What does keeping pace with environmental issues entail? Spending money, and lots of it. In Europe, regulations dictate that steel companies purchase CO2 certificates or permits for their mills where emissions exceed specific levels. The rules are less rigid in the Asian bloc, which is a net plus for Chinese steel companies. And in the U.S., the Environmental Protection Agency recently strengthened ambient air quality standards by lowering emissions limits for iron and steel facilities. Where the rules are stringent, minimizing CO2 emissions requires investments by steel companies in new technologies and the costly replacement of older, out-of-date processes and supply chain practices.
There are spillovers from the embrace of environmental consciousness. In the wake of the 2011 Fukushima power plant disaster in Japan, Germany began aggressively phasing out nuclear energy in favor of renewable sources. While doing so, the German government exempted the steel industry from additional charges resulting from bringing new energy sources online; however, the government has not yet settled on how long to extend this benefit.
At times like these, when the outlook for an industry is challenging, companies face a series of difficult choices. The obvious temptation is to cut costs to remain competitive — and there certainly is value in making sure that budgets and spending decisions are logical and under control. But at the same time, companies must continue to grow, to adapt to the rapidly changing landscape, and to make the right investments to stay ahead of their rivals.
Even successful companies often find themselves uncertain how to proceed at such a difficult crossroads. Companies may be tempted to abandon their proven capabilities in favor of a brand-new focus or an overhaul of their business model — but that can backfire, because building entirely new capabilities is an arduous and very expensive task and may clash with the culture and institutional DNA that the organization has nurtured for a long time.
In our view, the most efficacious choice for steel companies today is to anticipate and exploit change, rather than react to it. That may sound obvious, but few businesses do it well. To undertake this, steel companies should first commit to an identity — that is, determine the market sector in which they can best provide value to customers and in which they can differentiate themselves and grab market leadership. Next, they should shape their own future by updating, prioritizing, and extending their distinctive capabilities to allow them to deliver on this value proposition — their “way to play.” They should use knowledge about their customers’ preferences to create new demand for what they do best. If a steel company does all this right, it can become a supercompetitor — the type of company that creates sufficient value for its customers and itself to shape its business sector, rather than reacting to the moves of its competitors.
There are three distinct ways to play that companies in the steel industry should explore in an attempt to forge a new future for their business and restructure the industry. Of course, these approaches are often complementary, and it’s not uncommon for companies to engage in more than one pathway as they try to enhance the strength and results of their existing capabilities. But it is important to remember that steel companies can no longer be all things to everyone; they have to make hard choices when choosing ways to play, based on capabilities that they can build to world-class level. Broadly speaking, a steel company can focus on becoming a customer-centric innovator, a supply chain expert, or a cost leader (see Exhibit).