The Role of Human Resources in Business Strategy

Abstract

Industry Analysis

The word steel industry is not attractive to new companies. This unattractiveness is associated with its profitability versus the competition, prices for raw materials and the emerging substitutes. In the article ‘The world steel industry emerging from the Great Recession’ the authors point out that despite the steel industry remaining unprofitable for years, the state of things has changed. The industry’s largest companies made some essential acquisitions in the 2000s, for example, Mittal Steel and Tata, yet the rivalry among these producers remains strong. Moreover, companies from China increase their presence in the market, contributing to the rivalry.

As a product, steel is in high demand because it is used in production within different industries, some examples include cars, medical equipment, cutlery, everyday use products, and others. According to this case study, it is ‘one of the most widely used materials due to its strong, resilient, versatile, recyclable properties.’ For this analysis, Porter’s five forces model will be used to examine internal and external factors impacting the steel industry. Assessment is based on a threat of entrants, bargaining powers, rivalry and potential substitutes (Henry, 2018). First, industry rivalry is intense, because there are a few steel companies that account for most of the production. Moreover, China has significantly increased its steel production over the years, accounting for 45% of the market, although most of its steel is sold domestically. Mittal Steel, now referred to as ArcelorMittal produced 97 tonnes of steel in 2019, following the Chinese Baowu Group with 95 tons (Statista Research Department, 2020). The third-ranking steel producer has manufactured less than 52 tons of steel. Hence, there is a substantial difference between the production rates of the top 2 companies and their rivals.

Next, considering the production volume and the internal rivalry in this industry, the threat of potential new entrants is low. Although steel is used in many industries in large volume, the complexity of production and the need for a large investment to begin production, with the threat of cyclicity within this industry make it unattractive for new entrants. Bargaining power of suppliers is very high, considering the limited number of suppliers globally. The iron ore is the raw element required for the production of steel. Currently, there are three largest iron ore producers on the market, which account for 70% of the market. Hence, suppliers’ bargaining power is largely due to their control of the market and a limited number of suppliers. If steel producers had more iron ore suppliers to choose from, the competition between raw material suppliers would allow to bargain and negotiate contracts. This is why the prices for iron ore doubled by 2012 when compared to 2005.

Bargaining power of buyers is increasing, since the largest steel buyers-car manufacturers are finding substitutes for these products, such as aluminium. Moreover, competition from China is threatening the industry and prices because, despite the lower quality, the production volumes are high. If the demand within China’s domestic market decreases, the Chinese steel will become a substantial competitor on this market, allowing for more buyer bargaining power. Moreover, metal packaging producers, such as Crown Holdings buy in bulk and coordinate their purchases, allowing for increased bargaining power.

The threat of substitutes is high, both because innovation allows manufacturers to use cheaper and more durable materials. New developments in steel production allow it to be thinner with the same other qualities. Car manufacturers now use aluminium, and high tech companies revert to composites or ceramics. Other industries began using plastics and steel production threatened by materials that are cheaper and more suitable for different industries’ needs. In summary, the steel industry is not attractive for new companies because of the complexity of production, strong bargaining power of suppliers, and manufacturers’ low power. All elements of Porter’s five forces analysis are ranked as ‘high’ meaning that the industry is competitive, and companies have little bargaining power with suppliers. At the same time, buyers can negotiate prices or choose substitutes.

Strategic Planning

First and foremost, strategic management involves planning and setting long term and short term goals. One of the tools managers can use in strategic planning is SWOT, that allows analysing the current state of the industry and by converting the matrix into TOWS, planning how to use the opportunities. Table 1 is a SWOT analysis of the industry based on the ‘The world steel industry emerging from the Great Recession’ case study.

Strengths Weaknesses
  • Strong demand
  • Prices increase
  • Increase of raw materials price
  • The rivalry between existing steel producers
Opportunities Threats
  • Asia and Middle East markets grow.
  • Innovations in steel variations
  • Some industries already use substitutes for steel.
  • Governmental regulation (Florange plant case)

Table 1. SWOT analysis of the steel industry.

Steel producers may undertake strategy measures going forward—investing in research and development (R&D) to change the properties of steel. For example, make it more versatile and suited for the evolving needs of different industries. For example, the case study points out that car manufacturers now use aluminium more often, the packaging is made of plastic, and technology companies use compounds or ceramics. These industries have found substitutes that perform better and are cheaper than steel, while the price of raw materials for steel production has increased from 2005 till 2012. This opportunity is also connected to the high levels of rivalry in this industry, which suggest that steel producers have to differentiate and offer new products to their customers to remain competitive.

One issue that steel manufacturers may face when planning their strategies is governmental regulation. As shown by the example of Mittal Steel’s intentions to close production in Florange, France, the government may obstruct such decisions. This requires the steel industry companies to closely cooperate with the government, which can bring a competitive advantage. By cooperating with governments, these companies can secure governmental support, which is especially important during the pandemic and as China’s steel production continues to increase.

From a perspective of strategic management, the cyclical nature of the business requires making adjustments to prepare the business for the part of the cycle where there are low demand and production. This issue was mentioned in the case study, concerning the economic crisis of 2008 when demand and prices for steel have lowered substantially. With COVID-19, the steel production may be affected as well, due to uncertainty and economic impact of lockdowns. For example, the OECD Steel Committee has voiced their concern with the future of the industry due to the pandemic since ‘slump in demand caused by the global pandemic comes as steel production and inventories continue to grow in China’ (OECD Steel Committee gravely concerned, 2020). Considering this and the increasing capacity for production and market growth in the Asian and Middle Eastern markets, one suggestion is to place more emphasis on increasing market presence in these parts of the world.

One should consider the issues the changing geography of demand and production, with Asia and the Middle East becoming more prominent. Mabashi (2019) states that the overall capacity of production between 2019 and 2021 should increase by 4-5%, and the majority of the steelmaking capacity increase is attributed to Asia. Moreover, Mabashi (2019, p. 13) notes that ‘solid steel demand growth has attracted many foreign investors to the ASEAN region, and there are several new investment projects supported by Chinese companies.’ Using these opportunities to establish themselves in the new markets and secure new customers should be the focus of companies in this industry.

In summary, the steel industry is threatened by the potential substitutes for the steel and the economic consequences of COVID-19. The opportunities that steel manufacturers can use in their strategic planning include innovation-offering new products, and exploring new markets, including the Middle East and Asia. Hence, short term planning should focus on addressing COVID-19 consequences, such as demand and production issues. Long-term strategic planning should focus on innovation, R&D and new markets.

Introduction

Human resources are linked to the Sustainable Competitive Advantage (SCA) strategy. Proper human resource management (HRM) practices support an organisation’s goals and allow achieving them. Through long-term planning, HRM allows determining the qualifications of specialist a company will need, their background, potential salary, rewards and training they will require. This essay will review the role of human resources in strategic planning and management and how HRM allows for SCA.

Human Resource Management

There are many ways in which a company can achieve SCA. Mainly, strategic planning, development of company culture and investment in innovation are among the things that are often viewed as core components of SCA. This focus on planning and achieving goals may lead one to overlook the human assets that the company has or has to recruit. CIPD (2020, para. 1) argues that HR management ‘supports long-term business goals and outcomes with a strategic framework’. This statement refers to the work that a company does, for example, a software firm has to hire software developers to be able to deliver its services to customers. These developers have to be qualified and have a sufficient background to perform these tasks.

To achieve a competitive advantage, the employees should be motivated to think outside the box and work on solutions for achieving SCA. By definition, competitive advantage is when a firm can produce either better products or provide lower prices when compared to its rivals (Twin, 2020). HRM deals with this task, by creating an appropriate company culture, hiring qualified employees that will enhance the development of the business and training them to improve their skills.

Contemporary business managers recognise the role of HRM in achieving SCM. As Barney and Clark (1998) state, many companies claim that human resources are a company’s main asset, but the meaning of these statements is often misunderstood. As a result, human resource management is often not prioritised as an essential element of a firm’s performance. The generalised view of the HR function is hiring individuals capable of performing tasks. However, HR is also responsible for training and retaining qualified individuals. Arguably, whether a firm will have qualified personnel depends largely on the HR strategy.

HRM practices are interlinked with the company culture and its strategic goals, making it an essential element of strategic planning. When analysing human resources from the perspective of a resource-based view, one can argue that employees directly contribute to the firm’s competitive advantage. Barney and Clark (1998) argue that there are two ways of achieving SCA: reducing the costs or offering an innovative solution. For example, by paying less for the employee health insurance, the company can reduce its spendings and therefore have more profits. Alternatively, by encouraging employees to excel in their performance, the company can offer an excellent service to customers, which will become its competitive advantage. Either way, employees and practices used to manage them have an impact on the organisation’s profits and its SCA.

If an HR manager can identify and nurture employee characteristics that cannot be easily imitated by the competitors, the firm will achieve a substantial SCA. These characteristics become a part of the company’s unique culture. For example, Barney and Clark (1998) cite an example of Nordstrom, whose sales clerks are ready to change the customer’s tires if necessary. This approach to communication with customers creates a unique reputation for Nordstrom that cannot be easily adopted by the competitors since recruiting and training sales clerks to perform similarly would take a lot of time.

Conclusion

In conclusion, HRM is linked to organisational planning and allows a company to achieve its strategic goals. This essay explores the role of human resources for sustainable competitive advantage is discussed, mainly the idea that employees should be viewed from the perspective of their contribution to the firm’s performance. As a firm’s resource, HRM can help reduce costs or contribute to the company’s uniqueness in customers’ eyes.

Reference List

Barney, J. B. and Clark, D. N. (1998) Resource-based theory: creating and sustaining competitive advantage. Oxford: Oxford University Press.

CIPD (2020) Strategic human resource management. Web.

Henry, A. E. (2018) Understanding strategic management. 3rd edn. Oxford: Oxford University Press.

Mabashi, D. (2019) Latest developments in steelmaking capacity. Web.

OECD Steel Committee gravely concerned about impact of COVID-19 crisis on steel market (2020) Web.

Statista Research Department (2020) The world’s largest crude steel producers in 2019, by production volume. Web.

Twin, A. (2020) Competitive advantage. Web.

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