week3.pdf - WEEKLY ASSIGNMENT MEM771 STRATEGIC MANAGEMENT...

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WEEKLY ASSIGNMENT : MEM771 STRATEGIC MANAGEMENT & GLOBALIZATION WEEK 3 Case study For a long time, the steel industry was seen as a static and unprofitable one. Producers were nationally based, often state owned and frequently unprofitable – between the late 1990s and 2003, more than 50 independent steel producers went into bankruptcy in the USA. The twenty- first century has seen a revolution. For example, during 2006, Mittal Steel paid $35bn (£19.6bn; A28bn) to buy European steel giant Arcelor, creating the world’s largest steel company. The following year, Indian conglomerate Tata bought Anglo-Dutch steel company Corus for $13bn. These high prices indicated considerable confidence in being able to turn the industry round. New entrants In the last 10 years, two powerful groups have entered world steel markets. First, after a period of privatisation and reorganisation, large Russian producers such as Severstal and Evraz entered export markets, exporting 30 million tonnes of steel by 2005. At the same time, Chinese producers have been investing in new production facilities, in the period 2003–2005 increasing capacity at a rate of 30 per cent a year. Since the 1990s, Chinese share of world capacity has increased more than two times, to 25 per cent in 2006, and Chinese producers have become the world’s third largest exporter just behind Japan and Russia. Substitutes Steel is a nineteenth-century technology, increasingly substituted for by other materials such as aluminium in cars, plastics and aluminium in packaging and ceramics and composites in many high-tech applications. Steel’s own technological advances sometimes work to reduce need: thus steel cans have become about one-third thinner over the last few decades. Buyer power Key buyers for steel include the global car manufacturers, such as Ford, Toyota and Volkswagen, and leading can producers such as Crown Holdings, which makes one-third of all food cans produced in North America and Europe. Such companies buy in volume, coordinating purchases around the world. Car manufacturers are sophisticated users, often leading in the technological development of their materials. Supplier power The key raw material for steel producers is iron ore. The big three ore producers – CVRD, Rio Tinto and BHP Billiton – control 70 per cent of the international market. In 2005, iron ore producers exploited surging demand by increasing prices by 72 per cent; in 2006 they increased prices by 19 per cent. Competitive rivalry The industry has traditionally been very fragmented: in 2000, the world’s top five producers accounted for only 14 per cent of production. Most steel is sold on a commodity basis, by the
tonne. Prices are highly cyclical, as stocks do not deteriorate and tend to flood the market when demand slows. In the late twentieth century demand growth averaged a moderate 2 per cent per annum. The start of the twenty-first century saw a boom in demand, driven particularly by Chinese

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