BHP Billiton Strategic Analysis - Case Study Example

BHP Billiton Strategic Analysis Student’s Name Institutional Affiliation Professor’s Name Course Title Date Introduction In today’s highly competitive business world, organizations strive to build sustainable competitive advantages. The business world is highly unpredictable and, therefore, multinational firms, including BHP Billiton, are building lasting and sustainable competitive advantages in order to remain ahead of the competition (Zhou & Wu, 2010). BHP Billiton is an Australian metals, mining and petroleum company, which was formed in 2001 through the merger of its parent companies; Broken Hill Proprietary Company Limited (BHP) and Billiton plc (BHP Billiton, 2014). Mergers and acquisitions and corporate restructuring have become a large part of BHP Billiton. Every now and then, the company is arranging mergers and acquisitions, which are meant to bring together different companies with an aim of forming a larger entity. The essence of coming together for such companies is to try and dominate the market. Although some of these deals have ended up being successful, there are some mergers that do not work, and in most cases the company has faced numerous challenges, including higher costs.The purpose of this paper is to analyze BHP Billiton’s key resources, capabilities, and core competencies. The paper begins by analyzing the company’s external environment using the Porter’s Five Forces. The paper then proceeds to analyze the company’s internal environment. In addition, the paper discusses the strategies implemented by the organization which have led BHP Billiton to achieve growth. Finally, the paper will look at the implications of the recent decision by the management to split the company as well as possible changes that should be made in order to ensure the company’s continued profitability. External Analysis According to Porter, there are five competitive forces that can shape attractiveness of the industrial metals and minerals industry, including conflicting firms, threat of product substitutes, new market entrants, and the ability of buyers and suppliers to exercise their bargaining power in the market (Porter & Kramer, 2002). Figure 1. Porter’s Five Forces Source: 12manage.com Competitive Rivalry With each passing day, several new entrants join the metals and minerals industry due to the ever-increasing attractiveness of the industry. Currently, there are more than 20 firms, which compete for market share with BHP Billiton (Xie, 2012). The organization faces competition from multinationals, including Newmont Mining, Xstrata and ThyssenKrupp. Stiff competition in the metals and mining industry leads to loss of market share and puts pressure on BHP Billiton’s profit margins (Xie, 2012). The competitors have continuously launched new strategies with a view of gaining a larger market share and generating more sales. Therefore, BHP Billiton is forced to employ various differential advantage mechanisms in order to survive in the highly competitive metals and minerals industry. Among the differential advantage mechanisms that BHP Billiton employs include innovation and brand positioning. Based on the above, the level of competitive rivalry in the metals and minerals industry is high (Rodrigo, 2013). Threat of Product Substitutes The threat of substitutes in this industry is considerably low as there are no prefect substitutes for metals (Xie, 2012). New Market Entrants It requires too much capital to build up a new profitable company to compete with BHP Billiton. It also requires massive capital to market such a new company to the extent that it effectively competes with well-established BHP Billiton products (Xie, 2012). However, a new company may compete with BHP Billiton if it offers products that meet the diverse needs of clients. This, therefore, implies that the threat of new entry in the metals and minerals industry is moderate. Bargaining Power of Buyers in the Market The bargaining power of buyers in the industrial metals and minerals industry is high. With globalization and technological advancements, information is readily available to the clients, thereby making them more powerful in the end (Hanson, Hitt, Ireland, & Hoskisson, 2011). Thus, consumers can easily control pricing if they believe that prices of BHP Billiton products are too high. Bargaining Power of Suppliers in the Market The bargaining power of suppliers refers to the ability of suppliers of inputs, including raw materials, services (such as expertise), labour, and components, to refuse to work with a company for one reason or another (Porter & Kramer, 2002). The bargaining power of suppliers in the industrial metals and minerals industry is moderate. BHP Billiton strives to provide a flexible working schedule and various benefits to suppliers of raw materials in order to attract and retain them. Suppliers of raw materials have achieved success mainly due to the dominance of BHP Billiton. Thus, they want to associate themselves with this company. The dominance of BHP Billiton is high in the market and, therefore, the bargaining power of suppliers will remain moderate (Xie, 2012). The Internal Environment Analysis: Key Resources, Capabilities, and Core Competencies of BHP Billiton Core competencies are capabilities that enable an organization to perform exceedingly well as compared to its rivals (Phillips & Gully, 2011). The following are the core competencies of BHP Billiton: informal organizational structure, good management, tangible and intangible resources, robustness, human resources, and technology. BHP Billiton has overwhelmingly institutionalized the culture of innovation, and this provides the company with a competitive edge over its rivals. Competition in the metals and minerals industry is intense, and therefore, firms use innovation in order to differentiate their products from those of competitors. These companies also use marketing strategies, including positioning and branding for creating a niche in the market. BHP Billiton is striving to provide customer responsive services through innovation (Gordon, 2007). The organizational structure of BHP Billiton is highly informal. Thus, the organization encourages creativity and innovation. The past research shows that organizations that adopt formal structures do not foster innovation and creativity (Daft, 2007). At BHP Billiton, employees are encouraged to take risks when trying out new ideas. The senior leadership team at BHP Billiton ensures that the organization remains productive and innovative by having unique senior positions that other companies in the metals and mining industry do not have. Recently, the organization has received a lot of attention and acclaim due to its unique organizational culture, which aims to encourage productivity and creativity (BHP Billiton, 2015). BHP Billiton understands that employee satisfaction is the key to increased productivity and innovativeness. In this regard, the company treats employees in special ways that have mostly been referred to as unconventional (Philips & Gully, 2012). According to BHP Billiton (2015), the company hires talented, knowledgeable, and skilled persons. In addition, the company provides its human resources with better terms of service and this encourages them to perform better. BHP Billiton has a broad set of tangible and intangible assets. According to BHP Billiton (2014), the company carried goodwill of $5.44 billion as well as other intangibles on its balance sheet in the last quarter of 2014. The company’s Return on Assets for the same period was 0.00%. In addition, the company’s tangible book value was $27.56 (BHP Billiton, 2014). Therefore, the company is in a good shape as far as the tangible book value and intangible assets ratios are concerned (Pittampalli & Lenney, 2015). Both tangible and intangible resources provide BHP Billiton with sustainable competitive advantages (Morning Star, 2015). Since its inception, BHP Billiton has been committed to Corporate Social Responsibility (CSR) initiatives. Over the years, BHP Billiton has strived to improve economic systems in many countries across the globe. Some of the philanthropic initiatives that the company is committed to include youth empowerment, challenges of greenhouse emissions, and education (Rankin, Windsor, & Wahyuni, 2011). In addition, the company recognizes that every country has a unique set of rules and regulations (BHP Billiton, 2015). The CSR initiatives and adaptability to rules provide BHP Billiton with a competitive advantage over its rivals in the metals and minerals industry (Hanson, Hitt, Ireland, & Hoskisson, 2011). An Analysis of Strategies That the Organization Has Used To Achieve Remarkable Growth Business Level Strategies The first business level strategy that BHP Billiton adopts is offering quality products that capture the hearts and wallets of clients throughout the world. In 2006, BHP Billiton announced a $6.2 billion profit. This was a 41% increase from the previous year (Morning Star, 2015). In 2014, the company recorded a $13.8 billion profit, which was an increase from the previous year’s result where the company made a profit of $10.8 billion (BHP Billiton, 2014). This is an indicator of continued growth over the years. The large increase in profits from 2006 to 2014 can be attributed to delivering high-quality products to the customers. The second business level strategy adopted by BHP Billiton is the cost leadership strategy. Over the years, BHP Billiton has come up with the strategy of cutting costs further than the already implemented strategy of downsizing and outsourcing. The adopted strategy has played a key role of reducing operation costs (BHP Billiton, 2014). In addition, BHP Billiton strives to maintain a competitive pricing policy by keeping its prices slightly below that of rival firms, without compromising the quality of their products. The company at all times try and keep with the economic trends of the day. This ensures that the consumers, who are the main drivers of the business, are not exploited by any means (BHP Billiton, 2014). Corporate Level Strategies The first corporate strategy that BHP Billiton adopts is diversification of risks. Over the years, BHP Billiton has managed to keep a diverse portfolio of products and markets. The company extracts about a combined total of over ten minerals and other natural resources extracted from over twenty countries. While its biggest market is China, the company supplies raw material to other markets, especially in North America, Japan, Europe and India (BHP Billiton, 2014). International Level Strategies On the international front, BHP Billiton has set up more permanent mergers. According to Xie (2012) BHP Billiton is one of the largest organizations, having undergone transformational mergers, which have aided it in the improvement of its position in the highly competitive mining and petroleum industry. In 2001, two companies (BHP Limited (BHP) and Billiton Plc (Billiton), merged and formed the largest company called BHP Billiton. In that arrangement, the companies combined their assets and are run by a single unified board of directors, but operate as separate, publicly traded entities. The merger was aimed at reducing the economies of scale and increasing pre-tax savings by as much as $270 million by 2013 (BHP Billiton, 2014). Under this arrangement, the company has increased its profitability from $6.3 billion in 2005-2006, to $13.8 billion in 2014-2015. In addition to the merger, the company has previously expanded through acquisition. For example, in 2005, BHP Billiton acquired WMC Resources, an Australian mining company (Mining Journal, 2005; Raghavan et al., 2001). The merger between BHP Limited (BHP) and Billiton Plc (Billiton) has been perceived as the largest merge in the history of the mining and petroleum industry. One of the strategies that contributed to the merger of these two corporations was the need to be more efficient. Prior to the merger, BHP Ltd had been extremely efficient and effective in reducing wastes and streamlining its operations. In addition, BHP Ltd enjoyed economies of scale compared to other competitors in the industry. Billiton Plc, being one of the main rivals in the industry, was perceived as the ideal company to merge with in order to form a formidable company that would enjoy more scale economies (BHP Billiton, 2011). Therefore, when the two merged and formed one entity, they not only made history by being the most expensive mergers to take place, but also continuously dominated the mining and petroleum industry since they came together. The two companies complemented each other, what is the reason why they have remained together up to date. An Assessment of BHP Billiton’s 2014 Decision to Split the Company into Two In August 2014, the company announced a demerger plan which aims to form a separate metals and mining company that will deal with the Manganese, Silver, Nickel, and Aluminum assets (Hoyle & Flynn, 2014). This is expected to unlock a shareholder value by simplifying the company. In the new structure, BHP Billiton will concentrate on copper, coal, iron ore, petroleum, and potash. This is expected to reduce the company’s costs and increase its productivity. This decision has been attributed to the reduced profitability of these assets, which were mostly contributed by Billiton. At the time of the merger, they contributed about 30% to the groups earning, a figure that is believed to have fallen to 10% (Wilson, 2014). The retirement of David Crawford, a long serving member of its board of directors, is a case of mixed fortune. While he is expected to become chairman of the new company on retirement, the company might find filling the void left by him in the board of directors’ difficult (Mining Journal, 2005). Conclusions and Recommendations From the above analysis, it is clear that BHP Billiton is a global leader in the industrial metals and mining industry. Through innovation, BHP Billiton has been able to eliminate redundancies, inefficient processes, and service delays for the sake of fast response times. It is with this background that many companies have struggled to measure up to core competencies of BHP Billiton as its products have been associated with quality and value for money for a long time. However, BHP Billiton’s strategies can be imitated and, therefore, they will may not remain unique for a long period. For instance, competitors in the metals and mining industry are increasingly making new innovations and managing their costs down in order to increase their share of the market. Thus, BHP Billiton should continue using its resource capabilities to develop unique products that meet the diverse needs of its clients. In addition, BHP Billiton should concentrate on competitors’ actions and responses with a view of protecting, maintaining, and extending its competitive advantages (Hitt, Ireland & Hoskisson, 2014). Despite the various benefits associated with mergers and acquisitions, research has shown that the company may end up incurring costs and being negatively impacted by the acquisition opposite to what is anticipated, if the various risks associated with the acquisition are not evaluated and solutions found prior to the commencement of the acquisition process. Before BHP Billiton decides to merge or acquire another company, there should be a thorough understanding of what to expect in case the deal goes through (Hambrick & Fredrickson, 2005). Reference List BHP Billiton, 2011. BHP Billiton Annual Report 2012. [Online]. 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Strategic Management Journal, 31(9), pp. 547-561. Read More