MANAGING STRATEGY-EVALUATION OF STRATEGIC CHOICE

Section 1 (a) MERGER AND ACQUISITION In this assignment, the organisation chosen for the evaluation of strategic choice is BHP Billiton Plc. Originally Broken Hill Proprietary Limited (BHP) of Australia merged with Billiton Limited of UK to form the transnational company named as BHP Billiton. This company is world’s largest diversified natural resource company according to records. Company website reveals that BHP Billiton employs 39000 employees in more than 100 operations in 25 countries (BHP Billiton website, 2010). Today BHP Billiton is the biggest global resource organisation focusing on natural resources like Energy, metals and precious stones. This company is called a transnational company due to the reason that it shifts its home base frequently and has activities spread over global market. The strategy of growth and expansion of this company is mainly mergers and acquisitions intended to become technologically equipped, resourcefully competent and profitably located in world market. Evaluating the mergers and acquisition decisions made by the company in last 10 years, it could be seen that after the formation of BHP Billiton through giant merger in 2001, acquisition is the strategy that company have been adopting to expand the market reach. This was infact a defensive mechanism to the latter so that it could prevent the company from being a takeover target. The most recent acquisition of the company is that of Althabasca Ptash Inc (API). The strategy behind this strategic choice is to attain 100% control over the Burr project. The acquisition was completed on 23rd of March 2010. It has been a realistic, flexible, risk managed and successful strategic decision making and project implementation. With this

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strategic move company has also attained freedom and facility to explore potash in other properties situated in Saskatchewan in Canada. This implies that BHP is now having access to over 15000 Kilometres of prospective exploration grounds in the world-class Saskatchewan potash basin, which is a remarkable development. This acquisition will be one of the turning points in growth of BHP Billiton because the resource that they have acquired with the deal contains 95% of potash which is used as a fertilizer. The intention of company is not only to focus on mining but also to start a Saskatchewan Business providing employment opportunities to more people, focus on sustainable development and developing an environment friendly community. Prior to this acquisition, in mid 2008 BHP Billiton completed the acquisition of Anglo Potash Ltd and gained total control over Canadian Potash Joint Venture development project which was established between the respective companies in 2006. It was BHP Billiton Diamonds Inc that was involved in this agreement. By making acquisition decision, company is making the most out of market weakness that has swept the economy since the global recession. BHP Billiton has acquired an interest in 15 exploration sites at Falkland in South Atlantic and the intention for this strategic deal was to eventually produce gas and oil from the location. This reveals that by focusing on growth, company is acquiring potential basin and investing finance and resources to execute mining and exploration programs for better gains. From the acquisition strategy of BHP Billiton it could be seen that they are working to attain the organisational objective to create long term shareholder value through discovery, development and conversion of natural resources with priority of providing market focused solution to its innovative customers. This company can be designated as a proactive investor because it is with an extensive investigation, assessment, planning and strategy that BHP Billiton has entered into every merger and acquisition deals. Many times they have over priced the purchase deals to make sure

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that they don’t miss out any opportunity that they foresee in the potential location. Evaluating the landmark merger of BHP and Billiton at the first instance, it could be seen that combination of two companies with strong assets and capacities have not only given birth to a mining giant, but a vast pool of resources and potentials. The management and the size of BHP Billiton gave a boost to company’s brand identity. A merger is considered to successful if it increases the acquiring firm’s value (Gorton et al, 2009). Looking onto the takeover bid strategy if BHP Billiton it could be seen that their way is to mitigate risk and enhance returns for shareholders. Very soon company adapted and adjusted to new portfolio and rendered excellent service quality, reliability with new norms and regulations so that the employers and employees of system adjusted to cultural differences (BHP from Australia and Billiton from UK) and organisational requirements. As pointed out by Lindemann (2004), reason for this merger has been the pursuit for synergistic benefits which adds value to the organisation through cost economies, revenue enhancements and size of the company along with diversification and reduction of risk in a highly volatile industrial segment. Since 2001, all the acquisitions done by the company has enhanced the financial fundamentals of BHP. It includes the hike in commodity prices, total revenue, dividend yield, ESP growth etc. Through acquisition of Falkland site, company was actually repurchasing the outstanding shares and improving the benefits of its shareholders. The buyback programs are another strategic choice of BHP Billiton that has allowed them to attain and retain market positioning. BHP Billiton Company has always made acquisitions deals on a win-win scenario where buyer and seller are adequately rewarded and compensated for the risk and resource involved. To prevent risk in the operational and financial stability, company have been resorting to investment collaborations

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and this has helped company to exhibit successful performance and flexibility. Rising energy costs, shortage of mining equipments, demand for wage hike etc could be handled by the company during the process of development with the help of appropriate scheduling and planning. Without strategic decision making and choices, the stability attainment would not have been possible for the company. BHP Billiton is therefore a market leader in mining and metals with its vast resources, huge revenue, cross border diversifications and quality assets. Section 1 (b) JOINT VENTURE AND STRATEGIC ALLIANCE During past few decades collaborative strategies in international business has gained momentum. Joint venture can be defined “as activities in which two or more firms are partially and not totally, integrated in order to carry out activities in one or more areas like buying or selling operations, exploration operations, of natural resources, research development and and/ or production or conducting development engineering

construction operations”. (Cunningham, 1986). Strategic alliance on the other hand is “the strategic and operational coordination between two or more companies which includes functions like joint research and development, technology exchange, exclusionary market and manufacturing right and co-marketing agreements. This may or may not involve equity investments.” (Das and Teng, 1998). Porter (1980) observed that firms enter into a strategic alliance in response to competitive pressures to attain competitive advantage through costs leadership, differentiation or focus strategies. Joint ventures are one of the most important strategic options for growth and expansion of business. In high technology industries companies have been choosing joint ventures, joint research and developments, technology exchange agreements, sourcing relationship. Increased globalisation,

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modernisation and technological advancement have prompted multinational companies to venture up with other international companies and achieve maximum global exposure and benefits through strategic partnership. Joint venture is infact an umbrella term that describes commercial arrangement between two or more economically independent organisations (Bartlett and Ghoshal,1998).. In 2004 Nippon Steel Corporation and BHP Billiton entered into a strategic alliance for exploration and development of new mines. It was also accompanied by a joint vessel agreement for facilitating transport at reduced expense. The venture was focused on conducting studies for better utilisation of iron ores and cooking coal. This strategic alliance was the outcome of year’s long business relationship that existed between both the companies. The agreement was to strengthen up the existing ties and trust and attain mutual benefits from each others resources, competencies and market value. When this contract was put into practice a major change took place in the steel industry. BHP Billiton and Nippon Steels outlined new development projects, conducted joint research using skill sets, allocated resources for project implementation and started working globally for expansion of business and offering better value to shareholders. In 2009, BHP Billiton and Rio Tinto entered into a joint venture agreement with regard to their Western Australian iron ore assets. According to the strategic decision entered into by the companies, the assets and liabilities where to be divided on 50:50 shareholdings. Both companies are having world class resources and the venture unlocked significant value and fortune for furthering mining operations and attaining higher production and development synergies (St. John et al, 1999). The logic that prompted the joint venture between these companies are the expectations of combining adjacent mines and brining them under one umbrella of operations. This would not only reduce the rail hauls but also will bring about more effective port capacity to the companies.

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According to the spokesperson of Rio Tinto “the joint venture will establish an unrivalled iron ore business with world class assets and infrastructure. Company believes that it represents great value for shareholders and will create a business combination able to serve growing international markets with unparalleled efficiency."(website) s observed by the officials, the joint venture has increased the opportunity of maximizing product recovery and brining about operational efficiency to both the companies. The venture was putting together the human capital, reserves, revenue, brand value, assets and activities for growth and expansion. It is expected that in long term this alliance would bring in world class iron resources, infrastructure and people who would deliver real, significant and quantifiable synergies to business. EURPFER Commission had opened an investigation on this deal stating that the joint venture would be an “unacceptable concentration which will significantly restrict competition in the seaborne iron ore market” (Marketwatch, 2008). But overcoming the legal impediments this joint venture is expected to be completed by the end of June 2010 and hence the result of strategic choice could be assessed only in the coming years. Das and Teng (1998) defined strategic alliance as “partnership that covers a variety of flexible corporate arrangements between organisations from fluid short term corporation to long term formal agreements. The specific objectives for firms entering strategic alliance may be for cartelizing an industrial sector minimising the risk involved, bringing together complementary resources, capabilities or even to get over barriers in business”. The strategic partnerships of BHP are the best examples to narrate this observation. On 7th of June 2010 it has been reported in news (FT, 2010) that BHP Billiton has entered into a joint venture with Adaro for Indonesian Coal Project. Adaro is Indonesia’s 2nd largest thermal- coal producer. Indonesian coal project (ICP) is a metallurgical coal deposit mining project and the underdeveloped resource base is expected to be 775 million tones. In the

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agreed joint venture BHP Billiton shall be holding 75% of the share, the focus of Adaro is on increasing their shareholder value and that of BHP is in expanding their business to new horizons and exploring regions outstanding biodiversity.

Section 2 (a) ANALYSIS OF EMERGING MARKETS -BHP Billiton in china Management Strategy has been defined by Alfred (1962) in Homburg et al, (2006). as “the description for the relationship between the industry and its environment and serves as a tool for informed decision making”. China is one of the most lucrative markets for mining companies. BHP Billiton being a transnational diversified company, is a one stop commodity shop with a wide range of metals and mineral. Chinese have been demanding for Australian mineral commodities and the outcome of this was the signing of one of Nation’s biggest export contracts with BHP Billiton. The deal was to supply iron ore to China’s steelmakers for the next 25 years. The driving reasons for entering into this international deal by BHP Billiton was not only market expansion but also the strategic decision was made by looking into the China’s massive economic growth and emergence in world economy. BHP Billiton had taken advantage of the interest of Chinese companies to follow the Japanese trend of direct investment in resource projects of various international corporations. The long term joint venture entered into by BHP Billiton with companies in China for supply of iron ore was in accordance with company’s strategy to maintain global iron ore market share and ensure that they are a constant and integral part of China’s growing economy.

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In second quarter of 2010, BHP Billiton has put on hold the long term strategy of company to invest in value added projects and ongoing industrialisation so that countries economy gets stabilised after the recovery from economic down turn. This was because company’s assets, earnings and cash flow had been highly influenced by wide variety of currencies that prevail in countries where BHP Billiton operates. When demand for product weakened in China, due to drop of commodity prices, BHP limited production capacity and this strategic decision is expected to protect company from any future loss. This is one of the major challenges BHP Billiton has faced and solved in China, the emerging international Market. -BHP Billiton in India: The other international booming market which BHP Billiton has explored and establishing is India. In 2007, company had taken a target for aggressive growth by tapping into the opportunities of iron ore and bauxite projects in India. Today 4% of BHP ‘s sale comes from India and has rapidly helped the company to surge out of recent recession impacts which BHP Billiton faced due to downturn in US economy. Studies reveal that BHP Billiton is selling more products in India than in any other emerging markets in last 8 years. Earlier the most important challenge to rapid growth in India was the government restrictions and regulation for foreign companies to trade and investments. But as Indian government eased regulations on legal front, allocation of resources became more easy to be accessed. Already nine projects are waiting to get complete in 12 months and the strategy which BP Billiton ins intending to adopt is to propose for Uranium sales after the existing projects completion. Company is expecting to make moves according to forecasts and volatility of market. Petroleum, base metals and stainless steel are the other resources in India which BHP aims to explore in India. But already a number of established home companies are carrying out successful business in these

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sectors in India and that would result in a heavy competition for BHP Billiton. Also the cultural background of India is entirely different from that of any other country with which BHP Billiton has joined hands. But being a transforming market place, company is expecting to easily adjust to the internationalisation trend of upcoming market place and its business culture, rather than moulding itself to local culture (Hitt, et al. 2005). Since company is only funding in many explorations in India, it is not presently facing much operational functioning difficulties due to cultural differences and barriers. Exploring the reserves and resources of Indigenous areas in India are expected to bring about better prospects for the company in the coming years. -BHP in Russia: Russian mineral market has been one of the most potential target of BHP Billiton during its international expansion. In 2006, when company tied to enter the Russian market, governmental policies and legal regulations restricted BHP Billiton from purchasing land in Russia and conducting business. Foreign investment was restricted to be less than 50% even after the changes that was brought in to government policies in 2008. According to Schiffman and Kanuk (2007) “In 2005, through 29% market share criterion was lifted, the government announced a decision barring foreign-controlled companies from bidding for its most lucrative natural resources. Officially, Russia restricts foreign direct investments in aerospace, natural gas, insurance, electric power, defence, natural resources, Russian liquor concerns, and large-scale construction projects”. Due to cultural barriers, marketing and sales was also a huge impediment to the company if by any means they started a fully owned business in the Russian market. Therefore the strategy that company adopted for entering this market was to enter into a joint venture with MMC Norilsk Nickel as a global partner. This not only solved companies half the problem of man power, resources

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and

technology.

For

the

remaining,

company

invested

its

supreme

competence, world class technology and used its brand identity to conquer the Russian market. Strategic planning is a strong tool that has helped the company to implement these decisions in the upcoming Russian market where it is reported that the domestic mining industry in Russia is forecast to register an average growth of 7.7% average over 2008-2012, reaching a total value of US$216.1bn.” (Source: Business Monitor International, BMI). Inspite of weakness due to fluctuating value of Rouble, inherent corruption, worsening economic climate, environmental protection hue and cry, BHP is expected to gain momentum in Russia as it s a working partner to MMC Norilsk Nickel which is home country based and much experienced in the respective business. This partnership has also taken off the burden of competition from the shoulder of BHP Billiton which otherwise would have made it impossible to thrive in a rigid economic, political and social market place.

Section 2 (d) KEY THREATS FACED BY ORGANISATION Being a company that deals with natural resources, on a global basis the most important threat/ the key threat which BHP Billiton faces is the restrictions and regulations it faces from world economies on the basis of the environmental damage which company contributes at large scale. Howsoever company claims to have taken precautions to prevent damage to life and living on Earth, being a miner, the damage that company is bringing about to the world is irreversible and irreparable. One of the world’s worst mine disasters had been to the discredit of BHP Billiton when Ok Tedi Mine in Papua New Guinea spill cyanide to river. This had made government, world bank, environmental protection groups and other watch dogs around the

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world aggressively agitated and calling for clean up and closure of the mine. It has also been noticed at adding to exploitation of natural resources, millions of mine wastes are being dumped to oceans of some world’s poorest countries and it has resulted in pollution of water sources, killing flora and fauna with toxic heavy metals like lead and mercury and through oil spills. But when specifically addressed, climate change is the most disastrous contribution of mining and related activities conducted by BHP Billiton. Risk of climate change is the result of increased emission of greenhouse gases to the atmosphere. The result of climate change is one something that would affect few people or few living beings or non living things on Earth. It is an issue that adversely affects the world’s existence at large. The rising world temperature causes environmental changes that are devastating beyond predictable limits (Engle, and Mendenhall, 2004). Melting of ice caps is a direct outcome of this change. Consequently sea level rises leading to flood risk and extreme weather conditions. The loss of ecological balance is something that disrupts the peaceful existence of life on Planet Earth. When this is the direct result of activities done by miners like BHP Billiton, question of their need to conduct such deep and extensive explorations and projects comes into debate. According to BHP Billiton’s sustainability report 2010 “Sustainable

Development at BHP Billiton encompasses company’s commitment and policy towards health, safety, the environment and the community (HSEC). In February 2010, BHP Billiton has signed a landmark agreement with Flora and Fauna international for conserving and protecting wildlife. Initiatives of this kind are expected to save the face of company among the global environmentalist. But this doesn’t give them the exception from moving and acting away from sustainability and development. To ensure improved performance, company has set specific targets in these areas”.

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BHP

Billiton

is

conscious

and

considerate

about

the

mishaps

and

consequences of mining and related activities of the company and has therefore taken measures to reduce the impact of its operations on land value, vegetation and wild life, It has given due consideration to air and noise pollution caused by the mining activity conducted by company. Minimisation of land subsidence as an outcome of underground mining is an important step taken by company to minimise the negative impacts. Rehabilitation of land and its resources after the end of mining is a priority of the company also that it can contribute to repair of fragile environment. The technologies that can help companies like BHP Billiton to minimise the adverse effect they have on environment is to invest on pre and post carbon capture and storage technologies. Carbon di oxide capture and storage is a direct remedy to the threat of carbon emission from coal mines. Company has already taken steps to increase its understanding of the life cycle emissions of its products and improve the management of energy and greenhouse gas emissions in their global business ventures. The management’s strategic planning that can prevent the key

environmental hazards which BHP Billiton is contributing to the world are to be focused on Dredging management, Acid sulphate soil management, Mangrove management, Land use management, plan for improving the marine water quality, implementing EPA objectives, minimising risks and hence reducing potential impacts.

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Bartlett, C.A., and Ghoshal, S. (1998). Managing Across Borders. The Transnational Solution. Boston: Harvard Business School Press Cunningham, M.T. (1986). Strategies for International Industrial Marketing. In D.W. Turnbull and J.P. Valla (eds.) Croom Helm 1986, p 9. Das, T.K. and Teng, B.S. (1998). Resource and Risk Management in the Strategic Alliance Making Process. Journal of Management, 24(1). pp. 21-42. Engle, A. D., and M.E. Mendenhall. (2004). "Transnational Roles, Transnational Rewards: Global Integration in Compensation." Employee Relations 26(1), pp. 613–625. Gorton, G. B., Kahl, M. & Rosen, R. J. (2009). Eat or Be Eaten: A Theory of Mergers and Firm Size. The Journal of Finance, 64(3), 1291-1344 Hitt, M.A., R.D. Ireland, and R.E. Hoskisson. (2005). Strategic Management: Competitiveness and Globalization: Concepts and Cases. 6th ed., Mason, OH: South-Western Publishing Homburg, C., H. Krohmer, and J. Workman. (2006). "Strategic Consensus and Performance: The Role of Strategy Type and Market-Related Dynamism." Strategic Management Journal 20, 339–358. Porter, M. (1980). Competitive Strategy, New York: Free Press, pp. 49 Lindemann, J. (2004). Brand Valuation, New York: Interbrand St. John, C., and J. Harrison,(1999). "Manufacturing-Based Relatedness, Synergy, and Coordination." Strategic Management Journal 20(1), 129–145 http://www.bhpbilliton.com/bbContentRepository/docs/ourStakeholders2009 .pdf http://www.riotinto.com/media/5157_18100.asp http://www.bhpbilliton.com/bb/ourBusinesses/diamondsSpecialtyProducts/p otashDevelopment.jsp http://www.bhpbilliton.com/bb/sustainableDevelopment.jsp http://www.eurofer.org/index.php/eng/News-Publications/PressReleases/European-Commission-opens-cartel-investigation-against-jointventure-of-BHP-Billiton-and-Rio-Tinto

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