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 of natural resources, development and/ or production
operations, conducting research and development engineering or
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” (Market-
watch, 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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