SEVERSTAL CASE STUDY ANALYSIS
INTRODUCTION
BRIEF OVERVIEW
The Severstal case study provided an overview of the global steel industry, seen as highly
dynamic, volatile and fragmented. Severstal is a Russian steel producer which developed an
international strategy by overseas acquisition in USA, Italy, Africa and CIS countries. Its vision
was to become one of the major players in its industry through a global presence.
The company was founded in 1955 as Cherepovets Steel Mill under government ownership,
privatized in 1993 and registered as Severstal as an open stock company. Severstal’s core
businesses are steel and related products. World Steel Association (2008) reported Severstal as
the third largest steel producer in Russian and number fourteen in the world and their revenue
reaching USD 22 Billion. However, it was reported also, that the post Great Recession business
environment had a detrimental impact on global steel. This resulted in high levels of volatility
and uncertainty to which Severstal responded by pursuit of a new strategic direction by
consolidation and divestment in some of its international markets.
According to Johnson, et al. (2011) strategic planning consists of the three elements of analysis,
choice and implementation which are not rigid. This implies a dynamic process allows emergent
strategies to be pursued regardless of the stage in strategic planning, a view also supported by
Mintzberg (1987). The discussion follows Johnson, et al. (2011) to analyze strategy as pursued
by Severstal using the relevant frameworks and models, provide recommendation and conclusion
which shall answer the following question;

Appreciation of broader and industry environments.

Strategic options available for the organization to succeed in the long term.
1. APPRECIATION OF BROADER AND INDUSTRY ENVIRONMENT
1.1 the Broader and industry environment of Severstal
1.1.1
The Broader environment of Severstal
Various authors modeled an approach to macro environment, PESTEL
model. Severstal macro environment is as follows;
a. Political
i.
The majority of assets of Severstal are in Russia, a political
risk is such, historically in Russia, and political conditions can
be highly volatile.
ii.
This can negatively impact the domestic business and
investment climate with a direct impact on Severstal.
iii.
There was nothing in the suggested change of government in
Russia can be sudden and radical, relative political stability
creates confidence in the markets.
iv.
Severstal enjoys a good relationship with the Russian
government which could also otherwise suggest political
interference.
v.
USA and Eurpean Union established new trade barriers, this
can have an adverse impact on business for Severstal, for
example, operational and financial results.
vi.
Majority of Severstal production and operations are based
internationally in regions and countries with a stable political
system.
b. Economic
i.
Steel industry experiences production output or supply which
follows the economic cycles of the global economy (GDP).
ii.
September 2008 proved a major turning in GDP, the global
financial crisis and subsequent economic downturn had a sever
effect on the industry and market, demand for steel fell by
60%, prices fell by 70% to 2002 levels.
iii.
The global demand for steel and related raw materials and a
slow the economic growth, this economic downturn was a
sharp decline in 2008 and 2009 to less than 1% of global GDP
at the bottom of the cycle, a contrast of +5% GDP growth the
previous year.
iv.
Economic downturn created excess capacity in the market as
the global output in the same period remained above 1200
million metric tonnes, the demand-supply imbalance from the
slow economic growth resulting in plummeting steel prices
with potential to severely eroding profit margins.
v.
The steel market is very cyclical with short peak to peak
periods and large demand variations exist between regional
markets.
vi.
World Steel Association (2008) expected a challenging market
well into 2015 with sluggish growth from 2017 and beyond.
vii.
By the end of 2015, Severstal reported net profits of USD 1.7
Billion on revenues of USD 6.3 Billion, an improved financial
performance from 2014 and 2013 and substantially better that
the recessionary years. There was confidence about the
company’s future despite the difficult recent years.
c. Socio-Economic
i.
Ageing populations in the developed countries, China and
Russia, will likely contribute to reducing steel demand in the
long term.
ii.
Economic recovery post recession created a shift in wealth
distribution post recessionary years and industry experts
projected an annual increase of about 5% in global
construction, automotive and other transportation markets by
2021, based on growth in Asia-pacific, Africa and the Middle
East.
iii.
Automotive manufacturers wanted to see steel producers
having a greater role in the production of their vehicle with
early stages of car assembly taking place within the steel mills
hence concentrating industries nearer their customers.
iv.
In 2002, Severstal purchased Rougue, rebranded Dearborn, in
USA which was a supplier to the Ford and became part of
Severstal North America.
v.
As a multinational company, Severstal lacked shared common
management knowledge when integrating newly acquired
assets.
vi.
Also, at broader organizational level, there was lack of shared
understanding and culture. There was also lack of shared
understanding
on
how
to
incorporate
management
competences and create synergies.
vii.
Projections are 70% of the global population is predicted to
live in cities by 2050 sustaining steel demand.
d. Technological
i.
The steel industry is requires substantial capital investment.
New technology and innovation is required to develop the
market position by implementing new efficient methods of
production.
ii.
Steel is an alloy and is one of the mostly widely used materials
with main applications within the construction, shipping,
automotive and energy markets. Its success as a product is
observed to be based on strong, resilient, versatile and
recyclable properties.
iii.
World Steel Association (2008) suggested steel as a product
faces
competition
faces
competition
from
other
environmentally friendly materials and interrelated substitutes,
there also is an observation of a strong track record of material
technology development and process innovation that led to
improved properties and cost effeciencies.
e. Ecological
i.
Severstal is involved in an industry which may be hazardous
to the environment and require conmpliance with stringent
regulatory requirement.
ii.
Compliance by Severstal with environment laws and
regulations is a significant factor and requires financial
resources to be commited that impose additional costs in the
form of pollution controls.
iii.
World Steel Association(2008) has promoted a common
strategy among producers globally to promote product
stewardship. Steel is 100% recyclable.
iv.
Severstal
continue
to
invested
in
corporate
social
responsibility and sustainability as part of its strategy to raise
global awareness of the Severstal brand.
f. Legal
i.
Perceived barriers to investment in USA have been the
powerful trade unions and occasional federal protectionist
measures.
ii.
Most governments have introduced new trade barriers and
antidumping regulations of cheap steel to protect their
markets.
iii.
Steel industry is under pressure to improve energy efficiency
and cut harmful emissions. United Nations Conference on
Climate Change 2015 in particular produced a Paris
Agreement which legally binds atleast 55 countries, including
Russia and China, aims to reduce carbon emissions by 9% by
2030 and global warming to no more than 2°C by 2100.
iv.
Severstal has invested mainly in liberal market economies
such as USA, also attractive for its high demand for steel, it
also listed in the Russian Stock Exchange and London Stock
Exchange leading to inward foreign direct investment.
v.
Severstal invested substantially in promoting its international
image with a strong on corporate governance.
1.1.2
The industry environment of Severstal
Various studies on strategic management affirmed that different industries
can sustain different levels of profitability which is partly explained by the
industry structure. Porter (1991) provided a framework that models an
industry as being influenced by five forces, this offered a clear path
towards a firm seeking competitive advantage over rival firms. He
concluded that industry attractiveness depends on competition rivalry,
threat of new entrants, threat of substitutes, bargaining power of buyers,
and bargaining power of suppliers. A discussion follows on the industry
environment of Severstal based on the Porter Five Forces model.
a. Competition rivalry
According to World Steel Association (2008), global steel industry is
fragmented, the competitors are numerous, fragmented and roughly of
equal power and size. The study also suggested global market
segments are not dominated by one single producer as all major
international steel players constantly seek the most appropriate
strategy to enter the next prospective market. World Steel Association
(2008) expected a challenging market well into 2015 with sluggish
growth from 2017 and beyond. Steel products have low product
differentiation and with a few niches in the automotive industry where
producers made fabricated custom parts that offer differentiated
products where majority of demand is bulk steel. Also, producers
prefer acquisition as compared to organic growth due to tough
environmental regulations which often act as barriers to obtaining
planning permission and access to finance for construction of new
steel plants. This created high exit barriers due to high capital
investment.
b. Threat of new entrants
According to World Steel Association report of 2014, AccelorMittal is
dominant at ranked at number 1 with an output twice of its next
competitor Nippon Steel and Sumitomo Metal Corp. However, a
concentration of suppliers seems to be in China which also account for
more that 45% of global steel demand as of 2015 World Steel
Association report. The industry structure suggest high entry barriers
dominated economy of scale effect and experience curve effect that
give incumbents a cost advantage. The incumbency advantage would
therefore lower any threat by new entrants. New entrants in the global
steel industry are seen as South Korea and Russia and more recently
China and India.
c. Threats of substitutes
There are not many substitutes for steel especially in construction and
rail as steel has superior performance compare to close substitutes as
aluminum as it offers better performance advantages that customer
value. As indicated on the study, steel has a strong track record of
material technology development and process innovation that led to
improved properties and cost efficiencies. Steel is seen to offer a
comparative customer value.
d. The threat of buyers
There are many key buyers of steel and car manufacturers are seen as
the leading buyers of steel in the world. As a key player, in 2002
Severstal also purchased Rougue, rebranded Dearborn, in USA which
was a supplier to the Ford and became part of Severstal North
America. This provided Severstal a significant strategic advantage as
sole supplier by removing threat of backward vertical integration by
Ford creating high switching costs. However, low buyer profits then
have a direct impact on Severstal profit margins.
e. Threat of suppliers
Even though it was earlier suggested global steel industry is
fragmented, with numerous competitors and roughly of equal power
and size, China seem to seem to have concentrated supplier advantage
as majority of major suppliers are from China. China also accounted
for more that 45% of global steel demand as of 2015 (World Steel
Association) which suggest China also has supplier completion threat
by forward vertical integration as local suppliers are given preference.
2. STRATEGIC OPTIONS AVAILABLE FOR THE ORGANIZATION TO
SUCCEED IN THE LONG TERM
2.1 Strategic options
Various studies indictated central corporate strategy choice is which area a
company should grow. Ansoff (1957) provided a matrix as a useful tool for
identifying and classifying the range of strategic options available to a firm and
thus used in the strategic planning process. The Ansoff matrix classifies strategies
according to whether they involve new or existing products and new or existing
markets. This also help to analyze the risk associated with each option.
2.1.1
Market Penetration
This strategy was seen as the least risky of the Ansoff’s options (Baird &
Thomas, 1985). It’s a strategy by which a firm seeks to increase the sales
of its existing products in existing markets (Kumar, Scheer & Kotler,
2000). For example, Severstal may increase usage of its existing steel
products to existing customers by lower price offers and in the process
increasing its market share especially when the market is growing like
China and South Korean markets. However, it may be also argued that the
ease which this strategy can be pursued depend on the nature of the market
and the position of competitors (Hart, 1995). In Severstal’s case, an
indication is the industry experienced a constant cycle of global
consolidation and fragmentation, and opportunistic short term counter
attack strategic, suggesting already there is a possible existence of hypercompetition. This strategy therefore if not carefully executed, has potential
to leave Severstal in a far worse position than before. Market penetration
seem to work well when the overall market is growing, an organization
wants to confine its interest to existing product and market and other
companies are leaving the market which a position of Levitt (1993). In the
case of Severstal, it can be suggested that for the strategy to be of
significance, it might choose to pursue improvements in productivity to
make a greater volume of products without disproportionate increase in
costs, including modification or rationalization of steel production
methods.
2.1.2
Market Development
When an organization’s product reaches maturity in the current market, it
is suggested they find new markets for their existing product (Berry,
1995). An implication by Berry (1995) is this is a marketing strategy to
enhance the organizations current level of income by increasing sales of
an already existing product. Kumar, et al. (2000) based on their earlier
view on market penetration further suggested, opening additional
geographic
markets
through
regional,
national
or
international
development, attracting other market segments through developing
product version that appeal to these segment market. In the case of
Severstal, a consideration can be that there are potential opportunities for
market development in the steel industry including a possibility of
repositioning, exploiting new uses for steel or spreading into new
geographical areas. Pursuit of this strategy involves operations structured
to produce a particular product and it may be costly to switch technologies
in future in case of a change as argued by Hill (1988).
2.1.3
New Product Development
This involves a process of having a new concept or product feature to be
marketed to existing customers increasing growth where there is decline of
existing products in current market segments to boost market share (Berry,
1995). For example, in Severstal’s case, to solve a need in the market it
may pursue this strategy by proving solution customer needs by
developing new solutions for its existing customers in the steel industry. It
was suggested this strategy is followed if there is relatively high market
share, growth potential, changing customer needs and demand of new
product (Chandler & Hanks, 1994). Further, downside was also viewed
that the process of creating a product line is expensive, potentially
unprofitable, and there is high chance of product failure.
2.1.4
Diversification
A study by Crawford (2008) found product diversification strategy to
involve creating a new customer base product which expands the market
potential of the original product. This would include brand extensions or
new brands, sometimes product modification that can create a new market
by introducing new uses for the product. Diversification was also seen to
follow two distinct forms, related and unrelated diversification;
a. Related Diversification
This could be in the form of vertical or horizontal integration;
i.
Vertical integration
Taking over a supplier (backwards integration) or buyer
(forward integration). For example, Servestal acquired Rouge
in USA which was its customer hence forward integrated.
Advantages of this were seen to be cost efficiencies due to
combined operations and greater internal control, enhance
ability to differentiate, assure supply and it creates barriers
controlling suppliers and locks out competitors (Porter, 2011)
in the study on global competition. Disadvantages were also
advanced that it may not be cheaper as this may require
economies of scale, larger capital investment, and reduced
flexibility to switch suppliers and carries high exit barriers
argued by Snow, et al. (2000). This could possibly be the
rationale behind closure on the Severstal North America
subdivisions in 2014.
ii.
Horizontal integration
Another option was development into activities that are
competitive
and
complementary
to
current
activities
(Boschma, 2012). In the case of Severstal, this could be taking
over a competitor to achieve geographical advantage, develop
a full product range for the market including exploitation
byproducts of steel.
b. Unrelated or conglomerate diversification
Diversification may also involve venturing into unrelated strategic
business units with a common corporate parent (Porter, 2011).
Advantages were seen to be increased business strategy flexibility,
potential for increased profitability and cross subsidization, better
access to capital markets and spreading of the risk across portfolios.
Disadvantages were that there are no synergies, potentially with no
additional benefit for shareholders and lack of management focus.
3. Recommendations
i.
Servestal should pursue market penetration as a strategic option
In the PESTEL analysis, economic downturn of 2008 slow economic growth
for the period 2008 and 2009, which created oversupply in the market and
droven down steel prices. The Global economy has since recovered and global
steel demand still remains high. Projections that 70% of the global population
is predicted to live in cities by 2050 is a major trend that cannot be ignored to
benefit from first mover advantages. In the case of Severstal, market share
globally remains high hence suitable for this strategic option, this can be
purely export oriented without necessarily requiring global acquisitions. These
conditions are favored in the Ansoff matrix as also the less risky option.
ii.
Severstal has to mitigate on threat on new entrants
With a few firms continuing to dominate the world steel market,
ArcelorMittal, Nippon Steel and concentrated suppliers for China, new
entrants have a potential to change the structure of the industry as the
dominant
incumbents
retaliate
especially
if
this
gives
rise
to
hypercompetition. Historically, any excess capacity tends to create supplydemand imbalance and this erodes profit margins.
4. Conclusions
Severstal is confronting strategic challenges. The global steel industry is fragmented
and volatile. Concentrated suppliers from China continue to dominate the global steel
market with potential to create extra capacity in the market with or without new
entrants in the market.
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