During the 1980s, MIM implemented a major vertical integration growth strategy which saw its investments grow from 3.1% of total consolidated assets in 1980 to 25.9% of total consolidated assets in 1992. In all, close to A$1.5 billion was spent acquiring these assets. The 1980s was however, not a successful decade for MIM. Its investment portfolio clearly failed to generate a satisfactory return on investment.
As a case study, the vertical integration strategy in MIM's zinc and lead stream is considered in light of the academic works on vertical integration of Ronald Coase, Oliver Williamson and others, as well as various other more practical frameworks developed by authors such as Michael Porter and McKinsey business consultants which prescribe for management the circumstances in which vertical integration is an appropriate strategy.
The structure of the report is as follows:
• To present the strategy and summarise the performance of the investments made;
• To perform the literature review;
• To consider MIM's strategy as a case study in light of the literature review; and finally
• To draw conclusions about MIM's vertical integration strategy.
With reference to literature on the subject, and in light of MIM's actual experience, it is concluded that MIM's vertical integration strategy was largely without focus. Furthermore, it was largely ineffective in being able to provide the benefits, financial or otherwise, which were sought when MIM embarked on its strategy.
It is concluded that vertical integration is not necessary for a company competing in the market of the production of separate zinc and lead concentrates. Prima facie, it may be more appropriate for a company which competes in the bulk concentrate market to be vertically integrated as the dynamics of this industry are such that it could be prone to vertical market failure. However, vertical market failure in the smelting market alone (without similar failure in the metals market itself) is unlikely. Furthermore, even though MIM is the dominant producer in the world bulk concentrate industry and is heavily reliant on the smelting industry, the smelting industry itself is probably equally reliant on MIM as a source of supply. Consequently, it is concluded that vertical integration in this industry is also unnecessary.
Without a great amount of traditional experience and expertise in the down-stream processing industries for its metals, MIM should carefully consider whether it really needs to be a fully integrated metals producer. MIM should perhaps concentrate its efforts and capital on the activities where it traditionally has its core competencies, and is likely to generate the highest returns, that is, the development and mining of base metals' mineral deposits.