Case Study: BHP Billiton and Strategic Choices
BHP Billiton was formed through the 2001 merger of Australia’s mining and oil giant BHP and U.K.-based mining group Billiton. The merger is captured by BHP Billiton’s logo which represents a large ‘blob’ (BHP) merging with a smaller ‘blob’ (Billiton) to form a perfectly whole new entity. BHP and Billiton maintained their primary listings (London and Australia) while merging the board of directors and home office. The merger created the world’s largest diversified resources company, with operations in 20 countries spanning the aluminium, coal, copper, ferro-alloys, iron ore, titanium, nickel, diamond, and silver mining sectors, as well as the oil, gas, and liquefied natural gas markets. BHP Billiton is leader or near-leader in nearly every market it covers.
Before the merger both Billiton and BHP were undertaking a range of acquisitions and expansions. According to the CEO of BHP before the merger, Paul Anderson, a market leader in the mining industry would have to have free access to global capital markets, offer consolidated, global minerals solutions to customers, provide employees with a variety of opportunities for career development, operate with high regard for the environment and society, and hedge against potential economic, and hence, commodity price downturns. The MarketBusting strategy employed by both BHP and Billiton was that of exploiting the industry’s structure for the next stage of the life cycle. In looking at competitors, both BHP and Billiton realized that the industry was in flux and that in the next stage of the life cycle the industry would be highly consolidated and more vertically integrated, especially backward into the mining process.
The merger was successful and brought the company from a market capitalisation of $28b in 2001 to one of $42b in 2003. In addition, the cost savings that resulted from the synergies of the merger amounted to $285m, exceeding the $270m target. As a result of the BHP Billiton merger, the company has successfully beat out its competitors by capitalising on the shift toward a new stage of the industry life cycle. By forming a large conglomerate of minerals and petroleum divisions, the company now has a worldwide distribution network, as well as a portfolio that is no longer as exposed to the ups and downs of the commodities markets and foreign exchange markets. BHP Billiton continues to expand into new markets, increasing the extent to which it sells to Asia by finding new customers, especially in the burgeoning Chinese economy, and diversifying the minerals and products it sells there.
However, BHP Billiton is again preparing for a major restructure. After failed acquisition attempts between 2007 and 2010 under the then CEO Marius Kloppers, on August 19, 2014, under the current CEO Andrew Mackenzie, BHP Billiton announced a demerger whereby the company would be split in two. The reshaping of the BHP Billiton empire includes a commitment to cut $US2.6 billion a year in costs and make other productivity gains, a trend that has been rolling out across the industry as commodity prices continue to fall and miners look for new ways to preserve profits.
Analysts have suggested that after a demerger BHP would focus on a narrow range of coal, copper, petroleum and iron ore businesses (four pillars with potash as a potential fifth) that generate most of its profits at the highest margins. It would justify a demerger as a way of making its remaining assets more attractive and valuable to investors. This is reflected in a statement made by the company’s chairman, Jac Nasser AO at the 2014 Annual General Meeting, when he said,
Once simplified, BHP Billiton will be almost exclusively focused on exceptionally large, long-life iron ore, copper, coal, petroleum and potash basins. With fewer assets and a greater upstream focus, we will be able to reduce costs and improve productivity more quickly. As a result BHP Billiton is expected to generate higher margins, stronger growth in free cash flow and a better return on invested capital.
The proposed new company will also be positioned to improve productivity more quickly as it benefits from a strategy, systems and process designed for the scale of its assets. (see http://www.bhpbilliton.com/home/investors/reports/Documents/2014/140925_2 014AnnualGeneralMeetingsChairmansLetter.pdf)
The BHP Billiton website provides a detailed report on its strategy, operations and governance. The report is called Value Through Performance Strategic Report 2014 (see http://www.bhpbilliton.com/home/investors/reports/Documents/2014/BHPBillitonStrategicR eport2014.pdf). A summary of the company’s strategy on its corporate website is given below.
Bhpbilliton resourcing the future
Our strategy delivers
A disciplined approach. A proven strategy.
Our strategy is to own and operate large, long-life, low-cost, expandable, upstream assets diversified by commodity, geography and market. Our strategy has remained unchanged for over a decade and has enabled us to deliver superior margins throughout economic and commodity cycles for many years.
Our diversified, low cost, tier one asset base enhances the resilience of our cash flow by reducing our exposure to any one commodity or currency and provides for more predictable and robust financial performance. It allows us to invest in and grow our business throughout economic cycles thereby delivering superior long-term value to our shareholders.
Our strategy is founded on diversification – by commodity, geography and market. To succeed, we need a workforce that reflects our values and the communities in which we operate. We aim to recruit from our host communities, to attract high calibre people who are committed to the success of our organisation and thrive on working in high performing teams. We are committed to developing the skills and capability of our people and believe this, underpinned by our tier one resource base, is what differentiates us from our competitors.
We are focused on developing and growing our diversified portfolio of tier one assets to continue to meet the changing needs of our customers. Our products are the raw materials fuelling not just today’s growth, but growth that will occur a century from now. We have a world-class portfolio of growth options that will ensure we are able to plan for the short and long term and continue to create value for our shareholders.
Question: Firstly, read the case study, BHP Billiton and Strategic Choices and the BHP Billiton document, Value Through Performance, Strategic Report 2014 (see below and Moodle).
Secondly, conduct a comprehensive strategic analysis of the BHP Billiton case and the company’s 2014 strategic report. Your analysis should include the areas outlined below.
- Identification of core strategic management concepts raised in the case and which will be addressed in your analysis, and the main strategic issues which the management of the company has to address (e.g. mergers, diversification, etc.).
- External environmental factors (general, industry and competitor) impacting BHP Billiton and examination of the Australian and international mining industry. Of particular importance are the main opportunities and threats facing the company.
It is important that you concentrate on a few main elements and explain why they are significant, rather than attempting to analyse all elements. You must support the most significant elements of the external environment by references to the academic literature, business media, industry publications and relevant websites.
- An evaluation of BHP Billiton’s internal environment, in particular its resources, capabilities and core competencies.
As with the external analysis, you need to try to identify and explain the main issues, rather than list a wide variety of factors. You should address what resources and capabilities contribute to a competitive advantage for the company. Your analysis must be supported by refereed journal articles, texts, relevant information from the case study, company website and the media.
- An explanation and review of the strategies implemented by BHP Billiton which have led the company to remarkable growth and its current level of performance. Here you should consider relevant aspects of business level strategies, corporate level strategies, merger and acquisition strategies, and international strategies.
Your discussion of the company’s strategic actions must be informed by the academic literature and strategic management theories must be directly applied to the case.
- An assessment of BHP Billiton’s 2014 decision to split the company into two and what BHP Billiton will need to do to sustain their success in the coming years.
In this section you should provide a sound rationale for supporting or disagreeing with the new direction BHP Billiton plans to take. Be sure that your earlier analyses lead to your rationale.
- The major results of your case analysis, recommendations with regards to the main strategic issues identified in the introduction, and implications of your case analysis for BHP Billiton, the mining industry and the domestic and global economies.
The first point above should form the basis of your introduction and account for approximately 5% of the word limit. Remember, you are expected to introduce the analysis, not the company. There are no marks for simply retelling the case or facts about the company. Points 2 to 5 should form the body of your essay, and point 6 the conclusion. Your conclusion should account for 10-15% of your word limit, leaving around 80% for the body of the essay.
Your analysis must be presented as a academic formal essay; do not use dot points or direct quotes and do not treat it as a business report or series of short questions.
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