Environmental Analysis Of BHP Billiton: Internal And External Analysis, Business Strategy And Competitive Advantage

About BHP Billiton

Discuss about the Environmental Analysis of BHP Billiton.

Strategic planning and performance management go hand in hand. Performance management is primarily role of employees and is about setting and achieving the goals and objectives set as well as, removing the hindrances for achievement of goals post identification. The process of setting goals is where strategic planning comes into picture. Strategic or tactical planning is the method using which–the individuals working in the organization, on the organization’s behalf, define a set of objectives to achieve (Slack, 2015). Without proper strategic planning, no enterprise can become successful today (Haines, 2016). Also, the strategic plan needs to be supported by a clear vision and an equally apt performance management system to reap benefits.

The report conducts the environmental analysis of BHP Billiton which is a behemoth organization in Australia. The report presents internal and external analysis of operating environment of BHP Billiton. That shall shed light on some of the strategies in use in the organization which affects their environment of functioning.

Headquartered in Melbourne, Australia, BHP Billiton or simply BHP, is the world’s largest diversified resources organization. It was formed as a result of merger between BHP Limited and Billiton PLC. The organization follows a dual listing structure where both sections operate individually as separate trading public companies but is a single business entity with all their assets combined. It has a mineral exploration, technology, freight and transportation as well as logistics operation.

An organization’s internal environment analysis revolves around aspects, proceedings, necessities and objects inside the organization. All these factors collectively influence the organization’s performance, mainly – leadership type, culture, organization’s mission and vision etc. Post conducting an internal analysis, the below listed factors and their influences were deduced.

1. Resources – A resource of any organization would be a single productive unit. The unit could be for the purpose of supporting any activity or a means in itself to realize a targeted outcome. A resource could be financial, human, material or non-material resource (information). For an organization such as BHP Billiton, whose primary activity is extraction and production of minerals (iron ore), petroleum or gas. BHP has several mineral resourcing activities worldwide, these act as its material resources as well as assets important to BHP. Without them, BHP’s existence would be questionable as there would be no mineral to extract or produce. All the labourers and other employees are their human resources. They ensure smooth functioning and are vital to the bigger picture of performance of the organization itself. All the money that supports BHP’s operations are its financial resources. Together all these resources support operations of the organization and contribute to its success.
2. Capabilities – The quantity of production is the capability of BHP Billiton. High produce means the capability is high and low production means lesser capability. In case of BHP Billiton, its capabilities are mostly influenced by availability of mineral resources. Not only that, the processes in use, logistics used, employee skills, policies that influence their productivity everything is interrelated (Sykes and Trench, 2016. p-22).
3. Competencies – What led BHP to its success is mainly the knowledge and skill it acquired over years of its operations supported by strong leadership. If it needs to be listed though, they would be – policies and regulations for their employees, strategies to support core objectives, varied and rich resources, financial policies in place to support overall operations in every sphere

The report shall conduct micro and macro environmental analysis to present the external analysis of BHP Billiton. For micro-environment analysis, Porter’s five forces analysis was conducted and for macro-environmental analysis, PESTLE analysis was conducted.

Porter’s five forces analysis sheds light on the competitive factors in internal factors such as buyers, suppliers, threat from new entrants, threat of substitutes and existing competition.

1. Bargaining power of buyers –
   1. supply of natural resources is limited and demand is huge. The threat is moderate to low in this case for BHP Billiton. The organization could pass along any price increases here.
   2. Substitutes are, more or less, unavailable in large quantities reducing the bargaining power of the buyer.
   3. BHP focusses on maintaining a long-term relationship, impact of any price increase is thus much reduced
2. Bargaining power of supplier – BHP on the other hand, is quite affected by factors such as labour negotiations, material availability, energy prices, shipping costs etc. Since substitutes are more or less not there, suppliers have a strong bargaining power
3. Threat of new entrants –
   1. Natural resources are limited both in their capacity and supply. This automatically reduces the threat of new entrants for BHP Billiton.
   2. Demand from China for iron ore has reduced after drop in commodity prices. This also prevents new entrants from entering the market
   3. BHP Billiton has strong financial support and impressive infrastructure in place after years of operation. For any new entrant, it would take quite some time to match that.
   4. Presence of BHP Billiton is on choicest of locations across the globe for mining activities. A new entrant would not be much of a match to BHP Billiton.
4. Threat of Substitutes – The raw materials do not have much of substitutes in market. This is the reason for a low level threat in this department for BHP Billiton. Since the natural resources’ portfolio is quite diversified for BHP Billiton, it is holding quite a strong position
5. Competition –
   1. Among existing competitors though, rivalry is strong. There is intense competition to gain access to the reserves of resources across the world among rivals. Along with that retaining the human resources who are well trained has added to increase in salaries and wages.
   2. Despite such heavy competition, the industry in itself is quite lucrative because of the potential for making profits. This is also one of the reasons why even though the prices decrease, the competitors shall still stand in a favorable position.
   3. Major instances of mergers and acquisitions also strengthened BHP Billiton’s position.

To compliment the understanding of macro-environmental factors, a PESTLE analysis was also conducted. These factors also have an impact on choice of strategies by BHP Billiton.

1. Political – This factor is in favour for BHP Biliton on its home ground only. It enjoys great support from Govt. of Australia as they contribute hugely to economy. Due to its worldwide spread though, it is always at risk from political forces at play in different countries it has its operations in. the key drivers such as the operating license, pipeline of projects, growth opportunities and all the infrastructure as well as related assets. Changes in government and policies and regulations always directly and indirectly affects its profits. Example Chile imposed a 5% royalty tax on the mining activities. The tax was applicable on operating taxable income from mining activities (Ebert and la Menza, 2015. p-108).
2. Economic – Any changes to cost of energy, exploration, labour, operations etc. hits BHP Billiton. The increases could affect the organization’s plans of further growth and expansion and ultimately the profits 9Hecking and Panke, 2015. P-30). Also, the global economy stability is another susceptible point for BHP Billiton. Rise and fall of global commodities affect the demand. Once the demand is less, supply could alternatively, increase and impact price. Example, China economy contributes to approx. 16% of BHP Billiton’s revenue. Recently, the demand had decreased owing to fall in commodity prices which impacted the revenues of BHP Billiton (Zhang et al., 2017. p-248).
3. Social – All the stakeholder relationships and operations are vulnerable to socio-cultural factors for BHP Billiton. The factors need BHP to give financial support to local groups and facilitate natural resources for building of infrastructure such as roads. New projects need approval of societies, activities of this kind could impact profit or cost of development for BHP Billiton. Example – in Chile, BHP has worked on improving worker’s conditions in their copper mines.
4. Technology – All operations are mostly dependent on technology and related innovations. BHP invests heavily on upgrading their technology for exploration purposes. They affect strategy building for new projects and acquiring infrastructure (assets).
5. Environmental factors – BHP Billiton is essentially an exploration organization and is continuously facing pressure from environment conservationists. It si extremely vulnerable to regulations and policies related to environment. They have hence adopted policy of ‘zero-harm’ as well as sustainable development. The responsibility to adhere to environmental policies is strategically connected to the license of operation.
6. Legal – This also acts as a crucial factor of risk for BHP Billiton. As in the past, they have already faced legal liabilities for causing damage to environment. Example – Southwest Copper Operations at Arizona. This, along with other lawsuits faced by BHP Billiton had impacted the financial resources heavily. All of this indirectly also affected the strategic decisions for future investments.

BHP Billiton’s strategy is based on diversification. Be it diversification of geography, market and even commodity. They stress on owning and making use of large assets which have a long life, low running costs, could be up scaled as per their three targets of geography, commodity and market. This is the only way they have been successful in delivering excellent quality and gaining margins again and again through various economic as well as commodity cycles over decades. Their low cost as well as diversified assets of Tier-1 type makes their cash flow resilient by minimizing their vulnerability to exposure to any single commodity or currency. It is also beneficial as it allows prediction and enhanced financial gains (Grant et al., 2014.). They have also invested on building an extremely well trained and skilled workforce over time. Mostly they recruit from host countries itself. Then, they train them to become high caliber performers who reflect their organization’s values. This they believe also gives them an edge over their competitors. They continuously strive for development and growth of their assets to suit the needs of their customers.

Internal Analysis of BHP Billiton

BHP Billiton’s competitive advantage mostly is thrived by its low-cost asset base most of which, is diversified. That makes its cash flow quite resilient to exposure to single currency or commodity. This is beneficial for organization as it continues to expand and diversify its business portfolio. Also, it quickly adapts to meet the changing need of the customer. They have been successful in building a capability to assist different nations in their every type of stage of economic growth. The fact that its organization structure is also so simple is a plus point. The structure provides it with scalability (Donovan, Hartley and Billiton, 2016. p-14). Along with that, they have robust processes which are standardized as well as controlled. This makes it simple for the staff to handle operations.

Conclusion

With a lot of challenges related to price suppressing policies, risks of evident geopolitical nature and unpredictable policy formations in major economies, global economy has mostly been resilient mostly showing good performance. All of them has helped in robust performance in key commodities by BHP Billiton. BHP Billiton has been successful in having positive quarter performance in 2017 as well.

BHP Billiton is favoured with good demand in Asiatic regions, specially China and India. Owing to population growth and elevated living standards, energy demands, minerals, petroleum, fertilizers etc. demands are supposed to increase. Technology is also expected to improve leading to rise in potential of opportunities as well as threats. Along them, environmental policies owing to climate changes and corresponding market responses shall also occur. BHP Billiton believes that, with correct placement of their assets along with correct commodities they shall enjoy an edge in their strategic choices.

The report already portrays how well till now BHP Billiton’s strategies of diversification and low cost scalable assets have been beneficial in their journey over decades. Their outlook has been positive and extremely flexible to adapt appropriately with the environment demands.

References

Haines, S., 2016. The systems thinking approach to strategic planning and management. CRC Press.

Slack, N., 2015. Operations strategy. John Wiley & Sons, Ltd.

Ebert, L. and La Menza, T., 2015. Chile, copper and resource revenue: A holistic approach to assessing commodity dependence. Resources Policy, 43, pp.101-111.

Zhang, M.M., Bradley, C.F., Collins, A.F. and Saunders, M.H., 2017. Economic structural changes in China: challenges and opportunities. International Journal of Economics and Business Research, 13(3), pp.246-257.

Sykes, J.P. and Trench, A., 2016, August. Using scenarios to investigate the long-term future of copper mining and guide exploration targeting strategies. In AusIMM International Mine Management Conference, Brisbane, Australia(pp. 22-24).

Grant, R., Butler, B., Orr, S. and Murray, P.A., 2014. Contemporary strategic management: An Australasian perspective. John Wiley & Sons Australia, Ltd..

Hecking, H. and Panke, T., 2015. The global markets for coking coal and iron ore—Complementary goods, integrated mining companies and strategic behavior. Energy Economics, 52, pp.26-38.

Donovan, J., Hartley, P. and Billiton, B.H.P., 2016. Investigating the market manipulation hypothesis in iron ore. AusIMM Bulletin, (Jun 2016), p.14.