strategic implication of a segmentation and positioning

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c'r,21G11C ilffiffLi11D CAITHCON ©IF A

EIGM-Emmrsaal AN 23EMONIEG MODIL W© ULM EDMITE MICCA\N CAD CW2MT KEE:11G tl\MA rflr GO

CC CCCD:M OundwilnaulfirnEolotz= G la I

'aunclliaff2 Ke. gi'OD22,60

CONTENTS TOPIC PAGE

CHAPTER 1 : AN INTRODUCTION 1 - 3

1.1 Marketing Approaches Over Time 3 - 7

1.2 Statement of the Problem 7 - 8

1.3 Objectives of the Study 8 - 9

1.4 Methodology 9 - 10

1.5 Demarcation of the Study 10

1.6 Chapter Outline 10 - 11

CHAPTER 2 : MARKET SEGMENTATION, TARGETING AND 12 POSITIONING AS RELATED TO THE SOUTH AFRICAN GOLD MINING INDUSTRY

2.1 How gold Mines Purchase Explosives 13 -16

2.2 The Nature of Explosives Purchasing 16 - 17

2.2.1 Understanding Individual Behaviour 17 - 20

f.

2.2.2 Motivating Behaviour 20 - 22

2.2.3 The Buyer Decision Making Process 22 - 25

2.3 Market Segmentation 25 - 26

2.3.1 Market Segmentation Approaches Reviewed 26 - 29

2.3.2 Difficulties in Segmenting the Narrow Reef Explosives Market 29 - 31

2.4 A Segmentation Approach for this Study 31 - 36

2.5 Targeting Market Sectors 36 - 38

2.6 Product Positioning 38 - 41

TOPIC PAGE

CHAPTER 3 : DEVELOPMENT OF A SEGMENTATION MODEL 42

3.1 First Step - Define the Business Environment 42

3.1.1 Who is the Customer 43 - 47

3.1.2 Where are the Mines Located 47 - 48

3.1.3 What product is going Where? 48 - 49

3.1.4 What Market Needs Exit? 49 - 53

3.1.5 How can the Gold Explosives Market be Quantified? 53 - 56

3.1.6 Who Competes for the Market? 56 - 57

3.1.7 What Physical and Cultural Environment Exist in Gold Mines? 57 - 58

3.2 Second Step - Understanding Buyer Behaviour 58 - 63

3.3 Third Step - Identify the Base Variables and Segment the Market 63

3.3.1 Identification of the Base Variables 63 - 66

3.3.2 Segmenting the Market r.

66 - 69

3.4 Final Step - Verify the Result 69 - 70

CHAPTER 4 : TARGETING, POSITIONING AND STRATEGIC IMPLICATION 71

4.1 Business Strengths and Market Attractiveness in Relation to Market Segments 71 - 72

4.1.1 Market Attractiveness Versus the Market Position 72 - 76

4.1.2 Economical/Technological Needs Versus Capability 76

4.1.3 Competitive Position Versus Market Interaction 76 - 77

4.1.4 Market Targeting 77 - 82

TOPIC

4.2 Product and Service Positioning

4.2.1 Product Positioning in Market Sector A

4.2.2 Product Positioning in Market Sector B

4.2.3 Product Positioning in Market Sector C

4.2.4 Product Positioning in Market Sector D

PAGE

82 - 84

84 - 85

85 - 87

87 - 88

88 - 90

4.3 A Corporate Image 90

CHAPTER 5 : CONCLUSION AND RECOMMENDATIONS 91

5.1 A Summary 91

5.1.1 Study Objectives Reviewed 91 - 92

5.1.2 The Segmentation Model, Targeting and Positioning 92 - 95

5.2 Conclusion 95 - 96

5.3 Recommendations 96 - 97

BIOGRAPHY 98 - 99

FIGURES

Figure 2.1 : The Gold Mine Supply 14

Figure 2.2 : Individual-Behavioural Framework (Gibson et al, 1994: 99) 17

Figure 2.3 : A graphic comparison of the Maslow and Hertzberg motivational theories 21

Figure 2.4 : The stages of decision making ( Bateman and Zeithaml, 1990: 90) 24

Figure 2.9 :

Figure 3.1 :

Figure 3.2 :

Figure 3.3 :

Figure 4.1 :

Figure 4.2 :

Figure 4.3 :

Figure 4.4 :

Figure 4.5 :

Figure 4.6 :

Figure 4.7 :

PAGE

Major potential bases for segmentation according to the nested approach (Bingham and Raffiled, 1990: 202) 27

Dayle and Saunders industrial market segmentation model focusing on product benefits (Eckles, 1990 : 126) 28

The variable filtering approach to market segmentation 32

Implication of alternative positions within the Market Attractiveness/ Competitive Position Matrix (Walker et al, 1992: 197) 37

Strategic competitive positions for the U.S. Heavy-Duty Truck Market as measured by Return on Investment (Walker et al., 1992,305)

40

Geographic location of the gold mines of South Africa 48

Effect of cost and revenue for low and high cost producers 53

The gold explosives market as defined by operational excellence and affordability 67

Matching market attractiveness to company competitiveness (Size, Price, Technology, Presence and Life are considered) 73

The strategic implication cells of the Walker matrix (Figure 2.8) to be consulted for guidance in Market Segment A 78

The strategic implication cells for Walker consultation of the matrix for Market Segment B 79

The strategic implication cells for Walker consultation of the matrix for Market Segment C 80

The strategic implication cells for Walker consultation of the matrix for Market Segment D 81

Product Position Space matrix with product positions in Market Sector A 85

Product Position Space matrix with product positions in Market Sector B 86

TOPIC

Figure 2.5 :

Figure 2.6 :

Figure 2.7 :

Figure 2.8 :

TOPIC PAGE

Figure 4.8 : Product Position Space matrix with relative product positions in • Market Sector C

88

Figure 4.9 : Product Position Space matrix with relative product positions in Market Sector D

89

Figure 5.1 : The Market Segmentation Model explaining Explosives buyer behaviour in the Gold Narrow Reef Market

93

TABLES

Table 1 : Mining Houses and Associated Mines 2

Table 2.1 : Pros and Cons of using groups to make decisions (Bateman and Zeithaml, 1993 : 97) 25

Table 2.2 : Motivational Score Card 34

Table 3.1: Annual Number of holes drilled which serves as quantification for the explosives market 55

Table 3.2 : Relative Market Share of Explosives Companies in South Africa 56

Table 3.3 : Operational and Performance variables describing the Gold Mines of South Africa. 59

Table 3.4 : Relative importance of filters with regard to motivation of buying behaviour 64

Table 4.1 : Market Attractiveness and Business Strengths to be considered in targeting a market segment 72

Table 4.2 : The size of Segments A,B,C and D measured in million holes drilled annually, with the life of mine also indicated 74

Table 4.3 : The major product groups offered in the Gold Narrow Reef Market 83

Table 5.1 : Attractiveness and Competitive factors considered in market targeting 94

APPENDIX 1: SENIOR MINING PEOPLE PLOTTING THEIR MINES IN THE MARKET FIELD

CHAPTER 1

AN INTRODUCTION

INTRODUCTION

When the first 51 gold diggers settled in 1885 at Kromdraai west of where

Johannesburg would develop in later years, the foundation was set for a synergistic

growth between the narrow reef gold industry and an industrial complex supplying the

gold mines of equipment and commodities necessary to unlock the riches of the earth.

Although the South African industrial development largely resulted from the mining

industry, the latter was saved many times by the innovativeness and ingenuity of the

mining supplier industry (Anon, 1986:5). For example, improved hoist rope

technologies helped to reach the deeper lying reefs, sequential firing facilitated higher

mining rates and the cyanide beneficiation process allowed gold recovery to continue

when the state of the art technologies of the time failed to do so.

Today the South African Gold Mining Industry is in a mature stage, but still produces

almost 500 tons of gold annually, about 40 % of annual world production. The gold is

mined from deep narrow reefs, extending spatially over large areas and dipping

between 10° and 30°. The rock sufrounding the gold bearing reefs is typically hard but

strong allowing mining at great depths. However, the high quartz content of the rock

makes it highly abrasive on steel mining tools, one of the major factors inhibiting full

mechanization of the mining process. Mining is still conducted by labour intensive drill

and blast techniques. The pneumatic rock drills are hand held, although air legs are

assisting in forward pressure. Explosives are inserted by hand or pneumatic means.

Broken rock is removed by electric driven rope scraper winches and trammed by rail to

vertical ore-pass systems which collects all broken rock at shaft bottom to be hoisted

to surface.

There are currently 33 large operating gold mines owned by or associated with six

mining houses. Roughly one third of these mines are old and marginal with large

infrastructures to be maintained resulting in mining operations being far from the

2

shafts. The remaining mines can be divided into two groups; those that are established

with a 10 to 25 year life of mine left, or those established with new mines to be

developed from current mine infrastructure. These mines have life of mine

expectancies of over 25 years. Table I provides a summary of the mines with their life

expectancies (Von Below, 1996:17).

TABLE I : Mining Houses and Associated Mines

MINING HOUSE

••:mi[xs::::: - I.i.opyriort,::::: ANNUAL ootp: - - - • • : ::PROD(TONS): •

LIFE OF ::: - 'MINE

Amgold (Anglo Elandsrand Carltonville 15,4 20+ American) Freegold Welkom 92,7 20

Vaal Reefs Orkney 66,2 30+ Western Deep Levels Carltonville 35,8 30

Anglovaal Hartebeestfontein Stilfontein 25,2 10 Loraine Allanridge 6;6 5+ E T Cons Barberton 3,2 11

Goldfields Deelkraal Carltonville 6,6 19 Drie Cons Carltonville 50,6 25+ Kloof Randfontein 43,5 24

JCI HJ Joel Welkom 4,1 16+ Randfontein Randfontein 23,0 25+ Western Areas Randfontein 17,3 65+

Gengold Beatrix ..• Welkom 14,6 20 Kinross c' Evander 8,5 16 Leslie Evander 2,4 6 St Helena Welkom 5,3 7 Winkelhaak Evander 8,8 10 Fairview Barberton 1.5 -

Randgold Blyvooruitzicht Carltonville 4,0 11 Buffelsfontein Stilfontein 8,9 17 Doornfontein Carltonville 3,7 - Durban Deep Roodepoort 2,0 24 ERPM Germiston 8,2 6 Grootvlei Boksburg 2; 5 16 Harmony Virginia 20,1 9 Unisel Welkom 4,2 22 West Wits Randfontein 3,7 6 Stilfontein Stilfontein 0,6 -

Other Benoni Benoni 2,0 19 Cons Modder Boksburg 1,5 12 Knights Springs 1,3 25 Lindum Springs 1,7 7

Source : Von Below : 1996, 17

3

Three major explosives companies supply explosives products to the narrow reef gold

mining market, but other local and foreign suppliers are distributing explosives

products in association with these major suppliers or try to enter the market

independently. The major suppliers are AECI Explosives Limited (AEL), Sasol Mining

Explosives (SMX) and Bulk Mining Explosives (BME). SMX and BME are wholly

owned subsideries of Sakil Limited and Omnia Limited respectively. AEL, however, is

a joint venture between Imperial Chemical Industries Plc and AECI Limited.

This study is an attempt to segment the gold mining industry in relation to explosives

requirements in order for AEL to target and position itself successfully in a market

they still dominate but has been losing market share over the last ten years.

1.1 MARKETING APPROACHES OVER TIME

Until recently, AEL was effectively the only supplier of explosives to the South

African Gold Mining Industry and therefore monopolistic in nature. Right from

the origins of the gold industry, the old Transvaal Government discouraged

competition to maintain some control over the mining activities on the

Witwatersrand. The mining rush attracted foreigners in such numbers that it

became a threat to the Old Transvaal Boer Republic. Only one dynamite

concession was granted to Edouard Lippert, a cousin of Alfred Beit (Anon,

1986:12). Explosives manufacturing started at Modderfontein close to

Johannesburg and operated effectively as a monopoly. In reaction, Cecil John

Rhodes started an explosives company in Somerset West near Cape Town. In

later years these two companies amalgamated to form the African Explosives

and Chemical Industries. This amalgamation maintained AECI as a monopoly,

a situation that persisted until Sasol Mining Explosives was formed in the early-

eighties.

As the only supplier of Explosives products in South Africa, AECI had an

explosives supply agreement with the Chamber of Mines. All supply

requirements were expected to be met. In the nineteen eighties competition in

5

❑ Differentiated Market Strategy

(Mid-Eighties to early Nineties)

The mines became less tolerant to companies such as AECI which was

inflexible in their product offering and which harboured inefficiencies due to the

monopolistic nature of their business. At the time Sasol Industries became

interested in the fertilizer and explosives industries in order to develop a market

for the large volumes of ammonia produced as a by-product of the synthetic

fuel process. Sasol Mining Explosives started in 1985 and soon AECI started

losing market share, especially in mines associated with the Gold Fields mining

group. Sasol Mining Explosives entered the market with a low pricing policy.

AECI reacted by differentiation of its explosives products and marketing mix

and succeeded in obtaining a premium. The differentiation was based on the

nitro glycerine range of products which were extremely popular in the narrow

reef market due to its strength and forgiving nature in conditions of low

operational discipline. AECI was still the only supplier of blasting accessories,

that is detonators, fuse and igniter cord and was the only supplier which could

offer a full blasting system, that is both explosives and initiating systems.

Differentiation from its competitors was also achieved through high service

levels which included a welt trained and competent sales force. Better technical

advice was offered, better blast design using software developed in conjunction

with ICI was included in the service package. Central bargaining with the

Chamber of Mines was discontinued by the mines in 1985, which resulted in

centralised mining house price negotiations where a pricing structure designed

for each mining house and based on different discounts from the National Price

List was annually re-negotiated.

Market sectors were roughly arranged according to mining house with the

belief that some mining houses were more interested in technical and other

services while others were only interested in low priced explosives

commodities. In practice, however, high service levels were given to all mines

at all times. In 1993, ICI obtained a majority share of the explosives interest of

6

AECI, and the formation of a joint venture between AECI and ICI was formed

and called AECI Explosives Limited. AECI Explosives Limited stopped

producing water based explosives which was not ICI technology, but these

prOducts are still toll manufactured by a new player, Dantex Explosives on

behalf of AEL. Meanwhile, in first world countries, ICI discontinued the

manufacture of nitro glycerine based explosives, mainly due to the

environmental hazards of the manufacturing process and the physiologic effect

these explosives have on mine workers.

Dispite these changes to its micro environment, AEL still operated as if it were

all things to all customers. In addition to the water gel and nitro glycerine

explosives, water based emulsion explosives, which is an ICI technology, was

manufactured. In 1994, a huge accidental explosion in the nitro glycerine

manufacturing plant occurred, 11 AEL employees were killed. It was decided

to discontinue the manufacture of nitro glycerine explosives and to expand the

emulsion technology to replace it.

Competitors reacted to the way AEL differentiated on the basis of service

levels. They started to develop and grow their technical competence. AEL

attempted to reduce overl4ad cost, and reduced the sales force in 1995. During

1996, little difference could be detected between AEL and SMX technical

service. BME decided in 1995 to enter the underground explosives market and

erected a manufacturing plant near Fochville in the West Rand region and are

now trying to enter the market by undercutting both AEL and SMX on price.

AEL, dispite the intense competition, still succeeded in maintaining a high

market share in explosives. AEL also acts as the price setter, where SMX and

BME adjust prices accordingly. However, the intense price struggle lowered

margins of packaged explosives products to such an extent that a loss is

currently made on these products.

AEL still dominates the initiating system market, but companies specializing in

initiating systems from the international arena entered the market recently in

7

association with local competitors. For example, Ensign Bickford entered the

market in association with SMX and Famesa in association with BME.

The basis on which AEL differentiated itself has thus been eroded away by

recent events in the market place and it became clear that a more concentrated

market strategy is required to maintain market share and retain and improve

profitability.

❑ A More Concentrated Marketing Strategy Required

(Early Nineties to Current)

With the competitive edge being lost in the market to competitors who are

copying the service and marketing approach AEL is following, it became

necessary to readjust the strategy. It is too expensive to try and service all

market segments, since some market sectors might exist where these activities

only adds cost without earning a premium. Currently, AEL realises changes are

required and is looking for a credible segmentation model which will allow

clear and decisive focus in the market. The objective will be to stabilise market

share in the face of increased competition by serving selected markets best

suited to the company's infrastructure, technology and culture. It is important

to maintain a large market share, as economy of scale ensures price

competitiveness. Large investment will also be decided on the basis of the

segmentation. New technologies currently in an introductory phase, can

potentially replace the older technologies if clear markets exist. To summarise,

AEL is currently in stage of creative chaos, where it is clear change is required,

but it is not clear what the direction should be.

1.2. STATEMENT OF THE PROBLEM

Many variables exist that influence buyer behaviour in the narrow reef gold

mining market. Since some variables are real but subjective in nature, such as

the opinion and charisma of mine managers or influential individuals, it is

difficult to quantify and analyse them. The question is ? Which variables,

8

quantifiable or not, are more dominant in shaping buyer behaviour and how

should they be prioritised?

What is needed is a logical segmentation model which reflects true buyer

behaviour in order to shape future strategies in AEL so that the overall

company objectives can be met. Each segment should then be analysed and

considered regarding attractiveness in satisfying needs and the ability to add

value both to the customer and to AEL. It is also required to target market

segments and develop a marketing mix for them so that AEL is correctly

positioned to retain the markets it choose to compete in.

The problem is the failure to identify market areas of similar response

which are relatively stable and can be used to select areas where maximum

value can be added to the customer and to the company and can be used to

shape and define future direction.

1.3. OBJECTIVES OF THE STUDY

The following objectives have been set for this study: r.

- The establishment of a market segmentation model which will identify and

explain the basis of similarities and differences in buyer behaviour groups which

is sufficiently large and stable in order to focus future strategies.

- The interpretation of the segmentation model in the light of the strengths,

weaknesses, opportunities and threats of the company in order to target

markets best suited to the potential of the company.

- Development of strategies and positioning in the target markets to strengthen

the chance of success.

9

1.4 METHODOLOGY

Market segmentation can be either pre-determined or market-defined (Struhl,

1992:10). Pre-determined or a priori segmentation involves the collection of

available information of a market, selecting groups from a population and

finding-if they are segments. Market-defined or post hoc segmentation is more

objective and first consult the market and then analyse answers and survey

questions to predict marketplace responses.

The universe investigated here consists only of 33 user entities (the mines),

represented by 6 purchasing organizations (mining houses). Although hundreds

of people influence the decision making process, the physical realities of the

user environment, such as deep or shallow mines, low grade or high grade,

must logically be assumed the dominant factors that are driving human decision

making. A pre-determined process will therefore be followed. As much

information regarding operational variables, organizational demographics,

situational factors and purchasing approaches will be collected. The variables

will be prioritised and relationships will be sought for between the top variables

to be captured in a simple behavioural segmentation model. Prioritization will r.

be achieved by adjustment of McDonald and Dunbars's interrogative

segmentation technique. They developed a market segmention approach where

the current flow of product is plotted followed by interrogatory questions to

explain current product flow such as; Who buys? What is bought? Where?,

When? and How it is bought? (McDonald and Dunbar, 1995:1).

To ensure a reasonable coverage of possible variables that do influence buyer

decision making, Bonoma and Shapiro's nested approach will be followed for

identification of variables and then subjected to the McDonald and Dunbar

technique (Shapiro and Sviokla. 1992:72).

It is expected that two or three base variables will be identified, or variables so

dominant in influence that they can form the basis of the segmentation. Other

10

variable will be used as descriptor variables which provides depth of

understanding of a certain segment.

An attempt to varify the accuracy of the pre-determined segmentation exercise

will be made by interviewing consulting mining engineers and testing their

views on what is required from suppliers.

Perceptual mapping will be used to illustrate two-dimensionally the basis of

positioning, that can be technology, price, quality, distribution or service.

Adjustment in Company strategies will be recomended.

1.5 DEMARCATION OF THE STUDY

The study will focus on segmentation of the narrow reef gold mining

environment. Although the segmentation model has a wider application for all

suppliers to the gold mining industry, the study will focus on the supply of

explosives and initiating systems. Although hundreds of products are offered to

the gold mines, only the broad product groups will be considered, such as fuse

and ignitor cord, shocktube products etc.

The investigation will also be limited to South African gold mines, while a small

number of key consulting engineers and mine managers will be interviewed to

help verify the model.

1.6 CHAPTER OUTLINE

This study will consist of five chapters. Chapter 1 do constitute the scope and

methods of the study and contain an introduction, an explanation of marketing

approaches over time, a problem statement, objectives and a demarcation of the

study. Chapter 2 explore literature in search of techniques to assist in

segmenting targetting and positioning of business to business markets. The

theory is reviewed briefly and conceptually applied in order to test applicability.

11

The chapter concludes with a proposed methodology. Chapter 3 gives the

application of theory, namely the development of a segmentation model and

validation of the accuracy of the model, in other words, how well does the

segmentation model represent real life buyer behaviour. Validation is obtained

by a set of interviews, which also will serve as the foundation of decision

making to position AECI Explosives Limited in such a way that their objectives

can be met. In Chapter 4, sector targeting and positioning are considered. The

chapter also explore the strategic implications of the proposed positioning.

Finally, Chapter 5 summarise the major findings and recommendations as to

possible changes in strategic position of AECI Explosives Limited.

12

CHAPTER 2

MARKET SEGMENTATION, TARGETING AND POSITIONING

AS RELATED TO THE SOUTH AFRICAN GOLD MINING INDUSTRY.

All markets•consist of buyers, and buyers differ in their wants, needs and attitudes.

Each buyer is potentially a separate market. For a whole market, however, save

geographic, demographic, psychographic or other characteristics are shared by more

than one customer and as a result will influence their buying behaviour in a similar way

(Kotler and Amstrong, 1994, 274). The secret is to identify groups that might respond

similarly to communication, product positioning and product configurations (Struhl,

1992, 2). If deep and shallow gold mines, for example, use the same explosives

products, a market structure rather than a segment has been identified. A segment is

defined by an unit of similar behaviour when confronted with the same market stimuli.

Once the behavioural or "segments" has been identified, the company must determine

which market segments they will focus their efforts and why these segments is

attractive to them. Once the targeting decision has been made, the product or service

perception in the customer mind must be designed so that he will find the product f.

desirable.

Accurate product positioning provides a enduring advantage over current and future

competitors (Orville et el., 1992, 174).

This chapter will explain as a starting point, the buying process that gold mines follow.

Once the buying process is understood, buyer behaviour can be investigated which

forms the basis of market segmentation. By briefly reviewing different segmentation

technique for this study will be developed. The market attractiveness factors that will

identify target segments, will be reviewed, followed by a short description how

physical and perceptual product positioning will be achieved.

13

2.1 HOW GOLD MINES PURCHASE EXPLOSIVES

The South African Gold Mining Industry developed from large mining finance

houses, formed by pioneers such as Cecil Rhodes, Barney Benarto, Alfred Beit,

Herman Eckstein and Joseph Robinson. Each financing house, or Mining

House, generally fully owns prospecting companies as subsidiaries. If a gold

prospect has potential, a mining company is created, initially fully owned by the

Mining House. As confidence grows, further capital is raised by rights issues.

The mining house retains a dominant share of the mine, securing a management

contract. These contracts are traditionally expensive, but maintains head office

expertise in the following fields: geology, mining, finance, training,

administration and human resource development. It also provides funding for

further expansion within the industry.

These management contracts were recently under pressure with the inflow of

foreign capital. Randgold reduced head office personnel to 60 people, while

Gengold also restructured and sold off their management contracts. All six

mining houses, however, make use of central bargaining for their mining

companies. r.

An existing trend is to decentralise contract administration and results in only

20 % of contracts administrated by head office for central bargaining [80 % of

the value]; the rest are negotiated by the individual mining companies

themselves. Explosives fall in the former category, but lower levels of

management are being enabled to increase their influence over the purchasing

decisions.

Figure 2.1 explains diagramatically the recurring buying process.

DECIDERS Mine Management is Informed - Evaluates agains criteria

BUYING ROLES Buying Process ricsigragadier

Individual Suppliers Applies for an

Price Increase

INFLUENCER Volume Price (Preceeding) X (New)

Central Purchasing Unit (Mining House)

Calculate effect of increase to Mines. Evaluate against Criteria Alternative supplier ratio's or product mixes are considered

INFLUENCER

DECIDER o o 5 Ot)

The Mine

BUYERS

Consults on-mines purchasers + stores

INFLUENCERS Consult middle management

Influenced and USERS presurised by

users

FIGURE 2.1 The Gold Milne Sappily

14

Supply on

Orders Received from on-mine

purchasing unit

Somme e Anon o AEL Internal Hies, 1996

15

The process can be broken down into the following steps: .

Step 1: All mines associated to a mining house combine their needs and task the

central purchasing unit to negotiate with the supplier on their behalf. The supplier uses

the previous year's volumes as a basis, multiply it by both the old and new unit prices

and calculate the increases. Unit prices are calculated from applying a discount to the

National List Price of the product. The proposal (almost a tender) is forwarded to the

central purchasing unit of the particular mining house. The supplier influences the

buying decision in various ways. First, the account managers, blasting engineers and

technical representatives ensure during the proceeding year that the explosives are used

correctly so that maximum value is obtained from the supply contract. This is achieved

through technical service, training and regular consulting. Secondly a promotions

policy that includes sports days, advertisements, tokens etc. maintains maximum

awareness amongst customers.

Step 2: The Central Purchasing Department takes the tender prices and after analysis

advises the individual mines how they will be affected and what could be done to

optimise their situation. For example, product mix or suppliers mix can be changed.

The supplier credibility and reliability of supply are examples of aspects the mine s,

management is advised on by central purchasing before a decision is made. The final

supplier mix is decided by the central purchasing department and acts therefore as both

an influencing and a deciding body. Their purchasing units mission is to obtain the

required goals and services at the required quality, specification and best price and so

contributes to the groups cost competitiveness (Anon, 1996,1)

Step 3: Mine Management considers the supply proposal and consults the on-mine

purchasing unit (the buyers), middle management and the users. Direct contact with

the supplier sales force provides them with further information. The actual users of the

product recently started playing a much more direct role through workshop forums in

influencing the buying decision. Safety implications and product stewardship plays as a

result, a much more important role in buyer decision making.

16

Step 4: After evaluating the value a supplier can add to the mines operation,

essentially balancing price benefits or needs satisfaction, the mine management makes a

decision. The buying decision is communicated to the central purchasing department.

Mine management, which can be the general manager, mine- or production manager

or a committee, is therefore the most powerful deciding centre.

Step 5: If the decision is not to buy, the central purchasing unit re-negotiate the terms

with the supplier. On rare occasions, if agreement cannot be reached, no supply

contract is agreed on. Mines can then still buy directly from the supplier, but usually at

National List Price. Alternatively, arbitration can be an option.

Step 6: If agreement is reached, a supply contract is compiled and signed by

representatives of both parties. The process repeats itself a year later, when the

supplier again gives notice for the price adjustment for the following yera.

2.2 THE NATURE OF EXPLOSIVES PURCHASING

To understand the nature of explosive purchase decision making, individual and

group behaviour needs to be understood .

The process is essentially a decision-making process through communication

between individuals and groups. The supplier tender is compiled by a work

group and communicated by a negotiation team (one or more individuals). The

evaluation and decision making is done on a consultative basis between a

management group and a central purchasing group. Individual charisma and

personality plays an important part in the decision making process. Groups

are made up of individuals and can be dominated by individuals. Groups,

formal or informal, acts as a powerful equaliser and a mechanism where

balanced views are generated in order to make decisions and satisfy needs.

(Gibson et al, 1994:311)

17

Buying behaviour is shaped by individual and group behaviour. Behavioural

patterns form the basis of segmentation. The logical starting point to

understand buyer behaviour is to study the psychological and motivational

factors of individuals and groups and how decision making for buying of

explosives is affected by these variables.

2.2.1 Illunders

raclignEllnndividuai Behaviour t ,

Various variables influence individual behaviour. Figure 2.2 is an useful

framework constructed by Gibson et el. grouping variables that

influence behaviour in two groups, environmental and individual.

MIGURIE 2.2 laglifiviidund- eheviiounall 1Frramewout

The FAIN 11'011111CM rile Indi% idu al BehaN ior. Outcomes

q \ H!!!!.. , .wd ,,L,11 , 1'r. ■ 111.111- , ,,, 1\ in: Performance - In' , dt.-.11.In Hui) II\ 1),,,i,.,21,,11n,1 I Junking plocc, , - Lang-term - ( )! : Ain ;111-culi ,tml..tur.. ....n.olirilit N ( I t11 muntcation - ShOrt-terM

l'(' I k. ■ '...• tnd , 11H. L2t, cption - I ,ilknIF Personal developmen - t ,...,,,icl.111 ,, , \ ilitli,k, - L. 1 q,n in,..2. Relations with othci-s - Rcv,..mid , ,in„ -.iiktion, - R._-,..lit Lt..---

1 2.i(11111.,2 ..,1p,IC ON

\..,-..:

c )b'r LA k anon!,

\ lo \ ,...mcnt Satisfaction

- I .,1/4.4 , 11t1MIL. ,

--.“,r1 \\()14,.

ROL L .

`-..•.

- I- in c; 1 k I - \ p,._ pc.r..k:

- 1_,Asure anti hoMlles

Source a Gibson et el e 1994, 99

18

How can these variables influence the behaviour of individuals on a

mine or a mining house purchasing department when buying explosives?

A few variables from Figure 2.2 are elaborated upon to illustrate the

point. Most definitions is taken from Gibson et el. The examples are

imaginary.

Abilities and Skills - Ability is a learned trait that permits a person to

do something mental or, physical. The explosives user might , have a

problem connecting up fuse and ignitor cord, since the products were

not designed considering the human ability to perceive spatial patterns

and manipulate the cord in a confined space. The product becomes

unpopular which is communicated to middle and finally senior

management.

Senior management's memory span, the ability to recall perfectly past

experience, might reject the claim. His ability to make comparisons

might allow him to consider other products and anticipate the

effectiveness and cost consequences of a change. r.

Race Age or Sex - The supplier attitude to human diversity is crucial.

If the negotiator of the Central Purchasing Department is a woman, and

the supplier negotiator is overly chauvinistic, she might influence mine

management not to buy. Both white and black races are users of

explosives products, and product names should be selected carefully not

to offend (e.g. if names are overly colonial, black races might feel

offended or perceive the company as "Afrikaans" or "English").

Perception - The process by which an individual gives meaning to the

environment. It involves arranging and interpreting various stimuli into

a psychological experience. Explosives suppliers must concentrate on

good and clear communication, so that stereotyping can be avoided and

19

a good perception of the need and desires of the customer can be built.

The user of explosives might perceive an explosive to be weak, but the

poor performance might be a consequence of too large a interhole

spacing.

Attitudes - Positive or negative feelings or a state of mental readiness

learned through experience to direct behaviour towards people, objects

and situations. A mine manager might feel inferior if an explosive

supplier continuously tell him the explosives are performing sub-optimal

in his mine due to inadequate discipline over drill crews. He might

decide to select a supplier who does not get involved in operational

matters, but only the supply of the commodity.

Values - The guidelines and beliefs an individual uses when

confronted with a situation in which a choice must be made. For

example, the Anglo American mine manager might believe that new

technology can only work if the workforce is convinced it is

appropriate. The human involvement value directed his behaviour.

Personality - The set of characteristics and tendencies that determine

commonalties and differences in people's behaviour. The manner in

which a person acts reflects his personality. It is influenced by

hereditary, cultural and social factors. The mining environment is

usually structured and disciplined, eliminating participative type

managerial personalities and change them to more autocratic thinkers.

It is possible that a mine manager with charisma can alone decide

singularly which explosive supplier is to be chosen and inform the mine

personnel that that is how it will be. Recent changes to the Labour Law

encourages joint decision making, and this behaviour is on the decline.

20

2.2.2 Motivating Behaviour

What motivates behaviour? Maslow's theory assumes that people's

needs depend on what they already have. People's needs are

phsysiological, safety, belongingness, esteem and self-actualisation.

Herzberg's two - factor theory view job satisfaction as resulting form

the presence of dissatisfier - satisfier aspects or hygiene-motivators

factors.. Salary, job security, working conditions, status, company

procedures, quality of interpersonal relationships and supervision are

conditions when present, which do not necessarily motivates, but when

absent cause dissatisfaction. Achievement, recognition, responsibility,

advancement, work content and possible growth are strong motivators

when present, but absence doesn't prove highly dissatisfying. Figure

2.3 illustrates the motivation models diagramatically.

What motivators or hygiene factors play a role in decision making in the

gold mining industry? Both higher order needs and basic needs (or

motivator hygienic needs) influence motivation of the decision maker to

buy or not to buy from an explosives supplier. In Figure 2.3, the

aspects which are assumed dominant in driving buyer motivation at

mine manager level, are highlighted.

Alk MOTIVATORS

HYGIENE CONDITIONS

QUALITY OF INTERPERSONAL RELATION SHIPS

MASLOW

SELF ACTUALIZATION

ESTEEM

EfIERTZSIERG

ACHIEVEMENT

ADVANCEMENT

GROWTH

BELONGINGNESS RESPONSIBILITY

JOB SECURITY

PHYSIOLOGICAL

WORKING CONDITIONS

SAFETY AND

SECURITY

21

FIGURE 2.3 A graphic comparison ofr the Maslow and Herzberg

motivational theories.

HIGHER ORDER NEEDS

V

BASIC NEEDS

Source a Co piled from Gibson et al , 11994: 1141

The buying process as shown in Figure 2.1, elevate§ mine managers as

the most prominent "decision makers". Currently, a third of the 33

gold mines are marginal with limited life spans. The career progression

prospects of mine managers becomes limited. Self actualisation by way

of career advancement can only happen if exceptional mine operational

or profit achievements are illustrated by these individuals. Managers

22

will be interested if the explosives company can contribute without

doubt to the productivity and efficiency of the mining process by

exposing him to improved or new technology, or new services that will

enhance his operation.

Recent political changes have reduced mine management's esteem in

the workplace. The up-liftment of less privileged people to participate

in decision making, changed an autocratic environment to a more

democratic environment. . Suppliers who listen carefully to mine

management's needs and address them, enhance his esteem.

Professional behaviour when dealing with mine management is

therefore critically important, and building a personal relationship to

enhance a sense of belonging. At the same time, the workforce needs

careful attention.

Job security, and in general safety and security, is absent in many mines.

That makes mine managers cost conscious, and again the survival of the

mining complex they manage is important drivers in motivating

behaviour. Suppliers who focus on partnering with mines to help f.

extend the life of mine or increase profitability by improving operational

excellence will address these needs and influence managers positively to

buy from them.

2.2.3 The Buyer Decision-Making Process

Decisions, as defined by Gibson et al., is a means to achieve some result

or to solve a problem. A decision is therefore an organisations'

response to a problem. Complex buyer decision-making models exist,

such as the Webster and Wind model, the Sheth model or the Choffray

and Lilien model, (Bingham and Raffield, 1990 : 120). These models

do not adequately describe the mine buying decision-making process

and are not expanded upon here. The fundamental philosophy

23

underlying these models is that organisational buying is a decision

making process carried out by individuals who interact with other

people within a formal organisational structure.

Bateman and Zeithaml describes six simple steps in decision making

which is shown in Figure 2.4. A necessary condition for a decision is a

problem (Gibson et al., 1994: 610). The decision maker is a problem

solver which selects from alternatives generated by advisors or himself.

What problems exist when deciding who to buy explosives from? The

answer is complex, but the extent of satisfying needs balanced against

price is the essence of the problem. Should alternative products be

used to obtain the same broken rock, or should other suppliers be use?

If other products or suppliers is considered, will the same effect

(sufficiently fragmented rock) be achieved?

r.

24

FIGURE 2.4 The stages of decision maildng

Source o Bateman and Zeithaml, 1990 a 90

In evaluating alternatives, the decision maker has some probabilistic

estimate or idea of the outcome of each alternative. That uncertainty is

25

called risk. A supplier which provides best satisfaction to needs,

reduces risk. Risk is a subjective concept. Decision makers vary

greatly in their propensity for taking risk. A decision maker with a low

aversion to risk defines a problem, generate alternatives and selects

solutions differently from a decision maker with a high aversion to risk.

Some decisions are made on gut feel with lower levels of logic

supporting the decision.

Decision making in groups such as task forces, committees and work

teams has complex group dinamics, but since individuals and groups in

an organisation is subjected to the same operational and cultural

influences, it is likely that groups decision making will follow the same

pattern of individual decision making. The pros and cons of group

generated decisions is summarised in Table 2.1.

TA 1:; LE 2.11 Pros End Cons oil' usfang groups to mike decisions

lPOTENTIIA,L ADVANTAGES EDOTENTIAL DISADVANTAGES

1. Large pool of information. 1. One person dominates.

2. More perspectives and approaches. Satisfycing.

Intellectual stimulation. 3. Groupthink.

4. People understand the decision. 4. Goal displacement

(winning the argument).

People are committed to the decision.

Source e Bateman Zeithanull, 1993 e 97

2.3 MARKET SEGMENTATION

Now that individual and group decision-making behaviour is better understood,

a methodology is needed to identify classes of simular behaviour amongst

26

buying decision makers in the mining industry. Segmentation, according to

Struhl, should follow from some sense that groups within the marketplace

might respond differently to alternative products and product related

communication. How can segments be identified, analysed and evaluated for

p6tential attractiveness?

2.3.1 Market Segmentation Approaches Reviewed

All segmentation approaches focus on either one of the following

characteristics; industry, customer organisation, customer decision

making and product benefits. Macro segmentation devides the market

into sub-groups based on the characteristics of the customer

organisation or industry (such as usage rates, product mix etc.). Micro

segmentation focuses on characteristics of the buyer decision making

process (where is the buying power, attitudes towards products or

vendors etc.). Some of segmentation methodologies are reviewed

namely: the nested approach, a product benefit approach and a product

flow approach.

The Nested Approach

The nested approach stresses the degree. of difficulty to identify and

obtain information in order to evaluate different criteria (Bingham and

Raffield, 1990: 201). Possible criteria on which segmentation can be

based, is arranged in layers or nests with the outer nest representing

criterial information easiest to obtain and assess. Increasingly more

complex criteria forms inner nests. Five nests, or segmentation criteria

groups are arranged as a nested hierarchy. Moving from the outer to

the inner, the groups of criteria are: demographics, operating variables,

customer purchasing approaches, situational factors and personal traits

of the buyers (Shapiro and Sviolela, 1993: 74). Figure 2.5 sets out the

major potential bases for segmentation.

Organizational demographics

Industry

Company size

Location

Operati t g variables

0 Technology

® User-nonuser status

® Customer capabilities

(financial)

Purchasing approaches

o Organization of DMU

o Purchasing policies

© Purchasing criteria

Situational factors

0 Urgency

o Application

Size of order

Personal characteristics

® Motivation

® Buyer-seller dyad

o Risk perceptions

27

FIGURE 2,5. Major potential bases for segmentation according to

the nested approach

General,

observable

(Macro)

(Intermediate)

Specific,

subtle

(Micro)

Somme o Bingham and Raffled, 1990: 202

Validating the

Strategy

Follow-up

Develop a Positioning

Strategy

Decide "How" it will

Compete

Develop the Marketing Mix

Product Design, Technical

Support, Service, Channels

Distribution, Promo, Pricing

28

ilDroduct merit Approach

Basic old-line industries such as mining, metals, forestry products and

chemicals are forced into survival strategies in the Western World due

to overcapacity and reduced order frequency resulting from fierce

global competition. These industries are in search of growing niche

markets, specialising in "value added" speciality products that requires

totally unfamiliar skills to meet user needs (Eckles, 1990: 126). Figure

2.6 sets out the product benefit approach schematically, as developed

by Dayle and Saunder and reported by Eckles.

FIGURE 2.6 Daylle End Saunders industriall market segmentation

=dell Tocusing on product benefits

Defining Objectives Determine Market Evaluate Attractiveness Select Target

Segments of Alternative Segments Market(s)

3-5 Yr.

Planning Horizon Segment by Produc Size, Growth Rates Focused Strategy

Market Benefits-not Competitor's Goals Toward Specific

Financial Customer Seller's Capabilities Goals

Source Eckles, 1990: 126

29

Re-Examination of Product Flow

McDonald and Dunbar developed an a priori segmentation approach

whereby a 'benefits list' is arrived at by plotting the product flow from

the original to the final user. Final product usage is evaluated by asking

questions.

Who buys? - to determine the profits of different buying groups

What is bought, where, when and how? - to determine frequencies,

methods of purchase and location of use.

Why is it bought? - Understand what each market segment lives to

achieve.

All micro segments that displays similarities are brought together and

final segments are then checked for sustainability, reachability and

compatibility with the company.

r.

2.3.2 Difficulties in Segmenting the Narrow Reef Explosives Market

The Narrow Reef Gold Mines historically used nitro-glycerine based

explosives and the fuse and ignitor cord initiating system in all rock

breaking situations. Today many alternatives are available, like

pneumatically pumpable prilled ammonium nitrate products, emulsion

and watergel cartridged explosives, shocktube and electronic initiating

systems. A benefit of one technology over the other, however is easily

obscured by the multitude of variables that . need to harmonize to deliver

the best result. For example, if the drilling pattern is perfectly drilled

but the rock formation changed somewhat but not observed by the

crew, the result might be disappointing. If a better blast is achieve, but

temporarily scraping cannot take place due to full ore passes, the

30

benefit of a good blast is negated. The variation in performance levels

of all required services and activities to advance a face, makes

measurement of benefits difficult in an underground situation. Due to

the labour intensive nature of the process, performance is highly

dependant on how well the labour force is. motivated and performing in

the dangerous, dark, confined and hot humid conditions in which they

operate.

For this reason, many mines uses the same product mix providing them

simplicity. What is expected from a segmentation exercise is not only

identifying current behavioural similarities or differences, but also future

behavioural patterns. Most mines currently use fuse and ignitor cord

initiation systems. Who will change to shocktube, when will they

change and why? These answers are difficult to obtain in a environment

where benefits are be obscured in high background noise of operational

performance variability.

Another problem is the size of the . population within which

segmentation is tried to be achieved. There are only 33 buying entities, f.

and all information recording is structured around these entities. For

example, financial reporting to shareholders is done on a company

basis, that is on mine level. For particular sub-unit of a mine, like a

shaft complex, enough information to enable meaningful segmentation

might be impossible to obtain. Some distortion is associated when

using the mines as the individual population entities. Freegold or Vaal

Reefs, for example, is a union of more than one mines, while other

entities might be small in comparison.

31

2.4 A SEGMENTATION APPROACH FOR THIS STUDY

As explained above, product flow and product benefit segmentation approaches

will not adequately uncover what a particular mine wants to achieve. The

nested approach involves all macro and micro environmental aspects in a

logical fashion, but how these factors are prioritised to expand the dominant

decision leading variables remains a problem. Since the outer nests are more

visible due to easier accessable information, these nests might receive more

attention and distort the answer. Instead of starting at the outer nest and

working inward, the approach will here be to view the nests from the most

inner nest, namely the person making the decision. He sees the solution

through these nests, but the nests influence the decision makers view of the

solution and can therefore be compared with filters allowing less or more

illumination of the solution. Same base variables will lead the decision maker

stongly, which can be compared with a non-shaded filter allowing clear vision

of the solution. Other variables are less influencial, and are dark shaded filters,

only suggesting the solution to the decison maker.

The base variables dictate behaviour, while the others serves as discriptive

variables which help in identifying and differentiating the segments. Figure 2.7

illustrates the concept diagramatically.

32

FIGURE 2,1 The vganiablle Mitering approach to market segmentation

How do the `Decider' behave? How do he

o choose to solve sq" the Problem?

How can the intensity of these filters be determined? The best way is asking

the decison maker what he sees? Anticipate how a reasonable individual will

answer questions regarding his environment, his situation and how

demographics and purchasing styles influences him.

The McDonald and P unbar approach can be adjusted easily to accomodate this

approach expanded upon here. Four steps should be followed. First, a

business definition is obtained to set the scene. Secondly, the customer and

how he behaves in this environment is investigated. Thirdly, the base variables

are identified and the segmentation takes place. A segmentation model is then

compiled. The final and fourth step is to verify the validity of the model by

testing a saMple in each segment and check whether the behaviour corresponds

to what was anticipated.

33

Step 1 : Defining the Business Environment

The segmentation process will start by defining the gold industry and

giving a'business definition.

Define the market and map the product flow. The following questions

are asked;

Who are the customers?

Where are the customers situated?

What product is going where?

An understanding of what problems exist in the industry and what needs

are satisfied by explosive suppliers are investigated. Questions asked

are;

What are the market needs?

How can the market be quantified?

A description of other suppliers and their objectives;

Who are the other suppliers?

What are their strengths and weaknesses?

What strategies are they following?

r.

Step 2 : Seeking an Understanding of Buyer Behaviour in this

Environment

Now that the market needs are better understood, the likely behaviour of the

`decision maker' can be anticipated. The questions the buyer is asking in order

to reduce risk (the filters) are considered next.

How is productivity or efficiency influenced by the decision?

How affordable is the solution offered by the supplier?

What policies and direction is my mining group following?

What is my Central Purchasing Department telling me and what is the

suppliers, users and other influencers telling me?

34

The first three questions will appeal to the safety and security needs of the

decision maker, in other words what will best secure survival for his mine or

optimise the mine as an investment vehicle? The latter two questions appeal to

the deciders selfesteem, in other words how the mining house sees him and do

they approve of his actions so that he can progress or advance to self

actualization.

Step 3 o Ilelemitilfrication of the sine VarinNes

Each answer to a question uncovers variables which influences the decision

makers behaviour. These variables must be weighted, compared and

prioritised. Variables that represent more basic or hygiene needs score higher

than those influenced by higher order needs or motivational needs. Higher

order needs are scored lower than basic needs. The following excample

illustrates:

TA ILE 2.2 Motivational! Rowe Cant

MASLOW NEEDS WEIGHT

SellT Actazaztfioun 2

app 6

0

HI

Count down

Szfecy Secu11147

IPhyslolloecza

35

Question

How is productivity or efficiency influenced by the decision'?

A

How productive is the mine?

- Mine productivity very low.

How seriously is efficiency influencing the ultimate success of the mine?

- Mine can close as a result.

If it is improved, what does it mean to the decider, more profits (Esteem),

surviving the mine (safety and security) or both?

- Mine will survive, manager will have a job and will be considered for a

head-office job.

Condandon

Decision making to improve efficiency appeals most to Safety and Security

needs followed by Esteem. From Table 2.2 :

Score = (Surviving the Mine) + (Possible promotion) and have a job

= (Safety/Security + Physiological) + (Esteem + Self Actualization)

= (8+10) + (4+2)

= 18+6

= 24

The two top scoring needs will be used to segment the market and will act as

base variables.

36

Step 4 : Varify the Result

The objective of the segmentation process is to divide the market into groups

with simular needs or demands which results in similar behaviour. To varify

the segments, descripter variables can be used to test the correctiveness of the

behavioural expectation of a segment.

It is also necessary to select one or two samples from each segment and present

the model to these customers. If model prediction and customer expectation

correspond the market segments can be assumed accurately defined.

2.5 TARGETING MARKET SECTORS

Once various segments in a given market has been identified, the attractiveness

of each company's segment needs to be determined. The market opportunities

need to be identified, and the business strengths should be balanced with the

opportunities. Sectors where the opportunities match the company strength,

targetting comes naturally. Market attractiveness factors can be matched with

company strengths in matrix format, a methodology which will be adopted for

this study, but is more thdioughly described by Walker et al. Implications of

these decisions is given in Figure 2.8. Once market segments are targetted,

strategic objectives and resource allocation can be decided upon.

37

IFIfGURE 2.e kokplIfievatiofin oTsalltermiztive posfitto s wfithfha the Magket

Attrzetfiverness/Competitfive Ftsfitioral MeatIriLq

COMPETITIVE POSITION

Steil

Medium

Weak

llifyh

Medium

zz

E

Lc

.. • DESIRABLE . POTENTIAL TARGET `Pmtect p&dtion - • ;

- .. ;

- Inve3t in grow n row' rat ' maximum di3tible rcie . • .

,,. Cancentiabe on inMattjinin,n-trength .

.. D ESIRABLE • POTENTIAL TARGET . lleaveXt. to build , .

- Challenge for I .-eadel7ihip •

-' Build selectively mi'atrengths . - ReMfoice vulnerable areas' . . . ... . .

, . , / . • Build selectively

- Specialize around limited strengths - Seek ways to overcome weaknesses - Withdraw if indications of

sustainable growth are lacking

3

, . DESIRABLE POTENTIAL TARGET Baffd idectivelY ,

- - • , ; . • ._ ..-ais. riPhasizoPtorliamlitYbi: ulcr;•-1-sif'

prochictivity . - • ' - Build up ebilify to counter. ,

crmped:lion

..1-

-.

Manage for earnings

- Protect existing strengths - Invest to improve position

only in areas where risk is low

5 United expansion on- harvest

- Look for ways to expand without high risk; otherwise, minimize investment and focus operations

6

Protect and refocus

- Defend strengths - Seek ways to increase current

earnings without speeding market's decline

7 Manage for earnings

- Protect position - Minimize investment

$ Divest

- Sell when possible to maximize cash value

- Meantime, cut fixed costs and avoid further investment

9

Sotuarree a WsallIken- et all, 1992: 197

The following attractiveness factors should be considered for the marketing of

explosives:

Differentiation possibilities

Market gaps

Distribution

Investment Intensity

Technology

Industry Capacity

Competive Structure

Price

Business strength factors are:

Relative market share

38

Product/service differentiation

- Distribution

Capacity utilization

- Technological posision

- Salesforce

- Financial capaCity

Advertising

2.6 PRODUCT POSITIONING

A product position is the place the product occupies in the consumers mind

relative to competing products (Kotler and Armstrong, 1994: 258). It is the

perception of the customer as to how well the product offering is performing

relative to competitor offerings in satisfying needs in the targetted market

segments. The emphasis falls on identifying and stressing the competitive

advantage, which is based on quality, service or actual value added.

The products, services, sales personnel, and the company's image are all

aspects which can be used to differentiate, in the mind of the customer. One

way to assess a product offering in relation to competitor offerings is to

compare physical products characteristics (Walker et al, 1992: 205). For

example, the physical behaviour of emulsion explosives are different from

watergel explosives, but is used in the same environment. The high Velocity of

Detonation of Emulsions can be used to position the latter as a product that

does not break up the hanging wall. Physical positioning can be useful, but

does not provide a complete picture of reality, since ultimately, positioning

takes place in customers minds.

Walker et al. goes so far to state that "Many customers often do not want to be

bothered by information about a product's physical characteristics; they are

not buying these physical properties but rather the benefits they provide". The

consumer buys on what a product does rather than what it is. To return to the

39

comparison of emulsions and watergels, emulsions might be perceived as

"weak" explosives, nevermind the physical characteristics that might prove the

contrary. If the cusomer wants a 'strong' explosives, he will not buy

emulsions. Perceptual product positioning will be viewed in this study as the

more important to determine. The following methodology as suggested by

Waler et al, will be followed:

First, competitor offerings will be identified. The set of determinant attributes

which defines the borders of the possible perceptual space of a product is then

determined. Analize where products are 'positioned' currently and the

intensity of the position in the customers minds. Determine the customers most

preferred combination of determinant attributes in relation to market segment

needs, and select a positioning or repositioning strategy.

Product positioning and market strategy is interwoven. Positioning of

explosives products in the gold mining industry must be done with a realiation

that a mature market exists. Total volume is slowly declining, replacement

ptirchasers rather than first time buyers account for most of the volume. The

major objective is therefore to hold existing customers and to sustain a

competitive advantage thattwill sustain customer loyalty. Positioning in such a

market can only resolve around achieving and sustaining a lower delivered cost,

a perceived product quality or technological benefit or a customer service

superiority.

Evidence suggests that the ability to sustain a high level of differentiation or

maintaining a low cost position delivers success in a "mature" market. Walker

et al reports on a study by William K.Hall in 1980 comparing relative success,

measured in terms of 'Return On Investment' of seven heavy duty truck

suppliers in the U.S.A. Figure 2.9 shows Paccar and Ford to be the ROI

leaders, as indicated by the dark shaded area. Paccar offerred the most

differentiated product in terms of good performance, while Ford offered the

lowest relative delivered cost.

Rel

ativ

e pe

rfor

man

ce

High

Average

Low

% = ROI

White Motor 4.7

Ftprti 26

40

Figure 2,9 Strategic competitive positions for the U.S. Heavy-Duty

Truck Market as measured by Return on Investment

High

Average Relative delivered cost

Low

Source e WaIllker et ➢ 1992,305

Since SMX and BME has already stong perceptive positions as low price'

suppliers, AEL must focus on 'Value Added' approaches. However,

explosives systems has many sub-units, each viewed as a product. These

separate products must each be investigated and positioned to deliver the

overall supplier position in the customers mind.

The next chapter will be devoted to the development and validation of a

segmentation model, the first step in understanding market needs. A

subsequent chapter will be devoted to product postioning and market strategy.

Thompson and Strickland puts forward the following sentence as a

Competitive Strategic Principle! "Successful companies invest aggressively in

41

creating sustainable competitive advantage, for it is the single most dependable

contributer to above average profitability".

42

CHAPTER 3

DEVELOPMENT OF A SEGMENTATION MODEL

Although the South African Gold Industry can simplistically be defined as 33 or so

mines managed by six- mining groups, a closer look opens a profusion of a possible

segmentation criteria that easily baffles efforts to identify true behavioral groups that

illustrates similar buying behaviour.

The Variable Filtering segmentation technique developed and discribed in the previous

chapter, allows a structured analysis of the environment the industry operates in and

exposes at the same time a multiple possible variables that might define buying

behavioural segments. The segmentation method however, are focussed and highly

directed. By answering the five questions a buyer/decision maker would ask, a pattern

imediately emerges which allow market groups to fall into logical positions.

The four steps in the process are:

Step 1 : Define the business environment

Step 2 : Seek understanding of buyer behaviour in this environment

Step 3 : Identify and select the base variables

Step 4 : Varify the result

3.1 STEP 1 : DEFINE THE BUSINESS ENVIRONMENT

Important here is to establish an understanding of who the customers are,

where they situated, what product is currently going where, what the real

market needs are, how the market can be quantified and who the explosives

suppliers are? Each aspect is investigated separately.

43

3.1.1 Who is the Customer?

The 33 gold mines are listed in Table 1.1. in chapter 1. Also indicated,

is the mining house the mine is associated with. Since the mining house

manage the mine, the mine managers behaviours are influenced by the

cultures and the views that the mining houses represent. Four aspects

are of particular importance. First, how important are the workforce in

trying to achieve objectives. Does the mining house develop and

mature people, or do they view unions and workers as a negative

necesaty. Secondly, what role does technology play in future planning.

If cost is everything, new technology will be a low priority. If new

technology is viewed as a gateway to improved performance, it is likely

to be tried, and more importantly, the people will have a seriousness in

making new technology work. Thirdly, how are suppliers viewed by

these mining houses? Are they viewed fundamental to the success of

their operations and as a result willing to partner, or do they focus on

their own buyer power and view suppliers as parasites that puts strain

on margins that are already under stress. Finally, how do they evaluate

product and services required in the mining process. Is price the

dominant criteria, di does energy exist to establish value obtained, value

added, as the discriminator. Based on interviews conducted with six

consulting engineers, one from each mining house and summarised in

Appendix I, the following short descriptions of the six mining houses

were arrived at:

An2lo American (Gold Division)

Anglo envisage developing the deep lying reefs south of Western Deep

Levels and the deeper areas of Vaal Reefs in the future. They would

like to be the ultra-deep mining experts. With above average

operational excellence they would like to save the Free State marginal

mines. Anglo central purchasing offered their buying power to improve

44

AEL's input cost. Amgold is eager to partner fully for mutual benefit.

Attitudes are as follows:

Workforce: Positive but strict. Want labour to feel jointly

responsible . Willing to train and develop.

Technology: Look actively at better technology and are

willing to try new things.

Suppliers: Willing to partner.

Value/Cost: Willing to be persuaded of value. Are not only

cost driven.

Randgold

They cancelled the management contracts and reduced head office to 60

people. They are very cost conscious and would like to be seen as the

experts in turning around marginal mines with a no-nonsense approach. r.

Attitudes are as follows:

Workforce: Try to improve productivity while maintaining good

labour relations. Organise stope crews in small

business units. Thinking of higher skilled stope workers.

Technology: Willing to try, but cost pressures limit experimentation.

Economy of scale is most important.

Suppliers: They pressure for a 0 % annual increase, or should be

convinced that there will be a productivity improvement

equal to the price increase. •

45

Value/Cost: Cost focused, but potential is there for partnering for

maximising value.

JCI

JCI are developing the South Deep mine from Western Areas. Their

mines represent all mining conditions namely, deep and shallow, thin

and thick reefs or good and bad hanging wall conditions. Purchasing is

interested in one supplier instead of administering a multitude of

suppliers, but they are cost focussed. Attitudes are as follows:

Workforce: Good labour relations. Leading in concept of

productivity linked to salary increases.

Technology: Traditionally leading in technology, (failed trackless

mining experiment changed that somewhat)

Suppliers: Interested in a single supplier..

Value/Cost: Cosf focused, but willing to experiment with

new technology.

Genkold

Gengold's approach to productivity is to retain only newer high grade

mines, and sell off marginal mines. They would like to have world class

operations with a much reduced, but more productive, workforce.

Attitudes are as follows:

Workforce: Willing to invest and develop the workforce.

Would like to increase blasting cycles and reduce

number of people.

46

Technology: Traditionally not interested in new technology, but signs

are there that they would like to move to shocktube or

EDD's.

Suppliers: Do not like a close partnership. Very critical and hard to

satisfy. They feel they can do things better

and suppliers have little to offer.

Value/Cost: Very cost driven in central bargaining, but can be

persuaded. They advocate efficiency based pricing .

Goldfields

With their high grade mines, they can afford new technology, but at the

same time are very cost conscious. Mines are generally less efficient

due to high profit margins resulting from higher than industry average

grades. Attitudes are as follows:

Workforce: Lots of labour problems, as illustrated recently

at Driefontein. Have a strained relationship with the

workforce.

Technology: Move easily to a new technology, but do not

gain the full benefit due to discipline or lack of

excellence.

Suppliers: Have an aggressive approach. Not easily willing

to partner. Maintain an adverse relationship with

suppliers.

Value/Cost: Make majority of decisions on cost.

47

A mgovaal

Anglovaal is developing new and deeper mines from Loraine. The new

project is called Target, but Sun and Oribi will be developed at a later

stage. They want to be world class, highly productive and are very

interested in new technology. However, their purchasing decisions are

now made at production manager level, while the administration

manager on the mine also influences decisions. Attitudes are as follows:

Workforce: Labour relations are strained due to an older style

or approach to management.

Technology: Very interested in newer technology for the new

deep mine projects. Very interested in rapid cycling on

all their mines.

Suppliers: Tend to play suppliers off against each other.

Do not partner easily.

Value/Cost: Cost-dnven, but look at value too.

3.1.2 Where are the Mines Located?

The gold mines are situated in a golden arc stretching in the south from

Welkom in the Free State through the West Rand, Johannesburg, East

Rand and ending in the Evander area. Figure 3.1 is a map of the mines,

showing 51 mines, many of which are small or not operating any more.

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Source : Landman, 1997: 7 40:

3.1.3 What Product is going Where?

Explosives products can be divided into two groups, explosives which

is a chemical which expands almost immediately massively in volume

when subjected to an intense shockwave, and initiating systems which

provides the shockwave to ignite the explosives at the right time and in

the right sequence.

Gold mines drills millions of holes with relative small diameters

annually. Explosives are bought in cartridge form or alternatively in a

prilled condition, like solid fertilizer. The prills are made of ammonium

nitrate. The cartridged explosives can either be an emulsion or a

watergel, both water based explosives. A relative new technology is

49

pumpable explosives, a liquefied emulsion pumped through a hose pipe

into the blast hole.

Initiating systems consist of three technologies, namely Fuse and Ignitor

Cord, Shocktube and Electric Detonation. Fuse and ignitor cord is the

oldest but most widely used system in the South African gold mines

while the shocktube system is the standard for underground mines in

the rest of the developed world Electronic delay detonator systems are

new on the market.

Fuse and ignitor cord represents 95 % of the current market, shocktube

4,7 % and electronic delay detonator and other systems only 0,3 %.

Shocktube appeared in narrow reef mining ten years ago, but a general

stoping product was introduced only a year ago. As a result the current

shocktube users can be viewed as early adopters, while the electronic

detonator users are innovators. The challenge is to predict where the

growth will be what the extent of the growth will result from the new

products.

It is also observed that 65 % of the market is prilled ammonium nitrate

while the rest use cartridge explosives. It appears that large mines uses

prilled ammonium nitrate, while small volume mines use cartridge only.

Again, few product variations are used, and high homogeneousness do

not reveal clear segments. The challenge is to predict which mines will

experiment with newer technologies such as repumpable explosives and

what volumes can be expected to be sold in future.

3.1.4 What Market Needs Exist?

The market buys broken rock reliably provided at the right time,

quantity and fragmentation by explosives at a price commensurate to

the perception of the value received.

50

Breaking Rock

Explosive technology is still the most cost effective technology for gold

mines to break rock. The Chamber of Mines through COMRO,

developed the impact breaker technology . (hammering) to do stoping.

Five machines were in operation at the Kloof Gold Mining Company,

but have recently been discontinued.

Mining houses who are interested in extending their workings into

deeper areas (Anglo Gold, JCI and Anglovaal) show active interest in

non-explosive alternatives for the future. Anglo Gold is pursuing

diamond wire cutting, which delivers a smooth undisturbed hanging

wall resulting in increased safety. The Sunburst technology which uses

a chemical propellant to break out a cone of rock when released. into a

short hole, has also attracted attention.

Over the five year planning horizon, these technologies are unlikely to

have a huge impact on explosive usage. It should however be seen as a

threat, since little money is generally spent by mining companies

themselves to impr6ve drilling and blasting.

Explosive rock breaking, in the form of short hole drilling,

perpendicular to the face is envisaged to be the dominant rock breaking

method for the next five years. Parallel long hole drilling will start to

impact in deeper areas in 1999 to 2001.

Perception of Costs

Gold mines get deeper or grades are reduced in older mines, which

effect the revenue and the operating cost of there mines. Gold mine

profits are calculated as follows:

51

Profits = [Revenue] - [Cost]

[Gold Produced oz x $/oz x R/$] -

[Capital + Working Cost]

The mine has no control over

Price $/oz and

Exchange Rate R/$

The gold produced is affected by uncontrollable geological factors and

impacts on the stability of the revenue.

The Rand/Dollar exchange rate adjusts every 12 to 18 months (like the

jump from the R3,60/$ to the R4,40/$ range early in 1996). Revenue is

thus only adjusted every 12 to 18 months.

However, cost continuously increase with inflation. Inflationary

expectations are as follows:

1997 10%

1998 8 %

1999 6 %

2000 4 %

2001 4 %

Currently, revenue is ± R48,750/kg. Cost varies between

R30 000 and R45 000/ton. For some mines, inflation will put the mine

in a loss making situation, before the 18 month Rand currency stability

period is over. See Figure 2 for an explanation.

52

The only controllable variable, is the cost and effectiveness of cost

application (productivity). Gold Mines look at suppliers to reduce cost.

AEL will be ,under pressure to contain increases at or below the

inflation rate. Therefore, it is critical that AEL focusses attention on

the effectiveness of cost and not on unit cost. Explosives must be

measured' in terms of the value addition in the total value chain. This is

the real challenge for AEL, to change blasting and purchasing culture

from a cost based one to a value driven one.

Superior value can only be created if operational excellence exists in

AEL.

The following will be required as a given:

Reliability (supply and products)

- Quality

- Responsiveness

Safety

- Innovativeness r.

and partnering with the mine to:

- Improve productivity

- Measurement

- Skills Transfer

in order to optimise operations.

70.0

60.0

50.0 EC

40.0 CD

30.0

20.0

10.0 -

0.0 Dec '96

'Revenue

Dec '97 Dec '98 Dec '99 Dec '00 Dec'01

53

FIGURE 3.2 Effect of cost end Tevenne Tor Ilow gond high cost

producers.

Somme o Lgandunain, 1996 o 8

3.1.5 How Can the Gelid lEmpflosives Mantet he Quantified?

The market is best quantified by the number of holes drilled per annum,

since for every hole drilled, an initiating unit is required with about 500

to 800 grams of explosives.

To quantify the market, the correct annual number of holes needs to be

estimated per mine plus the growth or decline of the number of holes in

the next five years. The average gold ?Jude to which mines mine, can

influence the number of holes drilled. If the grade is expected to be

lower, but total production stays constant, more holes will be drilled

and vice versa. Productivity improvements might influence the number

of holes drilled, for example, if longer holes are drilled. The tons

broken by a hole, might go up resulting in less holes drilled. The

number of detonators sold in 1996 is used as an indication of the

number of holes drilled. Number of holes in the future is determined by

54

predicting the growth or decline of hoisted tons and devided it by the

tons a single hole break on that specific mine. The hoisted tons are

taken as 5 % less than milled tons to adjust for surface addition to mills,

and then grown 30 % for underground development. Table 3.1.provides

more details. These aspects are expanded upon:

Gold Grade's influence on number of holes drilled

Gold grade (g/ton) is expected to remain constant. The

establishment of younger mines will increase grade by 1 to 2

g/ton, reducing hoisted tons and consequently reducing holes

drilled by 1%. Large marginal mines will mine lower grades in

greater volumes to achieve economy of scale (making the huge

infrastructures work).

Productivity Improvements

Theoretically, each stope panel can be blasted 24 times a month.

The industry average is 10 to 12 . It is expected that the f.

number of siope panels will be reduced by 30 %, but each stope

panel will be blasted 20 times a month. More stope turnarounds

will occur as mines look for high grade areas, or mine old

marginal or isolated blocks. On average, no impact on the

number of holes is expected.

Tons to hole ratio

Tons hoisted is calculated by subtracting 5 % of tons milled to

adjust for heap treatment and 30% material from development is

allowed for. Therefore,

Number of holes = Milled Tons x 0,95 x 1.3

Blasthole per Ton

55

TABLE 3.1

• Blast holes per ton of Rock Hoisted

The number of holes drilled is determined by the number of

detonators sold over the last year (in the form of fuse,

shocktube or electric systems) divided by 1996 hoisted tonnage

figures. Hoisted tons (95 % of milled tons) provides the

required ratio. The ratio is assumed constant over the planning

horison.

Annual Number of holes drilled which serves as quantification for the explosives market.

MINE TONS PER

TONS HOISTED (millions)

HOLES (millions)

COMMENTS

HOLE 1996 1998 2001 1996 1998 2001 Freegold 1.82 27.05 21.80 18.66 14.88 11.99 10.26 Gold falls 102 to 70/-31%/R206m cap Vaal Reefs 1.70 15.81 15.80 16.00 9.29 9.29 9.41 Drop old #s/start new #s/R380m cap Drie Cons 1.64 6.42 6.70 6.50 3.91 4.08 3.96 Projects to enter deeper/R227m cap Kloof 2.21 6.05 6.00 6.10 2.74 2.72 2.76 30 Moz reserve/R133m cap WDL 1.96 7.90 8.00 8.00 4.03 4.08 4.08 Shaft deepening/extention/R168m cap Hartebeesfontein 1.51 5.93 6.00 5.90 3.93 3.98 3.91 Mine life at current prod = 10 year Randfontein 2.26 8.77 8.70 8.90 3.88 3.85 3.94 13 Moz res/R61m cap/25 year life Harmony 1.89 8.15 7.60 6.80 4.31 4.02 3.60 9 years ,life/7.4 Moz/RG look for call Western Areas 1.34 3.21 3.60 6.00 2.40 2.69 4.49 South Deep/57 Moz/R285m cap Elandsrand 1.13 2.72 2.90 3.00 2.40 2.56 2.65 Platform for new expan/22 year life Beatrix 0.86 2.84 2.80 2.60 3.31 3.27 3.03 Young/Shallow/R97 cap/20 year Buffelsfontein 5.93 4.69 4.60 4.20 0.79 0.78 0.71 Low grade/17 year/good managem Winkelhaak 1.14 1.73 1.65 ;1.55 1.51 1.45 1.36 Up grade/10 year/Low cap R17m Kinross 1.05 1.98 1.80 (:,1.70 1.89 1.72 1.63 Up grade/16 year/R36m cap ERPM 1.99 4.08 3.00 2.40 2.04 1.50 1.20 Low grade/6 year/2 Moz Deelkraal 1.53 1.48 1.49 1.30 0.97 0.97 0.85 AAC takeover/19 year/R53m cap Loraine • 0.99 1.98 2.20 3.00 2.00 2.22 3.03 Low res/Target platform/Sun?/5 year St Helena 1.22 0.99 0.89 0.60 0.81 0.73 0.49 Low res/1.4 Moz/7 year/Good Manage Unisel 1.07 0.86 0.90 0.90 0.81 0.84 0.84 6.1g/t /22 year/3.2 Moz/Econ Scale HJ Joel 0.69 0.86 1.20 1.30 1.26 1.75 1.90 Turn around/R70m cap/Dinamic Man Blyvooruitzicht 3.05 2.72 2.80 2.90 0.89 0.92 0.95 1.8 g/t /2.8 Moz/Econ scale/Doornfon West Wits 1.72 0.37 0.30 0.20 0.22 0.17 0.12 5 year/2.3 g/t /2.6 Moz/New Manage Doornfontein 3.72 1.61 1.50 1.20 0.43 0.40 0.32 Low grade/synergy with Blyvoor ET Cons 0.68 0.37 0.40 0.40 0.55 0.59 0.59 High grade/11 year/16% prod growth Grootvlei 0.82 0.62 0.70 0.70 0.75 0.85 0.85 Shallow/ 5.4 g/t /25% prod growth Leslie 1.19 0.49 0.44 0.40 0.42 0.37 0.34 6 year/low cap/-10% decline Durban Deep 2.80 1.36 1.35 1.35 0.49 0.48 0.48 1.3 g/t /6.4 Moz/R32m cap/24 year Benoni 0.00 1.90 1.60 0.00 0.00 0.00 19 year/no cap/-32% prod growth Lindum 0.00 0.00 0.40 0.00 0.00 0.00 Low res/prod decline/7 year Cons Modder 1.88 0.49 0.40 0.20 0.26 0.21 0.11 Loss making/12 years Barberton 0.40 0.12 0.10 0.09 0.31 0.25 0.23 10.9 g/t /high cost Knights 4.69 0.60 0.10 0.00 0.00 0.00 Dump operation Oryx 0.28 0.25 1.00 1.00 0.87 3.52 3.52 New Mine/World class Stilfontein 0.86 0.40 0.00 0.00 0.00 0.00 Mine closed/Dump reclamation

Source : Landman, 1996: 6

56

3.1.6 Who Competes for the Market ?

Table 3.2 summarizes the market share history since 1994 and predicts

market share for 1997. The major competitors for AECI Explosives

Limited are Sasol Mining Explosives (SMX), Bulk Mining Explosives

(BME), Dantex and Altech.

TABLE 3.2 Relative Market Share of Explosives Companies in

South Africa

COMPANY BULK PEX IS

199 6

1997 1994 1995 1996 1997 1994 1995 1996 1997

AEL 100 100 75 71 69 68 95 93 91 91 SMX 0 0 24 26 26 26 4 5 7 7 BME 0 0 0 0 2 3 1 1 1 3 DANTEX 0 0 1 3 3 3 0 0 0 0 ALTECH 0 0 0 0 0 0 0 1 1 1

Source : Landman, 1996: 11

Sasol Mining Expri•sives (SMX) entered the market in 1986. They

increased market share to a current 28 - 30 % level with Watergel

cartridged explosives (Explogel). Their low density ANFO (Expanfo)

is of particular interest to the mines.

Ensign Bickford of South Africa operates in association with SMX.

They sell shocktube products (Easy Stoper) and initially held 100 % of

the market. With the AECI Handidet entering the market, the market

expanded, but their share was probably reduced to 35 % of the market.

Dantex Explosives are producing the Tovex range of watergels with

MMAN sensitisation (Du Port Technology). Although only a small

percentage of the market is serviced directly by Dantex (6.8% Gold),

they do toll manufacturing for AEL (constituting 10 % of AEL's

57

explosive sales). They are particularly successful in niche markets such

as smooth blasting (Tovex Barrel) and the underground coal market is

dominated by them. They sell small quantities of detonators, bought

from UEE in Spain, to the local mining industry.

Bulk Mining Explosives (BME) recently entered the cartridged market.

They produce at a new site near Fochville, in the middle of the West

Rand region. They will produce between 100 and 300 thousand cases a

year of emulsion based product with chemical gassing and will be priced

at the bottom end of the market.

SMX has a cheap ammonia supply, since ammonia is produced in

abundance as a by-product from the Sasol synfeul process. Internal

transfer pricing can be manipulated, putting SMX in a good position to

undercut market prices. However, they offer increasingly good service

but is under attack from BME as being differentiated on pirce.

BME buys ammonium nitrate form Sasol, but specialises in very

effective and cheap conversion. BME undercuts both AEL and SMX f.

with price. SMX and BME talked about a possible merger in 1995, but

agreement could not be reached. This triggered a fierce rivalry amongst

these two companies.

AEL, although having some product ranges which are lowest priced in

the market, it tries to differentiate on value adding activities and earn a

premium in the market. AEL is still viewed as a partner that originated

with the gold Mining Industry, thus knowing it well and leading in

understanding it's problems. If it does not adjust quickly in offering

value packages that fits customer needs well, it will loose this position.

58

3.1.7 What Physical and Cultural Environment Exist in

Gold Mines ?

The South African Gold Mines are the deepest mines in the world.

Most operations are between 1 800 and 3 300 m below surface, but

shallower and deeper mines exist.

The mines are extremely hot, and central and localised air cooling is

done extensively. The organisational structures are rigid with a large

semi-skilled workforce doing drilling, cleaning and installation of

services. Middle management oversees men and material transport, and

looks after safety. The thin reefs provide confined spaces to work in.

Difficult human conditions exists, like heat, communication in different

languages, cultural differences and skills differences which make for a

stressful environment.

3.2 STEP 2 : UNDERSTANDING BUYER BEHAVIOUR

Table 3.3 list the major gold mines with some performance and operational

variables to indicate relative to other mines how a specific mine performs. For

example, Free Gold mills 18,8 million tons annually while Leslie only mills 0,4

million tons annually. The scale difference will result in different buyer

behaviour on these mines, since for the former many needs are represented and

for the latter the localised nature of a small volume results in a single simplistic

set of needs.

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U., C > 0 o a a.) ci. (1.1 (I) M. LI, > f...)

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E

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.3

60

Although the operational variables differ greatly, the assessment methodology

the customers follows is the same. In other words, although the answers are

different, the questions are the same. The same filters are used, but different

pictures are percieved. The following criteria are affecting buyer behaviour:

FILTER 1 flow is productivity or efficiency influenced by

the decision ?

Contrast Freegold who does 8,5m 2/man/month and Elandsrand

who does 30m2/man/month. The decision-maker at Elandsrand

will want to know if doing business with the supplier in question

will maintain his high performance, or even improves it. Can

technologies be offered that will help sustain or improve the

performance?

Freegolds decision-maker on the other hand, would not be

interested in new technology, since he knows that with current

technology, his workforce can improve a lot, and due to

operational factors, the maximum benefit from the current

technology fs not obtained. He knows that a new technology

will most likely not improve performance, since the workforce

are not even maximising the benefits of the technology they are

currently using.

Mines with a low face advance, low square meter per man ratio

or a high labour input to output ratio would rather stick to

current technology, technology like fuse and ignitor cord.

Mines with greater operational excellence will buy new

technology to improve their performance.

61

FILTER 2 How affordable is the solution offered by the supplier ?

The decision-maker will also ask how affordable the product

are? If Driefontein Consolidated Mines are compared with

Deelkraal mine, the former makes R262,3 million a year

compared to the R14,1 million loss the latter achieves.

Huge risk exists for the decision maker at Deelkraal. If a new

technology is tried, but does not succeed, his bottom line will

look even worse. He would need to be convinced that the

higher cost will be recovered and more benefit obtained by

switching. This mine will for obvious reasons not be on early

adaptor. On the other hand, the Driefonteins will experience

little financial risk and if the extra cost for the new technology

doesn't outstrip the benefits, little impact will be felt.

At the same time, Deelkraal will be very sensitive to price levels

and price increases of the current technology, but the

Driefontein Mines will be less so. r.

FILTER 3 How suitable is the suggested product to my situation?

The decision-maker for Harmony Gold Mine where 8,7 million

tons is hoisted, and 4,3 million holes are drilled annually, .might

feel a switch from one supplier to the next is risky. Service

levels might deteriorate. He might also be concerned about the

ability of the new supplier to supply the product on time in full,

thus reliably produce and deliver the large volumes required.

He might also consider whether the product is imported or

made locally, and judge the risk of moving to a product that was

not conceived and developed in local mines.

62

The West Wits decision-maker, also a Randgold mine, only

hoist 0,37 million tons of rock annually which is achieved by

drilling only 216 000 holes. Providing this small volume from a

foreign country is not that difficult, therefore the ability to

supply these volumes is not that critical. He will therefore

switch much easier. One retired shiftboss can assist him in

training his people and he does not require the ability to train

thousands of people at once to realise a successful

tranformation.

FILTER 4 What policies and direction is the mininggroup following?

The decision-maker at Elandsrand, an Anglo American mine,

knows that deeper reserves exists to the south of his mine and

that Anglo's Gold Division has stated that they will access it..

To be to do so, they need to develop people, "mining

techniques and mining practices. It would make sense to

partner with a supplier who can offer service, training, new

technology and has a willingness to adjust product to suit needs

in order to prepare for this challenge.

On the other hand the decision-maker at Driefontein, a Gold

Fields mine, has only one challenge; increase efficiency of the

mine to make an even larger profit. Suppliers are viewed as

profit takers and are easily chopped and changed. The

psychology is: we can pay, if the supplier cannot deliver, try

the next one. Reasons why delivery cannot be realised is seen as

a problem for the supplier only, not as a potential problem over

the longer term for the mine itself.

63

FILTER 5

What is the Central Purchasing Department telling the

mine and what is suppliers, users and other influencers

Lain?

If the culture is highly autocratic, decision-making is very

centralised.- On the other hand, some general managers rely

totally on his advisors to tell him, what to do and in the process

gives no direction. Vision and leadership are strong tools to

direct not only the decision maker, but also the users of the

product.

3.3 STEP 3 : IDENTIFY THE BASE VARIABLES AND SEGMENT

THE MARKET

In this section, the base variables are identified and the segmentation is done.

3.3.1 Identification of the base Variables

Table 2.2 in the _previous chapter is used to judge the relative f.

importance of the filters in directing behaviour. Relative scores is

assigned according to the influence a filter might have on decision

making. The scores are summarised in Table 3.4. Motivation for these

scores is given below.

FILTER 1 How is productivity or efficiency influenced by

decision?

For marginal mines, efficiency improvements can save

the mine and save a general managers job.

64

TABLE 3.4 Relative importance of filters with regard to motivation of buying

behaviour

MOTIVATOR SCORE FILTER 1 FILTER 2 FILTER 3 FILTER 4 FILTER 5

Self Actualization 4 4 - 4 4 -

Esteem 5 5 5 5 5 5

Belongingness 6 - - - 6 6

Safety and Security 7 7 7 7 — - 8 .

Physiological 8 8 8 - - -

TOTAL SCORE 29 24 20 16 15 19

His safety, security and physiological needs are

addressed. If he improves productivity and efficiency he

drives his standing in the company, and esteem and self-

actualization are satisfied.

Score = (Self Actualization + Esteem) (Safety +

Physiological)

= (4 + 5) + (7 + 8) f.

= 24

FILTER 2 How affordable is the solution offered by the

supplier?

The emphasis on price in decision-making is a natural

reaction if a mine is under threat to close. Value

appreciation needs harder work to quantify. The

decision maker is driven by survival. Safety and

physiological needs are addressed. He might brag to

some extent about the price 'he achieved and which will

boost his esteem, but it is not viewed as a* strong

motivator.

65

Score = (Esteem) + (Safety + Physiological)

= (5) + (7 + 8)

=20

FILTER 3 How suitable is the suggested product to the

situation ?

The decision-maker fears that his judgement might be

questioned if the supplier performs sub-optimally. It is

unlikely that the operation will grind to a total halt, thus

safety and security needs motivates him less strongly.

Esteem will be hurt if he is seen to have made the wrong

decision which will negatively effect promotion

possibilities. Self Actualization is in danger.

Score = (Self Actualization + Esteem)' + (Safety)

= (4 + 5) + (7)

= 16

FILTER 4 What policies and direction are my mining group

following?

Clearly, the dicision-makers esteem and self-

actualization plays a role, since he would like to play by

the rules to be seen as the right man for future jobs in his

group.

Score --(Self Actualization + Esteem + Belongingness)

= (4 + 5 + 6)

=15

66

FILTER 5 What is the central purchasing department s

suppliers and users saving?

Esteem and belongingness needs motivate behaviour in

this instance. A clever deal might help to perform better,

thus give better returns -to shareholders. The better

performance of the mine will enhance the mine managers

status amongst shareholders. The mines life might be

extended, which addresses the survival instinct.

Score = (Esteem + Belongingness) + (Safety)

= (5 + 6) + (8)

= 19

From Table 3.4 it can be seen that the dominant filters are filters one

and two with repective scores of 24 and 20. These two base variables

are used to segment the market. Operational excellence and

productivity are the most dominant influencing variables in decision

making for buying explosives, while affordability is the second most

influencial.

3.3.2 Segmenting the Market

The two concepts, operational excellence and affordability, are the

two variables that should be contrasted. Any attempt to quantify these

variables are difficult, since measured and reported variables does not

fully describe the concept. However, of all the variables listed in Table

3.3, m2/man/month best represents operational excellence and

grams/ton best represents affordability.

Plotting these variables against each other creates a two dimentional

field which represents the market place. Figure 3.3 illustrates

42 30- 28-

24 -111 n

co x 18 - _ U E 16- TS -Po 14 - c 12 -

. 10 16 8 6 - Q. 4 - (0 2 -

0

C

7.7

8.4

4?inSV.

®8.19.7

0.0 1.0 2.0 3.0 4.0 5.0 6.0 7.0 8.0 9.0 10.0 11.0

Affordability Wit)

Mine hluoviber

MOrge Name

Grade

WM

Centares per man

32 Knights 0.3 34 Stilfontein 0.9 10 28 Benoni 0.9 22 West Wits 1.6 27 Durban Deep 1.7 15 21 Blyvooruitzicht 2.0 12 15 ERPM 2.2 15 12 Buffelsfontein 2.5 14 33 Oryx 2.6 7 Randfontein 3.3 15 29 Lindum 3.7 8 Harmony 3.9 17 30 Cons Modder 4.0 17 Loraine 4.3 17

1 Freegold 4.6 9 25 Grootvlei 4.9 13 2 Vaal Reefs 5.1 18 6 Hartebeesfontein 5.2 18 16 Decikreal 5.6 13 26 Leslie 5.6 14 13 Win kelhaak 5.6 16 14 Kinross 6.0 16 18 St Helena 6.1 17 20 HJ Joel 6.1 14

11 Beatrix 6.4 27 9 Western Arszcz 6.6 14 5 WDL 6.6 15 10 Elandsrand 7.7 30 4 Kleof 3.9 12

24 ET Cons 9.6 3 Orb Cons 9.7 12

31 3zitszrtan 10.9 19 Unisel 23 Doomfontein

67

FIGURE 3.3 The gold explosives min ket s (Relined by openfationall emeellience

and zifordab' Your seg emits off' the wfiattet Es suRper-emposed.

68

The productivity variable m 2/man/month is influenced by depth of mine

and geological conditions, but is overall a good indicator of how a mine

succeeds in doing things productively. Although there is not a straight

line relationship between grade and profit, nevertheless a strong

relationship exists and grams/ton are a good indicator of revenue. A

mine mining are at 3 grams/ton must mine four times the volume before

the revenue of a 12 grams/ton mine is achieved.

If 15 m2/man/month is used as a barrier between operationally average

and exceptional mines, and 5g/t as a barrier between mines with high

and low affordability, then four market segments, delineated as

segments A, B, C and D can be recognized.

Segment A is a market where operational excellence is average while

affordability is low. The market will be cost driven, since high risk

s exists :.in delivering maximum benefit a new technology can offer.

Since margins are narrow, higher cost of a new technology can reduce

or eradicate profits, representing an unacceptable financial risk. For

replacing suppliers of current technology, a cheaper product without

service can open margins on the short term.

Market Segment B represents mines that have comfortable margins but

low or average operating excellence. Operational risk is high but

financial risk is low if a new technology is considered. However, new

technology will not likely deliver sudden improvements in operational

excellence and extra cost might outstrip the benefits experienced. This

market will more easily move to new technology but might be as easily

disappointed in it. Replacing suppliers of current technology is

beneficial to the mine if a price benefit is obtained and will deliver short

term growth in margins. This market will not likely be supplier loyal.

69

Market Segment C has high financial risk due to the low grades but

above average operational effectiveness. They will be late adopters or

laggards regarding new technology, because the lead in obtaining full

benefit from current technology will be left for others to prove. This

market is likely to be loyal to suppliers of current technology, if that

supplier helps to sustain the above normal performance they achieve.

Market Segment D performs above average operationally, and enjoys

low financial risk. This market will be early adapters or a early majority

and any new technology should first be aimed at this market.

3.4 FINAL STEP - VARIFY THE RESULT

Some mines where behaviour is well understood are selected to test the model.

The mines falling under Segment A are experienced by AEL as mines with high

competitor activity using conventional technology. For example, West Wits

uses SMX explosives and BME (Famesa) fuses.

Two mines in this segment illustrate greater supplier loyalty and can viewed as

exceptions. That is Freegold and Randfontein Estates. Both derived great

price benefit from the centrally negotiated contracts Anglo American and JCI

have with AEL.

Kloof and Driefontein are in Segment B, both rich mines but supplied by all the

explosives suppliers. They are very price concious, but tries new technology,

such as shocktube, easily. The buyer behaviour experience with these mines

and the presence of all suppliers confirms the nature of Segment B.

Harmony Gold Mine, representing Market Segment C, shows high supplier

loyalty, uses conventional technology and require high levels of maintenance

service but no paid-for service such as continued blasting training schools etc.

They are early adoptors of shock-tube, but converted only 6,6 % of their

70

requirement to shocktube product suitable for high angled stopes. Only about

6 % of their stopes has a high dip, where it is concluded that the technical

benefit are overwhelming in favour of shocktube." The fact that they converted

five years ago and never changed back to fuse, confirms Segment C behaviour.

Elandsrand Gold Mine leads the industry regarding productivity, producing

30m2/man/month. They are supplier loyal but try new product from all

suppliers. They use new technology, like shocktube most successfully.

Elandsrand was a early adopter of shocktube and converted the mine almost

100 % to it. Beatrix, Vaal Reefs and Hartebeestfontein, all mines in this

segment, illustrates simular behaviour.

When the consulting engineers of JCI, Goldfields, Anglo American, Anglovaal

and Rand Gold, were interviewed (see Apendix I) they were exposed to the

market field as defined by operational excellence and affordability. All

spontaneously nominated one of their mines and positioned it correctly in one

of the four segments. It is taken as a confirmation of the validity of the

segmentation model.

f.

What is required now is targeting and positioning of product and services in

these four market segments so that the strategy pursued by AEL can be

successfully realised.

71

CHAPTER 4

TARGETING, POSITIONING AND STRATEGIC IMPLICATION

Market strategies and market programmes a company can only be determined and

-developed if it is clear in which market a company wants to concentrated effort. Two

aspects facilitates targetting of markets; market attractiveness and competitive

strengths of the company. Market attractiveness defines factors that makes it desirable

to enter a market and is more forward looking than business strengths. Competitive

strengths are business strengths, which if understood well, indicates the position a

product must achieve in the market to be successful.

Once the market segments to be entered are identified, a value package is designed

directed at each segment. The value package is different combinations of product

service and price offered to that market.

This chapter first analyses the market segments for attractiveness and business

strengths in order to target, then investigates which value packages need to be offered

for each segment. f.

4.1 BUSINESS STRENGTHS AND MARKET ATTRACTIVENESS IN

RELATION TO MARKET SEGMENTS.

Three factors are considered here as criteria to select market segments to

target, namely market characteristics, economical/technological conditions and

competitive position.

Table 4.1 shows the factors that makes a market attractive for an explosives

supplier, but also the business strengths accompanying that factor.

72

TABLE 4.1 Market Attractiveness and Business Strengths to be

considered in targetting a market segment.

ATTRACTIVENESS BUSINESS STRENGTHS -

(Where to go) ,

COMPETITIVE POSITION

(Where to start from)

Market Characteristics Position in Market

Size ? .

Life of Mine (growth) ?

Market Gaps ?

Can high volume be provided ?

Life of current market ?

How quick can be moved ?

Economical and Technological Capability

Investment intensity ?

Capacity for change in customer ?

Ability to invest ?

Ability to convert a market ?

Competitive Position Interaction ,

Number/Size of Competitors ?

Price sensitivity ?

Size/Stability of Market Share ?

Price'Competitiveness ?

Source : Walker et al, 1992: 182

For each market segment, the attractiveness for and strengths of AEL will be

judged and ranked. Attractiveness is either /ow, (L), reasonable (R) or high

(H), while business strengths are weak (W), average (A) or strong (S). Figure

2.8 in chapter 2 shows possible interpretations of combinations of the degree of

market attractiveness and business strengths. Obviously, if a market is highly

attractive and a company's business strength is strong regarding that aspect,

the segment should be a desirable target market. Figure 2.8 will be refered to

regularly in this chapter and is called the "Walker motive" after the authors.

4.1.1 Market Attractiveness versus the Market position

A large market will be attractive to AEL, since economy of scale is vital

for a high volume low margin business such as explosives to be

C CC:lagig=1V2NESS

S A W

COMITEIITTWENMS

S A W

El

..s R

L

Presence la

R

L

Size Presence

Tech Price

Attract Life Tech Price

Life Size

S A W S A W

H Life Price

H Size

R Presence Size Tech

Attrac Less R Price

L L Presence Life Tech

COMMTIrirNENE.% B A CO ?2: inns NENESS

Attractiv

AtAractiv

iveness

veness

73

competitive. AEL has in general a underutilization of assets, thus has

the ability to provide to a big market. Table 4.2 shows the sizes of the

four market segments with 35 % of holes drilled in market Segment A,

followed by D, B and then D. Figure 4.1 shows market attractiveness

plotted against company competitiveness for the four identified market

segments considering size, price, technology, presence and life of mine.

Each aspect is discusse in greater detail.

FIGURE 4.11 Mattellatumg meutet ettirEctfiveratess to conagamly

competitiveness. grace, Slize, 'Irechjnollogy, alesellnee

amid Lfille sm comb:Rend).

74

TABLE 4.2 The size of Segments A,B,C and D measured in

million holes drilled annually, with the life of mine

also indicated. The table has been compiled from

own records and from records of Huyshamer Stalls

SEGMENT A SEGMENT B SEGMENT C SEGMENT D

No of Holes

(mill)

corn No of Holes

(mill) .

com No of Holes

(mill)

corn No of Holes

(mill)

com

14,876 FG 24 4,095 DCON 28 4,310 HARM 13 9,522 VR 33

3,878 REGM 28 2,515 KL 25 2,066 LR 4 4,687 HBF 10

0,792 BUF 8 3,935 WDL 30 0,870 ORYX 20 2,400 ELR 24

2,044 ERPM 5 2,403 WAGM 68 3,312 BX 19

1,347 BLYV 17 1,082 DLK 19 0,810 ST HEL 6

0,216 WW 8 1,515 WIN 8

0,801 GV 8 1,890 KIN 16

0,416 LES 7 ' 1,261 JOEL 23 '.

0,485 DURD 25 0,601 ETC 19

0,263 CMOD 17

0,312 BAR 10

25,430 14 19,297 1 26 7,246 12 20,731 18

35,0 % 11 26,5 % 9 10,0 % 3 28,5 % 5

Source : Compiled from Woolley, 1996: land Landman, 1996: 81

The size of Segment A makes it highly attractive. However, two mines

in Segment A are big, namely Freegold Consolidated and Randfontein

Estates. These mines can be serviced well by AEL, but the rest of the

mines are marginal, scattered all over the Witwatersrand and producing

comparitively low volumes. AEL business strengths are weak in this

segment with Freegold and Randfontein as the exceptions. They are

currently 100 % AEL customers. Should they be targetted and their

operational efficiencies be lifted to elevate them into Segment C,

75

Segment A will reduce to only 9,2 % of the market while Segment C

will contribute 48,5 % of the market. According to Figure 2.8, the

combination of high attractiveness plus.. weak competitiveness means

selective building. One will specialize on Freegold and Randfontein and

withdraw from the other mines in Segment A.

Segment B represents 26,5 % or over a quarter of the market, and are

as a result quite attractive. For AEL, some mines in this segment are

geographically difficult to service, that is Kinross, Winkelhaak and ET

Cons. All other mines can easily be reached, resulting in average

competitiveness. The implication is a market to be managed for

earnings, protecting existing strengths but invest in areas where risk is

low.

The size of segment C is small and thus possesses low attractiveness,

but these mines are highly servicable since they are close to the

Freestate distribution hub and AEL are strongly competitive in other

respects. The market should be protected and refocussing should be

done.

The size of Segment D has high attractiveness at 28,5 % of the market,

and a strong competitive position to supply and service them exists.

Collectively, these mines are natural targets for AEL.

Regarding the life of the mines, Segment B is highly attractive with life

of mines of 26 years, but AEL has average. competitiveness in Segment

B. Low attractiveness in Segment A exists with a weak competitive

position apart, from Freegold and Randfontein Estates. Segment C has

the lowest life expectancy, but AEL has a strong competitive position in

the market since these mines take large volumes from AEL and is close

to the Freestate distribution hub, an area solely service by AEL.

76

Currently the mines in Segment D have a reasonable life expectancies,

but. AEL has a strong competitive position.

4.1.2 Economical/Technological needs versus Capability

Market -Sectors B and D, as explained elsewhere, are attractive

regarding new technology due the lower economic or financial risk.

Segment . B has reasonable attractiveness, since it can afford new

technology but stand the chance to be disillusioned. AEL has the ability

to supply in volume and to introduce the product with high support, but

recent experience shows these abilities need to be improve further.

Segment D is highly attractive for introducing new technology, but

average competitiveness exists. Segment A has low attractiveness for

new ?technology combined with a weak competitive ability 'by AEL to

convert, due to the small and geographically scatterred nature of these

mines. Segment C is reasonably attractive for introducing new

technology, but behaves as a late majority, first allowing others to try

before they convert. AEL has a strong competitive position in this

market with a high market share and a high geographic presence. The

relative positions are indicated graphically in Figur 4.1.

4.1.3 Competitive Position versus Market Interaction

Two factors are considered here, price and presence. If the market is

very price sensitive using price levels as the major criterion in buyer

decision making, the market has a low attractiveness to AEL. If mines

are close to distribution hubs, and take product on large scale, AEL has

a better ability to compete. High competitive activity is experienced in

the near West Rand, less so in the Klerksdorp area with almost no

competitors in the Freestate.

77

Segment A are very price orientated and AEL has a weak position to

compete, since many mines take low volumes, with Freegold and

Randfontein as exceptions. Segment C are reasonably price sensitive

and AEL can compete strongly. In both Segments B and D, financial

risk is low resulting in highly attractive markets, but AEL's competitive

position is average regarding price.

Market presence essentially means the level of experience in providing

the market. If a market is likely to appreciate what AEL stands for, it

has high attractiveness, and if AEL can satisfy the expected needs easily

compared to competitors it has a strong competitive position. Segment

A has low supplier loyalty and thus low attractivenss, and AEL has only

an average competitive position. In Segment C, however, a strong

ability to provide has been experienced and high loyalty makes the

market highly attractive. Segment B has high expectations and is thus

only reasonable attractiveness, while AEL has a strong competitive

ability to satisfy needs. In Segment D, the market is highly attractive

and AEL has a strong competitive ability to satisfy needs.

4.1.4 Market Targetting

When a relative large market share exists, as is the case with AEL, it

can be expected that more than one market segment will be attractive to

invest in. Segmentation then leads the strategist to design different

value offerings to the different markets in order to successfully address

needs in these segments.

From the analysis above, one deduce that of the four market segments

identified, three are attractive to AEL, that is Segments B, C and D,

while Segment A looks less attractive. What is the strategic

implication?

78

If the market attractiveness/competitive position motive of Walker et al

as shown in Figure 2.8 is studied and applied, the following implications

come to light:

Market Segment A

Figure 4.2 reproduces Segment A of Figure 4.1 in greater detail with

the matrix blocks (originating from Figure 2.8) numbered. locks 3,6,8

and 9 should be interpreted in Figure 2.8 in order to understand the

strategic implication of the analysis. These blocks suggest selective

activity, to seek specialization around the limited strengths, but to

harvest, manage for earnings and finally to divest. Freegold and

Randfontein are the exceptions, and will be targetted.

IFIIGUIRE 402 The striategfic fimplIficsitiion cells off the WsallIker

mgateix (1Figum 2.) to he consulted iron. guridgannce nnn

Mantet Segment A

COMPETITIVE POSITION

STRONG

AVERAGE

WEAK

HIGH

REASONABLE

LOW

.-- -/,97//

7 ,

Indicated once

Indicated twice

79

Since Segment A has high financial and technical risk for introducing

new technologies, this segment should only be targetted with current

technology where AEL has a price advantage. Little backup service

should be given.

Market Segment

Figure 4.3 shows that Blocks 2,4 and 5 in the Walker matrix should be

considered.

FIGURE 4.3 'The strategfic limp lificatiion cells Tor Walker

consultation off the matrfa TOT Market Segment

COMPETITIVE POSITRON

STRONG AVERAGE WEAK

HIGH

REASONABLE

LOW

,....:-,,

7 8 9

I/% Indicated once

Indicated twice

Blocks 2 and 4 suggest a desirable target market where emphasis

should be placed on increased to improve profitability and build on

selective strengths while protecting vulnerable areas. The value adding

service AEL has, should be focused in this market to reduce this

segments operational risk, but new technology can be introduced as

long as it is accompanied by intense service. The service package

delivery must be of high quality, on time in full.

cal

HIGH

REASONABLE

F.1

LOW

80

MaRiot Segment C

As is shown in Figure 4.4, cells 1,4 and 7 of the Walker matrix are

applicable.

IFIGURE 4.4 The strategic i plication eels frorr co

stalitsition off the 1 1

w.laken. mzerim for Man-ket Segment C

COMPETITIVE POSITION

STRONG

AVERAGE

WEAK

/

//1/// ///, / / 2 3 / /77 4,

• 8 9

Indicated once

Indicated twice

It is indicated as a desirable market where current strengths should be

maintained and protected. This market should be serviced well, but not

with value adding services that are charged for. Prices should be

competitive but not necessary the lowest, current technology must be

protected, benefits maximized while new technology should only be

introduced if its benefits has been proved beyond doubt elsewhere.

, . , „. ,. ..>

,

3

7 ,,,,,,,

4 A/

/ 4 6

7 8 9

co) rad

HIGH

REASONABLE

LOW

Ito is' icated once

lindicoted twice

81

Market Segment D

Figure 4.5 indicates this as a highly desirable market with Walker matrix

cells 1,2 and 5 to give strategic guidance.

IFIIGU1RJ 4.5 The strategic fimplliesatfion cells from the Waker

matriz to give gnficilaimIce b Market Segment D

COMPETUTWIE IPOSMON

STRONG

AVERAGE

WEAK

The market should be invested in and strengths should be maximized

while vulnerable areas should be reinforced. Value added services can

be charged for and should be designed to sustain high levels of

performance New technology should first be introduced in this market

and should be supported by a high service presence during conversion.

Quality levels should be high and product deliver on time in full.

In conclusion, Segments B, C and D are targeted in full, while Segment

A will not be serviced and only price competitive products will be

offered.

82

4.2 PRODUCT AND SERVICE POSITIONING

To offer the right value package to each segment, the product determinants

that drives behaviour in each segment needs to be identified. Plotting two or

three of the most important decision determinants against each other, a

"product space" is created within which a position can be shown . Each axis

represents a continuum along which the determinant increase or decrease. For

example, for perceived 'expensiveness' one product can be positioned to the

left of a horizontal line, meaning it is viewed as inexpensive, while another to

right is viewed as expensive.

The total set of product and service offerings by a company to market

segments, including the way market communication is done, collectively

represents the image of the company in the market place. Thus, doing business

with AEL, SMX, BME or Dantex relates to different buyer experiences for the

customer, even if the same product range is bought. In the end, a corporate

image accross all market segments exists, therefore value packages targetted at

the different segments must all be consistent with the overall image in the

market.

The positioning process followed here will be as follows.(Walker et al; 2: 208):

Identify the Market Segments major determinants

Determine own and competitiors product location in the product space

Determine the customers most preferred combination of determinant

attributes

Examine the fit between market preference and product position

Select a positioning or re-positioning strategy and consider consistancy

with the overall coporate image.

Since a large quantity of product variations, within a product range exists, like

sizes, lengths, strengths, etc. single product ranges are grouped together as

83

shown in Table 4.3. More focus is put on perceptual positioning rather than

physical product positioning, however, where physical product features are a

determinant, it is- considered. Each Market Segment is considered separately.

Since the behavioural base variables are affordability and operational

excellence, the horizontal axis will highlight some or other particular discriptive

attribute of affordability, while the horizontal axis will highlight a discriptive

attribute associated with operational excellence. The degree of intensity of the

attribute is indicated on the continuim as high or /ow , low to the left of the

horizontal continuim line and to the bottom of the vertical continuim line.

TABLE 4.3 The major product groups offered in the Gold Narrow

Reef Market

PRODUCT GROUP , I SUPPLIER AND TRADE NAMES

PRO-

DUCT

AEL

-

SMX BME DANTEX ALTECH I '

Fuse and Ignitor Cord F/IC Stopefuse - Famesa - -

Durafuse Fuse

$topeline •

Shocktube Systems SS Handidets EZ-Stoper - - -

Tunnelmaster

Nonel Reef

Assemblies

Electronic Delay Detonators EDD Bishop - - - Electrodet

Cardinal

Cartridge Explosives CE Powergel Emex Megamite Tovex -

Energex Explogel

Magnum

Ammonium Nitrate/Fuel Mix ANFO Anfex

LDA

Expanfo , - -

F/IC - Fuse/Ignitor Cord SS- Shock Tube EDD - Electronic Delay Detonator

CE - Cardtridged Explosives AN - Ammonium Nitriate Fuel Oil

84

4.2.1 Product Positioning in Market Sector A

L

Market Sector A is price concious and operates at lower efficiencies,

since the cost orientation prevents them from spending much on

employee development. The descriptive attributes that are most

important in this market is expensiveness and technological

placability. Expensiveness, that is a price• orientation, is the attribute

linked to affordability and plotted horizontally,- The robustness of the

technology selected and it's forgiveness when used by a non-trained or

less developed workforce, forms the vertical continuim. Figure 4.6

plots the product space.

Product positions for some AEL and competitor products are shown in

the figure. The customer most preferred, combination is the upper left

area of the product space. Clearly, AEL can only compete with

Stopefuse and Stopline. Since the market is not targeted, no strategic

shifts will be attempted to better serve the market other than

communicating to the market that AEL fuse is robust and cheap and

easy to use. r.

Market (Customer) preferred attribute combination

Low Technollogicsi

High

° Handidets

AEL - Red SMX - Blue BME - Green Dantex -

'4f-Plf;

xpanfo

Anfex ° Do-a:arse LOA

Low

Ex Powargel

amite

amesa Fuse

85

FIGURE 4.6 Product lIposition Space nactrin wfitl>n produnct

positio s fin Market Sector A.

High

Source e Anon o AEL Internal Files, 1996

4.2.2 Prod anct IPositiouning n¢p Market Sector It

The mines in Segment B have high technological expectancies from

their selection of explosives products. This market feel they can pay for

whatever is required, therefore expect the product to work faultless and

to show an immediate difference in their operational performance, even

if they don't invest much in training or developing their people to use

that technology. A supplier is expected to do the training and

development and must make the technology work. They can even be

convinced to pay for service, but will be demanding in expecting proof

of what benefit was obtained. Price is linked to product and supplier

performance If these mines feels product/supplier output is high, high

prices can be obtained.

Pewoz-ge.: Meganite

• Handidets ---- High

Market (Customer) preferred attribute combfiErnation

Low Supplbler/Produet Owl, ant

AEL - Red SMX - Blue BME - Green Dantex -

High

86

The product space is thus formed by a price placability continuum

(horizontal) and a supplier output continuim (vertical) as shown in

Figure 4.7.

1FI[GURE 4.7 IProduct PosMon Slince mmtrav veith product

posh-Ions nnn M rket Sector

Source : Auomi : METE Ihtertmall Hes, 11996

It can be seen that many products of AEL are attractive, such as

Handidets, Stopefuse and Magnum. Products that are less forgiving,

such as Powergel is not recieved as being competitive. It is clear why

intense competition is felt in this market.

AEL is targeting this market and should try to position their products in

the upper right quarter of the product space matrix. The ability of AEL

to convert the market successfully to Shocktube, for example, should

87

be percieved superior to that of other suppliers. The ability to sustain

high performance from products should be perceived higher than with

other-suppliers. That will move Powergel and Handidets well into the

upper right quarter of the matrix, providing a good strategic fit for AEL

to be successful! in this market. A technological range of products on

offer, will also strengthen AEL's position in this market.

4.2.3 Product Positioning in Market Sector C

The operational performance of the mines in this market sector is high.

They need to sustain the performance, and appreciate strong product

support from suppliers. Should a new technology promise a step

change in performance, and is well proven elsewhere, the suppliers

ability to convert the market sucessfully will provide a strong advantage

for that supplier. The product space matrix is formed by affordability as

the horizontal continuum, meaning if service levels is low, the product

must be very cheap, but for higher service levels, higher prices will be

paid. The appropriateness of the technology, that is the track record,

the risk to make it work well, is forming the vertical continuum. r.

Newer technologies are viewed as highly appropriate but not

affordable. AEL's Stope-, Durafuse, Stopeline, Anfex LDA and

Powergel all fit this market well. Many competitor products can

replace them, and only the service levels and supply proximity keeps

this market for AEL. Since this market is targetted, these strengths

needs to be expanded even more. The ability of AEL to provide

appropriate technology and the track record of making it work, thus

low risk during conversions, needs to be percieved as far superior to

that of competitors.

Magnum EZ - Stoper

Handidets ° NRA's

owergei

High

Market (Customer) preferred attribute cornIbination

Low Servieefreellwollogicall Appropriateness

AEL - Red SMX - Blue BME - Green Dantex -

88

FIGURE 4.8 Product Position Space matrix wit ➢n relative product

positions Tor Market Segment C

High

Sounrce o Anon o ARIL Interne IFilles, 1996

4.2.4 Product Positioning in Market Sector ID

This market views price in the light of the value provided rather than

price itself The horizontal continuum of the product space is thus

value delivery, but technological ability forms the vertical continuum.

The high level of performance results in a good chance that new

technology will provide the intended benefit, thus delivering the value

even at high cost.

A good strategic fit exists between AEL's products and the need in this

market. AEL should be percieved as leading the market in trouble free

conversion, access to new technologies and the ability to provide in

1 High

Impact Breaker

MSL initiation system

Low Vallane

High

Meganite

Famesa Fuse

Market (Customer) preferred attribute combination

Low TeehnolloRitc2311 AlMility

AEL - Red SMX - Blue BME - Green Dantex -

89

large volumes when requested. Services should be perceived as market

leading and should provide sustained high performance

FIGURE 49 In-oduct 1Posiitiio1 Since vyntIln rellEtive product posfitlorms TOR"

Motet Sector ID

1 A non-explosive rock breaker

2 A electric detonator system with an electronic timing allocator

Source a Amiomi e AIEL Enntermisall 1Files, 19%

AEL need not be seen as necessary leading in technology or being first,

but should be perceived as the company providing the best value once a

new technology is introduced and support it with the best service

backup available. AEL should be seen as the logical partners for now

and for the future.

90

4.3 A CORPORATE IMAGE

From the analysis above, it is revealed that many AEL products are positioned

well in their target markets but in others repositioning is required. The

question is, can a consistent corporate image be maintained while different

perceptions are aimed at in different market sectors.

Market Segment B expects high supplier output when the price asked is higher.

and vice versa. Market Sector. C expects service commenturate with their

needs. Sector D expects service to sustain and improve their performance

levels. New technology is welcome in all three market sectors, but

expectations are different. Segment B expects the technology to uplift their

operations with little own input, Segment C expects the technology to be well

proven carrying low risk while Segment D expect new technology to support

their search for excellence.

The common denominator is servicability, the ability to partner with the

customer and help him to overcome his problems. Another common factor is

the need to have access to new technology without too high a risk of failure of r.

such conversion attempts. AEL needs to be perceived as understanding best

the needs of the market, providing the best service and having the ability to

provide intense backup if required. " Partnering with AEL provides best value

should be the clear picture in customers minds.

91

CHAPTER 5

CONCLUSION AND RECOMMENDATIONS

5.1 A SUMMARY

5.1.1 Study Objectives Reviewed

Until the mid-eighties, AECI Explosives Limited (AEL) was the

single supplier of explosive and initiating products to the South

African mining industry. In order to satisfy the industries needs,

an undifferentiated marketing strategy was followed. All needs

were satisfied by a single marketing mix based on a

comprehensive range of products.

With competition entering the market in the mid-eighties,

differentiation was achieve by offering nitro-glycerine based'

products, initiating systems and high service levels supported by

a well trained and competent sales force. Competitors slowly

improved service, slowly closing the differentiation gap. They

also entered into alliances with international explosives

companies, opening venues to supply initiating systems in this

market.

For AEL to stay competitive, the relative large market share still

achieved needs to be stabilized. This will assure the right of

scale which provides price competitiveness. To target

resources, understanding of buyer behaviour is required. What

is needed is a logical segmentation model to shape future

strategy and company objectives. Thus, markets of similar

buyer behaviour must be identified, areas of maximum chance of

adding value selected and targeted. To achieve this, three

objectives have been set for this study:

92

Develop a market segmentation model explaining

similarities and differences in buyer behaviour groups.

Interpret the segmentation model in the light of

strengths, weaknesses, opportunities and threats to AEL

in order to target segments.

Develop strategies and position AEL in the target

markets.

5.1.2 The Segmentation Model, Targeting and Positioning

Chapter 2 provides theoretical background on the explosives

purchasing process, explaining it as a decision-making process

by individuals and groups. Individual and group behaviour are

reviewed and contrasted to. current segmentation approaches,

namely the "Nested Approach", "Product Benefit Approach"

and "Re-examination of Product Flow Approach". Non of these

puts the decision-maker, the decision-making process and the

resultant buyer behaviour central.

A segmentation approach for this study is developed, starting at

the inner nests and working outward, the most 'inner nests'

being the decision-maker. The macro end micro environmental

aspects influencing his behaviour is regarded as filters, heavy

filters representing limited behaviour influence and low filtering

being the dominant influencers.

In Chapter 3 a segmentation model is develop according to the

proposed segmentation approach. In the process, the

customers, their location, the product taken, market needs and

the nature of the physical and cultural environment are

CMI,CitM)ol% c higgag pooh

.(-(1°4,0DTo.DG OD qGm011oudovo

S e2,ment A (price/cost)

(mg,roivinid

(.'r60[1* ,fiCsOol)pg(opoo))

Affordsbillity

'Increased Supplifier Loyslity

,.

:tx.

Op

erat

iona

l Exc

elle

nce

93

explained. Four segments are identified, which contrast

Operational Excellence and Affordxbilligy, which represents

erational Risk and Financial Risk respectively.

FIGURE 5.1 The Man- et Seg ipentation Modell exp nning

Explosives buyenr beh in the Gold Nan row Red

Man•cet

Increased technology sophistllestion

<1-1 IFfinsncllsil Risk

Segment A has both high financial and operational risk and is in

essence a price/cost market. Segment has low financial but

high operational risk, representing a market easily convertible to

newer technologies (early adopters) but requiring support not to

be disillusioned. Segment C has high financial but low

operational risks, which breeds supplier loyalty but are laggards

in technology conversion. Segment D have both low financial

and operational risk and illustrates supplier loyalty combined

with early majority behaviour in technology transfer.

94

Chapter 4 attempt to target the market segments best suited to

AEL, position and strategies. Business strengths and

weaknesses are investigated. Table 5.1 summarise the factors

considered.

TA ILE 5.11 Attractiveness and Competitive facton

considemi man•ket tarrgeting

ATTRACTIVENESS

COMIIDIVIETIVENESS,

Market Characteristics

Economic and Technological

Competitive Position

Position in Market

Capability

Interaction

Sourrcebile 401 concienseail, p 71

Market segments B, C and D are targeted as a result, offering

segments which requires high services levels, requires new

technologies and illustrating potential supplier loyalty. Segment

A suggest a disinvestment strategy for AEL.

Product Positioning strategies were reviewed next (chapter 4),

suggesting ways to move product and service perceptions in the

targeted markets to obtain maximum advantage for AEL.

Customer Vaal Reefs

0 Modell

'Western beep Levels

Free Gol

AP " ':NDIX I SIEN MIVIING TILOTTIING 711--H11

MIINIEE 1IN MAJR=r

Ian Cocker 11 - Technical Dfirector e Aull© Goal

Operational Risk

-4111—mmingsmmo IFinzradz11 llsk

ernard Swznepoell - zrITDOITIly

perztollull isk

Customer

0 Modell

Ffinzzicizlrisk

Operationall Risk 1 Customer

0 mode

peration Risk

1 CusttLmer

0 Modell

SENIOR MINING FIEOFILIE 711..407717NC- 'THEM, 1Tll--111E, MARKTIT

Thys Lottrens - Consulting Mining Engineer -

Fina el fl 'isk 7111it'■,44',11", 14.234,5411Rtill

Pieter K. o inson - Consulting Mining Engin :°er o Gengoid

Fi anthil Ris

95

5.2 CONCLUSION

In Chapter 1 it is stated that so many variables influence the explosives

buyer decision making process in the gold mining industry that

segmentation is found to be problematic. As a result, areas in the

market where the strengths of AEL will maximise value are difficult to

identify, resulting in inefficient resources allocation, consuming both

AEL's and customer value.

This study achieved a logical segmentation and identified stable market

segments. These segments are placed in a logical behavioural

segmentation model. Four segments were identified. The common

variables in all these segments are the degree of operational risk and

financial risk. The first segment (segment A) experiences both high

operational and high financial risk resulting in a price sensitive market.

The second ,segment (segment B) has high .operational but low, ,price.,

sensitive but support intensive market. Segment C represents low

operational but high financial risk, resulting in a market that is price

aware but appreciates value. Finally, Segment D contains low risk in

both areas, a market demanding new technology and successful, easy

conversion of one technology to another with high supplier support.

Targeting of segments were also achieved. All segments interest to

AEL, but with different approaches. The following segments were

identified with a summary of the needs in that segment:

Segment A - Low prices with little support (do it yourself)

Segment B - Provide old and new technology with service that target

skills upliftment.

96

Segment C - Sustain high performance of current technology with

good maintenance service. During conversion only

product related skills are transferred since other ability

is already high.

Segment D - New technology should be offered with continual value

enhancing service.

Segments B, C, and D, are targeted in full, while Segment A will only

be serviced if a product or service produced for other segments

accidentally also satisfy Segment A.

5.3 RECOMMENDATIONS

In order to achieve and maintain market dominance in market segments

B to D, the following strategies are recommended:

In Segment B product output must be emphasised, and service

should be designed focusing on measurement of benefits and J;

good training in application of products. Longer term

productivity enhancing services can be offered, and price should

support these extra activities. Promotion should convey

product benefits, but the service link involved to deliver benefits

should also be advertised.

The design of Product maintenance services, with the ability to

expand service to skills transfer intensive backup during

technology conversions, is recommended. Success of newer

technologies in other segments should be promoted in this

segment.

Products and services should focus on improving an already

97

good efficiency on productivity level in this market. Service

should be highly proac6e, identifying areas where a different

methodology or technology will improve performance or

enhance profits. Technological ability should be promoted

strongly in this market, combined with the capacity to support

conversion and sustain benefits such new technology can offer.

Only price competitive technologies should be offered in

Segment A, with reactive service backup, giving attention only

if product problems exists with a customer. This market can

thus be serviced from by the market force that look after

segments B and D. Segment C only requires a ton staff, calling

on the other resources over short periods of intensive activity.

Finally, it is recommended that an overall promotions policy

should be established, in order to communicate the right

message to the right market segment, and to understand which

channels methods and media will deliver these messages best to

the targeted segments. Overall, a unified image of a high

service provkler backed by good products and priced to ensure

maximum mutual value creation, should be established and

maintained. Thus, employee selection, sales force ability and

training should be in balance with the expectation of high

performance for the customer captured in the promise AEL is

representing as a supplier.

98

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