The future of the European steel industry in a context of
global overcapacity and increased Chinese competition
An analysis of the factors driving the strategic answer of the European steel producers to the Chinese steel imports
Nelleke J. S. Heijink
Abstract
The purpose of this research is to identify the factors that shape the strategic answer of the European steel producers to the Chinese competition. With the European steel industry crucial for the European economy, its survival in a context of current and future challenges is argued to be of high importance. The data used to identify the factors are a combination of interviews with representatives of the European Union, OECD, and Eurofer, and corporate publications of the steel producers Tata Steel, ArcelorMittal, and Aperam Stainless. It is concluded that the factors shaping the strategic answer of the European steel producers derive from three sources, being the producers’ external, internal, and inter-firm contexts. Within the external context, it is found that both trade and industry-specific factors influence the producers. In the internal context, the producers are driven by a need to integrate production processes, enhance operational efficiency, focus on specialized customer needs, and invest in research and development. Lastly, within the inter-firm context producers are
influenced by their ability to create network of partners. Collectively, these three sets of factors create a complex interplay of interdependent elements determining the strategic capacity of the European steel producers.
Statement of Originality
This document is written by Student Nelleke Heijink who declares to take full responsibility for the contents of this document. I declare that the text and the work presented in this document is original and that no sources other than those mentioned in the text
and its references have been used in creating it.
The Faculty of Economics and Business is responsible solely for the supervision of completion of the work, not for the contents.
Table of Content
1. Introduction ... 1
2. Literature Review ... 3
2.1 The Positioning Theory ... 3
2.1.1 Five Forces Model ... 4
2.1.2 Generic Strategies ... 5
2.1.3 Value Chain ... 7
2.2 The Resource-Based View ... 8
2.2.1 Identifying the resources and capabilities ... 9
2.2.2 Resources, Capabilities, and competitive advantage ... 10
2.2.3 Formulating a strategy and identifying resource gaps ... 12
2.3 The Relational View ... 13
2.3.1 Sources of relational rent ... 13
2.3.2 Protective Mechanisms ... 14 2.4 Critical Reflections ... 15 3. Methodology ... 19 3.1 Data Collection ... 19 3.1.1 Interviews ... 19 3.1.2 Corporate Publications ... 20 3.2 Analysis ... 21 3.3 Conceptual Model ... 22 3.4 Research Limitations ... 23 4. Results ... 24 4.1 Contextual Elements ... 24
4.1.1 Global Demand for Steel ... 24
4.1.2 Growth of the Chinese Economy ... 25
4.1.3 Provision of State-Aid ... 25
4.1.4 Energy and Raw Material Prices ... 25
4.1.5 Characteristics of a Steel Plant ... 26
4.2 Organizational Resources and Capabilities ... 26
4.2.1 Integration ... 26
4.2.3 Customer-Centricity ... 27
4.2.4 Research and Development ... 27
4.2.5 Technology ... 28
4.2.6 Location ... 28
4.2.7 A diverse product portfolio ... 29
4.2.8 A Talented Workforce ... 29
4.3 Partnerships ... 29
4.3.1 Networks ... 29
4.3.2 Interfirm knowledge sharing ... 30
4.3.3 Co-location of site facilities ... 30
5. Discussion ... 31
5.1 The European steel industry’s context ... 31
5.2 The European steel producers’ resources and capabilities ... 34
5.3 The European steel producers’ partnerships ... 36
5.4 Connecting the findings ... 36
6. Conclusion ... 37
7. Implications ... 38
8. References ... 41
8.1 Data references ... 45
1. Introduction
The recent announcement of Tata Steel to sell off its British integrated steelmaking plant ‘Port Talbot’ directly endangers the employment of 35,000 people as well as the entire British steel industry, also known as “the pillar of the British economy”
(Financial Times, 2 June 2016, p. 7). According to the Financial Times, Tata Steel’s decision to sell and possibly even close the plant derives from the steel producer’s daily losses incurred on the British operations. Tata Steel is however not the only steel producer going through such changes, as the underlying reasons that drive the
financial losses endanger the entire European steel industry. In 2008, with the
economic crisis slowing down the growth of the European economy, a decrease in the demand and production of steel led to an estimated loss of 66,000 jobs in the
European industry (Trappmann, 2015; Giuliodori & Rodriguez, 2015). The economic crisis is however only part of the explanation. From the beginning of the century the Chinese economy went through a period of growth, causing a significant increase in the domestic demand and production of steel (Financial Times, 2 June 2016). Consequently, while Europe and China used to be responsible for a comparable share in the global demand and production of steel, the surge in China’s steel activities led to the country becoming the world’s largest steel producer and consumer, as it remains to be today (Xuan & Yue, 2016; Giuliodori & Rodriguez, 2015). However, with the economic crisis starting to impact the Chinese economy in 2008,causing the domestic steel demand to decline, the global industry was confronted with a decrease in demand from the world’s largest consumer (Tata Steel, 2014, p. 2). Not only did this affect the steel prices, it created an imbalance between the demand and supply levels of the Chinese producers. However, with the support of the Chinese government, capacity continued to be expanded initiating a situation of overcapacity that as for today continues to impact the global steel industry (OECD, 2016). Confronted with the growing imbalance between production and domestic demand, creating a vicious circle between capacity additions and further imbalance, the Chinese producers supported by the government with export subsidies are increasingly “dumping” their steel products at the European market (Pooler, 2015, p. 2). It is the unfair price competition created with these dumping practices in
combination with the European producers’ higher energy and emission prices due to national and supranational policies, that lead to a deterioration of the competitive position of the European steel industry.
With the damaged competitiveness of the European producers, it is
increasingly complex for the industry to invest in long-term objectives on energy and CO2 efficiency, which is argued to ultimately determine the survival of the industry (Silva & Carvalho, 2016). As the steel industry is seen as crucial for the European economy and integrated in many different value chains as well as involved in different sectors such as automobile and construction, the restoration of the competitive position of the European producers is at the top of the agenda of the European Union (EU) and the Organization for Economic Co-operation and
Development (OECD) (European Commission, 2013). The EU can tackle part of the problem by imposing import sanctions on the imported steel products and providing subsidies on research and development (R&D) to stimulate the innovation of more energy and CO2 efficient technologies (European Commission, 2013). However, a major part of the problem is outside the influence of the EU and needs to be solved at a corporate level through strategic initiatives of the steel producers (European
Commission, 2013).
It is argued to ultimately be up to the steel producers to close down the plants that are inefficient and have become a major burden on profitability, as well as to invest in research programs that will innovate the more energy and CO2 efficient production processes (OECD, 2015). In fact, the OECD (2015) argues that it is only through foreclosures and an increase in the efficiency of the remaining plants, that the problem of overcapacity can be dealt with and the long-term competitive position of the industry can be improved. However, effectively making decisions on whether to close down a plant or to invest substantially in research programs requires a producer to understand its competitive strengths and weaknesses as well as the influence of its external context on its operations. This knowledge will enable the steel producers to re-group around the core products and activities that have proven to contribute most to the superior performances and to be best equipped to compete with the Chinese rivals. Essentially, this is a matter of identifying the drivers that determine the strategic abilities of the steel producers vis-à-vis their challenges and competition. With the importance of the survival of the European steel industry for both the European economy and the European society in mind, this research will focus on these underlying drivers as they ultimately determine the strategic capacity of the European producers and the extent to which they will live through the turbulent times.
Specifically, the research question to be answered in this thesis is as follows:
What are the factors that determine the strategic answer of the European steel producers to the Chinese competition? To arrive at an answer, several different
elements are discussed. In section two, the relevant literature for this particular topic is discussed and the research is provided with a theoretical foundation. The
conceptual model and accompanied sub-questions derived from the literature are discussed in section three, as well as the research’s methodology. In section four, the results of the data analysis will be showcased and section five provides a discussion of these findings. The ultimate answer to the research question is formulated in section six, followed by section seven containing the research’s implications.
2. Literature review
A myriad of different theories and viewpoints exist on the topic of strategy and on how businesses are to plan, design, implement and monitor their strategies
(Stoelhorst, 2008). Within this wide variety, dominant streams of thoughts can however be identified (Stoelhorst, 2008). In order to provide the research with more than one perspective on strategy, the following theories argued to adhere to largely distinct viewpoints are discussed and used: the “positioning theory”, the “resource-based view”, and the “relational view”.
2.1 The positioning theory
The positioning theory is closely connected to the economist Michael Porter (1979). Even though other authors contributed to the theory’s development, such as Schendel and Hofer’s (1979) and Schendel and Hatten’s (1979) publications, Porter is argued to be the founder of the theory (Stoelhorst, 2008). According to Porter, a strategy should reflect the right “fit” between a company and its environment. Identifying such a fit requires extensive analysis of the context to enable a firm to assess the attractiveness of the industry and the strategic moves necessary to establish the right position or “fit”. It is ultimately the successful analysis and positioning that will lead to superior performances and a sustained competitive advantage (Stoelhorst, 2008). From this, it can be concluded that the focus of the positioning theory rests within the external context of the firm (Stoelhorst, 2008).
Porter (1979) has developed several analysis tools that enable firms to systematically go through the steps of strategy making. The “five forces model”
firstly enables a firm to analyze the competitive forces that pressure the industry and ultimately determine the profit potential. When the attractiveness of an industry is assessed, a firm can choose between one of Porter’s (1979) three “generic strategies” to create the most favorable position and enable the right fit. Once the desired strategy is decided upon, companies can refer to the value chain model for the activities
through which value can be created (Jones & Hill, 2012).
2.1.1 The five forces model
Porter’s (1979) “five forces model” defines the competitive forces of an industry as the current competitors, the potential new entrants, the buyers, the suppliers, and the
substitutes.
The ultimate goal of yielding the highest market share causes the current competitors of an industry to constantly compete with one another. Paradoxically, often through the efforts initiated to win market share, such as price reductions and marketing campaigns, is the industry’s overall profitability damaged (Porter, 2008a). Porter (2008a, p. 85) argues that the extent to which the competitive behavior in an industry affects the profitability depends on factors such as the amount of companies competing and a decrease in the industry growth. Additionally, competition based on price is argued to be the most damaging to the industry’s profit margins and often surfaces in industries with high fixed costs and commodities to be sold rather than specialized goods (Porter, 2008a).
With the arrival of new competitors intensifying the competition in the industry and lead to less market share to be left to divide, Porter (2008a) argues that the industry’s incumbents will attempt to shield the industry from new entrants. The extent to which the threat of new entrants is high depends on the entry barriers existent in the industry, with higher entry barriers expected to benefit the profit potential of the industry’s incumbents. An entry barrier can vary from the economies of scale of the current competitors to the high capital requirements to participate in the industry, as it will force the new entrants to operate at similar high efficiency levels and to bring substantial financial resources in the industry.
An industry’s buyer can be both an industrial and a commercial buyer, with the former presenting the link between the industry and the end-consumer (Porter, 1979). As powerful buyers are in the position to drive down prices or demand higher quality goods or services, they are able to capture a larger portion of the value created
in the industry (Porter, 2008a, p. 83). Porter (2008a) argues that such power resonates with favorable negotiation positions, which is generally derived from a concentrated buyer group and the purchase of large volumes. Additionally, buyers with high price sensitivity will be more prone to switch between producers when a lower price is being offered, leaving the producers less able to change prices as desired.
The suppliers of an industry deliver the raw materials, labor, or other inputs needed to create the semi-finished or completely finished products. As with buyers, powerful suppliers are able to capture more value and have the potential to drive down an industry’s profitability (Porter, 2008a, p. 82). According to Porter (2008a), the negotiation power of suppliers will be higher when there are only a few suppliers present and the inputs they control are crucial for the production of the industry. Additionally, when the products the suppliers sell are specialized or differentiated, they will have more influence on the price as the industry has fewer alternatives to buy the products elsewhere (Porter, 2008a).
The fifth force identified by Porter is a substitute, which is a product or service performing the same or a similar function that another product or service performs, with different means (Porter, 2008a, p. 84). An industry’s profit potential tends to be constrained by the number of substitutes available in the market, as they impose a maximum on the price of the products. According to Porter (2008a), the threat of substitutes for a company will be high when products identified as substitutes offer a superior trade-off between price and performance and the company’s product has low switching costs.
It is argued by Porter (2008a) that an industry with limited competition between the current competitors, high entry barriers, limited buyer and supplier power, and few available substitutes is identified as an attractive industry.
2.1.2 Generic strategies
After the attractiveness of the industry is assessed through the five forces model, Porter (2008b, p. 34) argues that a firm’s next challenge is to successfully cope with the competitive forces and to achieve above-average results, all which can be done by creating a favorable position in the industry with one of Porter’s (2008b) three generic strategies: “overall cost leadership”, “differentiation”, and “focus”. Although not
impossible, Porter (2008b) argues that combining generic strategies rarely leads to success and to companies becoming “stuck in the middle”.
The general focus of an overall cost leadership strategy is to achieve a low cost structure relative to the competitors in the industry (Porter, 2008b). According to Porter (2008b), becoming the industry’s cost leader is a complicated task and requires a company to focus on low costs throughout its entire business model. Through large-scale capacity and an accelerated learning curve a company can achieve the
economies of scale and learning necessary to operate at higher efficiency levels. In addition to higher efficiency, the company needs to save costs on aspects such as overhead, R&D, sales, and market expenditures. Paradoxically, achieving the lower cost structure can initially lead to high losses as the capital requirements and the need to capture as much market share as possible to achieve the desired volumes requires substantial investments. However, when successfully implemented, Porter (2008b) argues that the strategy ensures high profit margins and cash flows, which then need to be re-invested in new equipment and facilities to maintain the cost leadership position (Porter, 2008b).
Porter (2008b, p. 38) defines a differentiation strategy as producing a product or service that is perceived to be unique by the entire industry (Porter, 2008b, p. 38). Differentiating a product or service can be done on different levels, such as the product’s functions or the technology used, and idealistically on multiple levels simultaneously (Porter, 2008b). Porter (2008b) argues that the aim to reap as much market share as possible, a main objective of the overall cost leadership strategy, is less applicable for a differentiation strategy, as the company produces an unique product or service that will fit the needs of fewer consumers. Instead, with a segment of consumers placing high value on the unique attribute, they are willing to pay a premium enabling the company to capture more value per product or service sold (Porter, 2008b).
The third generic strategy is a focus strategy, through which a company is targeting a specific customer segment, product line or geographic market (Porter, 2008b, p. 38). Within the chosen focus area, a company pursues either an overall cost leadership or a differentiation strategy. According to Porter (2008b), a company should choose to pursue a focus strategy when it beliefs to be in a better position to service the particular area than the competitors servicing the entire industry. In
addition, a focus strategy can also be chosen to select a segment of the industry where the industry forces are the least powerful (Porter, 2008b).
Pursuing one of the three generic strategies, which according to Porter’s (2008b) positioning theory is the main goal of every company, can be a complicated task. Failing to successfully implement the chosen strategy can lead to the company be “stuck in the middle”. In general, this position equals low profits as the company loses the customers with high volumes demanding low prices as well as the customers with high profit margins demanding differentiated features (Porter, 2008b).
Porter (2008b, p. 129) describes a group of firms pursuing a highly similar strategy within the industry as a “strategic group”. The reasons for the existence of such groups vary from entry timings in the industry to the companies having different strengths and weaknesses (Porter, 2008b). For the continuous assessment of the context, Porter (2008b) argues that it is important for a company to identify and understand its strategic group as the competitive forces present within the group tend to be more pressing than the forces outside the group. This due to the fact that the companies within a strategic group have less differentiation possibilities and more resemblances and are thus more prone to intense rivalry based on price (Porter, 2008b).
Porter (2008b) argues that when a company successfully implements one of the three generic strategies, superior profits can be yielded even when there are strong
competitive forces pressuring the industry and the profitability tends to be low.
2.1.3 Value chain
Once the generic strategy is decided upon, a company ought to look at its “value chain” to translate the general strategic direction into specific activities and mostly into combinations of specific activities (Porter & Millar, 1985). Porter’s notion of a value chain is built upon the idea that value is created throughout each activity and that a specific linkage between activities can yield superior performances over firms that do not possess similar linkages. The value chain itself is composed of primary activities and support activities.
The five primary activity categories are inboud logistics, operations, outbound logistics, marketing and sales, and service. Essentially, the primary activities are
concerned with the process of creating the product or service, increasing its awareness and ensuring its delivery to the final buyer, and the care needed after the transaction has taken place (Porter & Millar, 1985, p. 150).
In addition to the primary activities, the value chain contains support activities that provide the necessary “support” for the primary activities to perform as expected. The four support activities are the firm infrastructure (e.g. organizational culture or compensation structure), human resource management, technology development, and procurement. Arguably, with the right human capital, technologies, purchased inputs (e.g. raw materials), and infrastructure, a company can enhance the performances of its primary activities and design a competitive strength difficult to imitate as it is deeply embedded in the firm’s value chain (Porter & Millar, 1985).
The positioning theory advocates for an external analysis of the firm, guided by the 5-forces model. Once the generic strategy is chosen and the desired position is created, the organization can shape its primary and support activities accordingly by
perceiving the firm as a value chain of activities. As long as this position can be successfully captured the company will attain above-average performances, irrespective of the internal context.
2.2 The resource-based view
Stoelhorst (2008, p. 13) describes the focus of the resource-based view as “being able to understand the relationship between differences among firms in terms of their resources, competences, and capabilities on the one hand, and performance
differentials among these firms on the other hand”. Essentially, rather than seeking for explanations of performance differences in the external context of a firm, the
resource-based view believes that the analysis should focus at the internal context, composed by the firm’s strengths and weaknesses that are determined by the resources and capabilities position (Wernerfelt, 1984; Grant, 1991; Barney, 1995). Not only will this focus on the resources and capabilities put more emphasis on the importance of learning and innovation processes within the firm, Grant (1991) also argues that it will offer more stability in times where industries and consumer needs tend to change rapidly.
With the resource-based view placing the source of profitability inside the firm, the strategic focus is shifted to the resources and capabilities that determine the
competitive advantage (Bowman & Ambrosini, 2003, p. 291). However, as will be illustrated, only those resources and capabilities that possess the necessary
characteristics will contribute to a competitive advantage (Barney, 1995; Grant, 1991; Prahalad & Hamel, 2003). The next paragraphs elaborate on the resource-based view’s strategy-making steps, following Grant’s (1991) “five-stage procedure for strategy formulation”.
2.2.1 Identifying the resources and capabilities
A necessary first step for companies is to identify the current resources and capabilities in their possession, to understand where the internal strengths and
weaknesses lie (Grant, 1991). Resources are defined by Grant (1991, pp. 118-119) as the “inputs into the production process” and the “sources of a firm’s capabilities”. As a means to discriminate between different types of resources, Barney (1995) proposed the following distinction: financial resources (e.g. debt and equity), physical resources (e.g. machines and manufacturing facilities), human resources (e.g. experience and knowledge), and organizational resources (e.g. relationships and organizational culture). Grant (1991) argues that identifying the resources a firm possesses is a complex process, as the information systems most often used within companies create distorted pictures of the reality. Financial and physical resources are often
overemphasized as they can be easily valued and presented at balance sheets, while this is less easy for human and organizational resources that lack clear valuation methods. This is argued to be problematic, as the people-based skills often tend to be the “most strategically-important resources of the firm” (Grant, 1991).
Identifying individual resources is however not enough, as they are rarely productive when kept isolated (Grant, 1991). Instead, teams of resources should be created. A firm’s ability to create such a team where resources cooperate and coordinate with one another to collectively perform a task or activity is what Grant (1991, p. 119) defines as an organizational capability. In order to illustrate the nature of an organizational capability, Grant (1991) compares the concept with Nelson and Winter’s (1982) ideas on “organizational routines”. Nelson and Winter (1982) define organizational routines as the activities undertaken by individuals in a predicted and coordinated manner. Essentially, Grant (1991, p. 122) argues a capability to be an organizational routine and the organization the sum of organizational routines or capabilities that collectively support and guide the resources within the organization.
Subsequently, to identify capabilities organizations should focus on the activities conducted within the organization, as these represent the internal
coordination and cooperation mechanisms (Grant, 1991). However, similar as with resources, capabilities can be discriminated on the basis of strategic importance. Prahalad and Hamel’s (2003) concept of “core competences” offers a description of the most strategically important capabilities of the firm.
Prahalad and Hamel’s (2003) core competences are the organizational capabilities derived from an integration of individual functional capabilities (Grant, 1991, p. 121). As they emerge from an integration of activities, the core competences represent the skills needed to coordinate production skills and to integrate different streams of technology, which according to Prahalad and Hamel (2003, p. 4) essentially equals the collective learning within the organization. While resources can provide an organization with a short-term competitive advantage, Prahalad and Hamel (2003) argue that core competences are the only route to a long-term sustainable competitive advantage. They argue that with the value of physical resources decreasing over time the advantages based on these resources will erode, whereas core competences are known to be free of deterioration.
This however does not mean that once established the organization should not continue to invest in the core competence (Prahalad & Hamel, 2003). In fact, the authors argue that constant adaptation, protection and improvements are necessary to maintain the competitive position established through the competence.
2.2.2 Resources, capabilities, and competitive advantage
Once the company has identified its resources and capabilities, it has to assess the extent to which they contribute to a long-term competitive advantage (Grant, 1991). According to the resource-based view, the length of the competitive advantage and the speed of erosion depend on the quality of the resource or capability (Grant, 1991), which can be assessed using Barney’s (1995) four-question model.
According to the model designed by Barney (1995), a resource or capability has to be valuable, rare and complex to imitate in order to contribute to a sustainable
A resource or capability firstly has to be valuable in a way that it enables the company to exploit its opportunities and counter its threats (Barney, 1995, p. 50). Evaluating the value-adding capacity is a matter of analyzing both the internal and the external environments, as changes in the environment such as technological advances may render a previously valuable resource obsolete (Barney, 1995). Barney (1995, p. 52) however argues that a resource or capability merely valuable will only yield competitive parity. To become a source of competitive advantage, companies need to take into account the extent to which other companies possess similar kinds of
resources or capabilities as well, presenting the second criteria of rareness (Barney, 1995, p. 52).
Once the competitive advantage is established through the valuable and rare resource, Barney (1995) argues that the ease of competitors to imitate the resource or capability determines the length of the competitive advantage. After all, if competitors succeed in imitating the source of the competitive advantage, it will no longer be perceived as rare. According to Barney (1995), the ease of imitation is determined by the extent to which competitors trying to imitate a resource will face higher costs than the firm that already possesses the resource. Such cost disadvantages can arise when the resource is initially created through unique organizational circumstances or
socially complex constructs such as reputation or trust, making it harder to understand the resource’s underlying constructs (Barney, 1995, pp. 54-55).
Possessing a resource or capability that fits the right requirements for a sustained competitive advantage is however not enough (Barney, 1995). In order to support and stimulate the realization of a sustained competitive advantage, the
company needs to possess additional complementary resources, such as compensation policies and reporting structures.
Other authors besides Barney (1995) have also discussed the issue of valuating a resource or capability. While Grant’s (1991) requirements strongly resemble Barney’s questions, Grant (1991) places more emphasis on the imitability criteria, dividing it into requirements of transparency, transferability and replicability. Prahalad and Hamel (2003) furthermore designed a separate three-step test to identify and assess the strategic importance of a firm’s core competences. The authors argue that once the core competence provides a wide access to a variety of markets, contributes
imitate, it will lead to a sustainable competitive advantage. Contrasting Barney’s (1995) four-question model with this three-step test shows that the value adding and the inimitability requirements are important for both models. However, the fact that only a core competence has to be applicable to a variety of different products and businesses arguably illustrates the difference in strategic importance between a resource or capability and a core competence (Prahalad & Hamel, 2003).
2.2.3 Formulating a strategy and identifying resource gaps
According to the resource-based view, the focus point of the competitive strategy is the resources, capabilities and core competences identified by the firm as the most strategically important (Grant, 1991). However, as this might limit a firm’s scope to the activities that make use of these strategically most important elements, a company needs to constantly revise and keep track of potential changes in the context (Grant, 1991). Changes in the internal and external context might cause new resources and capabilities to become the sources of competitive advantage, requiring companies to “upgrade” their offerings (Grant, 1991, p. 131). Grant (1991) argues that such
upgrades can be achieved through investments that fill the identified “resource gaps”. However, as investments need to be planned it also requires companies to have knowledge on future changes (Grant, 1991). Prahalad and Hamel (2003) address this need for a future vision by arguing that companies should develop a “strategic architecture” that functions as a blueprint of the company’s future state and
subsequently identifies the core competences that the company is expected to need. Even though developing a strategic architecture will not enable a correct prediction of the future, Prahalad and Hamel (2003) argue that thinking about the fact that the status quo might change already enhances the flexibility of the organization.
Essentially, the resource-based view commences the strategy-making process by internally analyzing the organization. Current resources, capabilities and core competences are identified and potential gaps are filled with investments. The
company additionally needs to adhere to a constant state of development and learning, to ensure the quality of the sustained competitive advantage. With these efforts
focused at the internal context, the external context is underemphasized and argued to be less relevant.
2.3 The relational view
Dyer and Singh (1998) developed the relational view to illuminate a perspective overlooked by the positioning theory and the resource-based view. With the
positioning theory using the industry and the resource-based view the firm as units of analysis, Dyer and Singh (1998) argue that advantages derived from a firm’s
partnerships are ignored. Specifically, they argue that the critical resources that lead to a competitive advantage, as discussed by the resource-based view, do not
necessarily have to reside within the firm’s boundaries. Successfully combining resources with other firms might lead to an advantage over firms who refrain
partnerships (Dyer & Singh, 1998; Rowley, Behrens & Krackhardt, 2000). Dyer and Singh (1998) therefore argue that adhering to the resource-based view will lead to a restricted view of the firm’s profit potential. Consequently, with the relational view firms have an alternative approach to understand the sources of competitive
advantage, also known as relational rents, and to design a fitting strategy. Relational rents as the relational view’s equivalent of competitive advantage represent an above-average profit arising from the idiosyncratic contributions made in the relationship between alliance partners (1998, p. 662). Dyer and Singh (1998) argue that these rents arise from four distinct sources and they propose protective mechanisms that protect the superior results derived from the partnership.
2.3.1 Sources of relational rent
It is argued that relational rents arise from investments in interfirm relation-specific assets, the development of knowledge-sharing routines, the combination of
complementary resources, and effective governance structures (Dyer & Singh, 1998, p. 661)
According to the authors, investing in relation-specific assets can lower costs such as transportation and inventory costs and improve communication and
information-sharing processes for both parties (Dyer & Singh, 1998). However, as such investments might require substantial financial resources that tie the company to the external party, the company becomes dependent upon the partner. It is therefore argued by the authors that the extent to which advantages will be derived from the investments depends on the presence of safeguards that protect the partners from opportunistic behavior.
The continuous interaction and cooperation between partners can give rise to interfirm knowledge-sharing routines argued to be of strategic importance, as Dyer and Singh (1998) mention that the majority of innovations arise outside the
boundaries of the firm. However, with knowledge and information often strategically important for companies, the extent to which the partners are protected against free-riding behavior will determine whether knowledge will actually be shared and thus relational rents created. Examples of such protection are the alignment of incentives or increased transparency (Dyer & Singh).
With partners combining complementary resources, a synergistic value can be created that is greater than the sum of the resources altogether (Dyer & Singh, 1998, pp. 666-667). The extent to which the combination of complementary resources possess the same requirements as stated in Barney’s (1995) four-question model will determine the relational rent generated (Dyer & Singh, 1998). However, with the process of identifying the critical resources of partners and the potential synergies in the industry being a complex task, Dyer and Singh (1998) argue that the more the partners resemble in terms of organizational culture and structure, the easier the process will be.
Lastly, through the design of effective governance structures partners will be able to minimize the transaction costs created during the cooperation between the firms (Dyer & Singh, 1998, p. 670). As these transaction costs decrease the partner’s willingness to cooperate, apparent benefits on the cooperation as well as the
efficiency of the relationship can be reaped from the clear agreements of governance structures (Dyer & Singh, 1998).
2.3.2 Protective mechanisms
Similar as with the resource-based view, the relational rents derived from the partnerships are not free of deterioration. The extent to which the competitive
advantage based on the partnership is lasting, depends on the “isolating mechanisms” present (Dyer & Singh, 1998). In fact, Dyer and Singh (1998) acknowledge that some of the mechanisms proposed by the relational view derive directly from the resource-based view, such as the “causal ambiguity” characteristic. Other mechanisms include interorganizational asset interconnectedness, meaning the snowball-effect from investing in specific assets that become profitable due to earlier
partner-specific investments, and the extent to which suitable partners are available in the industry, resembling with Barney’s (1995) criteria of scarcity.
The relational view shifts the focus of the profit potential to the relationships between the alliances in the industry, placing itself between the positioning theory and the relational view. The synergies and efficiency gains created through the partnerships develop relational rents that set successful alliances apart from firms that restrict their views to the internal firm.
2.4 Critical reflection
This section provides a critical review of the positioning theory, the resource-based view, and the relational view, with the aim to assess their respective potential to contribute to the discovery of the factors that shape the strategic answer of the European steel producers.
Porter’s work, and more generally the positioning theory, has made a great impact on the strategic management field (Stonehouse & Snowdon, 2007; Stoelhorst, 2008). Not only did the theory add a focus on the content of the strategy to the strategy-thinking process, it also connected a management area to scientific theories enabling decisions to be based on more than merely experiences (Stoelhorst, 2008). However, besides being widely appraised Porter’s work has also received a considerate amount of criticism. Firstly, as mentioned by Stoelhorst (2008), the connection made between the world of theories and practice did not only lead to more rational decisions, it also led to a field designed for human interactions to be directed by economic theorists. This arguably led to a neglection of the internal context and an overemphasis on the external context, when explaining performance differences between firms (Stoelhorst, 2008, p. 12). Stoelhorst (2008) argues that this view of the firm, also known as the deterministic view, is one of the reasons for the emergence of the resource-based view.
A more specific area of Porter’s work that has been critiqued is the generic strategies typology. In particular the assumption that generic strategies represent the only strategic possibilities for superior profits has been accused of lacking fit with reality (Dawes & Sharp, 1996). While Hunt (2000) does agree on cost and
strategies alone do not fully capture the complex variety of strategies used in practice. Additionally, he argues against Porter’s (2008b) assumptions on the impact of the generic strategies on profitability, as situations were found where a stuck-in-the-middle strategy was more effective than a differentiation strategy. Similarly, Dawes and Sharp (1996) found in their research that a company pursuing a focused cost leadership strategy yielded inferior results compared to a stuck-in-the-middle strategy. Coinciding with both Hunt (2000) and Dawes and Sharp (1996), Merchant (2012) argues that businesses that want to excel in today’s social era need to pursue both differentiation and cost strategies.
Less specific on the generic strategies and more focused on Porter’s general reasoning process, Omar (2005) accuses Porter’s models of lacking validity as he fails to empirically verify his theoretical propositions in the management field. This
assertion is partially based on a statement made by Porter (1990) himself, explaining the difficulties he encountered when trying to fit his hypothesis with the experiences he gained while working in international businesses. In an attempt to respond to the critiques, Spender and Kraaijenbeek (2010, p. 5) argue that Porter’s ideas on
strategies are often misunderstood. Supposedly too much focus is directed towards the specific generic strategy typology rather than the general message it communicates, which is to make management aware of their different constrained strategic
opportunities.
Similar as with the positioning theory, the resource-based view has made a great impact on the strategic management field as well as received critiques on several of its domains (Stoelhorst, 2008). Even though the resource-based view’s internal focus restores the imbalance created by the positioning theory, it also creates a voluntaristic perspective argued to be one of the view’s main weaknesses. As Stoelhorst (2008) states, rather than having a myriad of different possibilities to choose from managers often face constraints imposed by their external context.
Other critiques derive from the resource-based view’s theoretical foundation. According to Priem and Butler (2001a, p. 31), the relationship found by Barney between resources and a competitive advantage is just as much based on empirical findings as it is on the definitions of the variables. With Barney (1991) stating
“valuable and rare organizational resources can be a source of competitive advantage” and defining competitive advantage as “a firm implementing a value creating strategy
not simultaneously being implemented by any current or potential competitors”, Priem and Butler (2001a) argue that competitive advantage is indirectly defined with value and rarity. The authors argue this to be problematic as the same elements, value and rareness, act as two of the criteria’s necessary for a resource to yield a
competitive advantage, thus leading to incorrect reasoning (2001a, p. 28). Such incorrect reasoning can also be described as a “tautology”, meaning a relationship based on the definitions of the variables (Priem & Butler, 2001b; Collis, 1994). Kraaijenbeek, Spender and Groen (2010) argue that the tautology renders Barney’s theory obsolete and suggest using the findings as merely heuristics for management.
However, Barney (2001, p. 41) responds to Priem and Butler’s (2001a) tautology accusation by stating that every theory can be seen as tautological with the right formulation of its definitions. Nevertheless, he does agree with a redefinition of value and the importance of paying attention to the role that external factors play in determining the value of a resource (2001, p. 54).
In addition to the remarks on validity, Hoopes, Madsen and Walker (2003) criticize Barney’s resource criteria’s for competitive advantage, arguing that only the value and inimitability characteristics should be deemed important. According to the authors, resources only become rare when they are considered to be valuable and cannot be imitated by other competitors, thus rendering the characteristic of rarity obsolete (2003, p. 890).
Another domain of the resource-based view that received criticizing remarks is its few managerial implications and limited applicability to practical situations. While Barney’s (1995) four requirements provide explanations for the type of resources and capabilities companies should seek to attain, it is argued that ample guidance is offered in how to exactly develop such resources and capabilities
(Kraaijenbeek et al., 2010, p. 351; Miller, 2003). This limited guidance is according to Conner (2002) especially problematic as management theories in general should offer practical value to the people they are designed for, the managers. With the resource-based view failing to do this, Conner (2002) argues it to be of limited use.
Contrary to the positioning view and the resource-based view, the relational view has not yet received much recognition or criticism, making it a complex task to determine its contributing value. In fact, with Molina (1999) arguing that the differences
clear, the distinctiveness of the relational view as a theory is questioned. The lack of evidence of practical usage further complicates the assessment of the theory, as it remains unclear whether application of the conceptual models will yield the expected advantages (Molina, 1999, p. 184). However, noteworthy is the timing of Molina’s article and the fact that since 1999 other authors do appear to support the views of Dyer and Singh (1998). Lavie (2006), for example, has developed a similar
conceptual framework as the one developed by Dyer and Singh (1998), extending the resource-based view by incorporating the resources of the networks of interconnected firms. However, as Lavie (2006) also departs from the viewpoints of the resource-based view, the question whether his conceptual framework is distinct enough to be seen as a separate theory remains. In particular, it is questioned whether the ability of a firm to effectively cooperate with other firm’s constitutes a resource different from the strategic resources identified by the resource-based view (Dyer & Singh, 1998, p. 674).
Mesquita, Anand and Brush (2008) attempt to clarify the distinction between the resource-based view and the relational view by researching the superior
performances arising from trained suppliers. The authors argue that while the resource-based view can explain the performance differences between trained and untrained suppliers, the relational view provides more guidance in explaining superior performances that arise from learning processes outside the firm but within the
partnership (2008, p. 914). Resulting from this, it is argued that even though the resource-based view and the relational view resemble, the theories additionally contain elements different from each other that combined improve the understanding of competitive advantages and performance differences (Mesquita et al., 2008, p. 935). In fact, it is believed that solely focusing on the resources and capabilities identified with the resource-based view will lead to companies neglecting the sources of performances that reside exclusively within the network (Mesquita et al., 2008). Dyer and Singh (1998, p. 674) themselves argue that the fact that the resource-based view and the relational view adhere to different units of analysis makes them distinct enough to be approached as different theories.
As is illustrated by the critical review, the positioning theory, resource-based view and relational view appear to complement each other on levels that they individually have been critiqued on (Spanos & Lioukas, 2001). Combining the three theories will
therefore lead to an approach incorporating the external context, the internal context, and the relationships, which is perceived to be superior to illuminating merely one dimension of the firm (Martin, 2015).
3. Methodology
To formulate an answer to the research question, data have been assembled and analyzed. This section will elaborate on the decisions made regarding the data assembly, data analysis, and other issues related to the research’s design.
Additionally, the sub-questions and conceptual framework that guided the analysis process will be introduced, as well as the limitations of the research due to the specific design.
3.1 Data collection
Initially, the sole focus for the collection of data was on conducting interviews, thus yielding primary data. However, due to not being granted access to three of the six chosen data subjects, this focus had to be shifted to a combination of primary and secondary data.
3.1.1 Interviews
The main objective of the interviews was to gain understanding of the nature of the problem, through communication with experts in the field. According to Boeije (2010, p. 62), that this can best be achieved by conducting interviews that are not entirely structured in terms of questions and sequence, nor left completely open. Therefore, instead of preparing a list of questions beforehand four to five topics relevant for the research questions were chosen to discuss, resulting in “semi-structured” interviews.
The first interviewee was one of the two commission members of the EU steel team, Aleksandra Kozlowska. After an initial e-mail was send to the steel team with a description of the research, an appointment was made for Thursday the 26th of May, at the EU building of “Internal Market, Industry, Entrepreneurship and SMEs” in
Brussels. With the EU operating at a supranational level, the commission has the ability to protect and support the European steel industry in ways that the member states are not able to, especially in terms of trade. In 2013, the commission published
the “steel action plan”, outlining the current situation of the industry and the future actions to be taken by the EU (European Commission, 2013).
The second interviewee was a member of the steel team of the Organization of Economic Cooperation and Development (OECD). According to its website, the OECD aims to promote policies that will improve the economic and social wellbeing of people around the world. Specifically for the steel industry, the OECD formed a “Steel Committee” to provide a “unique forum for governments”. The main focus areas of the committee are the industry’s competitiveness, the trade policies, the production overcapacity and the environmental impact (www.oecd.org). After sending an invitation through e-mail, a Skype-interview appointment was made for Friday the 27th of May. Contrary to the other interviewees, the representative of the OECD requested to remain anonymous and preferred the interview to not be recorded.
The third and last interview was with Charles de Lusignan, the communication representative of Eurofer which is the European steel association representing the entire steel production in the European Union. As a representative of the steel
industry, Eurofer informs its members on developments in European and international policies and provides a way for the producers to unite behind one shared voice
(www.eurofer.org). The interview was conducted over phone and took place the 2nd of June after an initial e-mail was send one week beforehand.
Both the first and the third interview were allowed to be recorded so that afterwards transcriptions could be made, which are written reproductions of the actual words used (Saunders, Lewis & Thornhill, 2012). For the second interview a two-page summary was made directly after, as the permission to audio-record the conversation was not granted.
3.1.2 Corporate publications
In addition to the interviews, the corporate websites of Tata Steel, ArcelorMittal, and Aperam Stainless were used to retrieve publications on the company’s European branches. Even though these data were not assembled for the particular research in mind, it is argued to be crucial for the development of a comprehensive understanding of the situation.
As mentioned on the website, Tata Steel Europe is part of the Tata Group which is founded in 1868. The Group purchased Tata Steel Europe in 2007, when it was operating under the name Corus. Corus as a steel producer was formed in 1999
after the merger of British Steel and the Koninklijke Hoogovens. With a wide variety of operations in its portfolio, Tata Steel Europe can be seen as a diversified company. Its main facilities are the two integrated steelmaking plants IJmuiden and Port Talbot, with the latter discussed in this research’s introduction (www.tatasteeleurope.com). From Tata Steel’s European branch, the two most recent year reports and in particular the three most recent “management speaks” found on the website have been analyzed.
ArcelorMittal, established in 2006 after Mittal Steel acquired Arcelor, is known as Europe’s as well as the world’s largest steel producer. According to the company’s website, ArcelorMittal Europe is present in seventeen European countries and employs around 86.000 people. Within its steel business, the European branch mainly focuses on the automotive, civil engineering, construction, energy, packaging, and shipbuilding industries (www.europe.arcelormittal.com). From the website the 2016 “fact book”, the 2013 “Corporate Responsibility” report, and two opinion pieces written by ArcelorMittal’s owner Lakshmi Mittal and his son, Aditya Mittal, were retrieved and used for the analysis.
Aperam Stainless is Europe’s second largest producer of stainless and specialty steel, with the former perceived as high-quality steel due to its corrosion resistance. The company was established in 2011 as a spinoff of ArcelorMittal’s stainless business and is built around multiple divisions producing the stainless steel and specializing the products according to the customer needs
(www.aperam.com/europe). For the analysis, the company’s year reports of 2014 and 2015 have been used with a special focus on the “management’s reports”.
3.2 Analysis
For the interviews, the first step in the analysis was to divide the transcriptions in sentences or groups of sentences and to allocate each section a code. This open coding enabled the initial discovery of the themes and topics expected to be relevant for the research (Boeije, 2010, p. 96). Subsequently, selective coding was conducted with the aim to find connections between the discoveries made during the open coding and to create a deeper understanding of the information (Boeije, 2010, p. 114). As the themes and topics discovered during the analysis were not known at the moment the data collection commenced, the processes of data assembling and data analyzing were alternated and a cyclical approach was maintained throughout the entire research (Boeije, 2010, p. 119). This enabled the collection of data to become more specific
with the progression of time, as the discoveries in earlier collection stages could be researched in more detail later on.
3.3 Conceptual model
A conceptual model based on a combination of the theories discussed in the literature review has been used to guide the analysis of the data and the formulation of an answer to the research question. As can be seen in figure 1., the core of this
conceptual model is the strategic answer of the European steel producers to the global overcapacity and the Chinese competition. Following from the literature, it is argued that the producer’s contextual elements (positioning theory), organizational resources and capabilities (resource-based view), and partnerships (relational view) shape this answer. Understanding the precise nature of these three categories is the focus of this research.
From this conceptual model, the following three sub-questions emerged: 1. What are the dominant factors shaping the industry’s context?
2. What are the producers’ key organizational resources and capabilities? 3. Which advantages do the producers derive from partnerships?
A final answer to the research question is formulated on the basis of the answers provided to the three sub-questions. This answer arguably captures the most
comprehensive image of the situation, as the questions are each derived from different domains of the strategic management literature.
3.4 Research limitations
Several limitations emerged due to the research’s specific design. First of all, as interviews are built upon social interactions and the findings on the researcher’s interpretations, biases of both the interviewee and interviewer might have caused distortion of the information and a decrease in the reliability of the research, meaning the extent to which similar results will be found when the research is reproduced. From the perspective of the interviewee, the fact that the topics and questions were shared beforehand in order to create informed consent might have caused the participants to share socially desirable answers, rather than what they truly felt or believed (Saunders et al., 2012, p. 231). For the interviewer, prior beliefs and a lack of experience might have led to the researcher’s interpretations to deviate from the interviewee’s reality and nuances to be misunderstood. Especially the lack of experience caused the interviews to have a less natural progression and potentially decreased the quality of the questions asked. For both types of biases several attempts were made to minimize the effects, such as reducing the impact of the lack of
experience by increasing the level of prior knowledge and using the audio-records of the interviews to discover possible distortions in the information.
The fact that different data collection methods were used increased the trust in the accuracy of the findings, as they were based on both the researcher’s
interpretations of the interviews and the information found on the corporate websites. However, it is noteworthy that the publications were not written with the specific research in mind, causing the majority of the data to be found unsuitable to answer the research question. Even though, it is argued that the data triangulation created by combining these two data types improved the accuracy of the findings of the research and research’s reliability (Saunders et al., 2012, p. 179).
In addition to reliability concerns, the fact that the research is cross-sectional deteriorated the external research’s validity as it limits the extent to which the
findings can be generalized to other settings (Saunders et al., 2012, p. 194). Due to the time constraints, only a selection of the factors relevant for the situation of the
European steel industry is included and a rather small number of subjects were investigated (Saunders et al., 2012). Additionally, Tata Steel, ArcelorMittal and Aperam Stainless represent merely a fraction of all the European steel producers, limiting the extent to which the results can be applied to the entire steel industry or other steel producers with different business models. Within the constraints imposed
on the research, attempts were however made to widen the applicability of the findings by selecting companies that represent different segments of the industry and the inclusion of neutral institutions such as Eurofer that acts on behalf of all the European steel producers.
After assessing the different limitations that reduce the overall quality of this research, it can be argued that the reliability issues created by the information distortions and biases are the most detrimental as they decrease the accuracy of the research’s findings. On the other hand, as also stated by Saunders, Lewis and
Thornhill (2012, p. 382), the findings of a qualitative research might not be intended to be replicated as they illustrate a reality that is created in a socially constructed context which is subject to change. Therefore, variations in the findings might not only represent participant and interviewer errors, but also changes in the context and thus the realities. It is additionally concluded that the fact that the findings are based on limited data is one of the research’s main weaknesses.
4. Results
This section will elaborate on the results of the analysis adhering to the structure of the conceptual model, providing answers to each of the three sub-questions.
4.1 Contextual elements
The findings suggest that the global demand for steel, the growth of the Chinese economy, the provision of state-aid, the energy and raw material prices, and the characteristics of steel plants collectively shape the context of the European producers.
4.1.1 Global demand for steel
Showcased in the publications of Tata Steel, ArcelorMittal and Aperam Stainless, the European steel industry has been plagued with a slowdown in the growth of the global steel demand. With the occurrence of the financial crisis in 2008, industries such as the construction and automotive sectors started to initiate fewer projects and activities resulting in lower steel demand from those consumers (Tata Steel, 2014, p. 10). Especially with steel being highly integrated in various value chains, such a surge in activities hurts the activities of the steel producers. Additionally, with China being the
largest consumer of steel and as well affected by the economic crisis, a decrease in its domestic economic growth leads to a further decline in the global steel demand.
4.1.2 Growth of the Chinese economy
The representatives of the EU, OECD and Eurofer collectively mention the growth of the Chinese economy as a direct cause of the growing global overcapacity. Besides its influence on the global steel demand, a decrease in the economic growth confronts the Chinese producers with an imbalance between supply and demand resulting in a situation of overcapacity. Rather than attempting to restore this balance, the Chinese producers continue production based on former demand levels and export a
signification portion of the steel products to foreign economies, such as Europe. As the Chinese imports are often lower priced than the European products, it is argued in the data that they directly affect the competitive position of the European producers.
4.1.3 Provision of state aid
Mentioned in all six data sources to drive the situation of overcapacity and to highly affect the producers’ competitive position is the provision of illegal state-aid by the Chinese government and the fact that “China is not a free economy” (A. Kozlowska, personal communication, 26 May 2016). Through the government support, the Chinese producers enjoy “subsidized steel production from the government, enabling the producers to export overcapacity and lower the final price of the product” (A. Kozlowska, personal communication, 26, 2016). With the European member-states constrained by EU treaty to offer similar kind of support, the lack of a level playing field created confronts the European producers with unfair competition.
4.1.4 Energy and raw material prices
Energy and raw materials represent a significant portion of the production costs of steel producers, making the producers vulnerable to volatility in the prices and supply (Tata Steel, 2014, p. 27). On a supranational level, the producers face a EU energy policy and CO2 emission targets that are based on a benchmark of the most energy-efficient producers. According to Lakshmi Mittal (2014) and Aditya Mittal (2014) from ArcelorMittal as well as the other steel producers and Eurofer, the energy policy and CO2 targets are unrealistically strict and increase the production costs far above the costs of non-EU competitors, again leading to the lack of a level playing field.
The external source of the raw materials used in the production, such as iron ore and coking coal, leads to the producers being exposed to price uncertainty and becoming dependent upon the suppliers (Aperam Stainless, 2014, p. 18). It appears from the data that the producers attempt to design sourcing strategies that minimize the risks associated with such dependency and price volatility, such as vertical integration through the acquisition of a mining activity.
4.1.5 Characteristics of a steel plant
According to the OECD interviewee, a steel plant is characterized by high fixed costs in terms of capital and site facilities as well as substantial closing down costs due to the complexity and size of the plant. These costs are argued to create exit barriers that will keep the producers from closing down an unprofitable plant to avoid having to incur the closure costs and the losses on the fixed costs. Or, as can be seen in China, the combination of exit barriers with state-aid leads to an artificial progression of production in order to maintain low average costs, even though this creates a situation of overcapacity.
4.2 Organizational resources and capabilities
It emerged from the analysis that the most important resources and capabilities for the European steel producers are the level of integration, operational efficiency,
customer-centricity, research and development, technology, location, a diverse product portfolio and a talented workforce.
4.2.1 Integration
It is argued in the data that the ability of the producers to integrate various production processes, such as Tata Steel’s “seamless process integration from
mine-to-manufacturer-to-consumer” (Tata Steel, 2014, p. 12), leads to greater efficiencies and competitiveness. Integrating the different production processes creates cost savings on distribution and opportunities for processes to share equipment and facilities where possible, creating economies of scope. According to Charles de Lusignan from Eurofer, one of the reasons Tata Steel’s IJmuiden plant in the Netherlands is especially successful is “because it’s so integrated”. “It does everything from raw materials processing to blast furnace all the way to continuous casting and final coil production. On one site.” (C. de Lusignan, personal communication, June 2 2016).
4.2.2 Operational efficiency
Another way the producers aim to improve competitiveness found in the data is through an increase of the operational efficiency, which is argued to improve the productivity rates and reduce fixed and variable costs. The removal of redundancies and the creation of “lean” processes are furthermore found to improve the flexibility of the producers. Examples from the data of this increased focus on operational efficiency is the Aperam Stainless its “Leadership Journey initiative”, consisting of restructuring projects, cost reduction projects and continuous improvement initiatives (2014, p. 10), Tata Steel’s declaration to increase the reliability and precision of its processes (Tata Steel, 2015, p. 31), and ArcelorMittal mentioning operational excellence as one of its top priorities (ArcelorMittal, 2013, p. 5).
4.2.3 Customer-centricity
In addition to efficiency, the producers are paying increased attention to the specialized needs of the consumers in terms of delivery, volume and product specifications (C. Lusignan, personal communication, June 2, 2016). With the steel industry servicing industries with deviating needs, such personal care is expected to enhance the customer loyalty and long-term working relationships. Additionally, the increased knowledge on customer needs combined with the alignment of marketing and sales efforts will enable the producers to reap additional customer value (Aperam Stainless, 2015, p. 12; Tata Steel, 2014, p. 11). In fact, Tata Steel’s increased focus on customer excellence has led to a thirteen percent increase in sales of automotive and special products in the financial year 2013-2014 (Tata Steel, 2014, p. 13).
4.2.4 Research and Development
Research and development (R&D) is mentioned in all six data sources as the main driver of growth and innovation. With R&D described as a “continuous effort at developing cutting-edge technologies and design solutions helping transform
processes, improve inefficiencies, and enhance customer experience”, it is argued that it functions as the foundation for every other organizational objective (Tata Steel, 2014, p. 24). Examples of innovations yielded from R&D investments are the for skyscrapers “A913 Grade 70 jumbo sections” of ArcelorMittal (2013), creating
increased weight savings and lower production costs, and Aperam Stainless’ “Electric Arc Furnaces” which use less energy and emit fewer CO2.
4.2.5 Technology
As an outcome of the R&D investments, possessing the right technologies is argued in the data to determine the extent to which the producers operate efficiently and have the capacity to produce a variety of different products (Tata Steel, 2014, p. 13; OECD interview; Eurofer interview). With advanced technologies, the producers will be able to produce larger volumes of high value-adding products as well as respond to the specialized needs of the consumers (EU interview). Additionally, energy-efficient technologies can create cost savings in terms of lower energy usage and a decrease in the emission allowances that need to be purchased. The strategic importance of the technologies is highlighted through the producers’ focus on patent filings, as they reflect the technology’s value for the producers and inhibit imitability. In the financial year of 2015, Tata Steel Europe enjoyed 79 patents and additionally filed for fourteen more (Tata Steel, 2015, p. 8).
4.2.6 Location
According to Charles de Lusignan from Eurofer, a favorable location of the plant can substantially decrease the production costs and increase the efficiency of the
operations. In the case of Tata Steel, the Eurofer interviewee argues that the IJmuiden plant is situated near easily accessible infrastructure modes and different links of its value chains, while the Port Talbot plant is located rather isolated in the UK
mainland. Partially due to this difference, it is argued that the distribution costs of the Port Talbot plant are significantly higher (OECD interview, Eurofer interview).
However, the accessibility of a location is not the only determinant of whether a location is defined as favorable. It is argued that the member-state the plant is located in additionally affects profitability, as member-states have the autonomy to adhere to different policies and regulations that affect the producers’ operations. For example Germany is one of the few countries making use of the energy exemption offer of the EU, leading to its steel producers to enjoy more favorable energy costs than producers located in countries not offering such an exemption (A. de Kozlowska, personal communication, 26 May 2016).
