The Mining Environment and its influence on strategy execution in 2017
In the recently launched Institute of Risk Management Risk Report – South Africa Risks (IRMSA 2017), four scenarios were tabled according to which the National Development Plan (NDP) might potentially be executed.
As part of ensuring that mining companies have a thorough understanding of the South African mining environment and how this may impact its strategy execution, the author then amended the IRMSA scenarios in order to establish four scenarios that could apply to mining companies in 2017.
The horizontal axis in Figure 1 represents how vulnerable or resilient a mining company might be in terms of its ability to respond to its risks and thereby either effectively executes or totally fails in terms of strategy execution.
The vertical axis in Figure 1 represents the South African mining environment, which may range from being stable with the associated certainties to being totally unstable with the associated uncertainties within which the mining companies would be implementing its organisational strategies.
I am of the view that South African-based mining companies potentially could be exposed to the scenarios set out below.
- Missed Window
This scenario is characterised by a stable mining environment coupled with a vulnerable mining company due to its inability to execute its organisational strategy. Some of the key aspects in this scenario are mining companies’ inability to influence future legislative amendments, limited proactive regulator engagements and influence on government policies. Another key aspect is that, despite a favourable stable mining environment, investors remain risk averse from an investment perspective, as companies fail to provide significant evidence that they are able to improve their strategy execution capabilities.
- Sunny Summit
This scenario is characterised by a stable mining environment coupled with a resilient mining company, which is able to effectively execute its organisational strategy. This could also be specified as the “blue sky” scenario in which the best outcome is achieved, namely that all targeted objectives were achieved and sound relations with stakeholders established.
- Steep Climb
This scenario is characterised by a resilient mining company in terms of strategy execution; however, it is a “taker” of volatile commodity prices, rand/dollar exchange rates and higher input costs due to the economic indicators caused by the unstable mining environment. Despite being a “taker”, resilient mining companies in this scenario are able to absorb these factors (as a result of their planning and execution processes). In addition, they are able to meet stakeholder demands, optimise limited capital availability, establish relationships with labour unions and meet the required regulatory requirements.
This scenario can be regarded as the “worst case scenario” under which a mining company can operate, as it is characterised by being unable to execute its organisational strategy (vulnerable mining company), coupled with the inability to respond to the unstable mining environment. This inability results in limited influence of government regulatory policy, poor stakeholder relations – especially with labour unions and surrounding communities, the inability to achieve its operational targets from a unit cost or productivity perspective, as well as skills exit, since your best employees tend to detach themselves from a company that is perceived as unstable.
Rather than fitting totally into one of the scenarios described in Figure 1, mining companies may find themselves at various points on the horizontal axis, ranging from closer to the vulnerable mining company point to, I am hoping, closer to the resilient mining company, considering that the ability to execute its strategy is what it has better control over in terms of responding to its mining environment.
A board member recently enquired: “So what is the Return on Investment (ROI) required should a company find itself in any of the abovementioned scenarios?” I politely answered that I am of the opinion that putting a number to each scenario requires a detailed exercise; however, I could indicate the risk management steps required in order to perform as a resilient mining company and thereby support sound strategy execution. These high-level steps were the following:
- establish a simplistic principal risk register that clearly identifies the key uncertainties impacting the set strategic objectives as well as associated risk mitigation measures;
- align appropriate key performance indicators (KPIs) with the principal risks and establish risk tolerances for identified KPIs that should flow into your reporting as well as the organisational risk appetite statement. Establishing the risk tolerances based on business KPIs (as well as key external environmental indicators) is an effective forward-looking mechanism to provide early warnings that the business is on a path of progress or regress;
- enhance your combined assurance process by ensuring ongoing verification of critical controls and progress of risk mitigation plans. Combined assurance processes do not guarantee the reduction of risk exposures, but provide comfort that the controls and status of risk mitigation have been verified;
- from a regulatory compliance perspective, ensure that the compliance universe is established and that an appropriate verification exercise is undertaken to ensure that all key controls are in place and functioning effectively;
- from a business continuity management perspective (as a minimum) have a thorough understanding of the key factors that may cause denial of access to business operations and how this would be managed by means of business continuity plans coupled with the required crisis communications;
- understand stakeholder demands by appropriately mapping and analysing their potential impact on strategy execution; and
- understand external environmental factors and its impact on strategy execution. This step should also include demand-side factors (key customers or markets) as certain mining companies tend to mostly focus on managing supply-side factors related to their operations.
To the risk management purists, the abovementioned steps may sound rather empty without processes such as policies, frameworks, software systems and reporting processes. Needless to say, these factors, accompanied by the overarching governance processes, are enablers and should be used appropriately to support organisational strategy execution.
The final step that requires an assessment of the effectiveness of your risk management process (I term it risk efficacy) over a specific period, requires an analysis of where risk/uncertainty reduction has occurred and in that way aided in strategy execution. In areas where no reduction of risks/uncertainty occurred, an in-depth analysis should be performed to ensure that the rectification of controls aligned with risk root causes. Mitigation measures should be revisited as well.