Executive summary 1
Question 1: Environmental analysis of Severstal Company 2
Question 2: Severstal’s corporate and competitive strategies evaluation 3
Question 3: strategic recommendations for Severstal 4
Steel is one of the most widely used materials in infrastructure development. This is due to the quality of its products and the fact that it is relatively cheaper than other materials that would be used to make the same products. However, the steel industry has had its fair share of tribulations especially during the 2008 economic crisis that fell many giants in the business. The industry experienced operations fall to near-zero but still survived. It would be interesting to find out what factors saw the industry through the tough times. The industry is one of the most unconsolidated with many producers having their own policies of operations, yet it is among the most successful industries.
In an effort to understand how this industry has been operating and the reasons for its success, I closely monitor the progress of the industry, the steps it has had to take to remain relevant, and the efforts it has made to get closer and more appealing to customers. I evaluate the policies that some companies have used as they to get to the top of the rest. In particular, I study the Russian company Severstal and the strategies it has applied in a bid to become the best. I analyze the past of the company, its present position and the strategies it intends to apply and the possible outcomes of the strategies considering the market forces that will influence the choice it makes. I will also use Severstal to provide some recommendations that would be applicable to any other company given the conditions that prevail within Severstal are the same that apply to any other business at one time or the other.
Question 1: Environmental analysis of Severstal Company
In the steel industry, there are a number of stages that exist between the producers and the final customers. There are also suppliers who provide the iron and the carbon to the producers. Due to its high value, the steel industry has one of the most lucrative value chains and this may be attributed to the fact that there is always a ready market for whichever stage the steel is. For example, the producers are aware that there are cartels of middlemen or manufacturers who are always ready to buy. The middlemen in turn know that there are final users who are also willing to buy it. All through these stages, there exist other factors such as transportation and warehousing which also must be considered in the value of the steel. This creates a series through which the value of the steel is maximized.
Although the steel industry has for a long time been a fragmented one, it has over the recent past experienced a high number of mergers and acquisitions and this has greatly helped in consolidating the industry. For example, the acquisition of A celor by Mittal helped the company to produce more tones of steel than Nippon of Japan. Another factor is the rapid developments that are taking place around the world raising the demand for steel in sectors such as construction, aviation, automotive and marines. In other instances, companies may result to mergers or acquisitions in order to reduce production costs, have a better access to raw materials and/or markets (Sergi, 2009).
The acquisition of some companies in other sectors such as the automotive by steel industry players has given many companies a competitive advantage over others and this has been a factor which has increased the profitability of many companies. Players in other sectors have also invited those in the steel industry to take part in the manufacturing of their products so as to come up with unique products and thus profiting those in the steel industry to a greater extent. Due to the quick and large profits made in these transactions, producers are able to focus on making high quality and diverse products, hence increasing their relevance in the market (Richardson, 2005).
Being a highly competitive industry, any company has a duty to ensure that all stages involved in the production, marketing and delivery of the steel are as effective as possible. It is necessary to have the materials at the fairest prices possible, check on the costs involved in the production process as well as ensuring that the production meets the standards of the market. To achieve this, companies have formed mergers or acquired others, established partnerships with suppliers and gone ahead to establish plants outside their usual territories in order to have a greater market and ease delivery to customers. This however has had its challenges especially due to the unstable world economy. For example, the dollar has been at a high rate thus increasing the costs of acquiring materials, transportation and other costs involved. However, after a hard hit on the dollar during the crisis of 2008, the industry is slowly regaining with the stabilizing of the dollar. They also hope that the dollar will remain at a low value in order to make it cheaper to invest in the markets they target (Pascal, E., 2003).
Question 2: Severstal’s corporate and competitive strategies evaluation
Although Severstal Group is one of the leading companies in Russia and the world in steel production, it has had a rough time in trying to realize its goals of setting up successful production facilities around the world. Some of the notable achievements of the group include holding a third position and fourteenth worldwide in steel production. Despite all these, the much awaited success slips further and this became a harsh reality for the group during the 2008 economic crisis. With interests in steel mining, a having a domestic airline and a port in their hometown in Russia, anyone would expect that the sail would be smooth for them McCarthy, D. J., Puffer and Shekshni︠a︡, 2004).
It is however important to note that apart from these numerous investments in Russia, the group has also invested heavily outside their country. Other areas where the group has invested include the US, Africa, Europe and Canada. In these areas, Severstal Group has diversified its investments including production of raw materials such as iron ore, cooking coal and in other countries such as the US; it has invested in the automotive steel industry and diverse steel products (Mallin, 2009).
In an effort to achieve all that, Severstal has spent quite a substantial amount of money and other resources to try and establish itself as the best but the most important thing that they wish for might be just too far from ever being realized. With the continued shifting of interests, it might be long before any fruitful results are realized (Panibratov, A. I., 2012). Despite having good relations with the Russian government, Severstal has continued to suffer lack of funding. It would have been easy to use the close ties with the government to access the capital they so much need to upgrade and extend its production facilities (Laudon, 2013).
One of the main possible contributors to the difficulties the group has experienced would be attributed to the diverse nature of investments it has engaged in and the rigid management structure it has maintained. It has also been slow in modernizing its assets to conform to the changing technology and has retained a high cost operating base. It is also important to note that the global steel industry is highly regulated and this has been another contributor to the difficulty that the company has had to contend within its bid to set up production facilities across the world (Keillor, 2011).
Over the last decade, Severstal has concentrated on acquisitions both in Russia and abroad. This is an effort to increase its presence and its asset base globally. In 2008, the company restructured its management to cut on operational costs and create a much simpler and efficient reporting system. The Severstal Group became the managing company in charge with three main divisions set in a vertically integrated structure of related but diversified products. By 2009, although Severstal had gained enough experience in buying out other businesses and incorporating them into theirs, their management still lacked in terms of running newly acquired businesses. They had to rely heavily on a few who had the experience in management of new assets. This prompted Severstal to invest in training and development of the current staff in order to bridge the gap in management. Another issue that impacts negatively on the company is the lack of a shared culture in the running of day to day business. This is a weakness that must be given the necessary attention and urgently (Haberberg and Rieple, 2008).
As far as the values and practices of a business are concerned, it is almost impossible to run the same business with different policies. For the common interest of the business to be realized, the overseas based plants must be run on the same policies and share in the vision of the whole organization. This could probably be the main factor that came into play when two US based plants failed to contribute to the cash flow of the managing company. Severstal should on the other hand look at the many chances it has lost to companies from China and the US. At one time, it was able to sell more than two-thirds of its steel to China and making good revenue. Listing on the London Stock Exchange (LSE) was another major milestone for the company, this gave investors confidence in the company and it was able to raise the much needed capital for its operations. However, the lack of competent managers, the many plants across Europe and the US and the lack of a common working policy across all divisions may continue to hurt Severstal for as long as the issues are not addressed. When stakeholders suggested the sale of some plants and especially those in the US, the company stood to the ground insisting that these plants were necessary as long term strategies to enable the company spread to other parts of the world (Gaddy, 2002).
Question 3: strategic recommendations for Severstal and how I would evaluate these options using Johnson’s Suitability, Feasibility and Acceptability criteria
According to Johnson’s suitability, feasibility and acceptability criteria, an analysis of suitability would reveal that Severstal’s strategic choices are perfect in terms of the target markets they venture into. Due to its high demand, steel would be expected to remain a relevant product in the market. The current and expected external environments indicate that all is getting well compared to the period during the economic crisis. With so many options to choose from and many having foreseen favorable and positive outcomes, Severstal is in a perfect position to turn around its fortunes and grow to a leading producer of steel in the world. Having many plants that are already functional and being in a position to raise capital through stocks and liaising with the Russian government, Severstal should be able to modernize its operations, train its staff or hire experienced staff to enable them to move to the next level (Lundy and Cowling, 1996).
A feasibility analysis on the other hand evaluates the organization’s resources to determine its capability to pursue its strategic choices. An evaluation of Severstal would reveal availability of the six most important factors that determine an organization's suitability to pursue its choices. The availability of money, machinery, manpower, markets, materials and make-up place the company at a front row for the winner. However, some factors would need closer monitoring and special measures be taken to avoid slip backs that would have negative effects on the company. Machinery, for example, would require to be upgraded although this would not be expected to consume much revenue bearing in mind that the machinery is not to be purchased but upgraded. For money, finance to cater for the strategic choice would be expected to be available through revenue from sales, investment capital from stocks at the stock exchange and company reserves (Lundy and Cowling, 1996).
However, the cost of financing and the repayment capacity would be crucial facts that would need close scrutiny before any strategic choice is settled at. The financing cost determines the profit margin while the repayment capacity is directly related to the cash flow of an organization. It would be important for Severstal to evaluate its financial capabilities to avoid plunging into further financial crisis having in mind the huge debt that would narrow their profit margins and the problem of getting a financier (John, 2000).
Acceptability is another factor that has to be considered before any strategic plan has to be implemented. It is important that all concerned are consulted before any move is made in order to get the views of the different stakeholders. This will avoid situations where some people feel left out of making of key decisions of an organization yet they are a part of that organization. One aspect of acceptability is finance. It is important to evaluate the expected return and the risk level of each strategic choice. In the case of Severstal, it is evident that considering their recent operations, it would be unfavorable for them to pursue any choice at the moment. This is due to the fragile market and the fact that the world economy is yet to recover fully after the crisis that almost crippled business around the world (Bovaird and Löffler, 2009).
For stakeholders, it is also necessary to consider their views before any choice is pursued. For example, there had been calls by stakeholders to sell some of the plants in the US that were proving unprofitable and did not contribute to the growth of the company. These calls were rejected by the management. It is necessary to consider stakeholders’ opinions since they invest in the company and it must be proven to them that their money and other contributions are being utilized to the fullest. In pursuit of a choice, Severstal would have to consider the expected reaction from stakeholders, including the community around and even employees to avoid a possible uproar in the event that things don’t work out as planned (Best and Barnwell, 2009).
Severstal is a company with ambitious leaders but it still has challenges rising to the top within its field. Some of the reasons for the difficulty would include the multiple plants it operates and the rigid management style that does not allow for decision making at each plant. This would make it difficult to manage given the different plants that operate in completely different business environments. To be effective and rise at a faster rate, it would be best if they shed some of the plants by selling them. This would provide capital to expand the remaining plants then concentrate on making them fully independent and profitable. After that, it would be much easier to spread to other parts of the world and establish profitable plants (Lundy and Cowling, 1996).
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