Introduction Globalization is becoming a common thing nowadays, as companies and people around the globe are becoming more connected to each other than ever before. Information and money flow more quickly now. Goods and services produced in one part of the world are increasingly available in all parts of the world and international communication is easy. The “globalization. ” era has actually started more than 2 decades ago (Modelski, 1972). Technological innovation, the rise of market institutions, advances in production and incentives for long-distance trade stimulated businesses worldwide to reach other parts of the globe.
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Thus, the international markets are seemingly attractive to most businesses and more businesses are now trying to capture markets internationally to gain competitive advantage and also economies of scale which will eventually lead to higher returns. Rio Tinto is one such company. Rio Tinto is a successful international company in finding, mining and processing the earth’s mineral resources such as aluminium, copper, gold, diamonds, industrial minerals (borax, titanium dioxide, etc), iron ore and energy products (coal and uranium). Rio Tinto is a combination of several subsidiaries with each subsidiary focusing on a type of product.
This report will be focusing on Rio Tinto’s industrial minerals group of ilmenite miners that are comprise of wholly owned QIT – Fer et Titane in Canada and also 50% interest Richards Bays Mineral located in South Africa. Both subsidiary mine ilmenite which produces titanium dioxide as the main products that are usually used for pigments used in paper, plastics, paints, etc. This report will analyze the importance of both the general and industry assessment and the impact environment will have on the company, strategies that are set to achieve the organization goals and also Porter’s 5 forces theory for the industry assessment.
The report will be focusing on a mix of both QIT – Fer et Titane and also Richards Bay Mineral and Rio Tinto as a whole. The importance of environment assessment According to Deresky (2002), the first thing that a company should do in setting global strategy is to define or clarify mission and objectives. Assessment of the external environment that the firm will face in future should be done next and also analysis of the company’s capabilities in dealing successfully with the environment.
Environment factors are significant factors that will influence the success of a company’s global expansion. Rio Tinto’s fundamental objective is “to maximise the overall return to shareholders by operating responsibly and sustainably in finding, mining and processing minerals – areas of expertise in which the Group has a clear competitive advantage” (www. riotinto. com). Rio Tinto Ilmenite mining operates in Canada and South Africa, the risks of operating in different geographic area should be carefully considered.
According to Deresky (2002), environmental scanning refers to the process of gathering information and forecasting relevant trend, competitive action, and circumstances that will effect operation in geographic area of potential interest. Hanson et al’s (2002) found that a firm might not be able to control the general environment’s segment and element; instead, it can gather the information required to understand each segment and its implication for the selection and implementation of the appropriate strategies.
Thus, general environment assessment is essential, the general environment that should be considered are demographic, economic, political/legal, sociocultural, technological and global dimensions which affect the company’s global expansion. – Demographic According to U. S. Census Bureau, the world population is 6. 4 M currently and is projected to reach 6. 5 M by January 2006. Thus the need for titanium dioxide is increasing steadily based on the rapid world’s population grow which is evidenced from Fig1 below.
To cope with the increasing world’s need for titanium dioxide, Rio Tinto need to expand its mining operations globally and Canada and South Africa was chosen for their expansion. By doing so, they have created jobs in these 2 countries, even though according to CIA World Factbook (2005), Canada has a low unemployment rate of only 7%, South Africa has a much higher unemployment rate of 26. 2%. Thus, the impact of providing employment in South Africa is much higher and thus, Rio Tinto is most welcome to have a mining operation in South Africa. Fig1. Graph of titanium dioxide supply and demand (taken from tiomin. om) According to Tiomin. com, “the high rate of growth in consumption of plastic materials and the superior characteristics as a whitening, brightening and opacifying agent attribute to Titanium Dioxide’s consistent rate of growth in consumption of approx. 3% per annum since 1970. Global pigment production in 2004 was estimated at 4. 60 million tonnes, or approximately US$9 billion. ” In the past, it has developed strongly in the most economically developed countries for being an essential component of basic consumer products such as housing and plastic products. Economic South Africa is a middle-income, rising market with abundant supply of natural resources, well-developed financial, communications, legal, energy, transportation and also a modern infrastructure which support efficiency in distribution of goods throughout the region and worldwide. Nevertheless, growth has not been strongly sufficient to reduce South Africa’s high unemployment rate and devastating economic problems that lingered from the apartheid era, particularly poverty and lack of economic empowerment amongst the disadvantaged groups.
According to CIA World Factbook (2005) South African economic policy is fiscally conventional, but realistic, focusing on targeting inflation and liberalizing trade as a way to increase job growth and household income. As I have mentioned previously, Rio Tinto is thus welcomed to have a mining operation in South Africa. Whereas, Canada is a prosperous, high-tech industrialized society, who has entered in the trillion dollar class recently, according to World Factbook (2005). Canada is similar to the US in its market-oriented economic system, pattern of manufacture, and high living standards.
Since World War II, the remarkable growth of the manufacturing, mining, and service sectors has transformed Canada from a principally rural economy into primarily industrial and urban. Given its huge natural resources, skillful labor force, and modern assets, Canada enjoys firm economic prospects. The 1989 US-Canada Free Trade Agreement (FTA) and the 1994 North American Free Trade Agreement (NAFTA), created a remarkable increase in trade and economic integration with the US. Canada enjoys a substantial trade surplus with its principal trading artner, the United States, which absorbs more than 85% of Canadian exports. Solid fiscal management has produced a long-term budget surplus which significantly reduces the national debt. Exports account for roughly a third of GDP. By expanding Rio Tinto’s operations to Canada, Rio Tinto will also have access to the U. S. market which Canada currently have close ties with. – Political This segment is about the trade barrier that governments set out to companies. As an ilmenite miner and exporter, it is important for Rio Tinto to understand, evaluate and acknowledge the trade barriers that are imposed. White Paper’ is the mineral and mining policy for South Africa which rule out the details of the tax and regulations that a company must abide when trying to have a mining right in South Africa such as the Mine Health and Safety Act of 1996. According to investopedia. com (2003), developing nations might have cheaper labor and mining costs, but the political risks are huge. Realistically, Rio Tinto is clever enough to have its significant assets such as Richards Bay Mineral, in South Africa and QIT- Fer et Titane in Canada that are politically stable and have a mining-friendly regulations and taxation.
According to Heakal (2003), multilateral agreement such as WTO could be used by Rio Tinto to reduce taxation costs and also boost ilmenite export. – Socio-cultural A significant trend that is currently in focus worldwide is the increased diversity of the workforce. The growing gender, ethnic and cultural diversity in the workforce creates challenges but also opportunities. Thus, Rio Tinto is challenged to manage and combine both gender workforces. When they have effectively managed a globally diverse workforce, the advantages are huge to Rio Tinto which will eventually lead to competitive advantage.
According to UNEP (2002), the practice of standardization, are becoming common nowadays, which is considered as a less than satisfying practice which will eventually lead to the loss of individuality and uniqueness of different countries. Rio Tinto should take note and be aware of that when they have an expansion to different countries, they should adapt and be conscious of the local preferred way of living and doing things. – Technological In the current postmodern world, everyone in anywhere is dependant on technology in one way or another.
For a mining company such as Rio Tinto, technology is the backbone of its operations, thus technological change and advancement will affect Rio Tinto’s operations. The need to upgrade and be updated will determine the efficiency of Rio Tinto’s operations. Companies, who spot emerging new technologies and use it effectively, will have certain competitive advantage over its competitors. Technology has ease firms in being able to communicate globally almost instantly, technology shrinks time and distance, helped in communication between divisions globally, and also reduces cost.
Technology is always important to the distribution of knowledge (data), and development of a firm’s structure. According to CIA World Factbook (2005), Canada has a high level of technology, while South Africa has a mid level technology. Knowledge transfers for both countries are beneficial to one another and globally. – Global Globally, the demand for titanium dioxide is increasing due to the rapid expansion of each country’s market, especially China, which has progress rapidly in these few years. Everyone now acknowledge China as part of the world important economy apart from U.
S, Europe, etc. China’s recent entrance to WTO will certainly bring more opportunities for international firms due to less restrictions or regulations, thus making China to be top choices in expansion. Developing countries such as Thailand, Indonesia, South Korea, etc are also important growth market which will be expanding more vigorously in future. As we are in the ‘globalization’ era, more and more companies are looking for opportunities to expand its operations globally which created competition worldwide.
Rio Tinto should keep in mind that it’s competitors are also in search of minerals globally, Rio Tinto should commit to exploration and find new minerals to keep up with the competition globally. With Rio Tinto’s worldwide expansion, the need to understand, appreciate, adapt and learn each country’s unique culture is vital to determine successful international expansion. Rio Tinto’s global entry strategy According to Keegan (1999), a research found that it is important for companies to go global because seventy five percent of world market potential is outside its home country.
Strategy of a business focuses on long term direction of the organizations (Johnson and Scholes, 2002). Rio Tinto’s strategy is to maximize the net present value per share by investing in large, long life, cost competitive mines. Investments are driven by the quality of opportunity, not choice of commodity (www. riotinto. com). “Our strategy is to focus on large scale, long life and cost competitive mining operations and to invest throughout their lives so that they maintain their competitive positions. ” Fig1. Entry Modes choices hierarchical model (taken from Deresky (2002)
There are many options for entry mode to another country that a business could use such as the one shown in Fig1 above. In Rio Tinto’s Ilmenite Group, a combination of wholly owned subsidiary and 50% EJV was used by Rio Tinto in expanding its operations globally. QIT- Fer et Titane is a wholly owned subsidiary whereas, Richards Bay Mineral expansion entry mode is by using 50% share EJV with BHP Billiton which is actually a foe. Thus the statement “a friend in need, a foe indeed”, this applies well to Rio Tinto and BHP Billiton.
Rio Tinto’s Joint venture strategy created certain advantages in many different ways such as: * Ability to gain huge capital by combining capital with partner. * Direct access to international and local market. * Access to partner’s technology or economies of scales in assets (plant). * Share risks with partner and thus, reduce risks when entering new market. * Acquire skill or knowledge from partners. Rio Tinto’s ilmenite industry environment & Porter’s 5 forces) Michael Porter (1979) believes there are five forces governing competition in lobal industry, which are: threat of new entrant, bargaining power of supplier, bargaining power of customer/buyers, threat of substitutes of product or service and the industry level of competition which is shown in Fig2 below. Porter’s five forces consist of those forces which are close to a company that might affect its ability to serve its customers and make a profit. A change in any one of the forces normally requires a company to re-assess the market. Fig2. Competitive Forces Model (Porter, 1979) -Threat of new entrant
In every business, not only competitions come from incumbent rivals but in addition there is also the threat of a new entrant anytime. The threat of entry for titanium miners is currently not that high as there are barriers of entry for the mining industry such as high asset specificity with specialized assets, lack of proprietary know how/ knowledge, restricted distribution channels and also government regulations. Existing firms should always create barriers to entry and use the expected reprisal benefits that will place rivals and possible new entrant in competitive disadvantage.
Financing is the principal barriers of entry for the mining industry as the construction of mines, production facilities, exploration and development, mining plant and equipment all oblige large amount of capital. These large capitals are required even before the mine is in production. Therefore, favorable financing terms are extremely important which means long-term survival in the mining industry requires significant capital. -Bargaining power of buyers The bargaining power of buyers is the impact that customers have on an industry.
In this case, the bargaining power of ilmenite buyers is not high compared to Rio Tinto as the demand for ilmenite is increasing over time and also there are not many suppliers of ilmenite with whom the buyers could alternatively buy from. Buyers of ilmenite are fragmented and thus the different buyers do not have any particular influence on the product or price. Buyers bargaining power is also weak as ilmenite miners supply critical portions of buyers input and also the fact that the cost of switching is high as the product is neither standardized nor easily available. -Bargaining power of suppliers
Mining industries need raw materials such as labour, equipment and other supplies to produce its products. Strong bargaining power of supplier can directly affect on the cost of the company’s operation by exerting an influence on the company such as selling equipment at a high price to capture the industry’s profits. The bargaining power of Rio Tinto’s suppliers is not significantly high as competition is strong and there are not many customers for mining equipment. According to Engineering & Mining Journal (2005), Caterpillar recently in March wins a supplier contract for Rio Tinto for a period of 5 years. -Threat of substitute product
According to Samath (2002), there is no substitute for ilmenite which produces titanium is regarded as the metal of the future. Thus, Rio Tinto could rest assured of increasing demand for ilmenite but Rio Tinto should always anticipate and be prepared for any sudden news of a substitute for ilmenite. -Rivalry among competing firms The rivalry among competing firms is quite high for ilmenite miners as there are several others ilmenite miners such as Tiomin Resources. Inc. High competitiveness among the competing firms results in pressure on the prices and margins, and hence on profitability for every single firms in the industry.
The rivalry among ilmenite miners are high as there is not much differentiation between miners and their products, hence, there is much price competition. The barriers for exit are high particularly attributed from the expensive and highly specialized mining equipment. There are several ilmenite miners of about the same size and have similar strategies, thus competition between each miners is high. Conclusion Porter (1980) pointed out that there are 3 generic strategies that could be used by businesses which are differentiation, cost leadership and segmentation strategy.
These 3 strategies are based on the strategic scope and strategic strength of the company. Strategic scope is the demand-side dimension whereas strategic strength is the supply-side dimension and looks at the strength or core competency of the company. Thus, Rio Tinto should strengthen its core competencies to compete successfully in the mining industry and also to maintain its position in the mining industry. This report has analysed the general and industry environment of Rio Tinto’s Ilmenite Group, discussed on the importance of environment assessments and has also analyzed on it’s global entry strategy.