ArcelorMittal USA (AMUSA), the US division of the world’s largest producer of steel, seeks to produce high quality steel in a sustainable way, at the lowest cost possible. I believe that ArcelorMittal is an example of a company that has effectively aligned its operating and business models to create a competitive advantage over its competitors, which has allowed it to remain profitable (through 2014) despite a global supply glut in steel.
The Business Model
The business model of ArcelorMittal is to create high quality steel at the lowest cost possible in a manner that is safe and sustainable. A common misperception of steel is that all steel is the same. In fact, the different processing steps and combinations of alloys that are added can completely change the physical properties of the final product. Some of these different variations (called grades) can be extremely complicated and costly to make, and the producers who optimize their processes, upgrade their equipment, and invest in training their people are left in a position where they can sell grades that other producers cannot. AMUSA stays competitive by making the necessary investments to keep its product offering and processes world class. Additionally, it generates steel using a fully integrated process where it owns and controls every step of the production cycle: the mining and shipment of raw materials, iron production, steel production, hot rolling, and finishing (See below for a quick video outlining this process). This business model is extremely profitable during strong economic conditions (AM global was 29th on the global fortune 500 in 2007) but does very poorly during economic downturns (down to 108 as of start of 2015) as it often has to absorb massive fixed costs associated with its operations during periods where supply is greater than demand.
The Operating Model
ArcelorMittal USA seeks to generate more value from its assets than its competition through research and development, capital investments to improve its processes, and training its workforce into a highly knowledgeable and productive unit.
Research and Development: ArcelorMittal spends massive amounts of money on R&D to create an edge over other integrated producers such as US steel. It spends this money in two ways: to develop stronger/more durable products and to improve the production process. It has a research center in East Chicago, Indiana that has a dedicated staff of some of the best minds in the steel industry working on ways to give AMUSA a competitive edge. I personally witnessed our plant develop new complicated grades that were not possible a few years earlier simply through process improvements largely as a result of this R&D expenditure.
Capital Investment: AMUSA operates extremely capital intensive facilities. They are becoming increasingly automated with time in an effort to reduce the massive labor cost associate with operating in the US (the plant I worked in currently has a higher production capacity with 5,000 workers than it did with 50,000 workers 40 years ago). Additionally, AMUSA is spending a lot of money in technology upgrades to collect as much plant data as possible and provide it as meaningful feedback to operators and floor supervisors in real time to improve their decision making throughout their shifts.
People: ArcelorMittal USA has massive labor costs (the average hourly cost of one hourly employee is somewhere around $80 once benefits/overtime are considered), so employees are constantly trained and expected to take on greater responsibilities with time. While some of the operating models we have seen through the TOM course have operators that do one task over and over, AMUSA employees perform job functions with 20+ tasks and are often required to think on their feet and make decisions that have massive impact on the plant’s operations. To enable their employees to succeed, AMUSA invests heavily into high quality training programs and into the development of detailed procedures to assist employees with their job responsibilities.
The strong alignment between the operating model and the business model of ArcelorMittal USA has allowed the company to stay profitable over the past few years (the US division, not the global company) despite an awful economic climate for steel production. Currently, supply for steel far exceeds demand and steel companies all over the world, particularly the integrated steel producers with massive fixed costs such as ArcelorMittal, are suffering heavy losses. The more nimble “mini mill” model that depends less on iron ore prices and has lower shutdown/startup costs is much better suited to do well in this climate. Despite all of this, AMUSA’s focus on process, research, and its people have allowed it to execute its business strategy and stay profitable by differentiating itself through low cost processes and a world class product offering.