This implies that copper is targeted at countries that are beginning new electricity installations, hence an opportunity for BHP Billiton to drive its growth figures. However, a threat is lurking as labor agreements expire, Fair Work Act 2009 demands that the business bargain with unions for Australian-based operations. Addison (2014, p. 68) argues that trade unions can stimulate worker voice through favorable micro outcomes, but its monopoly power can lead to misallocation of resources. A study by Clark (1984) on unionization and firm performance using a simple theoretical framework found that productivity effects and union wage are not sufficient to predict the rate of return on capital. However, unionization has long-term implications for productivity and efficiency especially in firms with little market power (Pontusson, 2013). This implies that for BHP Billiton, costs and productivity will be affected adversely by labor disputes or claims. Organizational strategies Single-business companies are vulnerable to problems in their industry despite the advantage of focus and rapid response (Digman, 1997). The advantages of remaining active in only one industry must be demonstrated by their corporate strategy while evaluating business opportunities in areas with complementary activities. Optimizing company operations, growth, and profitability, must compare starting up or acquisition of complementary businesses to the return of a continuing investment in the single business (Porter, 1985). BHP Billiton is instead focusing on retrenchment strategies by reducing its share of capital and exploration expenditure to $15.2 billion, a 32 percent reduction. The result was sustainable shareholder value, improved capital efficiency and increased internal competition for capital. Another organizational framework was a demerger strategy that is associated with stability strategy in which the company split the company into two. The two are BHP Billiton plc (aluminium, nickel, manganese and silver assets) and BHP Billiton (copper, petroleum, iron ore, and potash) have specializations that will maximize shareholder value, reduce costs, improve profitability and have fewer assets. This was an attempt to create a leaner operating structure as outlined in the go-to-market strategy (Dyer, et al. 2004). BHP Billiton espoused this strategy in order to reorganize its sales force into specialized groups so functional areas of precious minerals and metals. In theory, diversification is about adding different products to its mix or moving into different markets (Chandra, 2003). Concentric diversification concerns markets or products related to existing product while conglomerate diversification relates to the expansion of products unrelated to the existing business of the firm. According to Modern Portfolio Theory (MPT), proportion of various assets is carefully chosen, for a given expected return, to equivalently minimize risk or maximize portfolio of an anticipated return (Elton & Gruber, 1997). This implies that with reduced risk, diversification allows for the same portfolio expected return. Investors can lower the risk of individual asset risk exposure if they hold a number of diversified assets portfolios. Based on this theory, BHP Billiton split up to maximize the profitability and minimize shareholder risk. Business strategies support corporate strategic initiatives through evaluation of actions of competitors and setting goals for performance (Chandra, 2003). To improve and maintain its competitive advantages, a company may adopt low-price leadership, differentiation or focus on promotion. BHP Billiton is more on cost leadership than differentiation. The company believes that by reducing annual expenditures, it can compete for capital and enhance its focus on high margin major basins and core commodities. This is also possible by having greater upstream focus and fewer assets. Regarding mergers and acquisitions, the company has made progress in the last three years by complementing the conventional oil and gas operations with the unconventional shale business. The development of onshore operations was a result of the acquisition of Petrohawk Energy Corporation and Chesapeake Energy Corporation, which was closed at $3.3 billion. As provided in the Reference Point Theory (RPT), mergers and acquisitions emphasize on synergies where the new corporate structure derives a variety of cost reductions (Baker, et al. 2009). Based on their relative bargaining powers, the value gain is divided between the shareholders of the two entities. Naughton (2009) argues that a reference point stock price targets the recent 52-week high price since no appropriate target price can be set with precision. Therefore, the intention of BHP Billiton to engage in international mergers and acquisitions is to increase the financial performance of the firm and take advantage of economies of scale available in the host nation. Strategic decisions for a split-up The company announced plans to split up the firm into two. This was a good move by BHP Billiton in order to benefit from diversified investment and dual listings on two stock exchanges. The possible explanation was to explore the various strategic capabilities; financial, human and physical that will enhance shareholders value. From the case, BHP Billiton has been split into BHP Billiton Limited and BHP Billiton plc (BHP Billiton Strategic Report, 2014). As obtained in the previous section, the strategic decision of splitting the company has implications for its investors, stocks, and overall performance. First, by having similar organizational and reporting structures, it will enhance shareholders value. Secondly, the two separate firms will handle unique classification of products that will have unique market niches. For example, BHP Billiton Limited will conduct its exploration and extraction activities while BHP Billiton plc will be enhancing the performance of its assets especially silver, nickel, manganese, coal and aluminum. Thirdly, management structures will be simplified since separate structures will have better performance and synergy. Conclusion The case analysis has found that BHP Billiton is making sound strategic decisions informed by knowledgeable management and good financial performance. The firm has considered a split up into two companies even after some acquisitions in the recent years. The external environment is unsteady with threats of employee disruptions in operations and galloping inflations likely to influence prices of metals, and precious minerals. However, the company is yet to benefit from increasing demand for electricity and copper from emerging economies. This opportunity is a greater indicator of better times ahead for the mining industry. The Global economy is also expected to increase with the creation of new employment opportunities owing to increased extraction, mining basins and split up of BHP Billiton. The case analysis recommends that BHP Billiton divests most of its oil, mining and gas assets. The company must invest in the security of its data and information technology systems in order to protect its image and intellectual properties. It can also consider possible mergers with Freeport-McMoRan Copper Ltd (FCX) which has existing interests in Democratic Republic of Congo and Brazil. The firm should also create a niche market for nickel, manganese and coal in the Chinese and Indian market. More funds should be injected in the extraction of copper that has a high demand. Finally, the company needs to consider compensating its staff based on productivity and introduce bonuses to be rewarded at the beginning of the year. 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