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Advantages of strategic mine planning
Mining Science and Technology, 5 (1987) 309-317 Elsevier SciencePublishers B.V., Amsterdam- Printed in The Netherlands
309
ADVANTAGES OF STRATEGIC MINE PLANNING A.B. Szwilski Department of Mining Engineering, College of Engineering, University of Kentucky, Lexington, KY (U.S.A.)
(ReceivedFebruary I987; acceptedApril 3, 1987)
ABSTRACT
Strategic planning is being incorporated into the business formulation and implementation of many companies. The objective is to optimize the utilization of the principal resources (capital, labor, technology and mineral reserves) and maximize the strengths and opportunities of a mining company, while minimizing its weak-
nesses and threats. The present paper outlines the advantages of strategic planning for a mining company and the principal factors which affect its profitability (and survivabi#ty) in business, such as, productivity and environmental restrictions.
INTRODUCTION
ning, are being incorporated into business strategy formulation and implementation of many companies. One such model, SWOT, is a useful tool to systematically analyze the principal factors involved in the development of a strategy. This term is an acronym for the internal Strengths and Weaknesses of a coal mining business and the environmental Opportunities and Threats facing that business [1]. The objective being to develop a strategy that will maximize the strengths and opportunities of a coal business while minimizing its weaknesses and threats. In 1986, the U.S. Bureau of Mines (U.S.B.M.) conducted a survey of 25 mines which utilized continuous room and pillar mining and which produced two to five times the national average of 336 raw tonnes per unit shift [2]. Among many other factors which will be discussed later, a positive l a b o r /
Faced with rapidly changing world markets, mining companies will have to adapt, restructure and focus their attention and resources on the business niche that offers them the best chance of survival. This will mean less diversification, changing the present managem e n t / l a b o r culture of the company and a general streamlining of operations to be more selective and sensitive to the market requirements. Consequently, surviving in the coal business will require strategic planning in order to nullify the increasingly complex and sophisticated nature of everyday business decisions. The principal objective being to make effective decisions to allocate the limited resources available to the company and to take advantage of all opportunities. Analytical models, a very useful aspect of strategic plan0167-9031/87/$03.50
© 1987 Elsevier SciencePublishers B.V.
310 management relationship and a well above average safety record (with no outstanding engineering factors) were recorded as being significant in improving mine productivity. These conclusions highlight the importance of examining all the resource components to optimize mine productivity and, as a result, profitability. This is one aspect of strategic planning which can serve to formulate and implement strategies which best enable the mining company to achieve its objectives. The coal industry in the United States is blessed with many key resources, namely, extensive coal reserves, readily available capital and ample skilled labor and technology, which makes the U.S. a principal low-cost producer of coal. The Appalachian area, for example, produces more than half of the coal production in the U.S. However this share has declined from the figure of 70% in 1970; the principal competition coming from the abundantly available coal reserves in the western mining states of Montana and Wyoming. In sharp contrast to the large surface mines of the western region, Appalachia is a region where the small coal mining operation dominates, the large number of which makes the industry there highly competitive [3]. Besides the managing of the internal activities of t h e coal company, the mining executive also has to consider both the operating and the external environment which will influence the survivability and profitability of his company (see Fig. 1). The operating environment takes into account: • the ease of entry for potential competitors into the mining business, influenced by the possibility of profits; • availability of coal reserves, capital and skilled labor; • influence of regulatory agencies and environmental groups; and • changing requirements and specifications of the coal purchaser. The external environment includes:
eof rernot" /n2~,rntlnn
#'<% I
\
I/ f' ~ X'~']OperutingEnvir°men'\ ,\ / "l'mpect of / ~ " ~ / - \ /\/ Remote I X A .corn,pe!ition 1 Eovi~onm,.~ • ~o~ket I /V~Envir°nmenl le~ttp!rlcna~I i!a21iiiTers )
Fig. 1. Influence of the remote and operating environment on the fuctioning of a mining company.
• national and international economic conditions; • social and political changes; and • technological developments.
MINE
PRODUCTIVITY
Over the past two decades the coal industry in the United States has witnessed wide cyclical variations in mine productivity. The dramatic drop in productivity between 1969 and 1978 prompted numerous investigations (see refs. [4-6]). The principal causes of the decline in productivity have been given as [71: • passage of the federal health and safety bill in 1969; • work rule changes in 1968 and 1971; • poor industrial relations; • coal price increase; • opening of new and old mines in less favorable geological conditions; and • passage of state and federal surface mine laws. On the other hand, the years 1979 to 1986 have witnessed a steady rise in productivity,
311
some of the contributing factors have been noted [7]: • increasing experience of workforce; • technological improvements; • labor peace and decreasing unionization; • decreasing coal price; and • more spot orders filled with unwashed coal. Therefore, there are numerous factors which influence the ability of the mining company to do well, as illustrated in Fig. 1. These factors may be categorized as the operating and remote environments, where the operating environment represents the more short-term controllable business features and the remote environment comprises governmental and societal changes. Each of these factors impacts upon the mining company in different ways and ultimately effects mining productivity. Figure 1 also illustrates the recent and current phenomena of increasing legislation, such as the acid-rain proposal that is currently under consideration. The increasing size of the circles in the diagram represents the increasing total impact of the external environment on the m i n i n g company which effectively restricts and limits its options and flexibility in surviving the complex and uncertain mining business, and to which the mining company generally has no recourse. A national or world recession is an economic factor of the remote environment. Also inflation and cost of capital influences the ability of the mining company and its competitors to perform. The maturing of the mining workforce can be described as a social factor; tax changes and environmental protection are political factors. Technological advances are generally manifested in the marketplace and available to all. The operating environment defines the competitiveness of the mining company in terms of a company's ability to utilize comm o n resources such as labor, capital and coal reserves for its competitive advantage. The key factors for success in the mining business
[
Labor,Mana~. . . . t - motivation - training skills
MINE PRODUCTION U - productivity
N
I
- a°f°iY
@ from
T ~ . mechanization monitoring ..... ioes .
state
to
state
Regulatory Authorities - MSHA state inspectorate
Fig. 2. Principal resources of the mine production unit required to achieve the objective of high productivity and safety.
are: sales and financial leverage, price competitiveness, productivity and production capacity. Above all other factors, mine productivity is a function of the resources available and made available at the business end, i.e. the mine production unit. Figure 2 gives an outline of the key factors which affect the two principal objectives: high productivity and safety. The recent survey made by the U.S.B.M. [2] indicated that twenty-five highly productive mines of Appalachia had one third the national average of citations per inspector day (0.43 versus a national average of 1.46) and none of the mines exceeded the national average. As discussed previously, in referring to Fig. 1, the external environmental factors are generally fixed in the short-term; but they are perhaps variable (usually worsening) over the long-term. The geologic environment, human resources and technology are factors of the operating environment that are controllable a n d / o r optional.
Geologic environment The mineability of a coal seam, for underground and surface operations, affects both
312 unit costs and mine productivity. The factors that influence coal seam mineability are: coal quality, seam thickness, roof parting and control, overburden thickness and lithology. Of the twenty-five mines surveyed by the U.S.B.M., 21 sections operated in coal seams greater than 1.21 m (4 ft) and 10 sections in 3 m (10 ft) or greater. It was noted that, as most of the mines relied on shuttle car haulage, car capacity could be doubled from a 1.21 to 2.42 m (4 to 8 ft) thick seam, improving productivity. Coal price, which is more of an external environmental factor, has an indirect influence on the geologic environment or conditions of the production unit. In the boom cycle of the coal market, the increased demand for coal (and energy) increases the price of coal. As a consequence, previously uneconomical mines and coal seams are opened, or reopened, resulting in a fall in mine productivity; defined as tonnes per labor-shift. In contrast, a recession cycle lowers the price of coal (and energy), forces high-cost mining operations/companies out of business and the companies which survive to close down their high cost operations, thereby reducing costs and increasing mine productivity. The continuous depletion of coal reserves is another significant factor that promotes deteriorating geologic conditions; the best coal being mined first. Human resources
During their survey of the 25 highly productive production units, the U.S.B.M. "were struck by the quality of l a b o r / m a n a g e m e n t relations . . . . and that an atmosphere of trust and confidence prevailed as a common feature of every unit" [2]. The mine superintendents invariably ranked the quality and attitude of the workers more important than any other factor. Also, incentive schemes seemed to play an important role in improving mine productivity. Therefore, the attitude of
management and incentives generally helped to motivate the workforce, the input of whom improved both productivity and safety. In sharp contrast to this present recession cycle phenomena, the boom cycle of the 1970's witnessed both labor unrest and the entry into the coal business of inexperienced entrepreneur and labor. The increasing workforce and stoppages contributed to lowering the mine productivity. The influence of unionization on mine productivity is open to debate. Some studies [7,8] have concluded that non-union deep mines are more productive than union mines. This may have been the case in the 1970's, however, the U.S.B.M. survey noted that half of the highly productive mines were represented by the United Mine Workers of America, emphasizing the need of both labor and management to share common goals and motivation. The quality of the training programs and skills of both the workforce and management defines the quality of the human resources as a valuable asset available to the mining company in order to improve its competitive position in the coal business. It is apparent that the human resource is the most volatile and variable of all the components, as indicated in Fig. 2. When nurtured it has enormous potential to improve mine productivity, yet when ignored and taken for granted it could significantly reduce the mining company's chances of survival in business. Above all, the greater equity a manager or employee has in the company, the greater will be the sense of commitment toward company productivity and profitability. Technology
Advances in monitoring, remote control, automation and electronics, in general, have begun to make an impact on reducing the heavy workloads and mining hazards, as well as mine productivity. However, the difficult
313
nature of the mining environment has limited the application of these advances. The mining industry has traditionally been conservative and will probably continue to be inflexible to changes, and respond slowly, until forced to do otherwise by an economic crises. It will probably be a combination of the application of technology and improved mining methods which will have the most immediate impact on mine productivity. These methods include longwall mining, supersections and remote control continuous mining machines which permit deeper cuts. The U.S.B.M. [2] indicated however, that only four of the twenty-five mines cut 9.1 m (30 ft) or more, and eight mine units utilized a supersection. Thus, there may be more untapped potential in human resources than that immediately available in technology to improve mine productivity.
OVERVIEW OF STRATEGIC PLANNING Strategic planning can be defined as [1]: a set of decisions and actions resulting in the formulation and implementation of strategies designed to achieve the objectives of an organization. Figure 3 outlines a strategic planning model which incorporates the major components and provides a very convenient means of conceptualizing the coal company's business situation. A recent survey [9] of small businesses determined that only a few companies use strategic planning (see Table 1). The key components of the strategic planning model are outlined below. Mission defines the scope of the mining operations which makes any given company unique and more successful in comparison to its competitors. Resources outlines the total resources of the company, such as the coal reserves, capital, quality of management and skilled labor. Also an SWOT profile can assist in identifying future successes for the mining company.
Hiss~on] Company
esources
External ; Environment|-i
Potential l wnat i s /
Want?/
Analysis Objectives
- - ! ~ Evaluationi~ L. . . . . . . .
rl-I Strategies
Jv I
1 Operation
......
i
J
Fig. 3. Strategic planning model outlining the process by which a strategy may be institutionalized in a mining company.
External environment describes the variables which influence t h e coal business that cannot be controlled by the mining company. Being able to anticipate changes in Federal and State regulations, for example, could ultimately decide the success of mining projects. Analysis assesses the interactive variables of the mining company and its environment. Effectively, it is the second half of the SWOT analysis which identified the most beneficial opportunities to which the company can commit its resources. Objectives of the mining comPany in the long-term include: productivity, safety, return TABLE 1 Company use of strategic planning Number of employees
Percentage with strategic plan
1 - 25 26- 50 51-100 101-250 251 +
24 18 49 46 48
314 on investment, costs and employee enrichment and development. Each objective should be clearly stated and understood, and achievable as well as measureable. Strategy which the company delineates for operating under is based on the desired objectives; i.e. a plan of action which outlines the means by which the objectives can be achieved. Operation includes the components of objectives and strategy which are to be communicated throughout the mining company structure. These c o m m o n goals and positive attitudes should be promoted in the daily routine of all the employees. Monitoring and evaluating any change, strategy or policy implementation should be constant and modification should occur if deemed necessary. Table 2 outlines an SWOT analysis for a medium to large size coal company. This type
of exercise is very helpful in obtaining a complete picture of the mining company and its position in the industry prior to formulating a business strategy.
COMPETITION IN THE COAL MINING INDUSTRY The competition in the mining industry is predominantly influenced by: the bargaining power of the coal buyers; the threat of substitution of other energy sources, principally fuel oil, natural gas and nuclear power; entry of new mining companies; and influence of suppliers (see Fig. 4). The general trend in the coal industry is the shakeout of the high-cost operation, such as in Appalachia, thus increasing the industry concentration ratio [10]. The larger companies, especially the energy conglomerates, have the resources, capital and
TABLE 2 A SWOT analysis for a coal mining company Strengths Abundant coal reserves
Weaknesses Excess production capacity
Opportunities Stable/growing utility demand
Threats
Skilled, ample, mobile !abour
Industrial relations
Clean coal combustion technology
Imported coal
Work ethic, culture
Marketing, selling
Export growth (5% in 1990's)
Loss of export markets
Low R&D
National energy policy
Transport monopolies
Capital intensive
Synfuels
Substitutes--nuclear
Public i m a g e
Monitoring/remote control technology
Tax policy
Inadequate lobbying
Alternative system
Shift in energy use
Terminating long-term contracts
U.S. & world growth
Inflexibility to business and technologicalchange
transport energy
Acid-rain bill
Excessive legislation Worsening mining conditions
315 COAL MARKET Buyers Power - contracts spot market
SUBSTITUTE INFLUENCE
NEW MINING
ION IN TH INDUSTRY
COMPANIES
-Roclear power .petroleum • n a t u r a l gas
SUPPLY MARKET - availability
- cost
Fig. 4. Principal factors that influence competition in the mining industry.
productive capacity to maintain or increase market share. Also, the larger companies have "economies of scale" in terms of sales and financial leverage and coal preparation facilities and are thus better able to negotiate long-term contracts. In fact, many coal companies are able to survive this current recession on previous long-term contracts. Unfortunately, m a n y of these contracts will terminate by the early 1990's, thereby transfering a large volume of coal to spot market prices [7]. The major competition in the coal industry is not necessarily with other mining companies, but with their customers and suppliers for bargaining power. However, selling to a powerful buyer, such as a utility, can be to the advantage of a low-cost producer and often results in better-than-average profits. Therefore the principal strategy for the mining company should be to sell a good product, meeting specifications, and have a lowcost position both in the boom cycle and especially in t h e recession cycle. Rivalry in the Appalachian coal area is intense as the industry growth is slow. The coal product generally lacks differentiation and fixed costs are high, especially for the older mines. In the national coal industry, the sulphur content of coal will differentiate the coal produced in
the Illinois Basin from that of Appalachia and will benefit Appalachian mines considerably. The coal industry also suffers from excess capacity resulting in the healthier companies suffering as the weaker companies hang on. The companies with the higher exit costs (from the market) will tend to hang on longer. During the boom years of the 1970's, the high price and demand for coal offered easy entry into the mining business. An entrepreneur with a basic knowledge of operating readily available small equipment, such as bulldozers, could profit easily from developing a surface contour mine. Under these circumstances the sins of high costs were masked. A single-unit underground mine mining a coal outcrop, commonly referred to as a " p u n c h mine", requires capital of at least $2 million to produce 100,000 tonnes per year, that is, a capital intensity of $20 per tonne. In contrast, a surface strip mine would require, typically, $120 million capital investment to produce 3 million tonnes per year, resulting in a capital intensity of $40 per tonne capacity. As a result of the gradual depletion of the reserves of the "easily gotten" and low price coal, future competition will demand large capital investments to be made in large-scale mining operations. As a result, underground mining will be utilized more in poorer and higher cost geologic conditions. There will also be a trend towards vertical integration to improve the coal product service from the "face to the customer" with the objective of lowering costs. The size of this investment will be quite a barrier to entry into the mining business. Additionally, there is the ever increasing fixed cost imposed by the external environment, such as increased permit application costs and lead times. The future of coal depends largely on the global energy scenario in general and the local utilities more specifically. The anticipated demand for electricity, in the United States, should be about 2.5% annual growth to 1990 and 2.0% from 1990 to 2000. In 1986,
316
Increasing ..~.~e st i c i t y
ENERGY PRICE
COAL PRICE
___
P~
~
Pc
COAL SUPPLY
PI i
I
/
Po ~
/,ncreosi°g
_ [o
demand (consumption)
I
I VOLUM
VOLUME
Fig. 5. Supply-demand curves demonstrating the direct influence of the global energy price on the price and production of coal in the long-term; with respect to small changes in energy and coal supply elasticities.
coal contributed 57% of the electricity; nuclear 16%; hydro 12%; natural gas 11%; oil 4% [11]. Therefore, coal is an integral part of the global energy scene, which is a significant influence in the external environment, since the price of coal is tied closely to the overall demand for energy, which in turn is influenced by the G N P (of the country) and other economic and political factors. Although the energy market has been quite volatile, especially regarding petroleum, causing temporary shortages, in the long-term energy shortages should not exist. As Fig. 5 demonstrates, there will always be energy available at a price. The character of the demand and supply curves may change, ultimately affecting the energy price and volume produced, which could be the cause or the effect of the boom/recession cycles. Again, this is a significant component of the external environment of the coal company. Figure 5 also suggests that the coal market is led by energy price, which, depending on the substitute effect, ultimately governs the coal price; and coal volume follows.
ness, and serves to formulate and implement strategies that can best enable the company to achieve the basic objectives, principally to improve mine productivity and safety. The characteristics of the coal mining industry include abundantly available coal reserves having a worldwide geographical distribution, while developing a low-cost mining business is relatively easy. These factors make coal mining very competitive since there are a large number of coal producers. There are a relatively low number of consumers and little vertical integration between the mine and the consumer. As coal is not a homogeneous product, its quality is an important factor for the success of a mine. The acid-rain proposal, as well as other factors of the external environment, can impose severe constraints on the mining company. The sulphur content of coal could become a very significant factor in product differentiation, whereby, the Illinois Coal Basin and the northeastern coalfield would lose coal markets and central and southern Appalachia would gain.
CONCLUSIONS
REFERENCES
Strategic planning is a useful means of conceptualizing aspects of the mining busi-
1 J.A. Pearce and R.B. Robinson, Strategic Management, 2nd edn. Erwin, Inc., Chicago, IL, 1985.
317 2 J.S. Page, J.C. Volkwein and F.N. Kissell, Some continuous sections can cut more than 1,000 tons per unit shift. Coal Age, (January 1987): 51-55. 3 A.B. Szwilski and D. Lebo, Mining, Our Own Business: Small Underground Coal Operations. AIME Conf., New Orleans, LA, March 1986. 4 D.R. Walton and P.W. Kauffman, Preliminary Analysis of the Probable Causes of Decreased, Coal Mining Productivity, U.S. Dept. Energy Rep. No. FE/8960-1, Washington, DC, November 1977. 5 J.G. Baker and W.L. Stevenson, An Investigation of Coal Prices and Mine Productivity. Oak Ridge Associated Universities, TN, September 1981. 6 F.E. Hill, Analysis of the Labor Productivity Decline in the U.S. Bituminous Coal Mining Industry, U.S. Dept. Energy Rep. No. DOE/ET/10033-T1,
7
8
9 10
11
and DOE/ET/10033-T2, Washington, D.C., June 1981. S.T. Suboleski, Outlook for Productivity in the Coal Industry, Report and Communication, A.T. Massey Coal Co. Inc., December 1986. R. Lee, R.L. Schmoyer and P. Hu, Factors Affecting Labor Productivity in Coal Mining, Oak Ridge National Laboratory, TN, November 1982. Anon., The Wall Street Journal, October 1986, p. 29. A.B. Szwilski, Economic environment of coal mining operations in Appalachia, United States, Mining Science and Technology, 5(1): 1-10. Conoco Inc., World Energy Outlook: Through 2000. Coordinating and Planning Dept., Wilmington, DE, September 1986.
309
ADVANTAGES OF STRATEGIC MINE PLANNING A.B. Szwilski Department of Mining Engineering, College of Engineering, University of Kentucky, Lexington, KY (U.S.A.)
(ReceivedFebruary I987; acceptedApril 3, 1987)
ABSTRACT
Strategic planning is being incorporated into the business formulation and implementation of many companies. The objective is to optimize the utilization of the principal resources (capital, labor, technology and mineral reserves) and maximize the strengths and opportunities of a mining company, while minimizing its weak-
nesses and threats. The present paper outlines the advantages of strategic planning for a mining company and the principal factors which affect its profitability (and survivabi#ty) in business, such as, productivity and environmental restrictions.
INTRODUCTION
ning, are being incorporated into business strategy formulation and implementation of many companies. One such model, SWOT, is a useful tool to systematically analyze the principal factors involved in the development of a strategy. This term is an acronym for the internal Strengths and Weaknesses of a coal mining business and the environmental Opportunities and Threats facing that business [1]. The objective being to develop a strategy that will maximize the strengths and opportunities of a coal business while minimizing its weaknesses and threats. In 1986, the U.S. Bureau of Mines (U.S.B.M.) conducted a survey of 25 mines which utilized continuous room and pillar mining and which produced two to five times the national average of 336 raw tonnes per unit shift [2]. Among many other factors which will be discussed later, a positive l a b o r /
Faced with rapidly changing world markets, mining companies will have to adapt, restructure and focus their attention and resources on the business niche that offers them the best chance of survival. This will mean less diversification, changing the present managem e n t / l a b o r culture of the company and a general streamlining of operations to be more selective and sensitive to the market requirements. Consequently, surviving in the coal business will require strategic planning in order to nullify the increasingly complex and sophisticated nature of everyday business decisions. The principal objective being to make effective decisions to allocate the limited resources available to the company and to take advantage of all opportunities. Analytical models, a very useful aspect of strategic plan0167-9031/87/$03.50
© 1987 Elsevier SciencePublishers B.V.
310 management relationship and a well above average safety record (with no outstanding engineering factors) were recorded as being significant in improving mine productivity. These conclusions highlight the importance of examining all the resource components to optimize mine productivity and, as a result, profitability. This is one aspect of strategic planning which can serve to formulate and implement strategies which best enable the mining company to achieve its objectives. The coal industry in the United States is blessed with many key resources, namely, extensive coal reserves, readily available capital and ample skilled labor and technology, which makes the U.S. a principal low-cost producer of coal. The Appalachian area, for example, produces more than half of the coal production in the U.S. However this share has declined from the figure of 70% in 1970; the principal competition coming from the abundantly available coal reserves in the western mining states of Montana and Wyoming. In sharp contrast to the large surface mines of the western region, Appalachia is a region where the small coal mining operation dominates, the large number of which makes the industry there highly competitive [3]. Besides the managing of the internal activities of t h e coal company, the mining executive also has to consider both the operating and the external environment which will influence the survivability and profitability of his company (see Fig. 1). The operating environment takes into account: • the ease of entry for potential competitors into the mining business, influenced by the possibility of profits; • availability of coal reserves, capital and skilled labor; • influence of regulatory agencies and environmental groups; and • changing requirements and specifications of the coal purchaser. The external environment includes:
eof rernot" /n2~,rntlnn
#'<% I
\
I/ f' ~ X'~']OperutingEnvir°men'\ ,\ / "l'mpect of / ~ " ~ / - \ /\/ Remote I X A .corn,pe!ition 1 Eovi~onm,.~ • ~o~ket I /V~Envir°nmenl le~ttp!rlcna~I i!a21iiiTers )
Fig. 1. Influence of the remote and operating environment on the fuctioning of a mining company.
• national and international economic conditions; • social and political changes; and • technological developments.
MINE
PRODUCTIVITY
Over the past two decades the coal industry in the United States has witnessed wide cyclical variations in mine productivity. The dramatic drop in productivity between 1969 and 1978 prompted numerous investigations (see refs. [4-6]). The principal causes of the decline in productivity have been given as [71: • passage of the federal health and safety bill in 1969; • work rule changes in 1968 and 1971; • poor industrial relations; • coal price increase; • opening of new and old mines in less favorable geological conditions; and • passage of state and federal surface mine laws. On the other hand, the years 1979 to 1986 have witnessed a steady rise in productivity,
311
some of the contributing factors have been noted [7]: • increasing experience of workforce; • technological improvements; • labor peace and decreasing unionization; • decreasing coal price; and • more spot orders filled with unwashed coal. Therefore, there are numerous factors which influence the ability of the mining company to do well, as illustrated in Fig. 1. These factors may be categorized as the operating and remote environments, where the operating environment represents the more short-term controllable business features and the remote environment comprises governmental and societal changes. Each of these factors impacts upon the mining company in different ways and ultimately effects mining productivity. Figure 1 also illustrates the recent and current phenomena of increasing legislation, such as the acid-rain proposal that is currently under consideration. The increasing size of the circles in the diagram represents the increasing total impact of the external environment on the m i n i n g company which effectively restricts and limits its options and flexibility in surviving the complex and uncertain mining business, and to which the mining company generally has no recourse. A national or world recession is an economic factor of the remote environment. Also inflation and cost of capital influences the ability of the mining company and its competitors to perform. The maturing of the mining workforce can be described as a social factor; tax changes and environmental protection are political factors. Technological advances are generally manifested in the marketplace and available to all. The operating environment defines the competitiveness of the mining company in terms of a company's ability to utilize comm o n resources such as labor, capital and coal reserves for its competitive advantage. The key factors for success in the mining business
[
Labor,Mana~. . . . t - motivation - training skills
MINE PRODUCTION U - productivity
N
I
- a°f°iY
@ from
T ~ . mechanization monitoring ..... ioes .
state
to
state
Regulatory Authorities - MSHA state inspectorate
Fig. 2. Principal resources of the mine production unit required to achieve the objective of high productivity and safety.
are: sales and financial leverage, price competitiveness, productivity and production capacity. Above all other factors, mine productivity is a function of the resources available and made available at the business end, i.e. the mine production unit. Figure 2 gives an outline of the key factors which affect the two principal objectives: high productivity and safety. The recent survey made by the U.S.B.M. [2] indicated that twenty-five highly productive mines of Appalachia had one third the national average of citations per inspector day (0.43 versus a national average of 1.46) and none of the mines exceeded the national average. As discussed previously, in referring to Fig. 1, the external environmental factors are generally fixed in the short-term; but they are perhaps variable (usually worsening) over the long-term. The geologic environment, human resources and technology are factors of the operating environment that are controllable a n d / o r optional.
Geologic environment The mineability of a coal seam, for underground and surface operations, affects both
312 unit costs and mine productivity. The factors that influence coal seam mineability are: coal quality, seam thickness, roof parting and control, overburden thickness and lithology. Of the twenty-five mines surveyed by the U.S.B.M., 21 sections operated in coal seams greater than 1.21 m (4 ft) and 10 sections in 3 m (10 ft) or greater. It was noted that, as most of the mines relied on shuttle car haulage, car capacity could be doubled from a 1.21 to 2.42 m (4 to 8 ft) thick seam, improving productivity. Coal price, which is more of an external environmental factor, has an indirect influence on the geologic environment or conditions of the production unit. In the boom cycle of the coal market, the increased demand for coal (and energy) increases the price of coal. As a consequence, previously uneconomical mines and coal seams are opened, or reopened, resulting in a fall in mine productivity; defined as tonnes per labor-shift. In contrast, a recession cycle lowers the price of coal (and energy), forces high-cost mining operations/companies out of business and the companies which survive to close down their high cost operations, thereby reducing costs and increasing mine productivity. The continuous depletion of coal reserves is another significant factor that promotes deteriorating geologic conditions; the best coal being mined first. Human resources
During their survey of the 25 highly productive production units, the U.S.B.M. "were struck by the quality of l a b o r / m a n a g e m e n t relations . . . . and that an atmosphere of trust and confidence prevailed as a common feature of every unit" [2]. The mine superintendents invariably ranked the quality and attitude of the workers more important than any other factor. Also, incentive schemes seemed to play an important role in improving mine productivity. Therefore, the attitude of
management and incentives generally helped to motivate the workforce, the input of whom improved both productivity and safety. In sharp contrast to this present recession cycle phenomena, the boom cycle of the 1970's witnessed both labor unrest and the entry into the coal business of inexperienced entrepreneur and labor. The increasing workforce and stoppages contributed to lowering the mine productivity. The influence of unionization on mine productivity is open to debate. Some studies [7,8] have concluded that non-union deep mines are more productive than union mines. This may have been the case in the 1970's, however, the U.S.B.M. survey noted that half of the highly productive mines were represented by the United Mine Workers of America, emphasizing the need of both labor and management to share common goals and motivation. The quality of the training programs and skills of both the workforce and management defines the quality of the human resources as a valuable asset available to the mining company in order to improve its competitive position in the coal business. It is apparent that the human resource is the most volatile and variable of all the components, as indicated in Fig. 2. When nurtured it has enormous potential to improve mine productivity, yet when ignored and taken for granted it could significantly reduce the mining company's chances of survival in business. Above all, the greater equity a manager or employee has in the company, the greater will be the sense of commitment toward company productivity and profitability. Technology
Advances in monitoring, remote control, automation and electronics, in general, have begun to make an impact on reducing the heavy workloads and mining hazards, as well as mine productivity. However, the difficult
313
nature of the mining environment has limited the application of these advances. The mining industry has traditionally been conservative and will probably continue to be inflexible to changes, and respond slowly, until forced to do otherwise by an economic crises. It will probably be a combination of the application of technology and improved mining methods which will have the most immediate impact on mine productivity. These methods include longwall mining, supersections and remote control continuous mining machines which permit deeper cuts. The U.S.B.M. [2] indicated however, that only four of the twenty-five mines cut 9.1 m (30 ft) or more, and eight mine units utilized a supersection. Thus, there may be more untapped potential in human resources than that immediately available in technology to improve mine productivity.
OVERVIEW OF STRATEGIC PLANNING Strategic planning can be defined as [1]: a set of decisions and actions resulting in the formulation and implementation of strategies designed to achieve the objectives of an organization. Figure 3 outlines a strategic planning model which incorporates the major components and provides a very convenient means of conceptualizing the coal company's business situation. A recent survey [9] of small businesses determined that only a few companies use strategic planning (see Table 1). The key components of the strategic planning model are outlined below. Mission defines the scope of the mining operations which makes any given company unique and more successful in comparison to its competitors. Resources outlines the total resources of the company, such as the coal reserves, capital, quality of management and skilled labor. Also an SWOT profile can assist in identifying future successes for the mining company.
Hiss~on] Company
esources
External ; Environment|-i
Potential l wnat i s /
Want?/
Analysis Objectives
- - ! ~ Evaluationi~ L. . . . . . . .
rl-I Strategies
Jv I
1 Operation
......
i
J
Fig. 3. Strategic planning model outlining the process by which a strategy may be institutionalized in a mining company.
External environment describes the variables which influence t h e coal business that cannot be controlled by the mining company. Being able to anticipate changes in Federal and State regulations, for example, could ultimately decide the success of mining projects. Analysis assesses the interactive variables of the mining company and its environment. Effectively, it is the second half of the SWOT analysis which identified the most beneficial opportunities to which the company can commit its resources. Objectives of the mining comPany in the long-term include: productivity, safety, return TABLE 1 Company use of strategic planning Number of employees
Percentage with strategic plan
1 - 25 26- 50 51-100 101-250 251 +
24 18 49 46 48
314 on investment, costs and employee enrichment and development. Each objective should be clearly stated and understood, and achievable as well as measureable. Strategy which the company delineates for operating under is based on the desired objectives; i.e. a plan of action which outlines the means by which the objectives can be achieved. Operation includes the components of objectives and strategy which are to be communicated throughout the mining company structure. These c o m m o n goals and positive attitudes should be promoted in the daily routine of all the employees. Monitoring and evaluating any change, strategy or policy implementation should be constant and modification should occur if deemed necessary. Table 2 outlines an SWOT analysis for a medium to large size coal company. This type
of exercise is very helpful in obtaining a complete picture of the mining company and its position in the industry prior to formulating a business strategy.
COMPETITION IN THE COAL MINING INDUSTRY The competition in the mining industry is predominantly influenced by: the bargaining power of the coal buyers; the threat of substitution of other energy sources, principally fuel oil, natural gas and nuclear power; entry of new mining companies; and influence of suppliers (see Fig. 4). The general trend in the coal industry is the shakeout of the high-cost operation, such as in Appalachia, thus increasing the industry concentration ratio [10]. The larger companies, especially the energy conglomerates, have the resources, capital and
TABLE 2 A SWOT analysis for a coal mining company Strengths Abundant coal reserves
Weaknesses Excess production capacity
Opportunities Stable/growing utility demand
Threats
Skilled, ample, mobile !abour
Industrial relations
Clean coal combustion technology
Imported coal
Work ethic, culture
Marketing, selling
Export growth (5% in 1990's)
Loss of export markets
Low R&D
National energy policy
Transport monopolies
Capital intensive
Synfuels
Substitutes--nuclear
Public i m a g e
Monitoring/remote control technology
Tax policy
Inadequate lobbying
Alternative system
Shift in energy use
Terminating long-term contracts
U.S. & world growth
Inflexibility to business and technologicalchange
transport energy
Acid-rain bill
Excessive legislation Worsening mining conditions
315 COAL MARKET Buyers Power - contracts spot market
SUBSTITUTE INFLUENCE
NEW MINING
ION IN TH INDUSTRY
COMPANIES
-Roclear power .petroleum • n a t u r a l gas
SUPPLY MARKET - availability
- cost
Fig. 4. Principal factors that influence competition in the mining industry.
productive capacity to maintain or increase market share. Also, the larger companies have "economies of scale" in terms of sales and financial leverage and coal preparation facilities and are thus better able to negotiate long-term contracts. In fact, many coal companies are able to survive this current recession on previous long-term contracts. Unfortunately, m a n y of these contracts will terminate by the early 1990's, thereby transfering a large volume of coal to spot market prices [7]. The major competition in the coal industry is not necessarily with other mining companies, but with their customers and suppliers for bargaining power. However, selling to a powerful buyer, such as a utility, can be to the advantage of a low-cost producer and often results in better-than-average profits. Therefore the principal strategy for the mining company should be to sell a good product, meeting specifications, and have a lowcost position both in the boom cycle and especially in t h e recession cycle. Rivalry in the Appalachian coal area is intense as the industry growth is slow. The coal product generally lacks differentiation and fixed costs are high, especially for the older mines. In the national coal industry, the sulphur content of coal will differentiate the coal produced in
the Illinois Basin from that of Appalachia and will benefit Appalachian mines considerably. The coal industry also suffers from excess capacity resulting in the healthier companies suffering as the weaker companies hang on. The companies with the higher exit costs (from the market) will tend to hang on longer. During the boom years of the 1970's, the high price and demand for coal offered easy entry into the mining business. An entrepreneur with a basic knowledge of operating readily available small equipment, such as bulldozers, could profit easily from developing a surface contour mine. Under these circumstances the sins of high costs were masked. A single-unit underground mine mining a coal outcrop, commonly referred to as a " p u n c h mine", requires capital of at least $2 million to produce 100,000 tonnes per year, that is, a capital intensity of $20 per tonne. In contrast, a surface strip mine would require, typically, $120 million capital investment to produce 3 million tonnes per year, resulting in a capital intensity of $40 per tonne capacity. As a result of the gradual depletion of the reserves of the "easily gotten" and low price coal, future competition will demand large capital investments to be made in large-scale mining operations. As a result, underground mining will be utilized more in poorer and higher cost geologic conditions. There will also be a trend towards vertical integration to improve the coal product service from the "face to the customer" with the objective of lowering costs. The size of this investment will be quite a barrier to entry into the mining business. Additionally, there is the ever increasing fixed cost imposed by the external environment, such as increased permit application costs and lead times. The future of coal depends largely on the global energy scenario in general and the local utilities more specifically. The anticipated demand for electricity, in the United States, should be about 2.5% annual growth to 1990 and 2.0% from 1990 to 2000. In 1986,
316
Increasing ..~.~e st i c i t y
ENERGY PRICE
COAL PRICE
___
P~
~
Pc
COAL SUPPLY
PI i
I
/
Po ~
/,ncreosi°g
_ [o
demand (consumption)
I
I VOLUM
VOLUME
Fig. 5. Supply-demand curves demonstrating the direct influence of the global energy price on the price and production of coal in the long-term; with respect to small changes in energy and coal supply elasticities.
coal contributed 57% of the electricity; nuclear 16%; hydro 12%; natural gas 11%; oil 4% [11]. Therefore, coal is an integral part of the global energy scene, which is a significant influence in the external environment, since the price of coal is tied closely to the overall demand for energy, which in turn is influenced by the G N P (of the country) and other economic and political factors. Although the energy market has been quite volatile, especially regarding petroleum, causing temporary shortages, in the long-term energy shortages should not exist. As Fig. 5 demonstrates, there will always be energy available at a price. The character of the demand and supply curves may change, ultimately affecting the energy price and volume produced, which could be the cause or the effect of the boom/recession cycles. Again, this is a significant component of the external environment of the coal company. Figure 5 also suggests that the coal market is led by energy price, which, depending on the substitute effect, ultimately governs the coal price; and coal volume follows.
ness, and serves to formulate and implement strategies that can best enable the company to achieve the basic objectives, principally to improve mine productivity and safety. The characteristics of the coal mining industry include abundantly available coal reserves having a worldwide geographical distribution, while developing a low-cost mining business is relatively easy. These factors make coal mining very competitive since there are a large number of coal producers. There are a relatively low number of consumers and little vertical integration between the mine and the consumer. As coal is not a homogeneous product, its quality is an important factor for the success of a mine. The acid-rain proposal, as well as other factors of the external environment, can impose severe constraints on the mining company. The sulphur content of coal could become a very significant factor in product differentiation, whereby, the Illinois Coal Basin and the northeastern coalfield would lose coal markets and central and southern Appalachia would gain.
CONCLUSIONS
REFERENCES
Strategic planning is a useful means of conceptualizing aspects of the mining busi-
1 J.A. Pearce and R.B. Robinson, Strategic Management, 2nd edn. Erwin, Inc., Chicago, IL, 1985.
317 2 J.S. Page, J.C. Volkwein and F.N. Kissell, Some continuous sections can cut more than 1,000 tons per unit shift. Coal Age, (January 1987): 51-55. 3 A.B. Szwilski and D. Lebo, Mining, Our Own Business: Small Underground Coal Operations. AIME Conf., New Orleans, LA, March 1986. 4 D.R. Walton and P.W. Kauffman, Preliminary Analysis of the Probable Causes of Decreased, Coal Mining Productivity, U.S. Dept. Energy Rep. No. FE/8960-1, Washington, DC, November 1977. 5 J.G. Baker and W.L. Stevenson, An Investigation of Coal Prices and Mine Productivity. Oak Ridge Associated Universities, TN, September 1981. 6 F.E. Hill, Analysis of the Labor Productivity Decline in the U.S. Bituminous Coal Mining Industry, U.S. Dept. Energy Rep. No. DOE/ET/10033-T1,
7
8
9 10
11
and DOE/ET/10033-T2, Washington, D.C., June 1981. S.T. Suboleski, Outlook for Productivity in the Coal Industry, Report and Communication, A.T. Massey Coal Co. Inc., December 1986. R. Lee, R.L. Schmoyer and P. Hu, Factors Affecting Labor Productivity in Coal Mining, Oak Ridge National Laboratory, TN, November 1982. Anon., The Wall Street Journal, October 1986, p. 29. A.B. Szwilski, Economic environment of coal mining operations in Appalachia, United States, Mining Science and Technology, 5(1): 1-10. Conoco Inc., World Energy Outlook: Through 2000. Coordinating and Planning Dept., Wilmington, DE, September 1986.