Critical evaluation of Highveld Steel's product diversity strategy

Abstract

The steel industry is characterised by heavy fluctuations in product demand and fierce competition from players across the globe. It is for this reason, important for Highveld Steel to ensure that their strategic decisions are both effective and that there is a good fit between market conditions and strategies. In this report, the product diversity strategy of Highveld Steel regarding coiled products is evaluated against its efficiency in generating positive contribution margins towards company profitability. This was done by developing a model to quantify the real contribution margin of all coil products produced. In this model, processing time, product downgrading costs and the cost of production downtime due to production delays were quantified and a formula was derived to calculate the cumulative effect of all these variables on product cost. This formula was applied to historical yield information available for the past four years of production. From this, the real contribution of different product categories were calculated and used to identify products with negative or small contribution margins on the one side, as well as products with large contribution margins on the other. It was found that 15 % of all products produced by strip mill at present, have a negative contribution margin and should for that reason, not be produced. The information gathered from the application of the model was used to furnish recommendations on how Highveld's marketing and production departments should go about improving the contribution of coiled products to company profitability. It was proven empirically that Highveld could, in applying the recommendations furnished in this report, generate extra annual contribution on coil products of between 14 and 37%. The strategy developed was recommended as an interim strategy and it was further recommended that the model developed should be continuously applied and used on a monthly basis to evaluate order acceptance strategies to ensure a good fit between these strategies and prevailing market conditions.