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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 worlds largest diversified

natural resource company according to records. Company website revealsthat 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 defensivemechanism 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 isa 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 explorationsites 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 dont 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 companys brand identity.

A merger is considered to successful if it increases the acquiring firms 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. Withoutstrategic 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 attaincompetitive 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 arrangementbetween 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 years 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, allocatedresources 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 marketswith 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 choicecould 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 Indonesias 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

Nations biggest export contracts with BHP Billiton. The deal was to supply

iron ore to Chinas 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

Chinas 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 variousinternational corporations. The long term joint venture entered into by BHP

Billiton with companies in China for supply of iron ore was in accordance

with companys strategy to maintain global iron ore market share and

ensure that they are a constant and integral part of Chinas 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 companys assets, earnings andcash 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 theinternationalisation 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, Russianliquor 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 worlds 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 worlds poorest

countries and it has resulted in pollution of water sources, killing flora andfauna 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 worlds 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 theirneed to conduct such deep and extensive explorations and projects comes

into debate.

According to BHP Billitons sustainability report 2010 Sustainable

Development at BHP Billiton encompasses companys 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 doesnt 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 andnoise 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 managements strategic planning that can prevent the keyenvironmental 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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Andrade, G., Mitchell, M. & Stafford, E. (2001). New evidence andperspectives on mergers,Journal of Economic Perspectives 15, 103-120

Anderson, E. and Coughlan, A.T.(1987). "International Market Entry andExpansion via Independent or Integrated Channels of Distribution". Journalof Marketing, 51:71-82.

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Bartlett, C.A., and Ghoshal, S. (1998). Managing Across Borders. TheTransnational Solution. Boston: Harvard Business School Press

Cunningham, M.T. (1986). Strategies for International Industrial Marketing.In D.W. Turnbull and J.P. Valla (eds.) Croom Helm 1986, p 9.

Das, T.K. and Teng, B.S. (1998). Resource and Risk Management in theStrategic Alliance Making Process.Journal of Management, 24(1). pp. 21-42.

Engle, A. D., and M.E. Mendenhall. (2004). "Transnational Roles,Transnational Rewards: Global Integration in Compensation." EmployeeRelations 26(1), pp. 613625.

Gorton, G. B., Kahl, M. & Rosen, R. J. (2009). Eat or Be Eaten: A Theory ofMergers and Firm Size. The Journal of Finance, 64(3), 1291-1344

Hitt, M.A., R.D. Ireland, and R.E. Hoskisson. (2005). Strategic Management:Competitiveness and Globalization: Concepts and Cases. 6th ed., Mason,OH: South-Western Publishing

Homburg, C., H. Krohmer, and J. Workman. (2006). "Strategic Consensusand Performance: The Role of Strategy Type and Market-RelatedDynamism." Strategic Management Journal20, 339358.

Porter, M. (1980). Competitive Strategy, New York: Free Press, pp. 49

Lindemann, J. (2004). Brand Valuation, New York: Interbrand

St. John, C., and J. Harrison,(1999). "Manufacturing-Based Relatedness,Synergy, and Coordination." Strategic Management Journal20(1), 129145

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http://www.riotinto.com/media/5157_18100.asp

http://www.bhpbilliton.com/bb/ourBusinesses/diamondsSpecialtyProducts/potashDevelopment.jsp

http://www.bhpbilliton.com/bb/sustainableDevelopment.jsp

http://www.eurofer.org/index.php/eng/News-Publications/Press-Releases/European-Commission-opens-cartel-investigation-against-joint-venture-of-BHP-Billiton-and-Rio-Tinto

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