Basics of Strategic Planning and Management

Question: Discuss about the Basics of Strategic Planning and Management. Answer: Introduction The company, Fortescue Metals Group Limited is situated in the Pilbara area of Western Australia. The company is primarily involved in the business of shipping iron ore to China. The partnership has been a win-win situation for all concerned parties. The Chinese government is heavily dependent on the iron ore being exported from Australia by the Fortesxue metal groups limited. The company has also grown significantly since inception in 2003, owing to the volume of iron ore being exported to the peoples republic of china. The Australian Economy has benefited from the huge employment opportunities provided by the company as well as through the royalty revenues being paid to the government. Company Positioning The company is a start-up that commenced operations in 2003. It has positioned itself to tap into the market for exporting the iron ore to China. The increasing demand for iron ore in China, has fueled several exciting opportunities for the company which is also helping to improve the employment opportunities for residents of Western Australia. BHP Billiton Ltd, Rio Tinto Ltd and Hancock Prospecting Pty Ltd are the primary operators in the Pilbara area of Western Australia. Fortescue Metals Group Limited is a start-up that has been able to capitalize on the extensive market for Australian Iron ore in China. Industry Analysis The mining industry in Western Australia is one of the biggest contributors of revenue as well as employment opportunity provider in the country (Australianmining.com.au, 2016). The huge potential for iron ore in various parts of Western Australia is helping several start-ups like Fortescue Metals Group Limited to emerge as the centre of the economic growth story being charted in Western Australia. The Under the guidance of its chairperson Mr. Andrew Forrest, the Fortescue Metals Group Limited, aims to carve a niche in the iron ore export industry. The Company is catering to the increased demands of Australian iron ore in China and anticipates a significant growth in exports in line with the Chinese initiatives to improve the living conditions of its rural population and relocate them to urban areas with improved conveniences and infrastructure. Mission The company mission is to increase its exports of iron ore and thus improve the profits of all stakeholders. The company looks at increasing its employment base in tune with its growth and thus providing greater employment opportunities for people in Australia. Since Australians employed in the Mining industry tend to be less mobile, the employment opportunities offered by the Fortescue Metals Group Limited would be vested with the natives of Western Australia. The company intends to grow significantly by tapping into the huge mineral reserves in Western Australia. In line with its present growth trajectory, the company is expected to continue with its significant contribution to the GDP of the country through the royalty reserves that it pays the government for use of the mineral basin. Porters 5 Force Analysis The five forces analysis looks at the five significant forces to help determine the competition in the current business scenario. The factors that need to be considered includes supplier power, buyer power, competitive rivalry, threat of substitution and the threat of new entrants (Fitzpatrick, Nguyen and Cayan, 2015). The force, scale and size of the impact of these factors is seen in the scenario analysis carried out on the basis of the five forces theory by Porter. Supplier Power: This refers to the manner and ease with which suppliers can influence the prices of the end products (Mindtools.com, 2016). In the case of the Fortescue Metals Group Limited, the suppliers are the mines of Western Australia that are mined by the company. The primary factor that contributes to the supply of iron ore are the mining capacity of the company as well as the allowances ad restrictions placed on the company by the Australian government. Buyer Power: Buyer power refers to the ease with which buyers can influence the prices of the commodity (Mindtools.com, 2016). Since the Fortescue Metals Group Limited are catering only to the Chinese demand at present, the sales and exports are dependent on a single buyer. This places the company in a precarious position since the company would be easily influenced by the demands of China. The possibility of them dictating prices and driving the process southwards is a major failing of the marketing strategy being employed by the company. Competitive Rivalry: The number as well as the capability of competitors is a major concern for all companies. This is because these competitors may erode the companys customer base and this would have adverse effects on the financial position of the company (Mindtools.com, 2016). For the Fortescue Metals Group Limited, the competitors are all older and larger companies like BHP Billiton Ltd, Rio Tinto Ltd and Hancock Prospecting Pty Ltd. While these companies are highly diversified and have a larger customer base, Fortescue Metals Group Limited by its nature of operations has limited itself to a single client. The possibility of being edged out by these larger companies as well as the possibility that the buyer would shift loyalties if offered a better deal by any or all the competitors is a matter of grave concern for the company headed by Mr. Forrest Threat of Substitution: This refers to the possibility of the client to find a better alternative for the product or services being offered by the company. The possibility of easy and viable substitution is an important factor that would impact this factor (Mindtools.com, 2016). For Fortescue Metals Group Limited, the threat of substitution would arise not only from competitors and rivals in its own country but also from the possibility of China being able to procure a similar or even better quality ore at cheaper prices from alternate countries like India or Africa. Since China is looking at huge volume of exports it is in a position to dictate terms to not just Fortescue Metals Group Limited but also to negotiate better process with countries that would not have to incur similar costs in procuring and processing the iron ore. Threat of New Entry: This refers to the possibility of newer companies entering the same market (Mindtools.com, 2016) on similar lines as Fortescue Metals Group Limited entered the mining segment even when there were bigger players like BHP Billiton Ltd, Rio Tinto Ltd and Hancock Prospecting Pty Ltd. The possibility of these newer players adopting tactics like undercutting prices to make inroads into the market cannot be discounted. Summary Of Strategy Plans The company strategy is to maximize its contribution to the employment market and national GDP through its exports. While the efforts put in by the Fortescue Metals Group Limited are commendable, the same cannot be deemed sufficient in light of its current financial statements. The strategy to concentrate on a single market and reduce its diversification into other markets is a strategy that calls for urgent measures to counteract the expected fall in profits and decline in exports (Balancedscorecard.org, 2016). The company projects are too optimistic given the analysis of its latest annual reports. Market Share And Size Fortescue Metals Group Limited based in Western Australia is into the business of exporting Iron ore to China. The company primarily caters to the Chinese markets. Unfortunately, while the company is looking at expanding its mining capacity, it is faced with the ground reality of its declining market share in the Chinese markets. The market size of Fortescue Metals Group is presently at US$ 7083 million due to its overall decline in revenues from all markets (Fortescue Metals Group Limited Annual Report, 2016). Current Situation The company is presently well placed in terms of its commitment and capability to meet the projected exports for the coming year. However, it is important to consider the fact that the company is entirely optimistic in its projected figures and has not put into place any alternative mechanism in case it is unable to continue exporting to China. On the basis of Porters five forces analysis, it would be accurate to state that Fortescue Metals Group Limited is liable to competition from rivals, threat of substitution as well as the impact of buyer power in lowering prices (Pearce and Robinson, 2011). Any or all these factors would impact the profitability of the company and its ability to service the current debt position, as well as its ability to take on further debts as indicated by the CFO. The financial statements show that the revenue from China is US $ 6,789 million and forms the major part of its revenue of US $ 7,083 million. However, the year on year figures show that Chinas c ontribution has come down from US$ 8047 million to the current figure of US$ 6,789 million (Fortescue Metals Group Limited Annual Report, 2016). Comments And Recommendation Based on the current position, as well as Porters five forces analysis, Fortescue Metals Group Limited should consider exploring its export options and consolidating its position as a important exporter of iron ore. While the company has made significant inroads into the industry and boasts of good growth, as well as the guidance of persons like Andrew Forrest; it is imperative that the company looks at not only consolidating its position in exporting iron ore to China, but also to expand both its customer base as well as make efforts to enter newer markets in developing countries which would need iron ore for their infrastructural improvements (Kach et al., 2016). Annual Report The annual report of the company shows a robust growth. The company as posted a Net Profit after Tax of US$ 985 million, which is a significant growth of US$699 million over the previous year. The company was able to give an interim dividend of 3 cents per share and a final dividend of 12 cents per share, taking the total dividend paid during the year to 15 cents; an increase of 10 cents, over the dividend payout during the previous year. There is a marginal increase in retained earnings which has contributed to the increase in total equity of the company (Fortescue Metals Group Limited Annual Report, 2016). The net profit before tax in the current year shows a significant increase of US$ 934 million, year on year. Unfortunately, the income statement of Fortescue Metals Group Limited shows a marginal decline in assets, both current and non-current over the previous year, with cash and equivalents as well as inventories contributing to the decline. This means that the liquidity of the company has reduced significantly. On the liabilities side, the current liabilities are not affected to a great degree. However the non-current liabilities show a sharp decline in borrowings as well as an increase in the deferred tax liabilities of the company (Fortescue Metals Group Limited Annual Report, 2016). The cash flows statement shows both the cash receipts from customers as well as payments to suppliers have fallen drastically. However, the fall in income tax payable has helped improve the net operating cash inflow. The investments made have also sharply declined and this has contributed to the overall profitability of the company. There has been a huge decrease in cash and cash equivalents which reflects on the current liquidity of the company (Fortescue Metals Group Limited Annual Report, 2016). Conclusion The Fortescue Metals Group Limited is looking at a long term decline in growth on the basis on the data contained in its financial statements. Despite the increase in profits posted by the company, the decline in liquidity as shown by decline in inventory levels as well as the cash position is an indicator of the long term viability of the company. It is suggested that Fortescue Metals Group Limited look at entering newer markets in order to overcome the expected fall in demand from China. The companys decline in revenues from other markets by close to 50 per cent is also a indication of its inability to increase its market penetration in other countries and this needs to be addressed on priority (Bradley, 2016). References Australianmining.com.au. (2016).Australian Mining | Australia's home for mining industry news. [online] Available at: https://www.australianmining.com.au/ [Accessed 13 Dec. 2016]. Balancedscorecard.org. (2016).The Basics of Strategic Planning, Strategic Management and Strategy Execution. [online] Available at: https://balancedscorecard.org/Resources/Strategic-Planning-Basics [Accessed 13 Dec. 2016]. Fitzpatrick, B., Nguyen, Q. and Cayan, Z. (2015). An Upgrade To Competitive Corporate Analysis: Creation Of A Personal Finance Platform To Strengthen Porters Five Competitive Forces Model In Utilizing.Journal of Business Economics Research (JBER), 13(1), p.54. Fortescue Metals Group Limited Annual Report. (2016).Fortescue Metals Group Limited Annual Report 2016. [online] Available at: https://fmgl.com.au/media/2862/fy16-fortescue-annual-report-final-with-cover.pdf [Accessed 13 Dec. 2016]. Kach, A., Busse, C., Azadegan, A. and Wagner, S. (2016). Maneuvering through Hostile Environments: How Firms Leverage Product and Process Innovativeness.Decision Sciences, 47(5), pp.907-956. Mindtools.com. (2016).Porter's Five Forces: Assessing the Balance of Power in a Business Situation. [online] Available at: https://www.mindtools.com/pages/article/newTMC_08.htm [Accessed 13 Dec. 2016]. Pearce, J. and Robinson, R. (2011).Strategic management. 1st ed. New York: McGraw-Hill/Irwin. Bradley J. (2016).Why Is Strategic Management Needed?. [online] Available at: https://smallbusiness.chron.com/strategic-management-needed-61313.html [Accessed 13 Dec. 2016].