Introduction
A global strategy is one in which a firm seeks to gain competitive advantage on a global basis through either an optimal arrangement of value-adding activities, coordinating among those dispersed value-adding activities, or both. The highly competitive nature of many markets and the likely future prospect of continued economic turbulence as national and global economic fortunes vary require that business managers continue to look for opportunities to improve performance.
BHP Billiton (BHP), the world’s largest mining company, follows a global strategy that helps it to achieve a competitive advantage and remain competitive and profitable. The case of BHP vividly portrays that the ultimate purpose of strategic management is to secure the competitive advantage of the organization in question. The aim of strategic alliances is to acquire resources and capabilities beyond BHP’s own control. Strategic alliances allow BHP to set up exchange technology, gain market entry, lower production costs, and offset exports.
Analysis of the General Environment
BHP operates on the global scale and deals with “a diverse range of products, customers and markets, outstanding management depth and an enviable portfolio of growth opportunities” (BHP Home, 2007). BHP uses a number of strategies by which any set of objectives can be reached. In general, a number of possible strategies exist, since they give rise to a large number of possible combinations or alternative strategies, one of which must be selected as the most promising. BHP states: ‘We are distinguished from other resource companies by the quality of our assets; our deep inventory of growth projects; our customer-focused marketing; our diversification across countries, commodities, and markets; and our Petroleum business” (BHP Home, 2007).
Demographic Factors
The global demographic situation is marked by such factors as the increased population in less developed countries, high population growth rates in Asia, the aging population in Europe and America. The demographic situation in America and Africa suggests changes in demand patterns and consumption. While in the USA the unemployment rate is not high, and the demographic situation did not a great influence on the market, in low-developed countries this is the main factor that influenced BHP’s sales. A high poverty level and unemployment are the main threats for BHP in these markets. Population density is consistently positively associated with economic growth across time and across all countries; that population size is positively associated with economic growth during some time periods (Bengtsson and Saito, 2003).
Taking into account the population growth rates, it is evident that India has the highest rate – 1.606%. The place is occupied by the USA (0.894%) and the third one – Australia (0.824%). The negative population growth rates have Japan (-0.088%) and Germany (-0.033%) (Bengtsson and Saito, 2003). Real resource flows per person—to isolate the effect of fertility on distribution, and to act as the dependent variable in analyzing the effect of fertility on growth. New sources of power and energy (oil and natural gas) have improved the economic conditions of millions of people. Population growth is usually influenced by increased productivity, changing agricultural patterns, and technological innovation aimed to improve conditions of life (CIA World Factbook, 2007). These factors have a great impact on BHP’s strategy determining the main regions and countries for new market entry. These factors help BHP to determine long-term strategies and forecast possible changes that affected the global market (Black, 1999).
Economic
Liberalization of economies worldwide has created many opportunities for MNCs (multinational corporations) and TNCs (transnational corporations). The spread of economic liberalism has been the most important driver of globalization. The deregulation and privatization of industries in developed and developing countries has stimulated economic activity by opening borders for trade and foreign investment—which, in turn, stirred global competition.
Following Daniels et al privatization in both developed and developing economies has fueled strategic alliances. Privatized enterprises have globally engaged in strategic alliances such as licensing, joint ventures, marketing, and production partnerships to become and stay efficient and competitive. Likewise, a number of privatized enterprises in former socialist and developing countries have sought strategic partnerships with the belief that such alliances would contribute considerably to the development of Western-like business strategies and structures. (Hanson et al, 2005).
Low barriers to trade and favorable market situations in less developed countries open tremendous opportunities for such giants as BHP. The impact on strategy is explained by the fact that like many MNCs, BHP has established strategic partnerships with national firms in post-socialist countries that transformed their economies. According to Daniels et al strategic alliances with Western firms have injected new life into privatized firms in developing countries by revitalizing commercial practices and efficient production systems. They have quickly learned such business planning and practices through their interactions with their Western partners. Today, BHP operates in 25 countries in all regions of the world. This strategy allows BHP “to be a premier global company, we occupy industry leader or near industry leader positions in major commodity businesses” (BHP Home, 2006).
Political/Legal
The positive political climate in developed countries and democratic changes in less developed countries support the global leadership of BHP. Changes in global political regimes often precede changes in economic policy behaviour. A current global phenomenon is a trend toward reduction of direct governmental involvement as a supplier of goods and services in a given economy, on the other hand, it opens new opportunities for the elite to consolidate resources and money in their hand as private capital. Following Buckley and Ghauri (1999) MNEs establish new behaviour patterns in political life supporting the proliferation of democratic rules and progressive foreign relations. For BHP it means that market economies thrive in a political atmosphere that minimizes governmental interference in the economic laws of supply and demand. In reality, a corollary is that individual initiative in the marketplace is more likely to occur in an atmosphere of political freedom (Johnson and Scholes, 2001).
New regulations and rules accepted by the EU have a great impact on the strategic decisions and operations of BHP. BHP is now faced with demands for recyclability and environmentally friendly products from customers, and it is clear that an image as a “green” corporation can yield a competitive advantage in the future. Along with the growing importance of environmental movements, in some countries (Great Britain, France, Germany) political parties have formed with environmental issues as a message. Corporations must also expect government regulations in areas of recyclability of both product and packing, as well as in pollution and environmental issues in general (Johnson and Scholes, 2001).
Socio-Cultural Factors
The global environment is marked by such processes as mass culture, cultural globalization, and adaptation. Consumers worldwide are more informed than ever before; therefore, they demand quality, value, and convenience in products and services. As a result of sophisticated consumer demands (Hanson et al, 2005). BHP has made customers involved in their manufacturing and marketing processes. In other words, customers have become strategic partners of BHP that pay careful attention to their customers’ needs and demands. Cultural globalization reduces barriers and opens new opportunities for BHP. Global culture and mass consumption affect consumer tastes and preferences, attitudes to work, attitudes to education, and training.
The impact on the strategy can be explained by strict ethical principles and moral rules followed by BHP in all countries. The company states that: “the human rights of our employees and contractors – our relationships with our employees, development of our leaders, diversity including indigenous employment, training, remuneration and other benefits of our employees” (BHP Home, 2007). It is possible to say that socio-cultural factors are closely connected and depended upon technological changes and innovations. As a result of advanced communication technologies, people around the world can hear and watch the high standard of living of others when consuming quality goods and services. This kind of instant exposure to better products and services has stimulated consumer demands that were either nonexistent before or impossible to meet. The age structure determines the size of particular segments and also the size of the working population.
Technology
Technology has become important for BHP for a number of reasons. First, BHP uses manufacturing technology to achieve low throughput times, higher quality, and flexibility. This is undertaken by “cleaning up” its plants by using concepts such as quality circles and Just In Time and later automating heavily (Hanson et al, 2005). This resulted in an increased importance of manufacturing in strategy in the West. The speed of new product development also increases, decreasing product life cycles and yielding a competitive advantage to innovative firms. These two factors are supported by the emergence of new information technology, which enhances the possibilities for communication, and by new technologies replacing old ones, for example, composites, suggesting that a number of conventional technologies reached maturity and would be replaced sometime in the near future. Looking at these factors, it is not surprising that manufacturing, R&D, and integration are subjects of great discussion.
According to Michael Porter (1985), technology can be used to create competitive advantages (Daniels et al, 2006). This growth in R&D expenditure is seen both as a reaction from firms faced with the quickening pace of competition and as a process of producing innovation, which in turn is a source of more rapid and technical progress. According to Daniels et al (2006), the growing globalization of trade and competition forms the basis of a second hypothesis, which accounts for the increased importance of technology and the growth in R&D spending. Technological innovation proposes unlimited opportunities for BHP to operate on a global scale.
BHP develops its strategy in order to meet technological changes and respond effectively to changing conditions. Technology allows the company to “exist as separate companies, but operate on a combined basis as BHP Billiton” (BHP Home, 2007). BHP makes use of the Internet and WWW. An increasing number of consumers around the world, particularly in industrial countries, can now find most of what they need on the Web as the Internet is becoming easier to use and is expanding worldwide. A rapidly augmenting rate of electronic commerce (e-commerce) has empowered BHP’s consumers to make informed choices and compare products and services. The Web’s search engines and directories have been useful in helping users easily locate firms and products (Buckley and Ghauri, 1999).
Global Factors
The number and strength of international competitors have grown to such an extent that BHP now must include them in their strategic considerations, which is reflected by, for example, the work on lean production. For BHP, there is a great need for strategic collaboration with local partners and global suppliers. Globalization is mandating alliances and rendering them essential components of the strategy. Recent business developments—entering the global market by collaborating with local firms, performing joint R&D between pharmaceutical and biotechnology companies, and code sharing between airlines—reflect global business sentiment and alliances (Daniels et al, 2006). Old ways of doing business by relying entirely on your own resources and capabilities have been changing rapidly. Global alliances have become common. Now, BHP often collaborates with other global players or domestic firms from emerging economies.
Industrial Environment
The industrial environment is marked by increased competition and strategic partnerships among global companies. Productivity and revenues at many global corporations have risen dramatically, while overall worldwide employment has not. Meanwhile, a dispersal of productive wealth is underway as global corporations establish operations in key developing countries like Brazil and China (Daniels et al 2006). The uniqueness of the industrial environment is that many MNEs in the net are linked to each other and have specific dependence relations to each other. As was mentioned above, this has a great impact on the structure of BHP.
BHP has a layered organization that consists of technical, management, and community levels. The structure of the industry significantly affects the profit potential of the business operating in that industry. The strategy and actions of a business operating in the industry may improve or destroy the industry structure. Each business must recognize and evaluate the impact, short term, and long term, of actions taken on the overall industry structure and attractiveness (BHP Home, 2007).
Porter’s Five Forces
Taking into account competition among existing firms, it is possible to say that this is the natural competitive rivalry that exists between the various businesses operating within the industrial marketplace. In this industry, competitors are equally balanced, market/industry growth is slow, and fixed costs are high. Thus, buyers cannot easily switch purchasing between businesses without penalty Capacity is increased only in large increments which means that utilization (and therefore volume) is critical (Johnson and Scholes 2001, BHP Home 2007).
The threat of new entrants is less possible. In this industry, there is low economics of scale (i.e. volume/size do not significantly change the cost base) but customer loyalty is high. Products/services are commodities’ with little differentiation. High technological, regulatory, or competence barriers exist. The threat of substitute products (synthetic substitutes) is possible but it requires financial investments and funds. Also, some products can be produced through a different technology (low-cost production). Buyers can easily switch purchasing to the substitute without penalty but buyer acceptability of substitutes is low because synthetic substitutes will differ from BHP’s products.
Bargaining power of suppliers, the relationship between businesses in the industry and the suppliers to those businesses, does not have a great impact on BHP. Only in some spheres (oil, gas, diamonds) where suppliers have a unique or restricted availability product they can exert a strong influence over prices and conditions of supply, therefore potentially putting pressure on the businesses purchasing their product/services. There is a limited number of suppliers and availability of supply The supplier’s product is not valuably differentiated.
The bargaining power of buyers has an impact on BHP and its strategic decisions. There are a lot of potential buyers. The purchases represent a significant proportion of the buyer’s costs. The advantage is that products are commodities’ with little differentiation, and it is not easy for buyers to switch to alternative suppliers There is a threat of backward integration (Johnson and Scholes 2001, BHP Home, 2007).
Conclusion
The selection of which path or strategy is to be followed is referred to as strategy formulation. The uniqueness and important element of strategic decisions accepted by BHP is that these strategies are directed toward the future in which conditions may be very different from those at the time when the strategic plan is formulated. If the objectives are to be met, they must be realistic in relation to the business environment existing at some time in the future. Thus, a conscious view of the future, however imprecise, must be built into the strategy process. The need and opportunities for strategic alliances include low barriers to trade and favorable political and economic conditions.
For BHP, this strategy is crucial because a strategic alliance presents two distinct properties: long-term commitment and contribution to strategic performance of the partnering firms. A supplier agreement is a strategic alliance when it provides long-term relations that helps BHP build a sustainable competitive edge. The facts mentioned above suggest that global competition has improved product quality and customer service while reducing the prices of many products and services. Without strategic alliances, global companies would unable to survive and remain competitive.
Bibliography
Banerjee, S.B., Linstead, S. 2001, Globalization, multiculturalism and other fictions: Colonialism for the new millennium? Organization, 8 (4), pp. 683-722.
BHP Home. 2007.
Black, J.S. 1999, Globalizing People through International Assignments, Reading, M.A.: Addison Wesley.
Bengtsson, T. and Saito, O. 2003, Population and Economy: From Hunger to Modern Economic Growth. Oxford University Press.
Buckley, P.J. Ghauri, P.N. 1999, The global Challenge for Multinational Enterprise. Pergamon. CIA World Factbook 2007.
Daniels, J., Radebaugh, L., Sullivan, D. 2006, International Business: Environments and Operations. Prentice Hall.
Hanson, D., Dowling, P.J., Hitt, M.A., Ireland, D. and Hoskisson, R.E. 2005, ‘Strategic Management: Competitiveness and Globalisation’, 2nd Ed., Nelson Australia Pty Ltd.
Johnson, G., Scholes, K. 2001, Exploring Corporate Strategy. Hemel Hempstead: Prentice Hall.