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Business-Level Strategy for BHP Billiton Australia in Cuba

Business-Level Strategy for BHP Billiton Australia in Cuba
 

Introduction

Nowadays Cuba is recognized as a potential country for growing foreign investment opportunities. According to the U.S. Geological Survey Report in Cuba there were almost 246 mining projects, aimed at attracting additional capital in 2015 (USGS 2015). As it is stated in the global reports, the country is one of the top 10 nickel mining countries in the world (Jamasmie 2015). Thus, the Cuban nickel mining industry produces about 70,000 tons of nickel every year and accounts as one of the key income sources for Cuba. The country also has significant deposits of other minerals such as gold, silver, chrome, copper, zinc, and oil (USGS 2015). Thereby, the Government of Cuba is interested in speeding the exploitation of these minerals and may provide favourable conditions for the foreign investment.

The purpose of this paper is to provide an analysis of the current state of the Cuban mining industry and to develop a business-level strategy for BHP Billiton, an Australian mining company in Cuba.

Mining Industry in Cuba

Before developing a business-level strategy BHP Billiton Australia should understand the forces that determine the profits in Cuba’s mining industry. One of the useful tools for making such a decision is the Porter’s Five Forces model, which is based on the industrial organization economics (Ahlstrom & Bruton 2010). According to this model all firms in a particular industry, including the mining industry in Cuba, face similar forces that affect their business performance.

Bargaining Power of Buyers

The first force, defined by Porter, is a bargaining power of buyers. Its high level in a certain industry proves that the company’s consumers may have a great level of impact on the business, for example, by setting prices or dictating their wishes to the company. In case of BHP Billiton in Cuba the bargaining power of buyers remains low. It is based on the fact that the company is able to raise prices in response to the increased shipping, labour, and production costs. It is possible due to a strong demand of the consumers for the coal, petroleum, uranium, and diamonds. Moreover, a limited supply of natural resources in the Cuban market also reduces the buyers’ bargaining power. Furthermore, a low number of possible substitutes, available in large quantities, contributes to this phenomenon too. However, the bargaining power of buyers may increase due to the several factors. For instance, they may expect the consolidation between the mining companies that can be caused by the shortage of skilled labour, the inadequacy of the companies’ capital, or the growing cost of raw materials.

Bargaining Power of Suppliers

In case of suppliers, who may have a large market share, it is possible that they influence the mining industry greatly. The BHP Billiton company is impacted by the bargaining power of suppliers in several aspects such as shipping and energy costs as well as labour and materials supply. Since there are few available substitutes in the Cuban market, a strong suppliers’ bargaining power exists within it. For example, the mining industry in Cuba faces increased expenses for replacing parts of the mining equipment (‘British trade’ 2015). Furthermore, the exploration and mining labour costs have also increased during the last years. Thus, BHP Billiton may take a weak position by dealing with the suppliers’ pressure.

New Entrants

It is evident, that the new companies, which have entered the industry, will increase the competition. However, the mining industry has too high entry barriers that cause a minor threat of new entrants. It can be explained by the dearth of natural resources, which leads to the limited capacities and low availability of the global supply. Thus, any new company in the market will be restricted with a high probability of failure (‘British trade’ 2015). Thereby, the company’s revenues and profits will be potected from the newly arising competitors. Moreover, since BHP Billiton is a big global mining company, it is able to hold an enhanced infrastructure, use the latest mining technologies, and constantly develop the professional skills of its employees that will ensure the high quality of its products and set a high level of quality for new competitors.

Substitute Product

The Threat of Substitute products means that other similar products in the industry   may affect the products that the company produces. For example, substitutes may limit the ability of the given industry to increase the prices. However, the threat of substitutes for BHP Billiton is low. It can be explained by the fact that few possible substitutes for raw material products exist in the Cuban mining market. Thus, due to the diversified portfolio of natural resource assets, BHP Billiton will encounter fewer threats of substitutes while entering the Cuban market.

Rivalry and Complementary

The last Porter’s force is rivalry among competing sellers. It remains strong in Cuban mining industry. The high level of threat is caused by the rivalry between the mining and oil companies for access to the natural resources all over the world. For example, it is evident from training more qualified employees, building new infrastructure, and developing innovative projects. However, since the industry remains profitable due to a strong gain potential, it is not likely that the lowering of the natural prices will highly impact the mining industry players.

Thus, on the base of the Porter’s Five Forces model the following conclusions for BHP Billiton can be made. First of all, mining industry in Cuba is likely to remain profitable, since the limited supply of natural resources causes a strong consumers’ demand and highly competitive prices. Second, high entry barriers ensure that the company will not face a strong competition from new entrants. Third, the researches argue that the mining industry in Cuba is likely to be profitable due to its strong gain potential. However, BHP Billiton will face some threats such as high exploration, transportation, and mining labour costs as well as a strong bargaining power of suppliers. Nevertheless, it should be mentioned that possible benefits from entering the new market exceed the possible threats. Thereby, it is highly recommended for BHP Billiton to enter the Cuban mining market.

Business-Level Strategy for BHP Billiton in Cuba

While making a decision about its business-level strategy, an international firm should also be concerned about the motivators for entering the global market. According to Ahlstrom and Bruton (2010), if the company enters the international market, it will be able to increase its market share. Besides that, the business may find cheaper inputs or get an access to the new markets with multiple customers. As an international company, BHP Billiton also needs to decide whether it is going to change its domestic strategy and adjust it to a new market or to use it without any changes (Ahlstrom & Bruton 2010). Among the top priorities, which the company needs to respond to in its business-level strategy, are the following: effectively expand on new Cuban market, concentrate on new products and services, and improve its operational efficiency (Cavusgil et al. 2012). The analysis of the modern scientific literature, related to the global business development, proves that the most appropriate business-level strategy for BHP Billiton is a broad differentiation strategy.

The differentiation strategy is such type of strategic actions that is based on selling products that differ from the competitors’ products by their quality, which ensures higher prices for the company’s products (Griffin & Pustay 2015). However, the differentiation strategy cannot provide a predictable and strong financial performance for the company. For example, the customers may refuse to pay higherr prices for differentiated products, or a competitor that uses a low-cost strategy may discover new ways of adding new cost-effective features to the products (Ahlstrom & Bruton 2010). Thus, the company’s managers should provide some tactical steps in order to ensure the positive company’s performance on a new market. That is why, in order to meet the differentiated customers’ needs successfully, the competitive scope of the chosen market should be broad, because in this way the company will target diversified by commodity and geography markets (Ball et al. 2012). Since the company will use the differentiation strategy, it also needs to constantly provide the research and development practices. They will allow ensuring that the company is able to produce various types of products and customize the output. As an international company, BHP Billiton will also face several research and development issues. For example, it will encounter concerns about the smooth information flow throughout the company and will need to ensure the high creativity level of developments (Ahlstrom & Bruton 2010). Furthermore, the company needs to ensure the expandability of its assets. Thereby, the enterprise will be able to apply a proven by years strategy on a new market.

However, some changes should be made in the existent strategy, since there are several differences between the Cuban and Australian employees as well as in the cultural and socio-economic conditions.  Thereby, the company should use the multi-domestic strategy, based on adapting its policy to the local markets (Hill et. al. 2014; Wild & Wild 2014). At the result, BHP Billiton will benefit from meeting the needs of the Cuban market and managing the Cuban employees effectively (Peng 2013). For example, in order to ensure, that its new Cuban employees reflect corporate values, the company needs to pay attention to the collectivistic traditions and attitudes, since Cubans rely more on collective gains than on individual ones. Thereby, if the company’s managers provide such aims that will be related to the employee communities’ interests, their workers will be highly committed to the success of the company organisation and will make efforts for improving their teams’ performance.

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The net gain in the mining industry in Cuba remains to be high. For example, in 2014 the Canadian natural resources company Sherritt International gained 42.9 % of its profit on mining operations (Topf 2014). However, two years later the company’s net profit margin decreased to  -616.76% (The Globe and Mail 2016), while the average net profit margin of the top mining companies worldwide was 10% in 2014 (‘Net profit’ 2016). Besides that, according to Statista report (2016) the highest level of net profit margin of the top mining companies worldwide was 27% in 2006. Thus, on the base of the provided data, the expected net gain for BHP Billiton can range from 20 to 40%.

Conclusion

In conclusion, the analysis of the Porter’s Five Forces model proves that the highest impact on BHP Billiton is made by both the rivalry and the high bargaining power of suppliers. For example, labour, shipping, and materials costs are the key drivers of the suppliers’ bargaining power. Nevertheless, Cuban mining market remains profitable and the expansion on it is necessary for the efficient business development of the BHP Billiton. The analysis of the available data proves that the expected net gain for BHP Billiton ranges from 20 to 40%. Thus, in order to employ the appropriate strategy while entering the Cuban market, the company needs to pay attention to several factors. First of all, its strategy needs to be broad low-cost. Second, it is necessary to provide several changes in the existent company’s business policy in order to deal with the Cuban culture and economic features. Finally, the company needs to diversify its product range in order to fully satisfy different consumer needs.

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