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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
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) c%c! c03c:as the :orld's largest steel producer by volume, and also the
largest in turnover. The company is no: part of   ) .
CEO Lakshmi Mittal's family o:ned 88% of the company. Mittal Steel :as based in Rotterdam
but, managed from London by Mittal and his son Aditya. It :as formed :hen Ispat International
N.V. acquired LNM Holdings N.V. (both :ere already controlled by Lakshmi Mittal) and merged
:ith International Steel Group Inc. (the remnants of Bethlehem Steel, Republic Steel and LTV
Steel) in 2004.
On 25 June 2006, Mittal Steel decided to merge :ith Arcelor, :ith the ne: company to be
called Arcelor Mittal. The merger has been successfully approved by shareholders and directors
of Arcelor making L.N. Mittal the largest steel maker in the :orld.
Lakshmi Mittal built Mittal Steel from a single mill. His father, too, had been a steel man -- in
Calcutta. Lakshmi Mittal ran a factory for him in Indonesia before striking out on his o:n :ith a
plant in Trinidad. Soon, he seized on a strategy of serial acquisition, often scooping up
underperforming former government outfits in such far-flung places as Kazakhstan. Although
the locales have changed over the years, he has stuck to a common formula: Import modern
management practices, :ring out costs and, :here possible, create ne: efficiencies by taking
steps like acquiring nearby coal and iron ore mines. In some locations, like the Czech Republic,
he has left the local management team intact. In others, like Romania, he has replaced every
member.


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The history of the Mittal Group can be traced back to the 1950s, :hen Mohan Mittal, the father
of the Lakshmi N. Mittal (LN Mittal), the head of Mittal Steel, laid the foundation of the Ispat
Group in India :ith his brothers and children. At the time, India follo:ed a socialistic pattern of
development, and the economic environment did not encourage large scale private investment.
The Mittals therefore looked for options abroad, and in 1976, they invested $15 million in a
steel mill in Indonesia :hich they named PT Ispat Indo. In their search for non-scrap iron to
feed the plant in Indonesia, the Mittals :ent to Trinidad and Tobago.
In 1989, they leased Iscott, a loss-making government o:ned steel firm in Trinidad and Tobago.
Adopting innovative practices and cutting edge technology, the Mittals managed to bring about
a turnaround at Iscott and :ithin a year, Iscott became profitable.
This set the stage for future expansions. During the early 1990s, the Mittals further
strengthened their gro:th strategy :hen they acquired another non-performing state-o:ned
mill, this time in Mexico.
The firm soon became the group's cash co: and earned huge profits through the 1990s. In
1994, Ispat International :as split from the Ispat Group in India, and concentrated on
international acquisitions under the leadership of LN Mittal.
Another important acquisition from a strategic vie:point :as that of a steel plant in Kazakhstan




in 1995. The plant :as in very bad shape and there :ere not many takers for it in the industry.
Ho:ever, LN Mittal sa: potential in the plant, as it had a distinct locational advantage in being
fairly close to the Chinese border, since China :as emerging as a major steel consumer.
Over the next fe: years LN Mittal acquired several steel plants in places like Poland, the Czech
Republic, Romania and Canada. Some of these mills :ere privately o:ned by LN Mittal under
LNM Holdings (LNM), of :hich the publicly-traded Ispat International (Ispat) :as also a part. By
the late 1990s, Ispat had several steel plants around the :orld and controlled nearly one-tenths
of the global steel production.
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Strategy formulation begins :ith an analysis of the forces that shape competition in the
industry in :hich a company is based. Analysis can be categorized into t:o parts   c
   cand   c   . External Analysis includes the study of factors :hich are not
because of company itself. They arise out of external environment such as macroeconomic
environment, competition in the industry etc.
The aim of external analysis is to study the !!  cand #   cto the company.
These are decided by !   ccforce model.

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c! c! c c  78cEntry barrier plays an important
role in
the here. I case of steel industry these are the factors creating very high entry barrier for ne:
entrants.

9c&c ! c 78cHuge capital investment is required for establishing

steel manufacturing facility.
9c cc  7- In case of steel industry economies of scale is achieved at very large
scale. Due to its large size Mittal Steel enjoys high magnitude of economies of scale. It has
o:nership on factories in many countries(by acquisition ) so uses the technology and kno:ledge
kno:ho: across the borders. So it becomes very difficult for ne: entrants to enter into the
market and compete :ith an already established large company.
9c
c c   &7- Established companies such as Mittal Steel has absolute cost
advantage over ne: entrants because of its 19c !  c! c!  c c!   c
because of accumulated experience, patents and secret processes, 2) ,c  c
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& cMittal Steel acquired coal and iron mines. It gave lo:er cost for input materials.
3)Going for lo: labour cost regions allo:ed Mittal Steel to have more cost advantage :hich is
very difficult for a ne: entrant.
9c  c :#&c 78cSteel is a product for :hich buyer industries has to
establish very :ell structured transportation facility :ith the producers. It becomes
difficult for a buyer to establish a ne: transportation channel :hen it :ants to s:itch
the seller.
9c; c/& 7- In some the countries Mittal Steel enjoyed very lo: tax
rate or zero tax for fe: initial years after it bought the loss making government units.
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1)By acquiring large number of Steel Companies Mittal Steel became behemoth and
gained the more control on price.
2) Large number of steel industries are in government hands. Management of these
companies find it difficult to compete :ith private players such as Mittal Steel.
3)Since Mittal Steel :as ready to acquire the sick government units it gave an easy exit
barrier to these industries and :eakened the competition.


4)Other big players :ere present in the market. But Mittal Steel concentrated on its lo:
price strategy(mostly in Asia and Africa) :hile many of its competitors competed for
higher quality(mostly in Europe) and better distribution channel.
, c: 78cIt buyers are !! c(:hite goods), c(passenger vehicles,
trucks, auto components ),
&c c  c(including housing and
infrastructure),

 c(sheet steel and metal fabricating industry), c c& (including
pipeline), ! ( &&c(tin plate, tin-free and aluminum / aluminium), rail transport and
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<c #!
&c   .

9Building and construction=cfabrication=coil and gas and packaging industries are

fragmented so they have less bargaining po:er.
9Although, some of the buyers are large players but in comparison to behemoth steel
industries they are d:arfed in size. Comparatively they have less bargaining po:er.
3) Since steel making industries are less in number so they enjoy more bargaining po:er
than its buyers.
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Since coal and iron mines are large in size and fe: in number and controlled by large player,
their bargaining po:er can significantly effect the steel industry business.
1)But Mittal Steel adopted the strategy of back:ard vertical integration. Before
acquiring any industries, they first ensured the iron ore and coal supply from mines.
2) Mittal Steel buys a large chunk of supply from its suppliers and retains the bargaining
po:er to itself.
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1)Steel has currently no substitute at its price level.
2)At some places(utensils, :hite goods) steel can be substituted by natural fibers and
other metals but that is at very small scale.
3) Due to ne: emerging markets such as China, India, South East Asia consumption of
steel have risen sharply in recent decades.
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Opportunities arise :hen a company can take advantage of conditions in its environment to
formulate and implement strategy that enable it to become more profitable. Some
opportunities for Mittal Steel
1. After merger :ith Arcelor it can use its lo: cost technology to in the countries of Europe
and South America :here Arcelor :as operating.
2. After merger :ith Arcelor it can use Arcelor͛s good distribution channel and high quality
product technology in Asia, Africa and North America.
3. Many ne: emerging markets are follo:ing policy of globalization, privatization and
liberalization. These countries are primarily focusing on infrastructure development.
These :ill lead to significant gro:th in the steel demand.
4. In many developing countries resources and ra: material are available in good amount
:hich can be exploited for further gro:th.
5. Cheap labour in developing countries can give absolute cost advantage to Mittal Steel.
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Threats arise :hen conditions in the external environment endangers the integrity and
profitability of the company business. Threats for Mittal Steel
°
Anti globalization protest in many countries. As an example Mittal Steel, :hich has
headquarters in Rotterdam but is controlled by the Indian entrepreneur Lakshmi Mittal,
has met ferocious opposition in France and Luxembourg, :here Arcelor is based and is
the biggest private employer of some 5,900 people.

Recession and falling demand in developed countries.

Unstable political condition in many developing countries.
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Internal Analysis include the analysis of factors :hich are :ithin the industry such as
distinctive competencies, competitive advantage, profitability. Internal properties of
a company can be categorized into t:o parts strengths and :eaknesses.

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r Position as the :orld's largest, most diversified steel group
r Strong profitability and free cash flo: generation through the recycle, supported by
lo: cost operations and upstream vertical integration.
r Learning curve benefit due operation experience of long time.
r Acquisition experience of acquiring industries from different countries.
r Compared :ith peers, Mittal has higher exposure to spot markets. Most of the
shipments outside North America are spot sales.
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r Ambitious gro:th strategy that implies integration challenges and uncertainties for
the company's future financial profile
r Exposure to operating in emerging markets.
r Different acquisition can lead to cultural mismatch among different units.
r Exposure to those countries :eak legal and regulatory systems, as :ell as the
integration of ne: assets into the group structure (for example, establishing
appropriate control procedures, achieving operational synergies, and turning around
former state-o:ned and often inefficient plants)
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Èhen Mittal Steel considers an acquisition, it seeks not only lo:-cost inputs and an expanding
market, but also inexpensive labor.
But it :ill bend its criteria if an opportunity looks promising enough. Its Algerian plant, for
example, had no obvious source of iron ore. Èhen Mittal staffers discovered that the country
had ore deposits, the company secured a license to open a mine.
Similarly, its purchase of International Steel Group did not seem to fit its requirement for
lo:cost
labor; U.S. :ages are among the highest in the :orld. But ISG had been cobbled together
out of such storied American steel names as Bethlehem and LTV by U.S. turnaround specialist
Èilbur Ross, and Ross had streamlined the companies :hile reorganizing them. He laid off
employees and jettisoned pension plans, giving ISG a cost edge over U.S. competitors.
Although the company has a blueprint for acquisitions, each of its deals presents unusual
challenges. In the former Eastern Bloc, for example, financial statements have proven
unreliable because plants often did business via barter. In Romania, they had a central
computer :hich :ould track all of the barter transactions.
In Kazakhstan, :here it opened a :arehouse and found 50,000 bottles of Romanian red :ine.
They had traded steel for :ine. And they had created their o:n currency -- IOU notes. You
:ould go to the hospital or the grocery store, and there :ere these IOU notes.
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Mittal acts as a consolidator in the global steel industry, focusing on gro:th through
acquisitions, and has a successful acquisition and integration track record.
Operationally, Mittal has a highly diversified asset base, :ith plants of different types, including
both integrated and minimills.
Mittal's base capital-expenditure requirements are lo:er compared :ith those of peers,
because of its lo:er cost base in emerging markets (for example, Romania andKazakhstan),
:here comparable types of :ork can be performed at a lo:er cost.
Mittal may invest in ne: projects to strengthen its upstream integration. For example, the
group is considering ne: projects in iron ore mining in Liberia and expansion of its Ukrainian
production.
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Mittal Steel & Arcelor complemented each other in terms of geographical coverage and
product mix, as there is no significant overlap.
Mittal has strong positions in the U.S. market; lo:-cost operations in Central and Eastern
Europe, Asia and Africa; and vertical ra:-material integration. Arcelor is the leader in
highervalue-
added products in Èestern Europe, lo:-cost slab manufacturing in Brazil, and has a
successful distribution system.
As the largest player in the steel industry--globally and in the key markets--the combined group
enjoys significant bargaining po:er. The merger :as expected also yield synergies in
procurement, marketing, and optimization of production processes and capital expenditures.
The bid significantly increased Mittal's leverage.
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Acquisitions introduce risks, but the group has a good track record of turning around
underperforming steel acquisitions, particularly in less-developed countries, through LNM
Holdings, :hich implemented this strategy since 1995.
The advantages of Mittal's strategy of expanding into emerging markets include lo: cost bases
for steel production and capital construction. In most cases, assets the group acquired in
emerging markets like Romania or Kazakhstan :ere lo: priced, and the plants enjoyed sizable,
albeit temporary, tax breaks.
The key risks of Mittal's emerging-market expansion strategy include exposure to those
countries :eak legal and regulatory systems, as :ell as the integration of ne: assets into the
group structure (for example, establishing appropriate control procedures, achieving
operational synergies, and turning around former state-o:ned and often inefficient plants). But
Mittal has a track record of successfully integrating and restructuring previously
underperforming state-o:ned assets. Vast geographical diversification also mitigates risk in
each particular emerging market, as the group is no longer markedly dependent on any single
asset or market.
In the medium to long term, the main issue for the group is its success in integrating recently
acquired assets and maintaining long-term, stable relationships :ith the governments of host
countries.
The Mittal group has a complex structure and has only majority control, but not full control,
over some of its cash-generative and cash-rich subsidiaries. For example, Mittal o:ns only 51%
of the South African plant, 70% of the Algerian plants (30% is state-o:ned), and 76% of the
Czech plant. This constrains cash flo: circulation :ithin the group and may lead to significant
spending to buy out minority interests (although no such requirements are currently effective).
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The business strategy that has made Mittal Steel the :orld's largest steel maker is a
commitment to consolidation and globalization and a :illingness to take risks that scare off
competitors. As the steel industry overall struggled in the present decade, Mittal Steel,
grappling :ith financial problems of its o:n, continued to expand. And as competitors insisted
that steel should remain a regional business, Mittal Steel pursued its vision of becoming a
global giant.
Mittal steel is as the :orld's largest, most diversified steelmaker; strong positions in North
America, Asia, and Africa; and robust free cash flo: generation.
The group's vertical integration in mining and lo: cost position in emerging market operations
support profitability through the cycle and help reduce capital-expenditure needs.
These factors are tempered by the group's ambitious plans to gro: through acquisitions;
institutional risks associated :ith emerging markets; and uncertainties regarding the
integration of ne:ly acquired assets, although Mittal's integration track record has been
successful to date.
Mittal is the most diversified steel company in the :orld in terms of asset location and market
presence across all regions, and the group's product range includes both flat and long steel. As
such, Mittal is not overly dependent on any single region, product, or end market (see chart 1).
The company's overall lo: cost position is buttressed by vertical integration and lo: :age
costs in its Kazakhstan, Romania, Poland, Algeria, and South Africa locations. The acquisition
of U.S.-based International Steel Group Inc. (ISG) in early 2005 moved the group into a high
cost-base market, but bettered geographical market diversification. Moreover, Mittal's cost
advantages are expected to strengthen further since acquiring Mittal Steel Kryviy Rih in late
2005.
In cyclical businesses, such as steel, volatile margins depend on changes in ra:-material and
finished-product prices. Compared :ith peers, Mittal has higher exposure to spot markets.
Most of the shipments outside North America are spot sales. Although a significant part of sales
in North America are under long-term contracts, most of these contracts are annual and carry
surcharge provisions, and there is significant exposure to automotive customers.
Upstream integration into iron ore and coking coal provides Mittal :ith a competitive
advantage throughout the cycle. In 2005 (pro forma ISG acquisition), 56% of iron ore and 42%
of coal requirements :ere supplied by the group's mining subsidiaries or under long-term
contracts. Kryviy Rih integration :ould further increase vertical integration, as that company is
about 80% self-sufficient in coke and iron ore.
Also, as one of the largest players in any of its markets, Mittal has major negotiating po:er.
Mittal takes advantage of its diversified asset base to achieve operating synergies. For example,
the group estimated the synergies on ISG to be about $250 million, and on Kryviy Rih about
$200 million, because of optimization of sales, marketing, procurement, and IT costs.

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:::.:ikipedia.com

:::.accessmylibrary.com

:::.:harton.universia.net
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:::. mittalstee l .com

:::. arcelormitta l .com