Rio Tinto's Strategies for Developing and Maintaining Competitive Advantage

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Although Rio Tinto is the second largest mining company in the world, Walsh, the chief executive officer (CEO) inherited the corporation when the directors had already discovered that the company had lost its way because of the losses it incurred (Walsh, 2016). China’s rapid growth created high competition for Rio Tinto, something that made it experience losses. The spending was uncontrolled to an extent of using what it could not afford. This led to a multibillion-dollar loss in the year 2012 (Walsh, 2016). However, in order for Walsh to change the situation to develop and maintain competitive advantage, he clearly understood that international development relied on the mining industry for development. With the increase in urbanisation and technology, the world needs smartphones, cars, and buildings that depend on the products. In this regards, Walsh knew that there was a chance of stabilisation with the help of new strategies.

One of the strategies Walsh and his team employed involved reconnecting the company with its core balance-sheet discipline in order to measure its sustainable growth. In fact, this strategy is proposed by Murta et al (2013), who noted that fiscal disciplines, as well as responsible risk management, are indispensable business principles if organisations have to develop and maintain a competitive advantage. Walsh decided to prioritise only on the best projects that could bring good income to the company. In addition, Walsh decided to run the operations using cash, something that is unusual for companies of such magnitude and to elevate shareholder value. The other strategy was to cut costs and rationalising his workforce. However, he also emphasised on innovations that were critical for the growth and development. Any new technology was utilised with the intent of maximising value and for efficiency gains.

Apart from using the above strategies, Walsh decided to reinforce the system of checks and balances. Therefore, he decided to first stop the upward flood of delegation. The action intended to allow people who were closer to projects to play a role in decision making. The investment committee was not permitted to make all decisions but was used as a final safeguard. The move could be argued to be critical because it made sure that the decisions made did not solely depend on a single entity that has chances of making mistakes (Hsieh et al., 2011). The other move entailed focusing on accounting because before he was appointed as the CEO, the company had made so many changes to accounting rules where the earnings were not used to track performance. When he became the CEO, Walsh was told that managing cash was not possible to a large company like Rio but he insisted on managing it. The first move was to change how forecasts were made. Instead of forecasting quarterly, he introduced a monthly approach. Although there were too many variables, Walsh made sure that he took them directly by going through various input costs one by one. This approach led to a monthly arrangement with a margin error of 5%.

In regards to shareholders and stakeholders value, Walsh understands that shareholder returns are Rio Tinto’s number one focus. Although other issues such as environmental and sustainability records are important, Walsh believed that the most important object of any business it to make money. Therefore, this objective made the CEO to put effort to make a profit that would enable the company to take care of the environment and the safety of its workers. The company managed to reduce greenhouse gas by 21% and made the company’s community spending to increase the profit margins. In addition, the company also cut costs by reducing the number of employees by half and these changes made the company to reduce costs to $3 billion and made savings of $5.5.

Question 3 (a)

Organisations that want to develop and maintain competitive advantage have to embrace technology and innovations that come with it. However, technology comes with distinct components that have to be adhered to in order to positively impact a firm. Organisations have to be prepared for new technologies that affect their way of operations (Augier and Teece, 2008). The reason is that innovation does not only affect entities but also the customers. When there are new advancements, customers tend to be rational in consumption and they go for the products and services they think suits their preferences based on the kind of technology. Therefore, some organisations are not able to balance the needs of the innovations and those of the customers. For instance, a phone manufacturing company may have skills of manufacturing smartphones according to the demand of the market. However, the technology at first enables the production of big smartphones. With time, people start changing their preference from utilising big phones to small and slim ones. If the company delays to develop new innovations that can enable it to produce slim gadgets, the customers might start looking for other brands.

On the other hand, a firm can manage ambidextrously first by exploiting the present and exploring the future. In order to be able to do this, it is important to separate the new, exploratory units from the traditional ones. This has the advantage of allowing different processes, structures as well as cultures to take the course which is of benefit to the company’s growth and development (Flint, 2012). Firms should also be able to make architectural innovations which allow the change of design or taste because customers are rational in consumption. Therefore, ambidextrous firms understand this quite well and always keep changing the design of their products for the customers to experience new ones.

Kodak is one of the many examples of companies that failed to utilise technology effectively to maintain a competitive advantage. Although the RIO once dominated the analogue photography, the company failed to realize that digital technology had to revolutionise the industry with a big shift of the way photography is to be done in the future. While other organisations found out that technology was to affect the way of doing business and started producing digital cameras, Kodak continued concentrating on the analogue products. People had already picked the digital cameras and set behind the analogue one for the improved features that are found on the digital cameras but not found on the analogue ones. If Kodak had foreseen this kind of change taking place, it would have invested in research so that the innovations would have been used to develop digital cameras. In fact, the company stood a better chance of progressing with the new technologies because it had been dominating the industry for a long time.

On the other hand, a company like Apple has been able to have continued success all years because of its capacity to manage its present innovations and exploring future ones at the same time. The company is said to have considered developing innovations that it also admire to use. Apple’s engineers have been using innovative ideas for products they feel they also need as individuals and as consumers. They come up with products that have the best value in the market because unlike other companies that create products that they feel are for the market and not for their own consumption. As technology has continued to evolve, Apple has been able to understand that people need products that are easy to use. Creating products difficult to use tend to chase customers away as they look for brands easy to use. Therefore, this has helped the company to focus on the future products that are easy to use even as new innovations are developed. The move is a good strategy that connects the present innovation with the future ones (Garfinkle, 2011).

Apple has also been able to offer great customer service as well as in-store experiences. Nowadays, customers want to get support for the products, buy right from the comfort of their homes without difficulties. With this idea, Apple has developed different platforms on which its customers can interact with the company and share their experiences. The strategy is done through its website and other social media platforms. Whenever a new product has been developed using new innovations, the company is able to receive feedback from the customers efficiently, thus giving the company an opportunity to improve on areas identified as having shortcomings. This strategy is very important because it allows the customers to design the product of their own by a way of collecting their views and integrating them to what the company has already developed (Magretta, 2012).

Question 3 (b)

Smart, connected products play an indispensable role in dictating the success of companies. Productions of connected devices that are embedded in broad systems have made companies to improve and increase value of their products. If innovations are invented and not well marketed, there is a risk of the company running at losses because of lack of demand for its products or services (McGrath and Gourlay, 2012). However, in order to have an effective marketing department, it is critical to financing it to be able to sell the products to the market. On the other hand, marketing itself also requires innovative strategies in order for the message to reach many people. Successful organisations clearly understand the need to have an effective marketing department that uses innovative ideas to sell the brand name to the market. Once the products have been successfully marketed, quality assurance department has to confirm that the products quality is always maintained and that in case of new improvements, the new components are effectively incorporated to the already existing ones.

There is a need to conduct adequate research on the innovations that organisations want to develop. Thus, the research has to spend resources in order to have a thorough and successful innovation. However, many establishments are able to develop good technologies that add value to their products and services but fail to fully implement them (Curlee and Gordon, 2014). The strategy leads to a stagnant innovation that does not add value to the organisation. There is a need to have an organisational structure that keeps an eye on the innovations and to monitor their progress. Some of the technologies tend to be complex and require continuous monitoring for them to remain relevant. Others need replacement if they have to be relevant to the organisation. Setting aside a team to monitor the changes enables establishments to remain up-to-date according to the market need. Conversely, it is critical for the management to ensure that departments work closely to enhance functionality. For instance, a research department has to work closely with the finance department for them to be able to fund the research projects that come up with new innovations.

Part 2

Company Analysis

IKEA group initiated a growth strategy in 2012 with the intent of doubling its sales to €50 billion by 2020 (Rangan et al., 2017). The company planned to achieve this by increasing the market share of all its stores and opening around 200 more stores (Rangan et al., 2017). The target audience were the new customers, specifically the middle class in the emerging markets in Russia and China. This strategy was sought for because the company had a lower market share in the emerging markets compared to major markets in Europe and North America, and which the demand was predicted to grow slowly. In order for companies to achieve growth strategy, it is essential to look for opportunities that exist in the market. However, it is critical to evaluate implications attached to the urge to grow because there are always such negative impacts associated with growth strategies. Once these implications are analysed, the company can be able to look at the growth with the lens of sustainability plans. In light of this, IKEA launched a comprehensive sustainability strategy in late 2012 (Rangan et al., 2017). The strategy was named as “People & Planet Positive” which focused on the value chain from the raw materials sourcing to the end product that matched the lifestyle of the customers.

Having noted the importance of sustainability as a driver of growth, the company ensured that its supply chain was improved as well as the working conditions of its employees. Having employed 135,000 people, the company had to ensure that the employees were organised so that they execute the growth strategy in supply, production, and retail operating units (Rangan et al., 2017). In order to have sustainable raw materials, the company leased nearly 500,000 hectares of forest land while the remaining portion of supply was owned by third parties (Rangan et al., 2017). Leasing land was a great idea by the company because it was able to control it for sustainability. Conversely, the company also uses recovered wood as one of the sustainability strategies. Recovered wood is not much expensive like the supplied wood. Additionally, the company developed its code of conduct regarding the standards required for purchasing products, working conditions and environmental concerns, especially during manufacturing point.

The company also used a risk-based approach to improve efficiency in high-risk regions. For instance, Southern Asia and China were considered regions with high risk, and which sourced 20% of the company’s wood supply (Rangan et al., 2017). In these areas, the company made products that have wooden parts only on the front end in order to minimise the use of wood. FSC certified materials are recommended for use by the company, so the company requested for such materials to be supplied in plenty. In order to become more sustainable and to minimise costs, the company also decided to use engineered wood, which is made from wood particles which are made by joining the wood particles using glue and topped with wood veneer. With such deliberations, it is apparent that IKEA’s growth strategy was well articulated.

SWOT analysis

IKEA SWOT Analysis

Strengths

Strong financial base

Global operations

The vision to create a better everyday life for many people

Innovations to create new designs

Weaknesses

Size and scale of its global business

The need for low-cost products

New entrant to new markets

Targeting middle class

Opportunities

Demand for greener products

Demand for low priced products

New designs

Demand from other groups

Threats

Competitors

Uncertainty of income of middle class

Economic crisis of regions

Political instability

Strengths

IKEA has an advantage of having a strong financial base. Studies have shown that the financial strength of a company makes it possible for growth and development. Developing and maintaining competitive advantage relies on the resources a company has (Day, 2014). IKEA has a strong financial base nearing to €20 billion (Rangan et al., 2017). With such resources, the company has been able to expand its operations to many parts of the world. Due to its global brand operations, the company has been able to attract key consumer groups across the globe.

Weaknesses

In order for the company to grow effectively, it is important to acknowledge its weaknesses. This helps in setting objectives that propel the company to higher grounds. One of the weaknesses is the size and scale of its global business. The facet makes the company unable to control standards and quality of products it produces. People from different parts of the world have different tastes and preferences (Koontz and Weihrich, 2007). Therefore, it is difficult to satisfy all of them, especially because of the diverse of IKEA’s businesses across the world. The other weakness is the need for low-cost products which makes it difficult for the company to produce quality products when it uses cheap raw materials.

Opportunities

A company utilises its strengths to take advantage of the opportunities that might arise. Due to the company’s strengths, IKEA has an opportunity to grow demand for greener products. Any design and quality the customer's demand can be met by the company because of its ability to assemble resources to deliver what the customers want. On the other hand, with the growing demand for low priced products from the emerging markets, the company has an opportunity of producing such products and make good profits because they require little costs to produce (Prescott & Rothwell, 2012). With the engineered wood materials, the company can satisfy the customers in need of low priced products effectively.

Threats

Companies that are aware of possible threats facing them are able to plan on how to counter them by a way of devising new ideas. Since IKEA has much strength, it can use them to defend against any possible threat in the market. One of the notable threats to the company is the social trends. There is a slowdown especially with the first time buyers venturing the housing market. The middle-class people have several uncertainties that make them go slow on some products like housing and other key products. Competition is another threat especially from companies offering low price household and furniture. Therefore, IKEA has to reinforce unique qualities in order to overcome such a challenge. Customers tend not to compromise quality for the low price (Shaffer, 2009). They tend to go for the quality products even if they are expensive. On the other hand, the company is faced by the threat of recession, which tends to slow down spending by the consumers. The disposable income is also low for most people.

Recommendations

Although IKEA has a strong financial base, it is important for the company to develop strategies of ensuring that the growth strategy does not in any way disrupt its financial position. Some companies lack proper strategies of maintaining their financial position in the process of enforcing the growth. For instance, one of the tactics of growth by IKEA is to use cheap materials to cut costs. This has a risk of producing low-quality products that can lead to losses if customers shun away from its products and look for alternative brands. Conversely, the decision by the company to open more stores means that the company has to encounter extra costs for the same. Therefore, it is important to ensure that there is sufficient research in order to avoid opening branches that are not productive for the company. The plan can be executed by a way of evaluating the target market on the bases of analysing the existence of other competitors in the market that might be a threat to the company’s operations.

The company should take advantage of any available opportunity if the growth strategy has to be achieved. In the course of undertaking the usual operations, new opportunities arise and which might be of great importance to the company if well utilised. For instance, in the process of opening new stores in new markets, the company may find that the consumers want complementary products to accompany the products they purchase. An example can be beddings of a bed made by the company. Some people may want to have matching beddings of the bed they bed. With adequate research, the management can come up with beddings that suit the customer needs. Using its financial strength, the company should also consider improving the quality of the existing products depending on the customer’s preferences. The plan can be done by a way of using innovations that upgrade the quality and design of its products. Studies have shown that organisations that apply new technologies have chances of commanding a larger market share than those that do not.

When venturing into new markets, IKEA should consider having strategies in place on how to deal with instances of social trends that can act as a threat to its operations. Regions where international brands do not exist need to be approached with caution because there could be some cultural factors that determine the purchasing decision making. For example, some regions do not believe in purchasing expensive furniture when there are alternative products that can serve the same purpose at a lower price. In such regions, the company should make decisions of using low-cost material to make products specifically for that region. In fact, in most cases, political factors affect international businesses depending on the conditions set by the local government on how foreign companies operate in the country. Taxation is one of those factors where some governments would impose heavy taxations on international companies. The consequence involves affecting the profit margins of the company. In this regard, IKEA should consider evaluating such factors to avoid venturing a market that can make the company run into losses. In some instances, some regions have political instability that affects business operations, especially for foreign companies. Such regions are risky to set up the business in. However, the company should concentrate on countries that have little restrictions on international businesses.

IKEA should also invest in countries with the stable economy to avoid setting up businesses in countries with an unstable economy. Economic crisis regions tend to make businesses unable to operate normally as people lack the power to purchase. Therefore, the company has the responsibility of conducting adequate market research before setting up the business to ascertain the viability of the market in terms of economic stability. Nevertheless, there are countries where labour cost is high and which acts as an impediment for companies growth because this reduces the profit margin. In light of this, it would be advisable for IKEA to invest in countries where labour and production cost is low in order to maximise the profit. In some instances, there are some regions where the company can find it difficult to produce its products using the local raw materials but instead consider outsourcing them from other regions. Such a situation can lead to increased cost of production due to the supply chain involved. The cost of production should then be measured against the profits made from such a region in order to make a decision on whether to continue with the business or not. However, even in regions where there is a stable economy, people from different parts of the world have different tastes and preferences. Therefore, it is difficult to satisfy all of them especially because of the diverse of IKEA’s businesses but any design and quality the customers demand can be met by the company because of its ability to assemble resources to deliver what the customers want. Even in regions where the economy is low, with the growing demand for low priced products from the emerging markets, the company has an opportunity of producing such products and make good profits because they require little costs to produce. Nevertheless, this approach is a tricky one because customers tend not to compromise quality for low price. They tend to go for the quality products even if they are expensive.

The target market was the new customers, specifically the middle class in the emerging markets in Russia and China. This strategy was sought for because the company had a lower market share in the emerging markets compared to major markets in Europe and North America, and which the demand was predicted to grow slowly. In order for companies to achieve growth strategy, it is essential to look for opportunities that exist in the market. This means that the company can still look for opportunities that can bring about extra income. This can also include assessing the viability of producing materials for people in upper class.

References

Augier, M. and Teece, D. J., 2008. Dynamic capabilities and multinational enterprise: penrosean insights and omissions. [Online] Available at: https://www.researchgate.net/publication/305268165_Dynamic_capabilities_and_multinational_enterprise_Penrosean_insights_and_omissions [Accessed 28/10/2018]

Curlee, W. and Gordon, R. L., 2014. Successful program management: complexity theory, communication, and leadership. Boca Raton, FL : CRC Press

Day, D. V., 2014. The Oxford handbook of leadership and organizations. New York: Oxford University Press

Flint, B. B., 2012. The journey to competitive advantage through servant leadership: building the company every person dreams of working for and every president has a vision of leading. Bloomington, Ind: West Bow Press.

Garfinkle, J. A., 2011. Getting ahead: three steps to take your career to the next level. Hoboken, N.J: John Wiley & Sons.

Hsieh, Y. and Chen, H. M., 2011. Strategic fit among business competitive strategy, human resource strategy, and reward system. Academy of Strategic Management Journal, 10 (2) pp. 11-32.

Koontz, H. and Weihrich, H., 2007. Essentials of management: an international perspective. New Delhi: Tata McGraw-Hill.

Magretta, J., 2012. Understanding Michael Porter: the essential guide to competition and strategy. Boston, Mass: Harvard Business Review Press.

McGrath, R. G. and Gourlay, A., 2012. The end of competitive advantage: how to keep your strategy moving as fast as your business. Boston: Harvard Business Review Press.

Murta, D., Ramon, V. and Cabralez, A.L., 2013. In search of demanded competencies: designing superior compensation systems. International Journal of Human Resource Management, 24 (3), pp. 643-666.

Prescott, R.K. and Rothwell, W.J., 2012. Encyclopedia of human resource management, key topics and issues. John Wiley & Sons.

Rangan, K et al., 2017. Sustainability at IKEA group.

Shaffer, D. R., 2009. Social and personality development. Australia, Wadsworth/Cengage Learning

Walsh, S., 2016. The CEO of Rio Tinto on managing in a hypercyclical industry. [Online] Available at: https://hbr.org/2016/03/the-ceo-of-rio-tinto-on-managing-in-a-hypercyclical-industry

[Accessed 28/10/2018]

January 19, 2024
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