strategic planning & the business environment presented by adams erhuvwu

7/30/2019 STRATEGIC PLANNING & THE BUSINESS ENVIRONMENT PRESENTED BY ADAMS ERHUVWU

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STRATEGIC PLANNING & THE

BUSINESS ENVIRONMENT

PRESENTED

BY

ADAMS ERHUVWU


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Adams Erhuvwu Page 2

TABLE OF CONTENTS PAGES

INTRODUCTION 3

QUESTION 1 4

WHY SHELLS ACQUISITION OF BILLITON IS A RELATED DIVERSIFICATION 4

QUESTION 2 5

COMPARING AND CONTRASTING THE APPROACHES OF SHELL AND GENCOR TO THE POST-

MERGER INTEGRATION OF BILLITON INTO THEIR RESPECTIVE ORGANISATIONS 5

QUESTION 3 7

COMPARING SHELLS PARENTING ADVANTAGE FOR BILLITON TO GENCORS 7

QUESTION 4 8

EXPLAINING THE DIFFERENCES IN SUCCESS OF THE TWO MERGERS 8

QUESTION 5 9

REASONS WHY BHP WILL BE A BETTER PARENT 9

CONCLUSION 10

REFERENCES 12


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INTRODUCTION

The report is set to examine the mergers and acquisition that existed between Shell, Gencor

and BHP on Billiton; the companys quest to be world class in terms of its mining and

metallurgy will be critically ascertained. This will start by examining whether Shells

acquisition of Billiton is related diversification and why it can be said to be a related type of

diversification. At the same time the approaches of Shell and Gencor to the post-merger

integration of Billiton into their respective organisations will be compared and contrasted in

order to determine the best approaches from the two methods. On the other hand Shells

parenting advantage for Billiton will be compared to that of Gencors, in order to determine

the best company with the parenting advantage when compared to another organisation. The

report will also examine the differences in success of the mergers of Shells and Gencor in

order to be able to determine the companys that recorded the highest level of success when

compared to another and the factors that led to their successes. Finally, the report will also

examine the merger between BHP and Billiton by comparing its merger with that of its

predecessors which includes Shell and Gencor. At the same time the ability of the

BHPBilliton to be both responsive and its ability to realize significant synergies together with

the ability of BHP to be a better parent will be critically examined.


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QUESTION 1

Why Shells Acquisition of Billiton is a Related Diversification

The acquisition of Billiton by Shell Company when put into Ansoff Matrix approach which

includes product development, market development, market penetration and diversification; it

can be said that the acquisition of Billiton by Shell is a type of related diversification. This is

because the parent company which is Shell plc is into mining and oil exploration, so the

acquisition of Billiton which was a Dutch firm active in mining, metallurgy and non-ferrous

metals on a world-wide basis can be seen as a related type of diversification. The term related

diversification on the other hand simply means the ability of a firm to go into partnership or

business with a firm that is within its sector. It is important to note that one of the reasons for

Shells diversification is for them to be able to manage its risk within the organisation and at

the same time with the believe that diversification would guarantee long-term sustainable

growth. As a result of this the metal sector under Billiton Company was regarded as a

potentially enduring and stable source of income.

The main reason why Shells Acquisition of Billiton is a related diversification are stated

below and they include the following:

The both industries which include Shell and Billiton employ geographical and geophysical

methods; and at the same time processes the raw materials to products before they are ready

to use. Both industries require high capital investments and at the same time require excellent

relations with the governments of host countries and diplomacy skills. It is also important to

note that the marketing and the sale of both industries often focus on the same clients; metal

on its own is like oil, gas and chemical products which are used as raw materials for a wide

range of companies and industries. The metal industry such as Billiton explores, exploits,


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processes, recycles, and sells non-ferrous metals, industry minerals, and related products,

which are exactly the same activities Shell employs in oil, gas and chemicals. Finally, it is

also important to note that Shells strives for more intensive use of its geological know-how,

drilling, and technological knowledge, in field other than oil and gas.

QUESTION 2

Comparing and Contrasting the Approaches of Shell and Gencor to the post-merger

integration of Billiton into their respective organisations

The approaches of Shell and Gencor to the post-merger integration of Billiton into their

irrespective organisations differ from one another. This is because in terms of Shell

integration of Billiton into their organisation; the industry employed the use of its method

which include its upstream and downstream activities. In terms of Shell the upstream and

downstream oil activities within its organisation has proved to be a successful approach; and

as a result of this made Shell to introduce the same approach of upstream activities which

includes exploration and exploitation whereas the downstream activities includes processing,

refining, transport, marketing and sales at Billiton which recorded a less success when

compared to its success in the parent company.

At the same time it is also important to note that Shell Company also went ahead to introduce

the use of job rotation at Billiton which also proved to be unsuccessful. This was because of

the fact that in the metal business it takes a long time before someone really feels settled in a

particular branch, and so job rotation is an exception. Another approach introduced by Shell

included the expansion of existing sectors, the development of an extensive world-wide

exploration program to find ores and develop mines, and participation in many joint ventures.

In the field of research new ideas were developed on ore processing and production of metals.


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As a way of introducing the metal company to the international market, Shell industry went

into a lot of acquisitions and was able o cover the whole spectrum of non-ferrous metals. And

at the same time it is also important to note that more money was invested in research and

development of the firm, exploration, and promising new projects even while the metal

industry was in a deep crisis with the hop of future growth.

On the part of Gencor integration of Billiton into their organisation; the industry which

specializes in mining activities unlike Shell Company allowed Billiton to operate with its

own strategy. This allowed the company to come up with the best strategy that works well for

the mining and metal industries. As a way of achieving this Gencor decided to focus on

mining activities and unbundled its major industrial assets by distributing shares to its

shareholders. The industry also allowed the Billiton metal company to achieve its aim of

becoming a major mining group instead of a hug conglomerate. Gencor also introduced the

use of merger and acquisition as a way of growth of growth for the company; which included

the merging of Trans-Natal Coal with Rand Mines together with the 50-50 ownership of the

RTZ of the UK and the discarding of any mineral assets that did not meet the companys

definition of world-class.

In this post merger of Gencor and Billiton managers for the first time are given more

opportunities and powers to take more risks and at the same time to be more responsive to

market opportunities when compared to Shells approach. Another approach used by Gencor

industry in order to address the difficulties that a South African Company faces when it

wishes to finance major international acquisitions was to relocate the base metals business to

a market with less strict exchange controls. This was achieved by demerging the larger base

metals business from the precious metals which includes gold and platinum operations and

lists the base metals business on a stock exchange outside South Africa.


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QUESTION 3

Comparing Shells Parenting Advantage for Billiton to Gencors

It is important to note that Shells parenting advantage for Billiton includes its financial

strength, brand name and technological capabilities which will help to consolidate Billitons

position and at the same time be able to strengthen its economies of scale. One of the main

reasons behind Billitons decision to work with Shell is based on the realization that its

intended further growth would require major financial resources and upgraded technological

capabilities. It can also be said that Shells parenting advantage for Billiton is as a result of

increasing scale economies in the metal industry, the political risks and the consequences of a

mining project failure were getting too big to be carried by a firm of Billitons size.

Another Shells parenting advantage for Billiton was its guaranteed independence and a key

position within the group. This was based on the agreement that Billiton would become the

core firm for all mining and processing of ores and non-ferrous metals and for the fact that

Billiton would remain a separate division within the Royal Dutch/ Shell Group and was

promised involvement in all important decisions. In addition, it is also important to note that

Shell Company has the financial capability to finance any project and at the same time

projects a stronger competitive position within the Big Six multinationals in aluminum. The

Company also offers a stronger basis for research and development expenses, positive effects

of mutual activities, increased political strength, especially important in developing

economies, and entrance to Shells world-wide contacts in business and finance.

On the part of Gencor, its parenting advantage for Billiton includes its technological

capabilities and knowhow which will help to consolidate Billiton position in the international

market. One of the important parenting advantages of Gencor for Billiton was the fact that the


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way of thinking between the two companies possibly corresponds better than that of Shell

whose dominant direction was focused on oil and gas. Gencor also have a good management

capability when compared to Shells management capability. The good management

capability exhibited by Gencor on Billiton brought about a more focused and determined

managers who are determined to take more risks by trying new ways of doing things within

the organisation.

QUESTION 4

Explaining the differences in success of the two mergers

The merger of Shell with Billiton and that of Gencor witnessed a lot of differences in terms

of the successes recorded by the two organisations. In terms of Shell the new metal division

was expected to grow until it counted for at least 10% of shells turnover but the new business

was only able to account for only 2% of shells turnover throughout the merger period. On the

part of shell the merger between the two companies allowed them to enter the metal industry

quickly; it also helped the organisation to become an important producer of a variety of non-

ferrous metals, particularly tin. The vertical integrated structure of Billiton was big to Shell.

In one swoop Shell bought competencies in exploration, processing, marketing, sales, and

research of ore and metals. The merger also led to the expansion of the aluminum market

which made Billiton one of the top six aluminum companies in the world.

On the part of Gencor, its merger with Billiton recorded a lot of successes which includes

helping the Gencor Company to record a 62.7% increase in attributable income for the year;

and Billitons maiden contribution to income from operations represented 43% of the total.

At the same time it is also important to note that the merger between Gencor and Billiton

benefited from the sharp rise in the aluminum price, which increased by more than a 100%


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from its low US$1,109 to a high of US$ 2,147. The merger also contributed to the popularity

of Gencor Company and its sudden emergence in the international market which led to its

listing in the London stock exchange market.

QUESTION 5

Reasons why BHP will be a better parent

It is important to note that the deal between Billiton and BHP will be a sensational fit and will

be able to realize significant synergies because of the fact that Broken Hill Proprietary

Company (BHP) is a mining, metals and oil conglomerate with its headquarters in Australia.

On the other hand Billiton is a Dutch firm active in mining, metallurgy and non-ferrous

metals on a world-wide basis. Looking at the two companies it can be said that the two

companies operates under the same sector with huge interests in mining and metals unlike

Shell that has its huge interest in oil and mining. BHP will be a better parent to Billiton

because they have the same interest which includes mining and metals and at the same time

will be able to help the organisation to gain more international recognition. At the same time

it is also important to note that the both companies will enjoy a positive synergy because of

the fact that Billiton will give BHP a better understanding of business in Africa, a broader

portfolio to ride out cyclical movements in the commodities markets and advantages of scale

shipping, marketing and purchasing. On the other hand BHP will give Billiton a better

understanding of businesses in its European and western markets.

In return, Billiton would have access to cheaper financing for new projects and existing debt,

greater liquidity and better protection from political risks. Billitons merger with BHP also

removes the UK groups high exposure to African-based operations and a reliance on

aluminum as a major earnings driver. It is also important to note that the quality, size and


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diversity of the BHPBilliton will provide more options for responding to the present business

environment. Finally; it is also important to note that BHP financial strength and

technological capabilities together with its guaranteed independence makes the organisation a

better parent when compared to Shell and Gencor.

CONCLUSION

Having examined the merger/ acquisition that existed between Shell, Gencor and BHP on

Billiton; it can be said that Shells strategy proved to be unsuccessful because of the

introduction of the upstream and downstream activities into the metal business. At the same

time their frequent interference in the business activities of the company and their lack of

management capability to control the activities of the organisation makes it difficult in the

running of the organisation. At the same time it is also important to note that Shells merger

with Billiton is a form of related diversification but at the same time differs on the core

competencies of the two organisations. This is because of the fact that Shell Company is

more focused on oil mining whereas Billiton company is more focused mining and

metallurgy, the differences that existed in the companys interest brought about confusion

and the inability of the merger to work out between the two companies.

On the part of the Gencor, the merger between the two companies on a large extent proved

successful but at the same time witnessed a lot of setbacks in the rate of its growth; but when

compared to the merger of the former. There is the existence of a slight progress due to the

fact that the two organisations has interest in mining and at the same time has the managerial

capability on the part of it managers to take risks and try new things which was made

possible by the independence granted to it managers within the organisation. Finally the BHP

merger with Billiton promises to be both responsive and able to realize significant synergies a

better understanding of business in Africa, a broader portfolio to ride out cyclical movements


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in the commodities markets and advantages of scale shipping, marketing and purchasing. On

the other hand BHP will give Billiton a better understanding of businesses in its European

and western markets.

In return, Billiton would have access to cheaper financing for new projects and existing debt,

greater liquidity and better protection from political risks. Billitons merger with BHP also

removes the UK groups high exposure to African-based operations and a reliance on

aluminum as a major earnings driver. It is also important to note that the quality, size and

diversity of the BHPBilliton will provide more options for responding to the present business

environment. Finally; it is also important to note that BHP financial strength and

technological capabilities together with its guaranteed independence makes the organisation a

better parent when compared to Shell and Gencor.


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Kotler P, Armstrong G, Saunders J (1999). Principle of marketing, 2 nd European ED,Prentice hall

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