BHP Billiton and Strategic Choices - Case Study Example

Name: Course: Professor: Date: Introduction This paper discusses the evaluation and business strategies adopted by BHP Billiton in order to maintain a steady strategic growth in a competitive market environment. The report aims at assisting in creating the understanding and importance of Mergers, Acquisitions as well as Joint Ventures as critical tools to achieve competitive position. It will also analyze and explain key threats to the company as well as the emerging markets (Barnes et al, 2012). The report concludes by explaining the strategies that BHP Billiton implemented in order to ensure steady growth. Finally, the recommendations are drawn from the analysis and the inferences made regarding the various types of strategies adopted by the company. External Analysis (Identification and analysis of main issues in general, industry and competitor) The aim of exterior analysis is to evaluate the various variables from the external surroundings, competitive forces and industry. BHP Billiton’s context of external environment is better understood by reviewing the effects of environmental and key drivers for change (Bastida et al, 2005). The significance and meaning of external analysis impact directly on the strategic choices of BHP Billiton. It is important to assess the market so as to obtain a multiple scenarios to be expected in the future, hence facilitating timely adjustments to the proposed strategy. Porter’s five forces analysis The deliberate view of the BHP Billiton concerning its external environment due to global competition is best analyzed by the review of its porter five forces. This gives an opportunity to evaluate the sources of the company’s strengths and weakness that may enable the company to achieve its goals and objectives (Du Plessis et al, 2005). Bargaining power of buyer Research indicates that the bargaining power of the buyers is moderate to low. The main products that BHP Billiton markets globally enable it to increase the shipping prices or reduce labor and production cost at any time (Correia, 2007). This is because of the higher demand of the natural resources that include coal, diamonds, metals, petroleum and uranium and the low global supply of these products (Geological Survey, 2011). Bargaining power of suppliers The overall costs of BHP Billiton from suppliers have increased due to due to increase in the firm activity with an aim of reducing the capacity (Mackenzie et al, 2013). There are only few substitutes of the materials supplied by this company and hence high bargaining power of supplies (Du Plessis et al, 2005). There is little pressure from the competition from other companies in that mining demands high cost of exploration. Threat of new entrants This is temperate to small. There is little supply of natural resources to the markets globally including oil. It is such factors that led to significant barrier to new entry. Though there are some Chinese companies that have formed joint ventures with western Australian firms, the impact will be felt in the long term (Thompson & Macklin, 2010). Introduction of new companies to the market will take time in that mining requires a lot of resources and employees that is difficult to be brought up by small companies compared to BHP Billiton assets (Tatnall, 2007). Threat of substitutes There are no substitutes of raw materials hence, the threat is low. BHP Billiton is one of the largest companies in the world with a wider variety of natural resources and assets. Its long time stay in the market has enabled it to counter any threat of substitutes because of its portfolio and reserves (Mirza, 2012). Rivalry among competing sellers The rivalry among competing sellers is strong. There is global competition by the mining and oil industries to access natural resources (Tatnall, 2004). There is a geographic overlap in most parts of the world in terms of mining operations. The experienced mining staff is few and hence, there is global competition. The labor wages have been affected by continuous increase of staffing costs (Kelton, 2008). Commodities Market Macro Trends BHP Billiton has been a beneficiary strong external demand for commodities. The external environment of the company is characterized by overriding qualities of strong growth and demand for commodities across the globe. The coal, petroleum, oil, iron and other metals like aluminum are found in only some parts of the continents and hence, there is high demand globally (United States, & Geological Survey U.S. 2014). Industrialization and computerization has led to high demand of metals and petroleum due to manufacture of aero planes, vehicles and all other kinds of machines. The high growth of population globally is also demanding more use of these materials produced by BHP Billiton. Internal environment (identification of key issues- apply strategic management theory and issues) The main strategic management theory applicable to BHP Billiton is the dependency theory whereby the developing countries attempting to counter the inequalities in trade by adopting import substitution industrialization policies (Hunter, 2007). This strategy uses tariff barriers and government subsidies to companies in order to build domestic industry. This theory views industrialization as the precondition of economic and social progress. This theory is therefore applicable to BHP Billiton in that the economic, political and social factors have a lot of effects on this mining company (Hunter, 2007). SWOT Analysis Strengths BHP Billiton is one of the largest mining companies in the world. It is the largest supplier of uranium, silver and lead. BHP Billiton is also the third largest producer of nickel globally. It is through the sell of these products that BHP has made a lot of profits in the past four years (Hunter, 2007). The return of capital to investors has been perfect over the past four years. BHP has also increased dividends over the past ten years. Weaknesses BHP Billiton has been operating with a lot of human resource issues that include hiring of trained mining officials and selection of new CEO. The operations have been hurt in the field due to lack of enough qualified personnel (Murray et al, 2006). The company has not adopted the current corporate response unlike their competitors thus making their marketing weak. Opportunities There is a strong commodities market still having few producers and hence BHP can still expand. Marketing of natural resources to the customers is still none competitive in various parts of the world (Murray et al, 2006). The operations of the company are strengthened by expansion of the mining brands into creating customer awareness. Threats The current stage of BHP’s growth and development has been threatened by the rising costs from the suppliers for example from shipping and energy cost (Bastida et al, 2005). Politics in various markets like Africa has also affected profitability. There are unfavorable rules from the government in the home markets of Australia. Explanation and review of the strategies implemented by BHP Billiton which have led to the company remarkable growth and its current level of performance The first strategy that was implemented by BHP that has resulted in the company’s remarkable growth is the cost containment. One of the major weaknesses of BHP Billiton in the past few decades was the high cost of production due to many labors. The cost of production has been reduced through automation in most of the factories (Geological Survey, 2011). Use of machines for production has enabled BHP to minimize the cost in that the number of laborers has been reduced through the use of machines. The cost of production has reduced and in the same time the quality of production and consistency has risen in that machines are more accurate and consistent (Barnes et al, 2012). The improvement of product quality through automation has enabled BHP to attract more investors and customers. The profitability has also increased due to implementation of this strategy. The other strategy implemented by BHP Billiton that has enhanced growth is effective corporate leadership. Management is very essential in every company. The quality of production and recruitment of well trained staff has enabled BHP has improved the efficiency thus solidifying the company’s position (Hunter, 2007). The source of supply has also increased due to implementation of this strategy in great development project portfolio. It is through the implementation of this strategy that BHP Billiton has been able to keep the environment (Good, 2003). This was the greatest challenge in the past in that it BHP was viewed as the greatest enemy of the environment. Good leadership has led to proper management and hence, the stakeholders have been able to curb the environmental pollution. Formation of the joint ventures with other energy companies as a strategy has enabled BHP Billiton to share the cost of development as well as profit upside. Its strategy to merger with Energy Company has enabled it to lock in profits a higher valuation. Merging has also enabled the company to specialize on iron ore, copper, coal, petroleum and potash basins. This has led to reduction in costs and positive increase in productivity (Barnes et al, 2012). This strategy has hence, led to generation of higher margins, stronger growth in free cash flow and a greater return on invested capital. The merger was indeed a success to BHP uplifting the company from a market capitalization of $38 billion in 2010 to $ 52 billion in 2014. This has enabled the company to beat its competitors through capitalization of improvement of the industry expansion due to high profitability margin. Formation of a wide corporation of minerals globally through merging, BHP now has a global distribution network than any other mineral company (Murray et al, 2006). This is a clear indication that merging as a strategy has boosted BHP’s productivity through diversification of the products they sell. Assessment of BHP Billiton’s decision to split the company into two The decision made by BHP Billiton in the year 2014 to split the company into two was very essential to the company. This is because the group’s effective tax was reduced at the rate of 31.5 percent thus resulting in increase of the profit margin to the share holders (United States, & Geological Survey U.S. 2014). The total return to the shareholder was also increased in the year 2014 after the company was split into two and it grew by 13 percent as a result of increase in BHP Billiton share price and dividends paid. Splitting the company into two has also led to diversification of risks in the market. If one company fails the other merger is still going to be prolific thus posting the shareholders confidence. This has led to entrance of new shareholders and those who were already in have doubled their shares. Splitting has also led to opening of new branches in other continents that had few branches especially in Africa and Asia (Vulkan et al, 2013). The exploration and evaluation expenditure policy was changed after the splitting to ensure that all acquisitions of exploration leases are classified as intangible exploration assets depending with the nature of the assets acquired. This has enabled BHP Billiton to monitor the financial performance of their overall strategy (Thompson & Macklin, 2010). The profit margin to the shareholders the mergers at large has increased as compared to the previous years before merging because market, commodity and currency risks have been reduced. As a result of the merger, the company has managed to beat out its competitors through capitalization of the shift toward a new stage of the industry market competition. Merging has enabled the company to develop the worldwide distribution network and the foreign market exchange is no longer an issue to the company (Vulkan et al, 2013). Conclusion, recommendation and implications In conclusion, BHP Billiton has an opportunity to fine tune the company operations over the next few years. The company is not facing stiff competition in the market though unlike other businesses in that new entrance is very difficult. However, environment and political issues has affected the activities of BHP Billiton globally. BHP Billiton has improved the welfare of its workers and the social economy of the people globally. Recommendations BHP must make cost structure an area of competitive advantage in order to contain the cost of production. A better staff recruitment program must also be adopted by the human resource in that mining requires expertise. The training program of the staff must also involve the governments. They must also set up firm wide total quality management program and integrate with suppliers.BHP must also enter new communication strategies and adverts like social media. Implementation BHP needs to make significant changes in how the company is structured in order to implement the list of strategic programs. There must be a full commitment from the board of directors from top to down to the CEO’s and then the managers. References Barnes, T. J., Peck, J., & Sheppard, E. (2012). 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More than an ally?": contemporary Australia-US relations. Aldershot, Hampshire, England, Ashgate. Mackenzie, B., Coetsee, D., Njikizana, T., Selbst, E., Chamboko, R., Colyvas, B., & Hanekom, B. (2013). Wiley IFRS 2013: interpretation and application of international financial reporting standards. http://search.ebscohost.com/login.aspx?direct=true&scope=site&db=nlebk&db=nlabk&A N=518 372. Mirza, A. A. (2012). Wiley international financial reporting trends. Hoboken, NJ, Wiley. Murray, P., Murray, P., Poole, D., & Jones, G. (2006). Contemporary issues in management and organisational behaviour. South Melbourne, Vic, Thomson Learning. Ramamurti, R., & Singh, J. V. (2009). Emerging multinationals in emerging markets. Cambridge, UK, Cambridge University Press. Tatnall, A. (2007). Encyclopedia of portal technologies and applications. Hershey, PA, Information Science Reference. http://www.books24x7.com/marc.asp?bookid=20782. Thompson, P. A., & Macklin, R. (2010). The big fella: the rise and rise of BHP Billiton. North Sydney, N.S.W., Random House Australia. United States, & Geological Survey (U.S.). (2014). Minerals Yearbook Asia and the Pacific. Volume III, Volume III. Washington [D.C.], U.S. Dept. of the Interior; U.S. Geological Survey. Vulkan, N., Roth, A. E., & Neeman, Z. (2013). The handbook of market design Read More