21/02/2012 - 09:00

Analysis: why you sometimes have to change

21/02/2012 - 09:00

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Comparing Australia with a single company might seem somewhat odd, but if you want to see the difference between right and wrong, take a look at what OneSteel is doing.

Created by BHP Billiton when it quit the steel industry, OneSteel has limped along as a steel maker in the South Australian regional city of Whyalla, as well as running a range of other steel-related business, and what was once a small iron ore mine.

Not for much longer. OneSteel is adapting to changed circumstances. It is moving closer to quitting Whyalla, changing its name, and making a full-blooded entry into the mining business.

What’s happening is that Project Magnet saw OneSteel start consuming low-grade magnetite ore in its Whyalla blast furnaces, freeing up high-grade hematite for export to Asia, with the exports effectively saving the company.

Rather than persist with a policy of propping up a failed business strategy OneSteel is adopting to a new set of business rules and investing in operations that make profits, rather than losses.

Lord Keynes, if not the Australian Government, would be delighted. It was Keynes, the world’s leading 20th century economist, who famously said of adapting to change that: “When the facts change, I change my mind. What do you do, sir”.

The Australian Government with its continued cash hand-outs to car makers and other smoke-stack industries which can no longer compete in the Australian market, let alone win export orders without assistance, should consider what Keynes said and what OneSteel is doing.

The same might also be said of the way the European Union is propping up the obviously failed country of Greece, but that’s simply a variation of a theme on why it is always best to clean the poison out of a wound rather than let it fester.

At OneSteel, management has decided that enough is enough revealing in its half-year statement filed at the stock exchange earlier today that it planned to change its name and change its business focus.

After reporting a loss of $74 million for the six months to December 31 (from sales totalling $3.8 billion) OneSteel’s chief executive, Geoff Plummer, noted that the company’s mining and mining consumables business units had grown to account for 40% of total revenue.

“Despite this, our overall performance was disappointing due to the impact of the difficult external environment on our Australian steel businesses,” Plummer said.

Then came the punch line.

OneSteel is a very different business from when it decided to enter the export iron ore market through Project Magnet in 2005,” he said.

OneSteel is now a mining, mining consumables and steel business with an increasing global orientation.

“The board has decided it is appropriate to assess the benefits of changing the company name. This work is currently underway.”

What OneSteel is doing other companies can copy because it’s really not that hard to recognise that persisting with a loss-making business (or a loss making country) is an utterly hopeless strategy.

The better option, and perhaps the only one, is to focus on what you’re good at and cut free what’s not performing.

Perhaps the best example of that approach is Wesfarmers, a business which is actually disinterested in what it does, just so long as it’s different divisions achieve the goals set by management, particularly return on capital invested.

If, over time, a business unit fails to perform, it receives what a former Wesfarmers chief executive once famously called: “the ultimate capital sanction” – a very obtuse way of saying closure, or sale.

OneSteel management has recognised that it has some business units which perform well, and others which do not. It is investing in the good, and phasing down the bad.

Australia is facing a similar choice. We should be encouraging growth industries, and that does not mean turning the country into a quarry for Asia, and stop directing taxpayer’s funds into lost causes.

STANDING BY BUSINESS. TRUSTED BY BUSINESS.

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