Strategic Analysis of the BHP Billiton Company - Case Study Example

Name Course Instructor Date Strategic analysis of the BHP Billiton Company Introduction This paper presents a strategic analysis of one of the leading mining companies in the world known as BHP Billiton. The strategic issues identified include the external environmental factors of the company which were listed as global economic growth, the issue of climate, and fluctuating commodity prices. The internal environment encompassed financial and human resources, ability to embrace high standards of ethics as well as the sound capital management. The paper also outlines the strategies that the company employs which include international strategy, customer focus, merger strategy and corporate strategy. Finally, the paper gives the rationale of the demerger proposal and its implications on the company. External environment General environment BHP Billiton Companies sees the worldwide economic growth as a very good opportunity for its success. According to Maibach et al., (2007), global economic growth has some spill over effects that may or may not auger well for the company. On the good side, global economic growth improves the purchasing power of people and the counties where they come from and this is obviously good news for BHP Billiton Company. However, when this form of growth causes increased environmental pollution, increased accidents and other predicaments, then it no longer turns out as beneficial to the company. The general environment is also composed of climate change. Hazards related to climatic change such as floods, ice, and drought have a direct effect on the natural environment and being a company that relies on natural resources as raw materials, its normal activities such as mineral excavation and transportation would be negatively affected. For instance, floods and ice roads likely cost the company extra transportation expenses which have a negative effect on its overall income (Pearce et al., 2011). Uncertainty of currency exchange rates is also known to be an externality that affects BHP Billiton Company. Based on a study conducted by Harchaoui et al., (2005) among manufacturing companies, on the effect of exchange rates on investment capability, the depreciation of exchange rates have a positive impact on the overall investment of a company especially when the volatility of the exchange rate is low. Another externality that affects BHP Billiton Company is the uncertainty of currency exchange rates. Based on a study conducted by Harchaoui et al., (2005) among manufacturing companies, on the effect of exchange rates on investment capability, the depreciation of exchange rates have a positive impact on the overall investment of a company especially when the volatility of the exchange rate is low. Industry environment Ideally, BHP Billiton has a low bargaining power of buyers. This is because of the increasing labour cost in the industry, increase in the cost of shipping products as well as the low supply due to increased demand for mineral products. On bargaining power of buyers, BHP Billiton Company still have an advantage because even if consumers decide to switch to other brands, it will still thrive since it has multiple brands that can fulfil different needs of consumers. On the other hand, suppliers at BHP Billiton have a stronger bargaining power which has actually been caused by inflation, rising cost of electricity among other factors. According to Bruyneel (2012), bigger companies like BHP Billiton have a high bargaining power from suppliers as compared to the smaller ones because they are able to combine various aspects of production with those of supply and meet the demands of both at the same time. BHP Billiton is also faced with the threat of new entrants. This threat is comes on the basis of entry barriers within the mineral products market. It is also true that the existing competitors already affect this company profitability and the situation could worsen upon entry of new competitors. The new entrants may take different forms and in most cases, they can reduce the influx of companies in the mining industry if profits from the cost of capital go beyond zero. On the contrary, new entrances may be prevented when it is not economically viable for them to stand in the position of their incumbent(Bruyneel,2012). Competitor environment Like any other company, BHP Billiton experiences a lot of competition from other mining companies across the world. These competitors have had a significant impact on how BHP Billiton conducts its business and the manner in which it targets the market. According to Herrmann (2010), competitors on same target market can be dealt with in two ways. A firm can decide to look for other markets that are not active competition or it can consider facing the competitor head on in that same market and this is what BHP Billiton is doing. It should be noted that the success or failure of competitors also determine the marketing strategy of this company. The competitors of BHP Billiton are both national and international in scope. Their competition involves prices, location their business, the sizes of stores, creativeness and innovation, use of technology and the general image of business. Top Billiton competitors are able to integrate various roles such as shipping of products, purchase of raw materials as well as advertisement of their products. This integration gives the top competitors an upper hand in cost over other small-scale competitors (Herrmann, 2010). Internal environment The resources that a company has are key determinant of the nature of a company’s internal environment. BHP Billiton Company is endowed with great financial resources which it can count as one of its successes. Kitchen (2009) alludes that financial resources in combination with land and workforce make up key determinants of production. Money which is a financial resource is very useful when it comes to the acquisition of machinery, buildings, tools and other facilities needed in production. Another very important resource that BHP Billiton Company has is an experienced and skilful human resource. According to Price (2007), this resource is important because it makes the BHP Billiton and many other companies to increase their productivity, widen their market, come up with more sophisticated technologies, amicably respond to the market dynamics, maximise revenue and minimise costs. These developments are not possible without human resources. Another aspect of the internal environment of BHP Billiton Company its capabilities. One such capability is maintenance of high ethical standards. Studies have shown that there is relationship between ethical standards of a company and its innovativeness (Huhtala et al., 2011).Other evidences have also revealed that an organisation’s ethical culture has positive results on the effectiveness of an organisation, particularly, corporation and well-being of employees (Riivari et al., 2012). These two findings there brings us to the conclusion that for BHP Billiton Company to remain effective and innovative in all its operations, it must continue to embrace high ethical standards which not only benefit the organisation but also ensure the safety and health of the larger society. A core competency that BHP Billiton Company needs to be proud of is its sound management of capital. In studies on the impact of sound capital management on the company profitability,it was found that the profitability of a company is likely to increase when a firm’s capital is managed through reducing period at which the receivables of a company are collected as well that period for converting inventories (Iqbal & Zhuquan, 2015; Kulkanya, 2012; Taghizadah, Akbari & Ebrati, 2012). Strategies BHP Billiton Company has been able to utilise quite a number of strategies to ensure they become competitive in the mining industry. One such strategy is a business level strategy called customer focus strategy. This strategy enables a specific segment of the market to be satisfied with the products as possible. It is a plan that concentrates more on what a given category of customers expects to have (Bose, 2012). This can be seen following BHP Billiton’s decision concentrate on five main minerals as pillars of their company following the needs of their customers. From this strategy therefore, it can be concluded that consumers of the products of any company are above everything and should be satisfied at all costs (Nandakumar, 2010; Cao & Gruca, 2005). Business diversification is a type of corporative level strategy that BHP Billiton Company has used. Diversification is among those strategies that have researched on by most strategic management scholars (Caldwell, 2012; Miller, 2006). BHP Billiton Company has diversified all its minerals and products as well as its market. This strategy has made this company to continuously invest its capital, to get a better position in the market, to establish new segments of business for better development opportunities in future and finally to look for other initiatives which can ensure that the company survives even during very competitive situations.. However, the strategy of diversification also has its own risks which BHP Billiton Company needs to beware of. The risk is that when another company penetrates into the market with unique products, a company may find itself in a very difficult competitive situation with high costs and aggressive behaviours from competitors. The company has also employed merger and acquisition strategies. The company experienced the same in the year 2001 between Australian’s BHP and UK’s Billiton companies. Ameret al., 2013 and Trivedi et al., (2013) conducted a research to determine the long term effects by making a comparison between the pre and post-merger financial situations in a few selected companies in India. The study was conducted within 10 years and the findings indicated that service, pharmaceutical and Textiles Company had an improved financial performance mining, and agricultural and chemical companies had experienced a reduction in financial performance. BHP Billiton Company also has a well-developed international strategy that has earned it a locational advantage over its competitors. The company strategically selected its areas of operations in different parts of the world. The decision to select and segment countries by companies is largely determined by suitable portions and locations of operation. An international strategy for the selection of countries of operation by countries enhancing accessibility and cost effectiveness by putting logistics, production, force management of sales and support for service activities at a central place. So far, BHP Billiton has been able to achieve this. The adoption of this international strategy puts companies at a better position of investigating how and why new rival companies decided on specific locations and these locations enable them to acquire competitive advantage over other companies (Herrmann, 2010). BHP Billiton proposed demerger The decision by BHP Billiton to demerge could have been informed by the fact that most multinational companies are susceptible to loss of focus and may not always be able to attain the market value they are expected to have. A demerger strategy has always been considered the best surviving stiff competition brought by other upcoming companies. Under normal circumstances, the rationale of demergers is usually to improve total returns and revenue of a company (Rakshit & Ghosh, 2010). The break-up of a company in two or more units makes it to have a sharper focus on investment and also defines its potential more elaborately. In some instances, a parent company may not be able to equally enjoy the benefits of their relationship with the other subsidiary company and this may not make them compete well with other actors in the market. BHP Billiton could experience a similar scenario if it fails to take caution. However, there are still many reasons why demergers could be important BHP Billiton as outlined by Singh, Bhowal & Bawari (2009). Demergers help companies to increase their additional equity funds by dividing it into small manageable units so that a company can derive additional sources of equity funds. They also enable the performance of a company to improve because it permits the management to increase their focus on their jurisdiction and to remove misfits noted in their strategies. Finally yet importantly, demergers can facilitate the reduction of internal competition. Conclusion From this strategic analysis on BHP Billiton Company a number of strategic issues have been captured. These include the external environment which was divided into general, industry and competitor environment, the internal environment which comprises the resources, capabilities and core competencies of the company. The company has also been able to use a number of studies which include customer focus, diversification, merger and acquisition as well as international strategies. This paper also analysed the decision by BHP Billiton Company to demerger. This decision aimed at narrowing the scope and focus on few minerals that will reduce the production cost and maximise profitability. Given that all the strategic issues discussed in this paper have pros and cons, it can therefore be recommended that BHP Billiton Company should capitalise on the benefits that these strategies yield rather than challenges. This is a recommendation should be taken into consideration by strategists of the company. The implication that the findings of this analysis have on BHP Billiton, the entire mining industry and all local and multinational companies is that strategic planning is key to the success of any business. 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