We live in an age obsessed with the birth of new industries, new companies, and new business strategies. At the same time, the legacies of past decisions, old companies, and mature industries continue to govern much of our economy, our political discourse, and our future. Nearly 102 years after its formation on April Fool's Day in 1901, the United States Steel Corporation continues to exercise power that belies the fact that during its lifetime it has gone from beginning "the century with two-thirds of the nation's raw steel-making capacity to ending it with scarcely more than 10 percent" (p. 355). Most recently, U.S. Steel's continued leadership position as America's largest producer saw it lead a partially successful tariff fight that culminated in a March 5, 2002 Bush administration announcement of tariffs on many foreign steel products entering the United States. As one of the few corporate bridges between the day of Andrew Carnegie and J.P. Morgan and the days of Bill Gates and Michael Dell, a history of U.S. Steel's turbulent century is an intriguing topic for examination. Kenneth Warren's book represents an attempt to document a remarkable transition in American industrial history and economics.
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Warren's book is not an "easy read." The pages are lathered with voluminous quotations of commodity prices, names of long-dead individuals and companies, and accounts of corporate decisions long buried in internal corporate archives. For a patient reader, however, the history of U.S. Steel raises a host of mysteries of economics and business strategy. Warren's history also represents a case study of a non-monopoly company that, for much of its history, acted as if it were a monopoly. Even the birth of U.S. Steel is laden with more than normal historical significance, even for a company of its size. The formation of U.S. Steel by a group led by J.P. Morgan, Charles M. Schwab, and Elbert H. Gary (after whom Gary, Indiana is named) was in large part a buyout of Carnegie that represented his retirement from the steel business. Carnegie's departure by itself altered the strategic behavior of companies in the industry. Carnegie's spirit of "competition to the death" was replaced by U.S. Steel's desire to avoid "destructive" competition. In addition, the formation of U.S. Steel allowed Carnegie to "monetize" his fortune and to devote his very active retirement to his many charitable endeavors.
U.S. Steel was founded with the hope that its size would lead to economic benefits in the form of market power and operating and network efficiencies. While some cost savings were achieved, and some of the superior management of the Carnegie companies did transfer to the new entity, in the grand scheme of things, size appears to have acted as a drag on the new company rather than as an advantage. Warren hints at some of this tension when he notes that those "who had worked at Carnegie found it difficult to work in reasonable amity with rival companies rather than competing ruthlessly with them as in the past" (p. 27). In the face of attempts to manage prices and exercise leadership, U.S. Steel saw its many small rivals eat away at its markets. Between 1901 and 1927, U.S. Steel's market share in raw steel dropped from 65.7 percent to 41.1 percent (p. 129). This period of U.S. Steel's relative competitive latency allowed for the growth of companies such as Bethlehem Steel, which by 1903 was run by U.S. Steel "defector" Charles M. Schwab. U.S. Steel's price leadership strategies in the early twentieth century may have led to a high return on sales, but the company's dollar sales were essentially stagnant despite significant additions to capacity and production.
By 1936, the stagnation at U.S. Steel was such that Fortune magazine "recalled that the Corporation's policy had once been summarized as 'No inventions: no innovations'" (p. 132) and Charles M. Schwab reported that "the chairman of US Steel admitted to him that the Corporation, in fact, had missed every 'new thing' in steel" (p. 132). Under Carnegie's reign, Pittsburgh-based steel facilities had competed successfully against growing location-based advantages of other regions by relying on innovation, efficiency, and superior management. U.S. Steel under Gary did participate in the geographic dispersion of American steel-making but its "Pittsburgh Plus" pricing (an artificial attempt to exercise industry price discipline by linking prices across America to steel prices in Pittsburgh plus freight from Pittsburgh) led to a hobbling of the corporation's growth into new markets and eventually shrank the region in which Pittsburgh-area steel was competitive. Even in its infancy, U.S. Steel was an illustration of inertia and captivation by sunk-cost investments.
Warren effectively documents U.S. Steel's triumphs and failures over the course of a century. We learn of U.S. Steel's triumphs, such as the fortuitous or prescient refinancing that allowed it later to weather the Depression, and its contributions to the country's war efforts. The impressive gains the company made in the early 1950s led the Economist and Fortune magazine to gush over the company's performance, size (comparable to the production of the Soviet Union or that of Britain and Germany combined), and its transformation from a "laggard" (p. 223). Warren is also forced to describe U.S. Steel's history of tenuous labor relations, its failure to adopt oxygen converters in the 1950s, its falling competitiveness relative to foreign producers in the 1960s, and its growing competitive disadvantages relative to rising "mini-mill" production from the 1960s on.
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