Analysis of Corus’ Strategy - Assignment Example

Corus, formally British Steel merged with the Dutch Steel group Hoogovens two years ago. It is now the fifth largest producer of steel behind LNN, Nippon Steel, POSCO and Usinor/Arbed/Acerlia, (assuming the merger goes ahead).

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My investigation is into the recent announcement by Corus, February 1st 2001, of its findings from a strategic review of its carbon steel activities in the UK. The Chairman and Chief Executive, Sir Brian Moffat, announced that the company was going to reduce the size of their workforce by around six thousand people, as well as two site closures, and the closure of some parts from another three plants. The details of these losses are given on Appendix 1.

I will investigate why it is that Corus has felt it must make these drastic changes to its UK branches. I will analyse the main reasons given by the company for these changes and whether or not they justify the changes that are being made. Finally I will mention the likely impact of these changes at the local and national level.

Analysis.

In the announcement Corus revealed an operating loss of £301m in the nine months

up to July 1st 2000 in its carbon steel operations. Since January its stock has been up to a high of 17.4p, to a low of 4.7p. It was as a result of these losses that Corus have been forced to reduce the size of their workforce. The company gave two main reasons for these losses.

The first reason given by Corus is that the losses were as a result of weak UK demand, especially for its flat products. Corus produces the largest amount of flat steel in Europe. As a result, Corus is cutting back on these operations with a reduction of over 3 million tonnes mainly in this area. UK demand is also falling as a result of an increased number of imports. The strong pound has meant that products coming into the country are more attractive to buy in terms of price, than a UK based firm. Corus must compete on price with these imports if it wants to sell its products. If Corus wants to do this, it must become more efficient and cut its costs.

The easiest way for the company to do this is by reducing the size of their workforce, which is what they have done. The expectation after these reductions in the workforce and the structural changes, are estimated pre-tax benefits of some£180m per annum. However demand is not just falling in the UK, the world price of steel is also falling, (see appendix 4), which suggests that there is an excess supply of steel in the market, which is forcing companies to lower prices if they want to sell their product.

The second reason given by Corus is a lack of competitiveness in export markets. Currently the Pound is strong against the Euro. As a result, Corus’s products will be more expensive in the country exported to than the steel produced in that country, or from another exporter. Therefore less will be bought unless Corus absorbs these extra costs and keeps the price competitive. It must keep its price low because steel is fairly homogenous from supplier to supplier. It is therefore price elastic and close substitutes could be found easily at a lower cost. If Corus were to keep prices high then it would find it hard to sell its products.

The other problem with the pound is that it is fluctuating. Corus cannot predict the changes and it is therefore very difficult to use strategic management in planning for the future. These problems have also come at a time when the lack of demand in the UK market has meant that more steel needs to be exported. High transportation costs and aggressive price competition in the export markets have more than offset the benefits of the cost and efficiency changes in recent years. These combined costs have resulted in high losses and the need for drastic changes that is what Corus has done.

It is not just a lack of demand that has caused problems for Corus. There is an over supply in the market. Supply exceeds demand and price therefore needs to be lowered if the company wants to sell their products, (see appendix 2). Corus is the fifth largest producer in the world, (see appendix 3). The actual branch closure at Ebbw Vale and Bryngwyn in Wales indicates that there is no longer enough demand in the UK and overseas for some types of steel.

The oversupply in the market has meant that Corus cannot afford to produce steel that there is no demand for. This is why Corus did not accept the bid from Trade Unions to buy Llanwern instead of shutting parts of it down. Corus did not want the competition in the UK; it could not afford the competition in an already strained market. Corus is trying to rationalise its steel making and cut costs. The closures are a response to a weaker world steel market that needs rationalising, and Corus has begun this process.

Corus have also had problems with cultural challenges in its merger. Corus and Hoogovens have different cultures and languages. This has made the merger more difficult and less successful than it could have been.

The changes that this could bring will affect both the local and national level. The immediate impact is a large number of unemployed people in the already hard hit area of Wales, which is still reeling from coal-mining’s disappearance in the 1980’s. The spending power of these workers that would normally create a multiplier effect on the local economy, will now have much less of an impact. The result of this may well be the closure of the smaller shops that had relied on their spending as well as businesses that supported the sites such as the cleaners and caterers.

A survey by the Welsh Economic Research Unit at Cardiff University claimed that the 14,000 jobs in Welsh steel making supported another 44,000 jobs. However although some of these jobs will be lost as a result, the impact may not be as hard as expected. One reason for this is that the Welsh Development Agency is being used to find new work. It has had time to prepare for the job losses following the boardroom coup last year when two chief executives were forced to resign, (see appendix 5). The development agency is a coordinated body that has been proven to attract new industries into the area, often foreign firms wanting to get inside the EU.

Conclusion.

The problems facing Corus have resulted in large losses to the company, (£301 million in the nine months up to July 1st 2000). The company has therefore been forced to cut costs. A drive for increased efficiency without decreasing the workforce would not work because costs would remain too high. As a result of decreasing the labour force the company is saving around £180 million per annum. The lack of demand has resulted in the closure of two plants at Ebbw Vale and Bryngwyn as well as the closure of other parts at Llanwern, Shotton and Teeside. These changes have been done in order to return the company to profitability. The changes will decrease total output in the steel market and will allow Corus to compete more easily.

Without making these changes Corus would have been unable to compete with other companies who were able to keep their costs down. Corus needed to be able to compete more strongly with its competition in Europe in terms of price. However, these changes may not be the last for the company. Corus is a victim of the strong Pound against the Euro. It may not fully recover until the Pound weakens or if Britain joins a Single Currency. Until then, we can expect more structural changes and job loses from its UK branches. Europe is the largest buyer of Corus’s steel, if Corus cannot solve its problems there, it may have to look elsewhere to sell its steel. This could mean further restructuring of its companies across Europe.