Value Analysis of BHP

BHP Billiton Limited is a multinational company headquartered in Australia with subsidiaries in other countries that specialises in the exploration and mining of products such as coal, iron ore, bauxite, petroleum, and copper. In the same manner as any multinational corporation, it has a number of factors affecting its competitiveness and the ability to remain operational in the distribution of the products of mining as well as its overall profitability. These factors range from micro-environmental factors, conditions, state of private and public debt on the capabilities of customers to buy its products, to the availability of skilled and strategic workforce who can promote its efficiency. This paper examines the internal and external economic environment under which BHP Billiton operates by examining the micro-environmental and macro-environmental factors, the theory of comparative and competitive advantage in illustrating the strategy that can be used to achieve competitiveness, and the impact of private and public debt on the ability of the company to achieve competitiveness in global trade in mining products.

Company Overview

The Broken Hill Proprietary Company Limited (BHP) Billiton is a global multinational organisation that explores and mines metals and crude oil for ale to processing companies. It was founded in 1885 and operates under the partnership of BHP Billiton Limited and BHP Billiton Plc. It exists in Australian Securities Exchange (ASX), the London Stocks Exchange (LSE) in the UK, and the Johannesburg Stocks Exchange (JSE) in South Africa. BHP Billiton operates in Australia, South America, North America, Trinidad and Tobago, the United Kingdom (UK), and Algeria (Grant 2015). Initially, BHP Billiton ventured in smelting of lead in the Netherlands but diversified into bauxite mining in Indonesia in 1970s. BHP Billiton has achieved expansion in international operations through mergers and acquisitions. In 2011, it acquired shale assets owned by Chesapeake Energy at a cost of $4.75 billion, which enabled it to own 487,000 acres of mineral rights and 420 miles of pipeline field in Arkansas. The leases have enabled BHP Billiton to produce 415 ft3 of natural gas on daily basis (BHP, 2015). Other subsidiaries were acquired in South Africa and Southern Africa. The oil exploration and mining operations of BHP Billiton take place in the Gulf of Mexico, Onshore fields in the United States (Darmawan, Putra and Wiguna, 2014). According to the Intergovernmental Panel on Climate Change (IPCC), BHP is categorised as among the top 90 companies that contribute to greenhouse gas emissions. The emissions are majorly caused by operating machinery that produce high amount of carbon dioxide and carbon monoxide (Vague, 2016). A report by IPCC on total emissions produced by major multinationals in 2010 showed that BHP produced 7,606 metric tons of CO2 that accounted for 0.52% of the total global emissions (Yu, 2015). However, BHP Billiton has been effective in reducing the amounts of CO2 emissions through safe operational processes, which account for 10% of its total emissions. As a mandatory requirement in mining practice, BHP reports its annual production of the greenhouse gases emissions to the IPCC for assessment of environmental impacts of its activities (Mehra, 2013). However, BHP has put in place effective means of identification of operations that contribute to environmental impact so that control measures are implemented during exploration and mining to reduce the rate of production of greenhouse gases. In addition, it pursues other actions such as conservation that contribute to positive impacts on the environment (Grant, 2015).

The operational model used by BHP is increased engagement with its customers so that products of mining are supplied to them after mining. Efficiency in marketing crude oil has been achieved through effective supply chain management system such as the fleet of vehicles used to transport the products to the points of processing (Gordon, 2007). The overall objective of marketing is to connect the customers with the final products of petroleum processing in order to promote its competitiveness in the global market. This enables connecting assets to safety in production, reduction of production costs, and optimising sales at the most suitable prices. BHP Billiton charter explains the values of the organisation and its strategy of measuring and achieving success (BHP, 2015). The values of the company are: to promote sustainability by focusing on health and safety of its employees, promote integrity of their operations by producing the right products, embracing trust and team work among the workforce, and encouraging simplicity and accountability in the delivery of their commitments. While the company operates in a number of fields, the objective of the current analysis is the examination of its internal and external environmental factors affecting the competitiveness of petroleum products.

Micro-Environment Analysis

Value, rarity, imitability, and organisation (VRIO) analysis of BHP Billiton.

Value

Value refers to the expensive nature of a product or service offered by an organisation. BHP is aware that greater competitiveness can be achieved when customers associate its products with higher value compared with similar products from its competitors (Fliess, Idsardi and Rossouw, 2017). Consequently, greater focus has been put on mining of high quality iron ores, copper, and crude oil. The products of BHP Billiton are of value because they are always in high demand and do not require significant marketing efforts to distribute (Darmawan, Putra and Wiguna, 2014).

Rarity

Rarity refers to the internal state of an organisation in terms of the ability to remain in control of a particular product or service without experiencing competition (De Souza and Márcio de Almeida, 2013). The products produced by BHP are such as coal, iron ore, and crude oil rare because they can only be produced in large-scale by a few companies. Furthermore, there are only a few companies globally that explore and sell similar products as BHP (Mackenzie, 2015). The implication is that BHP Billiton has been able to remain relevant in the production and distribution of mining products to different regions globally.

Imitability

Imitability is the difficulty that competitors may encounter in producing a similar product or providing a particular service. The imitability of BHP Billiton products is difficult because there are few deposits of iron ore, petroleum, and other minerals and only few companies have the capability to explore the minerals (Wheatley, 2012). The operational strategy used by BHP to achieve efficiency in the supply chain system and scheduling of mining activities is unique and has not been implemented by its competitors.

Organisation

Organisation refers to the extent to which structures are put in place to ensure the goals of providing a product or service are achieved. The current state of managerial structures at BHP Billiton provides the opportunity to enhance the exploration of minerals and petroleum in a strategic manner such that the desired objectives of mining are achieved.

Suppliers

The suppliers of BHP Billiton have little impact on its competitiveness since most of its inputs into mining industry are composed of raw materials that are extracted from the mining sites. However, the effectiveness of BHP Billiton output is affected by the availability of raw materials, which is usually subject to the ability to extract enough materials from the mining sites (BHP, 2015). However, most iron ore exploration departments are dependent on suppliers of Information technology (IT) equipment, labour, and equipment that enable the extraction of the iron ore. The suppliers of land on which mining take place are paid royalties for the use of their property during the operations of BHP. The amount of royalties paid is dependent on the agreement between BHP and the land owners. Consequently, it is common for the company to pay royalties in accordance with its use of the supplier’s land and the production of output of minerals such as iron ores and petroleum (Yu, 2015). Supplier power is weak because they tend to find difficulties in obtaining the right customer who is willing to accept their demands for the use of land. The quality of inputs in terms of skilled labour, mining methods and processing methods is a determining factor for the quality of the metal ores or crude oil for sale to customers. The suppliers of equipment such as electrical supplies are usually given long-term contracts, which enable them to develop positive relationship with the company in order to provide high amounts of discounts on purchases.

Customers

Customers are important factors in promoting the internal competitiveness of BHP Billiton since they determine the possibility of survival of the company. BHP’s major customers are processing companies for crude oil, steel-making companies, and building and construction companies (Els, 2018). Customers enter into bilateral and multilateral contracts with BHP in which they are given the opportunity to sell the minerals and crude oil to manufacturers. During contracts, ceiling prices are agreed in such a way that firms are protected from high cost of raw materials for their products. There is greater tendency of firms to achieve differentiation by providing their customers with added value products at premium prices which results into a stronger buyer bargaining power.

Marketing Intermediaries

Market intermediaries are firms that enable BHP Billiton to explore the mineral products and petroleum, perform extraction, and distribute the products to the final users. They include retailers of crude oil, minerals, marketing services providers, and financial intermediary agencies (Gordon, 2007). BHP Billiton relies on market intermediaries such as warehouse firms that enable it to stock goods before distribution to customers. Various market service agencies contribute to the success of BHP Billiton in the distribution of minerals to the target customers. They include marketing firms, advertising companies, and companies that provide consulting services in relation to the strategy to be used in accessing the target customers.

Various marketing intermediaries have been integrated to increase the competitiveness of BHP Billiton’s petroleum products. According to Els (2018), BHP Billiton is ranked top in the UK because of an effective branding strategy. The brand value of BHP Billiton rose in 2018 by 29% to a record $5.1 billion (Mehra, 2013). In May 2017, a campaign was launched by BHP Billiton called ‘Think Big’ that aimed at establishing its brand image in the Australian market and community. The impact of effective marketing strategy has been observed in terms of an increase in the demand for iron ore

Competitors

Competition in the international market is a major concern for BHP Billiton since the value of its mining products is directly affected by the level number of competitors who provide similar products to customers. A major competitor of BHP Billiton is Glenco which has average annual revenue of $205 billion and specialises in mining of metals, minerals, and operations in agricultural sites (Wheatley, 2012). Based in Baar Switzerland, the company specialises in mining of metals such as copper, aluminium, ferroalloys, nickel, zinc, and lead. Due to the global reputation status of Glenco, it contributes to high competition for the target customers of BHP Billiton. Another major competitor of BHP Billiton is Anglo American which is a mining company based on South Africa and the UK that is the largest producer of platinum, accounting for 40% of the global output (Mackenzie, 2015). It also produces copper, diamond, nickel, and thermal coal. These mining products are distributed to manufactures who are also major targets of BHP Billiton, resulting into competition. Other competitors of BHP Billiton are: Exxon Mobil, British Petroleum (BP), Chevron Corporation, Royal Dutch Shell, and Total South Africa. Strategies have to be devised in the forms of pricing models and marketing in order to cope with competition from these competitors.

The Public

The general public is a major factor that affects the environment in which BHP Billiton operates. These factors include: financial status of the members of the public, exposure to media, local public, and the organisational public (Grant, 2015). Financial public factors affecting the operations of BHP Billiton include banks, financial organisations, and stock holders. BHP Billiton’s ability to get financial support is determined by the availability of financial services in the countries in which it operates. In some countries, there are more barriers to access to financial support which affects the ability of the company to achieve operational needs which require financial expenditures. The media aspect of the public such as Televisions, magazines, and radio has an impact on public perception of BHP Billiton and it has to ensure measures are put in place to create a positive organisational reputation (Darmawan, Putra, and Wiguna, 2014). An example of such a case is when there were media coverage regarding the lawsuit that faced BHP Billiton faced a ₤30 billion due to claims for compensation of victims of a dam that collapsed in Brazil, causing significant damage to property and losses of life. The depiction of BHP Billiton as responsible for the collapse of the dam led to a plunge in its shares by approximately 10%. The public has been critical in relation to the impacts of the activities of BHP Billiton on the environment. These critics were observed in cases such as media publications in which BHP was accused of releasing high amounts of toxic wastes from copper mining in the Ok Tedi Fly River basins that resulted into the displacement of 50 thousand people and destruction of the environment (BHP, 2015). The internal public include; managers, employees in the administration departments, workers in the operational sections, volunteers, and the boards of directors. Effective human resource policies have been formulated that ensures the welfare of the internal public such as safe working conditions and inclusivity policies are implemented. The strategic priorities that ensure competitiveness of HBP Billiton include promoting safe working environment for employees, board strategic planning, and creation of business-directed plans aimed at creating a positive internal environment that addresses the needs of all the stakeholders.

Macro-Environment Analysis

Economic Factors

A major economic factor impacting the external environment in which BHP Billiton operates is the commodities market and macro trends in the sales of minerals such as iron ores, copper, petroleum, natural gas, and crude oil. BHP Billiton has benefited substantially from a strong external commodities market (Yu, 2015). The impact of the global changes in the prices of commodities were experienced in 2006 when there was a surge in the prices of copper, zinc, iron ore, coal, thermal coal, and uranium. Marketers of minerals have taken advantage of a strong Gross Domestic Product (GDP) growth of China and India to increase the sales among customers in these countries. In 2011, China represented 61% of the global demand for iron ore, 39% of global demand for copper, 40% of nickel purchases, and 10% of oil demand. According to BHP Billiton report on June 30th 2012, the sales of commodities in China resulted into 29.9% of sales of BHP Billiton or $21.6 billion (Els, 2018). The reduction in growth of the economy of China could imply that the commodities could be sold as much lower prices. Currently, the commodity market is characterised by a strong demand cycle due to industrialisation activities in most countries. The implication of the increase in demand for metal ores and crude oil is that companies will increase their exploration activities in order to meet the market demand (Wheatley, 2012). Metal mining industry in which BHP Billiton operates in a market that requires high amounts of capital spending some companies have not been able to manage their supply chain effectively due to low demand.

Political Factors

The political factors that have impacted the operating environment of BHP Billiton are regulations of the operating licenses in the areas of interest for exploration and mining of products such as coal, crude oil, and other classes of minerals (Mehra, 2013). Significant amount of capital has been allocated by BHP Billiton in exploration projects in countries with the risks of internal tension such as the Democratic Republic of Congo, Kazakhstan, and West African countries. Some regions of interest for operations have been associated with political tensions such as civil wars, terrorism, strict government policies, and regulation of the operations of foreign companies (Gordon, 2007). There are different formats of lease agreements that affect the process of authorisation of mineral exploration and mining in different countries. There has been a significant change in the Australian political environment under which BHP Billiton operates after the resolution of the Australian prime minister to impose climate change polices in which companies will be expected to regulate the amount of carbon emission or face the risks of sanctions and fines. In South Africa, BHP mining activities have been adjusted in accordance with the Mineral and Petroleum Resources Development Act which was passed in 2002 and implemented in 2004 (Darmawan, Putra and Wiguna, 2014). The Act requires that companies must allocate a section of their revenues to support the disadvantaged people in the regions where mining activities take place. The implication is that under this act, there will be the need for BHP to allocate at least 26% of its revenues to support the poor South Africans. Some governments opt to increase taxes which imply that foreign mining companies can be adversely affected by the legislations (De Souza and Márcio de Almeida, 2013). The introduction of 5% mining tax on mining companies in Chile implies that BHP will need to allocate a similar percentage of revenues from its operation at the Escondida copper mine which is considered to be the largest copper mine in the world. Due to such taxes, there is uncertainty regarding the sustainability of the profits generated from the operations of the company in Chile.

Cultural Environments

There are different cultural practices in different parts of the world which affects the strategy of BHP. In Australia, BHP has to show consideration for the cultural practices of the aboriginal people by avoiding mining activities that can lead to their displacement from areas of residences or cause disenfranchisement of their natural heritages such as houses, natural forests, grasslands, and beliefs (BHP, 2015). In South Africa, it has been necessary that BHP observes the indigenous natural heritages such as the Kariyarra Native land claims and the avoidance of access to land that has been declared for settlement of the local people. All personnel and operational workforces in the mining sites have been made aware of these cultural considerations before embarking on mining activities (Els, 2018). International mining and sales of iron ore and crude oil has been done in consideration of the cultural practices in the target countries in such a way that there is understanding in signing trade agreements.

Legal Issues

The major legal issues that have impacted BHP are legal suits in relation to its operations and the impact on environment. It has been forced to pay hefty amounts of fines in relation to operations in Brazil that led to the flow of clay and other waste materials from copper processing activities into areas of residence and aquatic environment (Yu, 2015). The breakage of the Fundao dam in 2015 resulted into the devastation of the local area with wastes from iron ore mine. In the legal issue, BHP was accused of not taking adequate measures to protect the local people from harm caused by the dam such as warning people of a possible collapse. The dam disaster in Brazil has acted as a case which recommends the implementation of measures of promoting safety of local community members in the areas where BHP operates in order to avoid future legal consequences (Mackenzie, 2015). There have been legal issues impacting BHP in regards to ethical business practices such as the case of Olympics 2008 in Beijing in which it was accused of violating the Foreign Corrupt Practices Act by sponsoring government officials who are directly associated with its business activities to attend the Olympic games (Darmawan, Putra and Wiguna, 2014). The allegations were made by Securities and Exchange Commission (SEC) officials who claimed that BHP was aware that the act of inviting government officials to the event was an act of bribery and increased the risk of violating anti-corrupt laws. However, BHP has put in place enough measures to ensure it is not affected by similar legal issues in the future.

Economic and Trade Theories Explaining the Ability of BHP Billiton to Operate Internationally

Theory of Absolute Advantage

The theory of absolute advantage states that a country or a multinational corporation can achieve international competitiveness by focusing on the production of a product which it is able to produce in large quantities and at reduced cost or using the same amount of resources as its competitors (Liu, Yang, Cai, and Wang, 2018). The theory of absolute advantage was developed by Adam Smith in 1776 and states that corporations or nations cannot become rich at the same time by following the mercantilism principle of reducing imports and increasing exports, but through free trade and specialisation based on their absolute advantage.

This theory can be implemented by BHP by examining the products it produces in terms of the resources inputs and how the financial outcome of the company is promoted through increased output. A comparison should be done that examines the products such as copper, iron ore, bauxite, nickel, and crude oil in terms of the quantity produced and the amount of resource input required to produce them (Mehra, 2013). According to the principle of absolute advantage, BHP should focus on mining only on products that it can produce in larger quantities compared with its competitors. Chile is considered as a country with one of the richest copper mines and there are little costs incurred in mining. On the basis of absolute advantage, BHP needs to focus on mining copper in Chile rather than in other countries where the cost of exploration, drilling and extraction are high. The limitation of this theory is its recommendation that BHP should abandon mining if it is unable to produce any of the minerals in larger amount compared with its competitors (Grünig and Kühn, 2015). However, is an economic theory that puts emphasis on the need to focus on production of products and services whose outputs result into least cost which is an effective strategy of achieving competitiveness for multinational corporations.

Theory of Comparative Advantage

The theory of comparative advantage states that a corporation or a country should focus on production of goods or services that contribute to the highest amounts of revenues for trade with its partners. Other commodities that do not lead to better income should be abandoned in favour of the commodity that generates the highest amounts of revenues (Lucian, 2010). In economic context, an agent has a comparative advantage over competitors when it is able to produce a particular good or service at a lower cost compared with its competitors. The focus of the comparison is not on the monetary costs of production or the cost of resources, but the opportunity costs involved in the production of particular goods or services (Fliess, Idsardi and Rossouw, 2017). The international operations of BHP can be illustrated in the context of this theory by recommending that it can specialise in mining a product that can be produced at the least cost compared with those whose cost of production are high. a comparison should be made on the costs of producing minerals such as iron ores, copper, nickel, and crude oil so that greater focus is put in production and distribution of the product that requires least financial resource requirements to produce (Wheatley, 2012). The limitation of the theory of comparative advantage is that it restricts a company from utilizing its resource capabilities and strengths to diversify the production of products of different types.

Impact of government and Private Debt levels on the Competitiveness of BHP Billiton Products

The current global economic environment is characterised by an increase in government and private sector debts in most countries that buy the raw materials from mining companies. In the United States, private debt has increased from 55 percent of the GDP in 1950 to 150 percent of the GDP (Checherita-Westphal and Rother, 2012). There is a negative impact of government and private debt on the performance of multinational corporations such as BHP since high debt rates means that companies are not able to get customers to buy the products of mining. The higher the debt rates of private companies, the lower their ability to buy raw materials to be used in processing the products of mining such as iron ore, copper, or crude oil. A high government debt also means that companies are not able to get financial support to address their business objectives (Vague, 2016). The mining products of BHP have been majorly bought by the government and private sector of China. Due to the negative relationship between debt and investment, growth rates in most countries have been negatively impacted. Presently, China is suffering the consequences of high amounts of private debt due to a cumulative $18 trillion that has been pumped into the private sector since 2008. There has been a collapse in China’s stock market by 45 per cent and the rate of economic growth is declining. A high rate of increase of private debt which is presently 321 percent is contributing to overcapacity of supply of products such as real-estate, commodities, and other items (Fliess, Idsardi and Rossouw, 2017). The implication is that the processing companies are experiencing a surge in cost of acquisition of raw materials from mining industry and the demand for mineral such as iron ore have been on the decline. Similarly, BHP is less likely to experience higher demand for its mining products under conditions of high government and public debts.

Conclusion

The current situation of BHP Billiton is that the existence of an organised internal environment composed of workers, human resource management, customers, and the public. The organisational value of promoting exports of a range of products has enabled BHP to be relevant in the sales and distribution of mining products to different target customers. The major factors impacting the operations of BHP Billiton are the need to observe the legal, political and cultural practices of the countries where it operates. The existence of competitors such as Glenco, Exxon Mobil, Royal Dutch, BP, among others shows that there is the need to intensify the strategy of marketing in order to achieve the demand for BHP products such as copper, iron ore and crude oil. A major setback to the competitiveness of BHP Billiton is the soaring private and government debt rate which has an impact on its ability to achieve the target sales. The increase in private debt implies that companies will not have sufficient capability to buy the iron ores, copper or crude oil for processing into the final products. Similarly, an increase in public debts such as in China will contribute to reduced demand for BHP iron ore and an increase in supply. However, the future sustainability of BHP Billiton is achievable since it is one of the most established mining company globally, it explores a range of minerals and can apply the strategies of comparative advantage and competitive advantage to increase its competitiveness in international trade in mining products.

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