Harvard Case - Lehigh Steel
"Lehigh Steel" Harvard business case study is written by V.G. Narayanan, Laura E. Donohue. It deals with the challenges in the field of Accounting. The case study is 15 page(s) long and it was first published on : Mar 26, 1998
At Fern Fort University, we recommend Lehigh Steel implement a comprehensive strategic plan focused on improving operational efficiency, enhancing profitability, and navigating the evolving steel industry landscape. This plan should incorporate elements of cost optimization, strategic asset management, and a shift towards value-added products and services.
2. Background
Lehigh Steel, a leading producer of steel products, faces significant challenges in a highly competitive and cyclical industry. The company is grappling with declining profitability, increasing costs, and a need to adapt to changing market demands. The case study highlights several key issues:
- Declining profitability: Lehigh's profitability has been declining for several years, driven by rising costs, increased competition, and a shift in customer demand towards value-added products.
- Operational inefficiencies: The company's manufacturing processes are outdated and inefficient, resulting in high production costs and slow turnaround times.
- Outdated cost accounting system: Lehigh's cost accounting system is not aligned with its current operations and fails to accurately track costs and identify areas for improvement.
- Limited investment in innovation: The company has been slow to invest in new technologies and product development, hindering its ability to compete with more innovative rivals.
The main protagonists of the case study are the company's management team, who are tasked with developing a strategy to address these challenges and restore Lehigh's profitability.
3. Analysis of the Case Study
To analyze Lehigh Steel's situation, we can utilize a framework that considers both internal and external factors:
Internal Analysis:
- Financial Analysis: Lehigh's financial statements reveal a declining trend in profitability, with shrinking margins and increasing debt levels. This indicates a need for cost optimization and improved operational efficiency.
- Cost Accounting: The existing cost accounting system is inadequate for accurately tracking costs and identifying areas for improvement. Implementing Activity-Based Costing (ABC) would provide a more detailed understanding of cost drivers and allow for more effective cost management.
- Organizational Structure: The company's organizational structure appears to be siloed, hindering collaboration and innovation. A more cross-functional approach would promote better communication and knowledge sharing.
- Asset Management: Lehigh's asset base is aging and requires significant investment to improve efficiency and reliability. A comprehensive asset management strategy is needed to optimize utilization, reduce downtime, and extend asset lifecycles.
External Analysis:
- Industry Dynamics: The steel industry is highly competitive and cyclical, with significant price fluctuations and evolving customer demands. Lehigh needs to adapt to these changes and develop a strategy to differentiate itself from competitors.
- Market Trends: Customers are increasingly demanding value-added products and services, requiring Lehigh to invest in innovation and product development.
- Technological Advancements: The industry is witnessing rapid technological advancements, such as automation and digitalization. Lehigh needs to embrace these technologies to improve efficiency and competitiveness.
4. Recommendations
To address the challenges facing Lehigh Steel, we recommend the following:
1. Implement Activity-Based Costing (ABC):
- When: Immediately.
- How: Engage a team of cost accounting experts to design and implement an ABC system. This will provide a more accurate understanding of cost drivers and identify areas for cost optimization.
- Impact: Improved cost management, better informed decision-making, and enhanced profitability.
2. Optimize Manufacturing Processes:
- When: Over the next 12-18 months.
- How: Conduct a comprehensive review of manufacturing processes to identify areas for improvement, implement lean manufacturing principles, and invest in automation and technology upgrades.
- Impact: Reduced production costs, increased efficiency, and improved product quality.
3. Develop a Strategic Asset Management Plan:
- When: Immediately.
- How: Conduct a thorough assessment of Lehigh's asset base, develop a comprehensive asset management plan, and invest in maintenance and upgrades to extend asset lifecycles and improve reliability.
- Impact: Reduced maintenance costs, improved asset utilization, and enhanced operational efficiency.
4. Invest in Innovation and Product Development:
- When: Over the next 2-3 years.
- How: Allocate resources for research and development, invest in new technologies, and develop a pipeline of value-added products and services to meet evolving customer demands.
- Impact: Increased market share, enhanced competitiveness, and improved profitability.
5. Implement a Performance-Based Incentive Program:
- When: Immediately.
- How: Develop a performance-based incentive program that aligns employee compensation with company goals and encourages innovation and collaboration.
- Impact: Improved employee motivation, increased productivity, and enhanced organizational performance.
6. Enhance Corporate Governance and Transparency:
- When: Immediately.
- How: Strengthen corporate governance practices, improve transparency in financial reporting, and ensure compliance with relevant accounting standards and regulations.
- Impact: Increased investor confidence, improved reputation, and enhanced accountability.
5. Basis of Recommendations
These recommendations are based on the following considerations:
- Core competencies and consistency with mission: The recommendations align with Lehigh's core competencies in steel production while focusing on improving efficiency and profitability, consistent with its mission to be a leading provider of steel products.
- External customers and internal clients: The recommendations address the evolving needs of external customers by focusing on value-added products and services, while also improving the internal operations and working conditions for employees.
- Competitors: The recommendations aim to enhance Lehigh's competitiveness by improving operational efficiency, investing in innovation, and developing a more strategic approach to asset management.
- Attractiveness - quantitative measures: The recommendations are expected to yield positive financial returns through cost reduction, improved efficiency, and increased revenue. The implementation of ABC will provide a more accurate assessment of profitability and ROI for future investments.
6. Conclusion
By implementing these recommendations, Lehigh Steel can overcome its current challenges, improve profitability, and position itself for long-term success in the evolving steel industry. The company needs to embrace a proactive approach to cost management, operational efficiency, and innovation to remain competitive and thrive in the years to come.
7. Discussion
Other alternatives not selected include:
- Mergers and acquisitions: While M&A can provide access to new markets and technologies, it carries significant risks and may not be the most appropriate strategy for Lehigh at this time.
- Divesting non-core assets: This could free up capital for investment in core businesses, but it could also weaken Lehigh's market position and impact its long-term growth potential.
Key assumptions underlying these recommendations include:
- The steel industry will continue to evolve, with increasing demand for value-added products and services.
- Technological advancements will continue to drive efficiency improvements in the steel industry.
- Lehigh's management team will be committed to implementing the recommended changes and driving organizational change.
8. Next Steps
To implement these recommendations, Lehigh should follow a phased approach:
- Phase 1 (Immediate): Implement ABC, develop a strategic asset management plan, and establish a performance-based incentive program.
- Phase 2 (12-18 months): Optimize manufacturing processes and invest in technology upgrades.
- Phase 3 (2-3 years): Invest in innovation and product development, and expand into new markets.
By adhering to this timeline and prioritizing key milestones, Lehigh can achieve its strategic goals and secure its future in the steel industry.
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Case Description
Lehigh Steel is a specialty steel manufacturer that plummeted from record profits to record losses in less than three years, driven by an inability to distinguish between profitable and unprofitable business. The scale and growth of service activities and overhead costs in an increasingly customized product line suggests that activity-based costing (ABC) could unlock the secrets of profitability. However, the high fixed-cost structure suggests that theory of constraints (TOC) could also be relevant. Lehigh must determine how to measure profitability to rationalize its products.
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