Extent of Diversification Another facet of any industry's marl\t'structure is the degree of diversification of the firms. The large...
Extent of Diversification Another facet of any industry's marl\t'structure is the degree of diversification of the firms. The largest integrated steel firms are among the giants of U.S. industry. Firms within the steel industry are absolutely large when compared to firms in 'other industries. The U.S. Steel Corporation was the 12th largest U.S. industrial firm (ranked by sales) in 1974 (13). The 8 largest steel firms were among the 105 largest industrial firms, each having sales in 1974 exceeding $1 billion. The fully integrated steel producers appear on most lists of highly diversified firms when the measure is the number of . different industries in which a firm produces. United States steel, besides being the Nation's largest steel producer, is also one of the largest cement producers, a major producer of coal and chemicals, and a developer of real estate.
Wi th its ( :~:' knerican Bridge division, it is one of. the Nation's largest builders of br idges, office buildings, and other steel struc- . tures. Bethlehem is engaged in shipbuilding and, repair and is 'also a producer of plastics. Armco Steel manufactures à var ious kinds of machinery and recreational products and is -64- \, engaged in equipment leasing and property insurance. National Steel is engaged in aluminum production. Inland Steel fabricates mobile homes and develops apartment buildings. Youngstown Sheet and Tube leases dock facilities. Allegheney Ludlum manufactures a var iety of consumer products. Each of the compan i es surveyed ~/ wa s ask ed to r epor tits sales of steel mill products for each year since 1950.
The steel sales of each firm as contained in its response was then .~ . divided by its total sales for each year. The percentage of the eight firms var ied from year to year, but no discernible pattern was evident over time. Of the eight firms surveyed, three normally had over 90 percent of their total sales in steel, two had 70 to 80 percent of their total sales in steel, two had from 60 to 70 percent of their total sales in steel, and one had less than 60 percent of its total sales in steel. As a group, the eight firms had between 70 and 80 percent of their total sales in steel. The combined percentage was at 74 in both 1950 and 1974. This study has made preliminary estimates that, relative to other industries, large steel companies have shown only a 26/ Federal Trade Commission Steel Survey, 1975. A mandatory questionnaire was sent to each of the top eight firms under the authority of Section 6(b) of the Federal Trade Commission Act. -65- slight tendency to venture into fields outside of making steel and its products. ~/ Diversification into non-steel activities has occurred on a limi ted basis. In addition, it appears fro~ 27/ In order to obtain a quantitative measure of the degree of diversification of firms in the steel industry we utilized a data set prepared by Economic Information Systems, Inc. (EIS). EIS has developed estimates of plant value of shipments for each manufacturing plant in the United States employing 20 or more persons. Total shipments of the piant' are estimated by multiplying an estimate of total employment in the plant by the average productivity of labor for plants of that size in that industry. For each plant the parent firm is identified, and its primary production is assigned a four-digit Standard Industrial Classification (SIC) code. o As a measure of diversification we summed the value of shipments of all four-digit industries contained in each firm's primary two-digit SIC industry. The ratio of a firm's value of sh ipments in its pr imary two-d igi t industry to ì ts total sales in 1974 was taken as the measure of the diversification ratio. Sales were used as the denominator in order to capture all the firms activities including those outside the manufacturing sector. Two samples were selected. One consisted of the 13 largest steel companies and the other was a control group of 90 firms taken from the Fortune Double 500 Directory. A stratified sample was used as the control group in order to hold size constant. The Fortune Double 500 Directory was segmented by size into groups of 25 firms each, and roughly the same percentage of control group firms was taken from each size segment as steel firms. The analysis consisted of a statistical comparison between the mean values of the quotients of the two samples. The index was constructed such that a lower ratio of value of shipments to total sales indicates a higher degree of diversification.
The calculated mean values were .507 and .329 for the steel firms and control group, respectively. Using a t test, we found this difference to be statistically signifIcant at the . one percent level, implying steel is less diversified. Due to fundamental limitations in the EIS data set, however, we do not believe these calculations provide a definitive answer to the comparative diversification question. I -66- the survey of the eight largest U.S. steel companies that the firms do not have extensive operations outside the United States. There is a high degree of inter-relatedness of the product-market and service activities of the vertically integrated steel firms. The explanation for the lower diversification by steel firms is not entirely clear. Ultimately, the longrun viability of an industry is determined by its level of profitability., ,A.major concern of the basic steel industry has been its generally low rate of profit. Measured as a percent of stockholders' equity, steel profits have been consistently below the average for the entire manufacturing sector.
Table 2.23 shows the historical profit performance measured by rate of return on stockholders' equity for the primary iron and steel industry and for all manufacturing dur ing the year s 1950 thr ough 1976. For th i s 27-year per iod, rates of return on equity after taxes for steel averaged 9.1 percent while the all manufacturing average was 11.4. There is no single "best" measure of profitability; the rate of return on equity is most commonly used. Owing to a host of factors, however, accounting rates of return may deviate from true "economic" rates of return. And the deviations may vary across industries. In order to render conclusive economic profitability comparisons, one would have to engage in analyses of risk differentials, differences in accounting
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