UQ Business School University of Queensland

STRATEGIC ANALYSIS REPORT OF ALCOA.

MGTS 3301 Business Policy and Strategy Semester 2-2010 Prepared by, Akshay Hassaram Lakhiani S42262170 UQ Business School October 2010

10/22/20 10

Table of Contents

1. Scope and Purpose of

Report..................................................................Pg 2
2. Company

Overview............................................................................. ....Pg 2-3

3. Core business and

competencies.............................................................Pg 3-5 Figure 1

4. Macro environment and Internal

Factors.................................................Pg 5-8 Figure 2 Figure 3 Figure 4

5. External and Environmental

Strategies.......................................................Pg 9-10 Figure 5

6. Strategic Issues and

actions........................................................................Pg 10-11
7. Recommendations...............................................................

.......................Pg 11-12 Figure 6

3 8. References..........................................................................

........................Pg 12-14

A. The scope and purpose of my report.

We may not realise it but aluminium is an integral part of our life. Whether it is the transport, construction, or manufacturing industry, aluminium is widely used. My report is a strategic analysis of Alcoa in Australia and how this company has escalated from humble beginnings due to its strategic planning and development. The purpose of this report is to have better understanding of main strategic concepts, their relevance to Alcoa and also to determine the effectiveness of the companys business strategy. Not only does it provide a better insight into Alcoas management skills, its shortcomings but also its strength. The report has been based after reviewing its website and other articles in the UQ library. I have analysed the firms internal and external environments, the key issues it faces, the companys competencies and the strategic actions involved. Accordingly, I have made recommendations.

B. An overview of the company. (Alcoa.Inc, 2010) Charles Martin Hall who made the initial discovery of aluminium needed to carry out mass production on a commercial level. It is when he sought help of Capt. Alfred Hunt; the kingpin of the steel industry, that ALCOA was born. Arthur V. Davis, the first employee of Alcoa became the leader while Hall worked on research and development.

Their investments in New Kensington were successful. Following a strategy of vertical integration, they developed the core smelting process followed by fabrication, extraction and finally manufacturing and power generation. Soon, in August 1985, they expand manufacturing to new territories like New York. The company faced tough competition from high in demand commodities like wood and steel. Another way to deal with competition was to reduce the price to an affordable level. Consequently, they managed to expand production, improve their product quality and keep costs to the minimal. Although, they faced a few pitfalls such as rivalry with Cowles brothers, patent application and antitrust problems, they emerged unscathed. By then, ALCOA was controlling 63% of the worlds (Alcoa.Inc, 2010) production. During World War I, major production was allocated towards manufacturing army related goods. However, when the war ended, Alcoa faced losses due to overproduction. The company again strategized to overcome losses by producing for commoners. The leaders wanted to improve their product. Duralumin, a German made alloy was the prevalent competitive material which had to be surpassed by a better one. Using expertise of a renowned scientist, Francis C. Frary they researched and produced pure aluminium. Alcoa expanded to Canada and later in World War II Alcoa met demands of war by escalating its production. Out of the total production of $672 million, Alcoas contribution was $474 million. (Alcoa.Inc, 2010) Alcoa was also responsible for the rise in employment. The company created ALCOA foundation after its listing in the American Stock Exchange. Alcoa faced three competitors in the US industry. Anaconda, Ormet and Harvey set up smelters goading Alcoa to consider new territories for expansion. In 1960, ALCOA of Australia was formed with Western Mining to tap the huge bauxite reserves available in the country. Alcoa of Australia Limited was known as Alcoa of Australia (W.A.) Limited. The company was founded in 1961 and is based in Booragoon, Australia. (Contify.com, 2010) Expansion began at Wagerup refinery to recycle aluminium fluoride for reuse and to expand production from 1,750,000 t/y to 2,190,000 t/y. (Anonymous, 1997 Primary Aluminium Production: 2,254,000 tonnes, 1998) Now Alcoa has expanded to Brazil, Colombia, France, The Netherlands, Germany, Morocco, Tunisia and Libya and the list goes on.

5 C. The Role of Alcoa in Australia Today: Its Core Business and

Competencies. Today Alcoa manages the worlds biggest bauxite mining reserves and alumina refineries in Western Australia, alumina rolling and smelting systems in Victoria, Portland and New South Wales. It has a coal mine and power station in Victoria and an aluminium plant in New South Wales. The bauxite mines in Darling Range are tapped to extract bauxite and then process it into alumina. Some alumina is sent to other countries while a major portion is sent to Victoria and New South Wales to convert into aluminium. The company and its subsidiaries Alcoa of Australia is an unlisted public company with a dedicated team of board of directors to operate the company on behalf of the shareholders. Alan Cransberg is the chairman and managing director of Alcoa Australia. The Executive Director is Anthony Adams. Others include Kim Horne (Vice President Human resources), John Bevan and Judith Downes of Alumina Limited. (Alcoa Inc., 2010) Alan Cransberg joined Alcoa on January 1980 and worked for 7 years. In 2008, he returned to Perth and now leads over 6000 employees in Alcoa Australia. (Burell, 2010) 60% of Alcoa of Australia Limiteds ownership is by Alcoa Inc. while 40% of the ownership is by Alumina Limited. Alcoa Inc. Has a 100% control of the subsidiaries. Alcoa produces and supplies at least 25% of aluminium for Australia. (Inc., 2010) The other subsidiaries are Alcoa Australia Rolled Products (manages and runs plants for rolled products and runs a recycling plant); Alcoa wheel products (delivers aluminium wheels for trucks) and Alcoa Fastening Systems (involved in the manufacture and distribution of fasteners). Alcoa has made beneficial partnerships with Australian tribes. These include Winda Mara partnership, Clontraf partnership, Spectacles wastelands, Graham farmer foundation and Fairbridge charitable organisation that is committed to employment. These bodies provide training for tribes in construction, conservation of resources, land management, administration, outdoor activities and hospitality. Alcoa has consistently contributed to the Australian economy. Review the smart below.

Figure 1: Alcoas Contribution to Australias Economy (Alcoa Inc., 2010, p. 1) (Alcoa Inc., 2010)

It is evident that Alcoa is committed towards their goals towards the benefit of the country and its own interests. How has Alcoa in Australia proved its core competencies? Alcoa is the first aluminium company that has won the Cradle to-Cradle certification for its minimal impact to the environment and to the workers health. It also achieved recognition by the United Nations Environmental Program. It has acquired a stake in the Dampier to Bunbury Natural Gas Pipeline and supplies low cost energy to people in Western Australia. Moreover, Alcoa promotes community partnerships through volunteer programmes and non- profit organisations. Alcoa has been actively

working towards a green environment to reduce carbon emissions by supporting a climate change committee set up by the government. Recycling aluminium is Alcoa Australias key strategy to reduce pollution. It recycles 70,000 tonnes annually. The energy from a single tin can generates 3 hours of television time! Alcoa is committed towards a green Australia by encouraging the planting of 10 million trees. (Alcoa Inc., 2010)

Macro Environment and Internal Factors: Objectives Alcoas vision to success and strategy is based on its targeted goals. Firstly, Alcoa aimed for zero fatalities, to develop a conducive work environment and to hire a competitive workforce void of corruption. Its key idea was to reduce and control exposure to hazardous chemicals by ensuring the labour force wore protective equipment. Through its operations, the company aimed at community consultation programmes and cash conservation and liquidity preservation. On the environmental level, it targeted reduction of greenhouse gas emissions and reducing the use of freshwater for its manufacturing sectors. Their intention was to reduce wastewater discharge.

Figure 2: Key Issues - Internal factors and threats. (Alcoa Inc., 2010)

Alcoa has been facing many issues in the past and even today. In 2008, a gas explosion at a processing plant in Australia led to a 6.3% fall in share prices and expected earnings per share was reduced by 3cents. (Marsh, 2008) In 2009, a contractor died in an industrial accident at Wagerup Refinery in Western Australia. "There has been a fatality this morning," Ms Southby, Alcoas spokesperson told AAP. Investigations were carried out. (Anonymous, WA: Death at Alcoa's Wagerup refinery, 2009) In September 2010, Alcoa of Australia was fined $45,000.The alumina dust from its Perth refinery, escaped causing respiratory illnesses, skin and eye ailments, and throat problems for residents staying nearby. (Anonymous, WA: Alcoa fined for alumina dust, 2010)

Internal strategies implemented

Through fatality prevention program an effort was made to encourage workers to follow safety procedures and wear protective gear. This reduced fatalities considerably.

Figure 3: Table of Fatality reports from 2005- 2010 (Alcoa Inc., 2010)

Training and leadership development programs are implemented to train unskilled workers. To promote equality in the workforce, Alcoa provides jobs and incentives for women who form an integral part of the company. Much of the labour force includes third generation workers. Alcoa encourages loyalty through rewards and incentives for workers. Alcoa of Australia has 6,280 employees including about 1,850 at smelters in Point Henry and Portland, in south-west Victoria. While other companies slashed jobs during the 2009 recession, Alcoa Australia has no intentions of hiring new people or slashing jobs. (Anonymous, Alcoa jobs in Australia to remain secure, 2009) Through Alcoa Foundations Month of service program 23,000 service workers volunteered 650,000 hours in activities like planting ten million trees, repairing infrastructure, improving educational skills and community life. (Alcoa Inc., 2010) Through Community Consultation programs and framework Alcoa allowed local flexibility and community involvement for its stakeholders

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for effective company management. Alcoa encourages workforce interaction through different programs to eliminate non-compatibility. Global Health plans and Environmental Health Team target issues of health. A health risk assessment was introduced to address work related risks and industrial hygiene practices. Chemical and noise reduction initiatives are devised for tracking chemical risks and eliminating them. Figure 4: Key Issues - External and environmental factors. (Alcoa Inc., 2010)

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External and Environmental Strategies Heavy power consumption and energy requirements, has made Alcoa indirectly responsible for greenhouse gas emissions such as carbon due to using fossil fuels. Alcoa has reduced the carbon emissions through five strategies of policy and stakeholder agreements (reduction of emissions, energy decisions and product evolution), compensation program of 2010 and a new climate change committee. In 2008, at Pinjarra alumina 2 of 4 gas powered plants were constructed. At the Wagerup refinery 2 power facilities are set up. (Alcoa Inc., 2010) Alcoa is re-establishing an ecosystem for conserving forest land for timber production and water catchment by planting 0ne million trees through tissue culture. (Anonymous, News: Alcoa Reestablishing an ecosystem in Australia., 2009) Since 2006, Alcoa Foundation has invested about $22 million on global climate change to inform public policy, build community awareness and encourage individual participation. Alcoa has aimed to reduce gas emissions by 25% in 2010 as compared to levels in 1990. (Anonymous, Alcoa Volunteers Set to Contribute to a More Sustainable Future, 2009) To reduce wastewater discharge and store water for reuse, Alcoa Australia adopted policies including using secondary sources of water. Alcoa is committed to extracting of raw materials, producing aluminium and recycling it for reuse. The company is recovering latent heat from fluegas to use for seawater desalination and reduce fresh water consumption. (Ondrey, 2010) Alcoa Australia has developed a dry stacking process to stabilise its residue and to prevent leakage of bauxite. It constantly monitors the mines for any mishaps and works at reducing differences among its workforce for a performance orientated workplace. (Southby, 2010) By developing the strategy of inclusion, incentives and supporting employee network groups it has made way for cultural integration. Dealing with corrupt judges, inefficient court systems and governments internationally is challenging. Through its strict policies and anticorruption regulations, Alcoa has curbed corruption successfully. Alcoas cash conservation and liquidity preservation actions initiated progress through 2008 to 2010 through their headcount reductions, revolving credit facility, salary and hiring freeze, working capital efficiency, overhead rationalization and reduction of costs.

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Revenues for 4 months rose to $7.6 billion from $7.4 billion in early 2008. Cash from operations in mid 2008 was $1.0 billion, an approximately $1.3 billion improvement from first quarter 2008. (Anonymous, Alcoa Reports Strong 2nd quarter 2008 Results;Higher Volume and Pricing Offset Input Cost Pressures, 2008)

Figure 5: High Performance Objectives diagram. (Alcoa Inc., 2010)

Three major strategic issues facing the company today. Alcoa faces three urgent issues such as facing tough competitors like Rio Tinto, dealing with permit cuts and aiming for zero fatalities. Rio Tinto, the largest international mining group merged with Canadian aluminium miner Alcan using a $42.5 billion takeover offer that Alcoa could not match. Rio offered $101 share as opposed to Alcoa that offered $76. Unless Alcoa enters into a merger with another company, it faces danger of being displaced by the giant, Rio Tinto Alcan. (Evelyn M. Rusli, 2007) As a leading aluminium company, Alcoa uses a lot of energy which leads to carbon emissions. The government aims to reduce permits of industries

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that emit carbon and raise the fines of emitting carbon increase which will greatly affect Alcoas future developments. The company is working towards reducing the fatalities but physical and social factors often contribute to mishaps which are inevitable. During global economic crisis, there were fewer workers, less supervision and time pressure, which in turn lead to fatalities at the refineries.

Two possible strategic actions

1. Alcoa should merge with another aluminium giant company to

ensure it does not get displaced.

2. To face losses in overproduction, Alcoa should cut down expansion of refineries and reduce its workforce to improve liquidity.

RECOMMENDATIONS
1. In 2007, Alcoa had a lot at stake when Rio Tinto merged with Alcan.

The share prices of Alcan suddenly rose to 9.9%, or $8.85, to close at $98.45. The acquisition for Rio would be earnings and cash-flow accretive with annual savings of about $600 million Australian dollars ($517.7 million). (Evelyn M.Rusli, 2007) Since Alcoa lost the bid, it faces the danger of being taken over. I recommend that it forms an alliance with stalwarts like TLC, or BHP Billiton, Rio biggest Australian rival to avoid being displaced.
2. In 2009, overproduction of aluminium globally led to overstocking

and a sudden decrease in prices and sales of goods. Let us review the table of Income below.

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Figure 6: Hammered Down, Alcoas Net Income/Loss Credit: By Robert Guy Matthews

Alcoa faced the loss of $497 million in the first quarter. (Anonymous, Alcoa jobs in Australia to remain secure, 2009) To avoid reoccurrence of such losses in future, I recommend that Alcoa should reduce its bauxite output and slow down its expansion of refineries like the Wagerup refinery. It should also reduce its capital costs. By reducing its workforce and contractors, it can improve cash flow and liquidity considerably. REFERENCE LIST
Alcoa Inc. (2010). Alcoa Executives in Australia. Retrieved October Monday, 2010, from Alcoa.com: http://www.alcoa.com/australia/en/info_page/alcoa_board.asp Alcoa Inc. (2010). Alcoa in Australia/overview. Retrieved October Monday, 2010, from Alcoa.com: http://www.alcoa.com/australia/en/info_page/australia_overview.asp Alcoa Inc. (2010). Energy. Retrieved October Tuesday, 2010, from Alcoa.com: http://www.alcoa.com/sustainability/en/info_page/operations_env_energy.a sp Alcoa Inc. (2010). Key challenges (environmental factors). Retrieved October Tuesday, 2010, from Alcoa.com: http://www.alcoa.com/sustainability/en/info_page/home_key_challenges.as p Alcoa Inc. (2010). Key challenges (internal factors). Retrieved October Monday, 2010, from Alcoa.com: http://www.alcoa.com/sustainability/en/info_page/home_key_challenges.as p

15 Alcoa Inc. (2010). October is Alcoa's month of service 2010. Retrieved October Monday, 2010, from Alcoa.com: http://www.alcoa.com/global/en/community/foundation/info_page/mos_201 0.asp Alcoa Inc. (2010). People (diagram). Retrieved October Wednesday, 2010, from Alcoa.com: http://www.alcoa.com/sustainability/en/info_page/operations_soc_people.a sp Alcoa Inc. (2010). Safety. Retrieved October Monday, 2010, from Alcoa.com: http://www.alcoa.com/sustainability/en/info_page/operations_soc_safety.as p Alcoa Inc. (2010). Sustainibility and Alcoa. Retrieved October Monday, 2010, from Alcoa.com: http://www.alcoa.com/australia/en/info_page/sustain_home.asp Alcoa Inc. (2010). Ten Million trees. Retrieved October Monday, 2010, from Alcoa.com: http://www.alcoa.com/australia/en/info_page/ten_million_trees.asp Alcoa.Inc. (2010). Alcoa's 120 years. Retrieved October Sunday, 2010, from Alcoa.com: http://www.alcoa.com/australia/en/alcoa_australia/alcoa_history.asp Anonymous. (1998, August). 1997 Primary Aluminium Production: 2,254,000 tonnes. Mineral,Metals and Material Society , Vol 50 (Iss 8), pp. pg9,1pgs. "http://proquest.umi.com.ezproxy.library.uq.edu.au/pqdlink? did=33348221&Fmt=7&clientId=20806&RQT=309&VName=PQD" Anonymous. (2009, January 7). Alcoa jobs in Australia to remain secure. AAP General News Wire. Sydney, NSW, Australia. "http://proquest.umi.com.ezproxy.library.uq.edu.au/pqdlink? did=1622475131&sid=5&Fmt=3&clientId=20806&RQT=309&VName=PQ D" Anonymous. (2009, January 7). Alcoa jobs in Australia to remain secure. AAP General News Wire. Sydney. Jan 7,2009. Sydney, NSW, Australia. "http://proquest.umi.com.ezproxy.library.uq.edu.au/pqdlink? did=1622475131&sid=5&Fmt=3&clientId=20806&RQT=309&VName=PQ D" Anonymous. (2008, July 21). Alcoa Reports Strong 2nd quarter 2008 Results;Higher Volume and Pricing Offset Input Cost Pressures. Mining and Minerals Business , p. pg4.

16 "http://proquest.umi.com.ezproxy.library.uq.edu.au/pqdlink? did=1521291871&sid=5&Fmt=3&clientId=20806&RQT=309&VName=PQ D" Anonymous. (2009, April 22). Alcoa Volunteers Set to Contribute to a More Sustainable Future. Business Wire.NewYork.Apr 22.2009 . New York., United States of America.: Business Wire. "http://proquest.umi.com.ezproxy.library.uq.edu.au/pqdlink? did=1683721271&sid=5&Fmt=3&clientId=20806&RQT=309&VName=PQ D" Anonymous. (2009, September 14). News: Alcoa Reestablishing an ecosystem in Australia. Business Wire. New York. Sep14 2009 . (K. G. Lowery, Ed.) New York, United States Of America.: Business Wire. "http://proquest.umi.com.ezproxy.library.uq.edu.au/pqdlink? did=1859208041&sid=5&Fmt=3&clientId=20806&RQT=309&VName=PQ D" Anonymous. (2010, September 15). WA: Alcoa fined for alumina dust. AAP General News.Wire . Sydney, NSW, Australia. "http://proquest.umi.com.ezproxy.library.uq.edu.au/pqdlink? did=2137863161&sid=5&Fmt=3&clientId=20806&RQT=309&VName=PQ D" Anonymous. (2009, September 2). WA: Death at Alcoa's Wagerup refinery. AAP General News Wire . Sydney, NSW, Western Australia. "http://proquest.umi.com.ezproxy.library.uq.edu.au/pqdlink? did=1851030571&sid=5&Fmt=3&clientId=20806&RQT=309&VName=PQ D" Burell, A. (2010, October 9). Company man makes his mark at Alcoa. The Weekend Australian , 29. Contify.com. (2010, October 8). Alcoa of Australia Limited Files Patent Application for Biodegradation of Organic Compounds. Indian Patents News. New Delhi, Delhi, India. "http://proquest.umi.com.ezproxy.library.uq.edu.au/pqdlink? did=2156988321&sid=5&Fmt=3&clientId=20806&RQT=309&VName=PQ D" Evelyn M. Rusli, C. G. (2007, 12 7). Rio Tinto Swipes Alcan from Alcoa. Retrieved October Saturday, 2010, from Forbes.com:

17 http://www.forbes.com/2007/07/12/alcan-rio-closer-markets-equitycx_er_cg_0712markets31.html Evelyn M.Rusli, C.G (2007, 12 7). Rio Tinto Swipes Alcan from Alcoa. Retrieved October Saturday, 2010, from Forbes.com: http://www.forbes.com/2007/07/12/alcan-rio-closer-markets-equitycx_er_cg_0712markets31.html Inc., A. (2010). Alcoa in Australia: About Alcoa. Retrieved October Sunday, 2010, from Alcoa.com: http://www.alcoa.com/australia/en/info_page/australia_overview.asp Marsh, V. (2008, June 12). Gas accident affects hit Alcoa. Companies and Markets , Asia Edition, Pg13. London, United Kingdom: Financial Times. "http://proquest.umi.com.ezproxy.library.uq.edu.au/pqdlink? did=1493912151&sid=5&Fmt=3&clientId=20806&RQT=309&VName=PQ D" Ondrey, G. (2010, January). Recovering energy from fluegas. News: Chemical Engineering; Chementator , Vol 117 (Iss 1), p. pg11; 1pg. "http://proquest.umi.com.ezproxy.library.uq.edu.au/pqdlink? did=1957870851&Fmt=7&clientId=20806&RQT=309&VName=PQD" Southby, M. (2010, October 7 (Thursday)). Alcoas WA Refinery Residue Areas Safe. Retrieved October 13 Wednesday, 2010, from Alcoa.com: http://www.alcoa.com/australia/en/news/releases/Alcoas_WA_Refinery_Res idue_Areas_Safe.asp