Northern Drilling Inc. free essay sample

Executive Summary Peter Bremner, the general manager of Northern Drilling Inc. has received a request for proposal from Mond Nickel to bid for an upcoming project that will be Northern’s largest contract to date. The project involves an intermediate job, as well as a deep drilling job, and will require that Northern prioritize this contract over other existing contracts in terms of manpower and equipment. Northern has to assess the technical feasibility of this project before bidding with a competitive price. Mond Nickel being one of the largest players in the mining industry, winning this project would be a large step towards Northern’s growth strategy. However, overestimating their ability, or alternatively, selling themselves short would be detrimental to their overall success. The problem in question can therefore be defined as: 1. Should Northern bid for this project? 2. If it bids for the project, should it go for both jobs? 3. At what price should Northern bid? 4. What are the possible outcomes of Northern winning this contract, in terms of existing contracts, future contracts, and competition? Possible Courses of Action: The alternative courses of action that Northern can take are summarized below: Bid for both projects (intermediate and deep) Don’t bid for either project Bid for one of the projects (intermediate or deep) The main criteria for evaluating the alternatives will be the technical feasibility, costs and return on investment involved, and implications in terms of Northern’s Growth strategy. ANALYSIS Based on the proposed criteria and available alternatives, I would recommend that Northern bid for the deep drilling job. The reasons for my choice are as below: 1. Required Investment and Returns  Northern has 12 drills, which are currently being utilized for other projects. In view of this, it would be necessary to invest in new drills and equipment. The total cost of these investments would be: †¢Intermediate Job: $ 3.6 million (4 drills + equipment required) †¢Deep Job: $ 3.6 million (4 drills + equipment required) †¢Both Jobs: $ 7.2 million (8 drills + equipment required) The investment required for both jobs would represent 58% of Northern’s current assets (valued at $ 12.5 million) – a heavy capital investment for a company that is still looking to break into a larger scale market. The deep drilling job, with investment costs equal to those of the intermediate job, would not only result in greater earnings for Northern, but also be a crucial step in the direction towards their growth strategy. With reference to the expected return on investment, and bearing in mind the company’s policy to maintain a 30% gross margin, the internalized rate of return of the deep job is a healthy 7%, as compared to the negative IRR of taking only the intermediate project (see Exhibit 1). It is assumed in this case that depreciation and tax rates are at 2% and 35% respectively. While the IRR of taking both jobs is at 6%, the additional cost of investment is too great to consider. 2. Technical feasibility: The technical feasibility of this project can be assessed at three levels: Expertise and experience Manpower Available resources and equipment The manpower requirement for taking both jobs is the cost Northern would bear in terms of time spent in training new personnel. As it takes up to 30 months of training for each driller, training 24 new members of staff could delay the project by a considerable amount of time, which could pose a risk, given the fact that the mining industry is cyclical in nature. In terms of experience and expertise, Northern seems to be well-placed amongst its competitors. With Northern’s existing reputation of being superior in terms of technical capabilities and its market share of approximately 3% (View Exhibit 2) in the five short years since its inception, it follows that Mond would naturally consider Northern to bid for this project. Though the deep  drilling job would be more complex than the usual jobs Northern is known for, if Northern wished to break into the larger league, it would have to test its capability by taking on this project. By focusing its efforts and resources on only the deep drilling project as opposed to both jobs, Northern could use its strengths to successfully execute the job. The management was opposed to capital investment unless really required, which would make it hard to justify the purchase of 8 new machines, an inevitable consequence of taking on both projects. However, the reduced capital investment and expected revenues from the Mond project could be presented to make a compelling case to bid for the deep job. It could be argued that capital investment would not be required if the Noranda contract were to be re-evaluated. However, in view of the fact that Noranda still has the capacity for three more mines, and that the useful life of one of its mines is soon going to be expende d, it is likely that Noranda will require Northern’s drills for a project in the near future. 3. Competitive Strategy: Northern’s successful execution of the deep drilling job would place it in a niche above its existing competitive position. Currently, it is struggling to retain its market position due to price competition from lower end drill operators. However, with this new drilling job, Northern will gain valuable experience and recognition that could place it a long way ahead of its competitors, and justify its marginally higher costs. Apart from this, the Mond contract demands intensive requirements in terms of manpower and effort, which would result in their direct competitor, Noranda Nickel, a longstanding client of Northern, being overshadowed. Since Noranda contributes a hefty 60% to Northern’s revenue, it would be unwise to risk a bad relationship with them. By sharing efforts between the two contracts, Northern would be able to maintain existing relations with Noranda while attempting to capture a new segment of the industry. A SWOT analysis of the competition can be seen i n Exhibit 3. Strategy Summary Northern should bid for the deep project to advance its reputation in the industry. Though it may be a challenge for the company, being a difficult  job, there is no reward without risk, and it is crucial to their growth strategy to grab the opportunity that has been presented to them. This being said, attempting to overshoot their technical ability may result in poor execution, and therefore, Northern should focus their efforts towards the successful execution of the deep job. Northern can bid at a competitive price while maintaining its gross margin requirement, as it stands ahead of the competition in terms of expertise, and the complexity of the deep job justifies a marginally higher price.