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International Marketing Strategy of Fortescue Metal Group Case Study


Executive Summary

The external and internal environment of Fortescue Metal Group has been analyzed in this report. The external environment presents several threats, which include high competition, tariff barriers to foreign market entry, high bargaining power of buyers of iron, and high suppliers’ bargaining power.

The main opportunity that is available to FMG is the expected increase in demand for iron in China and other emerging markets. Moreover, the company has the opportunity to increase its market share because of the low threat of new entrants and substitutes.

FMG’s strengths include access to huge iron ore deposits, extensive railroad networks, and a talented workforce. However, its overdependence on the Chinese market is a threat to its long-term profitability. Overall, the company’s resources and capabilities will improve its long-term success.

Case Study Report: Strategic Management

Introduction

Fortescue Metal Group (FMG) is a leading producer of iron in Australia. Since its inception in 2003, the company has achieved rapid growth through cost reduction and expansion of production capacity. The aim of the company is to become the lowest cost producer of iron in Australia (FMG 2014).

This paper will provide a detailed analysis of the internal and the external environment of the company to determine its competitiveness. The aim of the analysis is to identify the internal and external factors that are likely to influence the company’s ability to succeed in the long-term.

External Environment

PESTEL Analysis

International trade policies are the main political factors that influence the performance of firms in the iron industry. Protectionist trade policies such as subsidizing domestic iron producers prevent competition in major markets such as China (Hau, Chatterjee & Jingliang 2011, pp. 68-81).

In emerging markets in Africa and the Middle East, high import duties reduce the competitiveness of imported iron.

Economic growth and exchange rate are the main economic factors that affect iron producers and exporters. Strong economic growth in China and emerging markets in Asia and the Middles East will continue to increase the demand for iron in the next five years (KPMG 2014).

Exchange rate fluctuations have both positive and negative effects on export revenues. An appreciation of the Australian dollar against major currencies such as the yuan and euro makes iron exports from Australia to be more expensive in international markets. The reverse effect occurs when the Australian dollar depreciates.

The major social factors that influence the competitiveness of iron producers include increased population growth and urbanization in emerging market economies, as well as, lack of experienced personnel in Australia’s iron industry.

High population growth and increased urbanization will increase the demand for housing, which in turn will increase the demand for iron in the international market (KPMG 2014). However, lack of experienced personnel means that Australian iron producers must incur high staff development costs.

Production and transportation technologies have a significant effect on the competitiveness of iron producers. Companies that lack access to efficient third party transportation systems are unable to improve their competitiveness.

Access to cheap energy and efficient mining technologies improve the competitiveness of companies in Brazil and China (Beresford, Pettit & Liu 2011, pp. 32-42).

Environmental regulations and access to iron reserves are key determinants of success in the iron industry. Nearly all companies in the global iron industry are incurring high costs due to prohibitive carbon emission fees (Inglezakis & Zorpas 2011, pp. 566-580).

Although Australian and South African companies have access to high quality iron ore, their counterparts in China and Brazil are losing their competitiveness due to limited access to high quality iron ore.

Anti-trust law is the main legal factor that influences competition in the iron industry. The Australian Competition Tribunal has the power to declare private railroads to be open access tracks. This limits the incumbents’ ability to prevent entry into the industry (Tian, He & Yi 2005, pp. 67-88).

Moreover, the competition laws determine the extent to which companies can combine their resources to create synergies. For example, if the joint venture between BHP Billiton and Rio Tinto is blocked, the two companies will lose the opportunity to save $10 billion annually.

According to the PESTEL analysis, the main threats to the competitiveness of FMG are limited access to third party transportation systems, tariff barriers to market entry, high carbon emission fees, and exchange rate fluctuations.

This means that the company must be able to reduce its operating costs in order to overcome threats such as high import tariffs and carbon emission fees.

The opportunities that are available to FMG include the expected increase in demand for iron and availability of high quality iron ore in Australia. Thus, the company can increase its sales and profits by increasing its production to cater for the expected increase in demand.

Porter’s Five Forces Analysis

Suppliers’ Bargaining Power

The main suppliers in the iron industry include owners of land with iron ore deposits, suppliers of fuel, and manufacturers of mining equipment. Owners of land such as the Aborigines have high bargaining power due to the limited supply of land with iron ore deposits.

Suppliers of fuel have high bargaining power due to their low switching costs (KPMG 2014). They can easily shift their supply to other industries such as manufacturing and transportation, which are able to offer high prices.

Suppliers of mining equipment have high bargaining power since their products are highly differentiated. The high bargaining power of suppliers means that iron producers can be exploited through high prices of key supplies.

Threat of Substitutes

Iron is mainly used in the production of steel. In the steel industry, “scrap metal is the only substitute for iron” (Beresford, Pettit & Liu 2011, pp. 32-42).

The threat of substitutes is low since iron performs better than scrap metal in terms of quality and availability. The low threat of substitutes means that iron producers face little competition from sellers of scrap metal.

Buyers’ Bargaining Power

Buyers (steel mills) have a high bargaining power due to their ability to implement backward integration strategies. For example, China’s Hunan Valin Iron and Steel Group has invested in FMG to improve its access to iron. The high bargaining power of buyers is also explained by their ability to make bulk purchases.

Buyers are also price-sensitive since they focus on reducing production costs in order to improve their profit margins (FMG 2014). The high bargaining power of buyers will continue to put a downward pressure on iron prices, thereby reducing the profits of iron producers (Doole & Lowe 2008, p. 121).

Threat of Entry

The threat of new entrants is low because the incumbents have economies of scale in production and transportation, which acts as a barrier to entry.

For example, BHP Billiton and Rio Tinto restrict access to their railroads, thereby preventing new companies that cannot construct their own railroads from joining the industry.

Other barriers to entry include huge financial capital requirements and the incumbents’ control of major mining sites. The low threat of new entrants is an opportunity to the incumbents to defend their market shares (Czinkota & Ronkainen 2012, p. 57).

Competitive Rivalry

Competition is very high because of the high concentration of the industry. The top three largest firms control over 70% of the market, thereby increasing competition for the remaining 30% of the market.

Fixed costs are also high since the industry is labor intensive. Although competition is high, the global market for iron is expected to grow by 11% in the next three years (KPMG 2014). The high competition will reduce the profits of iron producers.

According the Porter’s five forces analysis, the factors that are likely to have adverse effects on the competitiveness of FMG are the high bargaining power of buyers, high bargaining power of suppliers, and high competition.

This means that the company must respond to suppliers’ high bargaining power by reducing its operating costs (Terpstra, Foley & Sarathy 2012, p. 73). Similarly, it must be able to respond to buyers’ high bargaining power by reducing its prices.

These strategies will enable the company to overcome competition. The expected growth of the market is an opportunity to FMG to expand its production capacity to earn high profits.

Most Significant Resources and Capabilities

The most important resources and capabilities that are shaping FMG’s competitive position include the following.

First, the company has access to huge iron ore reserves in Pilbara. In 2013, the company’s iron ore reserves in Chichester and Solomon increased by 12% (FMG 2014).

Access to high quality iron core enables the company to compete effectively by meeting its effective demand. In addition, the reserves will enable the company to continue with its mining activities in the next decade.

Second, the company is capable of expanding its railroad and production capacity to meet the demand for its products. This enables the company to avoid delays in fulfilling orders.

Third, the company has a highly experienced and talented workforce. In addition, it has an effective organizational culture that promotes commitment and staff retention. As a result, it will be able to achieve product and process innovation (Freeman 2010, p. 89).

Finally, the company’s corporate social responsibility initiatives focus on strengthening its relationships with the local communities. These include providing training and employment opportunities to Aboriginal groups.

This strategy enables the company to avert resistance from the local communities who provide land for mining. These resources will enable the company to expand its operations in future.

Strengths and Weaknesses

Strengths

The company has the following strengths. First, the company is financially stable. It has been able to realize a strong growth in profits in the last four years. In 2013, FMG reported a pre-tax profit of USD $1,746 million, which represents a 12% growth (FMG 2014).

Second, FMG has a cost advantage in the iron industry. The company is able to maintain low operating costs, which in turn enables it to increase its profit margins.

Third, the company has focused on forward integration through joint venture agreements with major buyers of iron such as Hunan Valin Iron and Steel. This enables it to defend its market share.

Finally, FGM has an extensive railroad and port infrastructure in Australia. Currently, the company is expanding its railroad to cater for the increase in its transportation activities.

The railroad enables the company to reduce the time and the financial resources that it requires to transport raw materials to the production centers. It also enables the company to transport its products in a cost-effective manner and to earn additional revenue from companies that use it for transportation.

Weaknesses

One of the main weaknesses of the company is its overdependence on the Chinese iron market. The company is likely to make huge loses if the demand for iron reduces significantly in China.

Another weakness of the company is its inability to raise external capital to finance its expansion. Lack of access to external funding will slow the pace at which the company will expand, thereby denying it access to available growth opportunities (Sadler 2003, p. 91).

In sum, FMG’s excellent financial performance will enable it to attract investors. Thus, it will overcome its inability to access external capital.

The company’s cost advantage will enable it to charge low prices to gain market share in other countries. As a result, it will be able to reduce its dependence on the Chinese market (Witcher & Chau 2010, p. 117).

Capacity to Succeed in the Long-term

The company has adequate capacity to succeed in the long-term due to the following reasons. To begin with, its iron ore reserves at the Christmas Creek and Cloudbreak have a lifespan of 20 years. This means that FMG is assured of access to iron ore in the next ten years.

Apart from the existing reserves, the company has focused on extensive exploration to increase its iron ore reserves. In 2013, the company formed a joint venture with China’s Baosteel Group and Taiwan’s Formosa Plastics Group to exploit huge iron ore deposits at its Iron Bridge reserve (FMG 2014).

The Iron Bridge project will significantly increase FMG’s access to high quality iron ore. Moreover, the Iron Bridge reserve is a credible threat to entry that will enable FMG to prevent its competitors from expanding their capacities (Doole & Lowe 2008, p. 56).

Apart from having huge iron ore reserves, FMG continues to pursue its forward integration strategy to increase its market share.

In 2013, Formosa Plastics Group completed its steel plant, which is the largest in the world (FMG 2014). Similarly, Baosteel Group is the second largest producer of steel in the world. By partnering with these companies, FMG will have the largest market share in the long-term.

Conclusion

The main threats in the iron market include high competition, environmental regulations, high buyers’ bargaining power, and high suppliers’ bargaining power. The opportunities that are available to FMG include the expected increase in demand for iron and low threat of substitutes.

The company is capable of overcoming these threats due to its strengths and resources, which include access to large iron ore deposits, extensive railroad networks, strong financial performance, and forming joint ventures with the largest buyers of iron.

However, the company needs to reduce its dependence on China’s market by increasing its exports to other emerging markets.

References

Beresford, A, Pettit, S & Liu, Y 2011, ‘Multimodal supply chains: iron ore from Australia to China’, Journal of International Supply Chain Management, vol. 16. no. 1, pp. 32-42.

Czinkota, M & Ronkainen, I 2012, International marketing, Oxford University Press, London.

Doole, I & Lowe, R 2008, International marketing strategy, Sage, London.

FMG 2014, 2013 annual report. Web.

Freeman, E 2010, Strategic management, Sage, London.

Hua, S, Chatterjee F & Jingliang, C 2011, ‘Achieving competitive advantage in service supply chain: evidence from the Chinese steel industry’, Chinese Management Studies, vol. 5. no. 1, pp. 68-81.

Inglezakis, V & Zorpas, A 2011, ‘Industrial hazardous waste in the framework of EU and international legislation’, International Journal of Environmental Quality Management, vol. 22. no. 5, 566-580.

2014, Quarterly commodity insights. Web.

Sadler, P 2003, Strategic management, John Wiley and Sons, New York.

Terpstra, V, Foley, J & Sarathy, R 2012, International marketing, John Wiley and Sons, New York.

Tian, Z, He, Y & Yi, G 2005, ‘The pricing behavior of firms in the Chinese iron and steel industry’, Asian Pacific Journal of Marketing and Logistics, vol. 17. no. 3, pp. 67-88.

Witcher, B & Chau, V 2010, Strategic management, McGraw-Hill, New York.

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