Students have a knack for answering the wrong question in exam scripts year after year. An alternative explanation may be that it is actually the examiner at fault – for continually asking the wrong questions.
In marking exams this week, it was déjà vu all over again. On this occasion, it was very much the examiner who had asked the wrong question.
The test question was: “Suggest sources of competitive advantage for large diversified mining companies over smaller, less diversified mining companies”. The answers were excellent – but the question was pretty average.
A far more interesting question – and a correspondingly tougher one to answer - would have been to ask for suggestions as to sources of distinction capability in larger mining companies versus smaller counterparts. Answers to the first question produced a list as long as your arm: Here is a quick selection of the competitive advantages for larger miners described in exam scripts.
In no particular order, large miners were attributed the following potential advantages:
- Greater access to capital
- Lower cost of capital
- Economies of scale and scope
- Tier 1 assets within portfolio
- Infrastructure ownership
- Ability to fund counter-cyclical investment
- Stronger balance sheets
- Factor mobility between operating assets (labour, equipment, capital)
- Diversification of risk by commodity
- Diversification of risk by country
- Strength-in-depth of in-house technical expertise
- Market share influence on supply-side volume
- Bargaining power with mining services suppliers
- Ability to optimise saleable product specifications from multiple operations to capture value-in-use pricing benefits
- Greater access to governments and regulators
- Negotiating power with developing country governments (at least more so than smaller companies)
- Ability to ‘hibernate’ resource projects to advantage
- A strong ‘hand’ in the game theory analogy of mining sector business strategies
- Financial capacity to undertake M&
- Preferential access to M&A deal-flow ‘at the top-end’ of the market
- Local monopoly and/or oligopoly advantages in key markets
- Price leadership power in non-exchange-traded markets
- Greater capacity to assume exploration risk – including long-term greenfields exploration
Do you see the obvious omissions from the list? No doubt there are many gaps but one stands out.
Critically, very few if any of the above attributes refer to any form of distinctive capability within larger mining companies. That is, distinctive capabilities are notable by their complete absence from the ‘big is better’ list of business advantages.
So what exactly are distinctive capabilities again?
Just like the list above, they form potential sources of competitive advantage – but those that originate principally from a skill, or set of skills, that are superior to competing entities. Importantly, distinctive capabilities are not linked directly to a company’s financial accounts or hysical resource assets.
So why do they not appear on the list? Two possible explanations spring to mind. Either large resources companies do not have many capabilities that can be regarded as distinctive, or distinctive capabilities in the resources sector are not typically scalable? After all, a scalable distinctive capability is akin to the Holy Grail of business strategy – so they are not common.
Which of these answers do you prefer? Any which way, next year’s exam scripts will read very differently. Why? The examiner will change the question.
Good hunting.
Allan Trench is a Professor of Mineral Economics at Curtin Graduate School of Business and Professor (Value & Risk) at the Centre for Exploration Targeting, University of Western Australia, a non-executive director of several resource sector companies, and the Perth representative for CRU Strategies, a division of independent metals and mining advisory CRU group (allan.trench@crugroup.com).
