Comparison of Global Strategies in the Steel Industry: The case of Nippon and POSCO
Steel is a strong and hard element used as a structural and fabricating material. It is important to the global development due to its several uses. It is use in development of infrastructures such as roads and buildings and transportations such as cars and other vehicles. It is also used for housing, food and water supply, production of energy, tools and healthcare.(World Steel Association 2015) The demand of the element is said to be continuous. According to the World Steel Association, the demand will increase as developing countries are in need of infrastructures. As for the developing countries, consumer goods such as washing machine and refrigerators increases too. (IBID) Steel will be in demand now and in the future to come. The Steel Industry is as complex as it gets. The need for the element is high and the access of iron ore and coal is relatively diminishing at a point, in which steel companies are in need of strategies relating to sustainability and productivity. Companies must allocate resources and relocate for the effectivity and efficiency of their funds in order to maximize their profit. It is why business strategies are significant to attain the company’s goals. The focus of this paper is on two steel giants from East Asia. This paper will examine strategies of steel companies specifically: Nippon steel of Japan and POSCO of South Korea. The comparison of which is base on the comprehensive model of Entrepreneurship, which includes industry, resource, and institution based considerations.
NIPPON STEEL
Nippon Steel & Sumitomo Metals Corporation (NSSMC) is the second largest steelmaker in the world, producing ~50 million tons of steel in 2013. Its a Japanese Steel Manufacturing segment engages in the manufacture and sale of steel bars, pipes and secondary steel products.(Kotas 2015) The company dates back in the 1990’s when it started venturing in the steel industry and underwent series of merges. Sumitomo Metal Corporation was absorb by Nippon steel to build a new company. (NSSCMC 2015) Established in October 2012 by the merger of Nippon Steel Corporation and Sumitomo Metal Industries, Nippon Steel & Sumitomo Metal Corporation (NSSMC) is the world-leading integrated steel producer. The company emphasizes three business fields as key strategic areas: high-grade steel products for automobiles, resources and energy, and civil engineering, construction, and railways.(NSSCMC 2015) NSSMC is a holding company for five businesses: steelmaking, engineering, chemicals, new materials, and system solutions.(IBID) Their company’s philosophy is to pursue world-leading technologies and manufacturing capabilities, and contribute to society by providing excellent products and services. The company is striving to have the best high class steel producer in the global market and as early as the 20th century, It has acquired several joint ventures in other countries such as Brazil.(Bebenroth 2015)
Nippon Steel & Sumitomo Metal Corporation ("NSSMC") aims to become "the Best Steelmaker in the World by strongly advancing the following four initiatives.(NSSCMC 2015) Their business strategy aims to be the best by advancing the following: globalizing the steel business, enhancing their technological superiority, imporving their cost effectiveness. The company is expanding overseas and aims to achieve global production capacity of 60 to 70 million metric tons.(NSSCMC 2015) NSSMC will further improve its world-leading technologies by consolidating technological strengths of Nippon Steel and Sumitomo Metal. There is still a huge frontier of NSSMC will lead the world in product development with a focus on growing sectors, development of manufacturing technology including innovative production processes, with the goal of "maximizing the potential of steel as material."(NSSCMC 2015) NSSMC aims to realize synergies of around 150 billion yen per yearapproximately three years after the establishment. NSSMC will endeavour to increase the above target synergies amount and to achieve the synergies at an early stage. In addition, NSSMC will continue to make further efforts to reduce costs to increase a competitive edge which enables itself to contend more effectively in the global market. Each business segment of the engineering, chemicals, new materials and system solutions will seek greater synergies between the steel business, thus contributing to improvement in the consolidated profits of NSSMC.(NSSCMC 2015)
POSCO
POSCO also known as Pohang Iron and Steel Company is one of the most competitive steelmakers in the world. Established in the year 1968, POSCO was the first steel maker in South Korea and was subsidized by the government. In POSCO became the world’s leading steel company in 1998 based on crude steel production through continuous efforts to increase facility efficiency and productivity, and established an integrated digital system through a business transformation in 1999 reorganizing all work processes from purchase, production to sales.(POSCO 2015) In 2000, the company was successfully privatized. (POSCO 2015) In 2010 World Steel Dynamics (WSD), an organization which evaluates the production scale, profitability, and technology of steel companies, has crowned POSCO number one in the field.(WSO 2010) The company started from zero but was able to make its way up together with the South Korean growth economy. POSCO mainly produces Steel, flat steel, long steel, and wire products, plates, and other steel products that are mainly use for general infrastructures and automotive products. Figure 1 shows the vision of POSCO.
Figure 1
Posco aims to become the first in the steel business by using their innovation agenda with the help of their management philosophy.
ANALYSIS BASED ON STRATEGY TRIPOD: INDUSTRY BASED, INSTITUTION BASED and RESOURCE BASE
To further compare POSCO and NIPPON steel companies the research will use the strategy tripod, which includes Industry, Resource and Institution Based analysis. The first one is the use of Industry Based Analysis wherein Porter’s five forces frameworks is use to analyze the steel industry itself. The outcome of industry analysis will show steel industry’s advantages and disadvantages on the Global scale in terms of access to resources, competition within the steel industry and other factors that affect the steel industry itself. The second is the Resource base analysis where in tangible and intangible assets will be analysis and look into in order to see if the company will have a comparative advantage over the other. Lastly, Institution based analysis will show how institutions affect both companies.
INDUSTRY BASED ANALYSIS
Industry based analysis considers the five forces frame works, which includes the following: rivalry among competitors, threat of entrants, threat of substitutes, bargaining power of buyers and suppliers. The steel industry basic need is the iron ore, which is the element, needed in making steel. Figure 2. Shows a chart where iron ore are abundant. China and Australia holds the most iron ore in the world and are considered countries with most production of iron ore.
Figure 2
(US 2015)
The scarce resource paves way to the rivalry between competitors. Both Nippon and POSCO comes from a country will limited natural resources thus there is a need for export of the element. The production of the iron ore is manage by 3 big giants namely Vale, BHP and Rio Tinto.(Brown 2015) They are considered to have an oligopoly in the iron market, which gives both POSCO and Nippon an increasing cost for raw materials. For producers, the increasing cost would lead companies in search for substitutes. Substitutes are little or impossible since steel is as said earlier significant for the development of the world. In turn, the bargaining power of suppliers are very high in terms of the cost of iron ore. The steel industry as mentioned is very complex, not to mention the high cost of the industry itself. Therefore, threat to new entries is rare. As seen in figure 1, China has the most iron ore reserves, which it is why China could have an great comparative advantage against other steel producers. Baosteel is one of the few new competitors in the steel industry for both Nippon and POSCO. Baosteel could easily gain the advantage in the steel industry. (Baosteel Co.Ltd 2015) Nippon, POSCO and Baosteel are just some of the top steel producers worldwide. Their greatest rival in producing steel is ArcelorMittal in Luxembourg, which ranks first among the steel producers. Nippon, Baosteel and Posco follows the rank respectively. The industry has several other companies, which produces a greater bargaining of buyers for its price. After all, profit maximization is just one of company’s goal in producing products.
RESOURCE BASED ANALYSIS
This type of analysis sources of each companies are put in the spotlight. Tangible, intangible resources and capabilities of the companies are assessed. In this case, the VRIO framework is used. Value, Rarity, Imitability and Organization of Nippon and POSCO are compared based on their annual report in the year of 2014. Financial and Technological resources has a big impact on the company’s comparative advantages. Human, Innovation and Reputation are also assesed.
NIPPON is has an advantage of early comer in the steel industry and with the merge successful with sumitomo metal, the company is currently has a good amount of assets. Nippon net sales accounts to 5.6 billion yen with steel net sales to over 80 percent. As a early comer to the industry, Nippon boast of competitive advantages in Technologies which includes 20,000 patents in 70 countries with the human resources in R&D amounting to 800.(NSSCMC 2014) Cost effectiveness in production by reduction of cost with R&D improvements, in expenditures and other sectors. The company’s tangible assets are valuable and could be one of their steps into achieving their mission as to becoming a global steel maker with world leading capacities. As with respects to its human resources, Nippon boasts the less number of its accident within its industry making steel. Education and Health is also a focus of company towards their employees. The company value its stakeholders, society and most importantly their employees. Their employees amounts to 13,000 people in 90 overseas.
According to the POSCO’S annual report, The companies assets rose to 85,252 billion won but liabilities increased to 39,961 billion won which gives the companies equity to the same level of the previous year as to about 45.2 billion won.(POSCO 2014) Technologically, POSCO has been awarded for 5 straight years as the most innovative of WSO. This is one fact that the reputation of the company boasts about. Innovation in their technology in making the steel led them to the great amount of production in 2014 about 90 percent of overall steel products was produced by POSCO.(IBID) Their tangible assets are all considered valuable. Technological development is a trend so imitability of their intangible assets is possible in the future to come. Human resources are also valuable to the company with respect to ethnicity of their employees. POSCO has a good amount of human capital. In addition, effectiveness in joint ventures forecast due to localization of the human capital in certain ventures. For example, their venture in India, at least 2 foreign managers serves as top supervision while the rest of the employees are locals. POSCO has many innovative products that could be use in a variety of commodities from computers to infrastructures such as bridges and automotive. Overall, the company possess an comparative parity with its tangible and intangible assets.
INSTITUTION BASED ANALYSIS
Baosteel Co.Ltd. 2015. “Baosteel Gains Competitive Advantage through Quality Products Strategy.” http://www.baosteel.com/plc_e/02news/ShowArticle.asp?ArticleID=2004.
Bebenroth, Ralf. 2015. International Business Mergers and Acquisitions in Japan. Springer.
Brown, Kario paul. 2015. “How the Iron Ore Market Works: SUpply and Market Share.” http://www.investopedia.com/articles/investing/030215/how-iron-ore-market-works-supply-market-share.asp.
Kotas, Andrzej. 2015. “History of Nippon Steel – Japanese Industry – Historic Company Profile.” Steel industry portal. http://www.steelonthenet.com/kb/history-nippon-steel.html.
NSSCMC. 2014. “NIPPON STEEL AND SUMITOMO METAL 2014.” http://www.nssmc.com/en/ir/library/pdf/nssmc_en_ar_2015_all_v.pdf.
———. 2015. Basic Facts About Nippon Steel and Sumitomo Metal. http://www.nssmc.com/en/ir/library/pdf/factbook2015_all.pdf.
———. 2015. “Who We Are | About NSSMC | NIPPON STEEL & SUMITOMO METAL.” Accessed November 1. http://www.nssmc.com/en/company/whoweare/index.html#anc01.
POSCO. 2014. “POSCO ANNUAL REPORT @)!$.” https://www.unglobalcompact.org/system/attachments/cop_2015/163841/original/POSCO_Report_EN_0529.pdf?1433114874.
———. 2015. “History of POSCO | POSCO.” http://www.posco.co.kr/homepage/docs/eng3/html/company/posco/s91a1010010m.jsp.
US. 2015. “US Geological Survey, Mineral Commodity Summaries.” http://minerals.usgs.gov/minerals/pubs/commodity/iron_ore/mcs-2015-feore.pdf.
World Steel Association. 2015. “World Steel Association – Economic Sustainability.” https://www.worldsteel.org/steel-by-topic/sustainable-steel/economic.html.
WSO. 2010. “World Steel Association – Home.” http://www.worldsteel.org/.