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ICFAI University Dehradun

ICFAI University Dehradun

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Published by abhimanyu patel

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Published by: abhimanyu patel on Aug 02, 2010
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ICFAI University Dehradun
Student Name
Abhimanyu Kumar Patel
Course Code:
SL GM 611
 Course Name:
Business Strategy-1
 Faculty Name:
Jacob Chandy
Topic of the Assignment
Case Analyses
Student Signature Faculty Signature
This case report deals with British Steel Plc., its merger with Hoogovens to form Corus andthe subsequent crisis it faced. Corus suffered significant losses after its formation mainly dueto its localized market base, limited product range and limited production activities.The most appropriate course of action would be to diversify its market reach, expand their  product and service range and focus on increased productivity and efficiency.Traditionally, Steel has been one of the world¶s major industries. Initially, most countrieshad produced for home consumption and levels of imports and exports were low betweencountries that had their own industry. However, there were exports to countries without asteel making capability.But this pattern changed in last quarter of 20
century. In 1970 UK consumption of steelwas 20 million tons, 95% sourced from the UK. As this demand dropped to 13.9 million tons by 2000, imports had also increased to 6.6 million tons. In turn the UK producers wereexporting more than half their production.Around the world, production capacity exceeded demand by more than one-third,creating downward pressure on prices for commodity bulk steel products. This situationforced steel makers in developed countries to press harder for cost reductions and productivity improvements, which averaged 4-5 percent per annum in the 1990s.Also thedemand for steel was fluctuating. The requirement of steel in automobile sector wasdecreasing, whereas it showed an upward trend in construction sector. Thus the major  problem gripping the steel manufacturing sector was of overproduction, fluctuating demandand the compulsion to reduce manufacturing costs to continuing lower level.
Case Analysis:
The case in consideration in the context of the world steel industry is that of British SteelCompany (BSC). This company was an ailing nationalized company before its privatizationin 1989 to become British Steel Plc. BSC was in a bad shape and it had incurred losses of some £7 billion between 1975 and 1984. However its profits soared to 733
M in 1989-90after its privatization. They claimed it was due to increased investment, changes inmanagement structures (reducing overheads and devolving decision making) and, arevolution in working practices. The company had gained competitive advantages by both product development and the management of logistics of the supply and distribution chains.
As a result of all these measures, British Steel had become a major player in thedistribution (stock holding) of steel in the UK, with over 30% market share. Thus thecompany was in an advantageous position at this time and hence considered expanding itshorizons to become a truly global company. In early 1990s the exchange rates were favorablefor British Steel. It was due to a strong pound against the US dollar and weakness against theDeutschemark in the mid-1990s. This favorable situation lasted for 3 years. During this time,the company should have thought of long term profits and hence it should have focused tospread its operations outside Europe. But the company failed miserably in this aspect. Theyremained localized in Europe to reap the short term profits of favorable exchange rates. Theycontinued manufacturing steel in offshore units in USA and exporting it at increased prices inEurope.However, the international financial atmosphere reversed itself in Jan 1996. The poundsterling stood at DM (Deutschmark, currency of Germany) 2.22 ± by July 1997 it wasDM3.07 and it remained over DM3.00 for most of the following four years. This was largelydue to a weak euro ± a new currency established for the European Union ± which the UK government had declined to join. The weak euro was a serious challenge since 80% of saleswere still in Europe (including the UK) where Germany was the biggest producer. Thus it became clear that DM was weakening in comparison to pound. This put the UK basedcompanies at a disadvantage when compared to German companies. The German companieswere cheaply producing steel and making profits as DM was a weaker currency as comparedto pound sterling. On the other hand, for British Steel, manufacturing in USA was not veryattractive because Sterling¶s strength against the US dollar had declined slowly.
In this adverse situation, it would have helped that the company should shift itsmanufacturing facility in Europe, so that the effect of unfavorable exchange rates could benullified. However the company didn¶t consider taking this route.To cope up with the pressures of globalization, in June 1999 British Steel and Hoogovensannounced their intention to merge and Corus was born in October of that year. The merger  brought together British Steel¶s £6.3 billion sales and 15 million tons output withHoogoven¶s £3.2 billion sales and 6.2 million tons. The reasons for the merger were to benefit their customers, employees and shareholders and to provide services and solutionsmore internationally over a wider range of metal activities.

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