KARNATAKA UNIVERSITY

DHARWAD

INSTITUTE OF EXCELLENCE IN MANAGEMENT SCIENCEGROUP PROJECT

On

STRATEGIC MANAGEMENT

Of

STEEL SECTOR

Project Profile

SUBMITTED BY:

SUBMITTED TO:

Prof. PUSHPA H

CONTENTS

Sl.No Topics

01 Background of steel industry

02 Block diagram of the industry

03 Competitive structure

04 EFAS – 5force model, BCG matrix

05 IFAS

06 SWOT/TOWS

07 Ratio analysis

08 Generic strategy - FBC

09 Implementations

10 References

INDUSTRY OVERVIEW

Steel Industry

Due to most crucial necessity of steel in infrastructural and overall economic development, steel industry is often considered as an economic indicator of any country’s development. Steel seems to be heading for consolidation in the coming years as the global economic recovery is gaining momentum. In fact, China and India have reported huge rise in demand for steel with construction and auto sectors growing at a higher speed.

Steel is an important indicator to analyze the economic development of a country. The steel industry is highly scientific and technology oriented. Technological advancement is very important for the overall health of the steel industry.

Steel is not a single product. It is an alloy consisting mostly of iron, with carbon content between 0.2% and 2.1% by weight, depending on the grade. There are currently more than 3,500 different grades of steel with many different physical, chemical, environmental properties. If the Eiffel Tower were to be rebuilt today the engineers would only need one-third of the amount of steel.

Carbon Steel, Coated Steel (Galvanized & Color coated), billet, Electric Sheets, Flat Steel Products, Long Steel Products, slabs, Flat steel coil products(Strip) are the some of the finished steel.

India is expected to emerge as the third-largest consumer of steel in 2011, after China and the United States, buoyed by a focus on building infrastructure and strong growth in the automobile and consumer goods sectors.

Indian Steel Industry:

During Ancient Period:

The history of iron and steel making in India goes back by several centuries. It dates to 480 BC when archers in India used arrows tipped with steel. The iron pillar of Dhar near Indore in Madhya Pradesh dates back to about 321 AD, the iron pillar of Kutub Minar near Delhi dates back to about 400 AD and the iron beams of Sun temple of Konark in Orissa dates back to 13th century. These pillars are a testimony to ancient India's expertise in the making of steel.

Before Independence:

The roots of the Indian Steel industry in modern times can be traced to the year 1874, when a company called Bengal Iron works at Kulti near Asansol in West Bengal produced iron. One of the most important landmarks in the history of Indian steel industry was the commencement of the Tata Iron and Steel Company at Jamshedpur in the state of Bihar in 1907.The other prominent steel manufacturers before independence were Indian Iron and Steel Company (1922),Mysore Iron and Steel Works(1923) and Steel Corporation of Bengal (1937).

After Independence:

India found it difficult to sustain development in steel sector after independence on its own due to the lack of technological development. The high cost of developing technology in this sector proved to be a major hindrance. That's when the government decided to go for synergy with other countries for technology transfer. Some of the prominent steel plant set up then was in Rourkela in collaboration with West Germany and in Bokaro in collaboration with Russia. These steel plants came under the purview of public sector enterprises.

Post Liberalization:

The post liberalization scenario in the Indian Steel industry has witnessed a monumental shift. Some of the salient features are:

The need for license for increasing capacity has been abolished. Steel industry has been removed from the list of Industries under the control of state

sector. Foreign equity investment in steel has gone up to 74%. In January 1992 the price and distribution controls were removed. Policies like convertibility of rupee on trade account, freedom to mobilize resources from

overseas financial markets and restructuring of existing tax structure have immensely benefited the industry.

Milestone:

The Indian steel industry has come a long way since its humble beginnings. The takeover of the British steel giant Corus steel by Tata Steel and the acquisition of Arcelor by Mittal Steel herald a new beginning for the Indian steel industry. These events signify the fact that the Indian steel industry has acquired a global identity and are today extremely competitive globally.

Some of the prominent steel producers today are Posco, Tata Steel, Essar, Ispat, SAIL and RINL.

Future trends:

It has to be said that the global recession has affected the Indian steel industry especially stainless steel, but the steel industry is trying to offset the negative effect of the recession by focusing on transportation and construction projects which are usually funded by the government.

India is the only country globally to record a positive overall growth in crude steel production at 1.01 per cent for the period January -March 2009.

It is estimated that India's steel consumption will grow at nearly 16% annually till 2012. The National Steel Policy has forecasted the demand for steel would reach 110 million

tons by 2019-2020.

Global Production and Consumption:

World production of crude steel in March 2010 rose by 31% to 120.3 million tonnes, the highest monthly total since May 2008. The total production in January to March is 342.4 million tonnes, 29% higher than the same period in 2009. This figures shows clearly that most countries are on path of rapid recovery from the recession. From January to March Chinese steel production increased by 24.5% to 158 million tonnes, Japan’s production jumped by 51% and South Korea increased by 29% .

Demand in India will rise 13.6 percent in 2011 to 68 million tonnes, the World Steel Association predicted in October. Growth in global steel demand, however, is likely to slow to 5.3 percent in the year, with China's demand expected to grow by 3.5 percent.

INDIAN SCENARIO

According to the report 2009-10 by the Ministry of Steel, India is the fifth largest producer of steel in the world and it will become the world’s second-largest steel producer by 2012, more than doubling its capacity to 124 million tonnes (MT).

Steel production rose 4.2 per cent to reach 60 MT in 2009-2010 and has an installed capacity of 72.76 million tones. According to the Ministry of Steel, Steel production in the 2010/11 (April-March) fiscal year is likely to be 65 million tones.

The growth in steel consumption in any country is a positive sign for economic growth of that country. Due to improved demand from sectors like automobile, infrastructure and housing, India’s steel consumption rose 9.6 per cent to 4.14 million tonnes (MT) in April 2010. Exports continued to slide and dropped 34.8 per cent to 1.84 lakh tonnes in April, revealing the slow pace of recovery in main steel import destination–the US and the European markets.

India is the fifth largest producer of steel in the world. India Steel Industry has grown by leaps and bounds, especially in recent times with Indian firms buying steel companies overseas. The scope for steel industry is huge and industry estimates indicate that the industry will continue will to grow reasonably in the coming years with huge demands for stainless steel in the construction of new airports and metro rail projects. The government is planning a massive enhancement of the steel production capacity of India with the modernization of the existing steel plants.

Industry Statistics:

Government targets to increase the production capacity from 56 million tonnes annually to 124 MT in the first phase which will come to an end by 2011 - 12. Currently with a production of 56 million tones India accounts for over 7% of the total steel produced globally, while it accounts to about 5% of global steel consumption. The steel sector in India grew by 5.3% in May 2010. Globally India is the only country to post a positive overall growth in the production of crude steel at 1.01% for the period of January - March in 2009.

Exports:

About 50% of the steel produced in India is exported. India's export of steel during April - December 2009 was 64.4 MT as against 9.7 MT in December 2008. In February 2010, steel export increased by 17% to 12.6 MT from 10.8 MT in the same month last year. More than 50% of steel from India is exported to China. The Government's decision to reduce export duty on iron ore lumps from 15% to 5% has given a major boost to the export of steel.

Hurdles:

Power shortage hampers the production of steel Use of outdated process for production Lags behind in the production of stainless steel Deficiency of raw materials required by the industry Labor productivity is low. It is 144 tons per worker per year against 600 tons in Western

Europe as per estimates Inadequate shipment capacity and transport structure

Strengths:

There are many strong points of the industry that makes it one of the leading names in the global steel industry. The rate of labor wage in India is among one of the lowest in the world thereby making large scale production feasible. The boom witnessed in the automobile industry has ensured that the demand for steel is increasing gradually and will continue to do so in the near future. There is huge manpower in India which is another reason why steel production in India is high and the industry is doing pretty well both nationally and internationally.

Some important facts:

The domestic steel sector has attracted an investment of about US$ 238 billion. This consists of nearly 222 MoU’s signed between the investors and state governments of

Orissa, Jharkhand, Chhattisgarh and West Bengal. Due to some government initiative in the budget and higher spending on infrastructure

development, steel demand is likely to increase by 10 percent in the fiscal year to March 2011. In the Union Budget 2010-11, India’s Finance Minister Pranab Mukherjee proposed to invest 1.73 trillion rupees on infrastructure sector, which will further promote the steel industry.

Here are some key facts about India's steel industry.

NO. 3 PRODUCER

* India's iron and steel industry contributes about 2 percent of gross domestic product, or about $24 billion, to the country's roughly $1.2 trillion economy.

* India is now the third largest producer of steel in the world after China and Japan.

It produced 62.8 million tonnes of the alloy in 2010, but is still only about a tenth the size of China, the No.1 steel producing country.

* State-run Steel Authority of India is the largest producer, with capacity of 13.8 million tonnes. JSW Steel has annual capacity of about 7.8 million tonnes, while Tata Steel, the world's No. 7 steelmaker, has capacity in India of about 7.5 million tonnes.

About half of India's steel industry comprises a large number of makers of higher-end re-rolled steel with less than one million tonnes of capacity each.

EXPANSION

* India's steel producing capacity is likely to touch 120.62 million tonnes by 2011/12, the federal steel ministry says. Based on planned projects, capacity could go up to 293 million tonnes by 2020.

Regional governments have signed 222 memorandums of understanding for planned capacity of 276 million tonnes.

* India has immense scope to increase its consumption of steel. Current per capita consumption is around 40 kg, against 100 kg in Brazil, 250 kg in China and a global average of 198 kg. Steel demand is expected to rise in double digits annually for the next few years.

* India's growing status as a small-car hub is drawing global steel makers, especially Japanese firms, to the country.

Mergers and Acquisitions:

Defining M&A

The Main Idea one plus one makes three: this equation is the special alchemy of a merger or an acquisition. The key principle behind buying a company is to create shareholder value over and above that of the sum of the two companies. Two companies together are more valuable than two separate companies - at least, that's the reasoning behind M&A.

Distinction between Mergers and Acquisitions:

When one company takes over another and clearly established itself as the new owner, the purchase is called an acquisition. From a legal point of view, the target company ceases to exist, the buyer "swallows" the business and the buyer's stock continues to be traded. In the pure sense of the term, a merger happens when two firms, often of about the same size, agree to go forward as a single new company rather than remain separately owned and operated. For example, both Daimler-Benz and Chrysler or Arcellor and Mittal ceased to exist when the two firms merged, and a new company, DaimlerChrysler and Arcellor-Mittal, was created.

Reasons for Acquisitions:

By merging, the companies hope to benefit from the following:

Staff reductions - As every employee knows, mergers tend to mean job losses. Consider all the

money saved from reducing the number of staff members from accounting, marketing and other

departments. Job cuts will also include the former CEO, who typically leaves with a compensation

package.

Economies of scale - Yes, size matters. Whether it's purchasing stationery or a new corporate IT

system, a bigger company placing the orders can save more on costs. Mergers also translate into

improved purchasing power to buy equipment or office supplies - when placing larger orders,

companies have a greater ability to negotiate prices with their suppliers.

Acquiring new technology - To stay competitive, companies need to stay on top of technological

developments and their business applications. By buying a smaller company with unique

technologies, a large company can maintain or develop a competitive edge.

Improved market reach and industry visibility - Companies buy companies to reach new markets

and grow revenues and earnings. A merge may expand two companies' marketing and distribution,

giving them new sales opportunities. A merger can also improve a company's standing in the

investment community: bigger firms often have an easier time raising capital than smaller ones.

Tata Vs Corus

Corus decides to sell: Reasons for decision:

Total debt of Corus is 1.6bn GBP

Corus needs supply of raw material at lower cost

Though Corus has revenues of $18.06bn, its profit was just $626mn (Tata’s revenue was

$4.84 bn & profit $ 824mn)

Corus facilities were relatively old with high cost of production

Employee cost is 15 %( Tata steel- 9%).

Tata Decides to bid: Reasons for decision:

Tata is looking to manufacture finished products in mature markets of Europe.

At present manufactures low value long and flat steel products while Corus produces

high value stripped products

A diversified product mix will reduce risks while higher end products will add to bottom

line.

Corus holds a number of patents and R & D facility.

Cost of acquisition is lower than setting up a green field plant and marketing and

distribution channels

Tata is known for efficient handling of labour and it aims at reducing employee cost and

improving productivity at Corus

It had already expanded its capacities in India.

It will move from 55th in world to 5th in production of steel globally.

Arcellor- Mittal Deal:

The case……

Mittal makes surprise €18.6 billion bid for Arcelor in January 2006

Arcelor management announce large dividend

Arcelor makes very positive profit report, which is later found to be inflated

Arcelor makes rosy forecast for future performance

Arcelor management and European politicians criticize Mittal

Arcelor management refuses to meet with Mittal until a string of demands were met

Arcelor tries to get Luxembourg government to write a takeover law shutting out

Mittal

Arcelor unions fear job cuts, reduction in social standards

Arcelor managers fear Mittal will shift emphasis from long- to short-term goals

Arcelor commits to buy North American steel company that will cause Mittal anti-

trust problems

o Agreement contains clause making it costly to not go through with sale

Arcelor made €13 billion deal with Severstal of Russia, including break-up fee of

€140 million

Arcelor, Mittal, and Severstal engage in heavy advertising, meetings with investors

and politicians

Arcelor arranges for shareholder meeting where Severstal deal would be approved

unless 50% plus one of shareholders were present and voted it down, an unusually

high percent. The meeting isn’t scheduled until after Severstal deal has been nearly

finalized.

Mittal raises offer to €26.5 billion, and agreed to cede some management control

and family voting rights

o nearly double the price per Arcelor share Arcelor was trading at prior to Mittal’s

bid in January

Arcelor’s institutional shareholders and hedge funds voice disapproval in Severstal

deal, support Mittal deal

o Arcelor management fears shareholders will vote down share buyback necessary

for Severstal deal to go through

o Shareholders threaten to oust Arcelor management and sue Arcelor board

Six percent of Arcelor shareholders sued Arcelor’s board for selling for too low a

price

o Unlikely to succeed, given very high premium on Arcelor shares relative to pre-

takeover-battle price

Arcelor-Mittal sells valuable Maryland steel mill in August 2007 to satisfy U.S. anti-

trust authorities

Current Scenario:

Steel makers in the country had increased their prices for the third time this year in April due to spiraling iron ore and coking coal prices. Iron ore prices in 2010 had almost doubled from last year’s levels to $120-160 a tonne. But the industry is hopeful that curbing exports would help reduce iron ore prices.

Prices downgraded by around 13% in the month of April 2010, after hovering in broad range of Rs.25,130-30,150 per tonne. This is as compared to 2.06% gains in same month last year. Moreover, prices have fallen by around 4.50 percent since the year start SAIL had announced a price cut of Rs 2,000 per tonne for its long products effective from 1st May 2010. However, this is not an indication of any future fall in steel prices. There is consumer resistance to further price increase but ultimately the pattern of global prices is still followed here and so we will also depend on the same.

The current scenario of the Indian steel industry indicates that there is huge growth potential in this industry. The per capita-consumption of steel in India, according to latest available estimates, is only 48 kg. This is much less compared to the global average of 190kg. The per capita consumption level of developed nations like the United States of America is 187kg.

COMPANY OVERVIEW

JSW STEELS:

JSW Steel, the flagship company of the JSW Group, is the largest integrated private steel manufacturer in India in terms of installed capacity. JSW’s history can be traced back to 1982, when the Jindal Group acquired Piramal Steel Limited, which operated a mini steel mill at Tarapur in Maharashtra and renamed it as Jindal Iron and Steel Company (JISCO).

In 1994, in order to achieve the vision of moving up the value chain and building a strong, resilient company, Jindal Vijayanagar Steel (JVSL) was setup with its plant located at Toranagallu in the Bellary-Hospet area in the State of Karnataka, the heart of the high-grade iron ore belt and spread over 3,700 acres of land. JSW Steel, is today one of the low cost steel producers in the world. It has grown to USD 2.50 billion in little over a decade. It is been ranked 2nd among top 32 ‘World Class’ steelmakers by World Steel Dynamic (June 2010).

VISION:

“Global recognition for Quality and Efficiency while nurturing Nature and Society.”

MISSION:

Supporting India's growth in Steel Domain with speed & innovation .

CORE VALUES:

Transparency Strive for Excellence Dynamism Passion for Learning.

BOARD OF DIRECTORS:

Name DesignationMrs. Savitri Jindal ChairpersonMr. Sajjan Jindal Vice Chairman & Managing DirectorMr. Sheshagiri Rao M.V.S Jt. Managing Director & Group CFODr. Vinod Nowal Director & CEOMr. Jayant Acharys Director (Commercial & Marketing)Mrs.Zarin Dariwala Nominee Director of ICICI Bank Ltd.Mrs. Vandita Sharma, IAS Nominee Director of KSIIDCMr. Anthony Paul Pedder DirectorMr. Uday M. Chitale DirectorMr. Sudipto Sarkar DirectorMr. K. Vijayaraghavan Director

Dr.Vijay Laxman Kelkar DirectorMr. Shigeru Ogura Nominee Director, JFE Steel CorporationProducts of JSW Steels:

UPSTREAM PRODUCTS:

PRODUCT DETAILS :

MILD STEEL HOT ROLLED COILS :

Thickness : 1.8mm to 10mm

Width : 800mm to 1250mm

Inner Diameter of the Coil

: 710mm

Outer Diameter of the Coil

: 1800mm

Coil Weight :14 tonnes to 21.50 tonnes

MILD STEEL HOT ROLLED PLATES & SHEETS :

Thickness : 3mm to 10mm

Width : 800mm to 1250mm

Length : 2.5 meters to 10 meters

DOWNSTREAM PRODCTS:

HOT ROLLED PLATES

Hot Rolled plates from M.S. Slabs. It has an installed capacity of 2, 80,000 tpa. This plant is located at Vasind, 70 Km away from Mumbai, Maharashtra, India.

DIVERSE APPLICATIONS

Automobiles Electrical Panels Furniture White goods Transformers Oil Barrels & Drums

General Engineering

ARCELOR MITTAL

Arcelor Mittal is the world's leading steel company, with operations in more than 60 countries.

Arcelor Mittal is the leader in all major global steel markets, including automotive, construction, household appliances and packaging, with leading R&D and technology, as well as sizeable captive supplies of raw materials and outstanding distribution networks.

With an industrial presence in over 20 countries spanning four continents, the Company covers all of the key steel markets, from emerging to mature. Through its core values of Sustainability, Quality and Leadership, Arcelor Mittal commits to operating in a responsible way with respect to the health, safety and wellbeing of its employees, contractors and the communities in which it operates. It is also committed to the sustainable management of the environment and of finite resources.

Mission:

R&D is the main instrument for delivering Arcelor Mittal's ambitions in technological innovation and supporting its sustainability and future growth.

Products of Arcelor Mittal:

Stainless Steel

Arcelor Mittal is a global leader in the stainless steel business, both in volume and turnover. The company produces the entire range of flat stainless steel and alloy products.

Stainless steels are used in four major markets:

Domestic appliances and household equipment (sinks, cooking utensils, cutlery...). The household appliance industry is a big consumer of the Group's stainless steels. Arcelor Mittal is a world leader in packaging

Automotive (mainly in exhaust systems)

Construction and street furniture (facades and building products). Arcelor Mittal has developed a range of reflecting products that substitute for aluminum in lighting. Our colored stainless steels for use in architectural applications combine durability with aesthetic appeal

Industry (especially the food, chemical and oil industries)

Our range of stainless steels today covers all of the requirements for customers seeking materials that are attractive, resistant to corrosion, resistant to high temperatures and easy to maintain.

Board of Directors:

Name DesignationLakshmi N. Mittal Chairman of the Board of Directors and CEOVanisha Mittal Bhatia Member of the Board of DirectorsNarayana Vaghul Member of the Board of Directors IndependentWilbur L. Ross, Jr. Member of the Board of Directors Lead

Independent DirectorLewis B. Kaden Member of the Board of Directors,

IndependentFranois Pinault Member of the Board of Directors, Non

IndependentJeannot Krecke Member of the Board of Directors, Non

IndependentAntoine Spillmann Member of the Board of Directors,

Independent.H.R.H. Prince Guillaume de Luxemberg Member of the Board of Directors,

independent.

Mergers and Acquisitions:

February 2007:

Arcelor Mittal contracts a joint venture agreement with the Bin Jarallah Group for a seamless tube mill in Saudi Arabia. The mill will have a capacity of 500,000 tonnes per year; the major part of tubes produced will be used in the oil industry and the remainder for pipelines.

April 2007:

Arcelor Mittal finalizes the acquisition of Sicartsa, from Grupo Villacero, leading to the creation of Mexico's largest steel producer. Sicarsta is a fully integrated producer of long steel, with an annual production capacity of about 2.7 million tonnes and with facilities in Mexico and Texas (United States). Arcelor Mittal has also entered into a 50/50 commercial joint venture with Grupo Villacero.

February 2008

Arcelor Mittal acquires the remaining 50% interest in Laminadora Costarricense and Trefileria Colima, the only major long carbon steel company in Costa Rica.

November

Arcelor Mittal acquired an additional 13.9% stake in Arcelor Mittal Ostrava, increasing its stake to approximately 96.4%. The transaction was completed in January 2010.

Block Diagram of the Steel Iddustry:

Various partners of the Industry:

Automobiles Infrastructure Coal and Iron ore Mines Construction

Diversifications in the Industry:

Backward Integration: Ore.

Forward integration: Auto Industry.

Alternatives for the Steel:

Aluminum, Fibre and Plastic is treated as the alternatives for the steel.

Size of the Industry:

The steel industry is one of the major industries of India. It has also gained considerable importance in the global steel industry. This century old industry of India was mostly a regulated one till 1990.

The economic reforms undertaken in India in the early 1990s gave a major boost to the steel industry and it grew considerably in terms of investment, production capacity and number of producers. The industry faced a downturn during the late nineties but revived again by 2002.

The size of India's steel industry has increased considerably in recent years. According to latest available estimates, India ranks eighth among the top steel producers of the world with a production capacity of 62.8 MT.

The steel industry of India has capital investments of more than Rs 100, 000 crores. The total employment in the industry is more than two million (including direct and indirect employment).

Some of the major reasons that have led to the growth in the size of India's steel industry are -

Abundant availability of iron-ore in India. Good facilities for steel production Increased consumption of steel in the sectors like Construction, Housing, Ground

transportation, Hi-tech engineering industries such as power generation, petrochemicals, fertilizers

Relative Competitve Advantage:

Technological uniqueness

Successfully operates the contemporary Corex technology; regarded as the best Corex unit operational globally;

Houses the largest blast-furnace operational in India; Capable of rolling products over 2 metres wide (widest hot-strip mill); only domestic

capacity with the contemporary pair-cross technology; Only twin-stand reversible cold-rolling mill in India; possesses a continuous pickling

line, first in India’s steel industry; and The wire rod mill is India’s fastest facility, operating at 105 metres per second; the unit’s

coil weight is India’s highest (2.2 tonnes), against industry average of 1.5-1.75 tonnes. JSW Steels is the only company which uses both the Corex and Blast Furnace

Technology compare to other companies.

Relative Competitive Advantage in India

Focus - Value Addition: Through increasing the sales of Value added Products as well as by developing new products conforming to higher end specifications and grades. Value added product sales up by 55%.

Enhancing Global Competitiveness of Value-Chain partners: By making steel available at globally competitive proposition.

Thrust - Import Substitution: Expanded domestic share from 72% in 2008-09 to 84%. Expanding distribution network: To capitalize the spread-out demand opportunities as

well as for the betterment of timely delivery concept. JSW Shoppe continues to expand from 50 in 2008-09 to 174 as on March’10 with Shoppe sales up by 114% to 0.64 million tonnes, leveraging the demand of the Semi-Urban and Rural India as well. Additionally, JSW has been expanding its Distribution Points on a Pan-India basis as well.

Increasing Domestic presence for Flat Steel: Domestic sales up by 59% to 3.04 million tonnes with domestic market share increasing to approx. 13% from 9% in the previous year

Efforts onto Brand Building: Focus on leveraging brand-recall and brand-value adopting multi-fold brand-building techniques viz. Introduced innovative concept of “Shoppe-On-Wheel” in the Rural India, Wall- Paintings, Pro-Active participation in relevant exhibitions, Print-Media

Advertisements, etc., leveraged sales of branded products by 64% of domestic sales.

Porters five force model

The ideal 5 force of the industry refers to the following factors as shown in the figure. Based on

this model, the relative model for the JSW steels is drawn. The factors are analyzed based on

respective data collected from various sources.

The Threat of New Entrant

The threat of entry depends on the presence of entry barriers. Entry barriers make it difficult for

another business to enter the industry. Examples of these barriers include economies of scale and

capital requirements.

Because these are large in farming, they prevent new firms from quickly entering the industry.

Other barriers to new entrants include product differentiation, switching costs, and government

policy. In the production of Steel commodities there is very little product differentiation.

However, there are a few opportunities, such as the production of products with special traits or

the provision of special services, for creating differences. Differentiating products or services

raises customers’ cost of switching. Switching costs are the one-time costs customers incur when

buying from a different supplier. For most steel products, switching costs are high, providing

barrier to new entrants.

Licensing, permit requirements, and establishment of standards by governments can control

entry into some industries. Businesses such as real estate appraisal and brokerage require certain

licenses before you can enter the business.

Threat of substitute products

Substitute products are products that appear to be different but can satisfy the same need as

another product. Chicken can be a substitute for beef in consumers’ diets. When switching costs

are low, substitutes can place a price ceiling on products.

In general, substitutes are a strong threat to the farm business when customers face few, if any,

switching costs and when the substitute product’s price is lower or its quality and performance

capabilities are equal or greater than those of the competing product.

Bargaining power of suppliers

Bargaining power of suppliers affects the industry by suppliers’ ability to raise prices or reduce

the quality of goods and services. Suppliers are likely to be powerful if:

• They are few in number,

• Each individual farmer purchase represents only a small amount of the companies’ sales,

• There are not good substitutes for the product purchased, and

• The product or service is unique.

Suppliers of plants with specialized characteristics possess some of these features. The desired

characteristics, such as herbicide resistance, are unique, with no good substitute. The technology

for producing the characteristic in the crop is available from one or very few suppliers. In

addition, a single farmer represents only a small amount of the seed supplier sales. As a result,

the suppliers of these products are able to charge a higher price for their inputs. Another example

where the supplier is weak would be a small parts supplier selling to a large machinery

manufacturer. The major machinery makers may be in a very strong position with respect to the

thousands of suppliers and can use this to gain concessions in ways that support their own

strategies (lower price, higher service, or higher quality at the same price). On the other side, the

machinery maker may have a weaker position with respect to some inputs, for instance, steel,

and its own ability to compete will depend on the prices negotiated with the major steel

suppliers. If, for example, the supplier raised prices, the buyer may have little option but to carry

that cost

Bargaining power of buyers

Bargaining power of buyers affects the industry through the buyers’ ability to force down prices,

bargain for higher quality or more services, and play competitors against each other. Buyers are

likely to have power if:

• A buyer purchases a large part of the seller’s product,

• Alternative suppliers are plentiful because the product is undifferentiated,

• The buyers earn low profits and are sensitive to cost differences, and

• The purchased product is unimportant to the final quality or price of the buyers’ products.

Competition

Rivalry among existing firms is the amount of direct competition in an industry.

Industries that have intense competition are characterized by:

• Many competitors that are roughly equal in size,

• Slow rates of industry growth,

• The production of commodities,

• High fixed costs, and

• High exit barriers arising from investments in specialized equipment

The overall growth rate of the industry also influences rivalry. When a market is growing,

businesses have access to an expanding customer base. This reduces the pressures on businesses

to take customers from competitors. As growth rates decline, the battle for customers becomes

more intense.

The high degree of rivalry in production agriculture stems in part from it having high fixed costs

and high exit barriers. When fixed costs account for a large part of total costs, it is important for

the business to maximize the use of productive capacity. This allows the business to spread costs

across a larger volume of output. However, when many businesses attempt to maximize

productive capacity, excess capacity can be created for the industry. The price of industry

products will fall. These declining prices indicate that resources should be shifted to other

industries. However, many of the assets are highly specialized and have no value in other

industries. Hence high exit barriers. The best way to recover the investment in these resources is

to continue using them for the purpose for which they were designed. This means that

adjustments to overcapacity will occur only as these specialized assets wear out.

Competitive Analysis: Porter’s Five-Force Model

Entry barriers

The entry barrier to steel sector is high due to the following reasons.

Capital Requirement:

The capital required for setting up a steel plant is too huge. To set up 1mtpa plant the

amount required is of Rs. 25-30 bn.

Economies of scale:

Scale of operation is the important factor along with lower cost of operation & JSW has

good control over the economies of scale. EOS of the company is met by its work on the

R&D.

R & D expenses:

The R&D work needed is also high. As a result JSW spending on R&D is increasing

every year. In the year 2009 the amount spent by company is Rs.10.63 Crores compared

to year 2008 is Rs.10.21 crores.

Government policies:

Licensing, permit requirements, and establishment of standards by governments can

control entry into some industries. Businesses such as Steel plant set up & operations,

real estate appraisal and brokerage require certain licenses before you can enter the

business. Ex. JSW is into the business of minerals i.e. Extraction of ore.

The Govt of Karnataka has given permission for extraction of only 2.5mn ton though the

total permission is of 3mn ton. This might be due to reason of Govt limit entry into an

industry through licensing requirements by restricting access to raw materials and

environment protection in & around Timmappangudi located 25km away from the plant

where the ore is extracted.

Competition from Foreign Players:

The competition is bit high for JSW in the years to come. Due to the reason that Arcelor

Mittal Company is going to set up its new plant worth Rs.4000 crores near Ballary only.

Spurt in Merger and Acquisition Activities

Access to distribution channels

Competition within the industry

The rivalry among the existing players is high. The reasons are:

Influence of global price by China:

China is the world leading player with a maximum share of 46%. In the year 09 total steel

production across globe was 1223 Mn ton. Out of which china alone produced 567 Mn

tons. The other reason is along with largest production, there consumption is also high.

This is due to the increase in steel consumption by other sectors.

Commodity product:

Since steel is a commodity product, so there is no much option available for the branding

of product. With a minor gain over the edge, JSW is building its brand through JSW

“Vishwas” steel. Since its a commodity product which does not require branding.

Market share:

The steel sector is dominated by few players. Among the existing firms SAIL, JSW,

ISPAT & Essar have the market share of 71%. Remaining 29% is shared by rest of

company’s.

Concentration ratio:

The relative size of the firm in relation to the industry (JSW is leading 2nd)

Oligopoly market

Fixed Cost/Value added:

This is under control of Indian ministry which has no deregulation system.

Substitute products

The threats of substitutes are low in the steel sector.

Plastics & Composites

The major replacement for steel is the aluminum. Total of 4% steel produced goes into

auto sector. So slowly aluminum is getting the higher demand. But comparatively its not

affecting the steel sector in large amount.

Steel replacement in large volume

Few areas where steel is getting replaced are railway sleepers, RCC, PVC pipes & PVC

tanks.

Technological Change:

JSW is using the corus technology in its production when compared to blast furnace tech

used by other players.

Aluminium

Buyer’s inclination & Seller suggestions

Power of suppliers

Controlled by major suppliers

JSW imports coal from Australia which is about 40%. In India NMDC is the major

supplier of raw materials. Across the globe BHP Billiton, CVRD & Riotinto have the

2/3rd supply of raw materials.

Import of scrap

3.5 Mn scrap is imported in the year 09.

Deposits of iron ore are finite

Iron ore deposits are finite. In India coal deposits are of low quality

Differentiation of inputs

Importance of volume to supplier

Lack of Captive Source

Lack of Transportation

Threat of backward integration

To avoid this JSW is accessing to 20 billion tonnes of mines through international

competitive bidding in Bolivia. JSPL plans to invest $2.3 billion over the next eight years

in Bolivia. They have a huge product line over there – a 1.8 MT steel plant and 6 MT

snooze iron unit happens to be one of them.

Right now they are importing only coal from Australia & converting coal to coke is done

in JSW plant only. There having control over the price fluctuations.

Power of buyers:

The bargaining power of consumer is of mixed type here.

Substitutes Available

Threat of forward Integration

Buyers incentives

Conclusion:

Planning requires a careful look at the future. In developing a new strategy or recommitting to

your current strategy, the farm business manager must evaluate the social and industry

environment. To help organize your thoughts about the future business environment, two tools

are provided: “ Applying the Five Forces Model” and “ Assessing Opportunities and Threats.”

Suggested procedures for using these tools are presented below.

Perhaps the most important thing to keep in mind is the inverse relationship between profit

potential and the intensity of competition: as the intensity of competition goes up, profit potential

is driven down. The objective of business strategy should be to respond to these competitive

forces in a way that improves the position of the organization. Based on the information

collected from a five forces analysis, management can decide how to influence or to exploit

particular characteristics of their industry

BCG Matrix:

Understanding the Model

Market Share and Market Growth

To understand the Boston Matrix, you need to understand how market share and market growth

interrelate.

Market share is the percentage of the total market that is being serviced by your company,

measured either in revenue terms or unit volume terms. The higher your market share, the higher

the proportion of the market you control.

The Boston Matrix assumes that if you enjoy a high market share you will be making money.

(This assumption is based on the idea that you will have been in the market long enough to have

learned how to be profitable, and will be enjoying scale economies that give you an advantage).

The question it asks is, "Should you be investing additional resources into a particular product

line just because it is making you money?" The answer is, "not necessarily."

This is where market growth comes into play. Market growth is used as a measure of a market's

attractiveness. Markets experiencing high growth are ones where the total market is expanding,

meaning that it’s relatively easy for businesses to grow their profits, even if their market share

remains stable.

By contrast, competition in low growth markets is often bitter, and while you might have high

market share now, it may be hard to retain that market share without aggressive discounting.

This makes low growth markets less attractive.

Understanding the Matrix

The Boston Matrix categorizes opportunities into four groups, shown on axes of Market Growth

and Market Share:

These groups are explained below:

Dogs: Low Market Share / Low Market Growth

In these areas, your market presence is weak, so it's going to take a lot of hard work to get

noticed. You won't enjoy the scale economies of the larger players, so it's going to be difficult to

make a profit. And because market growth is low, it's going to take a lot of hard work to improve

the situation.

Cash Cows:

High Market Share / Low Market Growth

Here, you're well-established, so it's easier to get attention and exploit new opportunities.

However it's only worth expending a certain amount of effort, because the market isn't growing,

and your opportunities are limited.

Stars: High Market Share / High Market Growth

Here you're well-established, and growth is exciting! There should be some strong opportunities

here, and you should work hard to realize them.

Question Marks (Problem Child):

Low Market Share / High Market Growth

These are the opportunities no one knows what to do with. They aren't generating much revenue

right now because you don't have a large market share. But, they are in high growth markets so

the potential to make money is there.

Question Marks might become Stars and eventual Cash Cows, but they could just as easily

absorb effort with little return. These opportunities need serious thought as to whether increased

investment is warranted.

The various SBU’s of JSW are

Semis product

Rolled flat products

PS

RR

V

Rolled long products

STAR

Rolled long

Semis

QUESTION MARK?

Value added steel

Rolled flat products

CASH COW DOG

Busines growth rate

9%

Relative market share

The following conclusions are drawn from the above BCG matrix.

The relative matrix is drawn according to the data gathered & analyzed.

The rolled long products are placed in the Star. Its found that the market share & also the

business growth rate of JSW when compared on the basis of GDP is done. The rolled long

products are expanding both vertically & horizontally.

The rolled flat products are placed in the question mark. Its because the relative market share of

JSW when compared to SAIL is less & falls below 1. So the flat products are put in question

mark.

The semis products are placed in star box.

The value added steel products are gaining the growth rate but have failed t gain the relative

market share due to SAIL. The products are moving in the upward direction but not expanding

horizontally.

Ch.5: INTERNAL FACTORS ANALYSIS

INTERNAL FACTORS AFFECTING STEEL UNITS IN GENERAL

A Brief Introduction:

Why Internal Analysis To Any Industry?

Scanning and analyzing the external environment for opportunities and threats is not enough to

provide an organization a competitive advantage. Analysis must also look within the corporation

itself tom identify internal strategic factors- critical strengths and weaknesses that are likely to

determine whether a firm will be able to take advantage of opportunities while avoiding threats.

This internal internal scanning often referred to as organizational analysis is concerned with

identifying and developing an organization’s resources and competencies.

Internal factors:

1) Employee Turnover/Employee Satisfaction

2) Management of Resources

3) Research and Development

INTERNAL FACTORS OF JSW

1.R&D Expenditure

Total Expenditure on R& D Previous Years

2005 2006 2007 2008

R&D Expenditure 3.05 6.02 3.72 14.36

(in Crores)

At KALYANI STEELS NO Great expenditures are done on R&D

2. Reduction in consumption of electricity over the years

3. Focus On Cost Reduction:

Over the years JSW steel’s focus has been on cost reduction. Given below is what is achieved over the years

2003 2005 2007 2009Capacity Mtpa 1.60 2.50 3.80 6.80

Project cost Rs.Crores 6500 8517 9992 16442SIC Rs./tonne 40625 34068 26925 24179

4.Production of its own electricity

Kalyani Steels

SWOT Analysis (Chapter 6)

Author: Shashikala B G

SWOT of JSW (Indian Company)

Strengths:

Abundant resources of iron ore:

 At present, 10 no. of underground coal mines   are in operation. At present, the in-situ reserves

of relatively rich iron ore in India are 11.43 billion tonnes of hematite and 10.68 billion tonnes of

magnetite ores. Though the reserves of hematite ore appear to be large, high-grade lumpy

reserves constitute only 8.7 percent of the total.

Strongly globalised industry and emerging global competitiveness

Modern new plants & modernized old plants

Regionally dispersed merchant rolling mills

Weaknesses:

High cost of energy:

The additional requirement of power for the steel industry would be 7,000 MW by 2019-20,

requiring an additional investment of Rs. 24,500 crore. The Electricity Act, 2003 and the

National Electricity Policy allow captive generation of power and trading of surplus power.

This will facilitate growth of investment in captive power plants by the steel industry. At the

same time the Government would encourage the industry and the secondary sector in particular,

to bring down the specific consumption of power.

Higher duties and taxes:

Per capita consumption:

The present steel consumption per capita per annum is about 50 kg in India, compared to 180 kg

in the world, and 350 kg in the developed world. The estimated urban consumption per capita per

annum is around 77 kg in the country, expected to reach approximately 165 kg in 2019-20,

implying a CAGR of 5 percent.

The rural consumption of steel in India remains at around 2 kg per capita per annum, primarily

because steel is perceived to be expensive among the village folks.

Low labor productivity:

In India the advantages of cheap labour gets offset by low labour productivity; eg, at comparable

capacities labour productivity of SAIL and TISCO is 75 t/man year and 100 t/man year, for

POSCO, Korea and NIPPON, Japan the values are 1345 t/man year and 980 t/man year.

Dependence on imports for steel manufacturing equipments & technology

Opportunities:

Unexplored rural market:

As there is a lot of scope for rural development in India, so last year, in the budget, they have

provided Rs105 crore for exclusively rural development.

Huge infrastructure demand:

As per the national budget for the last year, they have proposed to maintain upgrading

infrastructure in both rural and urban areas and provided 173552 crores. For railway, provided

16,752 crore.

Increasing demand for consumer durables:

Alternative products, e.g. aluminum, glass, concrete have taken some of the traditional steel

market but on the other hand the steel industry is constantly seeking new applications for their

product.

Increasing interest of foreign steel producers in India

Technological change:

By implementing corex technology, the gross turnover of JSW has increased from 15179 crores

to 19457 crores in the year 2010 march compared to last year 2009 march. Whereas, it’s near

competitor Kalyani steels has not implemented any new technology, and its gross turnover has

not increased. In fact, its turnover has decreased from 11672 crors to 11535 crores in 2010 march

compared to last year.

Growth in auto sector:

Steel products occupy 72 - 88 % of all the raw material needed in a car manufacturing. 

One passenger car uses about 0.84 tonnes; commercial vehicle uses about 5.17 t.

For 2010, steel consumed by automobile manufacturing is estimated to be about 38 million t,

composing 22 million t of flats. Steel products consumed in finished automobile manufacturing

are 29 million t; that for spares about 9 million tons.

Threats:

Decreasing import duty on steel:

The import duty on steel cut down by 2%, hence reduced to 8%.

Slow industry growth:

Indian steel industry is growing only 4% per annum where as in china, it is growing 14% and in

US 9%.

Water consumption:

To set up a steel plant 400 million liters per annum of water is required.

High cost of capital:

Steel is a capital intensive industry; steel companies in India are charged an interest rate of

around 14% on capital as compared to 2.4% in Japan and 6.4% in USA.

Low labor productivity:

In India the advantages of cheap labour gets offset by low labour productivity; eg, at comparable

capacities labour productivity of SAIL, TISCO, JSW is 75 t/man year and 100 t/man year, 110

t/man year for POSCO, Korea and NIPPON, Japan the values are 1345 t/man year and 980 t/man

year.

High cost of basic inputs:

High administered price of essential inputs like electricity puts Indian steel industry at a

disadvantage; about 45% of the input costs can be attributed to the administered costs of coal,

fuel and electricity, e.g., cost of electricity is 3 cents in the USA as compared to 10 cents in India

Transportation cost:

Freight cost from Jamshedpur to Mumbai is $50/tonne compared to only $34 from Rotterdam to

Mumbai. Added to this are poor quality and ever increasing prices of coking and non-coking

coal.

Steel is a heavy product and expensive long distance transport makes it considerably more

difficult for export steel to compete with the product made locally.

It is estimated that every tonne of steel production involves transportation of 4 tonnes of

material. The envisaged addition of 75 mT of steel annually implies 300 mT of additional traffic.

In a globally integrated economy, minimization of the overall cost of transportation becomes an

important instrument of maintaining the competitive edge in both the domestic and overseas

markets.

Consumption from alternative:

JSW spends Rs.1223.3 Crores on Electricity for the year 2009-10. The power whatever they

consume, out of which 50% is generated by JSW on its own.

International developments:

Changes in a large steel producing country can have a significant impact on international

competition. For example, China’s net steel imports fell from 35 million tonnes in 2003 to a

mere 3 million tonnes two years later due to a major increase in local production. Following the

collapse of the domestic market, steel exports from Russia and the Ukraine have increased from

5 million tonnes in 2005 to a massive 34 million tonnes by 2009.

Ratio Analysis (Chapter 7)

Calculation of various ratios for JSW (Indian Company)

Liquidity Ratios 2006 2007 2008 2009 2010

current ratio= (current assets/current liabilities)

0.68 0.64 0.51 0.44 0.55

Quick (acid test) ratio= (current assets-inventory) /current liabilities

0.51 0.43 0.28 0.28 0.31

Current asset ratio:

Here the current ratio of JSW is less than 1. So it is not favorable to the company as the standard

ratio must be at least 1, so that the company we can say that the company is in a position to repay

its current liabilities out of current assets.

Quick ratio:

It is a measurement of a firm’s ability to convert its current assets quickly into cash in order to

meet its current liabilities. If this ratio is increased, profitability will come down. Here if we

compare this ratio for the last five years, it is decreasing. But this ratio should be at least 1:1. So

here it isles than 1, and it is decreasing year on year except the year 2010. So overall it is not

favorable to the company as it is less than one.

Profitability Ratios 2006 2007 2008 2009 2010

net profit margin= net profit after taxes/net sales

14.14 14.98 14.92 3.23 11.09

gross profit margin= (sales-cost of goods sold)/net sales

22.41 28.55 23.43 14.51 17.33

return on investment= net profit after taxes/total assets

14.68 22.89 18.76 11.53 15.08

return on equity= net profit after taxes/shareholders equity

19.84 23.10 22.99 5.59 21.14

earnings per share= (net profit after taxes-preferred stock dividends)/average number of common shares

53.28 77.09 90.84 22.96 106.59

Net profit margin:

It measures the percentage of each sales rupee remaining after the firm has paid for its goods.

Here JSW’s NP margin is average same for the starting three years, but after that it started

decreasing in the next two years. It is because the net profits came down as the sales are falling.

Gross profit margin:

It is nothing but the percentage of each sales rupee remaining after the firm has paid for its goods

and before paying tax and other expenses. Here the GP ratio was increasing in the year 2007.

After that, it has decreased for the next two years. And in the year 2010 it has again increased. So

at present it is moving in a upward trend. So it is favorable for the company.

Return on investment:

It shows how much the company has earned out of its investment. Here JSW’s return ratio is

increasing in the year 2007. After that, it has decreased for the next two years continuously.

Again the last it has started to increase. So it is moving on favorable side of the company. It is

also because of the decrease in sales.

Return on equity:

This ratio shows how much return the equity shareholders got out of their return. It should be

maximum or in a increasing trend. As previous ratios, it is also increasing only in the year 2007

and in 2010.

Earnings Per Share:

It is the share which the shareholders will get as dividend to their each share. If the profit is

more, the earnings per share will also be more. Here JSW’s EPS is increasing for the first three

years till 2008. And after that, it has decreasing in the year 2009. And in the year 2010, it has

covered the last year’s also and increased more than double from the previous year.

Leverage Ratios 2006 2007 2008 2009 2010

debt to equity= total debt/shareholders equity

1.07 0.84 1.06 1.51 1.26

Debt equity ratio: It shows how much long term debt the company has and also we can analyze

that the company’s ability to pay its long term obligation. The standard ratio should be 2:1. Here

at an average, the company has the debt of more than 1. So it is favorable for the company.

Fixed asset turnover ratio:

This is a measure of a firm’s efficiency in utilizing its fixed assets. It indicates how efficiently

these fixed assets are used while generating sales. If the ratio is increasing, it is good for the

company. It should go on higher year by year. Here this ratio has increased only in the year

2007. And after that it has decreased and continuing till the year 2010. Overall it is not bad for

the company.

Total assets turnover ratio:

This is a measure of a firm’s efficiency in utilizing its total assets including current and fixed

assets. It indicates how efficiently the total assets are used while generating sales. If the ratio is

Management efficiency ratio 2006 2007 2008 2009 2010

Fixed assets turnover ratio

= sales/ Fixed assets

0.82 0.93 0.82 0.83 0.83

Total assets turnover ratio

=sales/total assets

0.72 0.88 0.75 0.73 0.85

increasing year on year, it is good for the company. Here JSW’s ratio has increased in the year

2007 and again it came back to its previous year’s ratio. And in the year 2010, it has increased to

0.85. so at present the ratio is increasing. So the company’s management is moving in a

favorable condition.

Generic Strategies

If the primary determinant of a firm's profitability is the attractiveness of the industry in which it

operates, an important secondary determinant is its position within that industry. Even though an

industry may have below-average profitability, a firm that is optimally positioned can generate

superior returns.

A firm positions itself by leveraging its strengths. Michael Porter has argued that a firm's

strengths ultimately fall into one of two headings: cost advantage and differentiation. By

applying these strengths in either a broad or narrow scope, three generic strategies result: cost

leadership, differentiation, and focus. These strategies are applied at the business unit level. They

are called generic strategies because they are not firm or industry dependent. The following table

illustrates Porter's generic strategies: 

Porter's Generic Strategies

Target Scope

Advantage

Low Cost Product Uniqueness

Broad

(Industry Wide)

Cost Leadership

Strategy

Differentiation

Strategy

Narrow

(Market Segment)

Focus

Strategy

(low cost)

Focus

Strategy

(differentiation)

Cost Leadership Strategy

This generic strategy calls for being the low cost producer in an industry for a given level of

quality. The firm sells its products either at average industry prices to earn a profit higher than

that of rivals, or below the average industry prices to gain market share. In the event of a price

war, the firm can maintain some profitability while the competition suffers losses. Even without

a price war, as the industry matures and prices decline, the firms that can produce more cheaply

will remain profitable for a longer period of time. The cost leadership strategy usually targets a

broad market.

Some of the ways that firms acquire cost advantages are by improving process efficiencies,

gaining unique access to a large source of lower cost materials, making optimal outsourcing and

vertical integration decisions, or avoiding some costs altogether. If competing firms are unable to

lower their costs by a similar amount, the firm may be able to sustain a competitive advantage

based on cost leadership.

Firms that succeed in cost leadership often have the following internal strengths:

Access to the capital required to make a significant investment in production assets; this

investment represents a barrier to entry that many firms may not overcome.

Skill in designing products for efficient manufacturing, for example, having a small

component count to shorten the assembly process.

High level of expertise in manufacturing process engineering.

Efficient distribution channels.

Each generic strategy has its risks, including the low-cost strategy. For example, other firms may

be able to lower their costs as well. As technology improves, the competition may be able to

leapfrog the production capabilities, thus eliminating the competitive advantage. Additionally,

several firms following a focus strategy and targeting various narrow markets may be able to

achieve an even lower cost within their segments and as a group gain significant market share.  

Differentiation Strategy

A differentiation strategy calls for the development of a product or service that offers unique

attributes that are valued by customers and that customers perceive to be better than or different

from the products of the competition. The value added by the uniqueness of the product may

allow the firm to charge a premium price for it. The firm hopes that the higher price will more

than cover the extra costs incurred in offering the unique product. Because of the product's

unique attributes, if suppliers increase their prices the firm may be able to pass along the costs to

its customers who cannot find substitute products easily.

Firms that succeed in a differentiation strategy often have the following internal strengths:

Access to leading scientific research.

Highly skilled and creative product development team.

Strong sales team with the ability to successfully communicate the perceived strengths of

the product.

Corporate reputation for quality and innovation.

The risks associated with a differentiation strategy include imitation by competitors and changes

in customer tastes. Additionally, various firms pursuing focus strategies may be able to achieve

even greater differentiation in their market segments. 

Focus Strategy

The focus strategy concentrates on a narrow segment and within that segment attempts to

achieve either a cost advantage or differentiation. The premise is that the needs of the group can

be better serviced by focusing entirely on it. A firm using a focus strategy often enjoys a high

degree of customer loyalty, and this entrenched loyalty discourages other firms from competing

directly.

Because of their narrow market focus, firms pursuing a focus strategy have lower volumes and

therefore less bargaining power with their suppliers. However, firms pursuing a differentiation-

focused strategy may be able to pass higher costs on to customers since close substitute products

do not exist.

Firms that succeed in a focus strategy are able to tailor a broad range of product development

strengths to a relatively narrow market segment that they know very well.

Some risks of focus strategies include imitation and changes in the target segments. Furthermore,

it may be fairly easy for a broad-market cost leader to adapt its product in order to compete

directly. Finally, other focusers may be able to carve out sub-segments that they can serve even

better. 

A Combination of Generic Strategies 

- Stuck in the Middle? - These generic strategies are not necessarily compatible with one

another. If a firm attempts to achieve an advantage on all fronts, in this attempt it may achieve no

advantage at all. For example, if a firm differentiates itself by supplying very high quality

products, it risks undermining that quality if it seeks to become a cost leader. Even if the quality

did not suffer, the firm would risk projecting a confusing image. For this reason, Michael Porter

argued that to be successful over the long-term, a firm must select only one of these three generic

strategies. Otherwise, with more than one single generic strategy the firm will be "stuck in the

middle" and will not achieve a competitive advantage.

Porter argued that firms that are able to succeed at multiple strategies often do so by

creating separate business units for each strategy. By separating the strategies into different units

having different policies and even different cultures, a corporation is less likely to become "stuck

in the middle."However, there exists a viewpoint that a single generic strategy is not always best

because within the same product customers often seek multi-dimensional satisfactions such as a

combination of quality, style, convenience, and price. There have been cases in which high

quality producers faithfully followed a single strategy and then suffered greatly when another

firm entered the market with a lower-quality product that better met the overall needs of the

customers. 

Generic Strategies and Industry Forces

These generic strategies each have attributes that can serve to defend against competitive forces.

The following table compares some characteristics of the generic strategies in the context of the

Porter's five forces. 

Generic Strategies and Industry Forces

Industry

Force

Generic Strategies

Cost Leadership Differentiation Focus

Entry

Barriers

Ability to cut

price in retaliation

Customer loyalty can

discourage potential

Focusing develops core

competencies that can act as an

deters potential

entrants.entrants. entry barrier.

Buyer

Power

Ability to offer

lower price to

powerful buyers.

Large buyers have less

power to negotiate

because of few close

alternatives.

Large buyers have less power to

negotiate because of few

alternatives.

Supplier

Power

Better insulated

from powerful

suppliers.

Better able to pass on

supplier price increases to

customers.

Suppliers have power because of

low volumes, but a

differentiation-focused firm is

better able to pass on supplier

price increases.

Threat of

Substitutes

Can use low price

to defend against

substitutes.

Customer's become

attached to differentiating

attributes, reducing threat

of substitutes.

Specialized products & core

competency protect against

substitutes.

RivalryBetter able to

compete on price.

Brand loyalty to keep

customers from rivals.

Rivals cannot meet

differentiation-focused customer

needs.

Competitive Strategy: Techniques for Analyzing Industries and Competitors

Competitive Strategy is the basis for much of modern business strategy. In this classic work,

Michael Porter presents his five forces and generic strategies, then discusses how to recognize

and act on market signals and how to forecast the evolution of industry structure. He then

discusses competitive strategy for emerging, mature, declining, and fragmented industries. The

last part of the book covers strategic decisions related to vertical integration, capacity expansion,

and entry into an industry. The book concludes with an appendix on how to conduct an industry

analysis.

Strategy

Domestic Markets

• Focus - Value Addition: Through increasing the sales of Value addedProducts as well as

bydeveloping new products conforming to higherend specifications and grades. Value added

product sales up by 55%.

• Enhancing Global Competitiveness of Value-Chain partners: By

making steel available at globally competitive proposition.

• Thrust - Import Substitution: Expanded domestic share from 72% in

2008-09 to 84%.

• Expanding distribution network: To capitalize the spread-out demandopportunities as well as

for the betterment of timely delivery concept.JSW Shoppe continues to expand from 50 in 2008-

09 to 174 as on

March’10 with Shoppe sales up by 114% to 0.64 million tonnes, leveragingthe demand of the

Semi-Urban and Rural India as well. Additionally, JSWhas been expanding its Distribution

Points on a Pan-India basis as well.

• Increasing Domestic presence for Flat Steel: Domestic sales up by59% to 3.04 million

tonnes with domestic market share increasing toapprox. 13% from 9% in the previous year.

• Efforts onto Brand Building: Focus on leveraging brand-recall andbrand-value adopting

multi-fold brand-building techniques viz. Introducedinnovative concept of “Shoppe-On-Wheel”

in the Rural India, Wall-Paintings, Pro-Active participation in relevant exhibitions, Print-

MediaAdvertisements, etc., leveraged sales of branded products by 64% ofdomestic sales.

International Markets

The Company has been maintaining a strategic presence in the internationalmarket. 2009-10

proved a boon in disguise which led us explore and partiallyshift our focus from the conventional

advanced markets, adversely impactedby the global economic crisis, to other promising

economies.

• Shift of Focus by exploring the world: While the demand inconventional coated export

markets of North America and the Europesuffocated, JSW strategically shifted and consolidated

its presence in

other promising geographies including South America, CIS, Africa andAsia and capitalized the

demand potential, especially for the Coatedproducts.

• Expand into Logistics-Advantage zone: Increased our presence forother Semis, Flats and

Wire Rods into the economies having logisticsadvantage including South & Far East Asia, Rest

of Asia, Middle East

and Africa, especially, while the prices were touching the bottoms.

• Enhance Customer base: In order to maximize tonnages coupled withPrice-Advantage, JSW

judiciously expanded its customer base, meetingthe challenges of small order lots with high

degree of customizationdemanding a fast-track delivery schedules. For the coated products,96

new customers were added accounting for approx. 13% of export sales.The Company

successfully paved its way through the trying times of2009-10 and further sharpened its focus

and efficiency across the domestic

and international markets, harnessing and nurturing its relationship with itsvalued business

partners (customers) which would enable its journey ahead

more effective while taking the challenges of expanding product range withan expanded tonnage

intensity.

Expansion

JSW recently collaborative with Japan

Indian auto sector growth increased by 25%, so the high quality automotive grade steel for outer

body yards.

In 2011- its about 11mnt

In 2020-its around 30 mnt

In China the auto-world consuming 2million tones, and its rapidly increased as a result

now its 10 million tones .India consuming now 2 million only the difference is 8 million tones

JSW Change in scope of 2.8 mtpa expansion project

Setting up of 1.5 mtpa Long Product facility consisting of billet caster, wire rod and bar

mill in lieu of 1.5 mtpa slab caster

Increase in project cost by Rs. 300 crores to be funded by internal accruals

No impact on project completion schedule

Positive impact on all project financials

JSW Setting up new HR Mill

Initial capacity of 2 mtpa (with ability to enhance to 5 mtpa with nominal investments)

Ability to produce upto2,100 mm width for various high end HR applications

To be completed by March 31, 2009

Project cost –Rs.2,000 crores

Financing Plan

-Internal accruals –Rs. 800 crores

-Debt –Rs. 1,200 crores

Strategic Initiatives

Formation of Subsidiary for acquisition of coal assets overseas

–Investment in subsidiary uptoUS$ 25 million either by way of equity or loans/extension of

financial guarantees

•Formation of Subsidiary to pursue overseas acquisition opportunities in steel business

–Investment in subsidiary uptoPounds 1 million either by way of equity or loans/extension of

financial guarantees

Formation of Subsidiary in India to set up Service Centre

–Service centre for processing 0.25 mtpa of CRCA and 0.25 mtpa of HR products

–Equity Investment of Rs. 50 crores and financial guarantee for loan of Rs85 croresin subsidiary.

The deal is estimated as the biggest FDI in the metal and mining space.

Japan’s second largest steel maker JFE is buying around 14.99% stake in JSW Steel for about

$1.02 billion (Rs 4,800 crore) in what is pegged as one of the biggest foreign direct investment

deal in metal and mining space till date.

The transaction will be through a preferential allotment which could take the form of either

equity issue or convertible debentures. The deal will value the third largest Indian steel maker at

$6.8 billion (Rs 32,026 crore) or almost 50% more than its existing market cap of Rs 21,735

crore.

The pricing of the transaction is contingent on scrip movement of JSW. If the JSW scrip reaches

or exceeds Rs 1,365 for a certain period before August 31, 2010, JFE will be allotted 3.2 crore

shares at Rs 1,500 per share.

Otherwise JFE will subscribe to one convertible debenture with the face value of Rs 4,800 crore.

This debenture will be convertible into shares within 18 months at the same price of Rs 1,500 per

share if the JSW scrip reaches/exceeds Rs 1,365 during the tenure of the debenture. If the share

prices does not meet the above criteria, JFE will subscribe to shares at Rs 1,331 a piece.

In either case, JSW is selling a stake that is marginally less than 15%, the trigger point for a

mandatory open offer as per Indian takeover norms of a listed company. This will allow JSW

Steel to bring in a strategic partner without stressing the foreign firm to go through an open offer.

JFE also gets to nominate a director on the board of JSW Steel. In addition it has anti dilutive

(stake) rights.

Sajjan Jindal-led JSW had recently allotted warrants to promoters that gave the Jindals 1.75 crore

warrants convertible at Rs 1,210 per share. The promoters holding as of June end was 44.9%.

After conversion of warrants into equity and estimated equity dilution due to allotment to JFE,

promoter’s holding will shrink marginally to around 43%.

As per its disclosure to the stock exchanges, JSW plans to use the funds raised for debt reduction

/ to meet the capital expenditure / long term working capital requirements and general corporate

purposes. It has also entered into a foreign collaboration agreement, technical assistance

agreements for automotive steel, general technical assistance agreements for plant performance

improvement and substrate supply agreement with JFE.

The transaction is part of a strategic partnership announced last November. The world’s sixth

largest and Japan’s second biggest steel-maker JFE along with JSW Steel had announced that

they have struck a partnership pact to co-operate in developing automotive grade of steel.

This would mark yet another global partnership between and Indian and global steelmaker.

While Tata Steel had acquired UK’s Corus, Arcelor Mittal had struck a partnership with Uttam

Galva.

JFE is looking to build a supply base for Japanese carmakers such as Toyota and Nissan who are

planning big-time manufacturing in India, one of the world's fastest growing car markets. It also

marks a further expansion for JFE in the two fastest growing economies in the world.

It had recently agreed to buy 24% stake in a steel-pipe firm in China called Panchen Yihong Pipe

Co. Panchen Yihong Pipe, which produces seamless pipes used in oil production, plans to

increase its annual capacity to 330,000 million metric tons from 230,000 tons. PanGang Group

Chengdu Steel will have the majority 51% equity stake in the venture with Marubeni-Itochu

Steel owning the remaining 25% in the venture.

Stability

Earlier we used to import coke, subsequently we set up our own coke capacity, which is now

operational. So we now purchase coal from various countries and convert it to coke. It has given

us loads of benefits as coke prices fluctuate a lot because there are not many producers, while

coal’s availability is more and price variations are also less. So that has given us the fl exibility

to import at better prices. We convert the coal to coke at our own plant and save a lot of money

on that.

Besides, based on the hot gases coming out of the coking plant we have set up a power plant. We

generate power at a low cost. And there is another benefit of this method of power generation – it

gives us the benefits of carbon credit. So we have a 50MW power plant based on this and we

have got our power plant registered with United Nations Framework Convention on Climate

Change. That’s how we are saving on cost.

In Jindal steel & power, we have 340 MW power plant. We are planning to set up some more

capacities. We are planning projects in Orissa and Jharkhand ranging from 500-100 MW in each

state. We also have a 100% subsidiary – Jindal Power Limited. It is a 1,000 MW project and will

be operational within a year from now. First, 250 MW by September 2007 and then every quarter

we’ll have access to an additional 250 MW. We are also working to expand the 1,000 MW to

further 2,200 MW. Within JSP, we are expanding to meet our own captive needs and the surplus

power is then exported. Jindal Power is a company that will move into power business in a big

way.

JSW have won the rights of access to 20 billion tonnes of mines through international

competitive bidding in Bolivia. Right now we are complying with the government terms and

conditions. We are completing the procedural part of it and we have already had a couple of

rounds of discussion with the government of Bolivia on the contract.

It will go to the Bolivian parliament for ratification, followed by the process of legalisation.

JSPL plans to invest $2.3 billion over the next eight years in Bolivia. We have a huge product

line over there – a 1.8 MT steel plant and 6 MT snooze iron unit happens to be one of them.

JSW using COREX technology ,its increases the efficiency of the production .

REFERENCES:

URL’S

www.worldsteel.com www.jsw.co.in www.arcelormittal.com www.economywatch.com www.Nasscom.in www.reservebankofindia.com www.forbes.com www.businessweek.com www.businessblog.htm www.iipm.com www.moneycontrol.com

www.ministryofsteel.com

Textbooks

Business Policy And Strategic Management,Laurence.R.Wauch,5th Edition

Strategic Management and Business Policy,Thomas.L.Wheelen/J.David Hunger, 12th Edition