The Case Study of POSCO (Analysis of Its Growth Strategy and Key Success Factors)
KDI SCHOOLWORKING PAPER SERIES
KDI SCHOOL WORKING PAPER SERIESCase Study of POSCO:Analysis of its Growth Strategy and Key Success FactorsSeung-Joo Lee & Eun-Hyung LeeNovember 2009Working Paper 09-13This paper can be downloaded without charge at:KDI School of Public Policy and Management Working Paper Series Index:http://www.kdischool.ac.kr/faculty/paper.aspThe Social Science Network Electronic Paper Collection:http://ssrn.com/abstract=1505288
Case Study of POSCO:Analysis of its Growth Strategy and Key Success FactorsAbstractPOSCO has played a major role in Korea’s economic development by supplying domesticmanufacturers with high-quality, low-cost steel products. Despite its initial disadvantage andlack of resources such as capital, technology, and raw materials, it has emerged as a world-class steel maker in a short span of time. This case study aims to explore and analyze the keysuccess factors of POSCO through examination of the company’s growth and developmentprocess. In particular, it examines the role of government policy, top management leadership,technology learning and innovation, cost competitiveness and other factors as importantdrivers of success. The case also identifies its strategic challenges and key issues for growthin the future.JEL Classifications: L61, M10, N80Key words: Growth strategy, key success factors, steel industry, Korea
1. IntroductionIn 2009, at the height of the global financial crisis, Korean steel maker POSCO reported the highest earningseverinthecompany’shistory.Its2008revenueincreasedby38percentoverthepreviousyeartoKRW30.6trillion,operating profit rose by 21 percent to KRW 6.5 trillion, and net profit increased by 15 percent to KRW 4.4 trillion<See Exhibit 1>. While other global steel giants including Arcelor Mittal, Bao Steel and Nippon Steel Corporationhavesufferednetlossesinthefirst-halfof2009,POSCOrecordedaKRW760billioninnetprofitsdespitetheglobaleconomicrecession.POSCO has posted a continual surplus since it first started manufacturing steel in 1973<See Exhibit 2-3>.Today, it is ranked fourth in terms of steel production <See Exhibit 4>, and it outperformed other global steelproducers in operating margins <See Exhibit 5> and operating rate<See Exhibit 6>. According to World SteelDynamics (WSD), POSCO ranked first (2002-2005) and second (2006-2008) in the global competitiveness index<See Exhibit 8>. The company won perfect scores in seven out of twelve categories of the competitivenessevaluation<See Exhibit 9>. The company’s market capitalization as of August 2009 was second only to ArcelorMittal<SeeExhibit10>.POSCOhasplayedamajorroleinKorea’seconomicdevelopment.Bysupplyingdomesticmanufacturerswithhigh-qualitysteelproductsatprices10to20percentlowerthanimports,ithascontributedtothegrowthandexportcompetitiveness of Korea’s major industries such as shipbuilding, automobile, electronics, machinery andconstruction.POSCOhasbeenwidelyrecognizedbyvariousinternationalinstitutions.ThecompanywaschosenasthemostadmiredsteelcompanybyFortune(2006-2009),thebestcompanyinthemetalsandminingsector(2003)andoneoftheForbesGlobal200companies(2008-2009).Itwasalsolistedamongtheworld’s50mostinnovativecompanies(2003)andthemostadmiredAsiancompany(2007)byBusinessWeek,andintheSAM-DowJonesSustainabilityIndex,POSCOwasrecognizedasasustainabilityleaderintheindustry(2006-2009)<SeeExhibit11>.This case study aims to explore and analyze the key success factors of POSCO through examination of thecompany’sgrowthanddevelopmentprocess.Inparticular,itattemptstodrawlessonsfromthesuccessstoryofthe
steelmaker,whichovercameitsinitialdisadvantageoflimitedresourcessuchascapital,technologyandrawmaterials,andemergedasagloballycompetitivecorporationinashortspanoftime.2. Start-upandGrowthStage(1968-1992)POSCO’skeysuccessfactorsvarydependingonthetimeperiod.Thispaperdividestheperiodintotwostagestoanalyzethekeysuccessfactors. Inthestart-upandgrowthstage(1968-1992),governmentpolicyandsupport,theleadership of CEO TJ Park, technology acquisition/learning, and cost competitiveness were important drivers ofsuccess.Inthematuritystage(1993-2009),transformationalleadership,technologydevelopment,processinnovation,andglobalmanagementwereimportantfactorsinthecompany’scontinuousgrowthandsuccess<SeeExhibit12>.(1) GovernmentPolicyandSupportSince1948,theKoreangovernmenttriedtoestablishanintegratedsteelmillinKoreatomeettherisingdemandforsteelandsubstituteforimports.However,Koreafacedextremelytoughconditionstobuildsuchfactories,givenitslimited resources and experience. This reality was reinforced by a 1968 World Bank reportwhichheldanegativeview, saying that the steel mill construction plan Korea had been pushing for was premature. Integrated steelmanufacturingmustsatisfyasetofrequirementstobegloballycompetitive,suchashavingadvancedtechnologies,massive amount of capital, a domestic market large enough to enable economies of scale, and access to naturalresourcessuchasironoreandcoal.However,noneoftheseexistedinKoreabackinthe1960s.Infact,Koreahadtoborrowcapitalandtechnologyfromoverseas,itsdomesticmarketwassmall,andithadtorelyentirelyonimportsfornatural resources. From the perspective of advanced steel producing countries, Korea was just a poor nation thatexperienced Japanese colonial rule (1910-1945) and the Korean War (1950-1953). It was not surprising that theybelittledKoreaasdreamingtheimpossibledreamofbuildinganintegratedsteelmill.ThePresidentofKoreaPark,Chung-Hee,however,hadastrongbeliefintheimportanceofthesteelindustryasthefoundationforthenation’sindustrialdevelopmentandnationalsecurity.Hepersonallymadevariousdiplomaticeffortsattheinternationalleveltosecurecapitalandtechnologyrequiredforsteelmillconstruction.HavingfailedtoobtainloansfromtheU.S.andGermany,PresidentParkmadeabolddecisiontodivertcompensationclaimsfromJapan(about$100million)asseedmoneyforthesteelmillconstruction.Astheconstructionplanbegantomaterialize,the Park administration enacted the Steel Industry Promotion Act in 1970, which enabled various forms of
government support for the steel industry, such as provision of low-interest long-term loans, tax breaks, andinfrastructure subsidies such as low-cost supply of factory construction sites, ports, roads, railroads, and water <SeeExhibit13>.Duetosuchgovernmentsupport,POSCOcouldsaveonthecostofrailwayuseby40percent,portuseby50percent,waterby30percent,andgasby20percent.Itwasalsoabletogenerate80percentofitselectricityusebybuildinganin-housepowergenerationfacilitiesDespite the financial support from the government, POSCO was established as a corporation under theCommercialLaw.Theobjectivewastoavoidtheburdenofapublicenterprisesubjecttogovernmentinterventionbyrelevant agencies such as the National Assembly and the Board of Audit and Inspection. Considered a privatecorporationbylaw,POSCOwasabletoenjoytheautonomyandefficiencyofaprivatecompany.Atthesametime,by having government ownership of the majority of its shares, the company could have a sound capital base andsecurefinancialsupportfromthegovernment.Government support was extended to the construction of the company’s second steel mill at Gwangyang.When construction of this second mill was on the government agenda, other potential steel producers such asHyundai were more than willing to enter the steel industry. However, the government entrusted the projectmanagement authority to POSCO, in expectation of its superior execution based on the company’s extensiveknowledgeandexperienceinsteelmillconstructionandoperation.The government started to keep its distance as the steelmaker began to grow rapidly. In fact, the governmentmade its final investment in 1986, and ended all support upon the abolition of the Steel Industry Promotion Act.POSCO was first listed in the Korean stock exchange in 1988. From 1998 to 2000, the government graduallyprivatized the company by selling its shares in the stock market. Today, POSCO’s shareholders consist mostly offoreigninvestorsanddomesticinstitutionalinvestors<SeeExhibit14>.Duringtheperiodfrom1968and1986,thegovernmentinvestedintoPOSCOatotalofKRW220.5billion,andreceivedbackatotalofKRW3,889.9billionincludingKRW274.4billionincashdividends,andKRW3,615.5billioninstocksalesandtransfercombined.Toputthesefiguresintoperspective,underthenetpresentvaluemethod,the government gained a net profit worth KRW 2 trillion ― total revenues of KRW 6 trillion minus the initialinvestmentworthKRW4trillion―by2000whenprivatizationwascompleted.
(2) LeadershipofCEOTJParkPOSCO’s founder and legendary CEO Park, Tae-Jun played a pivotal role in building the foundation andcorporatecultureofPOSCO.TJPark,beforetakingthehelmatPOSCO,provedhismanagerialacumenbyturningadeficit-ridden public corporation (Daihan Tungsten) into the black in his first year in 1965. Impressed by TJ Park’strackrecordandleadershippotential,PresidentParkChung-Heesawhimastheidealmanagerfortheintegratedsteelmillproject.TJParkaccomplishedremarkableachievementsthroughoutthecompany’scourseofdevelopment.Undeterredby the failure to get international loans in 1968, he requested Japan to provide capital and technology support, andclosed the deal by using his personal network. His vision and faith in patriotic service through steel, his attention todetailsandperfectionism,andhispeople-centeredleadershipencouragedallemployeestounitewithastrongsenseofcommitmentandloyalty.Some of the key words to describe the leadership of CEO Park Tae-Jun could be “commitment toexcellence based on patriotic mission”. Park stressed a strong commitment to steel mill construction as it borrowedcapitalandtechnologyfromJapanascompensationforitscolonialrule,oftensaying,“Let’sturnrightandjumpintotheEastSea,incasewefailintheconstructionofthesteelmill.” Thishastakenholdaswhatiscalled“Right-TurnSpirit” of POSCO, which created a unique corporate culture emphasizing a sense of mission, dedication to goalachievement,grouployaltyandpersonalsacrifice.Parkspent mostofhistime workingtogether withPOSCOemployees attheconstructionsite,whichenabledthecompanytocompleteconstructionofPohangWorksPhase1,2,3and4ina veryshortspanoftime.Evenonthanksgivingholidays,ChairmanParkwasonthesiteandmadedecisionsrightonthespotifanyproblemsoccurred.WhentheconstructionofPhase1wasdelayedforthreemonths,thecompanycameupwithemergencyplansandcompletedtheprojectonemonthaheadofschedulebyworking24hoursaday.Nonetheless,henevercompromisedonqualityandneverallowedshoddyconstructiontoreducetheconstructionleadtime.WheninstallingfacilitiesforPohangWorksPhase3,Parkdiscoveredmajorflawsinaventilationsystemthatwasalready80percentcompleted.Muchtoeveryone’ssurprise,heorderedtheemployeestoblowupthesystemandexpeltheconstructioncompanyandtheforeignprojectmanagerincharge.
Althoughhemayhavepressedhispeopletoworkwithoutholidays,Parkvaluedtalentmorethananyoneelse.In1968evenbeforehestartedbuildingthesteelplant,heborrowedKRW2billionfromabankandbuiltresidencesfor employees. The residences located near the construction site were clean and comfortable, which helped attractmany talents to Pohang. Another program he emphasized prior to factory construction was employee training.Many international organizations including KISA said that Korea had few workers with sufficient experience andknowledge and that the factory operation should be left in the hands of foreign managers. However, Park thoughtdifferently.HewasconvincedthatPOSCOpeopleshouldtaketheinitiativeinoperatingandmanagingthefactories.Basedonthisfirmconviction,hehadsentPOSCOemployeestoJapan,Australia,Germany,andotherleadingsteel-producingcountriesaroundtheworldfortechnologytraining,andtheydisseminatedwhattheyhavelearnedoverseasthroughcompanywidetrainingprograms.(3)TechnologyAcquisitionandLearningIn the initial construction phase, POSCO had to rely on technology experts from Japan Group for the entireinstallation process of the first blast furnace in the Pohang steel mill. The Japan Group presented the design andprocurement plan to establish a steel mill capable of producing one million tons of steel. POSCO, lacking theknowledge and experience to evaluate the business proposal submitted by Japan Group, prepared a double-checksystem under which Broken Hills Proprietary Corporation (BHP) from Australia was asked to review the designdrafts and terms of purchase set forth by Japan Group, while Korean experts based in Japan re-evaluated JapanGroup‘sreportswithBHP’s.POSCOalsodependedonJapanfortheproductionandoperationstechnologieswhenPohangWorksPhase1got up and running in 1973. Technicians from Japan Group transferred technologies and skills such as inventorymanagement,productionscheduling,andmaintenancetoPOSCOemployees. Atfirst,POSCOworkersteamedupwith the Japanese experts to learn necessary skills and discussed every single detail about the project until theconstruction of Pohang Works Phase 3. Later, however, POSCO workers increasingly built up expertise andassumedagreaterroleoverJapaneseengineers.During its facility expansion from 1970 to 1992, construction projects continued one after another as thecompanybeganoperatingnewblastfurnaces.Theworkershadtotrainthemselvesfortechnologiestooperateanewblast furnace, while acquiring cutting-edge technologies to constructandinstallanewformoffurnace. Theshapes
andtechnologiesoffurnacesbecamemore sophisticatedandexpandedovertime. UntilthecompletionofPohangWorks Phase 4, POSCO kept learning new technologies by experimenting with new combination of ingredients,controllingthevolumeofingredients,scheduling,managingtheflowofrawmaterials,andreducingbottlenecks.POSCOmadetremendousinvestmentsintrainingtheiremployees.Thenumberoftrainedworkerstotaledabout 61,400 from 1968 to 1979, of which 4,200 were trained outside the company, while 1,513 joined overseastraining programs. The investment in employee training is partly reflected in the rapid improvement of laborproductivity. POSCO reduced the number of hours worked per ton of steel shipped from 32.65 in 1975 to 9.62 in1984,inarelativelyshortamountoftimecomparedtoJapan,whichsawadropfrom10.8hoursin1975to6.5hoursin1984.POSCOencouragedindividualemployeestoshareknowledgelearnedfromoverseastrainingprogramswithotherworkersandconductrehearsalstocarryoutgiventasksbeforeactualproduction.Theywereadvisedtorepeattheirtasksoutloudandputthemintoexecutiontogetabetterpictureofeachother’sworkaspartofanopentrainingprogram.TheystayedlateatnighttoshareknowledgeandbrushuponwhattheylearnedfromJapanesetechniciansduringtheday.POSCO workers did not simply follow the rules and instructions, but were encouraged to actively engage inproductivityandqualityimprovement.ThousandsofvoluntarygroupswithinPOSCOwereformedtoidentifyandsolveproblemsrelatedtoqualityandsafety. Employeeswillinglyparticipatedinthe“proposalsystem”wheretheymadeproposalstoenhancequalityattheworksite.Tominimizedowntime,theyadoptedapreventivemaintenancesystem. To stabilize facility management, they implemented a process monitoring system toidentify problems andresolve them through a thorough review of detailed information. It was not until Phase 3 construction that thecomputer-based process monitoring system was adopted, as the manual monitoring system was considered handyfor the workers to absorb technologies and know-how. It was at that time that POSCO went through processinnovationbyadoptingSixSigma,andreducingdefectstothelowestlevelintheworld.Thanks to such efforts, POSCO was asked by Taiwan-based CSC to teach their workers and transfertechnologies in 1975. In 1986, 13 years after it started production, POSCO took part in a renovation project ofAmericanUSXsteelmillandtaughttheirmanagersandworkersaboutfacilitymanagement,repairandmaintenance.Today,POSCOisratedasthegloballeaderinsteelmilldesign,constructionandfacilitymanagement.
(4) CostCompetitivenessPOSCOsoldproductsatprices10to20percentlowerthanimportsinthedomesticmarket.Thecompanyhadto keep its domestic prices low to help improve the competitiveness of its customers such as shipbuilding,automobiles, electronics, construction etc. This is evidenced by the fact that steel prices have risen 3.5 percent onaverage vis-à-vis the 4.2 percent growth in producer price index since the 1980s. Therefore, achieving costleadershipwascriticalforPOSCO’ssurvivalandcompetitiveness.WhenPOSCOfirstbeganproductionin1973,itslaborcostwasfarlowerthanitsglobalcompetitors.In1973,POSCO’slaborcostpertonofsteelshippedwas$7.06,whichwasfarlowerthan$23.83inJapan,$27.06intheU.K.,$32.86 in Germany, and $37.83 in the U.S. However, with Korea’s economic development, the gap in labor costnarrowed. during the period from 2002-2006, POSCO’s labor cost averaged US$38.40, higher than China’s BaoSteel(US$9.38),yetlowerthanArcelorMittal(US$79.70),NSC(US$47.60),andJFE(US$62.20)<SeeExhibit7>.POSCO’s labor-management relations is considered to be quite amicable compared to other largemanufacturingcompaniesinKorea.In1987,aunionwasorganizedwithinPOSCO.However,itwassoondissolved,and currently, POSCO runs the Management Consultation Committee that stresses mutual cooperation betweenlaborandmanagement.Thecompanyiswell-knowninKoreaforitsadvancedemployeewelfaresystem.Massiveinvestmentinemployeeeducationandtraininghelpedemployeesenhancetheircapabilitiesandbuildloyaltyfortheircompany.POSCO fully leveraged its status of a late comer and raised efficiency in inventory management of rawmaterials and finished goods by designing a U-shaped lay-out that locates processing lines for raw materials andassembly lines for finished goods close to the port. In particular, POSCO plants are much more efficient than steelmillsinother countriesinthat theyarrangetheentireproductionprocessinonebuildingratherthansegmentingtheprocess into separate buildings. Furthermore, the concept of functional connection was already conceived from thedesignstageofthefourPohangplants,whichoptimizedtheentiresteelmanufacturingprocessfromtransportationofrawmaterialstosteelproduction.Thedistancebetweentheblastfurnaceandthepierfromwhichrawmaterialsaretransported was reduced, and Plant 2 and 3 were set up to be closely connected and functionally compatible withPlant1.Furthermore,itslocationnexttoaportcapableofhandling100,000tonsofsteelfreightwasinstrumentalin
reducing the logistics costs in comparison with locations of other steel makers situated inland. In particular, theGwangyang Works was modeled on the Pohang Works and built even better with enhanced technology andaccumulatedknow-how.Ashortenedsteelmillconstructionperiodhelpedsavedirectcostssuchaswagesandindirectcosts.Atthesametime, this leads to production ahead of schedule, which in turn reduces the cost of production. While setting up theplants of Pohang Works, POSCO completed 23 facilities out of 26 in total ahead of schedule by as long as overeleven months. POSCO’s construction cost was about $400 per ton, which was significantly lower than $1,750 inBrazil, $820 in the U.S., $700 in Europe, and $590 in Japan. Moreover, POSCO was able to reduce costs bystrategically purchasing state-of-the-art equipment through competitive bidding procedures during global economicrecessions.Inparticular,theglobaleconomywashithardbythefirstandsecondoilshocks,whenthecompanybuiltproduction lines in Pohang and Gwangyang. However, the hard times benefitedPOSCOasequipmentsuppliers’bidding prices went down. The company also reduced construction costs by increasingly using local suppliers ofequipmentandmaterials.Localizationrate,whichwasonly12percentintheconstructionofPohangWorksPhase1and2,shotupto63percentintheconstructionofGwangyangWorksPhase4<SeeExhibit16>.Smooth operation since the very first year of production and has also been important. POSCO increased itsoutput-to-inputratefrom0.57inthefirstmonthto1.05inthesecondmonth,1.33inthethirdmonth,and1.45inthefourthmonth.Itsoperatingratejumpedfrom44.5percentin1973to114percentin1974.Itsaverageoperatingratenowstandsat111percent,thebestamongitsglobalcompetitors.According to World Steel Dynamics, POSCO’s cold-rolled sheet production cost was 20 percent lower thanJapaneseproducts,21percentlowerthanBritishproducts,26percentlowerthanAmericanproductsand28percentlower than German products (2002). Another global steel industry research institute, Commodity Research Unit(CRU)assessedPOSCO’smanufacturingcostofhot-rolledandcold-rolledsheetstobe9percentlowerthanBritishproducts,27to31percentlowerthanJapaneseproducts,and28percentlowerthanAmericanproducts.
3.ContinuousInnovationduringtheMaturityPeriod(1992-2009)(1) TransformationalLeadershipAfter achieving both quantitative and qualitative growth for 25 years, POSCO experienced a change in topmanagement leadership with the resignation of Chairman TJ Park in 1992. Efforts were made to fill the leadershipgap. Chairman Chung, Myung-Sik took office in 1993 and started to reform the organization under the ‘NewPOSCO Vision.’ In an attempt to streamline the organization that had grown huge in line with its rapid growth,reform measures were taken to reduce the number of departments from 85 to 76, teams from 349 to 335, andexecutives from 49 to 40. There were changes in POSCO’s traditional domestic market-oriented strategy and thecompany pursued diversification into telecommunications and expanded its export markets through a‘ComprehensiveExportStrategy’.In1994,ChairmanKim,Mahn-JebecamethefirstCEOofPOSCOcomingoutsidethecompany.Inresponseto the rapid changes in the global steel industry environment, Chairman Kim initiated ‘Green Management’ whichaimedat‘flexibleorganization’,‘democraticmanagement’and‘transparentmanagement’.Thecompanyestablisheda new vision for 2005, redefined its business domain with three key pillars- steel, engineering & construction, andtelecommunications.ThecompanyintroducedtheResponsibilityManagementSystemtoenhancetheaccountabilityof line managers, and established the Committee System for senior executives to streamline its decision-makingprocessandimprovehorizontalcoordinationamongthedepartments.Changesincorporategovernanceweremadeby bringing in outside directors and auditors on the board to enhance corporate transparency and strengthen theResponsibilityManagementSystem.In1998,ChairmanYoo,Sang-Boo,aformerPOSCOexecutive,tookofficewhentheKoreaneconomywasinadeeprecessionduetotheAsianfinancialcrisis.Toovercomethesluggishdomesticmarket,ChairmanYooinitiatedan aggressive ‘export-drive’ program, and restructured the company’s business portfolio by divesting itstelecommunications business and refocusing on the core business of steel. In response to the privatization anddigitalization trends, he introduced ‘Process Innovation’ to streamline the company’s key processes and develop amoreflexible,customer-orientedculturethroughoutthecompany.
ChairmanLee,Ku-TaekbecamethenewCEOofPOSCOin2003.TodevelopPOSCOasasociallyrespectedand trusted global company, he emphasized the following five management priorities: 1)transparent operationthrough management by principles, 2)sustainable growth, 3)competitive advantage through innovation,4)management valuing human resources, 5)trust-building with stakeholders. As POSCO had already achievedworld-class level in terms of cost and operational performance, the company put more emphasis on developing itsowntechnologiesandhighvalue-addedstrategicproducts.Inaddition,thecompanyactivelypursuedglobalbusinessopportunities in emerging markets such as China, India, Vietnam, Brazil and Mexico to develop production basesandsecurerawmaterials.(2) TechnologyDevelopmentPOSCO reinforced its own R&D activities as leading steel companies concerned with “boomerang effect”refused to transfer advanced technologies to POSCO. The company set up a collaborative R&D network amongindustry,academiaandresearchcentersbyestablishingPohangUniversityofScienceandTechnology(POSTECH)in 1986, the Research Institute of Industrial Science and Technology (RIST) in 1987, and reorganized its R&Dorganization in 1996 to accelerate the development of new technologies. In particular, as customers’ needs becamemoresophisticatedandmoredemanding,thecompanyhadtochangeitsexistingstrategywhichmainlyfocusedonproducinglow-cost,commoditysteel,anddevelopmore highvalue-addedspecialtyproducts.As a result,sincethe1990s, production of low value-added hot-rolled products decreased, while the production of high value-addedproducts such as cold-rolled sheet, steel plates, stainless steel and electrical steel plate continuously increased. <SeeExhibit17>In order to upgrade its product mix and develop cutting-edge innovative technologies, POSCO selectedautomotivesteelsheet,high-endAPIsteelmaterials,400seriesstainlesstechnologyandhigh-endelectricalsteelsheetas the ‘Four Major Strategic Products’ in 2002. The company also selected the commercialization of FINEXtechnologyandStripCastingmethodasthe ‘TwoMajorInnovationProjects.’In2004,high-endhigh-carbonsteel,TMCPsteelforshipbuilding,high-endtirecordsteel,andCr-Freesurfaceprocessedsteel werenewlyaddedasthe‘Eight Major Strategic Products’. In 2005 and 2006, high-end stainless, premium wire rod, premium hot and cold-rolledproductswerenewlyadded.Theshareofstrategicproductsintermsoftotalsalesasof2008was5.9percent,butitsproductionhascontinuouslyincreasedoverthelastfiveyears<SeeExhibit18>. R&DinvestmentgrewfromKRW161.1billionin1995toKRW203.2billionin2007.
Inordertosuccessfullyimplementtheselectedstrategicgoals,POSCOgrantedownershiptotheexecutivesincharge and ran a cross-functional Mega Y Organization composed of sales, operations and research departments.POSCO developed a corporate monitoring system to check the progress on technology and product development,evaluatethecommercialviabilityofpilotprojects,andanalyzeprofitabilitythroughoutthedevelopmentcycle.ThedevelopmentofFINEXisagoodexampleofPOSCO’srecenttechnologydevelopmentefforts.Comparedto the blast furnace process, the FINEX method enables cost reduction in facility investment as it does not requirecokeorsinterplantsthatpre-processironoreandbituminouscoal.Thismethodcansaverawmaterialcostsasitusespowdered iron ores that are cheaper and more abundant and general coal that is also cheaper. POSCO worked onnew methods that could improve the existing blast furnace technology since 1992. It constructed the FINEX pilotplant in 1998, and started to develop base technologies ofthe FINEXmethod by test-producing 150 tons a day. InNovember1999,POSCOsignedaMutualAgreementontheDevelopmentoftheFINEXTechnologywithVoestAlpineofAustria.InJanuary2001,itconstructedaFINEXdemoplantthatcouldproduce600,000tonsperannumand started to successfully operate the plant from May 2003. In May 2007, POSCO built the world’s first FINEXcommercializationfacilitythatcouldproduce1.5milliontonsayear.Strip Casting is a technology that makes hot coils of 2-6mm by solidifying the hot metal over 1,500 degreesCelsiusthroughcastingrollsinjust0.2seconds.Withmostofthehotrollingprocessbeingeliminated,thistechnologyreducesfacilityinvestmentandenergycosts,andithasahugeadvantageinmakingsteelwitharelativelyhigherloadonhot-rollingeventhinner.InDecember1991,throughtechnicalcooperationwithDavyDistingtonoftheUKandthrough industry-academia cooperation with POSTECH, POSCO developed a 350mm wide strip caster andconductedover150testcasting.In1994,POSCOsucceededindevelopingastripcasterwithawidthof1,300mmonits own. By the end of 2000, POSCO conducted more than 500 tests on casting, eventually accumulating atechnologytoproducezero-defect304stainlesssteelsheetcoils.InJune2004,thecompanyconstructedastripcastingdemoplantwithanannualproductioncapacityof600,000tons,andforthefirsttimeintheworld,itprovedthesafetyofitsprocessbysucceedingincontinuouslycasting500tonsofstainlesssteel.
(3) ProcessInnovationProcess Innovation (PI) that started in 1999 was aimed at streamlining the company’s core processes fromrawmaterialpurchasing,productiontocustomerdelivery,andtransformingthecompany’ssystemsandcultureintoone that is more customer and profit-oriented. POSCO implemented the whole process in a comprehensive anddisciplinedmannerandachievedsignificantcostsavingsandoperationalimprovement<SeeExhibit19>PI Phase 1: The ISPP (Integrated Sales & Production Planning) that was developed during PI had the followingcharacteristics.First,SCM(SupplyChainManagement)andERP(EnterpriseResourcePlanning)wereintegratedbyitemsandthisenabledmanagerstoobtainbasicdataonbudgetmanagementofallareas.Second,thebudgetinglead-time that was shortened to 15 days enabled the conversion of the existing annual budget planning into a quarterlyplanning. Third, the system calculated not only the profitability of steel mills and unit plants but also that of eachproduct line, enabling a more profitability-centered planning. Fourth, more accurate and timely delivery was madepossiblebyimprovingcommunicationwithcustomers.InordertopromoteERP,POSCOsetupItem,BOM(BillofMaterial)andRoutingdatabases.Itemreferstoallthe materials managed throughout the company. It can be classified into internally produced items and externallyprocured items. All materials were codified and task criteria were integrated and standardized. Bill of Materialspecifiesallthecomponentsusedintheproductionofacertainitemsuchasrawmaterials,semi-manufacturedgoods,aswellaserrorratesandusageunits.Routingdefinesstandardmanufacturingprocessandprocessingtimerequiredtoproduce certain item, as well as the types and the usage of relevant facilities, labor, electricity, etc. Throughout thisprocess,alltasksatPOSCOweresavedintostandardizedandquantifiabledatawhicheventuallyservedasabasisforthecompany’sintegratedmanagementsystem.PIPhase1targetedtochangetheavailabletopromise(ATP)lead-timeforhot-rolledcoilsfrom30daysto14days,thedeliveryfulfillmentratefrom82.7percentto95percent,anddaysofproductinventory10daysto8days.MostofthetargetsweresuccessfullyachievedandPOSCOmovedontoProcessInnovationPhase2.PI Phase 2: Since May 2002, all innovation activities started to center around Six Sigma. POSCO’s ISPP wascompleted by refreshing the obsolete operation system of steel mills, and the system expanded into other areas thatwere excluded during PI Phase 1 such as CRM and SRM. During the three years of Six Sigma implementation,
employees learned scientific methods, developed problem-solving abilities and acquired a more customer-orientedview.Cross-functionalprojectswerelaunchedinordertoeliminateinvisiblebarriersandbuildtrustamongdifferentfunctions.InNovember2004,afaster‘Real-timeEnterprise’wasrealizedthroughMES(ManufacturingExecutionSystem).TheITsystemsof81plantsand47yardsatPohangandGwangyangWorkswereintegrated,aswell.PI Phase 3: Phase 3 focused on building a corporate culture and way of working that meets global standard ofexcellence.Italsofocusedoninnovationactivitiesthatcouldengageeveryone.Therolesandresponsibilitiesofeachemployee were made clear, and an RAI chart was made to check whether those responsibilities were fulfilled.Measuresweretakentomakeordering,reportingandmeetingsmoreefficient.Inparticular,ordering,reportingandmeetingsbycompanyexecutivesanddepartmentheadswerediagnosedmoreoftentoprovidethemwithfeedbackandtips.In2008,smallteamswereconsolidatedintogroups,andoverlappingfunctionswereintegrated.Inaddition,cost reduction was further achieved by upgrading and integrating the SCM and the ERP that had been completedduringPhase2.(4) GlobalManagementDuetomarketmaturityandsluggishdomesticmarketgrowth,POSCOhadtolookforinternationalmarketsforitscontinuousgrowth.Thepercentageofexporthasbeenincreasingandreached39percentasof2008,withregionalexportstoAsiancountriessuchasChina,IndiaandJapanaccountingformorethan60percent.AssteeldemandfromChina and Southeast Asian countries was relatively robust, POSCO established production bases in those regions.POSCOcurrentlyhas4plantsinChinaand4plantsinSoutheastAsia<SeeExhibit20>.POSCO targeted China’s huge market since the 1990s, and is currently producing products from DalianPOSCO-CFMCoatedSteelCo.,Ltd.(100,000tonsofcolorsteelsheets)andZhangjiagangPohangStainlessSteel(500,000tonsofzinccoatedsteelsheetsand500,000tonsofstainlesscold-rolledcoils).VietnamisanotherstrategicmarketinwhichPOSCOhasthreeproductionfacilities-POSVINA(30,000tonsofcolorsteelsheets),acold-rolledproduct plant (1.2 million tons of cold-rolled products), and ASC (30,000 tons of stainless cold-rolled steel sheets).Thecompanyplanstofurtherincreaseitsinvestmentinthisregion<SeeExhibit21-22>.
The CGL (Continuous Galvanizing Line) plant that was completed in Altamira, Mexico in August 2009galvanizeszinconthecold-rolledcoilsimportedfromKorea.ThecarmanufacturersinMexicoarethemajorclientsofCGLforautomobilesproducedfromthisplant.Bysupplyingproductsthatcanmanufactureupto400,000carsperannum,POSCOaimstotargetnotonlytheMexicanmarket,butalsotheUSmarketinthenearfuture.POSCOhasbeenworkingontheconstructionofanintegratedsteelmillinIndia,buthasrecentlyfacedmanydifficultiesingettingitlaunched.In order to secure a stable supply of raw materials, POSCO participated in the iron ore and coal minedevelopmentofPOSMECinthewesternregionofAustralia,acquiringa20-percentshare.Sincethen,POSCOhasbeen actively engaged in acquiring equity stakes in mines around the world such as NAMISA’s iron ore mine inBrazil,MacArthur’scoalmineinAustralia,andamanganesemineinSouthAfrica.Thecompanyplanstoenhanceitsrawmaterialself-sufficiencyrateto30percentby2012.In order to increase export to areas with growing demand, POSCO established 8 more SCM (Supply ChainManagement)bases-processingandsalescenters-inChina,SlovakiaandMexico,tobringthetotalnumberofthecompany’sbasesto35.LeveragingthoseSCMbases,POSCOwillstrengthenitscustomerservice,promotethesalesofitsproductsandmaximizethesynergyeffectofoverseasproductionandsales.Asof2007,POSCOhasinvestedgloballyin46companies.Ithasmanagementcontrolrightsin28companiesandhasminorityequityinvestmentsin18companies.4. StrategicChallengesDue to the global financial crisis, growth in global steel demand fell for the first time since 1998. Internationalsteel prices in July 2008 stood at US$1,170 per ton, but dropped to US$606 per ton by December, forcing majorglobal steelmakers to reduce production. Inline with the global economic stagnation, the domestic steel market hasalso witnessed a significant drop. Furthermore, competition is heating up in the domestic market with the entry ofHyundaiSteel.By2010,whenHyundaiSteel’sintegratedsteelmilliscompleted,demandforsteelfromPOSCO’smajor customers such as Hyundai/Kia Motors, Hyundai Heavy Industries, and Hyundai Construction will mostlikelydecrease.
Globalindustryconsolidationisexpectedtocontinueasglobalsteelcompaniesmergetoachieveeconomiesofscaleandscope.Itispredictedthatcompetitionamongthe5to6companiesproducingmorethan50milliontonswillaccelerate. Competition for raw materials will also heat up, and regulations regarding climate change and carbondioxideemissionswillbecomestronger,creatingmoreuncertaintiesinthemanagementenvironment.As of March 2009, Chairman Chung, Joon-Yang became the new CEO of POSCO. Despite the globaleconomicrecessionanduncertaintybothathomeandabroad,ChairmanChunghasannouncedanambitiousvisionforPOSCOofbecomingtheGlobalBig3&GlobalTop3.Heisnowponderinghowtobestachievethegoalandleadtheworld’stopsteelproducerintothefuture.AlthoughPOSCO’sprofitabilityremainshigh,brightdaysarenotnecessarilyaheadfortheglobalsteelindustry.Inlightofstagnantgrowthinsteeldemand,thepriceofsteelproductsandrawmaterialscannotbeexpectedtoremainstable.Furthermore,large-scaleChineseplayerswithlowlaborcostsarerapidlycatchingupwithPOSCO.InJuly2009,Arcelor-MittalproposedtoPOSCOtheestablishmentofajointventureinthestainlesssector.Inthedomesticmarket,potentialM&Aopportunities,such asDaewooConstructionandDaewooShipbuildingareappearingonthescene.The new CEO had to reflect on some fundamental strategic questions. What are POSCO’s future growthstrategiesandoptions? Shoulditfocussolelyonsteel,pursueinternationalexpansionorshoulditdiversifyintonewbusiness areas? If international expansion is the preferred path, where should it build its main production base andhow should it enter the market? Is greenfield investment better than acquisitions or alliances? What are the keyorganizationalcapabilitiesthatneedtobedevelopedtoeffectivelycompeteintheglobalmarketplace?
ReferencesAmsden, A. 1989. “Asia’s Next Giant: South Korea and Late Industrialization” Oxford UniversityPress.IBRD. “Korean Economic Review” 1968Lee & Whang. 1997. “Steel Making at POSCO” Graduate School of Business StanfordNH Research Center. 2009. POSCO. NH Investments & Securities.POSCO. 2003. POSCO 35-Year History.POSRI. 2008. POSCO 40 Years Performance Report.POSCO. Annual Report. 2001-2008.POSCO. Fact Book. 2003-2006.Regani, S. 2004. “POSCO’s Competitive Advantage in the Global Steel Industry” ICFAI BusinessSchool Cases.Seo, K.K. 1997. “The Steel King” Simon & Schuster. U.S.World Steel Dynamics. 2008. Core Report D. Financial Dynamics of International Steelmakers.Yoon, S M. 2000. “A Study on the Institution Building Strategies of POSCO” Doctoral Dissertation.Department of Public Administration. Graduate School. Chung-Ang University.
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