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Student Name IUD No IBS No
Abhimanyu Kumar Patel 0901200038 09BS0000038
Course Code: SL GM 611 Course Name: Business Strategy-1 Faculty Name: Jacob Chandy
Topic of the Assignment
This case report deals with British Steel Plc., its merger with Hoogovens to form Corus and the subsequent crisis it faced. Corus suffered significant losses after its formation mainly due to 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 countries had produced for home consumption and levels of imports and exports were low between countries that had their own industry. However, there were exports to countries without a steel making capability. But this pattern changed in last quarter of 20th century. In 1970 UK consumption of steel was 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 were exporting 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 situation forced 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 the demand for steel was fluctuating. The requirement of steel in automobile sector was decreasing, whereas it showed an upward trend in construction sector. Thus the major problem gripping the steel manufacturing sector was of overproduction, fluctuating demand and the compulsion to reduce manufacturing costs to continuing lower level.
The case in consideration in the context of the world steel industry is that of British Steel Company (BSC). This company was an ailing nationalized company before its privatization in 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 1989-90 after its privatization. They claimed it was due to increased investment, changes in management structures (reducing overheads and devolving decision making) and, a revolution 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 the distribution (stock holding) of steel in the UK, with over 30% market share. Thus the company was in an advantageous position at this time and hence considered expanding its horizons to become a truly global company. In early 1990s the exchange rates were favorable for British Steel. It was due to a strong pound against the US dollar and weakness against the Deutschemark 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 to spread its operations outside Europe. But the company failed miserably in this aspect. They remained localized in Europe to reap the short term profits of favorable exchange rates. They continued manufacturing steel in offshore units in USA and exporting it at increased prices in Europe. However, the international financial atmosphere reversed itself in Jan 1996. The pound sterling stood at DM (Deutschmark, currency of Germany) 2.22 ± by July 1997 it was DM3.07 and it remained over DM3.00 for most of the following four years. This was largely due 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 sales were 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 based companies at a disadvantage when compared to German companies. The German companies were cheaply producing steel and making profits as DM was a weaker currency as compared to pound sterling. On the other hand, for British Steel, manufacturing in USA was not very attractive because Sterling¶s strength against the US dollar had declined slowly. In this adverse situation, it would have helped that the company should shift its manufacturing facility in Europe, so that the effect of unfavorable exchange rates could be nullified. However the company didn¶t consider taking this route. To cope up with the pressures of globalization, in June 1999 British Steel and Hoogovens announced 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 with Hoogoven¶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 solutions more internationally over a wider range of metal activities.
Cost Cutting at Corus was done in response to falling prices and unfavorable exchange rates. It was done in three ways:-productivity gain, exploitation of information technology, and significant reduction in costs of supplies. In spite of these measures, Corus faced crisis in early 2001. The main reasons were industry overcapacity, price pressures and the need to further increase productivity. The signs were building up during 2000 with 4,500 jobs lost in the UK, eventually leading to the resignation of the joint CEOs in December .Till 31 December 2000, Corus had incurred an operating loss of some £1.15 billion on a turnover of £11.7 billion. The detailed financial results showed that there were marked differences both
between different product groups and between territories.
Analysis of Turnover and Sales Volumes by Product and Destination clearly showed an imbalance, both in case of geographical distribution of sales (most of the sales were concentrated in Europe, and the sales in North America and other areas were substantia lly less) and product types (carbon steel was the major product followed by stainless steel. The production of aluminum was negligible). Thus it would have been beneficial for the
company to diversify its activities over a broader range of geographical areas and products.
SWOT refers to Strengths, Weaknesses, Opportunities and Threats. This concept can be applied in this case as follows:
1. Strengths of the company:
y y y
British Steel became a profitable organization after privatization. It experienced rapid growth and globalization in 1993. Superior production capacities of carbon steel in Europe.
2. Weaknesses of the company:
y y y
Poor product differentiation Poor geographical coverage Merger to form Corus came at the wrong time.
3. Opportunities for the company in Future:
There is scope for expanding business in North America Corus can venture in aluminum market and expand there.
Development and growth of downstream carbon steel businesses Key market areas: be construction, transportation, engineering, and distribution
4. Threats to the company :
y y y
Ever expanding population of competitors, especially in developed countries. Pressure to reduce production costs continually. Shrinking margins.
The key problems faced by British Steel plc and its successor, Corus, in chronological order are listed below: 1. In 1989, constant need for reduction in steel manufacturing and overhead costs, mainly due to overproduction and fluctuating demand. 2. Increased pressure to expand the company globally in 1993. 3. Unfavorable exchange rates 1996 onwards. Weak Euro was a major problem. 4. In 1999, massive need for cost cutting at Corus. 5. Crisis of early 2001 at Corus.
The appropriate course of action which would have helped the company to deal with various financial issues, according to me, are given below: 1. To overcome the problem of overproduction of steel, mainly in Europe, the company should focus on exporting in untapped markets where steel manufacturers are fewer. This includes Asian countries like India and China. These are developing countries with growing market demand for steel. Another opportunity lies in capturing the Russian market. If the company wants to maintain its market share in Europe then it should provide value added and differentiated steel products This would place it in an advantageous position than its competitors.
2. British steel should have started its globalization initiatives early in 1990s when the exchange rates were favorable. But the company just reaped short term gains. They continued manufacturing steel in offshore units in USA and exporting it at increased prices in Europe.
The company could have considered merging with Hoogovens at that time. This could have reduced the intensity of drastic cost cutting measures and retained precious human resource within the company. 3. In 1996, when DM was getting weaker in comparison to pound sterling and remaining solvent was a challenge, British Steel could have considered shifting their manufacturing units in Europe from USA. This way, they could have avoided the effect of weak sterling against dollar. 4. The company should have considered merging in early 1990s when its financial health was comparatively better. That way they could have avoided drastic cost cutting measures. 5. The 2001 crisis at Corus could have been avoided if Corus had considered maintaining a balance of product type and sales volume in various geographical areas. It should focus on aluminum products more. It should also consider selling more in North America, where the supply is less.
The case of British Steel plc is mainly based on the tough competitive atmosphere in world steel industry. The company merged with Hoogovens to form Corus in 1999, mainly to accomplish its need for globalization. But it failed miserably in aspects of long term planning and had a weak business strategy. The company enjoyed short term profits while compromising with its long term plans. The move to remain in Europe and delay foreign market acquisition is a proof of short sightedness. This led to the downfall of profits and revenues even after drastic cost cutting measures. Instead the company should have focused on diversifying its base from the very beginning, so that it would be in a better financial position at all times.