Strategic Management and Governance: Severstal Case Study Analysis

This case study provides a comprehensive analysis of Severstal, a major Russian steel producer, within the context of the volatile global steel industry. It examines the company's strategic responses to challenges such as the Great Recession of 2008, oversupply of Chinese steel, and declining global demand. The report employs PESTEL analysis to assess the macro-environmental factors impacting the industry, including political, economic, socio-cultural, technological, and legal considerations. It also delves into Severstal's organizational background, ownership structure, and vertically integrated business model. The analysis explores how Severstal has adapted its strategy through acquisitions, divestments, and a focus on high-value-added products to navigate the turbulent market conditions. The case study highlights the importance of stakeholder analysis, strategic significance of different ownership models, and the implications of corporate governance models. Recommendations and conclusions are provided, offering insights into Severstal's future strategic direction.

Running Head: STRATEGIC MANAGEMENT AND GOVERNANCE
Strategic management and governance
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Author’s Note

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Executive Summary
The global steel market has been facing high level of volatility because of the Great recession
that occurred in 2008. All major market players of the global steel industry like Arcelormittal,
Severstal and other major brands operating in the global market encountered cases of major
bankruptcies and several of the industrial enterprises were also shut down. In the middle of this
situation, the excess supply of Chinese steel at cheap prices over flooded the market leaving very
little competitive margin for the other frontline market players. This report will exhibit the
exponential market specific strategies that Severstal have been using in order to confront the two
major market issues like excess influx of Chinese steel and the gradual depreciation in demand
of steel in the global market.

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Table of Contents
1. Introduction..............................................................................................................................4
2. Strategic analysis......................................................................................................................4
2.1 Organisational background...............................................................................................4
2.2 Macro Environmental factors............................................................................................5
3. Discussion..............................................................................................................................11
4. Recommendations and conclusions........................................................................................13
5. Reference List and Bibliography............................................................................................16
6. Appendix................................................................................................................................19

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1. Introduction
This report will make an assessment of the environment of the Global steel industry where
Severstal is operating. The Macro environmental analysis of the industry will be done with the
pestle analysis model which will help in determining the place that holds in the global
environment. The aim of this detailed industrial analysis is to analyse the overall situation of the
Steel manufacturing and exporting market. The factors that help Severstal to achieve their
business objectives have been highlighted in this analytical report also.
The Severstal Company operates in the Steel manufacturing and the retail industry. The
major issues concerning the steel industry is the excess influx of steel in the market, compared to
the market demand. Nevertheless, the global market has been fed with Chinese steel at cheaper
than industry specific prices and that is the reason why Severstal as well as other frontline steel
manufacturing companies like Arcelormittal are facing the issues segmentation of their target
market. However, this report will also analyse how the organisation uses the vertically integrated
model for staying afloat in this turbulent market situation.
2. Strategic analysis
2.1 Organisational background
Severstal is Russian Steel manufacturing company operating in the steel and mining industry.
The headquarters of the organisation is situated in Cherepovets. Organisation has stock listing
with Moscow Stock Exchange and the LSE. The owner of the organisation is Alexey
Mordashov. The organisation owns industrial facilities in countries like Russia, Kazakhstan,
Italy, France, and Ukraine and also in several African countries as well. The largest Russian

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Steel manufacturer has been developing International strength by means of various acquisitions.
The vision of Severstal’s business strategy is becoming a major player in international market.
2.2 Macro Environmental factors
Political Factors
The global steel market has been facing high level of volatility because of the Great
recession that occurred in 2008. The decision of the Chinese government to export excessive
amount of stele in the market is one of the most feasible political factors that made the steel
industry highly volatile. All major market players of the global steel industry like Arcelor-Mittal,
Severstal and other major brands operating in the global market encountered cases of major
bankruptcies and several of the industrial enterprises were also shut down (Alexey et al. 2018).
The government’s decision of overproduction became boomerang for the economy. In order to
solve this problem, the Chinese Steel Association as well as the people’s government took the
decision of indulging in to a global oversupply of steel so that they could mobilize their statutory
assets.
Although China showed signs of cutting their capacity of excess steel production, because of
which the Global steel association had embarked on a slowly improving steel economy.
However, observing the trends of the steel exports from China, Ogoltcov et al. (2016),
highlighted that Chain has engaged in to a metal war and they will not rest unless they are not
devastate the entire steel industry of the world. The low cost metal producers of China are being
constantly funded by the governments so that they can engage in more than excess production of
steel and dump their cheap steel in to the global market. However, Beijing has responded that
they are not indulged in any wrongdoing. It is simply a matter that the cost of their production

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has been always lower because of which they can afford to make the product output cheaper than
the other market players. The European Union countries as well as the Free Trading countries of
North America are also among the major contributors to the global steel output. Among the
major political drivers, impacting the global steel industry, the privatization of the government
owned assets in the gradually emerging countries; especially the BRIC countries as well as the
Middle East provided strong scope of foreign direct investment (Ogoltcov et al. 2017). The
largest prospect as the potential markets of the steel products of the cheap steel products from
China has been the countries like South America, Asia as well as the Middle Eastern countries.
Economic Factors
Along with the challenge of excess deposition of Chinese steel, the global demand for
steel has also decreased in the ongoing decade. The demand had exceeded only 1% in the year
2014, and it is evident that this negligible rise in demand will not be stabilized and in the next
year the rate of increase in demand further slowed down to 0.8% (Vinogradov et al. 2016).
however, in the opening of the year 2017, the demand and global steel output had slumped by at
least 4% compared to what it had been in the year 2014 and it is expected that within 2020, the
production and global demand will further reduce. The shrinking in consumption of the demand
for iron and steel has occurred for the first time since 1981. There are several reasons
accountable for this. Firstly, the internal steel corporations now think that it is necessary to
reduce the over-supply of Chinese steel. That is why; major steel manufacturing companies
around the world have started producing steel at reasonable prices so that they can evade the
need for import of steel products from other countries. However, the endeavours have not been
able to spread its mark in the market. On the contrary, the impact has actually been adversary.
Firstly, it has been observed that the supply volume of steel from the Chinese market has now

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been hitting the 300 million tonnes mark (Brunetti, 2016). On the contrary, the usage of steel is
on the decline. On the contrary, the steel procuring agents are now demanding that the steel
manufacturing companies should be taking the responsibility of manufacturing the steel product
and that changes the consumption as well as the production pattern of the steel industry. While
all major steel manufacturing companies have been feeling the heat of the impending pattern of
drastic changes in the economy and consumption of steel in the international market, there is one
Russian major steel manufacturing company, Severstal that is still holding on to the major shares
of the market owing to their high end, efficient, as well as low cost and high margin products.
Along with that, the organisation has constantly brought about divergence in the international
target market so that they could easily find new markets for exporting their products. Around
2010, the company acquired .the Franco-Italian steel manufacturing and distributing company,
Lucchini as well as the Carrington Wire of UK. This turnaround strategy was facilitated by the
sales of their US, European as well as the other overseas assets of the organisation (Tumanov et
al. 2016). This shows that Severstal have been able to cope up with the market challenge by
means of a vertically integrated business strategy that is helping the organisation to sustain their
global business market as well as demand.
Socio-Cultural Factors
The customers of the major steel manufacturing nations of the world are forging the
companies for structural change in the supply chains. The automotive companies are demanding
that the steel producing companies must play a more significant role in the production of vehicle.
They are demanding that the steel manufacturing companies should undertake a greater role in
production of vehicles at initial stages of car assembly and that work is supposed to be completed
within the steel mills of the company. Now, the problem is that not all of the steel manufacturers

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are having the facility of such production for the fabrication of custom manufactured parts which
is completely differentiated from the products that attract higher prices. Gradually the pricing
pressure is increasing from the end of the steel manufacturing companies also. As an outcome of
that, gaps in the product mix as well as asset concentration is happening. As an outcome of this,
it is expected that the market differentiation will take place and the domination of the Chinese
steel manufacturing companies will reduce. As stated by Sainidis (2017), this is because; none of
the steel manufacturing companies are completely ready for this innovative market demand and
as an outcome of that, the companies dealing in the steel production in China and enjoying the
advantage of government subsidies in terms of steel distribution and export will be greatly
reduced and the this will be an open opportunity for the global steel manufacturing companies to
equalize their market share. Among all the major market players, it is only Severstal who have
been able to exhibit maximum market readiness against the current market demands. Severstal
had shifted their demands towards the high value added steel products as well as the specific as
well as highly lucrative and demanding automotive market of steel. In order to flourish in the
market, the organisation started making multiple acquisitions outside Russia. The process started
with the acquisition of the company Rogue from USA. Parallely, the company also focused on
selling non-performing assets of the organisation like the steel plant at Columbus, Mississippi for
a price of USD $1.63 billion (Kazakova et al. 2018). As highlighted previously also, the
acquisitions of steelmaking companies Lucchini as well as Carrington Wire were also done.
Technological Factors
It has been identified that with the use of the traditional technology, the organisations
belonging to the steel industry have not been able to mitigate the global demand crisis and
prevent the demand of thee Chinese steel manufacturing industry also. As an outcome of that,

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companies like Severstal have been involved in online trading of steel. There are major
benchmarking systems that measure the energy efficiency, maintenance and reliability of the
steel plants as well as CO2 emission (Litvinenko, 2016). The global organisations need to follow
stringent regulations in this context. However, the regulations regarding operations are much
more relaxed for the Chinese companies. There is an online monitoring system implemented by
the World Steel Authority, against which the above discussed aspects of the steel production
companies are monitored.
Legal Factors
Severstal is facing various legal regulations regarding stringent health as well as safety
regulations that might give rise to significant amount of cost as well as liabilities. Despite the
various efforts implemented by the organisation to monitor the risks of workplaces as well as
reduce the occurrence of accidents at their facilities, constant monitoring of the local area
governments of the countries where the company has recently started their operations in terms of
health safety and environmental pollution impacts of their operations, has been hampering their
business.
The legal framework of some of the nations where the company operates, is laden with
several legal risks, particularly in context of property rights, bankruptcy proceedings, as well as
protection of foreign investments that is leading to a lower standard of legal certainty for foreign
investments compared to more developed countries. In some of the countries, assets could be at
risk of expropriation as well as compensation for the assets that might be below the fair price
value. For evidence the policy of selective nationalization policy of the Venezuelan government
can be highlighted (Kumar, 2019). Although Severstal believes that the potential for the long
term growth in the developing economies is high, legal issues can have significant adverse

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impact on implementation of the growth plans of the organisation and their operations in the
developing nations.
Environmental Factors
In most of the nations, steel industry is under the coverage of the Environment protection
act as well as the Environment protection regulations. For sustained operations in the steel
industry, the new as well as the existing market players, need to obtain statutory clearance from
the government for establishment of the new steel manufacturing plants. In fact most local
governments are needed to install specific facilities or instrumentations for the measurement of
pollution standards as well as comply by the prescribed standards or norms in context to
minimization of air, water as well as noise pollutions as well as generation of solid waste as well
as utilization. The pollution control boards of the local area governments are responsible for
evaluation of their compliance standard. In this context, the environmental policy of Severstal
can be compared for understanding the level of compliance exhibited by the organisation. In this
context, it can be argued that the major aspects of the environmental policy of the organisation
are preventing environmental contamination and participate in the activities like reduction of
green house gas emission, optimization of usage of the energy as well as the natural resources as
well as efficient waste management (Kozhevnikov, Kozhevnikova & Bolobanova, 2017). The
company always emphasizes on the application of an efficient management system which will be
able to ensure compliance with all the applicable requirements of the environmental laws as well
as the environmental pollution regulation policies of the local area governments. The Severstal
PAO had been the first organisation pertaining to the metallurgy industry of Russia to implement
a system for environment management which complies with the standards of the ISO 14001.
Nevertheless,, the organisation is still bound to experience the impacts of the Kyoto protocol in

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terms of its imperatives to improve energy efficiency for managing climatic changes or the Paris
agreement, abiding by which, they have to introduce significant changes to their logistics section
to ensure sustainability of the environment.
3. Discussion
Severstal have been able to sustain their profit in the face of a degenerating global steel industry
where the major US as well as the European competitors have been losses incurred in the
consecutive financial years. The challenges that have been hovering over the steel industry
around the world have been explicit in the previous sections of the essay. This section will make
a detailed analysis based on the case study, in order to analyze how the Severstal Company have
been able to sustain the typical challenges of the steel industry of around the world. It is evident,
in the case study that the organisation has been maintaining a positive balance sheet by the dint
of their consolidation as well as divestment strategy. The primary business activities that have
helped the organisation to stay afloat are selling their business units that have been incurring loss
and parallely strengthening their vertically integrated business model. The aggressive divestment
strategy of the organisation has been providing dividends to Severstal. The net profits of $1.7
billion generated by the organisation in the FY 2015 shows that the organisation have been able
to stay on the top. However, the larger picture is that Mishnev et al. (2018), depicted that in the
FY, the organisation had been able to display better financial performance compared to that in
2014 and in 2013. After the reporting of significant losses in years 2009 and 2010, the company
started to walk on the ways of cost reduction as well as operational improvement programs
which gave them their strategic direction.

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Although Severstal has been engaged in large number of merger and acquisition activities, being
a comparatively new organisation there is still high fragmentation compared to the other Global
manufacturing brands like Nippon Steel, Sumitomo Metal Corporation or the Arcelormittal. The
average statistics of last three decades shows that merger and acquisition as well as a vertically
integrated business model has been there primary strategy of achieving Rapid growth as well as
market preparation of Severstal. On the contrary, the challenges faced by the organisation in the
international market, has made organic development, comparatively slower as well as expensive
with the environmental policies of an acting as barrier to getting permission of developing new
plant for financing the construction of new seal means across very latest markets of the
organisation. In many Latin American, as well as Asian countries the organisation has faced
challenges like lack of government permission for setting up steel manufacturing plants in
several areas after acquisition of local manufacturing companies undergoing debt and with non
performing assets. On the contrary organic growth of Chinese Steel manufacturing plants, which
do not have a global name, since they are being controlled by the government to operate under
lower stock pricing by heavy subsidization from the Chinese government, have been exhibiting
niche market penetration (Guo & Zhang, 2016).On the international front comma Severstal is
challenged by the big International brands like Arcelormittal, India based company Tata Steel
who has recently acquired British Dutch steel producing company Corus, and there high market
capital allows them entry into the growth markets and access to high technology of the west.
When other companies like Severstal are also implementing vertical acquisitions, thereby
increasing the negotiation power in relation to suppliers and buyers, they are also bound to
impact the price of Steel products over the world.