Address to the APMA Developing Competitive Advantages: Dofasco's Pursuit of Solutions In SteelTM
P.O. Box 2460, Hamilton, Ontario L8N 3J5
Telephone (905) 544-3761 Fax (905) 548-4935
Date: April 10, 2002
Location: Hamilton Place Theatre
Presented By: John T. Mayberry President and CEO - Dofasco Inc.
Let me begin with a story about the year that was.
2001 was what some pundits called “The Perfect Storm” for the steel industry… a weakened economy, slumping prices, and an overwhelmingly difficult trade environment converged on the steel industry like so many storm fronts.
This was a year that saw many steel companies seek bankruptcy protection, and their futures remain uncertain today. How will LTV re-emerge? What’s going to happen with USX, Bethlehem, Weirton, Wheeling-Pitt, and others in the United States? Here in Canada, what’s the future of Algoma?
Some of these companies face significant challenges: from pension and legacy costs to credit and cash flow concerns. Not to mention significant losses and external market pressures. Since 1997, 32 steel companies in North America have filed for bankruptcy protection. You can count the profitable steel mills on one hand, but you’d need an abacus to tally up those losing money.
Four North American steel companies made money in 2001. Only one of those was a fully integrated steelmaker.
Industry capacity utilization in 2001 languished at somewhere around 68 per cent. You cannot generate profits in this industry operating at 68% of capacity.
Trade was the biggest story of 2001. Imported steel flooded the North American market, inflated inventories at steel service centres, and depressed prices to 20-year lows.
But I’m not here to dwell on bad news or to talk about international trade. Yes, I’m the CEO of a steel company, so I hope you have a substitute speaker if a bolt of lightning strikes me down for NOT using this venue to lobby about trade issues.
I look at the year that was – and while it didn’t meet our expectations – I can certainly call it a success, as Dofasco was the only integrated North American steelmaker to turn a profit. As you can see, three mini mills were also profitable.
In fact, if ever there was a year that proved our strategy is working, it was 2001. Because of the strategies we employed, we stayed at full capacity throughout the year, in stark contrast to many of our competitors. And because of the way our people are engaged in our business, we were able to take quick action to respond to market pressures.
Let me give you an example: At the beginning of 2001, we saw it was going to be a tough year, with automotive demand tumbling in the first quarter. So we asked our people to create and implement a cost reduction plan, to batten down the hatches. Every aspect of our business was examined in this exercise, from operations to taking out our own garbage to reduce housekeeping costs. We put the plan together in a matter of weeks and were realizing savings in a matter of months. Over the year, we saved more than $100 million through this cost reduction program, without impacting production, or service, or quality.
That’s the power of an engaged workforce that understands the need to act, and to act quickly. That’s the power of a workforce that cares!
And we remained at full steelmaking capacity throughout the year, in stark contrast to many others. That’s the power and validation of our strategy.
I’m going to talk about Dofasco people and strategy today, which I believe are the drivers of our success and the basis of our competitive advantage. But first, I want to put forward two qualifiers:
First, there is no quick, silver bullet to creating a competitive advantage. Dofasco’s success in 2001 – and in every year previous – was the result of thousands of acts over several years by thousands of people, who understand the end-game. There is nothing as powerful as people, and the ideas and innovations they are capable of generating. But it takes time.
And second, I’m not going to talk about steel as a “material of choice” today. Because if steel has an exciting future – and I think it does – it’s not because of its intrinsic qualities, or new technology, or even quantum gains in the quality of the craft. I’ve heard that speech, and I’ve even given that speech about steel as the material of choice.
But, that speech doesn’t adequately describe WHY steel is so exciting. I want to come at the question from a different angle. So let’s take steel – the material – out of the discussion.
I once heard the president of a steel company say - and I quote, “The purpose of a steel producer is NOT to produce steel.”
Frank H. Sherman - my first ultimate boss - said that in 1968, one year after I joined Dofasco. It’s a phrase that has stuck with me and is as true today as it was in 1968.
If Dofasco is to grow and continue to succeed, it is because we will be addressing HIGHER needs. If you see steel through this wider lens, then maybe you can start to get excited with me. We will grow when we make people’s lives better and fulfill human needs. That’s what makes steel RELEVANT, to you and I alike.
I think we have huge opportunities to do this, with the convergence of technology, innovative thinking, and the need for solutions to the complexities of life in the 21st century, and that’s why I can look to the future with excitement.
Think of the opportunities: lighter, stronger, safer cars that are more fuel-efficient and rust-resistant. Homes that are more affordable, easier to construct and structurally superior. Appliances that are more efficient and durable. Thousands and thousands of realized and potential uses for steel in our daily lives.
We at Dofasco do not see steel as a commodity. We see it as an opportunity to add value for our customers, and to ultimately fulfill those human needs. I am convinced it is THIS mindset, THIS approach to how we deal with customers, employees, shareholders, suppliers and members of our community that creates a competitive advantage for Dofasco and creates truly sustainable returns for the company’s shareholders.
So, that’s a very nice philosophy, you might say. The challenge, of course, is in the implementation. How does this translate to a plant floor? How do we deliberately add this value to steel? That’s what I have been asked to talk about today.
For Dofasco, it’s been a journey, and one that’s not over yet.
I’m going to talk a little about what we’ve done over the years to get us to the point we’re at today. And instead of focusing on the products we make, I want to talk about HOW and WHY we decided to make them. I’m also going to talk a lot about people, because at Dofasco, people are the absolute heart and soul of our competitive advantage.
So let me back up to the early 1990s and describe some of the challenges we faced.
Between 1990 and 1992, Dofasco recorded losses of roughly $900 million dollars. This included the write-off of an ill-fated investment.
Internally, we were focused on tonnage. The more tonnes we could produce, the better. What those tons were (ie., primes or seconds) or where they were going weren’t necessarily top of mind to those on the plant floor.
Our technology was aging, compared to our peer companies; we were one of the last North American steelmakers to have an ingot-producing business.
We were experiencing delivery problems. And we handled it with firefighting, not process control. We became good firefighters, but we weren’t addressing the fundamental problems.
Even where we could identify clear problems, we lacked the management systems to achieve improvements.
Our people worked in silos. Production people wanted to make tons. R&D people wanted to invent, and Commercial people wanted to sell. But there wasn’t much communication between the three.
Our employee culture was what I call an “entitlement” culture; meaning people felt that if they gave a good day’s work they were entitled to wages and, one day, to retirement benefits. There was no connection to the company’s performance. In fact, this culture was an IMPEDIMENT to performance.
Outside our gates, the world was changing. Globalization had increased competition and impacted pricing. Our competitors started looking around for opportunities to consolidate, in the hope that bigger would be better in a globalized marketplace.
And our customers were consolidating. Global automotive platforms needed global supply solutions.
So that’s is where we were: more competition, depressed pricing and the impacts of globalization, aging technology, serious cash constraints, and people who weren’t directly linked to the overall performance of the company.
We were a company in crisis. And we were at a crossroads.
We had to take a long, hard look at ourselves, and re-define what we wanted to be. We looked around at our peer companies. Getting bigger just for the sake of it didn’t seem all that attractive. More often than not, combining two struggling companies results in one bigger, struggling company.
We talked about the things that were important to us, what we defined as success. We talked about financial sustainability, Return on Capital, the value of a sustained and strong cash flow. But we also talked about our community and our place in it. We talked about our people, our customers, our suppliers. We talked about customer intimacy, service, and about Quality with a capital Q. And we talked about what we wanted to MAKE.
And it wasn’t steel.
We wanted to create value. We decided that instead of producing a commodity and trying to create profit through volume, we would invest in selective technologies that would differentiate us from our competitors, add sustainable value for shareholders and added value for customers. The idea was to recognize and meet the needs of our stakeholders, not just produce tons.
It was an approach we called Solutions In Steel.
But to get there, we first had to survive the crisis. We had to get to the point where we could build a competitive advantage.
We had some tough decisions to make. We had to look closely at what areas of our business – even if they were viable at that point in time – would not be sustainable in the long run. As a result, we shut down our Foundry, our ingot stream, and other select operations. We divested companies like Prudential Steel and National Steel Car. We reduced our workforce from a high of 12,700 employees in 1991 to 7,100 in 1993. I’m pleased to say that of these 5,600 eliminated positions, only 350 were lay-offs – the rest were voluntary – and every single person who left was treated with excellence.
After this difficult process, we had to really focus on our people and get them engaged in the business. We needed to evolve from the entitlement culture I described a moment ago to what we called an ‘earnings’ culture, or a performance culture.
We wanted to keep the many positive messages in the entitlement culture – loyalty, care and concern – but also link the success of the employee directly with the success of the company and the fortunes of our shareholders.
We needed to instill a sense of involvement, give each employee an eye on the bottom line, let each person know how their actions are reflected in our results. Even instill a sense of ownership and entrepreneurship in each and every person.
Here are some examples of how we set about doing this:
We sent people around the world to benchmark best-in-class companies, practices and performances, bring their knowledge home and set stretch goals for improvement. Our early efforts were focussed on achieving operational excellence. The teams established project plans to close the gaps, assigning accountability, timetables, and feedback mechanisms.
We began using the Juran system – Plan, Do, Check, Act – with everything we did. This system was embraced, and eventually evolved into the Dofasco Management System.
We sent 6,600 of our 7,100 people, on a voluntary basis, away for three days of experiential learning on a pole and ropes course, to teach them how much more they could accomplish in a new situation by communicating, working together, utilizing each other’s strengths, helping and trusting each other. We then had two days of classroom instruction where we talked about our future, and what we had to do to be a successful company. And we talked about our personal roles in achieving that success, what we needed to do to WIN.
We eliminated "silo" thinking by de-layering management and giving more training, responsibility, and accountability to cross-functional, multi-discipline teams who were responsible for implementing hundreds of improvement projects, in addition to their regular jobs. The goal was to focus these teams on the end-game, so R&D and Commercial and Production were speaking the same language and working together to meet the needs of customers.
We stepped up our skilled trades apprenticeship program, and returned to university campuses to recruit the graduates we would need to rebuild our foundation for the future.
We began to celebrate the successes of the teams – everywhere. A particular achievement by one of the teams (made up of hourly and technical people) could result in their making a presentation to our Board of Directors. Or it could be a coffee and cake celebration, or just a simple thank you. The key was, accomplishments and successes were recognized, and appreciated.
The simple philosophy is to treat others like you would like to be treated. Everyone has a right to be, and wants to be on a winning team. Our job is to give them that chance.
We eliminated the cost-of-living allowance - which had no linkage to performance - and replaced it with variable compensation pay – or VCP – the same plan as senior management, tied primarily to Return on Capital Employed; for us, a key sustainability measure.
We also have a profit-sharing system where all Hamilton employees share equally in 14% of pre-tax profits on an annual basis. When the shareholder wins, everybody wins at Dofasco.
We took some of our bright young minds and formed an Innovation Group, where we hope to use our intellectual capital for profit and competitive advantage. Their only accountability is to dream up new ideas! We gave them a license and the freedom to innovate.
We also invested in some of our up-and-comers by giving them opportunities to learn. These could take the form of broadening experiences working at other organizations.
And we started seeing improvements. People became engaged. Multi-skilled teams began driving improvement and finding solutions, instead of reacting to instructions. Our people started asking more questions, talking to suppliers and customers about how to provide better service, improve quality, fix problems. People from all areas of the plant started looking through the eyes of the customer and understanding how to fulfill their needs.
Steelmaking and sales people started understanding each other better than ever before, and issues started being looked at holistically, rather than departmentally.
Let me give one example of the power of people: A few years ago and on our own initiative, we purchased a body-in-white, or automotive chasis, from a major automotive customer, and put a team of our people together to see if we could find ways of cutting costs. We were able to make recommendations that resulted in significant savings on that car model. Since then we have worked on other automobile bodies for that customer, and so far we’ve provided them with over $150 million dollars per year in cost saving ideas. That is the power of allowing your people the freedom to explore new ideas. But we don’t get credit for these ideas until they are implemented, so then teams had to follow up and work with the customer through implementation.
Let me move to the operational side, where we also started looking at creating value, instead of creating steel.
First, we needed more flexibility. So we built a mini mill in Kentucky with a 50% partner. This provided a couple things – it gave us a place in the US industry, and importantly, we learned how to run an Electric Arc Furnace. Which was a good thing, because a few years later, we built one at our Hamilton site, as well.
We’re now the only flat-rolled steelmaker in North America with both traditional Basic Oxygen Furnace and Electric Arc Furnace manufacturing capability in one plant. This gives us enormous flexibility to quickly ramp up and slow down production to respond to customer demand and market forces.
We de-bottlenecked our plant, identifying constraint operations and removing impediments. We initiated improvement programs for some of our significant operations, including our Hot Mill and Tin Mill.
We began making global alliances, to gain access to markets, technology, and know-how.
We partnered with NKK (DNN) and Usinor (DSG) – now called Arcelor – on two world-class galvanizing facilities.
DNN is 50% owned by Dofasco.
DSG is 80% owned by Dofasco, and is located at our Hamilton plant. Why build another galvanizing line, instead of just upgrading one of our existing ones?
Because DSG is capable of producing extremely high quality pure zinc-coated product for exposed automotive applications. The partnership with Arcelor gave us the technology to make this product, and it gave Arcelor a North American presence.
As a result of these actions – and many more – we started improving. 1992 was the last year we posted a loss. We’ve posted total earnings of about $1.4 billion from 1993 to 2001. We’ve been able to pay down debt and maintain a healthy cash flow.
Our strong financial position, our strong operational capability, and great employees made it possible for us to do MORE than survive, but to succeed and pursue those opportunities to add value and fulfill human needs.
Let me give you another example:
In the mid-90s, Bill Clinton and Al Gore put a challenge before the auto industry. They wanted a car that ran 80 miles to the gallon by 2004. Some of you in this room are no doubt familiar with this challenge.
To accomplish this, a car had to possess not only a more efficient engine, but also had to be dramatically lighter, while maintaining strength and safety characteristics.
Steel is the largest component of automobiles. Therefore, we perceived the greatest opportunity provided we were able to step up to this challenge.
About thirty-five steel companies from around the world, working with Porsche Engineering, became engaged in the Ultra Light Steel Auto Body, or ULSAB, project. In 1998, the ULSAB project unveiled a high-tech, strong, safe, and cost-efficient autobody that weighed more than 25 per cent less than the benchmarked model made by traditional manufacturing methods.
Of course, this was just research. Simply some well-conceived ideas how to make a lighter, stronger, safer vehicle.
Now as I said, there were thirty-five steel companies who partnered in ULSAB. But the rewards of participation were only available to those positioned to take advantage of them. Dofasco, in particular, harvested the benefits. We did so because we were strategically and organizationally prepared to recognize and exploit the opportunities that ULSAB presented.
Our people were aligned and recognized the value of these advances to both the customer and the end-user. Our operations were modern and flexible enough to meet new demands, and our financial strength allowed us to pursue opportunity.
One such opportunity is tubing for hydroforming.
Dofasco opened our first tube mill, the first of its kind in the world, in 1997 on our Hamilton site. We quickly reached capacity, as our customers started to employ this ULSAB technology. We opened our second Hamilton-based tube mill mid-2000.
Our third tube mill, built in a greenfield site in Monterrey, Mexico, began production earlier this year. We’re building a half billion dollar tube business from greenfields in four years, with a capital outlay of less than $100 million, and the opportunity to satisfy customer needs in three countries with emerging technologies.
Another ULSAB technology we pursued aggressively is laser-welded blanking.
In 2000, Dofasco purchased a company called Powerlasers, a uniquely positioned and qualified laser-welding pioneer, that sells laser welded blanks to the North American markets and also sells laser technology globally.
ULSAB also identified potential opportunities in the area of steel coatings. We searched the world for the best galvanizing technologies, and found EXTRAGAL, the high-quality product we make at DSG, which I talked about earlier.
And frankly we continue to expand our offerings of advanced high-strength steels, for a variety of applications – coated or uncoated.
The sum of actions like these are what help us add value for customers, shareholders, employees, suppliers and our community in a sustainable way.
They allow us to operate in a way that does improve people’s lives.
I’m going to talk about where we are today and where I think Dofasco is going, but first let me talk for just a moment about sustainability. It’s a word I’ve used half a dozen times already, and not by accident.
The triple bottom line of sustainability consists of environmental responsibility, financial strength, and social well-being. Stated very simply, you cannot have one without the other two.
- You cannot afford to invest in environmental technologies or donate to community causes without being profitable.
- You cannot be profitable if you are constantly paying environmental fines and cleanup costs and do not have a community that can provide skilled employees and a hospitable climate for customers and suppliers
- And you cannot have a vibrant community without having a healthy, attractive environment that is attractive to new business investment and skilled workers looking for a desirable place to live and work.
This grew over time into deep relationships – and recognition of interdependence – with the communities where we operate, particularly Hamilton. In recent decades, this led to increasing involvement with environmental matters.
Here’s how it works at Dofasco: every business decision we make involves a conscious examination on the triple bottom line. If we are going to upgrade a piece of manufacturing equipment to improve efficiency or quality, we also ask ourselves how we can improve energy consumption and environmental efficiency at the same time. And we ask ourselves how this can contribute to the local community, by using local suppliers, for instance.
We apply this thinking to all our community decisions. And if a proposal can’t pass the sustainability test, we don’t pursue it.
Today more than ever, in a globalized marketplace, a focus on sustainability is critical to maintaining a company’s implicit permission to operate; and in being seen as responsible and accountable directly to the public.
Columnist and author Naomi Klein observed the following; she said: “We’ve all heard the statistics that corporations are becoming as powerful as governments. What’s happening now that is so crucial is we’re saying, okay, if you’re as powerful as governments, then we’ll treat you the same way we treat our governments. We’re going to demand accountability, we’re going to demand transparency.”
It’s not often that I agree with Naomi Klein, but addressing the sentiment she describes is increasingly important, and any goodwill associated with it must be earned; it is never given freely.
At Dofasco, we work hard to build and maintain that goodwill within the framework of sustainability. We tell our community what we’re doing and why. We participate in local stakeholder groups, share our thinking and listen to their input. And we respond to their concerns. This can be as simple as standing on someone’s front porch and talking to them about air quality. Or it can be as complex as working on multi-stakeholder groups trying to address the problem of attracting new business development to our community.
And this effort starts internally. We constantly share what we’re thinking – explaining what we’d like to do and WHY we’d like to do it – with employees. And we ask for and welcome their input and feedback.
These activities add up to what some call our “permission to operate”. But that’s not - or shouldn’t be – the goal. The goal of all these activities is to improve our shared quality of life.
So I’ve talked about how we faced a crisis, and how we built a foundation for success. I’d like to conclude my remarks today by talking about where all this has got us… how we translated these activities into a competitive advantage, where I think it’s taking us, and how we’re poised for profitable growth.
We’ve moved up the value chain and are no longer producers of just commodity-grade steel. In 1992, almost half of our steel was sold as hot-rolled – commonly seen as one of the most basic commodity-grade steels. That number is now around a quarter.
Conversely, in ’92 galvanized - a high-end, value-added product - comprised only around a quarter of our product mix. It’s now around half our mix.
Our laser-welded blanks business will grow by 50% by 2005, with potential to even double within that time frame.
We’re the biggest provider of tubes for hydroforming applications in North America and we’re excited by the prospects of this business.
Financially, Dofasco is in a strong position. We’ve invested about $1 billion in capital expenditures over the last five years, while maintaining a strong cash flow and balance sheet.
We’ve posted solid earnings per share, even in tough years like 2001.
We’ve steadily outperformed the TSE 300 and TSE Steel Index.
We have industry-leading operating performance, outpacing other integrated mills and challenging the mini mills on performance.
We are also highly competitive in terms of our cost structure, across our product offerings….. Here’s where we are on Hot Rolled…
Here’s where we stack up on Cold Rolled…
And this is Galvanized.
And we’ve been returning our cost of capital, which for us is a key sustainability measure.
As a result of our performance, Dofasco has received a number of awards. In 2000 and 2001, Dofasco was ranked first and second, respectively, in North America among 30 steel suppliers in the Jacobson & Associates customer satisfaction survey. We’ve also been honoured in the last couple years with Certificates of Achievement from Toyota, World Excellence Awards from Ford, and an Outstanding Corporate Achievement Award from the Automotive Industry Action Group.
And for the last three years in a row, Dofasco has been listed as among the world’s most sustainable companies by the Dow Jones Sustainability World Index. This year, we were the only steelmaker in the world listed on the index.
Looking forward, we’re also extremely well-positioned thanks to the moves we’ve made. We’re poised to capitalize on the opportunities we’ve pursued, and to keep adding value for customers and ultimately improving lives.
The truth is, we’re already doing all this. Our people are working on tomorrow’s advances right now. We’re working with customers, with universities, with suppliers, with partners, with technology, and most importantly, with each other, to add value for our stakeholders and anticipate customer needs.
For instance: We’re just about at the commercialization stage with a new composite material called Zyplex. It’s incredibly light, incredibly strong, cost-effective, and represents enormous opportunity in untapped markets for Dofasco.
And our focus on innovation and adding value has taken us in new directions. A couple years ago, we patented a piece of preventative maintenance software that was developed in-house. We took a piece of homegrown intellectual capital, and translated it into a 30% interest in a technology company called Ivara, who are marketing the technology, which is now being distributed globally by Siemens.
Another example: our research people, in an effort to save money by reducing the amount of steel slag we send to landfill, developed a way to make slag better for road paving. Less waste to landfill, longer-lasting roads for our community, and a revenue source for Dofasco. This is a great example of both the innovative capabilities of our people and of operating according to the principles of sustainability.
I started my remarks today with a shopping list of reasons that could lead one to believe the steel industry is in big trouble. But am I pessimistic?
At Dofasco, we’re already working on the next generation of innovations. Will they contribute to lighter, stronger, safer cars, like tubes and laser-welded blanks?
But perhaps they’ll contribute to other areas of our lives as well. Can we make homes that are more resistant to fire? Faster and less expensive to build, while improving quality and strength? Cars that are even lighter, stronger and safer? These are all within the realm of very real possibility.
Maybe advances will be in the area of composite materials like Zyplex, or new coatings, or ultra high-strength steels.
When I was first invited here, I was asked to address the question, “How did Dofasco develop a competitive advantage?”
Some may think I’ve given a pretty long answer to that question today. But I think it’s a short answer. In fact, I barely scratched the surface. Because like I said at the beginning – our competitive advantage is the result of thousands of acts by thousands of people. I just provided a few examples.
What it really comes down to is simply focusing on what matters: improving the lives of our stakeholders by fulfilling the needs of employees, shareholders, customers, suppliers, and our community.
And then being organizationally aligned with great people to deliver on that promise.
Thanks very much for your time today and for listening to our story.