Describe about the Fortescue Metal Group for Market Position.
In this case study Fortescue Metal Group, an iron ore company and its position in the market is analyzed. The case study begins with the informational background of the company, its nature of business and its competitive analysis. The mission and vision statement of the company is developed considering its goals and values. the framework of the company is analyzed on the basis of five force model by Porter and what are the competitive factors for the company. Analysis of company’s capabilities and resources is done to evaluate it strength and weakness. SWOT analysis of the company is done and potential threat remedies are suggested.
Fortescue Metal Group is amongst the largest iron ore producer in the world. The company focuses on extension of iron ore. It laid its foundation in the year 2003 in Western Australia. Since its inception it has invented and fabricated some of the colossal mines in the world. Chichester Hub and Solomon Hub are the main areas where the company operates its mining activities. The company is also associated with port supply chain and rail operations to assist in the progress and revenue generation from the left out iron ore bodies (Fortescue Metals Group Ltd (FMG.AX), 2016).
Fortescue Metal Group is in Mining industry with net income generation in the year 2014, $2,740,000,000 (Fortescue appendix 4e financial year ended 30 June 2014, 2014).
The group is the world’s fourth largest iron ore producer and contributes significantly in the total 15% of the global production generated from Australia. FMG only operates in Australia and has its contracts with Chinese steel mills. Its competitors Rio Tinto, Vale do Rio Doce (Vale) and BHP Billiton are domineers of the market. Rio and BHP also have their operations established outside Australia. Under the competition laws infrastructure of FMG has not been declared as open network and is also not subjected to government regulations unlike its competitors BHP and Rio, this provides them with an added cost advantage (Our Business, 2016).
To deliver the premium value reliably to the shareholders, customers, employees and community in the mining industry by revolutionizing natural resources into prosperity and sustainable development. To become the new force in iron ore.
To utilize our mining expertise in attaining economic advantages by developing reserves and creating partnerships along with becoming a company that adds value to the global natural resources and values people, passion and the planet.
The Five forces model identifies and analyzes the forces that are faced in the business. It is a tool that assesses the strength and weakness of a business and affects its development strategies.
Bargaining Power of Suppliers- The sources of raw material and inputs are extremely crucial for a business. Suppliers enjoy a full power if there’s a monopoly because of the uniqueness of the product, but this puts business in a compromising position. The suppliers can over charge the company, set their own terms and conditions. Because of the less options the business losses its bargaining power. It is suggested for the business to look for alternate resources and inputs, so that they have the powers to function in their own hands and are not controlled by the suppliers (Hill & Jones, 2009).
In mining industry suppliers who provide information technology, labor, equipments and power supply are in more dominant position. Power supply being the most essential and there are only few suppliers in the mining areas so it does not give much bargaining power to the company. The company usually has long term contracts with the fuel and power suppliers. Skilled labor is also one such aspect where the bargaining power of the company is compromised because of lack of availability and complex miming process requires training which incurs cost. The supplier power in the industry is moderate because the market is competitive.
Bargaining Power of buyers- The business has to analyze the power that the buyers possess. If there are few buyers, the company would be dictated the terms by the buyer because they are few in numbers and would drive the price. On the other hand if there are large buyers available to the company, then the position of the company becomes strong and they can control the price and movement of the product. It also analyses the cost it would incur to convert a potential customer to an actual one (Schermerhorn, 2010).
Buyer power in the industry is moderate, but in aspect of FMG, since it caters to the Chinese market and due to weaker demand because of GFC, the bargaining power of the buyer is strengthened. The pricing practices have also changed because of weak demand (Dr Cutcher, 2016).
Competitor Analysis- analyzing the competitors’ strength and weakness and most importantly their USP. If the competitors’ offers the exact product then there is very little power in the hands of the business in controlling the price, but if the product of the competitor is inferior than the business can use this to its advantage. In the former case, the buyers use the variety and price differentiation to their advantage (Arline, 2015).
FMG mostly caters outside Australia, but its major competitors Rio and BHP are the dominant players of the domestic market. There is intense internal rivalry in the market which is reflected by struggle to increase the market share and profitability. The company tries to cut down its operational cost and maximize returns by undertaking large scale operations (Dr Cutcher, 2016).
Substitution threat- understanding the key components that how can your product is substituted in the market. If the substitution product is easy to generate, then the power of the product of the company is weak, but if the ability to substitute the product is difficult, then it gives the company and additional power to play a dominant role in the market (Porter’s five force of Competitive Position Analysis, 2016).
The demand for iron ore is dependent on volume of steel production. It is only affected in a positive or negative aspect because heavy steel construction requires iron ore and there is not a substantial substitute available. This reduces the threat of substitution for FMG.
Threats of New Industry Entrants – If a new entrant enters the market, if makes an impact on the position of the company. If the entrance barriers are not strong then this may be a difficult situation for the company, as it may see increasing competition. On the other hand if the barriers are stringent then the company may enjoy this leverage (Porter’s Five Forces: Assessing the Balance of Power in a Business Situation, 2016) Barriers to enter the market are high because of large capital requirements. To execute operations acquiring mines on lease or purchase involves hefty capital. FMG does not have a threat because firms with limited financial assets will not enter such market.
The bargaining power of the suppliers is moderate because to operate the site, heavy power supply is required, in which FMG has limited options in the choice of supplier. Skilled labor and heavy equipments also pose a problem.
Power of Buyers is high because FMG caters to Chinese market and due to global economic slowdown the market has not undertaken the heavy steel construction to an upscale level; this puts FMG in a compromising position to reduce the prices and continue to be in the market.
Internal rivalry and competition with international market is also another force. There is intense competition in the mining industry and FMG has not even captured a major share of it. Its competitors are strong and big players and this pose a threat to FMG.
Capability in the mining industry largely depends on three factors- mines, port and railways.
Mines- FMG operates on two sites Christmas Creek and Cloudbreak. Its third site is under exploration. The company forecasts that they have a target mining life of 20 years and could reach an annual production of 100 million tones with its major reserves being in the former two sites. The company has adopted a relatively new mining technique than its competitors, and also innovations in the machinery have helped them improve mining rates and increase production.
Rail and Port- Significant development in these two have led FMG improve its performance. Loading 10 trains in a day at a rate of 12000 tons per hour at their cloudbreak mine has been a major development. Decision to open up the port facilities to third parties has been a historic decision made by the company.
FMG is a strong player because it has the resources and capabilities to cater the market and become a dominant player in the domestic as well as international market.
Strengths of FMG lie in its developed infrastructure – mines, rail and port. Strength of the company is the adoption of new mining technique and enhancement of machinery which helps them in improving their performance and caters to more demand. The company portrayed its character strength when they allowed its port Pilbara access to third parties. The integrated port and rail system improved FMGs’ ability to co-ordinate its distribution and supply more effectively and to develop a reliable and cost effective infrastructure.
Weakness of the company is that the operations in Pilbara can be easily disrupted by the cyclone. The weather plays an important role in the operations and to reduce the risk the company has undertaken risk mitigation. Another weakness of the company is less bargaining power with the customer, due to GFC, the market has been in favor of the buyer, and they have power in controlling the prices.
Opportunities for FMG lies in creating a space for itself in the domestic market like its rivals. To capture the dominated areas of BHP and Rio, FMG has to drive low cost at Solomon hub. FMG also has the potential opportunity to cater to the growing demands in the international market.
Threats of the company are considerably changes in the market regulations and market drivers. Environmental changes also play a major role. Since this industry is largely dependent on technology, its advancement could pose as a potential threat. Companies working on low-profit margin can also pose problems (The rising threat of Substitution: mining & metals, 2014).
The prominent threat to FMG in the above analysis is technology. A company cannot constantly deal with technological advancements because it requires huge capital investments, to deal with this threat improving the business intelligence and planning strategies in advance could help minimize the impact of this. Investing in research and development is also another way through which this threat affect could be reduced.
Another prominent threat is Environmental challenges, since one of its mining operations are in Pilbara, which is highly cyclone prone area, FMG management team has to focus on risk mitigation techniques to reduce the adverse conditions (Business risk facing mining and metals 2015-2016, 2016).
Conclusion
The mining industry shows traits of a monopolistic behavior but due to intense competition and rivalry it can be structured as oligopoly. Rio, BHP and FMG are key players of the market. FMG has improved operations and distribution techniques which give them an edge over its competitors, but it is yet to capture the major share of the domestic market like its rivals. FMG mostly caters to Chinese market and its plans to expand its customer base with all its technological advancements are in place.
With its mine-rail and port infrastructure FMG aims to become the lowest cost producer of the iron ore in Pilbara. The company is relatively a new entrant when it is compared to the rivals, who are big market players. But the performance of the company in capturing the market on the international level and delivering to its commitments has proved that the company can fulfill its goal of becoming the low cost producer of iron ore in Pilbara.
References
Arline, K. (2015, February 18). Porter’s Five Forces: Analyzing the Competition. Retrieved 8 September, 2016 from URL https://www.businessnewsdaily.com/5446-porters-five-forces.html.
Business risk facing mining and metals 2015-2016. (2016) Retrieved 8 September, 2016 from https://www.ey.com/Publication/vwLUAssets/EY-business-risks-in-mining-and-metals-2015-2016/$FILE/EY-business-risks-in-mining-and-metals-2015-2016.pdf
Dr Cutcher, L. (2016). Fortescue Metal Group : the new force in iron ore. 8 September, 2016 from file:///C:/Users/Abasus%20Solutions/Downloads/935375_665220193_FMG%20(2).pdf
Fortescue appendix 4e financial year ended 30 june 2014. (2014). Retrieved 8 September, 2016 from URL https://fmgl.com.au/media/2346/20140820-annual-results785232.pdf.
Fortescue Metals Group Ltd (FMG.AX). (2016). Retrieved 8 September, 2016 from URL https://in.reuters.com/finance/stocks/companyProfile?symbol=FMG.AX.
Hill, C. & Jones, G. (2009). Strategic Management: An Integrated Approach. [Online]. Retrieved 8 September, 2016 from URL https://books.google.co.in/books?id=CzIK9ELsyYwC&pg=PA42&dq=porter%27s+five+forces&hl=en&sa=X&ved=0ahUKEwiu2dvBl__OAhWMvY8KHcv6AtAQ6AEIGzAA#v=onepage&q=porter’s%20five%20forces&f=false.
Our Business. (2016). Retrieved 8 September, 2016 from URL https://fmgl.com.au/our-business/operations-map/.
Porter’s five force of Competitive Position Analysis. (2016). Retrieved 8 September, 2016 from URL https://www.cgma.org/Resources/Tools/essential-tools/Pages/porters-five-forces.aspx?TestCookiesEnabled=redirect.
Porter’s Five Forces: Assessing the Balance of Power in a Business Situation. (2016). Retrieved 8 September, 2016 from URL https://www.mindtools.com/pages/article/newTMC_08.htm.
Schermerhorn, J. (2010). Exploring Management. US : John Wiley & Sons Inc.
The rising threat of Substitution: mining & metals. (2014). Retrieved 8 September, 2016 from https://www.ey.com/GL/en/Industries/Mining—Metals/The-rising-threat-of-substitution—mining-and-metals
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