Continuous investment at USX

Corp.
Case Analysis
)

Introduction USX Corp.

Steelmaking giant established in 1901 through a series of mergers

Fully integrated company consisting of mining division, shipping

fleet, railroads and steel mills

First corporation to enter the $1billion revenue segment in 1917

Employed 1% (168,000) of the total US labour force

Post world war 2, the USSs share in the US market began to

decline.

It was around 20% in 1980

Major competitor to USS corp. - Minimill

Used Scrap as their raw material

Manufactured products for less quality sensitive segment

It had Cost advantages in many elements of manufacturing cost structure:

Lower cost non-union labours

Lower cost capital equipment's

No restrictive work rules

Favourable tax rates and utility rates

Could sell profitably at prices less than 20% of what integrated mills charged.

Minimill with more advanced technology were beginning to enter the high
quality segment

USSs response to Minimills

Close underutilized, uncompetitive manufacturing facilities. Closed or sold 8 mills

USS place other two mills with capacity for 2.6 million tons of finished steel products Lorain, Ohio
works and Pittsburgh, California works into Joint ventures with Japans Kobe Steel and Koreas
Pohang Steel respectively

Change its product strategy; Focus on hot and cold rolled sheets, strip and tin
products

This family of products had accounted for 45 % of USSs tonnage in 1981, had grown to comprise
of 69 % tonnage in 1989

Total US demand for sheet and strip remained robust

USS therefore closed or consolidated much of its structural steel, tube and bar capacity

Aggressively invested in sheet and strip mills

Mon Valley Proposal

Monogehela Valley Complex was not in one location

2 mills ET (Edgar Thompson) and Irvin, Pennsylvenia

Both mills are 10 miles apart

ET for steel making

Irvin for hot rolling

$250 Million investment in continuous slab caster at ET

$300 Million investment in hot rolling mill in Irvin

Constraint : Caster had to be installed in ET as per the terms of USSs

1987 labour accord

Crossroads for Kappmeyer

USX must improve its degrading growth rate and profitability
Option 1:
Traditional Continuous slab casters at Mon Valley
Option 2:
(CSP) Compact Strip Production which is the new Innovation

Comparison of options
S.
No.

Factors

Option 1
Conventional
Casting

Option 2
CSP

1.

Capital Cost

$100 million

$87 Million

2.

Capacity

1.5 million tonnes

1.5 million tonnes

3.

Operation Cost

(X) $ per tonne

(X-15) $ per tonne (Best Case)

(X-5) $ per tonne(Worst Case)

4.

Location

1. ET
2. Irvin

Only ET

5.

Risk of the project

Low

High

6.

Customer Demand:

Preferred

Not known

Total commitment for CSP

required, No flexibility
Customers do not respond well to
the change, Change Averse

Favorable option

Favorin
g
Option
2
Favorin
g
Option
1

S.
No.

Factors

Option 1
Conventional
Casting

Option 2
CSP

1.

Capital Cost

$100 million

$87 Million

2.

Capacity

1.5 million tonnes

1.5 million tonnes

3.

Operation Cost

(X) $ per tonne

(X-15) $ per tonne (Best

Case)
(X-5) $ per tonne(Worst
Case)

4.

Location

1. ET
2. Irvin

Only ET

5.

Risk of the project

Low

High

6.

Customer Demand:

Preferred

Not known

Total commitment for CSP

required, No flexibility

Customers do not respond well

to the change, Change Averse

After Considering Diseconomies of

scale

Capital cost per ton of capacity in the CSP process escalates as

capacity increases beyond an optimal level

USS executives fixed capacity at Mon valley at 2.6 million tonnes

per year

It indicated the higher capital costs

the 15$ advantage in operation costs is not sufficient to cover

the excess capital cost.

Due to consideration of diseconomies of scale the two factors low

operations cost and low capital cost now no longer exist
Option 1 (Conventional Casting) is much more favorable

PFI Framework for USS

The challenge is not just creating value from innovation, but capturing that
value as well

Appropriability Regime (LOW) Industry Architecture

(Vertical)
Small companies will find it
difficult to do the necessary
reverse engineering
Big Integrated companies can
imitate it as there is no trade
secrecy

No Modularity
High degree of
interdependence limits
opportunities for independent
innovation

Can USS improve PFI

parameters ?
Can USS improve Appropriability regime?
No.
USS does not own the technology therefore no legal protection of patents .
Entry barrier to CSP is also low due to low capital costs.
Can USS improve Industry Architecture?
Yes.
USS had implemented it at steel making and hot rolling at Mon Valley.

USS can go for JV or Merger with Minimills to achieve cost advantage from
CSP
It is highly recommended that CSP should not be completely ignored

Option of JV or Merger with

minimills

Integrated Mills have very low market share in Wire rods,

Structural Shapes, Bars and Wire-Drawn product categories

These categories make up 27.6 millin tonnes tons in 1988

USS can enter into these markets with the help of JV or merger
with minimills like Nucor (net worth: $260 million)

Decision

Kappmeyer should not sign the proposal.

Through this USS will function smoothly in current cost structures

Risk will be less

Current customer base which are basically change averse in

nature will be satisfied

Through Mon valley changes in industrial architecture should be

implemented to increase the modularity

Customer base where USS is lacking should be covered with

Minimills through JVs and Mergers

THANK YOU!!!