RIO TINTOAnalysis of Business Strategy of ‘The Mining Giant’

IBS Case Study by

Sandeep Pandharkar (68)

Pankaj Kumar ( 48 )

Ashish P Kumar (17 )

IIFT –EPGDIB

10-11

New Delhi

Dec’2011

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About Rio Tinto….

A British –Australian firm founded in 1873 and named after a river in Spain called ‘Rio Tinto’ .

World's 3 rd largest international mining group.

Involved in every stage of metal and mineral excavation & production of aluminum, copper, diamonds, coal, iron ore, uranium, gold and industrial minerals.

About 85% of assets are located mainly in Australia and North America.

Operations in more than 50 countries in multiple continents.

Has 76,894 employees with a sales turn over of more than 62 billion USD.

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RIO TINTO

Rio Tinto’s Global Business Operations

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Vision statement of Rio Tinto

“Our vision of being the global mining leader means

maintaining or achieving sector leadership,

including operational excellence, sustainable

development, exploration and innovation ”

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RIO TINTO

Top 3 Miners of the Globe

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RIO TINTO

Share of Countries in World GDP by 2050 where

Rio Tinto operates !

Tri Sector Partnership – Core of Rio Tinto’s Strategy

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Understanding the Global Business Strategy of Rio Tinto

Long term investments ( 40 years ) in cost competitive, large mines across the world.

The discovery of Tier 1 (large, low cost) ore bodies that safeguards future cash flows.

The development of Group assets into safe and efficient large scale, long life and low cost operations to ensure the Group can operate profitably at every stage of the commodity cycle.

Operating in an ethical and socially responsible manner that maintains Rio Tinto's reputation and ensures ongoing access to people, capital and mineral resources.

Putting long term sustainable development at the heart of everything the Group does

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Understanding the Global Business Strategy of Rio Tinto

Access to people, capital and mineral resources.

Larger contributions to social well being, providing employment at remote locations, away from cities and human habitat.

Reduce environmental impact, cut operations costs, better returns to shareholders.

Apply new technology, innovative industrial relations practices and astute acquisition strategies, which serve to enhance the operations and, therefore, shareholder value.

Present in all key markets like BRIC, where the highest demand growth in the world is estimated for next 10 years (2020).

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RIO TINTO

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IS RIO TINTO GLOBAL ?

Dimensions of Globalisation Degree

1 Level of Global Integration High

2Number of world key markets served

All

3 Local Responsiveness High

4 Pattern of Competition Global

5 Marketing Approach Local

6 Type of Vision Geocentric

7 Organisational Structure Decentralised

8 Global Market Participation High

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IS RIO TINTO GLOBAL ?

Dimensions of Globalisation Degree

9 Global Products Yes

10 Global Location of Activities High

11 Global Competitive Moves High

12 Competitive Highly

12 Factor Costs Low

13 Employment of Senior Foreign Nationals High

14 Corporate Culture Global

15 Strategic Information Syatem Global

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Key Characteristics of Rio Tinto’s Global Approach

Adopts Transnational Strategy

Formulate a strong international vision

Allocate scarce resources on a worldwide basis

Participate in major markets

Implement global partnerships

Engage in global competitive moves

Configure value-adding activities on a global scale

Efficiency, Flexibility and Learning

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Global Leverage Points of Rio Tinto

EfficiencyGlobal

economies of scale

Responsiveness

Adapt to local customer

demands

Knowledge LeverageUse People and Ideas globally

Some of the Key Parameters of Rio Tinto

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Narration 2010 2009 2008

OperatingProfit Margin

34.8 % 17.95 % 18.79 %

ROA 12.74% 5.1% 4.1%

Net Profit 25.32% 11.65 6.77

RoE 24.56% 11.12% 17.81%

Recommendations to the CEO of Rio Tinto

RoS: Its good as it is higher than industry average but lower than its competitor by 10 %. The same can be improved by aggressive sales because there’s a good demand for their products.

ROA : Very much on lower side at 12.74 % whereas, nearest competitor is has it much higher at 22.8%. The assets owned by Rio Tinto are not generating profits efficiently. The assets need to work much harder.

Decisions related to Investment in assets need to be scrutinised and analysed more sharply and inventory pile up need to be avoided.

Recommendations to the CEO of Rio Tinto

Asset Turnover deteriorated in 2008 and later slightly improved in 2010. The effectiveness of its assets need to be looked into improve top line revenue. Its possible that the over all structure and level of backward / forward integration need to be reviewed.

The performance of Rio Tinto dropped in 2008 – 09 period , may be attributable to the global crisis of that period, but it need to aggressively pursue its operations strategy and unlock efficiencies from its assets.

A striking feature is that it does not own any mine in China and Mongolia. It needs to be on the radar of CEO’s key strategies to become dominant player in China. It shall help lower the cost of operations as well as reduced shipping costs to US.

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Recommendations to the CEO of Rio Tinto

Sell off Alcan packaging Food business.

Focus more on exploration and may give a try to enter petroleum exploration business.

Lobby for reduction in taxes for mining in lieu of green initiatives and preservation of ecology, in all countries where its mines are located.

Strategic Exposure : Since Rio Tinto operates in many countries with long horizons of contract terms, it need to minimise its foreign exchange exposure and risks by restructuring & redefining its business strategy, which otherwise, can impact its long term cash flows and competitive position.

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......... and finally,

It is not just about the boats themselves; it is also very much about the seas on which Rio Tinto floats.

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