Analysis of the Non-Market Environment
The leadership of the Brazilian government under President Luiz Inacio da Silva adopted an explicit policy that intervened on the strategic operations of business enterprises in the country. The government was putting immense pressure on Vale to increase its investments within the home country. The political leadership was in total opposition of the company’s international diversification strategy.
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With the global economic crisis’ effects biting hard, Vale had moved to safeguard its business performance by laying-off 1,200 Brazilian workers on top of slashing the investment budget. The government, however, was in opposition of such a move and looked at it as a failure on the part of the company to help Brazil tackle the global economic crisis’ effects.
Vale was also facing pressure from Para state governor to increase its investment in the region. Part of the demands included initiating a steel mill worth $3.2 billion. President da Silva wanted Vale to give priority to Brazilian firms, particularly after the firm indicated its plans of purchasing carrier vessels from a Chinese merchant.
The global economic crisis that began in 2008 had its effects increasingly hampering business operations at Vale. The crisis affected demand levels and the company encountered poor revenues. Vale, thus, decided to cut down on its overall operation cost by laying-off 1,200 workers from its labour force.
With the rising cost of business, there was need for Vale to achieve economies of scale in its business operations, particularly on the delivery of products to its main market in Asia.
Given Brazil’s geographic location, it was becoming less economical for the company to deliver goods to China compared to its main competitors in Australia, which is comparably near Asia than Brazil. As such, Vale was forced to acquire large vessels that would help in the transportation of large volumes of its products.
The pricing mechanism for Vale’s main commodity, iron ore, changed in the market from a practice of benchmark prices to spot market prices. This was influenced by the growing bargaining power of Chinese buyers of the product.
The benchmark price mechanism that was of advantage to the firm, owing to the strong bargaining position that it afforded the company, was abandoned for the spot market mechanism, which gave buyers more leeway. As such, Vale had to contend with diminishing margins as the buyers’ bargaining power in the Asian market increased.
Vale was being considered as a heritage of the Brazilian people, culture, and tradition. Given Vale’s magnitude and success in business, most Brazilians felt attached to it. However, the strong attachment affected the company’s competitive position in business.
Most people felt the company was doing little to improve on the quality of life of Brazilians by engaging with international companies and business. There was pressure on the company to give priority to Brazil even where practicality and feasibility of such actions would prove detrimental to the firm.
Technological changes offered a challenge to the operations and performance of Vale. With the fast advancement in the global technological front, demand for minerals that are rare, as well as complex alloys has been on the increase.
Demand for such minerals as silver, nickel, and platinum has been on the rise. As such, Vale faces the challenge of keeping pace with the changing demand in order to remain viable in its business. Vale also needed to acquire technology that would enable its operations to be less costly and, thus, increase its competitive edge.
The operations of Vale have been the subject of opposition from environmental watch groups, which cite adverse degradation of the environment. In the state of Espirito Santo, for instance, the governor provided land for purposes of enabling Vale to initiate a project on it.
However, its proximity to Tubarao harbour was the subject of opposition from the Brazilian environmental agency. An attempt by the company, in partnership with other foreign firms, to develop steel mills in the Maranhao state failed after the governor rejected it because of the environmental repercussions.
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Vale has faced several legal cases owing to its business operations, particularly in Brazil. Irregularities in land deals that involve the county governments has seen its planned projects delay, thus affecting business. The state government in Maranhao offered Vale land upon which the firm had intended to put up steel mills. There were legal ramifications, however, which delayed the initiative from taking place as it had been anticipated.
An Integrated Global Strategy for Vale
Vale can consider diversifying its business by increasing its investment in different business sectors in Brazil. The company can invest more in such domestic sectors as banking or transport, and spread its risk in different areas. This will help the company address the pressure from government for failing to invest more in Brazil.
It will also enable the company to address the pressure from the political class of building still mines in virtually all the states in the country, which might not be viable in the first place. Once the political class gets contented with an increased domestic investment, Vale can comfortably invest in other foreign businesses with little interference from the government.
The firm can also consider establishing subsidiaries in other foreign countries where it has interest, such as Mozambique, but maintain its original name rather than adopt a different one (Porter, 1990, p. 73). Vale should take the initiative of establishing its physical presence and operations in countries that contain mineral resources because mining business can only take place where there are mineral resources.
Such a move would help the company address the risk of being stationed at only one location or country, such as Brazil. Expansion of business to other locations will increase Vale’s business scope and improve on its revenue. It would eventually result in increased profits, which the company can in turn use to invest more in the local economy and win back the confidence of the Brazilian people.
Additionally, establishing subsidiary companies abroad with the same company name will make Brazilians feel proud about their heritage. Given the extent to which Vale is attached to the Brazilian people, exporting such a heritage would most likely receive approval from the people and endear them even further to the company.
A consideration of influencing foreign related businesses to invest in Brazil and establish their presence there would be a positive move in enhancing Vale’s performance (Porter, 1990, p. 80). Apart from mining, Vale also deals with other industries that, together, help in value addition. Such industries include shipbuilding, technology firms, and other transport sector firms such as railway manufacturers.
Since Vale relies more on Chinese ship builders to service its need for vessels, the firm should influence the vessel builders to establish their operations in Brazil. A closer proximity will enable the shipbuilding merchants to have a clear understanding on some of the challenges that are faced by their client in their business operations, and would in turn increase customisation.
On the other hand, such a move would create employment opportunities to local Brazilians and enable the government to get increased taxes. As such, the pressure on Vale particularly from the political class that it is doing little to add value to Brazilians will decrease. It would also allow Vale the opportunity to grasp the technological changes taking place, thus helping the firm to lower its cost of doing business.
Whether Vale should buy Vessels for Transportation
There is need for Vale to buy vessels for purposes of transporting its mined iron ores to China. Every business involves value addition, which is particularly important for enhancing and consolidating a firm’s overall trade operations. In the case of Vale, transportation is one of its most important value-addition activities. This mainly draws from the fact that the iron ore consumers or the market is far placed from the minefields.
For instance, Vale’s main market for its iron ore is in Asia, particularly in China, as well as in Europe. Iron ore is a bulk commodity that can only be transported in the most efficient way by use of water vessels.
In essence, the only perfect way through which Vale can service the market satisfactorily is by using large vessels for transportation. Owning the vessels would enable the firm to manage its distribution channel in a convenient manner than if the same were owned by a different company.
Owning ships for transpiration purposes will increase Vale’s direct control over its business. There will be convenience in servicing the market because of the direct ownership of the vessels.
There are several challenges that often affect businesses, including variation in demand and other external interferences, such as government intervention. When a firm such as Vale is directly in control of its transport mechanism, it will be easier for it to address such conveniences for purposes of achieving efficiency.
Ships are expensive to acquire and maintain. It is, therefore, a big challenge for individuals or smaller firms to own large fleets of ship that would be capable of servicing a huge capacity like the one that Vale requires. Expecting to outsource such services from a third party would affect Vale’s business.
Apart from requiring a large fleet, Vale’s type of business also requires that each of the vessels be bigger in size to be able to transport large quantities at once. This would in turn enable the company to achieve economies of scale.
Very few companies can be in a position to raise enough capital to own a fleet of ships with these characteristics. However, Vale is a big company with adequate resources that can meet these demands comfortably. It would be appropriate for Vale to acquire the fleet of ships and maintain them for increasing value to its business because this is the company’s prime business.
Vale is also expanding its production by including other minefields that are not necessarily in Brazil. For instance, the firm has a coal minefield in Mozambique, in Africa, and contemplates to add other international minefields. This means that the company will have numerous transport routes throughout the world for purposes of enhancing transportation of its commodities from the minefields to the market.
Coordinating such a vast and complex distribution network may not be an easy task, particularly if the company is to rely on outsourced transportation. Thus, owning its vessels will enable the company to improve on the quality of its overall performance, as well as increase on its own efficiency.
Owning large fleets of ship will present an open opportunity for Vale to diversify its business. During low season periods or where demand for iron ore grows lesser, Vale can outsource its fleets to be used for transportation of other commodities.
This will in turn provide the company with added revenues and help it maintain high profits. The diversification of business portfolio, thus, helps in spreading risk evenly and cushioning the company from the dangers of fluctuating business conditions in one area.
Most of the small-scale consumers in China do not have organised transportation. Instead, they rely more on the supplier to cater for transportation needs. Thus, Vale has to acquire its own fleet of vessels to cater for the needs of such consumer groups.
Owning vessels for Vale means the firm is also capable of achieving forward integration. This, in turn, potentially enhances its bargaining position, while it also lowers the buyers’ bargaining power. The enhanced bargaining position would eventually result in higher asking prices and translate to increased profit margins.
Sea vessels are expensive to acquire and maintain. This is a huge disadvantage for Vale, particularly given that the firm requires an expansive fleet of vessels to be able to service its distribution network effectively. Raising the required amount of money to sustain the purchase would require the company to seek for external financing. This option is expensive in the end because of the accrued interests.
Owning a fleet of ships will interfere with the core business operation of the firm. In other words, it will result in divided management attention, thus affecting on the quality of performance. For instance, the fleet of ships will require regular servicing to maintain them in perfect order.
Its operators, or the crew, will require special human resource management that is different from the workers who are based at the minefields in Brazil and other countries such as Mozambique. The logistical office will also need experts in the field to help in the scheduling and overall planning of the distribution.
Other expensive acquisitions will also be needed to sustain the operations, such as large cranes at the seaport to enhance the loading and offloading of the commodity. Servicing such a complex logistical network will call for additional responsibility from virtually all the levels of the organisation.
There are additional costs that come with owning large fleets of ship. Such additional costs will reduce the profit margins of Vale and end up limiting its profit margins. For instance, the insurance costs of such a magnitude of fleets will definitely be high.
Vale will be forced to raise its prices for the final product in order to cater for the added costs. On the other hand, other producers that rely on outsourced transportation or those who sell directly to the buyers will benefit from the price advantage and, thus, increase the demand for their commodity.
There is a possibility for the demand levels of iron ore minerals to grow lesser in the market. This may be because of other external forces that could be beyond the control of the firm.
For instance, the global economic crisis reduced the market demand for virtually every commodity in the world. Mineral reserves get depleted following years of continued mining activities. Such scenarios would subject Vale to lost opportunities and ground the large fleet of ships.
Sea transport faces numerous challenges, which may result in losses to the transport company. There is increased terrorism in the world that has in turn given birth to rising cases of piracy. Piracy carries numerous risks to the company as well as any other business relying on the sea for transport of raw material or finished products.
Apart from the ransom figures demanded by such terror gangs being high, piracy may cause delayed delivery and result in losses to the firm. It may also affect trade relations between Vale and the buying companies.
The shipbuilding industry in Brazil is less developed and lacks the capacity to service high demand levels such as the one created by Vale. This would definitely force the firm to purchase its needs from foreign suppliers with better services.
In essence, Vale will be forced to acquire its fleet of ships from foreign-based manufacturers. However, such a move will be met with opposition and resistance in Brazil. The political class has already raised its objection of Vale’s move to purchase vessels from foreign suppliers, terming it as ignoring the local ship industry.
List of References
Porter, M 1990 ‘The competitive advantage of nations,’ Harvard Business Review, vol. 68, no. 2, pp. 73-93