Strategic Analysis of ArcelorMittal - Case Study Example

Strategic Analysis: The Case of ArcelorMittal Internal Analysis According to Companies and Markets , Arcelormittal produced as many as 125 million tonnes of steel in 2011. It has a diverse range of customers and has a complete coverage of the European steel markets and is expanding into developing countries like India, South America, Africa and China (Company and Markets, 2012). Arcelormittal is primarily an European entity and has many operations throughout Europe. In 2011, it made a revenue $93.973 billion which was an increase of 20.4% of the 2010 revenue (Companies and Markets, 2012). The profits of the company for 2011 was $4.8 billion and this was an increase of 35.9% from 2010 levels. The company has various Balanced Scorecard targets that it attained in 2011 and is rolling them over to 2012. The Balanced Scorecard involves various preferences in the areas of: 1. Internal Capability, 2. Customer Benefits 3. Financial Results and 4. Learning and Growth (Kaplan and Norton, 1993). In terms of internal capability, Arcelormittal sought to increase engineering and iron making capacity by 20% in 2011 (Staden, 2011). This means that it can improve its service offerings in 2012. Also, in the area of customer satisfaction, Arcelormittal sought to assist research into better and more efficient services due to this, they provided discounts for such entities. Also, in the area of financial results, they improved their financial results from the 2010 levels and they are set to increase further in 2012. Human resource us still focused on improving excellence in health, safety and leadership as well as to attract and retain the best employees and keep them under very ethical circumstances (Staden, 2011). The main problems with Arcelormittal relates to the various weaknesses in their operations. First of all, Arcelormittal is bouncing back from a period of recessions which was marked by the fall in the prices of commodities and other regulatory matters (Staden, 2011). Also, Arcelormittal has been accused by various media reports for not having a strong corporate social responsibility plan. Competitor Analysis According to Porter, there are five forces that shape trends and activities in a given industry they include: 1. Threat of new entrants 2. Presence of substitutes 3. Buyer bargaining power 4. Supplier collective power and 5. Competitive forces in the industry (Porter, 1985) The cost of setting up infrastructure and development plants is generally very high. Also, there are many regulations that ranges from health to environmental requirements that cannot be easily met. Due to this, the threat of new entrants is very minimal. Most of the buyers of steel use it to manufacture cars and other equipment. These buyers do not really have a primary interest in acquiring and processing raw steel. However, in theory, several car manufacturers can come together and pool funds to form a steel making company with ease although this is not likely to happen soon. Suppliers include governments of countries that produce the steel and other land owners. These governments are not likely to come up with rival firms although they can do so if they want to. Thus, this risk is also minimal. There are no known substitutes to steel for the buyers of the products of Arcelormittal. Due to this, there is no risk of substitutes in this industry. However, the biggest and the most credible threat in the industry is the competitive rivals of Arcelormittal. Yahoo Finance identify them to include three key players: 1. JFE Holdings 2. Tata Steel Limited and 3. US Steel Corp These three competitors are highly capitalised and they have the potential to capture the market share of Arcelormittal. Although Arcelormittal is the market leader, these companies can easily expand and take up the customer base. However, Arcelormittal is secured with several long term contracts with customers. Also, there are some smaller mills that operate in Britain and other nations that are quite independent in their operations. These businesses are very specialised and they do not pose a significant threat. Thus, aside the core competing entities in the top three, the industry is generally secured for Arcelormittal in the foreseeable future. External Environment Arcelormittal has its core operations in the European Union and has a very strong presence in the United Kingdom. Due to this, it is affected primarily by conditions in the UK, European Union and other parts of the world like the United States where there is a significant presence of customers for Arcelormittal. In order to examine the external environment, we will use the PESTEL or STEEPLE Model. Political The main legal framework that affects Arcelormittal is the European Union laws and directives. This is because most of the nations it operates within, like the UK have ceded portions of their sovereignty to the EU. Due to this, the various laws that are made by the EU are relevant. The main area of focus of EU laws in the past two years relate to regulation of the heavy industry, environmental regulations, efficiency and labour (Tolbaru, 2012). In 2005 – 2008, the EU issued directives that set minimum standards on health and safety, intellectual property rights, administration and packaging (European Union, 2008). These have effectively increase the cost of production on one hand but has strengthened the quality standards of European steel. Also, the REACH Law reduced the level of chemicals that could be used and this increased efficiency regulations further (European Union, 2008). However, in the UK, the government came up with infrastructural development and other friendly policies that allowed some old steel companies to get in motion again (Clark, 2011). This included some tax holidays and other subsidies that enabled the industry to thrive. Economic In the UK, tax levels decreased from 30% in 2005 to 21% in 2010 and 20% in 2012 (HMRC, 2012). This means that there is a general fall in taxes and this will allow companies in the steel industry to make more money and expand their operations for further development. The economic benefits of importing cheap labour from the European Union adds up to the benefits of the European Union and cuts down costs of production. Sociological The growing middle class has created a larger demand for cars and other steel vehicles as well as equipment. Due to this, the market for European steel manufacturers is set to expand. Also, there is greater access to other nations that were formerly closed. This include India and China which has a growing and booming middle class with industries that have high demands for steel products. This opens up the opportunity for further global expansion. Technological Improvement in communication systems and globalisation has given the impetus for steel companies to do more transactions with their partners in different parts of the world. This enables such businesses to also maintain stronger internal controls and systems. Also, technology is a source of competitive advantage in the steel industry and due to that, more businesses maintain very strong production lines and systems around the world. This gives room for further expansion. On the downside, technology prevents movement and travel. This is because people can attain more in a single location. Due to this, it can be said that technology will prevent demand for vehicles and other steel products. Environmental The European Union has set very tight targets for environmental regulation and this means that a company like Arcelormittal will have to cut down on its carbon emissions drastically by 2020 (European Commission, 2012). This is to protect the ecosystem, the economy and health of citizens. The UK government is also thinking of lowering its carbon emission levels which could be detrimental to production in the steel industry (Tighe and Bonds, 2012). Legal The World Trade Organisation has important rules and regulations that regulates subsidies from the government (Dabydeen, 2004). This means that the producers and manufacturers cannot benefit from some kinds of subsidies from the government. On the brighter side, WTO rules prevents trade barriers and regulates competition which ensures that a company like Arcelormittal is protected from unfair actions and it can also do likewise (Dabydeen, 2004) SWOT Analysis Strengths Weaknesses Geographical diversity Global leadership Economies of scale Growing profits Strong HR unit Commitment to efficient technology amongst customers Lack of CSR Recovering from a slump: High debts Dependence on subsidiaries Product liability clauses Opportunities Threats Growth and expansion: Joint Ventures, Diversification into energy markets New plants in Mexico Reduction in taxes give room for expansions Housing and economic crises. Competitions Environmental regulations Volatility of prices of raw materials Strategic Recommendations 1. Expansion further to new areas: Arcelormittal can expand in to new geographical areas to prevent over-reliance on its European Union operations. This will prevent them from being too sensitive to changes in EU laws and regulations. 2. Diversification & Horizontal Integration: Arcelormittal can expand into the production of other materials like car manufacturing and other acquiring shares and joint ventures in other similar manufacturing entity. This process of horizontal integration will ensure that it would reduce the risks that come with over-reliance on the steel industry. This will allow her to spread risks and prevent serious set backs when things go wrong with the steel industry. Through this, they can also expand to other areas and improve their offerings to customers 3. Create plants in poorer nations: Arcelormittal can establish a presence in poorer nations to make use of cheap labour. This is because labour laws in the EU and minimum wage clauses makes it difficult for the company to save on labour costs. Due to this, they can establish new plants in nations like Mexico and India to get a workforce that will charge less and increase profit margins. 4. Invest in efficient and clean technology: Arcelormittal must invest in low emission technology in order to be compliant in this fast changing world of energy reforms. This will save them a lot of carbon taxes and allow them to gain public confidence. 5. Acquire long term contracts with suppliers & use hedging contracts: Arcelormittal must acquire long-term contracts with suppliers and transfer risks of price fluctuations to third parties like insurance companies to prevent exposure to changes in prices of steel on the world market. 6. Invest on CSR: Arcelormittal needs to give back to society and remain responsible in social terms. This is because the company is acquiring a reputation as being less responsible in social matters. This will help Arcelormittal to become more accepted in the wider society. 7. Pay off debts and build a strong working capital base: The company must pay of its debts which is expensive [due to the interest charges] and concentrate on spending internally. This will cut down costs and improve efficient use of capital. References Clark, N. (2011) UK Steel Production Soars at Start of 2011 [Online] Available at: http://www.independent.co.uk/news/business/news/uk-steel-production-soars-at-start-of-2011-2220833.html Accessed: 28th November 2012. Companies and Markets (2012) ArcelorMittal SWOT Analysis [Online] Available at: http://www.companiesandmarkets.com/Market/Agriculture-Farming-Raw-Materials/Company-Profile/ArcelorMittal-SWOT-Analysis/RPT894959 Accessed 29th November, 2012. Dabydeen, S. R. (2004) UK Steel Industry and International Trade London: iUniverse. European Commission (2012) Roadmap to Resource Efficient Europe Brussels: European Commission. European Union (2008) “Study on the Competitiveness of the European Steel Sector” [Online] Available at: http://ec.europa.eu/enterprise/sectors/metals-minerals/files/final_report_steel_en.pdf Accessed 29th November, 2012. HMRC (2012) Corporation Tax Rates [Online] Available at: http://www.hmrc.gov.uk/rates/corp.htm Accessed: 28th November, 2012. Kaplan, R. S. and Norton, D. P. (1993) “Building the Balanced Score Card to Work for you” Harvard Business Review 71(5) pp134 – 137 Porter, M. E. (1985) Competitive Advantage New York: Free Press. Staden, A. V. (2011) Balanced Score Card as a Reference Measurement in ArcelorMittal Northwest University. Tolbaru, A. M. (2012) Metal, Steel Industries warn EU Efficiency Laws will Force them Out of Europe [Online] Available at: http://www.euractiv.com/specialreport-recycling-society/industry-eyes-leaving-eu-resourc-news-515906 Accessed: 28th November, 2012. Tighe C. and Bounds, A. (2012) UK Steel Furnaces Roar Back into Life [Online] Available at: http://www.ft.com/cms/s/0/e43974ea-9cdf-11e1-9327-00144feabdc0.html#axzz2DVcNBjLA Accessed: 28th November, 2012. Read More