International operations management strategy of ArcelorMittal

University Degree Business and Administrative studies

Introduction

‘Globalization’ causes an inevitable international competition between the companies all over the world. Establishing a competitive international business strategy as well as international operations management strategy is a company’s foremost priority.

Mayer and Moore (1983) define manufacturing strategy as “a plan that describes the way to produce and distribute the product”, and “the choice of process technology, degree of vertical integration, the number and location of facilities, factory focus and the manufacturing infrastructure”. When the operational strategy comes to a global level, it means “global manufacturing”, which is a coordinated resources management, production and logistics system, providing the best mix of inputs from worldwide locations along the value-added chain (Fawcett 1992). This assignment will first examine the current international operations management strategy of ArcelorMittal, and then discussed whether its international operations management strategy remains appropriate over the next years.

Current international operations management strategy of ArcelorMittal

International operations management strategy is a phenomenon of combining the concept of international operation strategy and business strategy. Toni, Filippini and Forza (1992) discussed the relationship between globalization and operation. They point out that ‘Market globalization requires achievement of high standards of performance in quality, timeliness, total costs and customer service. To reach these levels of performance simultaneously it is necessary to change and improve all the phases in the value chain continuously’. Strategy refers to a direction for an organization designed to give competitive advantage. An operations strategy is a long range plan or vision for the operations function which is a part of the business strategy. It consists of four interrelated elements: mission, objectives, policies and distinctive competence. Booz Allen and Hamilton (1982) use the concept of the manufacturing mission as the way a product should be sourced, manufactured and distributed. The mission must also specify the levels of process flexibility, product mix, customer service, product quality, product cost, productivity and other manufacturing requirements.

ArcelorMittal is the world’s leading steel and mining company. With a total production capacity of around 125 million tonnes of crude steel, ArcelorMittal is a steel producer with a diversified production process. It has industrial operations in 20 countries on four continents producing flat and long steels as well as tubular products across both the developed and developing world. The company pursues a consistent strategy to reduce exposure to risk and cyclicality by using a three-dimensional strategy focusing on product diversity, geographic breadth, and vertical integration both upstream and downstream.

The strategy of vertical integration is divided into upstream and downstream integration. In upstream integration, the company invested in iron ore and coal mining assets which ensures supply and provides a natural hedge against raw material price volatility. Through a combination of acquisitions and internal expansion, ArcelorMittal is the world’s fourth largest producer of iron ore, with a global portfolio of 16 operating units with mines in operation or development. The principal iron ore mining operations are located in Canada, USA, Mexico, Brazil, Algeria, Bosnia, Ukraine, Kazakhstan, and Liberia. The geographically diverse portfolio of mining assets allows the company to supply the developing world as well as its own steel facilities. As most of the mines are also in close proximity to the group’s steel plants, the own production provides a competitive advantage for the company.

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In downstream integration, ArcelorMittal’s “Distribution Solutions” segment let the company meet a wide range of customer needs in virtually all steel-consuming industries and markets which is sold into a total of approximately 174 countries. The “Distribution Solutions” segment also allows the company to meet the operations performance objective. Slack et al. (2004) had argued that there are five operations performance objectives including cost, quality, speed, dependability, and flexibility. This segment assists the company to achieve the speed and dependability objectives. The Distribution Solutions business sells both in local markets and through a centralized marketing organization. The service centers finish ...

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Lockamy and Cox (1995) has found that short lead times, on-time deliveries, increased process/product innovation and flexibility, and responsive field service to be the factors on which international competition takes place. ArcelorMittal has a diversified production process, producing approximately 65.9 million tones of crude steel through the basic oxygen furnace route, around 22.6 million tones through the electric arc furnace route, and around 3.4 million tones of crude steel through the open hearth furnace. It creates flexibility in raw material and energy usage and the scale helps it to optimize plant load factors.

Apart from good performance on speed, dependability and flexibility, the company has a strong track record of delivering consistent cost improvements as well. This result is gained through the company’s international operation strategy. Marquardt (1999) points out that ‘Global manufacturing supports a global strategy that in turn focuses on which international markets to target, but also covers logistics, tactics and policy’. The benefits may include reduction of transportation costs, access to low cost production factors, and greater economies of scale. Since 2008, ArcelorMittal‘s management gains program has delivered $4 billion of cost savings. In 2011, the company announced its asset optimization plan which is aimed at concentrating production at the lowest cost plants to optimize productivity. As noted by Hayes and Schmenner (1978), “Manufacturing functions best when its facilities, technology and policies are consistent with recognized priorities of corporate strategy. Only then can manufacturing gain efficiency without wasting resources”. In addition to the policies consistent, the company’s facilities and technology are also consistent with their strategy that provides competitive advantage. ArcelorMittal frequently works with their customers in committed co-engineering programs and have a strong presence in the design centers of most global automotive manufacturers, acting as a strategic partner for many. It provide the service through a research and development budgets in the European steel industry, a worldwide network of laboratories, and a management program that actively shares practice around the company’s operations.

Based on the strategy and performance of ArcelorMittal, its international operations management strategy fully implements the company’s international business strategy in product diversity, geographic breadth, and vertical integration. It not only attains the entire five operations performance objective, but also acts as a competitive multinational company. According to Corbett (1996), there is a difference between global and multinational firms. The former create standardised products for a world market and then manufacture them on a large scale in a few highly efficient plants, while the latter may modify products and strategies from country to country. The company has different product - mix strategy in different market in relation to its demand. It believes that demand in the developed world is weighted towards flat products and a higher value-added mix, while demand in the developing world is higher for long products and commodity grades. The company also predicted that as these economies develop, their need for higher value products will increase. It shows that the company’s business strategy as well as international operations management strategy will follow the changes that are caused by these external factors.

Future international operations management strategy of ArcelorMittal

From a serial acquisition in different countries and the merger between Mittal Steel & Arcelor for complementing each other in terms of geographical coverage and product mix to the strategy of owning its own mines. ArcelorMittal applies a proactive operation management strategy to deal with the changing of economy and external market. Ward et al. (1995) points out that ‘the business environment appeared to have a tangible impact on operations strategic choices in operations’. Virtually, the innovative pace of the company has never been stopped. According to the annual report of ArcelorMittal in 2011, the company ‘have now transformed from being the world’s leading steel company with a strategy of vertical integration, into the world’s leading steel and mining company with a portfolio of high-quality growth mining assets that sell to both internal and external customers’.

ArcelorMittal’s operation strategy has stepped into the stage 4 which is proposed by Wheelwright and Hayes (1985). They suggest four stages for manufacturing strategy: (1) internally neutral, (2) externally neutral, (3) internally supportive, and (4) externally supportive. Stages 1 and 2 correspond roughly to past efforts to keep operations from interfering with business strategies. Stage 3 represents the case where operations strategy is derived from business strategy, while Stage 4 can be elaborated by Romano (1983)’s position “aggressive use of operations to build ‘corporate competence’”. The business strategy of ArcelorMittal focuses on not only steel business but also mining business is a significant proof for building corporate competence by use of operations. The company has an ambitious growth plans to increase its supply of iron ore to 100 million tones by 2015, including doubling of the market-priced tonnages over five years. Due to production from captive mines closely linked to one of its steel facilities, which was transferred internally on a cost-plus basis in 2011. This new strategy secure the raw materials supply to its steel business in the future and also allows optimization of supply and logistics savings and provides the group with diversification and an effective hedge against raw material price changes. In 2011, the company spun off its stainless steel operations into a separate company, Aperam. Its strategy will focus on continuous investments in order to maintain the production facilities and sustain R&D and product quality. But acquisitions will be made only selectively and it will consider some non-core asset divestments which is consistent with its new business strategies which are targeted to become the world’s leading steel and mining company.

Moreover, in order to further reduce the cost and optimize productivity, the management gains program and asset optimization plan are expected to be reinforced. ArcelorMittal has a further $800 million targeted cost saving to be contributed by its management gains program for 2012. This estimate is to come from operational improvements, sales, general and administrative expenses (SG&A) and fixed cost savings. As for asset optimization plan, it is aimed at concentrating production at the lowest cost plants to optimize productivity and better aligning its footprint to market demand which is targeted to add annual savings of $1 billion by the end of 2012.

As Joshi et al. (2003) remarks, alignment between the business environment and operations strategy is a central tenet of major strategic management paradigms. The international operations management strategy of the ArcelorMittal is aligned with their core business strategy as its production facility spread through the world. In 2011, approximately 38% of steel was produced in the Americas, 46% in Europe, and 16% in other countries such as Kazakhstan, South Africa and Ukraine. Due to the uncertainties arising from the euro zone sovereign debt crisis, ArcelorMittal temporarily suspended steel growth expenditure. In contrast, the company operates in a large number of emerging markets. Based on local market conditions and projected global and regional demand trends. The international operation strategy of the company is appropriate to target growth in key developing markets. First, the developing market such as both China and India are expected to continue their upward trajectory in 2012 or even next years. On the other hand, Steel use in the developed world is expected to show low growth to leave underlying demand around 20% below pre-crisis levels in 2012. Besides, many of the emerging countries have implemented measures aimed at improving the business environment and providing a stable platform for economic development in recent years. ArcelorMittal’s business strategy has been developed partly on the assumption that this modernization, restructuring and upgrading of the business climate and physical infrastructure will continue which is supposed to create a corporate competence for the company.

Conclusion

The strategic implications of operations require a forward-looking and proactive role for operations. Anderson, Cleveland, Schroeder (1989) say that “operations can give the firm a competitive advantage by turning operations outward toward the customers, competition and markets”.

In analysis of the external economic and internal business strategy of ArcelorMittal, the international operations management strategy of the company appears to be focused on global sourcing, location, network effect and competition. In the next years, the company can be benefited by strengthen its upstream vertical integration of mining business to stablize the raw materials supply, diversify company’s segment, and thus enhance competitive advantage and risk management. The consolidation and centralization policy such as management gains program, asset optimization plan and Distribution Solutions segment should be able to further reduce cost, optimize productivity, provide greater customer service, and maximize network effect. In order to capture the growing demand in developing market and offset the recession effect in developed market, the company is planning to increase investment in the operation of developing market to have a better response for those potential locations. The international operations management strategy of ArcelorMittal appears forward-looking and proactive and therefore will likely continue to help the company maintain its dominant status.

Reference List:

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ArcelorMittal Annual Report (2011).

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