DEPARTMENT OF MANAGEMENT STUDIES ISM-DHANBAD

ASSIGNMENT OF Operations Management
OPERATIONAL STRATEGY OF MITTAL STEEL

SUBMITTED TO:DR. SANDEEP MONDAL SUBMITTED BY: Saptarshi Dey 2010MB0001 MBA 2nd SEM

.................«««.......2....4 3........ Consideration before an acquisition««««.................10 5........11 7.«« 8 Weaknesses««««««««««««««««««««««««««« 8 5...............««««««««««««9 5.... Porter¶s five force model««««««««««««««««««««««............................3..........1..........9 5...........««««««««...............««««««««.«««««7 4........... History.............7 3..............5 3..4....««««««««........................ Conclusion««««««««««««««««««««.. Strategy of Mittal Steel««««««««««««««««.......3.......«««««««« «. External Analysis... Bid for Arcelor«««««««««««««««««.......1........3 2.««««««« «««««««...Table of Contents 1...........9 5... References««««««««««««««««««««... .......... Threats«...10 6......5 3. Operational strategy««««««««««««««... Introduction.««««««««««««««««««««........... Internal Analysis ««««««««««««««««««««««««««««««««8 Strengths««««««««««««««««««««««««««.....2....««««««« «««««««14 ..... Opportunities«««««««««««««««««««««««««« ««««««..... Financial risk profile««««««««««««««««««««««....

in Calcutta. The plant was in very bad shape and there were not many takers for it in the industry. 2. INTRODUCTION Mittal Steel Company N. and also the largest in turnover. Ispat International was split from the Ispat Group in India. the Mittals further strengthened their growth strategy when they acquired another non-performing state-owned mill. This set the stage for future expansions. the father of the Lakshmi N.V. and the economic environment did not encourage large scale private investment. had been a steel man -. often scooping up underperforming former government outfits in such far-flung places as Kazakhstan. laid the foundation of the Ispat Group in India with his brothers and children. (the remnants of Bethlehem Steel. was the world's largest steel producer by volume. the head of Mittal Steel. The Mittals therefore looked for options abroad. as it had a distinct locational advantage in being . Another important acquisition from a strategic viewpoint was that of a steel plant in Kazakhstan in 1995. The company is now part of ArcelorMittal. In some locations. they leased Iscott. The firm soon became the group's cash cow and earned huge profits through the 1990s. with the new company to be called Arcelor Mittal. he has replaced every member.N. In others. On 25 June 2006.V. Lakshmi Mittal ran a factory for him in Indonesia before striking out on his own with a plant in Trinidad. Mittal Steel was based in Rotterdam but. HISTORY The history of the Mittal Group can be traced back to the 1950s. In 1994. At the time. they invested $15 million in a steel mill in Indonesia which they named PT Ispat Indo. Soon. the Mittals went to Trinidad and Tobago. a loss-making government owned steel firm in Trinidad and Tobago. too. Mittal Steel decided to merge with Arcelor. India followed a socialistic pattern of development. and concentrated on international acquisitions under the leadership of LN Mittal. and in 1976. create new efficiencies by taking steps like acquiring nearby coal and iron ore mines. acquired LNM Holdings N. this time in Mexico. Republic Steel and LTV Steel) in 2004. The merger has been successfully approved by shareholders and directors of Arcelor making L. In their search for non-scrap iron to feed the plant in Indonesia. Mittal (LN Mittal). Adopting innovative practices and cutting edge technology. Although the locales have changed over the years. he has left the local management team intact. (both were already controlled by Lakshmi Mittal) and merged with International Steel Group Inc. managed from London by Mittal and his son Aditya.V. he has stuck to a common formula: Import modern management practices. wring out costs and. Iscott became profitable. like Romania. Mittal the largest steel maker in the world. CEO Lakshmi Mittal's family owned 88% of the company. where possible. he seized on a strategy of serial acquisition. In 1989. LN Mittal saw potential in the plant. It was formed when Ispat International N. Lakshmi Mittal built Mittal Steel from a single mill.1. His father. the Mittals managed to bring about a turnaround at Iscott and within a year. like the Czech Republic. when Mohan Mittal. However. During the early 1990s.

. They arise out of external environment such as macroeconomic environment. External Analysis includes the study of factors which are not because of company itself.Established companies such as Mittal Steel has absolute cost advantage over new entrants because of its 1) superior production operations and processes because of accumulated experience.Entry barrier plays an important role in the here. patents and secret processes. So it becomes very difficult for new entrants to enter into the market and compete with an already established large company. By the late 1990s. 1) Huge capital investment:. 2) By vertical backward integration Mittal Steel acquired coal and iron mines. 3. Over the next few years LN Mittal acquired several steel plants in places like Poland. These are decided by porter¶s five force model. Due to its large size Mittal Steel enjoys high magnitude of economies of scale. 4) Customer switching cost:. since China was emerging as a major steel consumer. It has ownership on factories in many countries(by acquisition ) so uses the technology and knowledge knowhow across the borders. Ispat had several steel plants around the world and controlled nearly one-tenths of the global steel production. the Czech Republic. of which the publicly-traded Ispat International (Ispat) was also a part. EXTERNAL ANALYSIS Strategy formulation begins with an analysis of the forces that shape competition in the industry in which a company is based.Huge capital investment is required for establishing steel manufacturing facility.fairly close to the Chinese border. 5) Government Regulation:. competition in the industry etc. 3) Absolute cost advantage:. Rivalry among established competitors:1)By acquiring large number of Steel Companies Mittal Steel became behemoth and gained the more control on price.In some the countries Mittal Steel enjoyed very low tax rate or zero tax for few initial years after it bought the loss making government units. Analysis can be categorized into two parts External Analysis and Internal Analysis. Romania and Canada. 3. It becomes difficult for a buyer to establish a new transportation channel when it wants to switch the seller. 2) Large number of steel industries are in government hands. 3)Going for low labour cost regions allowed Mittal Steel to have more cost advantage which is very difficult for a new entrant.In case of steel industry economies of scale is achieved at very large scale.1 PORTER¶S FIVE FORCE MODEL :Entry by potential competitors is enormous:. The aim of external analysis is to study the opportunities and threats to the company.Steel is a product for which buyer industries has to establish very well structured transportation facility with the producers. Management of these companies find it difficult to compete with private players such as Mittal Steel. Some of these mills were privately owned by LN Mittal under LNM Holdings (LNM). It gave lower cost for input materials. I case of steel industry these are the factors creating very high entry barrier for new entrants. 2) Economies of scale:.

1)Building and construction. Some opportunities for Mittal Steel 1. South East Asia consumption of steel have risen sharply in recent decades. 2. 1)But Mittal Steel adopted the strategy of backward vertical integration. oil and gas(including pipeline). But Mittal Steel concentrated on its low price strategy(mostly in Asia and Africa) while many of its competitors competed for higher quality(mostly in Europe) and better distribution channel. Supplier Power:Since coal and iron mines are large in size and few in number and controlled by large player. automotive (passenger vehicles. oil and gas and packaging industries are fragmented so they have less bargaining power. they first ensured the iron ore and coal supply from mines. After merger with Arcelor it can use Arcelor s good distribution channel and high quality product technology in Asia. Buyer Power:. 2) Mittal Steel buys a large chunk of supply from its suppliers and retains the bargaining power to itself. privatization and liberalization. Africa and North America. 3) Since steel making industries are less in number so they enjoy more bargaining power than its buyers. rail transport and maritime / shipbuilding industries. some of the buyers are large players but in comparison to behemoth steel industries they are dwarfed in size. India. white goods) steel can be substituted by natural fibers and other metals but that is at very small scale.3)Since Mittal Steel was ready to acquire the sick government units it gave an easy exit barrier to these industries and weakened the competition. 2)Although. fabrication. Before acquiring any industries. 3. These will lead to significant growth in the steel demand. 3. 3) Due to new emerging markets such as China. . After merger with Arcelor it can use its low cost technology to in the countries of Europe and South America where Arcelor was operating. auto components ).It buyers are appliance (white goods). their bargaining power can significantly effect the steel industry business. trucks.2 OPPORTUNITIES:Opportunities arise when a company can take advantage of conditions in its environment to formulate and implement strategy that enable it to become more profitable. tin-free and aluminum / aluminium). Many new emerging markets are following policy of globalization. fabrication (sheet steel and metal fabricating industry). Comparatively they have less bargaining power. These countries are primarily focusing on infrastructure development. 2)At some places(utensils. 4)Other big players were present in the market. Threat of Substitute:1)Steel has currently no substitute at its price level. packaging (tin plate. building and construction (including housing and infrastructure).

and turning around former state-owned and often inefficient plants) 5. . When Mittal staffers discovered that the country had ore deposits. 5. for example. the company secured a license to open a mine. Mittal has higher exposure to spot markets. INTERNAL ANALYSIS Internal Analysis include the analysis of factors which are within the industry such as distinctive competencies. Anti globalization protest in many countries. as well as the integration of new assets into the group structure (for example. yDifferent acquisition can lead to cultural mismatch among different units. STRATEGY OF MITTAL STEEL 5. but also inexpensive labor. profitability. yAcquisition experience of acquiring industries from different countries. had no obvious source of iron ore. 3. yLearning curve benefit due operation experience of long time. As an example Mittal Steel. which has headquarters in Rotterdam but is controlled by the Indian entrepreneur Lakshmi Mittal. most diversified steel group yStrong profitability and free cash flow generation through the recycle. Cheap labour in developing countries can give absolute cost advantage to Mittal Steel. Recession and falling demand in developed countries. Internal properties of a company can be categorized into two parts strengths and weaknesses.900 people. 3.2 WEAKNESSES yAmbitious growth strategy that implies integration challenges and uncertainties for the company's future financial profile yExposure to operating in emerging markets. Most of the shipments outside North America are spot sales. 2. 4. competitive advantage.3 THREATS:Threats arise when conditions in the external environment endangers the integrity and profitability of the company business. Threats for Mittal Steel 1.1 CONSIDERATIONS BEFORE AN ACQUISITION When Mittal Steel considers an acquisition. Unstable political condition in many developing countries. where Arcelor is based and is the biggest private employer of some 5. has met ferocious opposition in France and Luxembourg. But it will bend its criteria if an opportunity looks promising enough. supported by low cost operations and upstream vertical integration. 4. Its Algerian plant. 4. achieving operational synergies. In many developing countries resources and raw material are available in good amount which can be exploited for further growth. establishing appropriate control procedures. yExposure to those countries weak legal and regulatory systems.1 STRENGTHS yPosition as the world's largest. it seeks not only low-cost inputs and an expanding market.4. yCompared with peers.

as there is no significant overlap. low-cost slab manufacturing in Brazil. And they had created their own currency -. 5. the group is considering new projects in iron ore mining in Liberia and expansion of its Ukrainian production. each of its deals presents unusual challenges. Asia and Africa.S. market.Similarly. including both integrated and minimills. but the group has a good track record of turning around underperforming steel acquisitions. giving ISG a cost edge over U. Mittal has a highly diversified asset base. for example. through LNM Holdings. As the largest player in the steel industry--globally and in the key markets--the combined group enjoys significant bargaining power.IOU notes. 5. because of its lower cost base in emerging markets (for example.S. financial statements have proven unreliable because plants often did business via barter. and there were these IOU notes. marketing.4 FINANCIAL RISK PROFILE Acquisitions introduce risks. Mittal has strong positions in the U.000 bottles of Romanian red wine. where comparable types of work can be performed at a lower cost. Mittal may invest in new projects to strengthen its upstream integration.3 BID FOR ARCELOR Mittal Steel & Arcelor complemented each other in terms of geographical coverage and product mix. Arcelor is the leader in highervalueadded products in Western Europe. and Ross had streamlined the companies while reorganizing them. and has a successful acquisition and integration track record. and vertical raw-material integration.2 OPERATIONAL STRATEGY Mittal acts as a consolidator in the global steel industry. The advantages of Mittal's strategy of expanding into emerging markets include low cost bases for steel production and capital construction.S. U. competitors. Although the company has a blueprint for acquisitions. and has a successful distribution system. Mittal's base capital-expenditure requirements are lower compared with those of peers. You would go to the hospital or the grocery store. they had a central computer which would track all of the barter transactions. In Kazakhstan. and optimization of production processes and capital expenditures. its purchase of International Steel Group did not seem to fit its requirement for lowcost labor. particularly in less-developed countries. He laid off employees and jettisoned pension plans. In most cases. Operationally. with plants of different types. wages are among the highest in the world. assets the group acquired in . which implemented this strategy since 1995. In Romania. 5. The merger was expected also yield synergies in procurement.S. For example. But ISG had been cobbled together out of such storied American steel names as Bethlehem and LTV by U. In the former Eastern Bloc. focusing on growth through acquisitions. where it opened a warehouse and found 50. Romania andKazakhstan). They had traded steel for wine. The bid significantly increased Mittal's leverage. low-cost operations in Central and Eastern Europe. turnaround specialist Wilbur Ross.

In cyclical businesses. In the medium to long term. institutional risks associated with emerging markets. But Mittal has a track record of successfully integrating and restructuring previously underperforming state-owned assets. the main issue for the group is its success in integrating recently acquired assets and maintaining long-term. most diversified steelmaker. The Mittal group has a complex structure and has only majority control. Mittal Steel pursued its vision of becoming a global giant. 6. Mittal Steel. The key risks of Mittal's emerging-market expansion strategy include exposure to those countries weak legal and regulatory systems. as well as the integration of new assets into the group structure (for example. and 76% of the Czech plant. and the plants enjoyed sizable. strong positions in North America. For example. Poland. but not full control. Moreover. and turning around former state-owned and often inefficient plants).CONCLUSION The business strategy that has made Mittal Steel the world's largest steel maker is a commitment to consolidation and globalization and a willingness to take risks that scare off competitors. (ISG) in early 2005 moved the group into a high cost-base market. Mittal is the most diversified steel company in the world in terms of asset location and market presence across all regions. Asia. As such. 70% of the Algerian plants (30% is state-owned). as the group is no longer markedly dependent on any single asset or market. but bettered geographical market diversification. and uncertainties regarding the integration of newly acquired assets. Algeria.emerging markets like Romania or Kazakhstan were low priced. product. and the group's product range includes both flat and long steel. The acquisition of U. volatile margins depend on changes in raw-material and . albeit temporary.S. or end market (see chart 1). such as steel. This constrains cash flow circulation within the group and may lead to significant spending to buy out minority interests (although no such requirements are currently effective). tax breaks. Mittal's cost advantages are expected to strengthen further since acquiring Mittal Steel Kryviy Rih in late 2005. These factors are tempered by the group's ambitious plans to grow through acquisitions. Vast geographical diversification also mitigates risk in each particular emerging market. Mittal steel is as the world's largest. although Mittal's integration track record has been successful to date. Mittal owns only 51% of the South African plant. Mittal is not overly dependent on any single region. achieving operational synergies. continued to expand. The group's vertical integration in mining and low cost position in emerging market operations support profitability through the cycle and help reduce capital-expenditure needs. and robust free cash flow generation. over some of its cash-generative and cash-rich subsidiaries. And as competitors insisted that steel should remain a regional business. As the steel industry overall struggled in the present decade. establishing appropriate control procedures. stable relationships with the governments of host countries.-based International Steel Group Inc. and South Africa locations. and Africa. grappling with financial problems of its own. Romania. The company's overall low cost position is buttressed by vertical integration and low wage costs in its Kazakhstan.

wharton. www. and on Kryviy Rih about $200 million.com 2. In 2005 (pro forma ISG acquisition). www. Mittal takes advantage of its diversified asset base to achieve operating synergies.com 5. as one of the largest players in any of its markets. www.com . and there is significant exposure to automotive customers. www. REFERENCES 1.finished-product prices.accessmylibrary. most of these contracts are annual and carry surcharge provisions. and IT costs. Most of the shipments outside North America are spot sales. as that company is about 80% self-sufficient in coke and iron ore. www. Upstream integration into iron ore and coking coal provides Mittal with a competitive advantage throughout the cycle. Also. Although a significant part of sales in North America are under long-term contracts. Mittal has higher exposure to spot markets. Mittal has major negotiating power. because of optimization of sales.net 4. Kryviy Rih integration would further increase vertical integration. Compared with peers. the group estimated the synergies on ISG to be about $250 million. 56% of iron ore and 42% of coal requirements were supplied by the group's mining subsidiaries or under long-term contracts. arcelormitta l . procurement. mittalstee l .com 3.wikipedia. For example.universia. marketing.