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Analysis of the steel production company POSCO

1. Introduction

The project that started with a few people at the city of Pohang at the East coast of Korea has today grown to the company that most of us knows as POSCO. Today POSCO is not only among the top steelmakers in the world in terms production, but also in terms of technology has the company captured one of the leading positions. More specifically the company is today the third biggest steelmaker in terms of production, and has earlier figured as number before different mergers and acquisitions changed this status. POSCO has succeeded by constantly investing in new production facilities and new technologies. This is underlined by their slogan: “Resources are limited; Creativity is unlimited”.

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POSCO was founded in cooperation with the Korean government, which wished to create a local supply of steel. Thus, POSCO has always been highly dependant on the Korean market and the Korean government. Even today this dependence is preserved, emphasized by POSCO having 72% of their sales in Korea (Business and Company Resource Center, 2010). However POSCO is also starting to position themselves at the global market, where the patterns of competition is completely different than the ones at their home market. This paper will examine the position of POSCO at the Korean market as well as the global market, and what kind of possibilities and challenges they are facing in order to prosper.

The role of technology development plays a crucial role in this matter. Despite being an old and established industry, steel production is highly dependant on the development of technology, especially in terms of new processes of production. The paper should therefore also take into consideration how POSCO will succeed in further improving their technological competencies in order to stay competitive.

The structure of the paper will be as follows: After the introduction some theoretical considerations in relation to the paper will be provided. Second, a presentation of POSCO, including its historical development as well as a short presentation of steelmaking will be provided. Third, the competitive market of the steel industry that POSCO are acting in will be analysed through the model, Porter’s five forces. After this, the technological development within POSCO will be described and analysed. At last, the future challenges in terms of technology strategy and the possibilities improving their position in the market will be analysed. These will be complemented by some specific recommendations on how to prosper.

2. Theoretical Considerations

This study will consist of a business strategic part as well as a technology strategic part. The aim of the paper is to explain how the technology strategy of POSCO can be utilized in order to carry out the business strategy of the company, ultimately leading to a sustainable competitive advantage.

At the business strategy level this paper seeks to combine the market-based view (Porter, 1980) and the resource-based view (Barney, 1991; Prahalad & Hamel, 1990). The paper adopts an outward-in perspective, starting out by analysing the current market situation of POSCO. For this purpose a Porter’s five forces model is used. By making this analysis it becomes visible what kind of position POSCO holds in their current competitive environment, and how they can eventually use their internal resources, more specifically technologies, to obtain a more favourable position relative to their nearest competitors. The resource-based view is not applied in the same systematic way, but rather as a mean to understanding the importance of technology development for the overall resources of the company.

When examining technology development in the steel industry both product and process development can be considered. Starting out with product innovations; steel is not just steel, but can in fact be separated into several different product specifications, that can be applied for different purposes. This means that new steel types can in fact be developed to fulfil a new purpose, or maybe act as a more efficient substitute for another steel type. Developing one type of steel into being thinner, stronger or lighter can mean a big difference to steel users. An example could be to develop a lighter type of steel for the automotive industry, assuming all other abilities to unchanged. Taking an up to date issues, this might enable to automotive company to change the gasoline input in a more environmental friendly direction. Such changes will primarily be considered as incremental innovations, since the innovation is often an improvement of an already existent product. In the steal industry the separation of product and process innovation is however not always straight forward. A new steel product does often occur as a consequence of new production methods. Said in another way; the new process leads to the new product.

Process innovations can have different purposes. As mentioned before one can be to create new processes that enable the improvement of existing products or eventually facilitate the creation of new products. Another type of process innovation can be one that helps to make the production of an already existing product more efficient and thereby increasing the overall profitability of the production. Getting a higher output with the same input or getting the same output with a lower input will directly help to increase the competitiveness of the business in general, and can thereby be seen as a clear combination of business and technology strategy. The development of new processes can moreover be considered as both a disruptive (Christensen) or architectural innovation (Henderson and Clark). An example on a disruptive strategy can be the example of before, where a new process technology changes the levels of competition completely within the industry. An architectural innovation can be seen when one part of a process substituted for another, thereby making the production more efficient, and thus changing the levels of competition.

This paper will consider both concerned with process innovations since these are the most visible within the innovations observed for POSCO, and which have contributed to the competitiveness of the company.

3. Presenting POSCO

POSCO is established in 1968 and was originally known as Pohang Iron and Steel Company, later changed to abbreviation POSCO. Today the company has grown to being the number three in the world producer determined by output. When Park Chung-Hee took power in 1961 he emphasized the importance of establishing a national steel production. Park Tae-Joon was chosen to lead the establishment of POSCO. Park Tae-Joon had good relations to the Japanese industry and these connections showed to be highly useful in the establishment process of POSCO.

Even though the Korean government served as the main catalyser in the start up phase POSCO was nevertheless established as a private company. It is believed that the status as a private company secured a strict managerial focus from the start, putting emphasis profitability and cost savings.

When the construction began in Pohang in 1970 it was with huge assistance from Japanese technology, and the plant were finished in July 1973. Right after finishing the initial construction POSCO started the second phase of their construction, and the pattern of constantly increasing production has been a characteristic for the company, which have enabled them to put leverage their bargaining power with suppliers. In 2001 their annual production amounted to 12.7 million tons annually (Hogan, 2001). POSCO has later developed their production facilities in Pohang even further and has moreover opened up production in other parts of the world. A highly debated current project is POSCO’s plans to open up huge production facilities in India.

Even through significant economic crises POSCO has made huge investments, an option that has been available partly due to the tight relationship between the company and the Korean government. These constant heavy investment and long-term focus throughout the history of the company has enabled the company to stay competitive over a longer period.

The history of the company clearly shows that POSCO are strongly connected to the Korean society and as mentioned in the introduction the Korean market account for 72% of the company’s yearly production. The customers is primarily Korea’s shipbuilding industry, automotive industry, and home appliance industries. The rest of the production is sold on some of the 60 markets where POSCO is represented, through numerous subsidiaries or joint ventures. POSCO has since the Asian economic crises, where the company struggled hardly, focussed on building partnerships, around the world. One of the most remarkable is with former arch-rival, the Japanese giants, Nippon Steel Corporation. These partnerships has allowed POSCO to enter markets easier, while at the same time being able to develop and share knowledge together with their partner (Business and Company Resource Center, 2010). A prime example on common technology development will be shown later on.

The company is divided into four main areas: Steel, E&C (contracting), Energy, and IT. Where the steel division works as the engine of the corporation with the other business areas being more or less related. Due to limitations this paper will focus exclusively on the process of steel making rather than including the other business areas too much. The steel production can moreover be divided into a number of different sub-groups.

Iron making: where iron ore, coke and a flux (limestone) are combined in a blast furnace to produce molten iron containing about 4% carbon

Steel making: where excess carbon is removed in a basic oxygen steel making vessel and required alloys are added. The molten steel is then cast into billets, blooms or slabs

Shaping: where steel is rolled to various sizes and shapes in a rolling mill. A simplified process of steel production can be seen in the box below:

Source: www.hsc.csu.edu.au

4. Identifying the steel market

4.1. General Patterns

Today steel is one of the most important products for the industrialized economy and in the future the use of steel is expected to increase even further as economies continue to grow. Especially the growth in Asia is expected to increase the use of steal on a global scale. There has however been a major slowdown due to the financial crises, which has especially had a significant impact on the demand in 2008 and 2009. The market is however expected to bounce back in the short-run, thereby continuing to grow. In the long run the market is however expected to go back to more moderate growth rates. Such a change might suggest that the future will not allow for the same amount of steel producers as seen currently, thereby making it highly possible that the market will be consolidate at that time.

The role of government regulation serves a significant factor at the steel market influencing almost all parts of the value chain. In Korea the government played an important role in the development of POSCO as has been mentioned earlier, and have continued to participate in the development of the steel industry. In other countries the governments do not take the same role in directly promoting businesses, but today most countries are highly focussed on environmental concerns, such as greenhouse gas emissions. This means that in order to avoid confrontation with local governments the steel producers should take environmental concerns into consideration. Said in another way; steel producers are not only competing on efficiency and productivity, but also on their ability to develop environmental friendly processes.

4.2. Porter’s Five Forces

In general the competitive market situation of POSCO can be separated into two separate patterns. First of all there is the global market competition, where POSCO have a big share of their sales. However as mentioned earlier POSCO collect around 72% of their revenues at their Korean home market. This market is to a certain extent much different from the global market, where the degree of competitiveness is considered much higher. When considering the different parameters of competition below, a separation of the Korean market and the global market will be made when considered relevant.

4.2.1. Bargaining power of suppliers

POSCO’s suppliers are mostly located at a foreign market, and it is therefore not possible to differentiate between the Korean and the global market. The iron ore mining industry is characterised at relatively low margins, while at the same time requiring massive investments in infrastructure and machinery. This has had the effect of the industry being highly consolidated in the recent years, now containing of only three dominant players in order to reach the specific scale advantages (Bles, 2009). The world’s largest producer is the Brazilian mining company, Vale. Followed by the two Australian companies BHP Billiton and Rio Tinto Group. Due to the significant increase in the demand of steel during the recent years, the iron ore mining companies have enjoyed strong bargaining power towards the steel producing companies. Moreover during the recent years the raw material prices in this sector has been highly volatile putting an even higher pressure on the steel makers for coordination.

4.2.2. Bargaining power of customers

The customer base for steel producers is wide-ranging, meaning that steel is used in several industries. Most noticeable is customers such as the automotive industry, ship building industry and construction work in general. Generally the steel users can be considered as more consolidated at a global level relative to steel producers, which to some extent give them an upper hand. At the Korean market POSCO do however hold a strong position relative to its customers, due to the lack of competitors. This means that the overall definition of bargaining power can be separated into two different levels. The bargaining power of customers at the Korean market is considered as low relative to POSCO, due to the lack of alternative steel producers. At the global market the bargaining power of customers will be considered as medium, since most the market for steel customers is well consolidated, with the customers often being big players in the automotive, shipbuilding or construction industry. However the demand is at such a high level that POSCO still holds a relatively good bargaining power.

4.2.3. Threats of new entrants

If a newcomer wants to enter the steel production market it requires significant amounts of capital. Establishing production is extremely costly. This is highlighted by the costs of POSCO’s new project in India, where to costs are expected to amount to around $12bn (Kazmin & Fontanella-Khan, 2010). Only already highly established industrial players or national governments might hold the resources to enter this market. Industrial players with these resources available do however not tend to invest in industry areas that are unrelated to their current businesses or are eventually considered as emerging industries. The same holds for governments, which plays an active role in businesses. Their role is often associated with the start up of emerging industries, and not old and already established industries such as steel production. Additional to the high capital requirements steel production do also often require different kinds of government approvals. Taking these different factors into consideration the threat of new entrants in the steel production industry must be considered as low.

4.2.4. Threat of substitute products

As mentioned earlier steel is one of the most essential materials in the industrialized economy, and the production is moreover expected to increase in the coming years. Both in Korea and at a global level no products seem to be able to substitute for steel. Thus, the threat of substitute products should be considered extremely low and almost non-existing. An extreme increase in the price of steel, due to certain reasons, might however lead some consumers to search for alternative products. However an increase at this scale does not seem plausible, and moreover such a process of change like this would be long-term.

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4.2.5. Intensity of competition

Within Korea POSCO holds an extremely strong competitive position. Korea works as a net importer of steel, which stresses the high demand for steel at POSCO’s main market. Until recently POSCO has acted almost exclusively as the main actor on the market. However by the establishment of Hyundai Steel a large competitor has appeared. Moreover there has been a growth of Chinese steel producers, which can also be expected to take a part of the Korean market. POSCO is however expected to continue their dominance at the market, since the main aim of Hyundai Steel is to deliver steel to Hyundai’s automotive part. In relation to the Chinese producers they would be expected to focus on their own home market, since there will be plenty of orders at this market. It can however not be excluded that the Chinese producers will capture some of the market share within Korea. However the intensity at the Korean market should be considered as relatively low, due to the high demand from domestic steel users. At the global level the situation is quite different. No companies seems to hold more than 10% of the market even though some really big players, including POSCO, are present at the market (BNP Paribas, 2009). Most of the dominant players are located within the region of Asia. Most dominant is the worlds biggest steel company ArcelorMittal based in India. The company is however a result of the original company Mittal acquiring the other dominant player, Luxembourgian Arcelor. It can therefore be argued that the company is in fact globally organized. Next to this comes Chinese Baosteel as the 2nd biggest producer and POSCO as number three in terms of production. Other remarkable producers which is also well established in the industry is Japanese Nippon Steel, which is currently the 4th biggest producer, upcoming Tata Steel, which is the 7th biggest producer in the market, and US Steel, which holds a strong position at the American market, but which is today only the 11th biggest producer. At a global level the competition the competition should be considered as medium high, but since there has been a massive demand for steel during the recent years several players have been allowed to stay in the market, while at the same time a few new players have emerged as well.

It is difficult to determine the parameters of competition, but throughout a long time the different actors has been competing on production efficiency and cost reductions. Moreover since steel is not highly mobile in terms of weight and high transport costs the location of the steel mills is however an important factor. Nevertheless, when deciding the location of a steel mill there is a number of factors that should be taken into consideration. These include the accessibility of factors such as: labour, raw materials, energy, water, and flat land. These should of course be determined in relation to their costs. Moreover societal or governmental factors such as infrastructure, subsidies, charges, and technological development within the country plays an important role. Last and maybe most important the distance to key markets should be taken into consideration (hsc.csu.edu.au). These factors can of course change over time, and a location that might once have been strategically important might not hold the same role in the future. Thus, companies should consider their long- and short-term perspectives carefully before committing to an investment of such scale.

5. Technology Development within POSCO

Throughout their history POSCO has constantly stayed innovative. Focussing on developing new products, but especially by improving cost efficiency and productivity through process innovations. Some of the most noticeable project will be described further below. Moreover POSCO has engaged in more basic research throughout their history.

In 1986 POSCO participated in the establishment of Pohang University of Science and Technology (POSTECH), which is today considered as one of the leading research institutions in Asia. The university works as an independent and autonomous institution, but they do however engage in joint research programs with POSCO. POSTECH is engaged in several different types of science and engineering, and do both offer undergraduate and graduate programs. Currently 2500-3000 students are enrolled at the university. Even though the POSCO and POSTECH are not directly related the relationship offers great advantages for POSCO. First, the university is located in Pohang giving it a natural relation to POSCO, which acts as the dominant corporation in the area. Second, the joint projects between POSCO and POSTECH provide opportunities both to gain important knowledge, but also to spot eventual future employees. Another project that POSCO has been involved in is the establishment of the research institute of science and technology (RIST). RIST is established in 1977 and is a professional research institution. The institution serves a joint purpose as they are supposed to develop new technologies for POSCO, but also serves as a mean for Korea to be more self-reliant in science and technology. RIST currently employs around 450 scientists and engineers (Hogan, 2001). The role of RIST is thus not the same as POSTECH as they are more directly related to POSCO. Thus, the knowledge produced is consequently also more applied to the products offered by POSCO. The problem about these basic research facilities, and especially POSTECH, is of course that they to some extent are relatively open. Combined with the nature of basic knowledge this makes it highly difficult to protect the knowledge created.

5.1. FINEX

FINEX was has been developed by POSCO and Siemens through cooperation and is to day the most efficient way of producing iron, which is then used in the production of steel. Compared to earlier production methods the new technology holds several advangates. In short these can be summarized as: Flexibility in raw materials; easy and flexible operation; environmental friendliness; and cost competitiveness (posco.com, 2010). In exhibit 2 you can see how the FINEX technology has improved the processes on POSCO newly constructed plane in Pohang. As POSCO became better at controlling the process the plant has lowered the input of coal remarkable over time. The production output has however been increasing in the start of the period and stable in the last part of the period showed at the graph. This helps not only to improve the cost efficiency of the production, but also to make the process more environmental friendly. Moreover POSCO has already been successful in marketing their technology when they opened up their new production facility in Pohang in 2007, a construction process that started in 2004 (POSCO-India, 2010). The production plant, which is estimated to cost around $1.1, will make a huge impact on the competitiveness of POSCO. Throughout history steel producers have used non-environmental friendly ovens to turn the powdered coal and iron ore into masses called coke and sinter, these are then melted with air at extreme temperatures to make iron. What FINEX does is basically to take out some of the processes, thereby reducing the environmental damages substantially. More specifically it reduces the emissions of sulphur- and nitrogen oxides by 92% and 96% respectively. An illustration of the process can be seen in appendix 3. Another last point that adds to the attractiveness of FINEX, besides from the lower production costs and the being more environmental friendly, is that the costs of setting up a new production facility with FINEX technology estimated to be 8% lower than setting up a facility with the old blast furnace technology (AZ materials, 2010).

In general the FINEX technology offers great advantages to POSCO. The clear cost reduction is a huge advantage that can help them in their current market situation, but at the same time it gives them a huge advantage with setting up productions. Developing countries are often interesting in attracting steel producers, since they have traditionally provided large employment possibilities for local populations with a low educational level. I such situations POSCO holds an advantage since they can also offer an environmental friendly product.

5.2. Investments in information technology

In order to facilitate more smooth operations within the company, POSCO has invested heavily in information technology. In 2004 POSCO invested $179 million to create a network between the, at that time, 80 plants so that they could take orders online and coordinate production and deliveries (Business Week, 2004). Such information systems are essential for a company like several reasons. First of all, the company is heavily dependant on the deliveries of raw materials, and a mistake in the coordination of these materials can lead to huge costs. Moreover POSCO does often receive highly specialized orders from their different customers within respective industries. In order to improve the efficiency of these orders a high degree of coordination is required. At POSCO’s two major steelworks in Pohang and at Gwangyang, each is pressed to a stated weight and width dependent on the single customer’s requests. This mill-level customization facilitates POSCO to push steel out the door faster, which has enabled POSCO to lower the delivery time with 50% and reduce stocks by 60% (Business Week, 2004).

Part of this focus on information technology can be associated with the introduction of the management technique six-sigma. This system seeks to smoothen the process with customer by applying statistical tools, which helps to identify and eliminate errors or failures within the business processes that are critical to relationship between POSCO and their customers. The introduction of six-sigma has showed such a great success that POSCO has decided to integrate the method further into the company. This might help them to minimize costs even further, and thereby improve competitiveness.

6. Future Challenges for POSCO

In general POSCO seems to hold a relatively good position for achieving a better position within the steel manufacturing industry. Especially the development of FINEX will help act as a competitive scope for establishing further productions at a global scale, while at the same time improving production efficiency at already existing production facilities. Moreover their focus on different levels of research, ranging from basic research to highly specific research, will enable them to continue being innovative in the future. Providing incremental innovation of already existing products and processes, as well as more ground breaking and radical innovations that will change level of competition in a more significant way. Global growth does however also put certain challenges on the abilities to coordination of different units.

A second challenge is the relationship with resources for production. The highly oligopolistic mining industry puts POSCO in a position with low bargaining power. This relationship should be stabilized in order for POSCO to decrease production risk. One option would be to invest in the industry either through the start up of mining operations themselves or through mergers or acquisitions with one of the established players in the market. However an acquisition does not seem possible due to the size of the respective companies, on the other hand the strong bands to Korea might also serve as a barrier for a merger between POSCO and one of the three big players. The dependence towards raw material suppliers should however seek to be decreased.

A third challenge appears when the market growth starts to stabilize due to the fact that the rapid growth in especially some Asian economies can most likely not be maintained. At this point there will be an increasing pressure on prices, and the importance of economies of scale will increase further. In this situation it is important for POSCO to be prepared. One option would be to invest heavily in new production facilities around the world, in order to be ready to exploit the economies of scale. Another option would be to monitor the market carefully for future investment opportunities.

6.1. Recommendations

In order for POSCO to stay competitive and overcome the challenges described above the following recommendations should be adopted:

POSCO should invest further in communication technology. As global production becomes increasingly important, so does the coordination between the units. A communication system corresponding to the one introduced for the Korean units should therefore be introduced at a global level.

POSCO should invest in mining operations themselves to minimize their dependence towards established players in the market. Moreover this would provide them with useful information about this step of the value chain for steel making, which might benefit them in their core business area as well.

POSCO should continue to stay aggressive in the market by investing in new production facilities. It should however be aware of future investment possibilities through acquiring other competing companies that might hold strategic important markets or important technologies.

7. Conclusion

Throughout the paper we saw that POSCO were holding an extremely strong position at the Korean market, while at the same time being relatively good positioned at the global market. The close relationship with Korea is complex, not only being a one-way relationship. POSCO acts as an employer for thousands of people, while at the same being a provider of technology and wealth to the country. The Korean government does therefore have strong incentives to create favourable conditions for POSCO. At the same time POSCO do however need to increase their global operations.

POSCO has achieved their position within the market by being constantly innovative in order to optimize their business. This has been done through a number of projects ranging from basic research at independent research institutions to complex process development in cooperation with other industrial players. Most noticeable has been the invention and commercialization of the FINEX industry, which has allowed POSCO to lower their productions costs with one fifth, while at the same time making their production more environmental friendly. The environmental advantage can show to be an important factor when starting up production in new countries. Today, almost all governments take environmental concerns into consideration, and POSCO might thus hold a competitive advantage for being allowed to start production relative to their competitors. Another program that has been successful for POSCO is the six-sigma program, which has allowed them to achieve great cost savings in their process. Thus making their overall production process more efficient and more profitable.

Overall POSCO seems to be strong positioned within the industry due to its strong technology position. If they company succeeds in dealing with the future challenges, by adopting the recommendations proposed above they will stand with huge possibility for repositioning themselves into a better market position.

8. Bibliography

Academic Articles

Barney, J. 1991. Firm resources and sustained competitive advantage. Journal of Management, 17: 99-120

Christensen, How Can We Beat Our Most Powerful Competitors (Burgelman et al., pp.


Henderson and Clark, Architectural Innovation: The Re

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