My first ever dog (long-coated GSD bitch) had this when we found her, probably brought on by her emaciated state and being so nutritionally deficient. She stank to high heaven, her coat was matted with the stuff her skin was exuded and thick with scabby flakes.
In her case it gradually improved as her health improved and never came back once we managed to get rid of it.
She had to have Chappie to begin with, as her digestive system couldn't tolerate anything else and we gradually worked up to a good quality hypoallergenic diet with added vitamin/mineral supplements and fish oils. We also applied lavender and tea-tree topically and gave her regular baths with a tea-tree and lavender rinses to finish them off.
This was waaaay back in 1989 though and if I was in the same position now I would definitely opt for a raw diet and would probably try neem oil baths and topical applications as that stuff is an absolute godsend for any skin condition. It was the only stuff that worked for my Belgian Terv cross' malassezia after 12 years of searching for something that might help her.