International Business Strategy Of Posco

Published Date: 02 Nov 2017

The purpose of this paper is to conduct an in-depth analysis on the international business strategy of POSCO, evaluate its validity, and formulate recommendations for future improvement. To do so, we have first examined the firm’s international business strategy in four aspects: organizational structure, global human resource management, resource acquiring strategy, and global expansion strategy. Based on the analysis, we suggest four areas of improvement: raw material self-sufficiency, international entry mode selection, international site selection strategy, and global human resource management.

Company Profile

Company Background

1) Overview

Established in year 1968 as the first steel maker in South Korea, Pohang Iron and Steel Company, or POSCO is now one of the most competitive steel makers in the world. Currently POSCO is operating two steel mills in South Korea, one in Pohang and the other one in Gwangyang. With these steel mills, it has ability to produce 35,800,000 tons of crude steel annually, which ranks fourth worldwide in 2010, just behind ArcelorMittal in Luxemburg, Hebei Iron&Steel Group and Baosteel in China (see Appendix 1 for 2009 rankings). 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, followed by SAIL in India and NLMK in Russia (see Appendix 2). Also dominant in domestic market with a 58% market share, POSCO is a steel superpower both domestically and globally.

2) Subsidiaries

POSCO currently has 61 subsidiaries, and ranks 8th in terms of scale among domestic conglomerates. They mainly focus on four main sectors, which is steel manufacturing (POSCO, POSCO Specialty Steel, POSCO C&C), construction (POSCO E&C), energy (POSCO Power), and engineering (POSCO ICT, POSCO Plantec). In addition, the steelmaker also has overseas affiliates in China, Japan, United States, India, and Vietnam.

3) Operation

POSCO sells 57% of its products to domestic market and 43% to worldwide, most of which are concentrated in Japan, China and South-East Asian countries. In 2010 POSCO sold 26% of steel products to South-East Asian countries, 18% to China and 11% to Japan.

4) Technology

POSCO has four core technologies: FINEX, Strip Casting, Endless Hot Rolling, and Operations Technology, all of which are aimed at lowering cost of production. For instance, POSCO’s exclusive FINEX technology is a way of producing steel by directly using iron ore and coal in their powder form. Compared to the traditional method of using the blast furnace, it can highly reduce the production cost since it can use lower cost material and requires less equipment investment. In addition, the technology is a lot more eco-friendly, generating less carbon dioxide.

Industry Background

Steel companies buy raw materials, such as iron ore and coal from suppliers, and sell their steel products to buyers in diverse sectors including civil engineering, construction, automobile, shipbuilding, and etc. (See Appendix 3)

1) Upstream

The main raw materials for steel products are iron ore and coal. POSCO imports almost 100% of raw materials from overseas via shipping industry. The delivery takes about two months, and any additional costs such as CIF (Cost, Insurance, and Freight), tariffs, and loading are incorporated in the price of raw materials. Production cost model in Appendix 4 shows that the price of raw materials is determined by the supplier production levels, inventory levels, and the demand from the steel companies. Raw material costs directly influence the cost of goods sold for steel companies.

2) Downstream

Steel products are consumed in many industries. Steel companies sell their products through dealers or contracts. As shown in Appendix 3, the proportions of steel buyers industries float over time. The automobile sector’s proportion has increased steadily and it accounts for 37% of total steel products sold in Korea. In short, the business conditions in demand industries decide the size of steel demand, which in turn influences the price of products.

3) Market Configuration

Producing steel requires immense fixed capital. This is the reason why the underlying characteristic of the industry is "capital-intensive", where fixed cost is responsible for a huge part of total cost. Since only a few can afford to invest vast amount of capital, the steel industry is composed of few market leaders. Major steel companies usually dominate in their domestic market by taking approximately 70~80% total production of steel.

Company Analysis

Organizational Structure

By and large, the steelmaker’s organization structure was highly centralized like any other Korean company in the past. With the appointment of CEO Ryu Sang-Bu in the mid-90s, however, POSCO gradually sought greater decentralization and diversification of a firm that was desperate for flexibility and autonomy. It was not until early 2010 though that the firm carried out large scale reorganization with emphasis on "growth, consumers and technology". Three major changes occurred in the steel giant’s internal structure: the establishment of the ‘Growth investment division’, the integration of marketing and production divisions of the carbon steel business, and a new executive position of Chief Technology Officer (CTO) (see Appendix 5).

The Growth investment division is responsible for managing the entire corporate investment process; from performing feasibility studies on potential business opportunities, to the launching of the new business. Combining various corporate investment functions performed across different departments into a separate division, POSCO hopes to foster collaboration among future investment schemes so that the projects would connect and create synergy effects.

The grouping of marketing and production divisions of the carbon steel business, which accounts for 85% of the steelmaker’s annual revenue, is seen as a groundbreaking move for POSCO since it is a rare structure even in the global business field. The reason behind such a bold strategy was the desire for a close-knit cooperation between the two key functions that would result in enhanced customer responsiveness. As the business environment becomes increasingly competitive both domestic and abroad, POSCO has made clear from this organizational change that evolving into a more customer-oriented firm is key to attaining sustained global competitive advantage.

The new executive post of CTO is responsible for the firm’s overall technological strategies. As will be discussed further in this paper, rising raw material prices have been a constant issue for steelmakers worldwide, and firms are spending more capital into developing cost-efficient technologies. Under the supervision of the CTO and the firm’s newly founded ‘Productivity Research Center’, POSCO has put clear emphasis on technology as the future of the firm.

As a result of these core changes in the firm’s structure, POSCO has rearranged the existing five divisions of Finance, Administration, Marketing, Production technologies and Stainless, into Corporate strategy and planning, Corporate technology, Business administration, along with an empowered Stainless business, Carbon steel business, and Growth investment divisions.

Hence, the current organizational structure of POSCO could be illustrated as a matrix structure that combines both functional and product divisions. Divisions such as Corporate strategy and planning outline the organization’s functional characteristic, while Stainless and Carbon steel divisions indicate product focused businesses. By choosing the matrix structure, POSCO is able to put emphasis on any product or function that is deemed crucial to the firm’s future; granting the firm the flexibility it has sought for years.

However, utilizing the matrix structure may also pose some problems, such as the "who is in charge" problem. For instance, when POSCO has to deal with corporate technology issues in its stainless business, it is unclear whether the reporting line should be drawn towards the function (technology division), or the product (stainless division). Multiple reporting lines often result in operation inefficiency and conflict between the firm’s internal divisions, which would ultimately undermine the firm’s profits.

Nevertheless, ever since its adoption of the matrix structure in early 2010, POSCO has shown no signs of erratic increase in administrative cost or decreased profit. In fact, the firm renewed its record-high performance according to last year’s figures (see Appendix 6). We can only assume now that POSCO has succeeded in embedding a clear hierarchical structure within its matrix structure, minimizing the drawbacks it may present. As the recent change in organizational structure is yielding the expected figures for the steel giant, recommendation for a meaningful change does not seem necessary.

Global Human Resource Management (HRM)

Out of all overseas affiliates, POSCO only has two executive managers that oversee foreign operations. Thus, it can be said that POSCO’s global HRM is based on a highly ethnocentric approach, where almost all key management positions are filled with home-country nationals, and it does not seem that the firm will be switching to any other approach soon.

The main reasons behind POSCO’s heavy reliance on expatriates to staff foreign operations are related to the business environment it faces. POSCO is currently undergoing the process of transnational expansion, where it aims at utilizing the international environment not just for exporting domestically produced steel, but also to begin its key corporate functions in overseas locations. Investment abroad, establishment of foreign branch offices, and construction of production facilities outside Korea all prove that POSCO is vigorously pursuing international business. However, POSCO has only begun such pursuit for several years now, and the need to develop its expansion under direct command and control by headquarters is essential for the company to settle in a foreign environment. One might argue that a company can also use local adaptation instead of following direct orders from headquarters. However, POSCO is by nature a steelmaker which inevitably has to place emphasis in its manufacturing process rather than pertaining to customer relations. If the firm was engaged in providing service, local adaptation could be a better way as CRM is key to success. In contrast, steel making is a process best sought by home replication of operations management. All in all, it is valid to say that at present, POSCO’s ethnocentric policy is a more desired staffing approach to global HRM. Nonetheless, as the firm develops its overseas operations further and settles down in the country, a different strategy might be needed.

Resource Acquiring Strategy

It is in the resource acquiring part where the fundamental problem of the steel industry lies. The chronic concern of manufacturing steel is that, due to limited deposits, price of raw materials continues to rise in the long run. To further deteriorate matters, the iron ore market is dominated by Brazil’s Vale SA, Australia’s Rio Tinto and BHPB, which account for more than 60% market share. These Big 3 suppliers pressure steelmakers with high raw material price, making it difficult to procure materials. Costs are still higher for POSCO since Korea is not abundant in natural resources; the firm has to incur additional transportation costs such as CIF (Cost, Insurance, and Freight) to receive the necessary materials.

In order to overcome this situation, POSCO has been actively supporting foreign investments to increase independency on raw materials. The steel giant is participating in large-scale mine development projects across the world where potential deposits are deemed high, including Australia, South Africa, North America and India. POSCO has mainly selected cooperation strategies like joint venture with local companies as entry mode, and such strategies have helped the steelmaker share the risk of spending large amounts of cash.

POSCO’s latest major investment in iron ore was the acquisition of a 24.5% stake in Australian Premium Iron (API)’s mine development project in 2010. The deal was worth USD 162 mn, or KRW 194.6 bn, and POSCO will support prospective investments according to its share. When the mine starts production from 2014, POSCO expects to secure 9.8 mn tons of ores per year, which would raise its iron ore self–supply ratio from 18% to 34%.

Moreover, as a mega-project for overseas development, POSCO has promoted a new iron foundry in Orissa, India since 2005. The project, which holds a significant part in POSCO’s strategy to reinforce its global competitiveness, will include iron ore mine development at captive mines located in the region as well as the development of infrastructures in this region. With this investment, POSCO looks to obtain more than 600 mn tons of iron ore reserves over the span of 30 years.

Despite the firm’s constant investment to minimize price fluctuation risk, the raw material market is forecasted to remain undersupplied for the next few years. With other major steelmakers also striving to secure their portion of resources, POSCO’s resource acquisition strategy should be revised to make sure the firm takes into account the shifting industry background.

Global Expansion Strategy

In spite of high efficiency and profitability, POSCO’s global expansion strategy has been regarded as passive among steel names with stable operations. However, recent development has shown that POSCO is finally planting the seeds for an active global expansion strategy. With the advantage of strong balance sheet, POSCO was able to invest during the latest economic downturn without hurting profitability to accelerate momentum for growth at home and abroad. POSCO’s main strategy in the international era is to acquire global competitiveness by pursuing construction of integrated steel mills in emerging markets, such as in India and Vietnam. Moreover, POSCO is keenly watching for merger and acquisition opportunities with focus on countries with high-growth potential.

In 2009, POSCO completed a Cold Rolling Mill in Vietnam (1.2Mt/yr) and a Continuous Galvanizing (CG) Line in Mexico (400Kt/yr). In addition, POSCO acquired ASC (Asia Stainless Corporation) in Vietnam (30Kt/yr). Along with the investments in downstream facilities, POSCO also expanded global sales network by adding new processing centers in locations near the customers.

Furthermore, POSCO’s Orissa project has finally gained approval of the Indian government as of May 2nd, 2011, with construction to begin in the latter half of this year. After signing an MoU with the Indian government on 2005, the process has been delayed for six years, which disappointed stakeholders. Bearing in mind the fact that India is considered one of the biggest emerging markets for the steel industry with the steady increase in net import amount, as well as the source for high quality iron-ore reserves, POSCO’s successfully integrated steel mill project in India will help the firm to compete more effectively with Baosteel and Mittal in the Southeast Asian market. Moreover, since integrated steel mill in India will entirely apply POSCO’s own FINEX technology, cost efficiency is also expected to see overall improvement as the amount of steel produced using FINEX will increase from 7% as of now to 32% when the steel mill is completed.

In addition to POSCO’s overseas expansion of its production facilities, the company is also seeking opportunities for merger and acquisition. POSCO’s latest acquisition is Daewoo International Corp., a trading firm that focuses on raw material development. The subsidiary will be covered in depth in the recommendation part.

Recommendations

By analyzing POSCO in multiple aspects, we have concluded that while the steel giant’s organizational structure is functioning at the expected level, there is room for improvement or change in terms of resource acquisition, global expansion, and global HRM. The main objective of every business is to lower costs, while maximizing profit. Based on the analysis, we recommend that POSCO accomplish this goal by increasing raw material self-sufficiency, and further enhance its global expansion policy to increase steel production.

Raw Material Self-Sufficiency

As mentioned before, the price of raw materials has been rising rapidly for years, and is expected to remain undersupplied. Resources such as iron ore and coking coal have limited deposits, so securing raw materials necessary has been major issues for steel industry. In order to deal with this situation, POSCO is working to increase its self-efficiency ratio of raw materials through the huge projects in various countries persistently. By investing the development of mines, POSCO has acquired resources stably and economically.

In 2010, POSCO obtained approval of acquisition with Daewoo International from Korean Fair Trade Commission. Actually, POSCO was taking part in the process of disposal of Daewoo International actively because it expected the synergy effect after the acquisition. In fact, Daewoo International has been participating in 15 overseas resources developments for years, and it also has huge network of 94 offices in various regions. POSCO has competitive production capacity compared with other steelmakers, but it still depends on domestic sales for more than 60% of its gross production. In this condition, Daewoo International’s operational know-how and accumulative strategies for overseas expansion would be helpful to POSCO to map out its strategies more effectively.

POSCO should practically utilize the vast global network of Daewoo International to develop unexplored areas and invest in a new mine abroad because it can be connected directly with its international competitiveness. Especially, Daewoo international has strong competitiveness in Africa. It has main branches and offices in 8 countries like Egypt, South Africa, Algeria, Kenya, Tunisia, Nigeria, Libya and Israel compared to POSCO which has just 1 liaison office in Cairo, Egypt. In spite of huge potential and abundant natural resources, Africa is still remaining unexplored region because of its weak infrastructures. By developing raw materials mine with Daewoo International in Africa, POSCO would meet its satisfactory self-reliance ratio. Moreover, enhanced cooperation with resource department of Daewoo International would be necessary. As a part of those efforts, POSCO already invited global managers of Daewoo international from 14 different countries and held presentation of its future strategies and schedules in order to reflect their opinions and organize a new council for global expansion.

International Entry Mode Selection

Other than developing unexplored areas and securing raw materials, POSCO should also consider entering foreign market by locating steel mills in local country considering some of the various entry modes. International entry mode is divided into three main categories, which is ownership (FDI), exporting/importing and collaborative strategies. In order to make a decision, we can utilize a simple model of Dunning’s "Eclectic Model". It is a model asking whether a country has three advantages-ownership advantage, internalization advantage and location advantage- and in accordance with the answers, the company can decide whether it should export/import, license, or have direct ownership. In the sense that POSCO has its own technology and huge plants superior to other companies, integrating the resource development and steel production will reduce the risk being influenced by price of raw materials, and that steel products are high in volume and it takes lot of money to transfer it from country to country, POSCO definitely has all three of ownership advantage. Accordingly, Dunning’s Eclectic Model tells us that ownership (FDI) is the most desirable entry mode for POSCO. This is quite obvious that FDI is better compared to POSCO’s traditional way of importing and exporting. By FDI, POSCO can highly reduce the transportation cost of raw materials-when located where there’s abundant raw materials- and final products-when located where there’s high demand-. The problem of high tariff will be figured out, and the risk of exchange rate will be relieved. Also, POSCO can utilize the low cost labor in local country, and employ intelligent workers to develop more profitable technology. All in all, this way POSCO can reduce risks and become more competitive by lower cost.

But since this model does not include other possible alternative, which is high commitment collaborative strategy-including joint venture, equity alliance and franchising-, we should take it into account too. The possible benefit of these strategies is that it can reduce the cost of foreignness and can reduce risks taking advantage of the local company. In fact, POSCO has been operating abroad in a way of joint venture such as in case of API. Although it certainly has advantage of low risk over ownership strategy, but we should consider that steel industry is more of a B2B, selling its products to other companies rather than individual customers. Additionally, the competition is less concerned with non-price competition. So we could see that the benefits of the high commitment collaborative strategies are rather small for this field. Moreover, there exists a risk that the local partners could learn and steal the core technology of POSCO. Since technologies like FINEX are core competency of POSCO, choosing entry strategies such as JV is somewhat risky for POSCO. Therefore, we see that ownership (FDI) is the most desirable strategy of entry mode selection for POSCO. But we should also consider its drawbacks. Ownership has risk of high losses in case of failure, and the risk is even greater for steel manufactures since constructing even a single steel mill costs a fortune. So we propose that POSCO should mix those two strategies, focusing more on FDI.

International Site Selection Strategy

With respect to the ownership entry mode strategy, recommendations for POSCO’s international site selection strategy should also be considered. While POSCO’s investment in India is finally paying off, with news of the Indian government’s permission of the steelmaker’s Orissa project announced just weeks ago, now is also the perfect timing to lay out the map and look ahead for the "next Orissa". And while there are a number of potential candidates that might emerge as a site to host POSCO’s factories in the future, it is somewhat discouraging to say that none of them look as prolific as India.

An ideal site to accommodate a huge integrated steel mill must satisfy two main conditions. First, the site must have ready-access to raw materials nearby since it minimizes transportation cost and time to deliver raw materials to be processed in the factory. POSCO’s current steelworks in Pohang and Gwangyang come short on this aspect as Korea is devoid of raw materials needed to produce steel. Such limitation has been the source of higher costs for POSCO for many decades; a two-month delivery time plus additional CIF costs may be a luxury cost that should be cut down to deal with the inevitable rise of raw material prices.

In addition, the factory should be located in a fast-growing market with high potential for future steel demand. Since upon completion the production capacity of the firm is expected to undergo a sharp increase, demand for such increased supply must be guaranteed. Thus, it would be the ideal scenario if local customers could constitute the largest portion of demand.

Since Orissa was the place that sufficed both requisites, it surpassed other locations in the world to host part of POSCO’s future six years ago, when the company decided on the site. Six years later, India is still looking to be the most attractive place on the globe for POSCO to build its second steel mill.

The main reason why we recommend investing in the same country twice is due to two factors: quality and price. There are indeed other countries in the world that satisfy the two requirements for the ideal steel production site. In terms of iron ore production, China, Australia, and Brazil are also countries with the highest deposits. Among these states, China and Brazil emerge as the most attractive markets both in size and growth potential. Thus, it is valid to say that Brazil, China, and India are the potential candidates for POSCO’s next steel mill site. However, India scores over China because iron ore in the region is of relatively superior quality. It can be said that since POSCO owns the Finex technology, it can make use of inferior quality iron ore and still produce the same quality steel. Still, a large chunk of the ore found in China will still remain unused. India also has the upper hand when compared to Brazil because the suggested price of state-owned mining company CVRD is unacceptably high for POSCO to consider.

Other potential advantages for POSCO to keep investing in India include relationship with the government. At present, POSCO is the only global steelmaker to have reached an agreement with the Indian government; a symbolic indication of the positive relations between the firm and the state. Good relations with the government can never go wrong in terms of international business, especially when the country is highly selective against permitting foreign companies to lay foot on domestic soil. Furthermore, the fact that POSCO is the "only" international steel giant to be accepted to produce and sell in the second-most populous country speaks for itself.

There is some room for concerns to this suggestion; the main one being whether the country can accommodate such a steep increase in steel supply over a short span of time, what with Indian companies also ramping up capacities. However, it must be made clear that steel production in India is not solely for use within the country, but also for international markets. Geographically speaking, India is a strategic location close to POSCO’s main markets: Korea, China and South-east Asia. Through short sea routes, transportation cost and delivery time of end products can be optimized. POSCO’s chairman Ku-Taek Lee has gone as far as to saying that "If India has more capacity than Korea in the future, I see no reason why the company’s global headquarters cannot move there."

Global Human Resource Management

It has been discussed that POSCO’s current ethnocentric staffing policy is needed to retain control and integration over its core competence of manufacturing cost-effective, quality steel. We recommend that such staffing approach should continue to be maintained for the years to come. As POSCO’s global business to India is on the very initial stage, such staffing approach is essentially needed. Indian branch’s top level management positions will be staffed with home nationals in subsidiaries, POSCO could have some effects which are tight control over subsidiaries and interests of home office may be better protected. Chiefly, by staffing home nationals in subsidiaries, it will be able to understand home country organization’s agenda and replicate structure, policies, practices. In addition, it could lessen the possibility of happening accident such as technology leakage which might happen in polycentric staffing way.

It is clear this ethnocentric approach is the best staffing way in steel industry especially in POSCO’s case. Even though they can keep on maintaining growth in global business through ethnocentric approach, POSCO also has to consider how they would integrate other's culture and diversity. Employees from different and diverse backgrounds should not be suffering from uniformity. If it doesn't, this might deteriorate the efficiency of employee, which leads to lose core competency.

In order to foster such local managers before staffed in specific region, raising regional professions by giving a new education opportunity could be an option. Potential employees should have much experience company’s system. Company would send these people for 1 year to probable place where company will invest like India. From this opportunity they could learn about basic information, cultures and language thoroughly so that they will be able to handle troubles with local employees.

Meanwhile, in the long-term perspective, POSCO should ultimately aim for a gradual shift towards a geocentric staffing approach. As POSCO is trying to adopt a global business platform, such staffing approach should be the most proper way to leverage ideas worldwide, promote global learning, and emerge as a true transnational.

Conclusion

This paper delved into the internal and external environment of global steel giant POSCO, and has concluded that while the firm is performing well in certain aspects, there are also ways in which its international business strategy can be improved to sustain its competitive advantage in the future as well. Since the current state of the firm can be defined as a transitional phase towards becoming a true international enterprise, POSCO’s future may be dependent upon how the firm overcomes the issues at hand. By implementing the recommendations made by this paper, the future is bright for Korea’s No.1 steel maker.

Appendices

Appendix 1. Top Steel Producers by Volume

Appendix 2. World Steel Dynamics Competitiveness Assessment Rankings

Rank

2010

2009

1

POSCO(Republic of Korea)

Severstal(Russia)

2

SAIL(India)

POSCO(Republic of Korea)

3

NLMK(Russia)

Bao Steel(China)

4

Severstal(Russia)

NLMK(Russia)

5

CSN(Brazil)

Nucor(USA)

Appendix 3. Steel Consumption in Korea

Appendix 4. Business Model of the Steel Industry

Appendix 5. POSCO Organization Chart

Appendix 6. POSCO Financials

Unit: million won