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Industry Value Chain: Understand its Importance and Application to the Mining Industry

Editor’s Note: Ganesh Rajagopalan is a seasoned management consultant and former investment banker.  He is also a leading author on Flevy, having published numerous business frameworks on topics such as Strategy Development, Investment Analysis, and Value Chain Analysis.  You can view all his materials here.

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Most would be familiar with the term “value chain.” However, it is interesting to note that there are many standpoints from which it is viewed.  One key perspective is its customer oriented/focused approach. According to it, all that a firm does or is planning to do in terms of products/services, operations, logistics and support functions should flow from its understanding of the market place, essentially industry, customers, and competition.  We will use the term product to encompass services also in the rest of the article.

The environment and industry in which the firm functions is an essential element in determining the market’s attractiveness in terms of present and likely future demand, ease of doing business, as well as the level of competition. In this sense, it is the environment and industry in which the firm operates that will in-turn determine the firm’s strategy in terms of the market segments to serve, products to offer, operations to perform (production, logistics, marketing & selling and after sales service), and the most effective method to do it. The enablers to these key or primary activities (see Figure 1) also need to be configured and these are termed as support activities–human resources development, financial management & accounting, technology & information system, other firm administration activities etc. The term value is used to indicate that it is these set of activities which create value for the customer, the firm is aspiring to serve–the price that he/she/it is willing to pay for the product given the benefit/utility perceived or realized by using it.  The strategy will also consider how direct and indirect competition is delivering and/or is looking to deliver this value. And then this value has to be delivered in a most cost effective way to ensure good profitability or margin.

mining_figure1

Figure 1. Porter’s Generic Model.

This larger environment in which the firm is seen to operate is many a times termed as the ‘value system’ which essentially is the ‘industry value chain’ as against the firm’s “value chain.” The firm value chain becomes a part of the larger industry value chain (see Figure 2 below).

mining_figure2

Figure 2. Industry Value Chain.

Anyone associated with a given industry, be it the product manufacturer/service provider, supplier to these entities, product distributors, financial institutions, consultants, analysts, and such other players and stakeholders will be able to deliver better, reliable, and more consistent results/outputs if their focus is not just the firm concerned (internal or firm focus), but also larger industry value chain (firm’s linkages to external dynamics). For an effective achievement of the performance objectives set by such entities and individuals associated with a given industry, a good insight into the industry value chain is therefore imperative.

Mining Industry Value Chain

Let us take the example of mining industry value chain to illustrate it.

Figure 3 brings out the types of mined materials and their importance in our lives while Figure 4 provides an overview of the key stages in the mining industry value chain.

mining_figure3

Figure 3. Mining Basics.

mining_figure4

Figure 4. Mining Value Chain (Top Level).

For a more in-depth discussion on the Mining Industry Value Chain, take a look at this 232-slide presentation developed by the author: Mining Industry Value Chain Insights.  The figures in this article have been taken from this deck.

A very broad description of these stages would be as follows:

  1. Prospect – Can also be called early stage exploration and is a low impact activity. Involves identification of land containing promising mineralization for a more detailed examination. Geologists use their knowledge of ore genesis and occurrence to carry out the investigation.
  1. Explore – The most promising of the prospects identified become targets for a detailed exploration program or an advanced exploration program. The information gathered during exploration is used to assess the size, quality and distribution of a mineral deposit and to determine whether there is the potential (i.e. commercial viability) for it to be mined.
  1. Establish feasibility – The objective is to establish the feasibility that extraction is reasonably justified i.e. economically mineable/viable. Based on it the firm commits to the project and seeks to arrange/raise funds and/or get funding commitments to start the mine development work and other subsequent processes.
  1. Mine & Move – The process of developing the mine infrastructure, deploying the required equipments, removal of mineral resources from the earth and the transportation of broken rock of desired grade (called ore) from source to processing destination.
  1. Extract & Process – Extraction of saleable products from industrial mineral/metal ore & further processing of these saleable products (where applicable or possible) into higher value added products.
  1. Market & Sell – Taking the product to the customers in terms of awareness, availability, quality, customization, pricing, payment/contractual terms, supply logistics and other such related activities enabling revenue and profit generation.

A firm in this industry may span across all the stages or it may be a part of some of the connected stages. The risks that the firms that operate in the upstream stages such as prospecting & exploration take are very high and fall as we move downstream. While technology to assess the size and grade of ore body (the part of the earth’s surface or deeper parts being prospected/explored that contains the minerals in the desired quantity & grade) during the upstream stages have become high and sophisticated it still carries a fair amount of uncertainty and estimation error which can be known only when the actual mining starts. This process itself can take up to 2 to 10 years or some times more.

The range of firms that operate this industry could be from what are called as juniors to seniors to large global firms. Consultants & contractors with various types of specialization are also key players.

The legal and social environment in which mining firms operate can be truly challenging. The processes involved in getting various tenements can be lengthy running into years and compliance norms and procedures are complicated. Community and government interventions can be high.

Most products that this industry generates are industrial products (business to business sale) barring some precious metals which may be sold to the end consumers directly.  The saleable products can happen at various phases of the ‘extract & process’ stage where these may be sold to downstream firms or may be moved internally within the same group of firms(the downstream processing locations being geographically in another country). Some of the products could be traded in the metal exchanges and reference price obtained from these trades while many others are negotiated and sales cycle may involve lengthy testing and validation. Many of the mining products especially metals are vulnerable to business cycles and prices tend to fall to such a level that it at times renders mining unviable.

Haulage, transportation and storage are very key aspect in this industry. The movement of materials can be internal within the same site or external. The transportation cost could be large part of the final cost in many instances. The modes can be road, rail and water (sea, rivers & channels). On both fronts – movement and storage – a lot depends upon the mineral characteristics–e.g. precious metals, hazardous minerals, dry bulk, etc.

The end user industries are of a wide range–construction, glass, ceramics, electrical, electronics, automobile, white goods, jewelry, aircrafts and so on. The channels and intermediate industries through which these products reach them is complex.

The above is just sample of what nature of insights we can gain when studying the industry value chain which can have pronounced impact on the firms operating in this industry. These insights can be used by the firms/consultants/contractors in the industry to shape their strategy & approach – to their suppliers, to their customers, in adapting to collaborative or information sharing processes, in helping improve performance on various key parameters etc. For investors, financial institutions, analysts and such others the insight helps them to ask the right questions to the management, place their replies in perspective as well as judge its quality,  understand the external dynamics at play in determining the firm’s performance or likely projected performance and other similar related matters for them to take lending/investing decisions.

About Ganesh Rajagopalan

Ganesh Rajagopalan is an advisor and trainer with expertise in the areas of Strategic Planning, Business Planning, Business Modeling, Financial Planning, Tactical Planning, Industry Analysis, Investment Analysis, Credit Analysis, Financial Systems Planning, Team Building, and Organizational Structuring. Prior to consulting, Ganesh worked with Standard Chartered Bank, Oracle Finance and a niche investment banking firm. He has several business frameworks available on Flevy here.

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