Northern Drilling Inc. Questions.
Chapter 3 (External)

1. Does the industry offer attractive opportunities for growth?

I believe that the industry does offer attractive opportunities for growth.Northern is a subsidiary of the worlds third largest exploration drilling contractor. In 2010 the exploration market worldwide was 10.68 billion and expected to increase. The exploration market in Canada was 1.4 Billion USD in 2010. The market is very cyclical and dependent on commodity prices yet is expected to increase over time. 2. What kinds of competitive forces are industry members facing, and how strong is each force ?

Rival Sellers:The industry is highly competitive and very fragmented.Canadian industry comprised about 80 drilling contractors, including many smaller owner operators with almost no overhead costs, these owner operators drive down industry prices by operating on relatively thin gross margins.
Potential New Entrants: High start up costs, not likely to be too much of a threat.
Customer Bargaining Power:This is a very price sensitive industry and customers shop around for the lowest price often.Northern was struggling to be competitive in the market. Problems may be because of the price relative to some of the commodity type drillers and owner operators
Competition from Substitute products/Producers: See Rival Sellers. Low switching costs for customers.
Supplier Bargaining Power: Low supplier bargaining power. From the information we know there is a ready availability of supplier products and low switching costs. Very high cost of products though.

3. What factors are driving changes in the industry, and what impact will these changes have on competitive intensity and industry profitability?

There is a driving change towards lower and lower cost jobs. Many small owner operators drive down prices because of their low overhead costs. There are also more jobs that are highly specialized which is good for Northern. In addition the industry is highly cyclical and dependent on the prices of commodities. This will ultimately be the drivers of change in the industry. I think the driving factors are making the industry a little less attractive for big companies such as Northern. While I would not advocate leaving a profitable industry, I think that the attractiveness is not as high as it could be. These driving changes will increase competitivity and ultimately lower profitability.
4. What market positions do industry rivals occupy—who is strongly positioned and who is not?

In the terms of this case the three major competitors for this deal is as follows:
Boart Long year (Boart) Better reputation and in a strong position, but had some recent bad performance.
Major Drilling Group International Inc. (Major) Second largest drilling contractor, more experienced with more technically capable than Northern. Also global training camps in place for new drillers, better equipped to handle the Mond job. Constrained by capacity and had done little work for Mond. They will probably bid high as they do not need this job, otherwise Northern will not be able to compete against them.
Orbit Garant Drilling Inc. (Orbit) Discount contractor, expected to bid aggressively. However Bremmner did not think that Oribt performed such deep work and it did not perform technical work on a regular basis.

5. What strategic moves are rivals likely to make next?

Boart- Boart needs to improve their reputation. This could be a job that would make or break them. If they pull this job off then their reputation would be restored. I would bid a little aggressive for this contract and hope their well known history will land them the job.
Major- As one of the leaders in the industry I would bid the job If I was able at high but competitive rate. I would not want to see a company like Northern get this contract and expand into a more successful and larger company. I would rather keep it for ourselves as we have the experience and the staff to do it. Even if their profit margin was low, it would still make a smart competitive choice to go for this contract.|

Orbit- I would immediately go out and hire some experienced drillers who are well known and good with specialized work. I would bid low and hope to get this contract. This would be a good opportunity to expand into new markets in the industry and improve their company.

6. What are the key factors for competitive success in the industry?
The company has several Key factors /strategies which answers whether or not they are going to be successful or not. First of all they had developed a good technical ability and to keep this alive and sustained they knew how to manage their workforce efficiently, by focusing on employee retention and creating a safe environment with great safety standards to work, by treating them well this gave them a sense of job security leading to a dedicated long lasting workforce and good employee employer relationship. The company’s growth strategy was to secure long term specialized work thereby reducing the risk associated with investing in drilling companies. This helped them differentiate themselves and secure contracts with higher margins. The Management preferred to cut costs by avoiding to invest in new equipment unless absolutely necessary. One of their initial strategies were to develop excellent relationships with clients who were the world’s largest mining companies which helped them get to an excellent position to begin Canadian operations in 2006. One good example is their relationship with Noranda Nickel which helps generate 60% of revenue for Northern. The company never tried to promote themselves through any heavy mediums of advertisement, however kept it simple through cold calls and little print advertising. They had a very good strategy of on time delivery of work. Thereby providing high quality samples at a stipulated time under less than ideal conditions.

7. Does the industry offer good prospects for attractive profits?
Yes the industry does offer good prospects for attractive profits and Northern definitely shows signs of growth and making future profits if they follow through their strategies decisively. The exploration market alone was $ 10.68 billion in 2010 itself and $1.4 billion in Canada. The contractors had enough opportunities to forecast upcoming jobs. Northern being one amongst the contractors already have couple of strategies which have worked well for them in becoming popular amongst other players and differentiated them. They have excellent client handling abilities and know how to maintain relationships with clients. Northern has good technical ability and a promising workforce who are treated with importance and their team had the capability to deliver results very much on time. Northern had its completion in the market with others such as Boart, Major, orbit. Amongst all three- Major Inc appeared to be the toughest completion as they were more experienced and possessed more technical capability than Northern. They were also well equipped to handle the job for Mond Nickel Company. Northern has to be well equipped with more drilling equipment, possess knowledge and expertise in drilling on deeper jobs which wasn’t Northern’ s cup of tea in its entire drilling career. However it was all in the hands of Northern how they strategize work and formulate a quote / RFP which could be pleasing enough for Mond to award the job to Northern Drilling. The company also anticipates Noranda to ramp up and provide Northern with more opportunities of work and generate revenue. They had an option to use the 4 drills which would be made available after the renegotiation with Noranda and further use this for Mond’s work too saving capital costs and helping them outbid others contractors. Therefore there are big opportunities for Northern in terms of profit and sustainability of business.

Chapter 4 (Internal)

1. How well is the firm’s present strategy working?
The firms present strategy has been working well. Its the present strategy which has helped them gain all the popularity and become one amongst the top contractors any one would consider before sending a request for proposal. They had formulated their strategies in such a manner which differentiated them so well and this lead to their success in getting jobs awarded at higher margins. Their strategies to create a technical expertise, maintain a committed workforce, on time delivery policy, and great rapport ability with top mining companies with a highly experienced manager were all vital points to be considered. Above all their strategy of saving capital cost and trying to outbid competition was the best they could come up with.

2. What are the firm’s competitively important resources and capabilities?

The firms has intangible and tangible resources. First of all they were a subsidiary of the worlds third largest exploration drilling contractor - Interdrilling Corporation which helps them gaining name and recognition. Ap art from this, Northern has a good and competitive workforce which is the biggest human asset, they are truly a brand now because of their on time delivery and great relationships outside the firm with top players in the market, a good leadership display by their manager himself helped set an example, because of all these reasons they had received RFP from top players in the past. The company has drills it presently owns which are 34 drill rigs amongst which 12 were deep diamond drills and client Noranda which is the 4th largest Nickel producer from where Northern used to generate 60 percent of its revenue. They anticipated on cutting capital costs by renegotiation with Noranda and aim at using those 4 drills for Mond for their job. The firm is quite capable in carrying long term specialised work and even though the mining industry is quite cyclical they had the calibre to perform and show results in less than ideal situations and deliver on time. 1. Is the firm able to take advantage of market opportunities and overcome external threats to its external well-being?
SWOT analysis
Strength:
- world third’s largest exploration drilling contractor
- owner/CEO is very experience in the drilling industry
- focus on safety standards for employees rather than numbers of profits and others data
- superior technical capability
- wide range of net-working
- be able to handle and more suitable in working with complex contracts

Weakness:
- their pricing is high
- equipment on hands and managements (infrastructures)

Opportunity:
- to expand and gain more reputation with their strength
- relationship of the owners in order to expand

Threat:
- rivals with competitive advantage (Major is the hardest competitor to beat)
- market demands for pricing which the company has struggle with (not only major but also from smaller owner-operation)
- lack of resources such as others driller companies, equipment price goes up

As the result of their strength, weakness, opportunity and threat, the company has chance to growth for the long term in the future. 1. Are the firm’s prices and costs competitive with those of key rivals, and does it have an appealing customer value proposition? based on my opinion, the company has high customer value proposition due to the fact that they has superior technical capability than most of the competitors. although their price is high however, it may be their strategy to aim for a high contract rather than doing many small contract with low profit. My opinion is that the reason can come from their financial capability and their avoidance of risk when it comes to invest into new equipment. In addition, company focus on safety regulation in which also minimize the damage to both client and the company it self. 1. Is the firm competitively stronger or weaker than key rivals?
Major can be considered their biggest rivals compare to other firms due to the better performance. Other firms have that have low price strategy can only survive in a short term or doing business in small contract which does not have high profit margin. More than that, Northern Drilling has good connection with other firms and drillers so that in the future, there will be more opportunity for them to growth.

1. What strategic issues and problems merit front-burner managerial attention?
Short term:
The strategy so far is good but for the future its not. the first things is about their target market. The company should aim for the small contract rather than having a big contract. borrow money from the bank to spend on equipments and infrastructures

Long term: having connection to get more contract. gaining reputation is always the top piority then techonology (equipement and skill for maintaining their superior technical capability)

Questions for the interview. ( Cory don’t forget to note down the company's website )

1) Since when and why are you into this business ?
2)What is the product or service offered?
3)Who are your competitors ?
4)At what price are you offereing your product / service ?
5)Who are your customers ?
6)What legal aspects did you have to consider ? like - licenses , permits
7)How many people work under you in departments like HR/Marketing/ Finance ?
8) How many locations/ branches do you have in operation ?
9) Are you investing money into promotions / advertisements to increase market potential ?
10) Do you own any equipment/plant or have you leased it from a third party ?
11) Who and how many are your suppliers and how do you manage distribution ?
12) What are the upcoming opportunities / threats to the business ?

Fact Sheet:
Northern Drillng Inc.
-Just revived a request for proposal from Mond Nickel Company which is one of the largest players in the Canadian mining industry.
-Manager is Peter Brermner
- Developing a relationship with Mond a new client was very important to Northern’s growth plans.
- However contract compromise Northern’s long standing relationship with another of its customers, Noranda Nickel (Noranda)
-Bremner has many positive relationships with many of the biggest players in the mining industry
- Bremner not sure if they could handle the job
- He has only three weeks before proposed deadline
- Deeper the hole the greater the expertise, severe consequences incurred if a mistake was made
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-They treat there drillers like people not numbers. High safety standards,
- Since 2009 the industry had been experiencing a shortage of experienced drillers which has affected most of the major contractors
-Despite clients being generally very price sensititve, other factors could differentiate drilling contractors depending on whether the work was complex or routine
- Industry is highly competitive and very fragmented
- Canadian industry comprised about 80 drilling contractors, including many smaller owner operators with almost no overhead costs, these owner operators drive down industry prices by operating on relatively thin gross margins.
- Selling in the industry was typically done through conventions or cold calls to potential clients. Little print advertising was used in the industry
- Northern was considered to be a full spectrum services company, with superior technical capability with high safety standards.
-Northern has 34 drills, and 12 are diamond drills
-year to date revenue was 43 million, and 26 percent earnings
- Northern was struggling to be competitive in the market. Problems may be because of the price relative to some of the commodity type drillers and owner operators
Strategy
The company’s growth strategy was to secure long term specialized work
Cyclical nature of the mining industry, long term work mitigated some of the risk in investing in drilling equipment.
Specialized work allowed northern to differentiate itself in the highly competitive Canadian industry, helping northern secure contracts with higher margins.
Management preffered to avoid investing in new equipment unless absolutely necessary. W
When investments were assessed they were benchmarked against a 20% hurdle rate
Peter Bremmner
Peter Bremner very experienced, 30 years, and the owner

Contract
- Involved drilling over a span of three years.
- Job involved drilling deeper than they were used to and the work was complex, geography was expected to be poor in some areas, and the issues compacted because the holes were so deep.

-RFP divided into two individual jobs: A deep job with 3000 meter holes, and an intermediate job with 1800 metre holes.

- If costs and delays occurred due to negligence of a Northern Employee, Northern would bear cost
- Proposed contract for a total of 231,500 meters.
- Direct costs per shift is roughly 2450 for intermediate job and 2800 for deep job.
- Overhead costs amount to 8percent of sales but synergies equal to 2 percent if Northern won both jobs
-550,000 per drill cost. Plus a bulldozer per drill also required to move the drills costing 150,000 each.
- Need additional 24 drillers to both jobs
- Drillers found long term contracts to be appealing.
- He wwantedt o grow the company without affecting Northern’s other clients. Noranda represented 60% of Northerns revenue and they currently had an excellent relationship.
- Unsure what Noranda is going to do when the contract was expiring at years end.
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Competition for the Contract
- Three drilling contractors that would be bidding for the Mond contract
1) Boart Long year (Boart) better reputation, but had some recent bad performance
2) Major Drilling Group International Inc. (Major) Second largest drilling contractor, more experienced with more technically capable then Northern. Also global training camps in place for new drillers, better equipped to handle the Mond job. Constrained by capacity and had done little work for Mond. They will probably bid high
3) Orbit Garant Drilling Inc. (Orbit) Discount contractor, expected to bid aggressively. However Bremmner did not think that Oribt performed such deep work and it did not perform technical work on a regular basis.
Decision
- 75% CAPACITY, AND NO DIAMOND DRILL RIGS AVAILABLE FOR THE UPCOMING YEAR
- Up to 4 years may be made available through the renegotiation of the Noranda contract.
- Using these drills could save on capital costs and allow Northern to outbid competitors.
- Noranda likely to ramp up its exploration efforts given the urgency of its situation
- If the company underperformed, Northern would compromise its relationship with mond and its reupation.
- If the deep job was won and executed properly , Northern would be established as one of Canadas most technically competiente drilling contrators