Company background information
Rio Tinto is in the operation or last 150 years. The main approach that the business took in its operation is continuous exploration, operation expansion and innovation. The business of Rio Tinto is speared over many countries but main focus is on the North America and Australia. In its total operation the organisation employs around 500000 employees (Riotinto, 2017). The main products that are offered by the company are copper, aluminium, gold, diamond, coal, iron and uranium.
Main focus of the company from the above figures can be well understood in the Iron ore section. Within this above portfolio the iron ore segment contributes around 41% of the revenue. Second to that the main focus of the company is on the Aluminium segment of the mineral market (riotinto, 2016).
One of the main mottos of the company is to adopt the innovation process for the growth in the business. For the better portfolio development of the business the innovation and growth approach is applied. The innovation and new technology that are applied by the company was awarded internationally. The ‘Mine Automation System (MAS) and RTVis’ that Rio Tinto uses as mining technology in its operation got the gold medal from the Austmine (Riotinto, 2017). Austmine also recognised Rio Tinto as the industry leader in the ‘Miners Innovation Award’.
The global mining industry has seen the worst year in the year 2015. The industry had seen difficult situation in worldwide. The situation can be understood from the situation of top 40 mining company of the world. The report developed by PWC for the mining industry in the year 2015 showed that for the first time these companies collectively shoed loss at the end of the year. There were 37% reductions in the market capitalisation of these companies (PWC, 2016). The companies in this industry were debt ridden in that situation and because of that they have to sales some of their assets. The economic situations were looking very disappointing at that time and the companies were in cost cutting mood to reduce the loss from the operation. The commodity price had seen a sharp 25% decline for YOY basis (PWC, 2016). The drop in profitability had seen drop in price of the share of the companies. Here the long term approach which is specially required for the mining companies were missing at that time. But the strong focus of the companies on the cost cutting measures had helped the companies to reduce the cost by around 17% on an average.
Industry background information
From the year 2016 the industry started to improve. The fundamental of the business started to improve. The price of the commodity like iron ore began to increase from the year 2016. But the rising trend in the price did not improve the confidence in the market in same manner. The commodity price rise was the cause of the economic advancement of the Asia specific countries especially the Chinese economy (Industry.gov.au, 2017). The Chinese economies trend is not showing any rising trend of the past years. This apprehension of the sluggish growth is not proving the optimistic nature in the market. The drop of 2015 created pressure for the industry, but the largest miners like Rio Tinto did not cut their production capacity and supplied 20% more ore to China (Sanderson, Raval and and Sheppard, 2015). The iron ore produced in the Australia are largely for the export purpose. Around 80-90% of the production ore are exported (Industry.gov.au, 2017). In the iron ore market Australia were in the top position for quite a while. So the economic and market scenario of the external world is some cause of concern for the industry in Australia. Now in Asia the first fastest growing economy is India which is also one of the largest iron ore producers in the world. So this demand is some cause of concern for the industry.
With the help of the Porter’s five Forces, there are several factors that can be analyzed. Porter’s five Forces help us to understand about the bargaining power of the supplies as well as the customers. Additionally, it helps us to analyze whether there are any threats from the substitute products or threat that can be faced from the new entrants in the industry (Eva, et al., 2014). Lastly, five forces analysis helps to understand the rivalry that exists among the companies that are there in the market.
The new entrants in the market are the ones who join the market recently or the business that have been established in the same industry very recently (Fleisher et al., 2015). There are a variety of challenges that can be faced by the companies form the new entrants as they can take a part of the market share of the companies that are older in the market if they are successful in establishing their business properly.
Rio Tinto faces a lot of challenges from the new entrants but as compared to the other factors, the threats of new entrants in the market are very low for the company (PwC, 2017). As Rio Tinto is in the business since a long time, it doesn’t face a survival challenge from the new entrants, but there are a few challenges that the other recent mining companies bring in for them. Some of the challenges faced by Rio Tinto are the pricing strategy that is followed by the new entrants. Some of the new entrants like Iron Road Ltd., Ironbark Zinc, Fortescue Metal Group, which were founded between the year 2002-2008, lowers the prices of their products in the market and thus competes Rio Tinto and this can be viewed as a threat for companies like Rio Tinto as the customers can shift their attention towards the lowered priced items provided by new entrants (Ivanova, 2014). The pricing strategy that is followed by these new entrants is competitive pricing with the help of which they provide the products to the customers at a very low price and thus compete the companies like Rio Tinto and BHP who are the leaders in the mining industry. The new entrants also bring in new schemes in order to provide more value to the customers which can also be viewed as a threat for Rio Tinto. When the customers are provided with more value by an organization, the satisfaction level of them increases as well as the loyalty also increase which can pose a threat for Rio Tinto.
Porter five forces analysis
There are some ways which Rio Tinto have taken in order to tackle the threat of new entrants and some of them have been mentioned below:
Innovation of the products is the factor with the help of which Rio Tinto brings in new products for the customers and it helps the company to capture new customers in the market and also provides a reason for the old customers to buy product from the company (Walsh, 2014). Silverglass is among the newest products of the company.
With the help of building of economies of scale, Rio Tinto lowers the fixed cost of the products per unit in the market which helps them to provide the customers with the products that are less in price and thus keeping the customers satisfied.
With the help of research and development, Rio Tinto is entering into an industry which is more dynamic in nature where the new entrants might think twice before entering. With the help of research and development investment, there is no super profit that Rio Tinto earns from the business and thus the new entrants are discouraged to make an entry into the mining industry (Walsh, 2014).
The suppliers bargaining power is the factor with the help of which the suppliers that supplies raw materials to the firms can bargain with the business (Hamilton et al., 2015). There are a number of suppliers that supplies their raw materials to Rio Tinto and as the suppliers are in a good market position in the market they can demand a higher amount fees from Rio Tinto in order to supply raw materials which can decrease the level of profit of the company. The suppliers that supply raw materials to Rio Tinto are powerful in the market and among the top three suppliers (Bellis, 2016). Thus they demand a higher price from the company in order to supply raw material to them which lowers the rate of revenue of Rio Tinto.
Some steps that are taken by Rio Tinto in order to curb down the high bargaining power of the suppliers have been cited below:
In order to curb down the bargaining power of the suppliers, there is an efficient supply chain that have been created by Rio Tinto where there are many suppliers. This helps them to take the products from another supplier when one supplier demands high rate of the raw materials.
With the help of experimentation, Rio Tinto lowers the price of their production and thus also keeps their suppliers in control. When the price of one raw material is high in the market, then Rio Tinto create experimental products with the help of using other raw materials which is low in price (Ellem, 2014).
Rio Tinto also focuses upon creating a supply chain that contains of trusted suppliers and they charge reasonable amount of money from Rio Tinto. This is due to the fact that the business of those suppliers depends upon Rio Tinto. Also Rio Tinto can follow the strategy of Nike and Wal-Mart who use third party producers in order to run their business and it provides them an edge over the competitors as there is no bargaining that is required.
The bargaining power of the buyers is the factor with the help of which the buyers are able to bargain for better quality of products form the business with least amount of money payable for the products. The buyers of raw materials are the ones who demand a lot from Rio Tinto and in terms of quality of the product and also wants to buy the products at a lower price. In long run, these things put pressure upon Rio Tinto (Bailey et al., 2017). As the customer base of Rio Tinto is huge in the market the bargaining power of the customers is very low. This is due to the fact that when the customers bargain for discount or lower prices, the business does not sale their products to those customers as there is a huge customers base and the company is sure that some customers will buy the products at the price fixed by Rio Tinto.
Some measures taken by Rio Tinto to control the bargaining power of the customers are mentioned below:
In order to control the bargaining power of the customers in the market, Rio Tinto has created a huge base of customers in the market which helps them to keep the bargaining power of the customers at the lowest level.
Also innovation of the new products in the market can also keep the bargaining power of the buyers at minimum due to the fact that the customer also understands that the company will not be providing the new products at a discounted rate (Floris et al., 2013).
When the company comes up with new products it can also reduce the rate of customers shifting towards the other businesses products and thus it can also lower the price of bargaining of the customers.
The threat of alternative products is the factor when there are alternative products launched in the market which can perform the functions of the previous products and have the ability to replace the product. The profitability of the whole industry also suffers when there is a launch of new product in the market which can replace the demand for the mining products (Debaere, 2016). The threat of alternative products are low in the market as iron ore is product which is unique in mining industry but steel and iron can be used with the help of recycling of the products.
There are some steps that have been taken by Rio Tinto in order to diminish the threat of alternative products in the market and it includes:
Rio Tinto has diversified their business from being only product oriented business to also shifting the focus upon service industry and thus they have minimized the risk of alternative products.
Increasing the cost of switching from one product to another alternative product can also minimize the alternative product risks of Rio Tinto (Walsh, 2014).
Rio Tinto can also focus upon understanding the main requirements of the customers than focusing upon the products than the customers are buying.
The competitive rivalry is the factor which has the potential to drive down the prices of the products and services of an industry, when there is fierce rivalry among the competitors of a same industry, the companies’ tries to bring down the prices of their products in order to beat the competitors and gain more customers from the industry. The mining industry companies of Australia compete among each other in the Australian market and lower the prices of the products in order to attract more customers (Brooks, 2015). But being ones of the oldest players in the market, it is regardless to say that Rio Tinto enjoys a favourable position in spite of their moderate prices of the products. That is the reason, the competition in the market do not affect much the profitability of Rio Tinto.
There are some ways with the help of which Rio Tinto controls tackles the rivalry that exists between the different mining firms in the market and they have been quoted below:
With the help of creation of sustainable differentiation of their products from that of the competitors in the market, Rio Tinto have differenced themselves form that of the competitors (Fonseca et al., 2014). For instance, the iron ore and wrought iron that is extracted by Rio Tinto and sold in the market is of very high quality than that of their competitors of the same industry.
Rio Tinto also follows the strategy to collaborate with the competitors and tries to gain a huge market share in the Australian market and they do not focus upon fighting with the competitors to gain a small amount of market share.
The main feature of the business is the value creation. The value creation approach in the business is over and above the volume of the business. The company have some high class assets around the world. In 2016 the business was able to cut cost in the operation of these assets by around US$1.6 billion. This approach of greater value creation over the just volume of production is one of the distinct features of the business of Rio Tinto. The business was also been able to reduce its debt position in the year 2016 by US$4.2 billion to create more value for the shareholders (riotinto, 2016). At the time of value delivery the company do not focus only on the shareholder but also other stake holders like customers, employees, communities, suppliers and the govt. In their operation the business uses their highest capability to achieve operating excellence by properly utilising the quality asset that business has been to acquire over the years. The capital allocation follows the cost cutting and the productivity betterment approach to produce better profitability and growth for the shareholders. Rio Tinto is in a capital intensive industry (Turban et al., 2008). Considering that the balance sheet of the company is improved through reducing the debt level of the business. The organisation currently has short and long term projects in the pipelines. The business continuously revaluates the projects and maintains the capital discipline to promote growth in the business.
The organisation considers the current scenario of the international market and makes strategy for the survival and expansion of the business. The main strategic approach of the business to increase strength through strong balance sheet, asset quality worth world class standard, and improvement in the operating excellence (Peng et al., 2008). The organisation wants to maintain the discipline in the capital expenditure to produce greater cash flow into the business. For the specific strategy the business has focused on their 4 ps in the business operation.
Portfolio- in this first ‘P’ the business maintains world class quality of asset.
Performance- in this second ‘P’ oriented strategy of the business better performance of the business is targeted through two different approaches (Riotinto, 2017). In one hand the business wants to increase operating excellence and on the other hand the operational safety is also given priority.
Partners- for the operating licence and smooth operation of the business, the organisation wants to build long tern effective partnership with different stakeholder of the business.
People- for the better performance delivery the organisation recognise their employee’s critical role ad that is why they give value to the capability increment of their people (Teece, 2010).
Rio Tinto does the external market situation analysis along with the different internal business variable analysis to come up with better strategy for the business. For long time this approach has produces good result for the business. But in recent time the situation in the world commodity market had shown some different picture. The demand of the mineral especially the iron ore has come down because of the economic slowdown in the major iron ore supplying market like China. So the business needs to meticulously evaluate the previous success factor of the business and find hedging process at the time of crisis (Teece, 2010).
The above approach of strategic improvement implicates that the business has to improve the process of diversification in the business. Currently the business is focused mainly on the iron ore and somewhat of the Aluminium products. A well diversified products portfolio would help the company to focus on different market for their revenue generation (Nath et al., 2010). So when one market slows down the other market would help the company to maintain the growth process. One of the diversified capabilities would be to go for the production of Nickel. In the stainless steel production around 65% of the Nickel is consumed (Hoatson et al., 2006). So the business could supply Nickel to the existing client of iron ore of the company. Australia has good Nickel resource and would be beneficiation for the company to develop this capability.
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