Name, surname: Mădălina Viorica Ion, PhD student; Ilie Vasile

Institution: The Bucharest University of Economic Studies, Council for Doctoral Studies (CSUD)
Address, e-mail: mvmadalina@yahoo.com; vasile.ilie@fin.ase.ro

Becoming an International Company

Insights from the Romanian Steelmaking Leader

Key words: firm growth, internationalization, strategy, reconstruction, model, enterprise value, factors
JEL Classification: L25

Abstract
This paper studies the aspects of globalization and firm’s growth, while trying to understand the strategies of a firm
while going global. The field of enterprise internationalization has expanded and the paper analyses a Romanian
steelmaking company in its becoming the global steelmaking leader, considering the information available regarding
the privatization of Sidex Galati and other state-owned enterprises acting in the steel industry, and the author’s
significant working experience at this company. Analyzing such a large company with tradition has the advantage of
multi-annual information available and opinions expressed in the published literature. Understanding the
antecedents, exporting challenges etc. can be critical for the survival and/or success of the enterprise. In the research
of enterprise success factors and in order to develop a model for enterprise value maximization, the paper studies the
path, process, potential, problems and pattern of internationalization. The lessons learned from the insights analyzed
and the model for business (re)construction according to the demand can be useful for managers or company
founders, when adopting strategic decisions for company success.

Introduction
This paper is a minor extension of the author’s previous research1 on corporate performance and
enterprise value.
The analysis of the public data about the most important Romanian steel producer, with insights
from the author’s life and professional experience, aims to identify key factors for a value
maximization model. Analyzing such a large company with tradition has the advantage of multi-
annual information available and opinions expressed in the published literature.
Becoming an international company can be a very long, but successful process: Galati steel
works were founded in 1960, by the decision of the Romanian communist party; by 1972, there
were 40,000 employees—over 50,000 in the entire works, including nearby industrial units (1).
Given these premises and the ambitious plans of the state, output reached a maximum in 1988,
with 8.2 million tons worth some $7.2 billion which reflects the production-oriented type of
activity specific to those times in the communist Romania. The steel mills of Galați became a
well-known producer in the later years and one of the biggest ironworks of the world (2). In
1991, Galați steel works became a shares company and received the name SIDEX Galați (3).
Privatization occurred2 according to the terms specified by the Government Emergency
Ordinance (O.U.G.) no. 119/20013, with respect to the privatization strategy, debt conversion into
shares, exemptions from delay increases, employee policy, etc.

1
http://www.jsrpublishing.com/userfiles/files/archive_pages/11/SOURCES_OF_ENTERPRISE_VALUE.pdf
2
in 2001, when LNM Holdings NV bought the state shares at SIDEX
3
known as Sidex’ Ordinance, it has been subsequently modified by several other ordinances and laws
At present, the company4 employs about 6,200 people and is the largest integrated steel plant in
the country and leader in manufacturing metallurgical products, with a production capacity of 3
million tons of steel, which leads to the conclusion that the lessons learned can prove useful (4).

Literature review
Conditions of privatization transactions
Communism collapsed and under market conditions, Sidex Galați was making heavy losses
(27,000 billion lei, by 19955), so the government decided to sell it, yet save the jobs of 28,000
steel workers: the pro forma sales price was US$54 million, on condition that the labor force was
retained for at least five years and the new owners committed themselves to technological and
environmental investments of US$350 million (2).
Seller’s eagerness is a major ingredient in the LNM group’ success, as governments in emerging
economies, or in more conservative states wanted to escape social pressures and fiscal burdening.
Another factor that might have influenced LNM’s decision to invest in Romania is the exemption
from the 30% surcharge on steel imports imposed by the U.S. Given the industry turmoil, Sidex’
difficult financial position and competitor’s lack of interest, Mittal was probably the only
potential investor with a global exposure (5).
Privatization transactions are complex and usually are of strategic importance. Over the past two
decades, close to one trillion US dollars’ worth of state-owned enterprises (SOEs) have been
privatized, while in OECD6 countries7 - nearly 80 percent of the total amount, privatization has
had major implications for public finances, corporate performance, employment and equity
markets (6). Megginson and Netter (2001), in their survey of microeconomic empirical studies,
show that privatization acts to enhance enterprise performance in both developed and middle-
income economies (see also La Porta and Lopez-de-Silanes, 1999) (7).
After privatization, Sidex (renamed Ispat Sidex) increased production and sales by an impressive
30%, to more than 110,000 tons/month by May 2002 (2).
As corporate statement, value maximization is not likely to tap into the enthusiasm of employees
and managers to create value. Since a firm cannot maximize value if it ignores the interests of its
stakeholders, long run maximization of the value of the firm requires tradeoffs among its
stakeholders’ interests. Considering value simply as a matter of maximizing the short-term
financial performance of the organization is contending with the "stakeholder theory" (managers
should make decisions so as to take into account all of the interests of all stakeholders in a firm:
not only the financial claimants, but also the employees, customers, communities, governmental
officials, etc.). For example, employees and managers should have a structure that will help them
resist the temptation to maximize the short-term financial performance (usually profits, or
sometimes even more silly, earnings per share) of the organization, because short-term profit

4
ArcelorMittal Galati, the former SIDEX Galați
5
The average ration rol/US$ was 2033,28 (according to the Romanian central bank, http://www.bnr.ro/Raport-
statistic-606.aspx)
6
Organisation for Economic Co-operation and Development
7
35 Member countries, from North and South America to Europe and Asia-Pacific, they include many of the world’s
most advanced countries, but also emerging countries like Mexico, Chile and Turkey, People's Republic of China,
India and Brazil and developing economies in Africa, Asia, Latin America and the Caribbean (18).
maximization is a sure way to destroy value (Jensen, 2000). In 1970, M. Friedman suggested that
firms should maximize profits “while conforming to the basic rules of the society, both those
embodied in law and those embodied in ethical custom.
The main objective of a firm is to maximize the wealth of its shareholders (Cheng F. Lee, 2017),
so the firm needs to determine its present market value (MV) and improve its future MV, based
on its policies (investment, financing, and dividend policies).

Methodology
The value of the enterprise has an increased importance in business valuation, so maximizing it
becomes a priority for the interested parties, such as its shareholders or investors (8).
In 2000, despite the initial strengths, and history the company was behind the technological
developments of those times, pollution was a very sensitive issue, because of the old production
technology and installations, while the informational system and the informatics system was
lacking investments. The company image was suffering deeply, being described as ‘the black
hole of the Romanian economy’ in the press, because of the huge debts to the state budget.
After the privatization (2001), the entire business of the steel producer has been rethought, based
on the analysis of the demand, rather than on an exceeding production as before in communist
times.
The model below can be used for business (re)construction, as in fig.1.
Fig. 1 Model for business construction/ reconstruction starting from the demand

1) demand: analysis and prediction

2) settlement of the production unit(s) and/or functioning program

3) Planning: technology, capacity, resources, Material requirements planning (MRP)

4) Operations: the information system - including the informatic system (ERP), logistics, aquisitions, sales
(CRM), etc.

5) The organization: structure, human resources management (HRM)

6) the total quality system (TQM) and control

Source: adapted from the 7 steps of the operational and management construction (11)
Each of the 6 steps presented above need careful analysis and planning, while considering some
of the following:
 With respect to the 3rd step, MRP can be expressed as an optimal control problem, with initial
conditions as in fig. 3.

Fig.3 Model for material requirements planning (MRP)

Source: author’s research from (12)

 Regarding the 4th step, the Enterprise Resource Planning (ERP), at its most basic level,
integrates into a single system the processes needed to run a company (i.e. finance, HR,
manufacturing, supply chain, services, procurement, and others).
New ERP systems, providing visibility, analytics, and efficiency across every aspect of a
business, facilitate the flow of real-time information across departments, so businesses can
make data-driven decisions and manage performance – live (13). As an example, SAP ERP
(earlier named SAP R/3) incorporates the key business functions, in modules such as: Sales &
Distribution (SD), Materials Management (MM), Production Planning (PP), Logistics
Execution, and Quality Management (QM), Financials (Financial Accounting, Management
Accounting, Financial Supply Chain Management), Human Capital Management (Training,
Payroll, e-Recruiting) and Corporate Services (Travel Management, Environment, Health and
Safety, etc.) (14). The system has the advantage that can be tailored, according to the
management decision and company specific, etc.
 With respect to the 6th stage, a preliminary step in TQM implementation is to assess the
organization’s current reality: the history, current needs, precipitating events leading to TQM,
and the existing employee quality of working life (15), as TQM must be practiced in all
activities, by all personnel (in manufacturing, marketing, engineering, R&D, sales,
purchasing, HR, etc.) (16). In fig.4, the evolution of the concept known as TQM can be seen,
so that companies can consider when diagnosing their operations control.

Fig.4 Evolution of the concept of TQM

 Source: from (15)
This 6-step model presents the big picture of business (re)construction and the amplitude of such
an endeavor, e.g. in the 1st step, the marketing team may be in charge of the analysis and
prediction of the demand and products profitability; management may decide to buy a new ERP
system; sales teams may have to accomplish the (new) export sales targets and/or domestic sales
plan and perform customer relationship management (CRM); the human resources responsibles
may have to deal with job reduction and employees willing to leave the company.

Results

Conclusion

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