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
í
var ious kinds of machinery and recreational products and is
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\,
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.
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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
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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
