Strategic Planning And Management - the Ore Wars - Assignment Example

Running head: ORE WARS CASE STUDY Strаtеgiс Planning and Mаnаgеmеnt – The Ore Wars Case Study Q1. Is the iron ore industry attractive to investors? According to Porter (1979, p.137; 2008, para. 3), the five forces that affect the attractiveness of an industry include the rivalry that exists between players in the same industry; the threat of products which customers can use as substitutes to the product that a firm produces; the power that buyers have; the power that suppliers have; and the threat posed by potential entrants to the market. In the case study, industry rivalry does not seem to be high as the major iron ore producers seem to be Rio Tinto and BHP Billiton. However, there are other emerging second-tier and potential producers of iron ore. Still, the different players do not seem to have major market wars, thus indicating that new entrants would not face too much opposition. In relation to the threat of substitute products, the case indicates that recycled steel could become more preferred in future. However, one gets the impression that China is still a huge consumer of iron ore, and as such, the demand for the product may go on unabated in future. This could be interpreted to imply that the market is attractive in this aspect. The bargaining power that buyers wield appears substantial in the iron ore industry going by the joint venture investments that Chinese steel millers have made with some iron ore producers. Additionally, the buyers’ preference for contract ore purchases as opposed to spot market prices as indicated in the case study by Rice (n.d., p.4) is another indication that buyers have substantial bargaining powers. Arguably, this makes the industry unattractive to new investors because they may not have the liberty to set market prices for their products. According to Rice (n.d., p.6), some of the major suppliers to the iron ore industry are makers of monster trucks used for transporting the ore from the mines to the ports. Since the suppliers (e.g. Komatsu and Caterpillar) are few, their bargaining powers are arguably high, thus making their supplies costly to investors. This makes the industry arguably unattractive. Finally, the threat of new entrants is arguably low judging by the capital intensive investments that new entrants have to make especially in transport logistics. This may be a good thing for investors on one hand (i.e. because the industry is not flooded with too many players), and a bad thing on the other (i.e. because investors would have to invest too much money in entering the new market). Q2. Strategic groups evident in the case study and their characteristics Hunt (1972, cited by Reger & Ruff, 1993, p. 103) describes strategic groups as consisting of firms who have similar business strategies. The symmetry of operations in different firms and the characteristics of each group are used to gauge if an industry has strategic groups. The following strategic groups are evident: Large iron ore producers: This group consists of Rio Tinto and BHP Billiton. Being the large producers, they have similar interests in getting the best prices for their products. In the case study, it is indicated that the two companies have engaged in similar vertical integration strategies. They also share similar interests in the market as indicated in the two being part of globalORE™, which according to Rice (n.d, p. 5), is a trading platform which upholds specific quality benchmarks and market regulations. Emerging mining companies: This strategic group includes the like of Western Desert Resources and Fortescue Resources. Although they are not as big producers as Rio Tinto and BHP Billiton, these iron ore mining companies are similar in their dedication to make it in the mining industry regardless of the challenges. For example, both companies have had to invest in building road and rail infrastructure that has been necessitated by the need to transport their iron ore to ports, from where it can be shipped to the markets abroad. Prospective iron ore producing companies: This strategic group is made up of firms which have mines from they are yet to start producing iron ore. Such include Grange Resources and Western Desert Resources. Though not expressly stated in the case study, one would argue that these firms have similar strategies, which are meant to ensure that they start iron ore production and export. Since their production volumes are low compared to the major producers, both firms would be concerned about competing in the market, and would hence be keen to develop strategies that enhance their competitiveness. Vertically integrated companies: This is a diverse subgroup, because as indicated in the case study, firms pursue different strategies. BHP Billiton and Rio Tinto for example have pursued partnerships with steel makers in China. On its part, Grange Resources pelletises its ore as a vertical integration strategy, while Arrium has opted to invest in steel milling. Although their strategies are different, the common theme among these iron ore producers is their pursuit for value addition in a manner that will improve their respective competitive strategies. Q3. Dynamic capabilities evident in the iron ore firms Dynamic capabilities are defined as the “ability to achieve new forms of competitive advantage” by integrating, developing and reconfiguring a firm’s capacity to change with the shifts that always occur in the business environment (Teece, Pisano & Shuen, 1997, p. 515-16). Winter (2003, p. 992) argues that capabilities must possess the ability to provide new competencies to a firm in response to the changes that occur in the business environment, if they are to be considered dynamic. It is worth noting that different firms have varying dynamic capabilities that uniquely work to improve their respective competitive positions in the industry. From the case study, the following dynamic capabilities can be seen. Steel production by Arrium: This company has dared to do what other firms have feared to do, or deliberately avoided due to the costs involved. Despite its unique venture, Arrium is the only Australian firm which is vertically integrated in its operations. Arguably, Arrium’s decision to become vertically integrated could have been a response to the demand for steel, because after all, even iron ore buyers finally end up milling steel from the ore. Pelletising ore by Grange Resources: In the case study, it is quite evident that iron ores with low iron (Fe) content are not in high demand compared to their better quality alternatives. This demand is perhaps what has pushed Grange Resources to adopt value addition, which ideally attracts better earnings compared to the iron ores that are exported without any value addition. Long-term purchase agreements that involve debt and equity investments by buyers: An assured market is one critical aspect that guarantees firms of their longevity in the market. Sharing of risks (e.g. through joint ventures) is another way that firms can protect themselves from too much risk exposure. The case study gives the example of Noble Resources – a firm that has entered into an agreement with Western Desert Resources, which will buy iron ore from it. This unique arrangement is a pointer to dynamic capabilities both for Noble Resources, which will access markets through a proxy, and for Western Desert Resources, which will have more iron ore for sale in its target markets without engaging into too much mining activities (except in its own mines). The infrastructural advantage that Rio Tinto has over its major competitor BHP Billiton and other iron ore producers is a dynamic capability, which is evidently working to enhance the company’s competitive advantage. Q4. Does Rio Tinto have core rigidities? Leonard-Barton (1992, p.118) argues that core rigidities often result from traditional sources of core capabilities. In other words, there is a flip side to a firm’s core capabilities, which may become dysfunctional and if not well taken care of, can hamper the operations of the firm. A core rigidity could be anything that hinders Rio Tinto from embracing change that could benefit it. As a result of such a rigidity, the company tends to delve too much into one function of its operations, which though necessary, needs to be complemented by other equally important operations. Examples of Rio Tinto’s core rigidities are outlined below. Infrastructure that connects the Pilbara mines to the Port: Notably, the company has two ports conveniently located near its Pilbara mines. Over the years, the infrastructure has been a source of competitive advantage for Rio Tinto because compared to BHP Billiton, whose ports are 250 kilometres away from the mine, Rio Tinto incurs less transport-related logistical costs. As the study notes however, recent mining projects are being connected to the same ports, regardless of the distance. The cost of constructing the new infrastructure is relatively high, but since Rio is fixated with using its existing ports, the firm is arguably unable to consider other options or ports that may end up being cheaper in the long-run. The two ports are not of so much strategic advantage as they were when they were first constructed, hence the argument that they form a core rigidity for the firm. The mine in Guinea, West Africa: Going by the textbook’s definition of core rigidities as capabilities that become frozen, it is notable that the mine in Guinea could qualify to be ranked as a core rigidity. Specifically, while the mine must have been acquired through Rio Tinto investing some money in Guinea, the mine is yet to give any returns to the investor. Some of the possible reasons why the company seems reluctant to invest in its African mine could be that the Pilbara mines still appear promising and able to sustain its production targets. If that was the case, the Pilbara mine would act as a hindrance to beneficial change, thus becoming a core rigidity. Over reliance on direct shipping ore (DSO): It is evident that Rio Tinto has not engaged in any sort of value addition, despite some of its minor competitors engaging in the same. If the business models of the minor mining companies are sustainable, one can argue that there are indeed profits to be earned in value addition. References Leonard-Barton, D. (1992). Core capabilities and core rigidities: A paradox in managing new development. Strategic Management Journal, 13(1), 111-125. Porter, M. E. (1979). How competitive forces shape strategy. Harvard Business Review, 57(2), 137-145. Porter, M.E. (2008). The five competitive forces that shape strategy. Harvard Business Review, January issue. Retrieved from https://hbr.org/2008/01/the-five-competitive-forces-that-shape-strategy Reger, R. K., & Huff, A. S. (1993). Strategic groups: A cognitive perspective. Strategic Management Journal, 14(2), 103-123. Rice, J. (n.d). The ore wars – the Australian iron ore industry. Case Study, 1-16. Teece, D., Pisano,G., & Shuen, A. (1997). Dynamic capabilities and strategic management. Strategic Management Journal, 18(7), 509-533. Winter, S. G. (2003). Understanding dynamic capabilities. Strategic Management Journal, 24, 991-995. Read More