NORTHERN DRILLING INC. Case Solution And Analysis, HBR Case Study Solution & Analysis of Harvard Case Studies

INTRODUCTION

Peter Bremner, who is the general manager of Northern Drilling Inc, had received an RFP or request for proposal to bid a tender for one of the largest contracts they have ever done so far. The RFP was sent to them by the Mond Nickel Company, one of the largest players in the mining industry in Canada. Northern had never worked for this client before. It was the first contract that Northern would have to do and it was the biggest to date.

Peter Bremner had worked very hard for his company to build up its reputation. It is the subsidiary of InterDrillingCorporation, which is the world’s third largest exploration drilling contractor.Bremner is now considering the latest bid. He needs to decide what consequences this contract will bring to the whole business in the future. There is also a risk that this contract might affect the long-standing relationship Northern has with one of its oldest client, Noranda Nickel. Peter Bremner also needs to decide a suitable price of the job based on the technical feasibility of the work that is to be done.

The contract comprises of two jobs: the intermediate job and the deep job, which was more complex and required drilling deeper as compared to the other job. Also the geological conditions of that area are poor, which good affect the deep drilling to be done in the deep job. If geological conditions worsen, Northern will have to bear the extra cost of drilling on an hourly basis. The company wants to evaluate this contract and how much return would it generate and would it exceed the target hurdle rate of 20% and whether to opt for the whole contract or Northern should bid for a single job.

DRILLING INDUSTRY ANALYSIS

The Canadian drilling industry was highly competitive. It had a huge number of contractors, about 80 drilling contractors. These 80 contractors also comprised of small owner-operators who were threatening the large contractors by thin gross margins as they had no overhead costs. The clients of this industry were very much pricy-sensitive, but they also chose among different contractors based on the exploration work they required at their mines. The reputation of the drilling company, the crew that will staff the area and work on the jobs and how much experienced those workers were also other important factors which the mining companies considered before contracting out the jobs to drilling companies.

On the other hand the mining industry was cyclical in nature. However, Northern’s long term growth strategy was to secure a strong position in the area of specialized work. Expertise in the area of specialized work was something which mitigated the risks of further investing in drilling equipments considering the nature of the mining business and this was something which differentiated Northern from its strongest competitors. Northern had maintained a tradition 30% target gross margin on all its contracts in the past, but we need to evaluate the whole contract and the both the jobs individually according to their reasonable gross margins based on the complexity of the job to determine which alternative to follow based on the industry environment and the three bidding contractors that would be bidding for this contract. Given the industry analysis this contract could prove to be lucrative for Northern but it needs to consider all the risks considered along each option.

THE INTERMEDIATE JOB

The intermediate job required the drilling of less depth as compared to the deep job which made it slightly simpler. This job was based on 1800-meter holes. 131500 meters of drilling would be done under this job. The total cost of this job would be $24008750, ignoring the overhead costs because it has been assumed that the overheads to be incurred in this job would be the overheads already incurred by the company which means that no incremental overhead cost would be incurred. The target gross profit margin set for the intermediate job is 20%based on industry conditions and the nature of the job. Based on this target gross margin Northern could quote a price of $30010938 for this job. The return on investment generated by this job would be 25%, which is in excess of the current hurdle rate of 20%. Northern has good expertise in this job and has previously worked on jobs similar in nature to the nature of this job. This would minimize the risk faced by the company. Also, it would not need to hire 24 additional drillers. It could renegotiate the contract with Noranda and free up some of the drillers to reduce the cost of hiring extra drillers. Northern needs to keep in mind that Noranda was in direct competition to it so it needs to also consider that factor too.(APPENDIX-A AND D)

THE DEEP JOB

The deepest job was complex in nature and required deeper drilling than required in intermediate job..................

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